141: Erik Townsend – Software Millionaire Fooled by ‘The Dream’ and Saved by Global Macro

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Hey, what's up? What's going on everyone? Now this is this is the first intro I'm recording since getting back from Sydney last week. So I'm back in Brisbane now after a very all Fairly short, but a very busy few days in Sydney. Yeah, so while I was down there I hosted a live podcast, which you probably heard me hyping up on uh the past

few episodes. But anyway, that's all over and done with now. And I would like to give a big shout out to everyone who came along and attended. Uh the evening was a lot of fun. It was a sellout event. I think we had about something like a hundred and sixty people there, many of which were professional traders. There were several past guests from the podcast. There was a few brokers in the room. There was even some of the higher ups from a couple of the prop firms in Sydney,

All in all, it was just a really great group of people. So thanks everyone for coming out. Of course, a thank you to Trading Technologies for getting behind and supporting the event. And a big thank you to We Work for allowing us to use their space and drink a lot of their beer. All right. Now, let me tell you about what's coming up on this episode. My featured guest is hedge fund manager Eric Townsend.

So I'm sure some of you will already be quite familiar with Eric, in particular the macro investing crowd, because Eric hosts the Macro Voices podcast. That's right, Eric is a budding podcaster.

Eric has a pretty interesting story and some interesting experiences about what's led him to where he is now. You'll hear all about this in just a moment. But other big talking points we cross off include how Eric uses the concept of the fourth turning and major cycles to guide his macro outlook and one possible scenario for the future of cryptocurrencies. I'm sure some of you won't like what you hear, but I think it's well worth listening to.

You know, macro's not really my thing, as I expressed a couple of weeks ago. But to be honest, I found this conversation with Eric to be really fascinating. So I hope you'll agree with me and get something out of this also. In case you are wondering, this conversation was recorded on the 17th of August 2017. Alright, well I'm gonna end this right here. Here is my guest, Eric Townsend, for episode 141.

Uh microphone is good. And one, two, three, Mark, I'm rolling. Okay. Cool. Anyway, Eric, uh what were you doing before you got into trading? Let's hear a little bit about that. Well, I was an entrepreneur in the software business. I uh spent most of my career designing distributed software systems. If there's any IT geeks in the audience, the idea that's now known as

This is funny. I I almost forgot what it's now known as. Service oriented architecture. And it wasn't called that when I started doing it in the nineteen eighties, but But I'm one of the guys that co invented that idea and I've never been credited as the guy who invented that idea, but we were doing it before anybody else. And I actually sold the company in ninety eight before I think it was Gartman Group uh coined that term. But it's basically getting

uh uh b figuring out how to get a bunch of large enterprise information systems talking to one another and communicating with each other. And I sold that business in ninety eight because it was obvious to me that tech was in a bubble. And so I come from that background and what I think.

thought I wanted to do in life was to learn to run my own money because I'd always been fascinated with investing in finance. I watched Wall Street Week with Louis Ruckaiser when I was a kid in high school. And I thought that's what I wanted to do. And very much uh To my regret as I look back on it, it was the MA lawyer that handled the acquisition of my software company that talked me out of it. And he just said, Eric, you are a software guy. You're not a finance guy.

You've got millions of dollars now. You are not qualified to manage your own money. And it would be reckless and irresponsible of you to try to do so. You are at a wealth level where you can attract the services of the world's most prestigious investment bank and have their private client group manage your money. You should do that. Don't try to do this yourself. You need professionals. Um, that is the single worst advice that anybody has ever received, I think. And uh, you know, if

As I look back at it, the part of that that he was right about is I was not qualified to run my own money at that time. I was a software guy. I didn't know a lot about investing and I would have needed to Invest in learning. That's what I should have done.

Uh, instead I got talked out of it. So I went off and lived on a yacht and tried to be retired in my early thirties, which never works, and wasted what really was the worst chapter of my life, believe it or not, living on a mega yacht, eighty-seven foot motor yacht. Touring around the Caribbean is the worst experience that I've ever had in my life. I was bored, I hated it.

I I thought that's what I was supposed to do because I had money and it was miserable. And what happened was the world's most prestigious investment bank lost about half of my net worth uh in the course of six or seven years. And out of necessity, I finally did what I should have done in ninety eight, which is to learn about markets and do what I always wanted to do, which is to be a full time private investor.

And so that was probably the end of two thousand six, beginning of two thousand seven. that I kind of reinvented myself as a full time private investor. By then I had sold the yacht and uh d tried to figure out what I was gonna do next in life. And I thought that what I wanted to do next was some kind of fintech business. I figure, okay, I'm a software entrepreneur. I know how to run a software company. There's a lot of opportunity and algorithmic trading and so forth.

You know, I'll I must be some opportunity for me. I'll go do that. And what happened was I had a whole bunch of faulty assumptions about the investment business. I knew about Graham and Dodd style of, you know, analyze balance sheets, figure out you know, expense ratios and d decide which company to buy in in a buy and hold stock portfolio. I knew about that stuff and it didn't sound fun to me.

