Mark Yusko Interview - Fed, Markets, Bitcoin, Crypto Winter, SEC Ripple XRP, & Ethereum Merge

In my latest interview with Mark Yusko, the Founder, CEO & CIO of Morgan Creek Capital Management, we discuss the Fed raising interest rates and impact on all markets including crypto, the crypto bear market and if we’ve hit the bottom, Bitcoin, what would make him change his mind on investing in XRP, SEC Ripple lawsuit, crypto regulations, Ethereum merge and much more.

Transcript

Welcome back to the, “Thinking Crypto Podcast,” your home for cryptocurrency news and interviews. With me today is, Mark Yusko, who’s the founder and CEO and CIO of Morgan Creek Capital Management. Mark, great to have you back on.

• Well, thanks for having me back and excited to chat here on this last day of summer, as we were talking about before we went live.
• For sure. Well, Mark, I gotta start with the fed they’re meeting today and we may see a 75 to 100 basis points hike, but there’s a lot going on here because it’s killing markets right now, it’s killing wealth. I wanna get your take as someone who’s on the investing side and seeing things from a different perspective as well.
• Yeah, well, I think you summed it up actually pretty well. The fed is breaking things and I find it interesting in that these are really smart people by our definitions of smart, right? Buildings full of PhDs, long tenured professionals. And yet they seem to make periodic policy errors and then think that making an error in the opposite direction will fix the previous error and it’s just kind of crazy. So, it started with printing too much money, right? Having liquidity conditions that were just too loose, we had emergency, literally emergency liquidity provisions 10 years after a global financial crisis. You say, well, why would we do that? Well, it’s really complicated in that the fed exists for a different reason than most people think, right? The fed was created not by the government, right? It’s not federal and it has no reserves. It’s not a federal agency and it doesn’t actually have reserves like a bank. It is a private institution that was created by banks to basically be a lender of last resort to the banks to keep them from going under like they did in the panic in 1907, Knickerbocker panic. So if we take a different lens and think, well, maybe they don’t care about the average investor. Maybe they don’t care about unemployment and stability in prices like they claim. Maybe it really is as simple as, how do I keep the banks from going under, because without a healthy fraction reserve banking system, economies don’t function very well. You look around the world at countries that have poorly functioning banking systems, not really great places to live. They may be beautiful or whatever, but in terms of bad currencies, usually bad governments, not a lot of prosperity. You look at strong fraction reserve banking systems around the world, better places to live, not a perfect, I’m not saying that America’s perfect or Europe is perfect or Japan is perfect, but relative to some countries that don’t have that fraction reserve banking system better. And there’s more opportunity, but from the lens of, well, if it’s about liquefying the banks, then it made sense for the better part of a decade to give them access to basically free money, because they were so decimated after global financial crisis because of the bad decisions they made pre-crisis, most of them should have been out of business. Literally their liabilities exceeded their assets and if you look at a place like Iceland, they actually let the banks fail. In America that wasn’t gonna happen because the regulators are, let’s say lobbied, fancy word for bribery, lobbied to not let that happen. So they got almost a trillion dollars. In fact, there’s a reason the Genesis Block and I actually on Monday had my Genesis Block socks on, my Bitcoin socks. And it basically has a picture of the London Times, the chancellor approves second big bailout for banks. It’s not a coincidence that Bitcoin was started in the depths of the great financial crisis. It was being worked on for a long time before that it was released exactly and precisely at a time to maximize the social commentary on how bad that system was and to provide a way for the average investor to opt out. So that’s a really, really long way of saying, the fed serves a different master than we all think, whether they raise 75 basis points, 100 basis points or 50 basis points really has very little to do with economic growth and employment and stability of prices. It really has to do with how can they best keep the banking system functioning in a sound way. And they’ve kind of painted themselves into a corner, right? They printed all this money, post the lockdowns in 2020, they expanded the excess reserves. And those reserves, if you look at the velocity of money, aren’t getting lent ’cause there’s no demand, right? The average person is full up to here with debt, they don’t want more debt. Small businesses have been crushed because the lockdown policies, so there’s no demand for new business loans. And so you have this problem that velocity of money is falling as a supply of money is rising antithetical. So what do you do? You go, well in the old days, I used to be able to jumpstart the economy by lowering interest rates. Well, if I’m already at zero, I can’t lower them further, I’d go negative like they did in Europe, but that didn’t work. They actually went into recession and Japan went into recession with negative rates. So I think they really believe if I raise it, then I can get to a point where I could lower it again and jumpstart this more moribund economy. And here’s the thing, we’re probably in recession, but it’s not a depression, it could turn into a depression. And if you look at history, we had a depression in the 1840s because of some bad policy decisions around banking. We had a depression in the 1930s around some bad policies related to banking and trade. And here we are in the 2020s and it’s a 90 year cycle. Each generation forgets the sins of the previous generation. So I think they are on the verge of that same bad policy decision to over tighten. But here’s the thing, if you threaten one thing and then you don’t go all the way through with the threat, you can actually achieve an interesting outcome. So let’s say they only did 50 today, I’m not saying that will happen, but let’s say they did, what would happen? The markets would soar, right? Crypto markets would soar everybody would be like, oh, they’re gonna be back to printing money, maybe. But they did contract money supply in the last 12 months, first time in over a decade, it wasn’t a lot, about 3%, but that’s not an environment conducive to risk assets and part of the problem. And again, this is a really long answer, but part of the problem in my mind is leverage, right? Leverage is a problem throughout the system, there’s too much leverage in traditional financial markets, right, stocks and bonds. And that’s the reason that stocks have been hammered so hard this year is when you’re over levered and stocks start to fall, well, you can’t sell the stock to pay back the debt, so you gotta sell something else. So what happens is you sell what you can sell and in liquidations, not bear markets, but in liquidations of leverage, cash, gold and Bitcoin, these stores of value and bonds tend to underperform and that’s exactly what we’re seeing this year. Bonds are having their worst year in their history. Gold is down, which is, according to Peter Schiff, impossible, if we have 8% inflation, gold should be up, but it’s not. Bitcoin’s down, well, that shouldn’t be the case, but it is because these things are being sold to meet margin calls in the traditional world and that is an environment that in 2020 happened really quickly. Remember we flash crashed down to, 3,800, and then bam, we were back to 10,000 within a few weeks. Here, it’s been more of a slow, steady grind down as increasing pockets of leverage are found, unwound and solved.
