[00:02:44] James Lavish: And period. And what are we missing here? Where’s the disconnect? You know, and that’s, that’s what I’m kind of zeroed in on, like what’s the disconnect here? And I, I would be interested to hear what you have to say as well.

[00:02:56] Preston Pysh: Yeah, no, the thing where I’m struggling is I’m looking at the US markets and the credit market.

[00:03:01] Preston Pysh: When you’re looking at the yield curve is screaming that the fed’s got it wrong, there’s going to be a correction and it’s imminent. But then when I look at the yield curve over in Europe, It’s not looking that way. It’s looking like it is still aggressively selling off and that nothing is under control.

[00:03:20] Preston Pysh: And you know what? I got these charts hold on, let me bring up these charts so people can see what we’re talking about. The first one that I’m bringing up here, and just let me know if you’re not seeing it, James, but I have the US I see it. Yeah, the US yield curve and you can see how it’s going sideways, so it’s not selling off anymore.

[00:03:35] Preston Pysh: For the most part. I guess the short duration stuff is continuing to sell off, but the long duration stuff is actually catching a slight bid. Over the last call it four or five months, but it across the yield curve completely, it’s going sideways and, and it’s upside down. It’s inverted. And this is basically what you’re saying is the credit market saying, yeah, we don’t believe this.

[00:03:56] Preston Pysh: You’re going to have to ease soon. But where I’m having trouble is I’m looking at the UK and to me this, this looks like it’s still aggressively selling off to me. Right. And then here’s the European yield curve. And it’s still well within just like the, the standard volatility and it’s selling off like crazy.

[00:04:18] Preston Pysh: And so I guess when I’m looking at this and I’m saying, yeah, I, I hear that narrative, I definitely hear that narrative in, in the US that the credit market’s pricing in this big change. I’m looking over to Europe and I’m not seeing it. I’m seeing double digit inflation in the UK that just got printed.

[00:04:37] Preston Pysh: I think it was 10.2.

[00:04:38] James Lavish: Yeah.

[00:04:39] Preston Pysh: You see their yields, what are they? One year is the highest yielding at 3.9%. So you still got a 600 basis point spread between that and their inflation.

[00:04:49] James Lavish: Negative. Negative deal. Yeah, negative. Really yield.

[00:04:52] Preston Pysh: I guess where I’m like really struggling is I’m saying everything’s systemically connect.

[00:04:58] Preston Pysh: It’s not like you got the US market and it’s completely disconnected from Europe. It’s totally connected. I guess, how do you interpret that quandary and that difference between these two markets?

[00:05:10] James Lavish: It’s funny, you’re watching Europe. They’re just, they, the central bank in Europe has just been acting in slow motion this whole time, right?

[00:05:17] James Lavish: I mean they, yeah, they started out last summer. They were still at negative rates in July while there was double digit inflation. And they then raise rates to be what, if I remember correctly, they’ve been so far behind on this, and I think there’s a few things going on in the us we’re hyper focused on what’s going on what the Fed is going to do.

[00:05:38] James Lavish: And, and it’s not just the us, the whole world is focused on this, right? Because the treasury market, the US treasury market being the Global Reserve asset, and everybody’s looking at. And so the question is, how lagging are all these indicators that the Fed’s looking at? And when does it catch up? And when it does catch up, does that mean that that’s it, we’re already in a recession because we have this watershed moment, you know, this like a steep drop off in productivity.

[00:06:04] James Lavish: We have large layoffs, whatever it may be. Well, we saw it in the industrial numbers this morning. There were some pretty dismal numbers, and what it’s showing is that inventories are up, you know, orders are down. And what does that mean? That means that we don’t have that supply issue that we had before.

[00:06:21] James Lavish: And now you’ve got OPEC that comes out and so they’re going to, they’re going to cut a million barrels of oil a day, so that just keeps energy priced high. So you keep inflation high and you’re trying to battle it, you know, you’re crushing demand. And it just isn’t working yet. But when it does, I think it, it happens in a way that just sends us spiraling into a recession.

[00:06:42] James Lavish: And so that’s what the market is telling us. But the Fed is so laser focused on just this inflation number that they’re, you know, they don’t have enough firepower yet to say, okay, we’re going to step. They thought about it. They thought about it. This last meeting you heard Powell admit that in the last press conference, he said, yeah we actually considered pausing this round.

[00:07:05] James Lavish: But the inflation numbers are still high enough that we couldn’t, and we felt like the, the liquidity event that they faced, that interest rate risk event, that happened with Silicon Valley. I’m not, and I don’t think you and I have talked about this on your show yet, but they felt like they had put that fire out.

[00:07:23] James Lavish: The credit markets were short up. And so they still need to keep inflation down. And so the market’s telling them, look, you’re going to raise these rates too high and something is going to break because first of all, the bank problem is not finished. Like, that’s not over. And so now we’re starting to talk about the commercial real estate market and all of those leases coming to you and the low occupancy that, that you’re seeing in office buildings, like that’s going to be a problem.

[00:07:52] James Lavish: And the biggest problem is that the, that paper’s being held by the smaller regional banks. The, the vast majority of that paper, the market’s saying like, look, thi this is going to happen and it’s going to happen quickly, and you’re going to have to pivot. And so that’s what we’re that’s what the market’s saying.

[00:08:08] James Lavish: And yet you still have fed and all of its reps out there every day saying, no, no, no. We’ve got to keep rates high. And part of that, I believe Preston, is part of it, is they’re trying to instill confidence in the. Saying, oh, there’s no problem with the banks. Like, that’s okay. We, we’ve taken care of that.

[00:08:25] James Lavish: Well, how did they take care of that? They injected liquidity into the system. They’re already doing it. Right. So you see that we’re supposed to have quantitative tightening, and though you can’t call, what happened a couple of weeks ago, quantitative easing, it’s not really qe, but it is injecting liquidity into the system that would not otherwise be there.

[00:08:43] James Lavish: There’s just no way around that. But the sa at the same time, what’s funny about. Is at the same time, you’re not seeing banks lend to each other. They’re pulling capital and putting, you know, they’re taking their money market capital and putting into repo the reverse repo and just parking it there. It’s like you’re having this liquidity, you’re having this liquidity crunch between banks, but then they’re shoring up the banks with this fake qe, like the, you know, and we can talk through the math of that for your listeners.