And when I think it was probably reading Jim Rogers' work that really got my attention, I said, wait a minute. Learning about macro, learning about what the interactions are between governments and trends and global trends in the economy, learning all these fascinating things. Why is it that when there's an earthquake in Chile the price of copper is likely to go up? Uh or what if this Ketla volcano

In Iceland erupts, what's downwind of that? How many people spend time thinking about that? Well, the Russian wheat crop is downwind of that. So as I figured out that you can learn about the most Fascinating and interesting puzzle in the history of the world, which is how all of the global macroeconomic connections

relate to one another and how currencies, uh, you know, currency exchange rates relate to the relative productivity and interest rates that are being offered in different countries and so forth. You can actually learn about all these fascinating things.

and make money by knowing about this stuff. And that's called macro. And I didn't know that existed. So as I was researching what kind of fintech software company I might launch, leveraging my software experience, I learned about macro and I just fell in love with it.

And so I invented myself or reinvented myself as a full-time private investor, tried to learn as much as I possibly could. And eventually I got pretty good at it. I I'm a very collaborative kind of guy. So when I was living full time in Hong Kong, I st established a traders group. And we had a bunch of mostly hedge fund guys that w got together every couple of weeks. We rented the uh Chamber of Commerce, Canadian Chamber of Commerce in in Hong Kong.

And uh basically just had a a traders lunch meeting every couple of weeks. And these guys I got to know said, you know, Eric, we've met private investors in air quotes before, you know, guys that take their iPhone to the golf course with them and uh check their stock quotes. You're sitting in front of nine computer monitors and you're there for fourteen hours a day.

You're doing all of the work of, you know, running a hedge fund except for calling a lawyer and turning it into a hedge fund. You should do that. I said, What are you crazy? I'm not in this business. I'm a software guy. And I said, Well, look, you're you're you're you're doing this. And I resisted that uh advice for several years because I didn't really want to be in the finance business. I hadn't had

very good experiences with the world's most prestigious investment bank and their very elite private client group that lost half of my net worth. So I didn't want anything to do with it. And it was really uh not till two thousand thirteen that I finally launched a fund. And it's it's fascinating to me that it went down this way. The business about

making lots of money, running other people's money and making lots of fees on it. You know, I I'm a a small guy. I d I don't have the ability to raise institutional capital. It it never really made sense from a fee standpoint. But what's happened for me is I'm running a business again. When I was a private investor, I was not engaged. I wasn't waking up and feeling like I've got a mission in life. And what's happened is my Trading returns have improved dramatically because I've got a mission.

So I don't really have very many investors in my fund. I'm mostly running my own money, but I'm better at it now and I'm much more committed to it now that it's organized this way. So it's kind of a a a weird story. But that got me to this point of basically running my own money, but it's organized. It's organized now as a fund and it's it's been fun. I've met some interesting people and have learned about all sorts of things that I never knew about before. So it's been uh a real journey for me.

It certainly sounds like a real journey and there's a few interesting things which you've mentioned and I I'd love if we could go into them a little further. One of those being the fact that you said that you'd retired from the software business at least by when you were thirty something. You had millions of dollars in the bank and you were in the Caribbean living on a a a great big yacht.

I mean for many people that sounds like the dream. I mean, why was that not the dream for you? Why why was that not the best time of your life? Well, y I certainly thought it was gonna be the dream. It sounded like the dream to me. ¿Qué pasa es esto? Everybody who's interesting, everybody who is intellectually engaging has a job. I mean, I guess there's eighty year olds that that are interesting and retired and and don't have a job. But anybody in my age, I retired when I was thirty three.

Um anybody in my age group uh who's interesting is at work. And the people, you know, a yacht especially, it's not something you can enjoy by yourself. It's a group activity. Now there's every imaginable kind of scumbag, sleaze ball, and uh, you know, parasite that wants to hang out with the guy that has the yacht. So there's no shortage of people in your life, but they're all the wrong people.

And all the right people are busy'cause they've got jobs, they've got careers, they're doing intellect uh interesting intellectually stimulating things. And I found that I went from having a career in the software business where uh I had about

40 people working for me, all of them six-figure income, very, very smart people. My interactions every day were dealing with the smartest people on earth. Because my my whole strategy in the software business was basically every time I meet somebody smarter than me. than me, just figure out how to hire them. And that was what led to my success. And I was surrounded by very smart people. And now all of a sudden I'm a multimillionaire.

And all the only people that I know, the personal network that I have, are waiters and bartenders in restaurants because I eat out a lot. And I don't know anybody who's interesting anymore. And, you know, is amazing as a Caribbean beach and a scene on a yacht. seems like it ought to be. It gets old fast and the the food sucks in the Caribbean.

Uh the responsibility of running the boat is very serious. You know, hurricanes and stuff, you've got to constantly move the boat around. And as much as it looks like fun, i it's not. And uh so I very quickly tired of that. It also takes a lot longer to sell these things than it does to buy them. And so getting rid of the yacht was probably the best thing that ever happened in my life. And uh it was from there that I really uh I wasn't sure what I was gonna do next and

I thought I would get back into entrepreneurship as a software guy'cause it seemed like the natural thing and it was really discovering macro that that changed my life. So while you were living on this yacht, that was the point where you had put some of your money with this this prestigious firm which you've spoken about and They were managing your money, right?

Oh, and it was just a d I I I got so completely uh screwed over by these people. I the worst advice that I've ever gotten was this lawyer who told me you cannot go wrong. Having the world's most prestigious investment bank run your money for you. Look, what the big investment banks are good at is making money for themselves and ripping off their clients along the way. And what they did is they saw me coming. Uh they basically, you know

you know, told me you you're the kind of guy at your age, you can afford to take some risk. You ought to really invest in private equity'cause they were supposedly the best of the best at private equity. And they recommended that I should put about two thirds of my net worth into a single fund of funds, a private equity fund of funds that this outfit was offering, and it would invest in some of their own uh deals as well as other managers. And what that really means is it was the highest

fee structure product they could think of to sell me. And I s you know, at that point I was not an investment professional by any stretch of the imagination, but I knew the basics. I said, wait a minute, put two thirds of my money into just one investment? You know, what about diversification? They said, Oh, well it's inherently diversified because it's a fund of funds and it invests in a whole basket of different sub investments.