• So I’m gonna ask you a very hard question. Do you think we’ve seen the bottom and do you think the fed will pause and reverse anytime soon?
• They say a good economist says what or when never together, right. So you could say, well, we’ll have a bottom, but I’m not gonna tell you when. Or you could say, on June 30th, 2023 something’s gonna happen, but I’m not gonna tell you what. So I’m bad at short term predictions in the sense that there’s just too many variables and in a highly levered world, it’s fraught with peril. But here here’s what I do think, right. It’s funny, I tell this funny story that I got media training one time. So I’ve been in media most of my career and someone said, you just get some training. So I went to the training and guy sat me down like this and he started to ask me questions and he asked me the first one and I answered it. And he said, “What are you doing?” I said, “What do you mean? “I’m answering the question.” He says, “You never answer the question, “you deflect and redirect and talk about “what you wanna talk about.” I said, “No, no, no, I am a dutiful first born, “you ask me a question, I will answer it.” So you asked me the question, what do I think? I actually do believe crypto winter is over, I believe we’re in crypto spring. I believe we have seen the bottom that whip down to 17, eight, or whatever it was, I think was the bottom. That doesn’t mean we can’t retest it. It doesn’t even mean we couldn’t go a little bit lower than that, but I really do think that the cathartic unwind of the leverage in Bitcoin happened. And I do think we’re having a little follow through here with a, by the rumor, sell the news, about the merge. I think there were a lot of people that thought, when the merge happened, suddenly everybody was just gonna buy Ethereum. Remember Y2K, remember the world was gonna end on January 1st, 2000 and everybody, the fed put half a trillion dollars into the economy trying to get everybody ready and everybody was poised. And then nothing happened, literally nothing happened, a couple machines didn’t work, but pretty much nothing happened. And I think that’s kind of what happened here is the merge happened and we didn’t see electricity usage collapse because the ETH miners just turned on a different algorithm ’cause they need to make money. ’cause they have at lease locked in on electricity contracts. And so the the whole ESG narrative, haven’t heard anybody talk about the ESG narrative in two weeks, ’cause didn’t happen, right. And so maybe on the margin, there’s a little bit less electricity being used, but for what now we have arguably a less decentralized and they’ll, we have arguments back and forth and back and forth. But look if I can get the authority to confirm a block with a single stake, that doesn’t sound decentralized to me. Even if I’m a good person, I think I’m a good person, but if I was given the opportunity to fudge, would I do it? I hope I wouldn’t, but I don’t know, if the stakes were big enough, maybe even good people will do bad things. And we said, oh, but then we’ll just fork and we’ll go do something else. Okay, but we did that with BSV and BCH and the longest change still wins. Bitcoin’s still the king. So I don’t know, that’s a rambling answer to your question, what’s gonna happen. Look, I think, my personal belief is we’re in recession, it’s a shallow kind of 2001 style recession, not a depression. I think the fed could over tighten and break things. But here’s the thing, how many fed hikes are gonna change the price of wheat coming out of Ukraine doesn’t matter, right? It has nothing to do with it. How many rate hikes are gonna change the price of natural gas from Russia to Europe? Doesn’t matter, you could hike 50 times, it’s not gonna change the price of gas. They’re not gonna lower the price of gas ’cause it’s kind of, they got you over the barrel. How many rate hikes is gonna change the zero COVID policy in China and fix the supply chain so I could actually trade in my car and get a new Kia? I want a new Kia, I can’t get one, I literally can’t get, and that’s a Korean car, not even a Chinese car or a Japanese car. But the components are made some of them in China and they can’t get them, so I can’t get a new car. Literally, there’s three in the whole country and one’s in Hawaii, which I guess that’d be a fun trip, but I’m not sure how I’d drive it back, ha ha. And there’s one in Georgia, but I’m sure other people in Georgia will pay more than I’m willing to pay. So I think we’re in a recession. I think because of that, the fed will reverse. When they reverse, we’re gonna have a face melter of a rally. I mean a face melter ’cause the shorts are gonna get scorched and the amount of shorts in crypto is massive. In November people won’t talk about this enough, in November when the SEC decided not to approve a spot ETF and approved a futures ETF, There was method in their madness. That was not a random decision, right? What that did is the same thing that when they approved gold futures or oil futures, when you can create paper commodities, instead of physical. In the old days, if I want to sell you a barrel of oil, I actually had to have a barrel of oil to deliver to you. I couldn’t just make up a paper contract and say, yeah, you buy this barrel of oil and wink, wink, I’ll get it if we actually settle. But we’ll just settle up before I have to deliver and we’ll just, we’ll settle up the accounts. Well, what happens invariably is people say, oh, that’s an easy trade, I’ll just do that. And they create too many paper commodities and the price falls. And so look at gold prices have been spoofed for years because of this. Oil prices have their boom and bust cycle because of it, we got to $140 and we went to $26 then we went to $120 now we’re back to $80. And I think the same thing’s happening in Bitcoin is the banks are short the heck out of this ’cause they’re the other side of BITO and BTF that are long futures, ’cause someone’s gotta be short. And speculators are just the opposite of hedgers, right? They’re a necessary part of markets. But they can also manipulate markets if they have more capital than the hedgers. And in this case, the banks clearly have more capital the providers. And so I believe there’s downward pressure and you can see it, if you look at the Bitcoin chart off the bottom on June 13th, we made a nice, beautiful accumulation pattern, higher lows, higher highs, 17, 18, 19, 20. Then we started hitting 22, 23 and then we’d spike up, if you look at July and August, we’d hit 24K over and over. And bam, there were sellers, sellers, sellers, just massive sellers and it was an ugly looking chart, it was a hugely distributive chart. And so then we had the correction back down to 20 and now we’re stuck in this 1920 zone. We’re starting to see more accumulation, in fact today was a good day, it’s good we’re recording it today. We made kind of a second double bottom and people are like, that doesn’t exist, right? Triple bottoms don’t exist. Well, we made a bottom in June and then we made a second bottom in August on lower volume, that’s usually a good sign. Then we started to rally, but then we rolled over again on all this fear of higher rates. But this morning and it tells me that he’s gonna hike less than people think. ‘Cause someone always knows before the actual stuff happens it’s funny how that works. So my guess is, it’ll likely be 75. It could be as low as 50, but it’s likely 75 because they put in people’s brains that 100 was possible. And if you do 75, when people are thinking 100 is possible, oh that’s a win. Well, but two weeks ago you thought 75 was high. So it’s all about this gamesmanship. And so if that does happen, I think we could get a little ripper. If they were to do 50, it’d be a face melter.