[00:09:13] James Lavish: It’s a really strange dynamic and to be honest, I’ve never seen a market like this and, and I’ve never seen so many managers struggle trying to figure out where to put capital because it’s a very uncertain situation right now. There’s nowhere to hide. Yeah, there is nowhere to hide. Right?

[00:09:28] Preston Pysh: So let’s talk about the backstop facility.

[00:09:30] Preston Pysh: There’s a lot of people debating and arguing over the semantics of what it’s being called some. And it’s amazing to me how passionate people are about it not being called QE or not being called this. Yeah. Meanwhile, I guess from my vantage point, I’m not only looking at it as being qe, I’m looking at it as a form of yield curve control.

[00:09:49] James Lavish: Yeah, we, I want to hear, I want to hear you talk about that too, right? Like, let’s talk through it. Let’s talk through what it is. Yeah. What happened, right? Yeah. Okay. For your listeners, for anybody, anybody who hasn’t already heard what happened at, at Silicon Valley Bank, basically we’re going to simplify it for everybody. I like to do that.

[00:10:05] James Lavish: We’re going to simplify it for everybody so they understand it. The, there are nuances here. This is not exactly the way that works, but in essence, this is the way it. For customers put their deposits in a bank. The bank uses those deposits, it puts some of the reserves and then it lends the rest out and uses it as a form of leverage so they can make other loans using your capital and generate income on that.

[00:10:25] James Lavish: Right. But the capital they keep in the reserves, they have to do something with, so they can keep in cash or they can try to battle inflation and help their margins by investing it. And they invest in treasuries typically. At Silicon Valley Bank, what they did is they took that capital, they lent most of it out, they kept a little bit in reserves, and then what they kept in reserves, they were listening to the Fed. Right?

[00:10:49] James Lavish: So the Fed one year, December, okay, so December of 2021, and I’m going to actually do a thread about this. I’ve written about it. I’m going to do a thread about this very soon on Twitter, maybe by the end of this week so people can, can understand. I mean, the Fed is just not a good predict. You can listen to what they say and what their intention is and it’s helpful, but the Fed is not a good predictor.

[00:11:11] James Lavish: So if you’re somebody trying to invest, don’t listen to what the Fed thinks they’re going to do cause they have no clue. Here’s evidence back in 2020 1st of December, 2021, they put out their Fed dot plot where they all plot out where they think interest rates are going to be now and in the future, in the next couple of years.

[00:11:28] James Lavish: Well, on that dot plot, they said that at the end of 2022, December, 2022. They expected the average fed rep expected that the interest rate was going to be at 0.86%, 0.86. I mean, Preston, they were off by 4%. Yeah. Okay. Yeah. And when you’re buying, when you’re buying treasuries that are 10 years, 20 years, 30 years out, oh, that 4% is massive.

[00:11:58] James Lavish: It’s a massive move on your principle because when you go into the. And if you own that bond and you have to sell it in the market, it’s worth way less than it was because you have to compound that 4% over all those years. And it, it generates a, you know, a loss for you. That’s massive. Okay, so let’s go back to what happens.

[00:12:18] James Lavish: They’ve got these deposits, they put the, some of the deposits in treasuries, they bind lo, they buy elongated treasuries. They hear the Fed saying, well, rates are not going to go up. Inflation’s not a problem. You know, so they think, oh, we’ll take a flyer on that. We’re going to generate more income by holding a treasuries that are further.

[00:12:34] James Lavish: Then the Fed starts raising rates. Well, people say, well, you, they should have hedge that interest rate risk. Immediately having that, that much capital. They should have in that. That’s what you should do at a bank. You hedge out your industry risk. How do you do that? You can do it with swaps. This is where the swaps are good, where you can hedge out risks that you don’t want to take on.

[00:12:53] James Lavish: If you don’t want to take on a variable interest rate, you can hedge it out by locking that rate in getting a little bit less of a rate that you would otherwise, but taking out the risk, you can do that. They didn’t do that. So instead they watched the rates start ticking up higher, and once they start ticking up higher, the only thing they could do is lock in a loss so it’s too late unless they think they’re really going to go higher.

[00:13:14] James Lavish: Which the Fed kept saying, no, it’s transitory. No, inflation’s. It’s just going to be a minute. So they took these massive losses on the books. You know they didn’t even have to list on their books because they can say that these are, these are treasuries, that these are assets that we are going to classify help to maturity assets.

[00:13:32] James Lavish: Yeah. Which means that you don’t have to mark them on the gap accounting as a loss. They say that they’ve got this many assets in, in, in their reserves. They don’t really, if you market to market, they, it’s, it’s down 20 or 30%, so then investors start getting wind of this, right. Or, or depositors. Well, you’ve got two types of depositors, right?

[00:13:52] James Lavish: You’ve got your everyday depositors, you and me, and then you’ve got your business depositors, you know, which are these venture capital firms and these venture capital, the actual companies, right? So these very young companies, these tech startups. That have a bunch of capital they’ve raised from these VCs and they’ve got deposits in the bank, but they use it.

[00:14:10] James Lavish: That’s what they do. They raise capital and then they use it in big chunks to buy equipment, to buy, to do software development and whatever it is. Then they’ve, they use it in big chunks, so you’ve got to match your deposit and the turnover, your deposits, and the duration of your deposit. To the duration of your reserves, but they didn’t do that, right?

[00:14:31] James Lavish: So they had these big withdrawals and then people started getting win that Silicon Valley banks got some big losses on their books. If they mark to market, obviously deposits get nervous, they start taking out their money, they have a run on the bank. Then what happens? They, Silicon Valley has a choice.

[00:14:48] James Lavish: They can either sell those assets and take a loss or borrow against them, but either way, if you borrow the overnight window, you borrow from another bank, you’re taking a haircut. So there’s nothing they could do except sell them down. And then it, you had enough depositors ask for their money back that they became insolvent.

[00:15:07] James Lavish: They just didn’t have it. And so, okay. Step in steps, the Fed and the treasury, and they say, okay, well we can’t have Silicon Valley just go under, we’ve got to shore them up. Because if we let them just go under and all their depositors that take that loss, okay, then this could cause some contagion.