And it's diversified. Well, of course, that's nonsense. It's all private equity. It's all the same asset class. It made no sense whatsoever. But most importantly, Uh private equity is structured as a long term, it's a ten year uh limited partnership agreement, and you can't get out of the thing. So I had a ten million dollar commitment to this thing and at the time that I agreed to that, which was a mistake. I had a little over fifteen million in total investments.

And you know, 2000 hit and the stock market took a dive, and all of a sudden 15 million turned into thirteen million. And I'm immediately on the phone calling my private banker, the esteemed private Harvard MBA, private banker that uh that knew everything. And I said, Hey, you know, I'm getting concerned. I've got this huge commitment of ten million bucks that

I forfeit the money if I miss the capital calls. The the fifteen million turned into thirteen million. Should we go to cash? Should we reduce exposure? What should we do? He says, Oh no, no. You want to stay with the investment. Don't make the m mistake of of panicking and getting out on a bottom. You know, you wanna keep all of your money invested. Well what that really meant is they want all of my money invested in their high fee structure.

uh S and P type of fund, which is basically an index fund with a very high fee structure. Uh and And you know, all of a sudden a couple months go by, I get another statement and 13 million has turned into 12 million and then 11 million. And I'm calling them up in a panic saying, hey guys, you know, we're we're down to just barely over what I'm committed to.

in this investment that hadn't really started yet because I I agreed to this at the beginning of ninety nine and it was a 10-year limited partnership where over the course of those 10 years you get all of these capital calls and have to, you know, put 10 million bucks into the thing. And they said, No, yeah, yeah, yeah, don't worry because you know, sure you're only at eleven million right now, but you know, that'll that'll turn around.

And more importantly, these things, they never really draw down all of the money until they start distributing. There's an overlap there. You're not going to have the full ten million drawn down at the same time. You've got absolutely nothing to worry about were the words that they told me. And I said, boy, you know, this does not feel good to me, but they're the experts. My lawyer told me I cannot go wrong with the world's most prestigious investment bank.

Well, another year or so goes by and they call me up one day and say, Hey, um, you don't have enough money in your account to cover this capital call. What do you want to do? I said, what do you mean? What do I want to do? Uh you're running my money on a d on a discretionary basis. I agreed to let you guys do this because my lawyer talked me out of doing it myself. I never would have gotten into this. I I've called you five times and said

Why are we not going to cash with my remaining investments so that we have enough money to fund this? You told me, quote. You have absolutely nothing to worry about. And my private banker, the Hovitt MBA, said, Oh well, we don't have that in our notes. And one thing these people are very good at is they keep very, very detailed notes that may or may not reflect what really happened in the conversation, but they're very well equipped to defend themselves in a lawsuit.

So, you know, who knows what their notes said, but it did not reflect the actual reality. And they're basically saying this is your problem. Uh and so now all of a sudden, you know, fire sail the yacht. I wanted to get rid of the yacht anyway. Uh I I'm, you know, gone from supposedly being comfortably retired and set for life. to scrambling to sell off assets to meet capital calls. And I was forced to sell twenty percent.

of that ten million dollar uh commitment at pennies on the dollar because it was the only way to meet the capital calls and took a huge loss on that. There was absolutely no reason to have gotten into this investment in the first place. I knew better. Shame on me for having been talked into it.

Uh a as my available assets that were still liquid were decaying, I knew and I called them over and over again and said, Hey guys, but I I stuck for some reason The fact that the guy uh was a very expensive MA lawyer seemed to be so sure that he'd seen so many entrepreneurs make the mistake.

week of trying to run their own money and he was so convinced it was a bad idea that I should let the professionals do it that I trusted their judgment. And eventually it ended up costing me about half of my net worth. And the the other thing that was amazing, it's a 10 year private equity fund from 2000 I'm sorry, from nineteen ninety-nine to two thousand nine. That's ten years. Well, as of this day in 2017.

I still haven't gotten all my money back out of this stupid thing because i as a result supposedly of two thousand nine, which admittedly was not a good time to be liquidating that kind of investment, they extended the ten years I didn't see in the fine print that

They don't really have to give the money back when the ten years is up. And maybe that made sense for a couple of years, but they tried to just stretch it as far as they could to make more fees out of it. And to this day, it is still not fully closed out. And I didn't make anything, especially after having to liquidate twenty percent of it at pennies on the dollar.

Uh the whole pitch that I had gotten was supposedly they were anticipating a twenty one percent annualized return and supposedly never in the hundred and fifty year uh history of the world's most prestigious investment bank had they ever underperformed their estimated returns for one of their special investments. And well they certainly did in this case. So uh the you know, m my message to anyone is

If someone is telling you you shouldn't be running your own money because you're not qualified to do it, they're probably right. You're probably not qualified, but you're better off learning to do it. and qualifying yourself than trusting the private wealth management business, certainly the private wealth management business of the major investment banks. I think that the good guys in the private wealth business are running smaller shops. They're not the big investment banks.