• And now from a face melter standpoint, are you talking kind of like a retracement, a small rally or a to new all time highs?
• Well, great question. So we’re in spring and spring, nine-ish months, right? If you think about the four year cycle, it’s broken up into three pieces about 15 months, nine months, 15 months, nine months, winter, spring, summer and fall. And winter is the downdraft, spring is kind of the consolidation, summer is lift off and then and then fall is kind of that parabolic craziness, right? That last, where all the levered speculators and the gamblers come in and we go way above fair value to set up for the new winter. And so spring is more likely bouncing around with an upward bias. So, when I say a face melter, we could go from 1920 back to 25 in a hurry, right? It’s a 25% move, but it would happen fast.
• Got it.
• Then we probably consolidate a little more and it’s probably sometime, I’m gonna call it March next year when we get into summer and then we start heading back for new highs and by the end of next year, right, in anticipation of the next having, I think we could see a really big FOMO move, all the institutions that, I’m going to do a dinner tomorrow night and a speech on Friday to a board of a big pension. And it’s called Get Off Zero, right. They have zero exposure, they’re going to get off zero. How much are they gonna do, I don’t know. But 83% of pensions still have no exposure. So as they go from 83% to 73% to 63%, that’s 20% of pensions, we’re talking trillions of dollars. If they just put in 10 basis points, that would cause a really interesting supply, demand move. And the thing people forget about Bitcoin in particular, it’s a very illiquid market, right? The HODLers control the vast majority of coins and they’re not selling at any price, they’re not buying it at any price. In fact, some of them probably lost their keys, no, I’m just kidding. And well, like the Satoshi wallet, that probably, I’ll say it, I don’t think it’ll ever move, right. I believe that it was a multisig and that one of the people’s passed maybe two and that it’ll never move. But as Satoshi himself, he, she, they said, consider it a donation to the rest of the community when coins get lost or stolen.
• Very interesting. You mentioned institutions and recently we’ve seen a good amount of just major massive institutions like BlackRock. And just yesterday, we heard about NASDAQ launching crypto custody, and there was talks of Charles Schwab, fidelity and Citadel partnering to launch a cryptocurrency exchange, amazing what’s happening despite retail being scared. And it’s a bear market at the end of the world, again.
• Again, really, really important points and data is way more important than narratives, right? And one of the problems, human beings are wired in a funny way, right? We tend to form beliefs backwards so the way we normally work is we’re given our belief by our parents, by the media, by our friends, by conventional wisdom. And then we gather data that supports our view and reject all data that’s against our view. We just pretend it’s not there and we should actually do the opposite, right. We should actually gather data about an idea, sit on it, think about it, ruminate and then form a belief rather than, being convinced that you’re right and everyone else is wrong. How about you consider all sides of an issue and then think about it and say, yes, I believe this. And I think the same thing is true with markets is the narrative is crypto’s dead, again. And you got the people, the Peter Schiffs, et cetera. See, I told you it was going to zero. Right, you told us 14 years ago, and 13 years ago, and 12 years ago, and 11 years going five years going four years ago and two years ago, there’s going to zero. We’re still not at zero and we’re never going to zero. That’s the thing that gets lost in the translation is this is a technological evolution, the same as the internet, the same as the mobile net, the truth net is real, right? We will have a system where all value is transacted on blockchains, just all of it. And that’s not good, bad and different, that just is and it’s because that technology is superior to databases and centralized services. And it’s no different than there was a time when we didn’t have computers, right. Not even that long ago, I was alive when we didn’t have personal computers. Now we had mainframe computers, but there were no personal computers, there weren’t even really computers in businesses unless you were massive, like IBM. And so the idea that we carry around a super computer in our hand all day and grow little nodes on the back of our head from leaning down all the time, which is kind of, I actually have one, it’s kind of freak, is amazing. But the inevitability of blockchain as a superior technology to databases is incontrovertible and you say, no, it’s just a fancy database. Well, right, for certain applications, it is. But for other applications like money, right? Gold, money, the only money in the world, everything else is currency or credit. But money been around 5,000 years, it’s really heavy, it’s really hard to divide. If I had a bar of gold, wanted to break it in half and give you half hard to break it in half, really hard to stuff it into my computer and have it come through the internet to your office, not gonna happen. But I can send you Bitcoin with a couple touches of a button. So it’s more visible, it’s more portable, it’s more transmissible and it’s just better because it’s a permanent immutable ledger where each token that any of us own, just a digital property right, so anything that’s titleable, money, assets, businesses, art, collectibles, marriage licenses, driver’s licenses, property titles, anything where you need singular truth, right? I own this property, I own this stamp, I own this coin, I own this Pokemon card, my son and I play Pokemon. So they will all be line items in digital form in the future, there won’t be record albums like I grew up with, there won’t be MP3 players, there won’t be, there’ll be digital streaming services where digital music plays and every time a music song plays, the artist who actually wrote it will actually get paid. Versus the old days where the record labels were skimming off all the profits and the artists were starving, starving artists exists for a reason, right?
• Yeah, just paradigm shift taking place. And I think to your point, people sometimes fall for the media narratives and look, they play for the views and the clicks, right? So sensationalism.
