Lyn Alden: Nothing Stops This Train - BTC, AI Equities, Bond Market Analysis

0:00 Speaker 1 Lynn Alden joins us now Founder of Lynn Alden Investment Strategy. Welcome in Lynn. 0:04 Speaker 2 Happy to be here, thanks for having me. 0:06 Speaker 1 Yes. Thanks for joining us. So you're famous for the saying nothing stops this train. For people who somehow aren't familiar with that yet, what is the train? Why can't it stop? And what do you make of the trajectory for its acceleration? 0:18 Speaker 2 So, yeah, the the train is fiscal deficits, particularly in the US and it's originally a reference to Breaking Bad, basically the the inability of the unwillingness to stop in this, you know, reapplied here. And basically it's a combination of a couple things. One is high degrees of political polarization in the US, It's very hard to get any sort of meaningful chained through. 0:38 And then the other part is mostly demographics and just decades of accumulated decisions. We've built these entitled structures that kind of assume that every generation is going to be bigger than the prior one. And now of course we have a pretty top heavy demographics. We have 40 years of declining interest rates that, that we're offsetting ever higher debt loads, but now that we're over 100% of debt to GDP and interest rates, you know, they, they, they bounced off 0, they're not falling anymore, means that interest expenses now really a substantial component of the deficit. 1:09 So, so even kind of decisions to trim things here and there have trouble affecting the bigger picture. And so a lot of this is locked in and it's, it's a macro variable for investors. It's a macro, you know, it matters for obviously politics, it matters for just day-to-day living. 1:25 But from my perspective, mainly what I do is is focusing on the investment implications. 1:30 Speaker 3 And, you know, under fiscal dominance, the government, government spending, you know, it can work against the Fed's efforts to control inflation. What? What can actually bring prices under control if if Washington won't cut the spending? 1:44 Speaker 2 Not a ton. I mean, that's so that the kind of the the definition of fiscal dominance compared to monetary dominance is that the central bank is kind of in the backseat here. Their tools are primarily based around accelerating or decelerating bank lending, which works when, you know, unusually high rates of bank lending are a major driving force of inflation, like like what we saw in the 70s, for example. 2:07 That's why that particular cure fit that particular problem. But when the when the government's running 7% of GDP deficits and when they have so much accumulated debt that higher interest rates blow out the fiscal deficit more so than they slow down bank lending, their tools just become less effective. 2:26 It's not that they have no impact, but the impact ends up being mixed compared to just a clean kind of anti inflationary medicine that it did it once was when debt levels were lower. So, you know, things like getting oil flowing, you know, can help, help, you know, the get the cost of things down or at least, you know, going up more slowly, you know, trimming parts the deficit where possible can can sometimes address it, but because it's so locked in it, it's really not going to stop anytime soon. 2:54 And kind of part of it is that when a when a country gets this indebted, it's going to the fault one way or another. And when they control the curve, they when they control the units for their own liability, that the fault is primarily through purchasing power rather than nominally. And so kind of like some degree of of inflation and debase. 3:12 And it's being inevitable because they let that get to this stage where it's at now. 3:19 Speaker 3 And, you know, you, you brought up the 70s and, and, and, you know, policy of the past kind of makes me think of, of kind of maybe through the 90s with the IT boom investment, kind of comparing himself to that. And the AI plays a huge part of that kind of the core of that. And we, we see figures like Elon Musk saying we're entering this age of abundance and, and kind of the popular belief in, in Silicon Valley seems to be that we're going to have this extreme price deflation. 3:43 But often times I think that might be conflated with, you know, monetary or price deflation, sometimes conflated with monetary deflation. You're someone who's thought about this for a long time and could, could you help us maybe kind of tease out those differences there and maybe where though they might be being conflated and, and where you think the limits of what this AI build out might be able to actually help us solve for? 4:07 Speaker 2 Yeah, absolutely. So 1, is that the also the 90s in addition to the tech boom, they that was also the demographics boom. So, so peak demographics in the US, meaning kind of like maximum labor force participation was in like 1999 or 2000, right, right near the peak as well. So that was like a multiple, multiple factors coming together to to create that environment. 4:25 And so, but focusing on AI as a topic, basically inflation's a spectrum. So you know, one hand, you have things that are pretty truly scarce, you know, fine art, waterfront property, Bitcoin. Then you have things are like a little bit less scarce, but still quite scarce, like gold. You know, you can make it, you can make more of a slowly, you know, high quality houses, energy to certain extent. 