Yeah, that's an interesting comment and I can only imagine how frustrating that must have been for you. I mean, I'm I can't believe you still don't have all your money out of that considering you first entered into the arrangement in in ninety nine. I mean Uh, you're not wrong. They certainly are trying to drag that out. It's an interesting comment you make because, you know, you've taken responsibility for your own money now and you are managing your net worth yourself.

You're also taking it very seriously. Like this has become your like full time job now. You know, for someone else who might not want to make it their full time job, but would like to do something, you know, let's say they have a bit of cash in the bank uh and they'd like to do something with that instead of having it just s sit there.

I don't really know how to best word this question, but like w what do you suggest in that situation where someone wants to do something but they're maybe not prepared to make it their full time job? Is that still a viable thing to do? It is viable, but I think that the immutable rule is what I call the Schwager doctrine. I I call it that for just Jack Schwager, who's written a lot about it. in his books, which is you've got to find your passion.

You cannot do this investing stuff as a job you don't like, but you've got to do it for money because you will fail at it. You've got to figure out what makes you passionate.

It and you know, if if you're the Graham and Dodd style guy that's just turned on by balance sheet ratios, good for you. I I couldn't do it all day. If I tried to, I would fail at it. Figuring out macro, understanding The interactions between nations and and what makes the world tick is so fascinating to me that I just can't get enough of it.

And there are certain themes, which we can talk about if you want, that really have captivated my attention. And those major themes that have to do with what the world is going to be like and how the rest of uh what I expect the to occur in the world

for the rest of my lifetime is so fascinating to me that it you know, I don't do this because I need to make the money. I've I've gotten back to where I started, where I'm comfortable enough to, you know, to be retired and And uh I've got enough money uh to to get back to where I was before I met the Harvard MBA at the world's most prestigious investment bank in nineteen ninety eight.

So uh I don't have to do this. I do it because it is so much more fun than living on a mega yacht in the Caribbean. Uh, it is so interesting to just be on top of markets and to see what's going on, and particularly to see how this fourth turning is playing out. I just interviewed Neil Howe myself. last week the author of the book The Fourth Turning, which is w one of my favorite invest uh investing books of all time. And uh it it is

So interesting to me just to wake up every day and think about where we are at this moment in history and what's coming next. Uh, you've got to figure out what you're passionate about. And I don't think it makes sense, regardless of whether you've got millions of dollars or hundreds of dollars, it doesn't make sense to risk it on something that you're not committed to, that you can't do with passion, so that you are just attracted to it for the sake of doing it, regardless of making money at it.

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Okay, now we're gonna speak about the the fourth turning very shortly, but just before we get into that sort of thing, I feel as though I I really need to ask you, like, how did you begin to come to grips with understanding macro. Like how did you start learning about this stuff? Because, you know, you were a software guy.

You retired from that business, you know, you kind of took a hiatus for a while, and then you've decided that you're going to get into managing your own money. The macro approach has really appealed to you. How did you actually start learning how to implement and properly do the research and that sort of thing which is involved with global macro trading.

I think that reading Jack Schwager's Market Wizards books was probably a turning point. I had for a while been trying to figure it out. And remember at first, the mission I thought I was on was to go learn about the investment business so I could figure out the first time. out what kind of software company. I might start. start in the investment business'cause I I figured I'm a software entrepreneur, that's what I know, that's where my skill is, that's what I gotta do next.

And so I was going to finance conferences, I was going to in institutional investor conferences, trying to learn about the business, you know, uh figure out what a Bloomberg terminal is, one of the most malengineered software systems in the history of the world. You know, could I give them a uh uh a run for their money. Well, it would take a lot of capital to do that, although there's plenty of opportunity, uh

Bloomberg is a very, very poorly designed system from a technical standpoint, but they've they've definitely got the market captured. I didn't have enough capital to take them on. I'm thinking about the world in terms of a software company. So I start reading the market wizards books from the standpoint of thinking about okay, I need to learn about different styles of investing

so that I can see what needs to be automated with computers, what I could do using my skills. And I'm reading about different traders, different famous traders thinking about what do they do manually that might be uh a ripe opportunity for

uh automating with software systems in some way. That's how I started reading those books. And I think it was probably the Jim Rogers chapter in the first book that just captivated me. And it's uh you know, hearing Jim uh through Jack Schwager's interview talk about how he was a student of history and was just fascinated with the world and that led him to you know be successful, uh fa fantastically successful, just because

He got interested in things like what happens if there's an earthquake in Chile? Why does that make the price of copper go up? Uh, you know, that was so fascinating for me to read about that I was just enthralled with it. And I started thinking, well, maybe I should try to learn about that. And macro is something that Uh, I I think that the downside to it is it's one of the hardest strategies. It's not something, you know, if you wanna do uh, you know

m momentum trading or uh, you know, trend following or something. You can read uh a a book like the the turtle book. I forget the name of the guy, Koval Kovell? Michael Covel or something. You know, it's a 120-page book. You read the thing cover to cover and you know how to do the strategy that that uh that he embraces. Macro is really learning a whole lot.