• 100%
• Yeah, if it’s bullish, it’s super bullish-
• Negative sells, negative sells everything. And it’s really kind of sad ’cause positivity wins. When you think about positivity and optimism are the cause of all progress and a little bit of irrationality. I always use the example of who was the third guy, ’cause back then only guys were hunter gatherers and the females were the caretakers. So the guys were the hunter gatherers. Who was the third guy to go out after a mastodon with a spear? ‘Cause the first two guys didn’t come back, right. Who was, but what happened is he tripped on the rock, the mastodon comes to get him and the spear goes right up through the soft part there and kills the mastodon, total accident. But he is like, hey, I know how to kill the mastodon now and progress and meat and fire and all that good stuff. And so that’s just a silly example, but it had to be optimistic to go after that thing, you have to be optimistic to say, you know what, I can create a better money. I have to be optimistic. I have to be optimistic to say, I can create a better way to communicate. The telephone companies hate the fact that you and I are speaking in real time, in high definition for free, they hate that, they tried to pass a law to stop it. Thankfully Al Gore blocked the law. So he didn’t invent the internet, but he really helped the internet by blocking that bill. And it’s really interesting how you could poo poo the tech or you could be Peter Schiff and or Norio Rubene and say, ah, it’s just a scam, it’s just a ponzi. Okay, but why not cheer on innovation? Why not invest in innovation? Why not benefit from it? Look, my pinned tweet, the greatest wealth in the world, full stop, is created by investing in innovation. Investing is something you believe in before others even understand it. And yes, you’ll be mocked, you’ll be ridiculed, you’ll be chastised for your non-consensus actions, but it’s totally worth it. And I just don’t get why anyone would wanna live any other way. And if you look at the best investors in the world, right? Yale, Princeton, Stanford, Harvard, UNC, Duke, Notre Dame, all of them, right? Those powerful pensions, the best family offices, they all overweight innovation as an asset class. And they all follow the technological innovators, the young people, ’cause it’s always young people. Why, ’cause young people don’t know what they don’t know and they’re not afraid. And so, no, my dad, I shouldn’t since say this, I love my dad, but he doesn’t have an ATM card. He literally doesn’t have an ATM card. “Dad, are you joking?” I said, “Where do you get your money?” He says, “When I go to the bank.” I haven’t been at a bank branch in 10 years. I would never go into a bank. Well, other than sign a notary or something. But now I go to the UPS store ’cause they’ll do it for less. But I would never and yet he’s very happy, not having an ATM card, but so he’s not going to invent a better way to do payments, nothing against my dad. Wonderful man actually used code COBOL for Anderson Consulting and could probably fix the mainframe computer at Visa, which still runs on COBOL at 84 years old. But who’s gonna invent a new payments rail? Jack Mallers, a kid and I mean that with all affection, we’re investors in Strike, I love the guy. And I say as a kid, ’cause he’s younger than my kids. But he’s an amazing visionary, CEO that’s building what could be, I’m not saying it will be, but could be the future of payments, right? The Bitcoin blockchain could replace all of this 60 year old technology that we all use every day, ACH and Fedwire and SWIFT, it’s bad technology, old, it doesn’t work very well, it’s not very flexible, breaks down. And Visa runs on a mainframe. Bitcoin blockchain’s faster, stronger, better, can’t be hacked. How many times you had to change your Visa card ’cause Visa got hacked, a lot. So now they make you a whole ’cause they basically have insurance and all that good stuff. So yeah, we’ll have to have insurance markets for the digital assets space and that will come, we’ve invested in those companies too. But we’re basically remaking financial services the same way that the internet remade media and commerce. And it didn’t take one year. Amazon’s been around for 26 years, just let that sink in. It’s not a new company, 26 years and still has low double digit market share. It’s not 90%, it’s still got a lot of growth, 26 years in. And here’s the funny thing, I compare them all the time. Amazon and Bitcoin have the exact same volatility, 80%, every single year for 26 years, Amazon has gone down double digits. On average in a single year, it goes down 31%, went down 39% this year, every single year. So every single year you have the risk of losing 1/3 of money if you sell. But when was the right time to sell, never. But who actually bought it 26 years ago and holds it today? Five people in the whole world, Jeff, mom, dad, ex-wife ’cause she got half of his and Bill Miller who bought at the IPO, no one else could handle that volatility. So when people talk about HODLing or HODLing, however you pronounce it, insurance, insurance, it takes guts, right? It takes stamina and it takes ability to not watch the day to day volatility and understand that, I have a shirt, t-shirt, I used to wear it all the time. Embrace volatility, volatility is our friend, volatility is what makes the world go round, it’s what innovation drives and upside volatility is manna from heaven, right, that’s what we all want, right? I can put a portfolio together with zero volatility and I will lose everything I ever worked for. ‘Cause I could put it all in cash and treasuries and then inflation will ravage my wealth and I’ll have nothing left. In fact, I tweeted out a couple hours ago, a picture from 1971 of prices. Average house was $25,000, a car was $3,500, rent was 150 bucks. Gas was 40 cents. Dozen eggs was 45 cents, a gallon of milk was a dollar. And you look at today and those numbers are vastly different, why? Not because those things got better, an egg is still an egg, a car is still a car, it’s because the money got worse. And when your money gets worse because the fed keeps printing it, the value of a store of value, gold since 1971, Gold’s up a lot. Why, well because we went off the gold standard, went to a Fiat standard, which meant we could destroy the value of our currency for political expediency. And that’s the whole purpose back to the fed, the fed’s owned by the banks, it’s not owned by the people, it’s not federal, it’s not owned by the government, it’s owned by the banks. And it’s designed to channel the wealth to the top of the pyramid through this stealth tax of inflation. I also tweeted a video of Warren Buffet from 20 plus years ago talking about how inflation is a cruel tax on the working people. And it basically steals your wealth and puts at the top. ‘Cause if you think about it, the average house has gone from 25,000 to over 350,000. The average wage has gone from 10,000 to 50,000, that’s half as much. So you’re less well off as someone who does, if you don’t own your own house, if you don’t own your own business, if you rent and you rent your car because you have a eight year lease that’s, eight year payment system, eight year loan, that’s not owning, that’s renting. You’re just renting money instead of renting the car. And so if you live that life, you’re getting less well off and the few people that own all the assets keep getting better off. And that’s what Bitcoin solves because one Bitcoin equals one Bitcoin, forever and always. But Bitcoin isn’t priced in Bitcoin, it’s priced in currencies. So in dollars, it goes like this. In boulevards it only goes up. in rupee, not rupee, in pesos, Argentinian pesos, it only goes up. in Turkish lira, it only goes up, why? Because those dictators have turned their currencies into toilet paper, literally down 99.99%. And so if you opted out, not with all of your wealth, with a portion of your wealth, you survived. And the same thing happens today in the US. We are following that same playbook, devaluing our currency at record levels. And if you opt it out, right, here’s the thing, over the last two years, we printed half of the money, oh we printed half of the money that’s ever existed in our republic, 246 years. Which means a store of value should have gone up 100%, right? If you devalue the currency by 50%, the value of the store of value should go up 100%. Bitcoin over the last two years is up exactly 100%. But Mark, it’s down since November, Michael because the speculators pushed it up to a price that exceeded its value. The value of the network today is around 30,000, we got to 67, that was too high. Now we’re at 20, that’s too low. We’ll go back to 30 and then we’ll start the whole process over again.