4:47 You know, they're, they're labor intensive, they're, they're physically constraining in various ways. And then you move across the spectrum, you get the things like grains, textiles, manufactured goods, semiconductors, you know, with the, with the, you know, multi decade trend of Moore's Law. Obviously sometimes you have near term semiconductor bottlenecks, you know, offshore goods and over the past several decades, obviously automation, information technology, offshoring has made us radically better making a lot of those things. 5:17 It's easier to make a T-shirt or plastic toy now than it was, you know, 30 years ago. And so that's helped that that long end of kind of abundant thing stay cheap even in the even in the face of money printing. And so a lot of the the price gains were concentrated in the scarce side of the curve. 5:33 What AI does is basically targets another side instead of kind of suppressing, you know, blue collar wages and making our manufactured goods more abundant, AI comes in and makes a lot of white collar services just radically more abundant. You know, it costs way less to translate something or edit something or, or, or create, you know, a, a poster or something like, like there's multiple things that just are way cheaper and more abundant now because of AI and, you know, ongoing improvements there and Moore's law and everything will keep kind of bringing that down to some pretty low level. 6:03 And so you're, you're, you get a, it is true that if that technology continues to take off as as many of us expect it will, it'll be a deflationary force on those categories. But it doesn't mean that it slows down money printing and it doesn't mean that it it it radically reduces the cost of things in the physical world or things are just very scarce. 6:24 And so that those are the assets you want to be long even as other parts do get suppressed. It also obviously the more abundance there is, the less we feel inflation. So inflation is still happening in the monetary sense. And how much it impacts, you know, the average person will largely depend on abundance. 6:41 If you have negative abundance, so you have war or you have bottlenecks or constraints or or technology stagnation, you feel that money printing more. Whereas if you have some sort of offset that, then you generally feel that a little bit less, even though it's still showing up in the in the scarce end of the the goods and services curve. 7:00 Speaker 1 So obviously, high interest rates make America's debt more expensive to finance, but cutting the rates could add to inflation. So what wood forest the Fed to step in and support the government debt market? And what does that mean for Bitcoin? Well. 7:15 Speaker 2 Any sort of acute illiquidity would would make the Fed step in. So right now the bond market, despite yields going up, has not become truly disorderly. You know, it's still a market that's able to be made. Obviously volatility is higher, but liquidity is still fine. 7:31 If you have events that are similar to the, the 2022 UK gilt crisis, so that the, the, the Bank of England Lily had to cancel a speech about balance sheet reduction and instead do emergency temporary QE to, to fix their bond market in, in kind of one of the, the greatest ironies. 7:47 And like the, you know, the Fed when, when in March 2020, during the kind of the peak of the, the COVID lockdown crash, it got so bad, the Treasury markets went just illiquid, just the off the run securities literally just kind of broke. And that's where the Fed had to come in and to start buying, you know, with emergency meetings, start buying hundreds of billions of dollars, so eventually trillions of bonds. 8:08 And so, you know, around the margins, if it does get illiquid at some point and just starts to generally break, the Fed has to basically step in. I mean, they can, they can try not to, but then all their other mandates start breaking apart. So there's softer ways they can do it. 8:25 I mean, they have standing facilities ready to provide liquidity. They can potentially ease bank regulations to let banks be able to buy more Treasuries, kind of increasing their leverage, or they can step in and buy them directly. Obviously that could that, that that's hard to do narrative wise, you know, when inflation's above target. 8:44 So that that's kind of one of the, one of the hallmarks of later state fiscal dominance is the Fed finding itself increasing its balance sheet despite above target inflation. And even right now, even as they're increasing rates, they actually still are mildly increasing their balance sheet. They're not buying the long end, but they're still doing this very gradual QE as part of just their view of maintaining ample bank reserves and avoiding some of the liquidity problems that they faced late last year. 9:10 Speaker 1 So gold remains about 1/4 below its record intraday high from January. What is your outlook for gold right now? Are you buying more or holding what you have? And why own gold in addition to holding Bitcoin? 9:22 Speaker 2 So I'm a holder here. I've been a long term bull on both gold and Bitcoin and you know, it's something they go up and down at different times, just just part of a kind of a balanced portfolio. They kind of serve different purposes for, for different types of tail risks. 