About what makes the economy work. It's lots and lots of books about economics. I don't think it makes any sense for anybody to invest the time and energy. to learn all about it, unless, as was the case for me, every time you pick up the next book, you're so fascinated you can't put it down. And so I think it really is a question of finding

What's that thing that resonates with your personality that says, this is what I gotta do? And I don't know of any better way of finding that than reading all four of Jack Schwager's Market Wizards books. And I I'd say the first read, if it's somebody who's new to this and they're not sure what they want to do, don't worry if you understand the the details, you're reading about merger arb or something and you don't know what that means. It's not important. Лисенту the style.

that each one of these traders that Jack interviews exhibits how they describe the way they do things and figure out what resonates with your personality. Once you figure that part out, and for me it was it was guys like Jim Rogers that I I I really felt a connection to. And uh once you figured that out, then you start going and reading more about how to do that strategy and what's involved and so forth.

So essentially a lot of what you know about macro today uh is being very much self taught in some ways. Like o of course you've got the information through books and doing your own research and that sort of thing, but it's not like you've had someone sort kinda holding your hand or or guiding you through uh the things, a lot of it's kinda been very Yeah, self discovered, right?

Yeah, it's self discovered and I think you've got to have an addiction to reading about it. Uh I I don't think anybody has enough energy to go read enough every day to be competent in macro unless they have some personal satisfaction. I I couldn't possibly do what I do. if it was a job that I was doing just because I make money at it. I I do it because I can't wait to read the next article that teaches me something fascinating about the world that I never knew before.

And there are aspects, you know, to to really take a classical definition of global macro. You've gotta trade currencies, you've gotta trade uh you know, interest rate swaps. There's sort of a a list of things that make up macro. I I really give it a broader definition. To me what macro means is understanding as much as I can about what makes the world work.

and what major trends are going to affect the future. So I get interested in things like fourth turnings and peak cheap oil and the, you know, the international monetary system because I see that they're going to play a really important role in economic history in coming years. And that makes it fascinating for me. So, you know, it it probably is not the most strict

interpretation of the phrase global macro, but frankly I don't think anybody has a strict interpretation. The the way to be successful in investing

is figure out what you're good at and what uh relates to your personality or resonates for your personality and what you enjoy doing because you've got to have, you know, the only way you can have edge is to work harder at this than the next guy does. And the only way that you can as far as I'm concerned, have the drive and determination to do that is if you truly find it uh enjoyable and rewarding and fascinating every step of the way.

Now you've mentioned fourth turning a couple times. So fourth turning capital management, I believe that's the name of your fund, and I believe it's of course not just some arbitrary name. What's the significance of this? Would you mind just Telling us a little bit about this this concept of the force turning.

Sure. Well it I guess is as I first started learning about long wave business cycles, and this was after I got interested in macro in general, I was reading about Nikolai Kondrayev, who was a Russian economist. economist who was, I think, the first guy to figure out that there's a long wave business cycle. A lot of people know about the five to seven year business cycle that people talk about where you kind of go through a boom and bust.

Well there's i think about those as little waves on the ocean. They're Little waves are occurring on the surface of much larger swells. And the swells in this case are about an 80 year long wave cycle. And Kondradev wrote a lot about it. This was qu uh I don't know, I was forty or fifty years ago, I think, that Kondradeev uh wrote about this. The guy that uh really modernized it

is Neil Howe, who wrote the book The Fourth Turning. And it was actually co-written by Howe and William Strauss. Strauss is now deceased. Uh so I think of it as Howe as the author just'cause he's the guy who's still alive. I had the the pleasure of interviewing him recently. So uh essentially what he's figured out is that uh history comes in about uh eighty year. cycle. That's the period uh the period of the wait.

waves. And those waves can be broken into roughly four different seasons. So think of it like seasons of the year. You know, you know what a winter is like, you know what a summer is like, you know what a spring and a fall are like. Uh history comes in these seasons that Howe calls churnings. And there are very clear patterns in American history as well as history of other countries that these seasons kind of drive everything.

So there is uh each one of them has a a a number and and a name in in Howe's book, but the one that we're in right now is called a fourth turning. And the fourth turnings are the crisis periods. the the Spanish uh revolution was one, the next one after that was the American Revolution, the next one after that was the Civil War. The next one after that was the uh Great Depression and World War Two. The next one after that is the one that we're experiencing currently.

And Hal wrote about how these things are all predictable. They happen about every eighty years. And a fourth turning is where you have the really difficult times where major institutions break down and get replaced. And that was the case of the pound sterling being defeated as the previous de facto world currency being uh replaced after World War Two with the US dollar.

Uh of course the Great Depression, World War Two were the major events of the last fourth turning. And then in second turnings, which are about forty years off. That's when you have the major awakenings, which are cultural and spiritual. So in this current cycle, uh the last fourth churning was World War Two and the Great Depression.

The second turning would have been the sixties and, you know, free love and and the whole uh changing of social attitudes that occurred uh around the sixties and early seventies. Well we're now ever since two thousand eight, which is when Howe figures that this present fourth churning started.

Uh they last about twenty two, twenty-three years. So this one will continue until about two thousand thirty. And this is the crisis period. And unfortunately, one of the things that we learn from studying history is that these things tend to start with something that seems like the big deal. So for example, the last fourth turning started with the stock market crash and the Great Depression and everybody said, Well yeah.

uh fourth turnings are times when there's really bad stuff going on. We're we're having the Great Depression. That's really bad stuff. So we know what the bad stuff is for this fourth turning. Well of course what they didn't know at the time is that the Great Depression was the opening act and that actually World War Two was yet to come and that was gonna be the really difficult experience that the world went through.

in the last fourth turning. And unfortunately, uh, that probably means that the great financial crisis that began in two thousand eight was the opening act. That's the thing that's equivalent in this fourth churning to the role that the Great Depression played in the last fourth churning. That means that, you know, World War II, or its analog, has yet to come yet. Now

I absolutely am not predicting World War Three because I think that uh in this age of nuclear weapons, world war is pretty much an impossibility. If it does happen you know, it goes nuclear, civilization ends and everybody's dead. So hopefully that doesn't happen. But I think that if you look at economic things that happened as a result of World War Two. R changing the world's uh, you know, major hegemonic power was still Great Britain.