• By the way, Mark, I just saw it, that fed raised 75 basis points, so.
• We called it, we called it and now, and I’ll bet you that the market is reacting positively because
• Not 100.
• Maybe not, let’s see. No, no, the market doesn’t like that, they thought maybe he was gonna give into 50, so I stand corrected.
• Well, we know their target for inflation is 2%, I don’t even think that’s possible because how much more are they gonna raise rates to get it to 2%, it might stall at five, right?
• Well but here’s the thing, it’s a great point. What they do, isn’t gonna change inflation. The bulk of that inflation number, that CPI number was two things. Oil prices and used car prices, used car prices have already started to come down, they’ve been negative four months in a row. So those will go away, right? The supply chain will get fixed, I’ll be able to get my new Kia eventually and that’ll get fixed. Oil prices are gonna come down. Mark my words by November, whatever day of the election is gas will be sub three dollars. I guarantee it, I guarantee it, it will be sub three dollars and that’s because there’s a perfect inverse correlation between presidential popularity and gas prices. And so they’ll cut a deal with Saudi, they’ll release more from the SPR, whatever it is and oil prices will probably be around 60 bucks and gas will be sub three dollars. And so all of that will lead to a point where we’ll look back a year from now and inflation probably will be back down into the two, 3% range. Now you’re right, it’s probably gonna be a little bit sticky higher because services and stuff, because of all the bad policies of the post COVID world have put such pressure on small business that they have to raise prices like dentists and nail salons and restaurants all have to raise prices to deal with the fact that they just got crushed and they didn’t get the PPP loans, which the PPP loans were for because they went to all the rich people and the senators and congressmen, which had jobs that didn’t get cut, which you weren’t supposed to be able to apply, but that’s a whole nother story for another day. So I’m with you that inflation will be a little bit higher than their target, but I think none of it matters at the end of the day. ‘Cause it’s not inflation the way we would think of inflation, not you ’cause you’re going weren’t around in the 70s like I was. But in the 70s, we lived with real inflation. Inflation was caused by excess demand and limited supply, right. We had lots of us boomers who were turning 40 and when you’re 40 that’s when you start maximizing your spending, right? You got your kids in school and you’re taking vacations, you’re buying the second house and age 46 and a half is the maximum spending. So in the late 70s into the early 90s, there was this massive run, greatest stock market in history. We went from no debt to lots of debt and we levered up everything and everything was great ’cause we had demand. And so in the late 70s and the early 80s, we had this spike in inflation. But even then we didn’t really because what we had was a system that was double counting. So the whole story about how Volcker broke the back of inflation, it forgets the first part of the story. Volcker created the inflation that he beat because the unit of measure they were looking at was double counting mortgage rates and interest rates. And so every time he’d raised interest rates, the mortgage part of the real estate prices that they changed to this thing called owner’s equivalent rent was going up. So he was increasing the thing that he was trying to fight and then finally they figured it out and it collapsed. And he’s like, oh, I won. Well kind of, that’s literally like the arsonist calling the fire department in a way. So yes, there was a period where those super high rates did choke off. And I remember, living in Seattle at the time, there was big billboard with, the last one to leave, please turn out the lights because people were leaving ’cause warehouses was shutting down and all these companies were laying people off and it was ugly. That 81 to 83 recession, it was a double recession, double dip recession, it was horrible. And yeah, you can blame Volcker for that. But on the other side, everyone wants to cheer him, but it weren’t him, it was us, the boomers collectively just started to buy stuff ’cause had to, right? And we got married, had kids, we bought houses, we got jobs. And if you look at history or, if you look at geographies around the world, you can know what inflation will look like based on population demographics, right? So when you have a lot of 25 to 45 year olds, you get super high inflation because those people don’t really know very much, they’re being trained, right? They’re learning their jobs and you have to borrow from your customers in the form of higher price. So if you look at India high inflation, right, lots of young people. When you get to 45, inflation goes the other way. So since 1982 to today, right, interest rates have been going down ever since because the boomers, right, became more productive and 45 to 65 year old people, super productive, super efficient and you get deflation or disinflation. Well, 65 to 85 year old people, we’re very nice people, I’m not there yet, but we’re not very productive and we don’t spend a lot, we buy bonds. So what happens in that part of the world is you get super low interest rates and inflation. Look at Japan, Japan’s 11 years ahead of the United States. They have some of the lowest interest rates in the world, despite the fact of lots and lots of QE, way more than us as a percentage of GDP but they haven’t been able to generate any inflation. So this is a blip, it was caused by currency devaluation, not demand poll inflation. People say, well it’s the same thing, it’s not, right. My house in Chapel Hill, North Carolina did not go up 40% in value in the last 12 months. It didn’t grow, it didn’t get more efficient, it didn’t get better. Actually had to put money into it to keep it from getting worse. What happened is the money that people use to buy stuff got devalued ’cause we printed so much of it.
• Yeah and Mark, do you feel like this system that we’re in where we are at a point of no return and they have to keep doing this. They have to keep printing and they have to keep devaluing. And hopefully we don’t end up like an Argentina or Venezuela where hyper-
• No, it’s a great point and we won’t, we’ll end up like Japan that’s, if you wanna know where the US is going, look at Japan 11 years ago and that’s where we’re headed and Japan is nine years, so they’re two years ahead of us. So look at Europe right now, it’s a mess, right? Really bad GDP growth corporations are struggling, very little innovation, making bad policy decisions. This zero carbon emission mandate, total nonsense, absolute nonsense, but it’s gonna harm them as a competitive global contributor. And how is Germany gonna survive if you’re not allowed to generate carbon, right? They sell cars and you say, oh, well, they’ll sell electric cars. Well, but how do you mine the lithium? How do you assemble, how do you make the steel? You haven’t been to a steel mill lately? Generates some carbon. I don’t know, unless you’re gonna ma make them like, make, what was it? Wonder Woman had the invisible car, unless you’re gonna make invisible cars that run on invisible electricity. ‘Cause a lot of electricity’s created by stuff like burning coal that generates a lot of carbon. Anyway, don’t get me started on that whole nonsense.