9:38 You know, I, I was a lot more bullish than gold and it was like 2000 or less compared to when it, you know, briefly touched, as you point out, the intraday's high somewhere around 5000 corrected down to like 4000 or so. I, I generally think 4000 is a very reasonable number for gold to be at longer term. 9:55 I'm still bullish on it, but I think it's still has some consolidation to do after just how big of a run it did in recent years. And basically it's just it it, it's a, it's a scarce physical asset. It it has certain advantages over Bitcoin, has many disadvantages over Bitcoin. 10:12 It's obviously less mobile. It has less true scarcity and you know, other, other divisibility or auditing limitations to it. There's certain segments of the population that like it. There's a, you know, there's a physicality. I think that especially in the world of AI is interesting to people. 10:28 So I I just view it as one of the leading monies out there, one of the leading kind of liquid, you know, bare asset store of value alongside Bitcoin. 10:39 Speaker 3 And, you know, you mentioned that gold and Bitcoin often move separately. Even though we're seeing the highest correlation between the two, they still are not on the same page, it seems. And, and many analysts would have expected Bitcoin to trade down similar to gold with these rising Treasury yields. 10:55 Why do you think Bitcoin may be acting different in this kind of macro environment than other kind of long duration scarce assets like gold? And, and what do you think would would need to happen to sort of drive a move back towards those previous all time highs over 100K? 11:10 Speaker 2 It's a good question. I mean, 1 is that Bitcoin is smaller market than gold by that, you know, an order of magnitude and it's more volatile. So it has a somewhat different holder profile. I mean, you know, gold's more held by sovereigns, more held by, by older investors or partially held in the form of jewelry, whereas you know, Bitcoin is on average could be held. 11:30 Obviously there's a lot of institutional holders, there's some sovereign holders. On average, the ownership, the retail ownership profile will skew a little bit younger than gold is, is considered a little bit more risk on in some, in some capacity, at least in a portfolio sense. And so the, this, the pricing just kind of works differently. 11:47 Sometimes they go up, sometimes they go down together and in general fiscal dominance over the longer term should drive multiple types of high quality scarce assets up. That can include high quality equities that can include Bitcoin gold, anything that's kind of leading it is category as long as the category still doing decently as far as what gets Bitcoin over 100 Ki mean that that's a trader's question. 12:13 I mean, obviously it went, it moved quite quickly from, I mean the bottoming somewhere around 58 K to, to what it is now far higher. It's a smaller move than that to, to hit 100. And I think it's a combination of liquidity. I think it's a combination of just, you know, the, the, the chart has come in first they saw that, you know, bitcoins not going down anymore. 12:35 So they, they start to get in. If it starts to build up some momentum, then momentum traders come in and and so you know a lot already like a lot of the fast money's out it's strongly held and eventually there there are things that can attract fast money back and I but I think that the longer term backdrop is just that money supplies around the world are going to keep growing. 12:56 The bond markets around the world are going to keep growing. Nothing stops as trains. And so they're they're this kind of like background pressure, this rising tide for the best quality assets, even though just like a rising tide, you have waves that come in and out. So you get, you get, you know, surges in corrections, but you still want to own the the highest quality scarce things and, and you know, obviously Bitcoin is, is among the best. 13:18 Speaker 1 So we hit on how AI impacts the macro picture earlier and, and I know you've talked before about how a peak in AI stocks could boost Bitcoin. What would cause money to rotate out of AI stocks and and back into Bitcoin rather than cash or a safer investment? 13:36 Speaker 2 So partially it's, it's a, it's a view on a risk on situation. So obviously cash is protective where someone, you know, buying Bitcoin that they perceive as being kind of near the lows and expecting that it, you know, could give another multi year run. So it's, it's often just a counter cyclical approach. 13:53 People saying, OK, I, I, you know, I made huge gains on AI. You know, at a certain point, the companies become multi trillion dollar companies and it's hard for them to keep multiplying and get the same kind of percentage returns that they could when they were smaller. And so when they see bitcoins, you know, it's sub 2 trillion market cap and and generally, you know, like not a ton of fast money in it. 14:15 There's not traders just like, you know, leveraging, leveraging to the gills on Bitcoin in a similar way that they were kind of ran stocks, for example, during the peak memory memory stocks. And so it just, it just becomes a different risk on asset or a different kind of volatile, you know, tech adjacent asset that some investors will find interesting and, and, and just be interested in getting into in the counter cyclical sense to be in a less crowded trade. 14:41 Speaker 3 Now, you know, spending time in Egypt means you've experienced first hand very different monetary systems from the US. Has living between the two countries changed the way you think about kind of this broader picture at all? 14:54 Speaker 2 I think it just gives me more, more hands on experience. So I've been going to Egypt every year since 2019. I lived generally for months each year there. I mean, right, like this currently official inflation, there's 15% and no one's talking about it because it, that's just, that's normal. Like that's the background. 