[00:15:28] James Lavish: Cause run on other runs on other banks, runs on other regional banks. So they wanted to shore it up and make sure that everybody knew that they weren’t going to execute what is called a bailin. I wrote about this, it’s funny because I wrote about this to maybe three weeks beforehand, talking about bail ins with Credit Suisse.

[00:15:47] James Lavish: And just making sure everybody understands, hey look, if you have your capital at a bank, if you have a deposit at a bank. You’re only backs stopped in the United States for $250,000. And now after 2008, we instituted through Frank Dodd a new rule, a Dodd-Frank, a new rule that the US couldn’t just bail out any institution individually.

[00:16:11] James Lavish: Right. So it had to be one of a globally systematic, you know, important bank.

[00:16:17] Preston Pysh: Well, we learned that wasn’t true.

[00:16:20] James Lavish: Well, yeah, that wasn’t true, right? So, but the point is that if they e executed the, this new law that says, Well, you can execute a bail in, which means that any asset, which includes depositors Yeah, deposits can be used to pay off creditors, you know, in a bankruptcy situation will anything above $250,000, that’s fair game for them to claw back and use and you could lose it, right?

[00:16:47] James Lavish: Because it’s not protected under FDI. It’s a lot of information, but the bottom line is the Fed and treasury came in and said, no, no. If you have your deposits at Silicon Valley, we’re going to make you hold. Don’t worry about it. What we’re going to do is we’re going to institute this new rule, okay? And we’re going to have this new funding program, right?

[00:17:07] James Lavish: And it’s just ludicrous isn’t it?

[00:17:11] Preston Pysh: It’s insane. Well, there’s just, they make the rules and then when it comes like crunch time, it’s like, well, we’re not going to actually do what we said we were going to do. We’re going to do this other thing, and we’re going to manipulate the market. We’re going to manipulate the market.

[00:17:24] Preston Pysh: It’s more manipulation. Right? Why? Because, well, there’s a, there was a lot of very noisy people who were very rich than very wealthy, who needed this to be back stopped. Now there are definitely some companies that we would not want to go under some small tech companies that were going to get hit sideways with this.

[00:17:38] Preston Pysh: It was just, you know, it was unfortunate all the way around. It was just, it was just risk management give to give people an idea. Roku. Right? What did they have on deposit at Silicon Valley? It was like half a billion, right?

[00:17:50] James Lavish: It was half, yeah, it was, it was like half a billion dollars.

[00:17:52] Preston Pysh: And so like, they would’ve been bailed in, they would’ve got $250,000 hundred dollars back and they would’ve bailed in.

[00:18:00] Preston Pysh: Yeah, they, they would’ve been bailed in the rest of that deposit.

[00:18:04] James Lavish: That’s right.

[00:18:04] Preston Pysh: Not just to show people how insane this is, but so amazing job laying that out. Where I want you to kind of explain why I’m calling it yield curve control. I’m curious if you would agree with that definition of it. Yeah.

[00:18:17] Preston Pysh: But explain what you think it should be called.

[00:18:19] James Lavish: All right. Well, let’s back up. The bank term funding program. BTFP, I mean.

[00:18:22] Preston Pysh: Okay. What is it? And so people have to understand what it is to really get their head around it, right?

[00:18:27] James Lavish: Basically they’re saying, I, if a bank is in need of capital, right?

[00:18:30] James Lavish: And they’re eligible and they’re FDIC insured, they can borrow against their securities instead of selling them on the open market, right? So they can go to the treasury and they can borrow them. Right? And not, not everything is, is up for is available to borrow against, but US treasuries and pro and high quality mortgage backs, MBSS right? Here are a few kickers.

[00:18:50] James Lavish: First of all, they get to borrow at par value. They don’t have to borrow at the, at the market rate, which is, you know what? They could sell it in the market force. They get a hundred percent. Next thing is they don’t take any haircut. Right. So they, it’s not just the market value. They, they don’t have that 5% haircut either.

[00:19:06] James Lavish: Okay. Then the rate is the one year overnight swap rate. So it’s a year out plus 10 basis points. Okay. So it’s not, it’s not what Fed funds is. It’s a year out and we all know that the yield curve, it’s inverted. So yields are, they’re, they’re lower a year out. There’s no prepayment penalty. The loan term is for one year.

[00:19:27] James Lavish: No, there are no transaction fees. And then this is the, this is the best part. So Greg Foss and I talked about this on, on Spaces the other day. If you’re a bank and you need capital, you go to the overnight window, which means that you borrow from another bank, and that’s kind of the typical thing where you go to the overnight window and you, you borrow from another bank, and it’s just what they do.

[00:19:52] James Lavish: But when you have a capital like, like crunch, liquid, be crunch, other banks won’t lend to you because your credit is like, then, then we are not going to, you know, JP Morgan’s not going to lend to you. Sorry. Because we don’t believe that you’ll be able to pay it back. And it’s really embarrassing. You have to go to the discount window, which is actually borrowing directly from the Fed and it’s a bad, it’s a stigma.

[00:20:11] James Lavish: It’s negative. Right. So you don’t want to say that you borrowed from the Fed. It’s kind of right. Okay. What they’ve done is they said you can borrow from us. And we’ll keep it secret. We won’t tell anybody. Yeah. Yeah. So nobody has to know that you borrowed from us for at least a year after the term of your borrowing.

[00:20:32] James Lavish: All right? So that kind of sets it up. So what does that mean mathematically? Well, it means that, look, if you have a hundred percent value of whatever you’re trying to borrow against, well, if you went to the overnight window and you want to borrow, or the discount window, If you went to the overnight window and you want to borrow against that, well, you’d have to, you would first have to mark to market value.

[00:20:53] James Lavish: So let’s take a 30% haircut there. So now you’ve got 70 cents on the dollar that you can borrow against. Then you have to take your haircut and it’s another 5 cents, right? So now you’re at 65 cents on the dollar that you can borrow against. So for a million dollars, you can borrow $650,000.