• So I wanna ask about Morgan Creek Digital. Since we last spoke, have you guys added any new coins or new companies that you’ve invested in?
• No, that’s great, so we just closed our third fund. So we’re finishing up investing in fund three. We’ve made about 26 investments in equities and four investments in liquid protocols. In terms of new investments, we’ve made a couple investments in wallets. I’m a big believer that wallets are gonna be the new phone. And the question is, are we gonna go web two device phone and create an enclave inside that allows us to have a web three kind of area? Maybe, or are we gonna have a web three device, like a ledger device that then takes on functionality like phone and iPad and all that stuff, television screen. I probably lean that direction, so we’ve made a couple investments in that space and done a couple gaming companies. I still think gaming and play to earn or move to earn or all these things where ownership economy matters. I think about social networks, right, social media. Everyone in social media is viewed the same. If you like something and I like something, it’s one like, but if let’s say you’re an expert on nutrition and I’m not, your like is worth way more than my like, I may just like it, ’cause it’s an interesting point, but you actually know something. So in a decentralized world where we could reward expertise with tokens, I think we could have a far superior social media experience because everyone just hitting like randomly wouldn’t have the same impact as someone with domain knowledge actually sharing their expertise. And so, that creator economy, that ownership economy I think is gonna be big. On the liquid protocol side, we’ve been on the sidelines, we fortunately, I don’t wanna say we anticipated, but we anticipated the cycle. Now, did we go out and short everything, no, that’s not what we do. But we didn’t go buy everything and watch it go down. Now, to be fair, we did nibble at Bitcoin early, which is euphemism for wrong, right? So we had our first little nibble around 30,000 and it’s funny right after we did it, I sent out a tweet, it was right before father’s day. I was down at Consensus in Austin and I was looking at this chart and it was just looking so much like November, 2018. And I said, guys, no one wants to hear this and I’m probably gonna lose a bunch of followers, but the longer we stay at 30,000 and keep making this descending wedge pattern, the more likely are to bust and go to 15. And they’re like, whoa, where’s that coming from? I’m like, well, that’s what happened in November at sixed, six, six, six, six, six and then bam, we’re at 3,200. And unfortunately four days later, that’s exactly what happened. And so I do think that was the cathartic bottom and then over the next nine months, we kind of made that series of higher lows and higher highs through crypto spring in 2019 and then we’re back off to the races. And I think the same thing happened here. So it’s funny, I’ve been spending some time with some Algorand people and I’ve been spending some time, little less time, but a little bit of time with some XRP people.
• Well, the XRP people want me to ask you, what would change your mind for you to make an allocation?
• Yeah, look, it’s gonna take a lot to change my mind. Here’s the thing, the Algorand, the arguments are pretty sound and Mooch just wrote a book about it and you got a Nobel laureate at the center of it and not many can claim that. But I’m still struggling with the $64 trillion question, which is, are we gonna have a single chain world, Bitcoin, lightning, layer three, layer four? Or are we gonna have a multi chain world? And within the multi chain world, there’s two models. There’s the stacked model, which is Bitcoin is like TCPIP, file coins like FTP. Ethereum’s like www dot. And then in the middle, you got everybody competing to be, SMTP and HTTP or are we gonna have a pure multi chain world are gonna have bridges across chains and that’s just a better way of doing tech, I don’t have the answer for that. The the thing I struggle with XRP is it’s attacking something that I think needs to be attacked, which is, ACH, SWIFT, et cetera. They have a really good salesman at the helm, so he sells a really great narrative, but I just don’t see yet that they’re there and so I struggle to see the applications and the use cases, the way I see it with some of the other chains. And then the last piece of it is the super consolidation at the foundation level still bothers me. People say, but Ethereum’s just as bad. I’m like, again, that’s not a good argument saying something else is bad, so I’m equally but better, that seems like a bad argument to me.
• So would the solution be and I’m spitballing here, because I remember when I first came across, I’m like, yeah, they hold 50%. Yes, they have an escrow, but they still hold it. Would it be better to put it in a foundation or it’s distributed to, I don’t know, different.
• Look, I struggle with this, I don’t know the answer. Look for me, again, if I were the architect and I would be doing all this, airdrop, give it to everybody and then let people decide, do they sell it? Do they lose it? Do they get rid? It’s kinda like what the Russians did with their vouchers. Then everybody goes, oh, but then the mafia went around and stole all the vouchers and the people, I’m like, well, yes and that could happen, but it probably wouldn’t happen the same way because vouchers were in people’s hands and people with guns could take them. If you’re on a blockchain, I guess they’d come to your house with a gun make you give then your keys, but society’s a little less lawless than that particularly in the developed world. So I still think the biggest problem for all of crypto adoption is this, it’s too concentrated in too few hands. And until we get the next billion people and then the next billion people, and that’s why I’m kind of bummed out that they killed off the DM project. Letting Facebook create a crypto that would’ve gotten into the hands of 3 billion people globally, I think would’ve been awesome. I understand why they killed it, right, I understand why they killed it because the banks don’t want that to happen because they really want a CBDC and they wanna control it and they wanna be able to program your money and look, I’m sure you’ve seen the video of August and whatever his name is from the BIS that dude is dystopian scary. Not only just because he is like bigger than kingpin, but what he says is even scary than how he looks. And it’s, so I’m willing to be convinced and I’m willing to, and yeah, DMs are open. So if people wanna make the case to me why I should become a believer, I’m open to it. But I started in 2013, super skeptical of all of it. Came from the traditional world didn’t get it. I said, not running drugs on silk road, not a cryptography student, didn’t get it, but I did the work and the more work I did on Bitcoin, the more excited I got. The more work I did on Ethereum, I got pretty excited, not as excited, but I got pretty excited, made a bunch of money in Solana, but I can’t ever say that I got super excited about it, but Kyle and the guys did, so I’m happy I gave him some money. And there have been a handful, I love the Dash project, but it’s just never gotten any bigger than Venezuela. but I love the project and I love the idea and I love how it’s actually used as a medium of exchange But and I kinda like the privacy features of some of the privacy coins. And so I think there are a lot of use cases I think that are interesting. No one’s showed me a real use case for XRP. No one’s really showed me a real use case for Algo, To just say, well, we’re better than them. Okay, but show me how I use that.