Before World War II, everybody thought that was forever. Everybody thought that the pound sterling was forever. These were things that were just. ingrained in people's mindset that could not change. Well, of course, the Great War was such a big deal. That it did change it. And you had Bretton Woods in nineteen forty four. And this is what happens the last couple of years of every fourth turning, is there's a phase which Howe calls the resolution. And that's where old systems are tracked

Torn down and new institutions are created. So at the end of the last fourth turning, which would have been around nineteen forty three to forty five. You had the creation of the World Bank and the IMF and United Nations, uh the Bretton Woods Conference establishing the US dollar as the world's reserve currency. These are all the things that happen. at the end of a fourth turning. So sometime in the late twenty twenties, coming into two thousand thirty.

is when we should expect to see the new institutions being created that really define the economic backdrop going forward for the next seventy five years or so. And I think that the US dollar probably will be replaced. Uh there's an

economist called Robert Triffin who wrote uh quite extensively about what he called the uh what's been become known as Triffin's paradox or or Triffin's dilemma, which is he said, Look, how do you choose what's going to be the reserve currency? Well you choose the best credit. What is the result of being the reserve currency? Well, the issuing nation is almost forced to run massive capital uh excuse me, massive current account deficits in order to supply a sufficient

quantity of the reserve currency to the rest of the world. So they're borrowing and spending beyond their means and getting away with it for decades. Eventually that gets you to the point. where you're not the world's best credit anymore. So look at the US dollar. In nineteen forty four, the US was a creditor nation. It had no external obligations.

Now we are the not only not a creditor nation, but we're the greatest debtor nation in the history of the world. This all has to come to a head at some point, Triffin predicted. And he said any country that becomes the uh the issuer of the reserve currency will eventually lose that status because having that status

causes you to do things that make your currency no longer suitable. So, you know, if you look at all of the things that are likely to go on, if you if you take it, if you have an understanding that where we are in history is in a fourth turning. We're only about halfway through it. It ends around twenty thirty. And a lot of really major things will probably be reset and redefined.

By 2030. Well, what are the likely candidates? It's very easy to see. Is the US dollar gonna stay the world's reserve currency forever? Is the US Treasury bond still going to be the safest investment on earth, as it's perceived by almost everyone in institutional finance to be today? Probably not. If you look at the massive, massive debt

that the United States Treasury has accumulated. We continue to get away with it because we're the reserve currency, and that creates such an external demand for US dollars that there's something that that uh is actually French

finance minister at the time, later president of France, Valerie Giscard d'Estaing said back in the nineteen sixties, which is the US has this exorbitant privilege, he called it. And the exorbitant privilege was referring to the US having the ability to basically just borrow as much money as it wants uh and go into debt almost for free because we're other countries that were not reserve currency issuer would pay a penalty.

for that excessive borrowing. As reserve currency issuer, there's so much external demand for US dollars, the US could get away with it. Well, if we have been able to get away with twenty trillion dollars of treasury debt without anything going broken in the night. and we get away with that because we are the reserve currency issuer. What happens when we're not the reserve currency issuer anymore? And at the same time, Look at something like two hundred and something trillion dollars.

Of unfunded liabilities in the form of Social Security and Medicare and so forth. We've been able to get away with having these systems that It it's been known for for thirty years that Social Security would go broke in the twenty twenties sometime. Well, of course, it's no coincidence that that is toward the end of a fourth turning. So at some point

If you look at the most important uh social contracts that we have in society, it's pensions and uh entitlement programs. We tell all of the hard working people of the world, look. You've just got to work hard, pay your taxes, and don't worry because There's this retirement system, a pension system, and don't worry, there's really smart finance guys like us who are in charge of it. And you can trust us, really.

We're going to make sure that you're going to be able to enjoy your retirement and everything's going to be fine because you're going to be taken care of. But what's happened is because we don't Think about demographics and the fact that there's this worldwide baby boom. It's biggest in the United States, but the the baby boom exists in other countries around the world. in roughly the same decades.

We've got this huge demographic overhang of it used to be that all of these systems there were far more people of working age paying into them than there were people of retirement age that were drawing down from them. We're going into a time frame right now. The baby boomers are hitting seventy and retiring. We're right now transitioning to where there will be more and more retiring baby boomers drawing down from Social Security and a smaller number of millennials who are paying into the system.

in order to finance it. So we've got these uh systems like Social Security and a lot of defined benefit pension systems that are basically Ponzi schemes. They have to fall apart. And those promises that have been made to all the hardworking people of the world that they were going to have all these defined benefits and everything's going to be great, those promises will be broken. There's no way around it.

Well, what happens when those promises are broken? People are gonna be pissed off. They're going to revolt. How is that going to happen? It will probably be violent in a lot of places. Eventually Sometime by about 2030, we've got to get through this as a civilization and figure out.

what we're gonna do? Are we going to uh, you know, super tax the people that are still working so we can take care of paying out the benefits to the people who are retiring? Are we gonna tell the people who are retiring, hey, It it was on your watch, guys, that uh, you know, y you're you might be seventy now, but you were forty. when the sixty minutes T V show first broadcast the the special about how social security was gonna go broke by two thousand twenty.