[00:21:09] Preston Pysh: And this is just all in the hope and the prayer? This is all the hope and the prayer that rates come back down. So that you don’t get crushed even further while it’s sitting on deposit with them. Right?

[00:21:20] James Lavish: Right. Exactly. But if you go into the BTFP program, you can borrow all a hundred percent. You can borrow your, your million dollars, whatever it is. So what does that mean?

[00:21:32] James Lavish: That means that you basically are getting 35% more for that. You have access to 35% more liquidity than you otherwise would. 35% over 65. I mean, it’s literally 50% more than you would’ve otherwise, right? Yeah. So you get $350,000 for a million more on top of the 650 that you would’ve gotten. So in 350, divide by 650, that’s like 50% more than you would’ve been able to get.

[00:21:59] James Lavish: Otherwise, that’s 50% K boost in your liquid. And this is why I’m saying it is liquidity in the market. Because, and people are saying, well, but you’ve got to pay it back. And yeah, you do, but it’s short. It’s absolutely short term liquidity that you would not have access to otherwise, because that liquidity is not in the market.

[00:22:16] James Lavish: It’s not like I’m borrowing from JP Morgan and taking off of their books. That liquidity is in the market. I’m taking it from the Fed and putting it into the market. So it’s, it’s adding liquidity to the market where that isn’t there otherwise. Yeah. Yeah. You have to pay it back in a year, but that’s absolutely a form of QE.

[00:22:34] James Lavish: It’s not traditional QE, but it’s absolutely form of it.

[00:22:38] Preston Pysh: Well, so James, so let’s pull the thread. Okay. So, yeah, we all know the, the, the Fed’s playbook is that they’re going to create a recession. This is what they think is going to happen, right? Yeah. And maybe it is what this is going to happen. I’m just saying this is the only way that this works for them is they create a recession.

[00:22:52] Preston Pysh: All the rates come collapsing back down to the 0% across the whole duration of the curve. Then all these banks can then go back, take all these dead instruments that are sitting on the deposit there. They put them back on their books. Because now the, the value’s back to the par value that it was, right. They quickly pay back the loans and everything and, and it’s like time stops in their minds. Time stops right there and doesn’t progress forward ever again. For this to all work, right? For this to work, you have to be able to stop time in the year from now. If all of that actually happens, what I just described, because what nobody plays out is the step after that.

[00:23:34] James Lavish: And second, third step. But yeah, going into the, go to the first step after.

[00:23:38] Preston Pysh: Yeah. So, so then they’re going to flood the system with more monetary units as, as all these rates come collapsing back down. It’s going to, like you think the, the supply chains were broke on the last one with covid. Just wait till the next round.

[00:23:51] Preston Pysh: And wait till the next round of what happens inflation wise as they try to restimulate this economy as they just literally broke it.

[00:23:59] James Lavish: How bad was the recession? That’s the first question. Yeah. How bad is the recession? Like how, how hard does it hit? And that’s what we’re trying to figure out. And I mean, nobody does-

[00:24:07] Preston Pysh: But James, yeah, it has to hit hard.

[00:24:08] Preston Pysh: I mean, look at the amount of manipulation that happened here. It’s not like it’s going to be this soft layup that everybody can recover from it. They don’t need to induce a lot of stimulus.

[00:24:19] James Lavish: That’s right. And you have you, so you have two things that could happen. I mean, of course there are other things that we can’t even imagine, but you have a harder session.

[00:24:27] James Lavish: You know, there’s not going to be a soft landing that’s just ludicrous. I just can’t see it happening.

[00:24:31] Preston Pysh: I mean, they’re saying softish for God’s sake.

[00:24:34] James Lavish: Yeah. I mean, look, I would put a low probability on that. Yeah, okay. It’s not zero chance, but I put a low probability on it. All right, and then you, you have a harder recession, which is high probability to me.

[00:24:44] James Lavish: Another high probability to me, but which is not, maybe not more than 50%, but it’s a higher probability than a Softish landing is we have a real credit event, like a real credit event where you have some sort of lockup in the repo market, a lockup in the treasury market where the Fed has no choice but to flood the.

[00:25:06] James Lavish: With massive liquidity immediately, like in an emergency me measure, and that, that’s a distinct possibility then. So why is that? Because of just the sheer amount of leverage that’s in the system. You pull one string that, I mean, okay, let’s back up. You had one bank, it was the 17th largest bank in the nation at the time, Silicon.

[00:25:28] James Lavish: And the Fed was so worried that there would be a spread of contagion. Yeah. In a real credit event from this, a run on banks, a lockup of the treasury market, whatever it may be, because of a fleet of capital out of these banks. And I mean, it was, it was a little bit nervy there that weekend. Right. And so they rushed in to save this bank, number 17 in, in the nation because it had a run on deposit.

[00:25:54] James Lavish: Do you know how many other banks we have that don’t really have their liquidity shored up? I mean, they can go to the, they can go to the, this new BTFP window, but JP Morgan’s talking about that adding 2 trillion of liquidity to the market because they had to rush and save them to be sure that this doesn’t happen again.

[00:26:13] James Lavish: So then asked in front of, was it the Senate or Congress? I can’t remember who she was talking to, but Janet Yellen when point blank, she was asked, will you backstop every. If this happens to another regional bank, are you going to be there right after? I mean, Powell’s, this is the kind of clown show. We’re there, we’re, we’re in a circus, right?

[00:26:33] James Lavish: He was within 30 minutes of each other in one tent. Over here you’ve got, you know, this guy is telling us the fed snake oil and he says, we’re going to keep raising rates. Everything’s good, everything’s fine. The bank situation is it. We’ve dealt with that. We’re not in a panic about that. We’re not, we’re not particularly worried about that now.

[00:26:51] James Lavish: If you have money and deposits in the bank, you can assume that it’s safe. He says this, and then in the other tent, just two doors down. At literally the exact same time. Janet Yellen is telling her audience, oh no, we’re not back stopping every bank. You cannot assume that. I mean, literally, it’s a, I mean, you couldn’t, it’s crazy.

[00:27:12] James Lavish: Like they’re literally saying at the same moment, like, which tent should we be in? Which, which tent should we listen to?

