#722 The Macro Economy and Your Portfolio w/ Lyn Alden

Lyn Alden is the founder of Lyn Alden Investment Strategy, which provides market research to hundreds of thousands of individual investors and financial professionals. Lyn’s focus is on value investing with a global macro overlay, including currency differentials, shifts in monetary policy, and equity valuations. In this conversation, we discuss inflation, employment, supply chain disruptions, monetary policy, fiscal policy, stocks, bonds, commodities, and bitcoin. ======================= Choice is a new self-directed IRA product that I'm really excited about. If you are listening to this, you are likely part of the 7.1 million bitcoin owners who have retirement accounts with dollars in them, but not bitcoin. I was in that situation too. Now you can actually buy real Bitcoin in your retirement account. I'm talking about owning your private keys and using tax-advantaged dollars to do it too. Absolute game changer. https://www.retirewithchoice.com/pomp ======================= Circle is a global financial technology firm that enables businesses of all sizes to harness the power of stablecoins and public blockchains for payments, commerce and financial applications worldwide. Circle is also a principal developer of USD Coin (USDC), the fastest growing, fully reserved and regulated dollar stablecoin in the world. The free Circle Account and suite of platform API services bridge the gap between traditional payments and crypto for trading, DeFi, and NFT marketplaces. Create seamless, user-friendly, mainstream customer experiences with crypto-native infrastructure under the hood with Circle. Learn more at circle.com.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off.

• 0:11Anthony Pompliano?

  Lynn Alden is the founder of Lynn Alden Investment Strategy, which provides market research to hundreds of thousands of individual investors and financial professionals. Lynn's focus is on value investing with a global macro overlay, including currency differentials, shifts in monetary policy and equity valuations. In this conversation, we discuss inflation, employment, supply chain disruptions, monetary policy, fiscal policy, stocks, bonds, commodities, and Bitcoin. I really enjoyed this conversation with Lynn, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. First up is BlockFi. BlockFi provides financial products for crypto investors. Those products include a high-yield interest account, a US dollar loan product against your crypto collateral,

• 0:54Anthony Pompliano?

  and a no-fee cryptocurrency trading platform. BlockFi also just released a brand-new product, a Bitcoin Rewards credit card. It's a normal credit card that when you swipe it, you earn back Bitcoin rather than cash back or airline miles. Normal credit card, Bitcoin rewards, no cash back, no airline miles. It's awesome. I've been using it now for a couple of months, and I gotta say that not only am I earning Bitcoin back, but also there's a great feeling when you're swiping your card, knowing that it's going to end up being much less expensive than it is today. Go check it out at blockfi.com/pomp. Again, blockfi.com/pomp to start with that Bitcoin Rewards credit card today. Blockfi.com/pomp. Next up is Choice. It's

• 1:38Anthony Pompliano?

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• 2:21Anthony Pompliano?

  Again, choice app.io/pomp. And one more thing, if you want to hold your own keys, choice lets you do that, too. So start stacking tax efficient sats today and visit choice app.io/pomp. Last but not least, are my friends over at Circle. If you manage corporate or institutional funds, you're probably looking for ways to access opportunities in crypto. You see the growth and momentum and want exposure. But a lot of institutions don't know how or aren't comfortable with the risks of Bitcoin or DeFi. Now there's a new investment that's built specifically to help institutions get into digital assets. It is called Circle Yield. It's a blockchain based investment built with USDC, the leading dollar digital currency. Circle Yield is over collateralized and fully secured with Bitcoin collateral to protect

• 3:06Anthony Pompliano?

  your funds. This also makes it a great fit for crypto institutions who want to diversify their treasuries and reduce risks while staying on chain. You get your choice of terms from one month to 12 months and a fixed rate that's higher than what you'll get at a bank or in many fixed income markets. Visit circle.com/pomp to book a meeting with one of their experts. Again, circle.com/pomp to book a meeting with one of the experts at Circle who will help you figure out how to manage your corporate or institutional funds or your treasury to earn higher yield. All right, let's get into this episode with Lynn. Hope you guys enjoy this one.

• 3:41Speaker 02

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 4:04Anthony Pompliano?

  Yesterday, 6.2% CPI. What was your just overall read? Were you expecting this high of CPI print? Or did that catch you by surprise at the

• 4:13Speaker 03

  I didn't have a firm view on exactly what it would be. So nothing between, say, five and six and a half percent would have been surprising. My overall high conviction view that it was going to be sticky at these elevated levels for at least a few more quarters. Because we were seeing basically, especially rent inflation and owner's equivalent rent inflation, those official components of the CPI, which are kind of like wonky ways to measure actual rent increases and actual housing price increases. Those are on the uptrend. And so those were the clear drivers of a lot of the inflation pressures. And so I didn't have an exact number in mind, but yeah, this wasn't surprising. And one of my overall views, you know, going back over the past year was that we would get inflation. And that also we'd have a big disconnect between inflation and interest rates.