• Would you, question for you, outside of XRP, would you invest in the company Ripple as far as equity?
• Ah, so the answer is, I did in a secondary. So I invested in Panera, which invested in Ripple way back when. And so yeah, we in theory made a bunch of money on that and I’m happy. Would I have made the same decision? Yeah, probably, I said, Brad’s a really good salesman. Today with what I know now, I just, I certainly wouldn’t buy it at current valuation, but if I could go back in time and do it at a low valuation, it’s a great idea. The idea of beating 70 year old technology, great. I just, I’m not convinced that it is superior to transacting on the Bitcoin blockchain. But again, I’m open to be convinced.
• Well, I’m sure you, after this podcast, there’s a lot of people who are gonna be sending you messages, so.
• That’s great. Anyone with technical expertise or real world knowledge, I’m happy to talk to you. If you’re just an owner and a bag holder, don’t shill at me, right, that’s not interesting. We all have stuff that we wish will go back up, that’s not interesting. But if you actually have a logical technical, real world example and experience, I’m definitely interested in those conversations. I had this one experience where, when I first got out out of college and I had my first job, thought I was really smart, right, I’m working for this asset management firm and I had a little bit of money ’cause it’s got a bonus or something, I was gonna buy some stocks and I was all set to buy a basket of tech stocks and this was a long time ago. So it was like, Intel, Cisco, Microsoft, before they went up right in the late 80s, early 90s. And I worked at this firm and this broker came in and he’s talking about these two small cap stocks. He’s like, oh, you don’t wanna buy those big cap, ugly, these things are gonna go to the moon and they’re gonna be great. And one was a biotech company and another was an oil company. And so like an idiot, I listened to this guy who was there doing what? He was there to sell those things, he was a broker, he was paid to sell them, but I bought them and that basket of stocks that I was gonna buy, went up like 20 fold. And the two things I bought literally went to zero. Now the cool thing is, at UBS, I have a family harmony account, my brother-in-law works at UBS, so for family harmony, I have an account with him. And at UBS, no matter what happens to the stock that you hold, it stays in your account. So I still have an entry with the name of the company, Nova Metrics, zero and the loss. And it wasn’t again, it was a couple thousand dollars, but to me it was a lot of money and I love seeing it, I love seeing it ’cause it reminds me don’t do that, right? Don’t hold it because you hope, it’s gonna oh, and the point of my thing was I kept hoping it was gonna come back. I had no knowledge, I had no experience, I had no reason, it was just, well, it went down, it has to go back up, this guy said it was good. No, that’s not how you invest, right. That is pure speculation and I bought it for all the wrong reasons, ’cause it was going up at the time and this guy was shilling it. And look, it’s the four types of market participants. There are investors who buy things that are below their intrinsic value, that’s what I aspire to be. There are traders that don’t care about fair value. They buy and sell and try to scalp, if you’re good at it, great, I’m not really very good at it. There are speculators who are the opposite sides of hedgers, right? Oil producer needs to sell their oil, speculator buys the oil, they have to exist. You don’t have any opinion, you’re just taking the other side of your transaction. Then there are gamblers and the gamblers buy stuff that’s going up or they short stuff’s going down and they don’t do any work. And I think there’s a lot of that in crypto, unfortunately, where, and again, not politically correct, but I think it’s funny. So back to the hunter gatherer thing, guys were hunter gatherers, right? So in our genetic code we see movement. If someone walked by my office here, I would look at them. And so my wife will say, hey, go get the ketchup, I’ll open their refrigerator, no ketchup. She’ll walk up, she’ll grab the ketchup bottle, it’s not moving, I can’t see it, right. So if it’s not moving, I can’t see it. If you look at trading markets, it’s dominated by men, why? ‘Cause it’s moving and we love the movement and we love the hunt. And doesn’t mean there aren’t good female traders, there are ton, there are, but if you just do the data, just, don’t go on beliefs, it’s not about political correctness, it’s the data. The vast majority of day traders are men and it’s because we’re overconfident and we over trade and we like movement. And so when I get the feedback on, well, why don’t you own this? I’m like, well, why, give me a reason, well, because I own it. That’s not a reason, right? Give me a reason that it’s got a project, it’s got a solution, it’s got a use case, it’s got good leadership, it’s got good tech technology, give a good reason. But ’cause you own it, it’s not a good reason. So and I appreciate open the technology discussion is not open to hope. By the way, hope not an investment strategy, four letter word.
• Well, I appreciate that you’re open minded and willing to listen to, like you said, if someone comes with a technical use case and shows you all the specs and so forth that is. Final question for you here, lots going on with US Crypto regulations. We got the White House releasing reports, We got the Lummis-Gillibrand bill. There’s a lot going on between the SEC and CFTC, what are your thoughts, are we moving in the right direction?