[00:27:18] Preston Pysh: So James, I want to, I want to pull the thread on you basically said, I think it’s a real low probability that they get a soft landing. I agree. You think it’s a, it’s a high probability that they get a hard landing and when we look in Europe and we’re still seeing 600 basis points spread between inflation and their, and their yield curves, I think that’s-

[00:27:36] James Lavish: for everybody to understand, that means if you buy a bond in Europe, And you hold it for two years, you’re basically losing 6% a year on your purchasing power when you get, when you get paid back. So, go ahead.

[00:27:49] Preston Pysh: Well, when I’m looking at that, that’s the reason why I think this thing’s not only just going to hit, it’s going to hit really hard, is because none of this is under control.

[00:27:58] Preston Pysh: Looking at like where we’re at right now, there was a big announcement this past week with OPEC Plus saying that they were going to cut the amount of supply that they’re adding into the. I’ve heard two different scenarios on this. It’s, Hey, they’re, they’re they’re wanting to play ball with the US and European Central Bank and Bank of Japan, and they’re basically not going to be held captive to the dollar dominance.

[00:28:25] Preston Pysh: And this is a big middle finger to those planners and their ability to get inflation under control by controlling the number one input, which is energy input to the inflation numbers.

[00:28:37] James Lavish: Yeah, it’s derivative to all of it.

[00:28:41] Preston Pysh: The second side of that that I’m hearing is people that are saying, no, no, no, no, they’re just doing what they normally do.

[00:28:48] Preston Pysh: I think Jeff Snyder, this is kind of his, his take. I’m sure Joe Carlasare would agree, and other people would look at that and say, no, this is just what they do at this point. They’re expecting it. The treasury market here in the US is suggesting we’re getting ready to go in the recession, and this is a standard cut in order to make sure that the price doesn’t collapse too much and that, and it’s a preemptive.

[00:29:10] Preston Pysh: Which side of the, that do you side on, and based on where you see it, what, what do you think that impact is in the coming six months?

[00:29:18] James Lavish: I think that they’re using the, the typical playbook as kind of a, a front, but they’re, they are exploring other avenues of currency to the treasury and or to the US dollar, and that is the danger.

[00:29:38] James Lavish: I mean, if you just look at it, I mean there were already rumblings about brick, the bricks getting expanded to bricks with two eyes and two S’s. So you know, Brazil, Russia, India, China, South Africa, getting expanded to also Iran and Saudi Arabia. Right. They, they’re clearly sending a shot over the bow and, and just because

[00:30:01] Preston Pysh: they say they’re going to do a million, what was the, I don’t remember what the number was.

[00:30:04] James Lavish: 980,000 barrels a day. Less a day, I think. Yeah. They’re going to cut it by 980,000 barrels a day.

[00:30:09] Preston Pysh: So if I’m them, and I am going to exercise the more aggressive strategy middle finger to the central planners of the. I would come out with what seems to be a pretty normal announcement and then that doesn’t mean I actually have to implement what the number I said I could be maybe way more aggressive in how much I pull it back.

[00:30:29] Preston Pysh: And that, I guess that’s what I’m afraid of. That’s what I think is actually the most probable.

[00:30:34] James Lavish: That they’re going to cut more.

[00:30:35] Preston Pysh: They’re going to cut more than what they’re already saying that they’re going to cut.

[00:30:38] James Lavish: Yeah. But we look, we stepped into this, right, Preston? We stepped into it By By you weaponizing the treasury against, yeah.

[00:30:46] James Lavish: I mean, that’s just it. It’s nonsensical. That was just the worst chess move I’ve ever seen in US treasury, you know, playbook. I just can’t believe that we actually did that. If you’re a country that’s on the margin and you’re using US dollars in, in US dollar denominated debt, you know, you’re looking for other avenues because you’re, you’re worried about, let’s say, you know, if you’re China, you don’t want to be holding treasuries, because we can use that against them obviously.

[00:31:15] James Lavish: We’ve done it before. Now we’ve set the precedent that we’re we, that we will weaponize the treasury against you. And and so of course if you’re Saudi Arabia, wouldn’t you be doing this? I mean, wouldn’t you be looking for avenues? I mean, it doesn’t make sense. Well, it seems like,

[00:31:31] Preston Pysh: it seems like they have a lot of these deals already in place to start coming off of the dollar.

[00:31:35] Preston Pysh: You’re already seeing a lot of the pricing happening in the, in the yon.

[00:31:38] James Lavish: You won. Yeah. Yeah. It’s already starting happening. That’s right. And China executed their first LNG purchase in Euan.

[00:31:46] Preston Pysh: Well, so let, so let’s tell people the consequence of what we’re talking about. So let’s say they cut more oil rips.

[00:31:54] Preston Pysh: Let’s say oil starts going over a hundred again, 120. 140. Yeah. What’s this mean for inflation? And then what does that mean for these treasury markets that here in the US people were thinking are under control and that are maybe need to be, start getting to be bid. When in fact, none of the inflation is under control still.

[00:32:13] James Lavish: Yeah, so the inflation, it continues to spiral out of control. Well, it hasn’t spiraled outta control. Inflation is coming down, but that’s because we’re crushing demand. And but the problem is as you’re crushing demand and we’re going into recession, you’re raising the price of energy. And energy is derivative to everything we do.

[00:32:30] James Lavish: It’s, it’s derivative to food, housing, like every material, everything that we need because we’re, we’re importing so much that we have to pay, you know, higher import bees to actually get materials here to everything costs more when you. Obviously when energy is more expensive, everything costs more, so everything inflates and that gets passed on to the consumer.

[00:32:54] James Lavish: There’s only so much that the manufacturers and, you know, these companies can actually, they can swallow themselves that they, that they don’t pass on, so they have to pass on a certain percentage of it. That’s, you know, so it’s just what it is in order to keep it marches.

[00:33:09] Preston Pysh: What’s your base case on oil?

[00:33:11] Preston Pysh: Because I kind of think it goes sideways or maybe even up in the coming six months.

[00:33:15] James Lavish: I’m curious if you Yeah, I do. I agree. Agree. I agree. Yeah, and I agree and that, and so if you look at, I mean, look, Go through the machinations of what happens in, in a recession, right? So you start having layoffs, you start having a, a decrease in demand.