And you didn't do anything about it because you thought that was forever and you didn't have to be worried about. Well, now the piper has to be paid and uh so you're not gonna get your benefits. There's gonna be huge, huge social uh divides and you're already seeing it, you know, with what's going on now in the United States. How the political left and right

It you used to be able to air their differences and uh, you know, go to a cocktail party and you could disagree with the guy who was in the other party, but you could still be civilized. Now we've got riots in Charlottesville and all these crazy things going on. It's gonna get much worse. And the reason it's gonna get worse is because these institutions like social security

uh are not going to be able to uh to make good on their commitments. Meanwhile the treasury debt is going to reach a point. We've for the last three presidents, we've had this plan of basically the United States in every presidential cycle. over the course of eight years doubles the national debt. You cannot exponentially double the national debt every eight years indefinitely. Eventually it blows up. When does when do these kinds of things blow up? History teaches us in the second half.

of a fourth turning, and that's the next ten years. So it's going to be a really interesting ride. One of the things I I want to just end this point on fourth turnings about that Howe emphasizes It's not necessarily a bad thing. It's a necessary thing. It's gonna be a really unpleasant ride for the world, I think, for the next ten years. But this is how history takes major injustices. Like the fact that we're not going to be able to

that we've got way too much debt and that we have these unfunded systems. And basically They t t t they all culminate together into a really big problem and then it gets solved. And that solution paves the way for prosperity. for the next several decades. So we're going to go through some really difficult things over the next twelve years and eventually, hopefully, as we go into the twenty thirties, we will have solved our problems and we'll have a new era of prosperity ahead of us.

But right now, you know, we're in the the home stretch for what's gonna be some really hard times.

Wow. Glad you asked. Yeah. Yeah, absolutely. So I have a few questions, obviously. I've just been uh sitting here patiently. Um eighty years, where does that number come from? Like why eighty year cycles? The the theory that Howe has, and I I don't think Kondradeev had any answer. He came up with about the same number and he didn't know why. How has the the theory that it has to do with it's basically a long human life cycle? And the idea is we learn from our mistakes.

We also learn from our parents' mistakes'cause we saw them being made when we were kids. But we tend not to learn from our grandparents' mistakes. because we were either not old enough or not around or or whatever. And certainly our grandparent our great grandparents' mistakes, that's so far behind us that, you know, we we end up repeating all of those mistakes. Sakes because we didn't learn anything. He has a theory that each generation, he he has this idea that

the seasons in the economy are really driven by generations of people and that each generation has a personality. And he has archetypes that he defines and he says There's a profit archetype which is what the baby boomers fall into. And they have certain characteristics because They were, if you look at the baby boomers, you know, they didn't live through World War Two and uh the Great Depression. So each generation is defined by what it just missed.

the the baby boomers didn't go through all of that hardship. Whereas the silent generation that came before them, they grew up during World War Two and they knew what it was like. So I look at my father who's of the silent generation, The the guy is just so conservative. He was a little kid. through the Great Depression. He saw what debt could do to people. He refused to go into debt and for his entire life he was just paranoid about having to save, save, save no matter what.

The the baby boomers on the other hand They were fortunate enough to miss the Great Depression in World War II. They never experienced that. All they remember is growing up. in the American high and the nineteen fifties and sixties and how great it was. So they're the ones that are much more inclined to go deep into debt because they haven't seen firsthand what can happen when you get over indebted, the way my father's generation has seen. The generation Xers

They don't remember the American High and all the good times. They were you know, came up as kids through the sixties and seventies when the American family was falling apart. the all of a sudden kids were kind of bringing themselves up. You didn't have a a nuclear family to anything close to the degree it existed in society previously. They learned to fend for themselves. So they were very much individualists.

Uh the millennials, on the other hand, uh were the overprotected kids. They were born in the nineteen eighties when, you know, the baby on board signs were in the back of the car and they had bicycle helmets and They they were very, very protected by their parents. So they have this attitude of being very uh you know, uh c comfortable with uh sharing with other people. They're they're very community oriented, whereas the Xers that came before them.

were much more individualist and were not nearly as comfortable with the so-called sharing economy that the millennials embrace. And then Howe goes on to describe another generation, which is just coming of age, which he calls the homelanders. And they have the most in common with the silent generation, with my father's generation, because what they don't remember is anything that happened

uh before nine eleven in the in the great financial crisis. You know, maybe if they were born in two thousand four or something Th they were are around before the financial crisis, but they weren't old enough to remember it. And so their whole experience in life has been what the GFC and subsequent has been. So he basically says that the major events in history define the personality.

of these generations. And I I just interviewed him on my podcast last week. So for anybody who's interested, there's a a full hour long interview with Neil Howe, uh where he does a much better job than I do of explaining these concepts. Okay, I can I can kind of see how that might make sense. One thing I'd like to put forward is

The things which drove the markets, you know, hundreds of years ago, have they fundamentally changed from what drives the markets now though? Like wouldn't that throw off the the eighty year cycle? Well, I think it's a totally different game. A a a mistake you don't want to make is to say, Oh, well it was a Great Depression financial crisis followed by a world war, so that has to happen again. That's not the the point of the fourth turning. The point is This is the time when