• Great question, great question and questions are always better than answers. The big superpower in the world being able to formulate good questions, so I appreciate you doing all the work to formulate good questions. Problem is our culture folks don’t answers, right? Everybody’s all about answers, like, no, no, no questions, way more important. So that question is so insightful because most people ask, are they making bad decisions? No, no, no. Are we going in the right direction? The answer is yes, the problem is incentives. We’re in the, then they fight you phase. So 2009 to 15 first they ignore you bunch of nerds and geeks playing with your magic internet money, whatever, then they laugh at you. 2016 to 21, ah, bunch of nerds and geeks playing internet and magic internet money ha ha ha stupid. 2022 to 2027, then they fight you, now they’re fighting. And regulation is how you fight, right? Because that’s what every incumbent uses to slow down disruption. And so the regulation, now, under Jay Clayton, the SEC was actually quite astonishingly good. They were measured, they were prudent and they were most of all consistent. They ruled Bitcoin, not a security Ethereum, not a security. Looked at it again, Bitcoin not a security, Ethereum not a security. Other things, bordering on securities. Few people did really bad stuff, we’ll go after them. Very prudent, very measured, not crazy. Genzer, he’s a little more of a bankster, he’s a little more forceful but then, and look I don’t like a lot of what’s coming out of the White House these days and that’s not a political statement, either side, I don’t like it ’cause I think what they’re doing is bad. But the executive order, it’s actually good. Said, hey, I want you all to work together to study this and then we’re gonna decide who regulates and that’s what you should do, you should evaluate first, don’t make a decision and say this guy I like better than you, so I’m gonna give it to the SEC and not the CFTC. And now is it a commodity, is it a currency? Yes, gold is a commodity, physical commodity, it’s also a currency. It’s the only money in the world, asset that exists in the absence of liability. So that should be regulated commodities or currencies, I don’t know. So same thing with Bitcoin, it’s digital gold, Ethereum different, okay. It’s probably still not a security, you can argue how it was issued and all that good stuff. But this whole thing about the how we test and the orange groves, I think that’s antiquated. Of course most of our regulation around financial services is antiquated. We still talk about the 1940 act. 1940, that was 82 years ago, we’re talking old. So the idea that that’s still relevant and that case law from the 70s and 80s is still relevant in the digital age doesn’t make any sense to me. So, with all that said, I think they’re being measured and prudent and so I do think we’re going in the right direction. Now, will they blow it? Will they do a China and ban it? Well, what happens when you squeeze the air in a balloon, the air just goes someplace else, it doesn’t disappear, it just goes someplace else. So you can ban mining in China and it just moves to Kazakhstan and Texas. And some on people’s backs, walking around China, literally, mining Bitcoin on their back. So they didn’t get rid of it and if you look at the data on chain, Chinese are still doing a huge percentage of daily transactions, even though it’s banned. So it’s a resilient system, it’s a decentralized system. And so if we clamp down and make it too hard to create exchanges and tools and software and custody then. But here we are, like you said, talking about big companies, NASDAQ, pretty big successful business saying they’re gonna get into the custody business. You got Citadel, right, which rules the world, literally, financial services world saying, yeah, we’re gonna get involved in this. BlackRock, look I will say the first ETF spot ETF approved will be a BlackRock ETF.
• See, I don’t like that, Mark because-
• I don’t either, I’m not saying I like it, I’m just telling you that’s what’s gonna happen.
• And I feel like, I tweeted about this and I know it’s a bit like tongue and cheek, but I tweeted, if the SEC approved a BlackRock ETF ahead of a Grayscale, they should abolished the SEC ’cause it’s-
• It’s just pay to play, right, it’s absolutely just pay to play. But look, it’s always been that way. The incumbents will always use lobbying, which is just a fancy term for corruption. There is no difference between the corruption in India or China and lobbying in the United States. No difference, right? My favorite 2014, Exxon Mobil makes 40 billion that year tax rates at the time were 40%, so how much should they pay in tax, 16 billion. What did they pay, minus 1.7 billion. They got a rebate, well, how is that possible? They paid 362 million in lobbying that year, they were the number one lobbying firm and they turned 362 million into 17.6 billion, that’s a great trade. I would do that trade all day. JP Morgan gets fined 920 million for spoofing gold, 920 million, almost a billion dollars of fines and they’re like, yeah, whatever, we made 20 billion, so that’s like less than 5%. And so if you’ve got the regulators on your team, because you pay them handsomely, then you are going to get first dibs. Now that’s not right, but it’s the way it’s always been. And look, we would all love to live in a world where it’s a level playing field and everybody has the same shot, we know that’s not true in anything, does it mean you can’t win by working hard and being a good person and doing the right thing, of course not, you can win, sometimes it’s hard and if you go up, if you do something that’s accretive and additive and everybody loves it, you’ll be celebrated. If you do something that threatens a big guy, you’ll be fought against and that’s kind of where we are with crypto. We’re fighting against the largest, most entrenched, okay, incumbents in history. The financial services industry is the largest business in the world, it’s bigger than any industry, it’s bigger in commerce, bigger than media, it’s bigger than all of it. And the derivatives part of that is orders of magnitude bigger than that. And the currency markets are orders of magnitude bigger than that. And so the idea that we found through technological innovation, a better way. That’s awesome, we should be celebrated. No, we should be feared. And when I say, we, I mean the community, we should be feared and we are feared by the incumbents and that’s why the incumbents are run into the regulators, partnering with the regulators to try to slow down. But it’s always been this, I used the story, Last story for you, the red flag law. Everyone’s heard red flag, right? You see red flag or this relationship as a red flag. You know where it comes from, it comes from horse horse’s carriages. So horse’s carriage was invented, the horse and buggy manufacturer’s like uh-uh, we wanna own the streets of New York. So they paid the regulators to pass a law that said, if you had a horse’s carriage, you had to hire someone to walk in front of your car with a red flag so people could see it coming. Have you ever seen someone walking in front of a car with a red flag, no, ’cause it was a dumb law, but it actually existed, you can go back and look at it. And that did slow it down, right? It slowed down the adoption. And my other funny one that everyone when says, oh, Elon Musk invented electric cars, no uh-uh, largest car manufacturer in the United States in 1903 was the American Electric Vehicle Corp, true story, number one by far. Cars went about 45 miles on a charge, all electric, big giant batteries, there’s one in the basement of the Dartmouth engineering building, really cool. And what happened, Henry Ford invented the model T and he came up with an idea to use grain alcohol to power a combustion engine, and his friend, John D. Rockefeller, who created this thing called standard oil and it wasn’t an oil company to make gasoline, what they made was kerosene for lamps. When you make kerosene, one of the waste products is gasoline. What did they do at the gasoline? They literally flushed it down the river and literally would catch on fire and people were growing big goiters on the side of their neck from the pollution. He was a bad man, right, just bad man. And so he says, Hank, I got this stuff, it’s just a waste product and it’s flammable, why don’t we put that in your cars? And we’ll exchange stock and we’ll do a deal. And then we’ll put the electric company, electric car business out of business, we’ll pass some laws and get some, that’s exactly what happened. And so for 70 plus years, okay, we could have been all driving electric vehicles and not using gas engines. ‘Cause it doesn’t actually make sense for every car to have its own energy production plan, it doesn’t. Now they’re not evil like everybody says, but it actually doesn’t make sense, it makes more sense to have it generated someplace and then transferred to storage. But we didn’t have the storage technology that was really good for a long time now we do. So well, we do it in logs, we have lithium and tantalum which is the other one that, look up, have your listeners look up tantalum and Venezuela, it’s a very interesting story anyway.
• Mark, always a pleasure, so much insightful information, thank you for joining me today.
• No, great to be with you and we’ll talk you in soon. I see the XRP in the background, so hopefully someone reaches out and we’ll talk some more.
• Awesome.