[00:33:32] James Lavish: You start having, margins are, are compressed for companies because they’re, they’re not selling as many products. And then on top of that, now they’re, the cost of everything is higher because of. And so the layoffs are even steeper. The demand is drops even more because the, the prices are higher. So you wind up, this is what this is.

[00:33:53] James Lavish: The problem of the soft landing is that it almost makes a certainty that we’re going to have a hard landing if you have energy prices going up as you have demand coming down. And we’re going into like we’re going, we’re driving into this recession with all of this leverage. I mean, it just makes it almost a certainty that we’re going to have a hard landing in the next six to nine.

[00:34:14] Preston Pysh: How, how do you see Bitcoin performing through that? Because I think that that that’s, I think you have a lot of people that looked at the 2020 big giant credit event that happened and they saw Bitcoin, I think it was, you know, 10,000 got punished down to like 4,000. But there was a lot of froth leading up to that where we saw Bitcoin go from four up to like 14,000.

[00:34:38] Preston Pysh: And so I think you still had a lot of speculators in the market just prior to the 2020, the March, 2020. Yeah, like really quick selloff where I look at the, the market today in the past year and a half has just been a blood bath. Like it’s been aggressive selling. Obviously we got a nice bid since the start of the, of the year where it’s up like 80% Bitcoin.

[00:35:01] Preston Pysh: That’s his normal performance for a quarter day.

[00:35:05] James Lavish: That’s normal volatility day in life. Yeah.

[00:35:08] Preston Pysh: But I think that I don’t see a lot of speculators in the market. I think there’s been tons of selling. So how do you see Bitcoin performing if your base case of something really breaks down here in the coming six to nine months?

[00:35:21] Preston Pysh: How does Bitcoin perform through al that?

[00:35:23] James Lavish: Well, let’s start from the top, right? So when you see, when you have, when you have, okay, let’s say that we have a steep market selloff that we do have, we you do have some sort of of crash and risk on assets. Well, when that happens, we call it, the correlation just becomes one.

[00:35:40] James Lavish: That means investors sell everything just to have liquidity and go into cash. They don’t care what it is. They’re just like, take 20% off the books. Just take it off the books. I don’t care what all of it, sell it all, I mean, sell it all. And that’s what they. And so you see all correlations go to one. It doesn’t matter if it’s a treasury, doesn’t matter if it’s a stock, doesn’t matter if it’s gold.

[00:36:00] James Lavish: All correlation goes to one. And especially normally you could see treasuries actually take in some of that capital. But in this market, people are worried now because they’ve gotten so hurt with treasuries last year, they don’t know what’s happening. Yeah, right. So it just, everything goes to cash. So in that scenario, Preston, what I see happening is Bitcoin selling.

[00:36:21] James Lavish: I think it sells off, but I think that assets like that, like Bitcoin and gold solidify quickly, and Bitcoin in particular has a V recovery, like it just comes right back. I see it as if it’s a selloff, that’s a tremendous opportunity. And I don’t see it as something where we sell often, you know, 9, 12, 14,000 and just, you know, then we’re in purgatory for another year.

[00:36:48] James Lavish: You know, I don’t see that happening. I see a sharp selloff and a sharp recovery, and so do I know, of course not Bitcoin. I mean, it does what it does, but that’s what I would expect. If we have all correla, all, all assets correlate to one event, especially if it’s some sort of like credit event.

[00:37:07] Preston Pysh: Could, could we see 40,000 bitcoin before something like that would happen, the 30,000 or could we get like-?

[00:37:13] James Lavish: Absolutely.

[00:37:13] James Lavish: Yeah. Yeah, absolutely. We’re, we’re like, we’re bumping them against 30 already. We could absolutely see 40,000 this spring. It’s the absolutely, which means that in a selloff, well, if it sells off 50% from there, it’s down to 20. It’s very difficult to pin. Also, it really depends on what, what is happening with rates.

[00:37:32] James Lavish: If the, if the Fed comes out and says, alright, let’s back up. First of all, look Bitcoin right now. This is the, this is the funny part. You said it so well the other day. You said it so well. When we were on that, that space of stage, and you said, look, people, what people are discounted, they don’t understand is that we are psychopaths.

[00:37:49] James Lavish: We are not selling this corn like we own Bitcoin and we’re going to hold it. Because we are psychopaths. We are right.

[00:37:56] Preston Pysh: We got conviction. I mean, that’s really what I’m, I’m saying.

[00:37:59] James Lavish: Yeah, we have, I’m just trying to make it funny though. It is, but it’s, it is funny, but it’s, it, we have, and look, this is one of the first pieces I ever wrote way back when I first got onto Twitter.

[00:38:10] James Lavish: This is my first thing, is like, look, you have to have deep, deep conviction in something that has a very, very high reward to risk. You know, and so it’s something that gives you a tremendous risk, route adjusted return, and you have very high confidence in that, and it puts it up in this quadrant that you want to put more capital to.

[00:38:32] James Lavish: That’s where you want to put your capital, and that’s where you want to have a very long term view and weather. These little storms as you see that going out. So that’s so important as an investor to have these high, high, high conviction investments that aren’t emotional, but you really do understand it, deeply understand it, and deeply believe in it for a long term, like a very long duration asset.

[00:38:56] James Lavish: Right? But let’s back up for a second. Look, BI Bitcoin is straddling between being like the leading risk on the asset. It’s like the tip of the spear risk on assets over the last couple of years. Bitcoin goes down while the market just follows and NASDAQ follows with it. Bitcoin goes up. Well then all the thanks stocks follow after it.

[00:39:14] James Lavish: There’s a lot of reasons for that, but it’s straddling between being that tip of the spear risk on asset and being financial lifeboat in the event of like an all out banking crisis. So it’s kind of benefited from the, from the recent turmoil and now the prospect that the Fed could be done tightening.

[00:39:30] James Lavish: And so what I could see happening in your scenario, Is the Fed calls it quit in the next meeting, or they raise and say, this is, we’re probably north of a neutral rate. Okay. Which the neutral rate is where it does not affect the economy at all. It doesn’t have a tightening effect. It doesn’t have a loosening effect.