• 4:55Speaker 03

  So people holding cash or treasuries are not getting adequate amounts of interest to cover their, you know, loss of purchasing power. So it's essentially a currency devaluation going on.

• 5:05Anthony Pompliano?

  Okay, so you had a thread yesterday. We're going to talk about a couple of these just to start with. And the second tweet in this thread, you said it looks a lot like the 1940s. And you pulled up a chart that basically had the Fed holding the interest rates low despite the periodic inflation. And then you also showed the 1970s as well. And so maybe talk a little bit just about what was happening in the 40s and the 70s that you see a lot of similarities.

• 5:30Speaker 03

  Sure. So those were the two inflationary decades of the past century in the United States. And so in the 1970s, that's what a lot of people think of as the inflationary decade. But it's actually a somewhat less viable example here. It has some overlap, obviously. So in the 70s, you know, debt as a percentage of GDP at that point was very low. They'd already inflated away a lot of debt from the 40s and the 50s. And so actually, you know, public debt as a percentage of GDP was something like 30%. And private debt wasn't that bad either. And so overall, you had a pretty low debt environment. We had other issues, obviously. So basically, they had, you know, spent decades drawing down their gold reserves to, you know, support the Bretton Woods system,

• 6:13Speaker 03

  which was the dollar was pegged to gold, and they couldn't really back that anymore. And two, US oil production peaked in 1970, representing a real world constraint.

• 6:23Speaker 03

  They had to, they had to import more of their oil. And so basically you had this, this combined scenario where they, you know, they went off the gold standard. Um, so that broke the money system. Uh, and then they actually had that inflationary component of, of oil restrictions. Uh, and then also there were geopolitical issues, obviously, in the Middle East. Uh, and so for a while that was a very inflationary period. And as you can see on the chart there, the Fed kept trying to raise interest rates, uh, to combat inflation. Uh, but they were generally, you know, they weren't decisive with it. They were slow. They kept saying it's transitory. Uh, sounds familiar. Uh, and so they, they fought this for a while. And it wasn't until the very end where a number of factors relating to demographics as well as Paul Volcker, Volcker coming in and jacking up interest rates super high.

• 7:06Speaker 03

  He basically put the economy into recession in order to stabilize the, the dollar, the purchasing power. Uh, so that, that's how that decade went. Now, if you go back to the forties, it was a different environment because most of the inflation was driven by fiscal spending, whereas in the seventies, it was a combination of a lot of things. It's partially fiscal spending. A lot of it was bank loan growth, right? Whereas in the forties, it was almost entirely gigantic war spending. Uh, and so we, we often think of war spending as foreign spending, but actually most of it is spending on the domestic economy. They're building factories. They're paying for GI bills. Uh, you know, a lot of the programs are somewhat similar to what we saw o- over the past year and a half. Uh, but obviously tailored towards more industrial purposes. Uh, and so you had this, this massive increase in the money supply from the fiscal spending, which was monetized by the Fed.

• 7:51Speaker 03

  And so you had an, you had an inflationary component, especially because also every country in the world was trying to get as many commodities as they could, right? So there's a lot of commodity demand. Uh, and so you had a very inflationary environment. The difference was that because federal debt as a percentage of GDP was a hundred and thirty percent. They could raise interest rates to five percent or 10% or higher because it would bankrupt the government. So they, they, they had no choice. They just had to hold interest rates low. Despite the fact that inflation was high, and so if you were holding cash or treasuries, you just got annihilated on an inflation-adjusted basis for like a nine-year period where they just held rates super low, even though inflation peaked at 19% year-over-year in the 40s, and

• 8:32Speaker 03

  the overall average inflation for that decade was about 6%, and you just sat there earning roughly 0% on your T-bills and roughly 2.5% on your longer-dated treasury bonds.

• 8:43Anthony Pompliano?

  So when you look at this, you had a second tweet that basically said this is the widest gap that we've had on record, and you'd have to go back to the 40s and kind of the situation you're talking about there. Is your thought process that we now are entering the exact same situation where they're going to have to keep the rates low for a decade or so, and we can look to the 40s as the actual guide for what to expect moving forward? Or do you think there's some similarities, but we may get kind of a different outcome or a different action? One, they obviously have the hindsight of what happened in the 40s and the 70s, but also they may have some different thoughts in terms of what to do moving forward?