15:11 You're kind of like how in the US if inflation's 2 or 3%, not a ton of people are talking about it. That's like 15 percent, 10 to 15% in Egypt. And so I mean, it's, you don't have to convince an Egyptian why a store value is good. 15:26 You just have to maybe something to discuss which, which stores value. And it's because when, when you're in a country that doesn't have a robust stock market like the US does for Egyptians, it's it's generally gold in real estate or even ironically, dollars. You know, there's some Bitcoin interest, not not a ton on a per capita basis, but basically like emerging markets in general will generally provide a somewhat more extreme environment of broken money. 15:52 And so I think that having some experience in in both developed and developing markets gives someone a kind of a broader perspective on the different ledgers that we have around the world. 16:04 Speaker 1 Linda, I wanted to get your thoughts on stable coins because obviously it makes dollars easier to access and move around the world. But does it actually strengthen the dollar? Are stable coins just moving existing dollar demand onto new rails or is it creating new demand? 16:21 Yeah. 16:22 Speaker 2 It's a good question. I I think it's creating some new demand, but that overall demand is relatively small compared to existing total demand. And so the, the effect of, of strengthening or solidifying the dollar is kind of marginal there. There's a report by city maybe a year ago or so, they kind of looked out at stable coins through 2030 and had like a bull base and bear case. 16:43 I think it's a, it was a reasonable report and they, they categorized different sources of demand. And some of those, as you point out, are, are, are basically existing demand for dollars that is like re repurposed or, or some percentage repurposed. 16:59 And other times it is generally new demand for dollars. Basically, if stable coins can get to places that otherwise physical dollars or bank accounts would have trouble getting, then that can that can represent new demand around the margins. Or if it if it can, you know, solve cross-border payment problems in a way that that, you know, weren't happening before. 17:18 It can make various small businesses and things like that hold, you know, marginal stable coin balances that they might not have otherwise held in dollars to dollar assets. But you know, we're talking about a very large monetary base and we're talking about, you know, hundreds of billions of potential demand in, in, in the coming years, of which some percentage is new. 17:38 So these are, these are macro scale numbers, but they're not really game changing numbers compared to you know, 2 trillion annual deficits, you know, the the existing stock and rate of, of money supply growth that we currently have. 17:51 Speaker 3 Nolan, we're almost out of time, but I got to ask before you go, your thoughts on Japanese yen intervention, of course, and Scott Besson's comments on being the house and his latest comments clarifying that what he means is that he has this edge. 18:06 Do you believe Scott Besson's Scott Besson does have an edge intervening in this market here? 18:12 Speaker 2 But I think he has an edge. The question is how big of an edge basically is between the US and Japan? Iran actually, especially Japan. But if they're working together, they've got a ton of firepower. You know, Japan is well over a trillion dollars worth of reserves. 18:28 They also as like a kind of a nuclear option, have their, their, their giant pension system and they can choose to repatriate some of that to sell some foreign assets and to buy domestic assets. Basically Japan, even though they have a very high public debt, they've got a, a very positive net international investment position for their other assets. 18:47 They've, they've got a current account surplus of, of basic dividends and interest flowing to them from around the world from all these investments. And, and so they actually have a ton of firepower to protect the should they want to. So far they've been, you know, they, they, when it, when it starts to get disorderly weakening, they come in and they, they do a jolt to kind of break those that are shorting it on leverage. 19:08 They, they, they, you know, they, they kind of slow that down. And I mean, they can keep running that playbook over and over and over for years. It's, it's most a choice of how large they do it. And when both Japan and the US generally find that there's a certain line in the sand that they prefer to protect, they could choose to protect that pretty aggressively. 19:26 You know, not, not forever, but the amount of firepower they have to do it is pretty immense. So I wouldn't, I wouldn't be too aggressively trading against it. And instead, I mean, I, I'm long Japanese assets that are not the yen because I mean, Japanese corporations are, are structurally short the yen in general, you know, and so I, you know, there's, there's, I'm pretty bullish on Japan, even though I'm not particularly a yen bull. 19:52 I, I think it's, it's more of a consolidation now with a lot of firepower to kind of micromanage it. 19:58 Speaker 1 The one and only Lenalden. Thanks for joining us. 20:01 Speaker 2 Thank you.