[00:39:51] James Lavish: Right. If you’re above a neutral rate, that means you have a tightening effect on the economy, and if you hold that rate there, then you’re expecting the, the, that unemployment will go up, that the productivity will go down. That prices will come down, and you’ll, you’ll tame inflation if you’re above that neutral rate.

[00:40:11] James Lavish: Europe has been below the neutral rate for like, had, like in perpetuity, not even close. Not even close. So where we are is, I think what they may do, and look, we’re speculating on the Fed, who knows what they’re going to do. But let’s just say that they do raise one more time, 25 basis points, and they signal like that’s it.

[00:40:30] James Lavish: That’s it. We’re above the neutral rate. We think that inflation’s coming down hard enough that this is probably where, where we end, like this is our terminal rate. That’s where in, in, that’s the highest, the rate goes in the, in the cycle, right? That’s your terminal rate and then that’s your terminal rate and they back off from there.

[00:40:46] James Lavish: Well, if they do that, I could see risk assets, stocks, bond or stocks fang stocks, and particularly Bitcoin, just ripping. And it could easily get over 40. Does it stay there? Well, do we have a credit event? How bad is the recession? When does it hit and what tips it off? What company collapses?

[00:41:06] Preston Pysh: I completely agree with the way you’re describing this.

[00:41:09] Preston Pysh: This is, it’s exactly how I see it going down too. Like especially if we get like this cascading contagion cascade.

[00:41:17] James Lavish: That’s it. Yeah, yeah. Cascading where it just one, one event just leads to another event and then suddenly you, you have a credit crisis. That’s distinctly possible. How that’s, that’s the part that worries me.

[00:41:27] James Lavish: You know, that’s the part that worries me. The credit event.

[00:41:31] Preston Pysh: How do you speak to the boomer population that maybe understands Bitcoin or, or wants that have some of it in their portfolio based on this setup? When we set it earlier, we’re like, there’s no place to go that is comf. Definitely not comfortable.

[00:41:47] James Lavish: So no.

[00:41:47] Preston Pysh: Like how would you construct a portfolio for somebody like that?

[00:41:51] James Lavish: Yeah, well they have to own gold because they understand it. But they also have to understand that gold’s been confiscated before and some of them have been around right after that. Right. So they know that this is possible. They also, I, what I explained is like Go Gold has a massive amount of paper around it.

[00:42:08] Preston Pysh: Like that market is so much, that’s my biggest concern with it, is just the manipulation of it.

[00:42:14] James Lavish: The manipulation of it. And so that right there, just understand that, okay. Yes. I do tell them they should own some gold because they’re very comfortable with that, and it has been a good asset to, you know, store your value.

[00:42:27] James Lavish: Well, it’s low vol.

[00:42:27] Preston Pysh: I mean, at the end of the day, if you’re 60, 70 years old, like you can’t afford to have 80% vol in your entire portfolio. Like that’s, you know, people who are saying that they should, they just aren’t actually putting themselves in their shoes. Right?

[00:42:40] James Lavish: Yeah. And I, and I disagree with that.

[00:42:41] James Lavish: If you look, if you’re a 25 year old, even a 35 year old kid ain’t a kid, 35 years old. But if you’re a 35 year old in the person. Then you want to have 80% of your net worth and Bitcoin. Well, you know, that’s, that’s your prerogative. If you, if you can, if you have enough daily liquidity that you don’t need access to that capital, fine.

[00:43:00] James Lavish: You know, because you could lose it all and you, you could make it back. That’s your deal. You know, I don’t recommend it, I wouldn’t, but you know, now said, if you have the kind of conviction that you believe in this asset, deeply believe in it long term. And you don’t need access to that capital for a while, then you don’t care about the volatility, because the volatility is actually a positive and that’s okay.

[00:43:25] James Lavish: But if you’re a boomer and you’re 65, 75 years old, well you could have periods of volatility. There’s so massive that it could impact you too much to have that kind of. So I agree with you.

[00:43:37] Preston Pysh: But they need to, they need to have some position.

[00:43:40] James Lavish: But I told them you must have some, why do you need to own some?

[00:43:45] James Lavish: Well, because, well, there’s a number of reasons, right? We, we we’re seeing now that there, first of all, you want some sort of store of value, right? And Bitcoin is the best digital store of value that’s ever been created. It’s like, it’s not even close. And I explain to them, I start with the. You know, Preston, I start with the money and what the problems are with the money and how badly it’s being manipulated.

[00:44:10] James Lavish: And so your purchasing power is going to go down. If you own bonds, you’re going to lose purchasing power. There’s just no way around it. Why? And I explain to them about how the Fed needs negative real rates in order to keep the debt spiral from spiraling out of control in the next five to 10. They need negative real rates of return by having high inflation.

[00:44:34] James Lavish: Well, that high inflation means that it’s going to impact wherever you have your assets. Your house is not liquid. You know, you don’t want to have three Airbnbs. That’s probably not the best choice. So what do you do? You have to, you have to store your value somewhere, and if you have a complete collapse of the system, Bitcoin is the only asset that you can take with you.

[00:44:58] James Lavish: And it can’t be confiscated. Yeah, it’s anti inflationary. I mean like, and when I, when I start talking about the money, that’s where they really do get it. because they do understand, they’ve seen prices go up their whole life. They’ve seen these prices get out of control and so they do understand that. And they do.

[00:45:16] James Lavish: And so I tell them, look, have one, two, 3% of your money minimum in there if you lose the two or 3% who cares.

[00:45:24] Preston Pysh: Who cares. It’s, it’s the asymmetry of it. Yeah. It’s the asymmetry that provides.

[00:45:28] James Lavish: And the asymmetry of it is it could save the whole rest of your portfolio. Yes. If the world does collapse and Bitcoin does take on that crown of store of value, it eats up gold.

[00:45:39] James Lavish: It eats up bonds. It eats, I mean, like it, it would eat up massive chunks of the investible assets of the world. Then it’ll be worth a hundred times what it’s today.

[00:45:50] Preston Pysh: Is there anything that you’re excited in the Bitcoin startup or things that are being built through this deep recession that we went, Bitcoin recession that we went through?