• 9:16Speaker 03

  So I find that the 40s is the most instructive analogy to be familiar with. Basically, I would say it's not going to be identical to that. There are differences that I can go over, but anyone who's not familiar with the 40s is going to be in it for a rough time, I think, and confused about markets. And so it's a useful period to study in terms of fiscal monetary policy. So I would say in those areas, fiscal monetary policy, it's likely to be very similar to the 1940s. There are some differences, and so obviously there's a different geopolitical environment. We're not in a world war. Instead, there's basically spending related to lockdown things and basically fiscal stimulus in that regard. So there's still kind of similar fiscal environment, but it's for different purposes. There's very different demographics in the developed world, right? So you have

• 9:59Speaker 03

  a much older population, and so some of these structural deficits aren't really going to go away anytime soon, whereas at the end of World War II, they were able to eventually, get their deficit away, at least for several years. And so there's differences there. Another difference is that the United States back then was a creditor nation and a trade-surplus nation. So we were like a rising power. We were producing more than we We're importing and we own more foreign assets than foreigners own of our assets. Whereas in this period, the United States is the world's biggest debtor nation where you have a structural trade deficit. So in some ways, we actually look more like the United Kingdom looked in the 1940s. Meaning that we, you know, they were the existing kind of world reserve currency.

• 10:44Speaker 03

  They were the ones running structural trade deficits. And, and the United States was kind of like China back then. They were the one that were, that was coming up with massive GDP growth. They were the ones, you know, making things for the world. And so the, the roles are somewhat flipped here. So there are important differences to be aware of. I think one final difference is that in terms of the equity market, it's a pretty different environment because we went into the 40s. Equity valuations are very low. You just came out of the 1930s, depressionary period. And then obviously the, the beginning of the war years were not going very well. So basically until there were major victories in the Pacific, equities were very, very low valued. And they started to rise after that, when you had these inflationary pressures. And we, and when it became increasingly obvious that the United States was going to win the war.

• 11:30Speaker 03

  And that things were going to go, you know, pretty well at the end. And so going into this environment, obviously it's, it's very high equity valuations. And in many ways, that actually does look closer to the seventies. Because you had very, very high valuations in the late sixties, early seventies, going into that inflationary period. And so that can certainly affect how equities perform on an inflation adjusted basis between these two environments.

• 11:52Anthony Pompliano?

  When you start to look across asset classes, I know you've done a ton of work looking at everything from public equities to obviously the bond market, crypto, et cetera. It feels like being invested has been the trade for the last 18 to 24 months, right? Just, you could almost pick any market, as long as you were investing, you weren't holding cash, you've done pretty well. How does this change as we get deeper and deeper into this? And, and it feels like there's almost this element where every time we get towards a market correction, or what could be the start of a bear market. There's just something that comes up. It's like they're reaching their toolbox and whether it's some sort of guidance, whether it's some sort of actual spending bill. Or some sort of action. And I joke all the time that like bear markets have been banned and market corrections are outlawed. And like, it's just everything has to go up.

• 12:37Anthony Pompliano?

  Is that actually true? Or is, is there just like some correlation between the actions they're taking and has that impact? But they will actually allow us to have kind of more.

• 12:45Speaker 03

  More prolonged market corrections and maybe even a bear market in one of those kind of core asset classes. So I think that I think a bear market can happen, especially in in real terms, right? So obviously, if if if markets go flat for a decade, but inflation averages 6% for the decade, that's really poor performance in real terms, even though we don't think of it as like a big market craft, for example. And so I I kind of look towards that possibilities being somewhat likely. And there's a couple of catalysts to look for, I would say. So one is, you know, basically, if interest rates were to rise, that that would be very detrimental to the equity market. I mean, if Treasury rates go up to 3%, 4%, 5%, right? That would be devastating for some of these, especially these really high valued growth stocks

• 13:30Speaker 03

  that are like unprofitable growth stocks that we that we were happy to pay 10 or 15 or more or times earnings for, times revenue for, because, you know, basically, interest rates are so low, alternatives are so low, we're betting on their future out 10 years. Those if those discount rates go up dramatically, that puts a lot of pressure on those big companies. And then also including some of the big FAANG companies that really kind of drive a lot of the S and P 500. So that would be a risk. Now, if interest rates stayed low and inflation stays hot, that's a that's a trickier outcome. The catalyst I would look for there would be if the if the Fed basically stops doing QE. Because QE, you know, QE is a complicated thing because the inflation we're seeing is largely due to fiscal spending and other measures,

• 14:13Speaker 03

  which QE supports. But QE on its own is not necessarily inflationary, as we saw from the, you know, the 2010s decade, where they did QE, but it just stayed in the banking system because there was no fiscal spending to really get that out into the into the economy. And so instead, it just inflated asset prices. And so I would say that if you get in an environment that's that's rather inflationary, and it becomes somewhat self sustaining with with wages going up and therefore prices going up, and then therefore wages going up and therefore prices going up, if that becomes a more self sustaining loop, and if they if they slow down QE or end QE, that could be a rougher time for for equity markets, because you have less of that asset price inflation most likely, and you still have this this underlying real inflation going on.

• 14:58Anthony Pompliano?

  When you think about somebody like Jack Dorsey and Square, obviously, they have a very incredible data set. One of the things I'm fascinated by is not only is it a data set of point of sale data, but also they have everything from the payroll data for companies that they work with. They also have the consumer cash app. They have cards. They kind of have, in my eyes, kind of a 360 view of many data points, both in real time, lots of them, and across a diverse set of market participants. And so I continue to say that is, in my opinion, one of the most valuable data sets in evaluating some of this. Do you have any thoughts about what the data would show if somebody could actually see that versus like the government's ability to collect some of this

• 15:40Anthony Pompliano?

  data and analyze and use like cost of living index baskets and things like that? Like, how do you think about the data we're looking at? And I use that as a proxy for if we have bad data, then we're going to make bad decisions regardless. But what are your thoughts on that?

• 15:53Speaker 03

  I think they could certainly construct a probably a more accurate or real time inflation measure in the company. I don't know if they have one, but I think they could with their data. And it's basically, it's also clear from Jack's tweets, he's been looking at macro stuff. So he's like looking at probably the, you know, the WTF happened in 1971 site. He's been mentioning alternative ways to measure inflation. Obviously, he had that famous hyperinflation tweet. He's been looking at, at obviously some of those macro things. And so I don't know exactly what he has in terms of internal data, but if they, if they wanted to construct an internal inflation measure, they could. And an example I use, like, so if you, if you go back to that rent inflation

• 16:35Speaker 03

  and owner's equivalent rent inflation, so house, house pricing used to be included in the inflation basket, if you, back in like the, the early 80s and before then. And so if houses go up 20%, that would, that would be in the, in the CPI. Now, they took that out because they said, okay, well, houses are a capital asset. We're trying to measure consumer price increases. But we still, obviously, obviously, housing is a big consumer expense. So they said, okay, well, we'll, we'll come up with a measure that determines basically what is the equivalent kind of monthly expense of being a homeowner. And so they, they kind of put that wonky measurement in there. And if you track home price growth compared to owner's equivalent rent growth, there's a couple of

• 17:16Speaker 03

  things. One is that housing prices grow faster than owner's equivalent rent. So it's basically a way to Understate inflation in some ways and two, it's a lot smoother. So it doesn't, it doesn't go up and down as quickly as housing prices do in some of these big events. And yet, you know, so if you look at, say, the largest owner of single family homes in the U.S. is Invention Homes. It's publicly traded. I believe it's a REIT structure, but it's publicly traded. And so they own like tens of thousands of single family homes and they, they disclose their rent increases. And offhand, the numbers were something like 16% for, for new tenants and something like 7% for renewals. And the average was like 11% across their board for rent increases.

• 18:01Speaker 03

  Whereas if you look at rent and CPI, it's nowhere near that. It's, it's kind of coming in with a lag and it's somewhat understating it. So if Jack's looking at, or if people at Square are looking at kind of, you know, real time data, they, they'd probably see, you know, closer to the real numbers for, for, you know, some of the inflation we're seeing, rather than seeing this kind of laggy managed basket that, that slowly catches up over time, but still understates it.

• 18:25Anthony Pompliano?

  Got it. And then one of the other things that I'm really, really interested in is as people see the higher and higher inflation number, it feels like people are getting red pilled on a daily basis and they may not even know what inflation is. So some see CPI, some just see, I went to the store while we were on the show, somebody DM'd me a screenshot of their Chick-fil-A order and it's like $14, right? And, you know, of course there's sticker shock with some purchases. Do you look at changing the portfolio, right? Are there things that you're tactically doing as inflation continues to not only be persistent, but actually accelerate in official numbers? Or is it, no, I positioned myself kind of Q3, Q4 last year for inflation and now it's just playing into exactly how I've been kind of allocated in a portfolio perspective?

• 19:09Speaker 03

  So I, I've not been making many changes lately because I've been positioned for this. I made a lot more changes last year or earlier this year where I was kind of positioning for things, whereas now I've actually been in a state of not, not making very many changes at all because it's just kind of playing out. But you've raised an important point there of basically. We talked before about differences between now and 1940s. And one of the differences is the speed of information. And so in the 1940s, you didn't have the internet. You got like a newspaper. Many people weren't even following the markets, obviously. And so you couldn't sit there and look up, say, St. Louis Fed website to get the exact like, you know, what is inflation right now according to the government? You couldn't do things like that.