[00:46:00] James Lavish: I mean, look, I just got off and I can’t disclose details, but as you know that I’m, I’ve launched the Bitcoin Opportunity Fund and we’re closing funding soon, but with Greg Foss, Larry Lepard, Corey Klippsten from Swan, Mark Moss, and my co-managing partner, David Foley. We’re doing a distressed, we’ve launched this distressed investment fund.

[00:46:20] James Lavish: It’s focused on distressed and deep value opportunities in the Bitcoin space. Only Bitcoin, but what we’re seeing is, I just talked to a company and they’re going to have a down round that’s going to be, it’s deeply in the hole. And it’s a fraction of the valuation. They, that they got their first round of capital in.

[00:46:38] James Lavish: Now they’re doing fine. They’re doing great. But I think that they’re going, they’re an, an excellent company. They’re a very strong company, but they’re struggling to raise capital right now because of all the damage in the space. There’s so much damage in the space and so much contagion in, in Bitcoin from all the garbage from the FTX and the Celsius and all the all, all the, you know, the fraud and mismanagement and the complete lack of risk management.

[00:47:03] James Lavish: There are tons of opportunities out there, and I’m excited because it’s just like back in in, in 2000 when we had the complete tech wipe out and you had the pop, the tech bubble, if you pick the right companies and you pick the the right spots, the internet, the explosion of growth and the internet from that period to now has been just tremendous, you know?

[00:47:24] James Lavish: And so it’s kind of like that where you can make multiples of your capital and finding the right companies that are very levered to this growth. We’re excited about it. We’re super excited. So awesome. That’s, that’s, we we’re working on it every day. I have to say it’s for accredited investors only. I wish it wasn’t.

[00:47:41] James Lavish: It’s an SEC rule. I wish I could change that, but I can’t. But, you know, it’s just reality. But if anybody wants more information about it, you can go to bitcoin opportunity.fund and just put your information. We’re happy to send packet to you. So, but that’s about all I can really say about it without getting in trouble.

[00:47:59] James Lavish: But, you know, that’s it’s, we’re excited.

[00:48:01] Preston Pysh: Awesome. James, I could talk to you all day. Love these chats. Truly love these chats and just trying to figure out where this is going.

[00:48:09] James Lavish: Well, you and your listeners can hear us, you know, they can hear that, look, we’re navigating this too.

[00:48:15] James Lavish: There’s a lot of uncertainty and I like to talk in percentages and probabilities. Yes. Because I, I mean, it’s just reality. None of us know exactly what’s going to happen, but what I’m looking. So you asked me what I’m watching. I am watching the credit markets. I’m watching the credit markets. So if you, you know, for your, your listeners watching what’s happening with the treasury market, what’s happening with the high yield market, what’s happening with bonds and their yields, and the yielding and inversion, and exactly where those rates are going, and not just where they move.

[00:48:49] James Lavish: But the rate at which they move, like those are indications. Yeah. How quickly they move that there’s a move index that you can, you can watch the MOVE that, that shows the volatility of bonds. And then the other thing that people can see and you, and even if you don’t have a a Bloomberg terminal, you can see the, the sovereign CDS rates online.

[00:49:10] James Lavish: And then we talk about them all the time on Twitter where, where some of these companies credit default swaps are. And that’s the best indication of what’s going on in a company. Because when you own a bond, you’re, you’re a high up in the claims ladder of that company and you feel you need protection because that company might trip a covenant or go bankrupt.

[00:49:30] James Lavish: You’re buying a CVS, if those CVS prices go up again, you’re watching the rate at which they move. That is a huge indication. So Greg Foss and I were talking about it months and months and months ago about Credit Suisse. Why? Because you could see the credit default swaps just suddenly just making moves that we’re just like, these are huge moves.

[00:49:48] James Lavish: It’s like, okay, there’s something going on here. It’s just a real quick indication. If you’re not an investor that’s, that’s deep in that company all day long and you’re, you’re just watching from the periphery and you see the credit default swap just spike. Well that’s a major red flag. Those are the things we’re watching.

[00:50:06] James Lavish: We don’t know anything, but we’re, you know, we’re keeping an eye on that because the thing that scares me the most, Preston, is the credit event. That’s what scares me the most. Yeah. And so we’re just, I’m just trying to keep an eye and out and, and see if there’s any indication there to help people and to make people aware.

[00:50:23] Preston Pysh: Well, thank you so much for making time and coming on. I know you highlighted the Bitcoin Opportunity Fund. I know you’re active on Twitter. We’ll have links to that in the show notes. Anything else that you wanted to highlight?

[00:50:34] James Lavish: No, I mean you know that I, I write the Informationist.

[00:50:37] Preston Pysh: Oh, yeah, yeah, yeah. The newsletter. Newsletter, of course.

[00:50:39] James Lavish: Yeah. Yeah. And so, and you know, I do that every single week and I pick out a topic that I, I simplify for people. Just make it super simple for anybody to understand. And so it’s been awesome. The thing suddenly jumped over 15,000 subscribers this week. And it’s been fun.

[00:50:54] James Lavish: It’s a great community. I get a lot of good interaction from people there, and people under trying to understand what’s going on It. I love helping people break into the, into the knowledge of the space because it’s so opaque, especially on the institutional side with the Treasury and the Fed, and everybody talks in acronyms and nobody understands what everybody’s throwing around, you know?

[00:51:13] James Lavish: And it’s so much jargon, so much jargon, and it, and I love simplifying for people, and so yeah, that’s, I love that.

[00:51:22] Preston Pysh: I love that about you.

[00:51:23] James Lavish: Yeah. No, thank you.

[00:51:25] Preston Pysh: Well, we’ll have links to that in the show notes. James, thank you for coming on today.

[00:51:29] James Lavish: Of course, always good to talk to you, Preston. I appreciate it.

[00:51:33] Preston Pysh: If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for, We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I’d love to have you as a regular listener if you enjoyed the show or you learned something new or you found it valuable.

[00:51:38] Preston Pysh: If you can leave a review, we would really appreciate that. And it’s something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I’ll catch you again next week.

[00:52:05] Outro: Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only.

[00:52:16] Outro: Before making any decisions, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permissions must be granted before syndication or rebroadcasting.