• 19:52Speaker 03

  And so when they held bonds that were yielding zero to two and a half percent for a decade, while inflation was averaging 6%, you know, there are obviously financial professionals that were aware of that and could somewhat quantify that. But it's not like people on aggregate could tell you those numbers. Whereas now with the internet, with Twitter, with social media and memes that can spread information very quickly, you know, people like just regular people know what they can look up inflation. They can look up bond yields. They can look up their whatever wage increase they got over the past year. And they can say, wait a second, I'm getting paid less than, you know, my pay went up 5%, but inflation went up 6.2%. And that inflation rate might even be understated.

• 20:37Speaker 03

  So that's not good. Or they can look at, you know, they can post their pictures of like what their Thanksgiving turkey costs this year compared to last year. And then it'll get a, you know, 10,000 likes and go viral. And so that's a very different dynamic than you had in the 1940s. And so that can, that can make it difficult to, you know, that, that topic is called financial repression, which is where you hold rates below the inflation rate for prevailing period of time. And sometimes it's combined with regulations that force certain pools of capital to own those crappy assets, like banks or insurance companies or pensions or other large pools of capital. And financial repression is easier when information moves slower, where it's a lot harder to do when it moves at the speed of light.

• 21:22Anthony Pompliano?

  What questions do you guys have? Hey Lynn, thanks for doing this. So my question would just be around kind of what we're seeing in Bitcoin. I think most people look at the on-chain metrics and they look really healthy and strong. And combined with the inflation print and stuff like that, I think most people expect over the next, over the next six plus months, we'll see price appreciation in Bitcoin. But as we get closer to that 2024 halving, do you think that, one, I guess, will there be another kind of crypto winter where we see a big pullback? And two, do you think the idea that distribution is getting tighter, right? 19 million of the 21 million Bitcoin that will ever be in existence have already been put into existence? Do you think that will make that crypto winter shorter? Or how do you think about that?

• 22:01Speaker 03

  It's a good question, and I've thought about this before and I've talked about it to some extent. So I break it into two parts. One is, the more euphoric of a spike you get, like you had in late 2017 or parts of 2013, 2014, the more euphoric that spike is, the more likely you have, are to have a crypto winner for a period of time. Whereas, for example, the high we got in Bitcoin back in, what was it, April? That was less euphoric and therefore the pursuing kind of, you know, correction was, was less deep, less violent, less long. And so I would say part of it depends on, you know, how bullish it gets in the first place. The deeper part of the question, I think, is that the further we go, the halving should become less important.

• 22:46Speaker 03

  And I think this really clear kind of four-year price appreciation cycle will probably become less impactful. And you might have smaller bull markets and smaller bear markets and kind of the, the less of this kind of clear four-year thing. Because as you pointed out, you know, a large percentage of the coins are already mined. And the percentage of new coins coming from miners is low compared to other sources of supply that exists in the market from existing holders. Whereas before, those new coins were a very significant part of Bitcoin, you know, the number of Bitcoin that exist. And so that should theoretically become less important. We're also seeing interesting dynamics where in prior cycles, miners were these small companies,

• 23:28Speaker 03

  often in China, they didn't have great financing, they would have to sell a lot of the Coins that they mined to pay their bills. And so miners were regularly selling to the market. And so we considered this basically dilution. Whereas now what you're seeing is that, you know, as miners have come over to North America. And as there are a number of companies, you know, whether it's, you know, like Galaxy or others. That basically improved ways to lend to miners, right? So they can, they can mine to them using the Asics as collateral. They can make all sorts of different types of loans to them. And also some of those companies are publicly traded. So they have much better and cheaper sources of capital. And so they're actually able to do kind of the Michael Saylor playbook. Where they, they just never sell their Bitcoin.

• 24:13Speaker 03

  They, they, they issue other types of liabilities, whether it's debt or equity. And that funds their operations. And then they mine Bitcoin. And some of them might have to sell a certain percentage of them. It depends on how they want to do that. But the point is they're not selling like eighty, ninety percent of the Bitcoin that they mine. And so that, you know, it's not even as though that the new Bitcoin supply is really getting to the market. There's this kind of this structural change in the way miners operate and their capital structures. This is even smaller private companies that are hodling their Bitcoin. And again, it's partly because they have lower cost of capital. And because after a long enough time of appreciation. Obviously miners would prefer to hold their Bitcoin. They, they don't want to look back and be like, man, those miners from 2012 that sold their Bitcoin sucks for them.

• 24:57Speaker 03

  Right? Like they, they want to actually hold their Bitcoin and basically make that a balance sheet asset. In a similar way that, that Michael Saylor does with, with MicroStrategy. And so I, I think that's going to be a big theme. So when you, when you combine those things, you know, there's not a lot of new supply. Some of the miners are just hodling the supply they do create. And then, you know. Just the fact that it's, it's becoming a more mature asset class, it's more widely held. Less spiky in terms of price. It's obviously still, still a volatile asset, but it's less volatile than it was in, say, 2013. I would expect kind of bull markets to maybe be somewhat less euphoric. And, and bear markets to be, say, shorter or maybe less extreme. Maybe instead of a, you know, ninety percent drawdown, you have a fifty, sixty percent drawdown like you saw this summer.

• 25:42Speaker 03

  And so that, that'd be my base case. But obviously you have to, you have to change based on, on what's happening in the market.

• 25:48Anthony Pompliano?

  John, what questions you got?

• 25:49Speaker 04

  Yeah, Lynn, thank you for doing this and I see you again. So the stock market has been insane. It's up, S and P is up like 25% year to date. It's at $54 trillion. It was 20 months ago, it was only at like 27 trillion. Is this sustainable? And then if not, what assets can people run to, um, to kind of hedge against all this inflation that's going on?

• 26:09Speaker 03

  Yeah, so this rate of, of growth is generally not sustainable, uh, at least in real terms. And so when you look at, obviously valuation metrics were already kind of high and now they're even higher. Now they're approaching records, you know, some of them are records, other ones are basically records that are only surpassed by the dot com bubble. Whether you look at price of sales, um, price, price to cyclically adjusted earnings, uh, replacement cost, market cap to GDP. Uh, you know, there, there are dividend yields, right? There are all sorts of, of metrics to measure valuation. And so it's, it's very hard for them to continue at this pace. Now they kind of go higher. I mean, they went higher in, in Japan, for example, in the late eighties. They can get to pretty extreme levels. But it's, I wouldn't say it's sustainable on a long-term basis.

• 26:52Speaker 03

  If you look back over periods of inflation in the past, generally, you know, commodities and real estate is, is a better hedge against those sorts of environments than equities. Equities have a somewhat checkered past. So obviously in the, in the 40s, they did pretty well, but that's because interest rates were low and they started with low valuations. In the seventies, they did, they did about as bad as bonds did actually. So equities were, were pretty terrible in the, in the seventies, especially, you know, growth equities or just overall market indices. And so generally commodities and real estate would be, would be ones. And obviously in this day and age, Bitcoin would be in that, essentially that commodity bucket for now.

• 27:33Speaker 03

  Whereas it's this scarce asset that you can hold that's, that's, you know, outside of the, you know, fiat currency system that's getting devalued, melting ice cube. And so you can, you can describe it as commodities, hard assets, real estate with a fixed, fixed mortgage, right? Fixed 30-year mortgage is a nice thing to have, uh, and then assets like Bitcoin.

• 27:52Anthony Pompliano?

  Lynn, one of the other things that I spent a lot of time thinking about is from a monetary policy standpoint, the Fed, uh, only has so many tools. But we also see a narrative taking over, um, in the political realm, uh, who is basically in some way, uh, you could argue that politicians are having a hand in, uh, monetary policy.

• 28:11Speaker 03

  And obviously, they've got the fiscal policy that they've more historically been able to affect. How do you look at the idea of the Federal Reserve or a central bank in any country being independent versus being heavily influenced by some of the social programs, the political kind of debates that occur, etc. So that actually goes back to another difference between the 40s and 70s and why it played out like that. So generally, the idea of independent central banking is that you're never going to have complete independence, but you want to have some degree of autonomy. You don't want, for example, the person running the Fed to be the Treasury Secretary, who can juice the economy six months before an election, or maybe do the pain right after the election, right?

• 28:54Speaker 03

  You don't want to do these intricate timings to basically benefit your own party. And so the idea of an independent central bank is that they're appointed by an administration, they're confirmed by whatever governing body of the country it is. And so there's some degree of independence, and then they have a different term, right? So they basically, they have some latitude to make their own independent decisions. They're not tied to having that group win or lose an election, in theory. And so there's obviously a spectrum there. And so in the 70s, you had a somewhat independent central bank. Paul Volcker was basically doing a lot of unpopular things at the time.

• 29:36Speaker 03

  And he had varying levels of support from the administrations throughout his tenure. And so that was an example of partially independent central banking. In the 1940s, basically, independent central banking goes out the window when you have debt as a percentage of GDP over 100% with massive deficits, because those deficits have to be monetized. And so in the 1940s, from 1942 to 1951, there was almost no central bank independence. Basically, the Treasury pretty much took over the Fed. And they just became the de facto monetizers of deficit spending. And they even did a thing called yield curve control.

• 30:20Speaker 03

  Where in addition to just holding the short end of the rates low, they actually hard capped the long end of the yield curve too. So basically 10-year treasuries, they said, we're not going to let these go over 2.5% interest. And they had to buy a lot of them in order to keep them suppressed there. That was just a stated policy. And so that was an example of no independence. And it was funny because towards the end of that period, that nine-year period, the Fed, they were trying to break out of that. So I mean, the war ended in 1945, and the Fed's like, so we can be independent, right, guys? And the Treasury's like, well, not yet. We need to do other things too. It's kind of like that meme, like the Star Wars meme, Rannick and like says something, and then she's like, well, like, right? And he's just like, looks

• 31:04Speaker 03

  at her. That's kind of what happened to Treasury and the Fed. Like, the Treasuries wouldn't let go. And it wasn't until 1951 that there was enough pressure to finally kind of get them separated again. And so that's essentially what you get into at the end of a long-term debt cycle, where when debt is super high, and say there's high levels of wealth concentration and things like that, and you know, it's politically, they have no way to like, cut the deficits. That's when you get that merger of basically central bank and monetary and fiscal policy. So you've seen that in Japan for a while now. They have obviously different circumstances. They have a trade surplus, you know, current account surplus. They have, you know, a lot of other things going for them that have kind of made that smoother

• 31:47Speaker 03

  than we're seeing in other markets. But in the United States, basically, the last time we're in this situation was back in the 40s. And one more example was during 2020, during the heart of the, you know, the financial crisis that was happening, there was even like that special purpose vehicle set up between the Treasury and the Fed, where the Fed could buy corporate bonds now. And normally, they can't do that. And one of the reasons they can't do that is because they can't buy things that they're subject to nominal loss on. So they can buy Treasuries, they can buy mortgage-backed securities, but they can't buy, you know, like... Corporate bond because theoretically the company can default on it and therefore

• 32:27Speaker 03

  they would have a nominal loss. So instead, basically, the fiscal side had to authorize basically a backstop as part of one of their bills. They said, okay, here's X number of billions of dollars to cover any losses that the Fed has buying corporate bonds. And then they set up a special purpose vehicle, which was like a separate balance sheet. So the Fed didn't technically put corporate bonds on its own balance sheet. So it kind of bought them into this other basket and then had that backstop from Treasury and Congress. And so that was an example of a closer unification between them that we that pretty much that we've seen since the 1940s. Got it. And when we go looking forward, I think that you've got a very unique perspective

• 33:11Speaker 03

  on a lot of kind of what's happening and what has happened in the past, which I appreciate. What are you looking for as we move forward in terms of either milestones, certain developments, certain key decisions? Like, are there things where you're like, okay, I'm going to really pay attention to this because that'll have an outsized impact on how this unfolds? I would say two areas. One is watching fiscal very closely, right? Because this is a very fiscal heavy environment. Fiscal spending is driving a lot of inflation. And so I'm kind of watching to see what happens there. If you get fiscal gridlock, you're more likely to get a period where inflation levels off for a period of time, or at least, you know, with some delay. And so if you go back and look at those 1940s and 70s charts,

• 33:53Speaker 03

  it wasn't like inflation was a straight line. There were rises and falls in inflation throughout those periods. And so I would expect the 2020 to be the same way where, you know, you get periods of inflation and then you get some sort of cool off period and maybe you get another round of inflation where there's another fiscal response. And so these things kind of come in cycles. So I'm kind of paying attention to the election cycle to some extent. I'm looking for signs of gridlock. I'm looking to see probabilities of certain things passing because that affects my view of inflation, nominal GDP growth, things like that. The other thing I'd be looking for is

• 34:31Speaker 03

  If inflation becomes more self-sustaining in terms of wage, that wage price spiral, where prices go up, workers demand higher wages to make a living, and then therefore, when their wages go up, their employers have to raise their prices on a lot of their goods to make up for that, and then that leads to more wage pressure. And so if that becomes somewhat self-sustaining, then you get inflation even if fiscal stimulus kind of goes dark for a couple of years. And so those are probably the two things I'm watching. In addition, I'd pay attention to the Fed's balance sheet. So right now, they're planning on tapering their asset purchases, meaning they're still buying them, but they're planning on gradually

• 35:13Speaker 03

  slowing down how many they buy over the next six-plus months. And if they're able to get through that, and they eventually just stop increasing their balance sheet for a period of time, that could be more challenging for equity markets. And so those are some of the things I'm watching, I think, pretty closely overall.

• 35:32Anthony Pompliano?

  And when we start to look forward, it also feels like companies are going to start having to make some decisions here. Obviously, Michael Saylor has outlaid an idea in terms of that corporate balance sheet. As you look forward at those different events, do we think that corporations will start to act much more like macro traders to some degree and start having to do things other than just hold cash and cash equivalents? Or do you foresee a world where it's hard to kind of move the ship? It's hard to get them to turn and change strategies, and maybe they should or maybe they shouldn't, but we shouldn't expect any sort of change on a material basis across the public markets for treasury management?

• 36:10Speaker 03

  I think it partially depends on, one is how smart the company is, how much basically power the CEO has, and

• 36:21Speaker 03

  How kind of connected that company is, right? So, an example of MicroStrategy, you know, he owns the, I think, the majority of the voting rights. He's obviously, he knows exactly what he wants to do. He still has a board he had to work with, but he basically had a lot of influence over that company and was able to get on it quick and in a big way, right? So, all in and early. And it paid off substantially. Now, if you look at other companies, they can start putting Bitcoin on their balance sheet in a smaller way.

• 36:51Speaker 03

  And I think it's, the closer they go to being kind of politically connected, the harder it gets. So, you'd have to ask yourself, why have an Apple, or Facebook, or Google put a billion into Bitcoin? Right? I mean, it'd be trivial for them. They have billions and billions and billions of cash in the balance sheet. Some of them have over $100 billion. Why not put 1 or 5 billion into Bitcoin? And I think, you know, it's hard to say for sure, but I think partially that would spook Congress, right? So, if you start to see Google announce a $5 billion Bitcoin purchase, they might get looked at more, whereas a smaller company doing it gets less scrutiny. And so, I think it partially comes down to how kind of tied they are. And then, too, just the makeup of the board of directors, the makeup of the shareholder base, the CEO, right?

• 37:35Speaker 03

  So, if we keep entering this period, the longer we go with cash and treasury yields held below the inflation rate, you know, the smarter companies should increasingly want to put their resources into other assets. So, basically, Facebook and Google, holding hundreds of, you know, tens or hundreds of billions of dollars in cash equivalents in this environment, is a melting ice cube. And it depends on the company. So, for example, Apple, they have a lot of cash, but they actually also have a lot of debt. They issue a lot of debt to buy back their own shares with. They kind of, they change their capital structure like that. So, they're somewhat neutrally positioned in this inflationary environment, because their debt's getting inflated away, but also their cash is getting inflated away.

• 38:16Speaker 03

  Whereas a company like Facebook, which has like no debt and is like tons of cash, they're just entirely getting inflated away in this environment. And then, Google's more in that position as well. So, really, Alphabet, it really comes down to the specific company in question. The ones you want to look at are ones that just have tons of cash, that exceeds their debt, and they're just sitting there getting inflated away. And you have to ask, why not put at least some of that into Bitcoin?

• 38:43Anthony Pompliano?

  I completely agree. Before I let you go, help everyone understand the research that you do. I just dropped in the chat a link to Lynn Alden.com where you publish a bunch of research, but help everyone just kind of understand your process. And then if they went ahead, they signed up for the newsletter, which I think is fantastic. It's, I don't know if I should say this, but it's the only macro newsletter that I read, top to bottom, every single time it comes out. So what is the process and kind of what do you spend a lot of time thinking about from a research perspective?

• 39:10Speaker 03

  Well, I appreciate that. So I basically have three types of content, really. So one is that I put out public articles that just touch on a subject, basically goes into detail on something that, and those are meant to be kind of evergreen. Like you can go back and read them two years later and they're still pretty much relevant. Then I have those free newsletters. They come out every six weeks and they generally talk about something a little bit more topical. They might include, they generally include some evergreen content in there as well, but it generally ties it more into what's happening now for the next six months, next year. And so those are, you know, more timestamp type of pieces. And then, and then, so that's all free material. And then I have a low cost research service that comes out every two weeks. And I've, again, focused on tactical stuff, more specific

• 39:52Speaker 03

  investment ideas, things like that. And so generally all my research kind of focuses on that blend of macro. So what's happening, the big picture, right? So what's happening with things like inflation, disinflation, growth, stagnation, overall asset classes I'm interested in? That's kind of the big picture view. And also what country markets I might be interested in more than others. And then the micro view is, you know, what's happening with technical sentiment? What's happening with these weird things in the market? What's going on with reverse repos right now? What, what investments look interesting? What is showing signs of maybe having bottomed and is cheap? What is showing signs of being maybe really expensive and kind of topping out? So that's kind of the more tactical stuff I go into after I already kind of have a big picture idea in mind.

• 40:35Anthony Pompliano?

  Got it. You guys got any other questions? No, appreciate you coming on Lynn. I always learn so much when you do.

• 40:41Speaker 03

  Thanks for having me.

• 40:42Anthony Pompliano?

  Anyone who, who is not following you on Twitter or subscribe should absolutely go do it. So listen, Lynn, thank you so much for doing this. I wish that I could say inflation is over. We're not going to be talking about this anymore, but I feel like we will do this many more times again. So I appreciate you taking the time to come on here.

• 40:57Speaker 03

  Yep. Thank you.

• 40:58Anthony Pompliano?

  All right. Awesome. See you later.