People lose faith in institutions, major institutions that were never questioned before, like the pound sterling being the reserve currency or Great Britain being the the world's largest hegemonic power. The the idea that Everybody assumes the United States will forever be

the strongest military force on the planet and the strongest economy in the world. Those are the size things that tend to change in fourth churnings. I don't know what's going to change. So it's not at all that the same stuff that happened last time will happen this time. But things of the same magnitude are likely to happen this time. The things that that uh that I look at specifically is really the the whole pension crisis, what's what's going to happen demographically with

uh entitlement programs and government pensions and so forth. You've got you know one set of problems in the United States. It's the welfare system in Europe exposes European governments to a huge amount of vulnerability. It's different in different places, but the same theme exists around the world. Another one that I look at a lot is energy and a concept that I call peak cheap oil, which has to do with.

you know, where we're gonna get energy in coming years. And, you know, the world's not running out of oil. We're not gonna not have any more. But what happens is you end up Those are gone. We've already found and exploited those energy resources. Right now shale is the big thing. At some point shale will play out and probably deep water will be the next thing after that.

At some point that'll play out and you know, who knows what's next, whether it's tar sands or deeper water or Arctic deep water. I I don't know. But we'll go through waves of new technology being required

in order to produce energy. And each new wave of technology comes at cost, and that means that the cost of energy in the economy becomes greater. At the same time, that's being offset with the advancement of technology because You know, you you don't have to travel as much and a lot of things can happen online and a lot of collaborative technology.

technologies, you know, video conferencing and so forth uh reduces the necessity of business travel. So there's a lot of of of different trends that need to uh uh to kind of be resolved as we go through this fourth turning and figure out what the next era is going to look like after this. So I I think that it's not a question of the same thing happening. It it's, you know, w I I think Mark Twain said

history doesn't repeat, but it rhymes. It's not at all that we're going to have the financial crisis followed by the world war. It's that we're going to have Major institutions that people assume are never going to change do get changed. And they get changed in ways that nobody ever predicted. And it paves the way to a new form of society. The other thing that I do think is uh again, every

You know, just as every person has their own personality, every generation has its own personality. It's not going to be the same as last time. But what we do see is the individualism that I was brought up with. You know, I was born in the nineteen sixties and, you know, it it it's all about freedom and and, you know, uh peace movements and so forth. And

People were rejecting authority. What's happening now, probably because we're afraid of terrorism or whatever, is the new generation that's coming up. which Howe calls the the homelanders, they're very, very accepting of more government control, more authority. millennials tend to be just as comfortable, if not more comfortable, with socialism than they are with capitalism. Whereas if you go back forty or fifty years, you know, if you even mentioned socialism in a favorable context,

in the McCarthyism era, I mean, you could get thrown in jail for that in the United States. These days, th you know, Bernie Sanders uh almost had the nomination. uh for president. And a lot of millennials really think that socialism is a better system of government. So assumptions that we had uh on the level of whether or not uh You know, a liberal democracy is the right way to run a government.

are subject to change. And I I think that we're gonna see a whole new world in the next twenty years. And at the same time, technology is advancing very quickly and it's going to create a tremendous amount

of investment opportunity. But I think what you've got to do is just be cognizant of where we are. One of the things that just is to me is like the sound of of fingernails scratching on a chalkboard is when somebody says to me, Well, Eric, if you look at every post war recession, I'm like, wait a minute.

y if your definition of economic history is what happened post World War Two, Maybe that made sense before we got into this fourth turning, but you've got to start looking at a longer cycle of history because assuming that history Yeah, you know, everything changed after World War Two and everything's gonna stay the same as it's been since World War Two. No, we're in the next major change where things that have been stable since World War Two are gonna start to change.

in ways that they haven't changed since before World War Two. So don't think about every post-war recession. Think about what happened leading up to and going into uh 1929 and and you know from World War One to World War Two and and what happened in that period of history. That kind of change, that magnitude of change

is possible now. And it doesn't mean I can predict what's gonna happen. It doesn't mean that what happened last time is gonna happen this time. It just means that we're in for what could be some pretty big changes.

Now, as a trader, how do these cycles drive your investing decisions? They don't directly drive trades because if you think about something like, okay. It's a certainty that over the next ten years, uh, the demographic change is going to put huge pressure on the pension system. I guess you could translate that to a trading strategy, but I don't know how to make uh a profit next month.

uh on on that. What it does for me at least is it causes me to focus on the things that I think are going to be important. So I've become extremely focused on crude oil because I see what's going to happen with this peak cheap oil phenomenon that I described earlier. Ironically Uh the fact that I I'm definitely a peak cheap oil guy. I I'm very, very fascinated by the theory of peak oil.

It doesn't mean that I think oil prices are going up. I'm bearish on oil prices right now because what's happened is post the great financial crisis, we've had so much easy money in the system that it's led to a malinvestment. of overproduction capacity in the shale patch in the United States. So it doesn't mean that maybe the the thing you might logically assume is the long-term outcome is what you want to bet on.

But the reason that I understand what's going on with the shale patch in the United States and why now is a good time to be actually, I think, bearish on crude oil prices. It because I have this longer term view and this fascination with the big picture. Whether or not we're gonna see

another test of, you know, sub thirty dollar oil prices like we had uh a little over a year ago. I I don't know. But if we do, it's gonna be a buying opportunity of a lifetime, I think, especially If the longer dated futures contracts uh come down to to a uh uh a a lower level. Last time we got to twenty six dollar oil, it was a little bit of an illusion because the long dated futures were still above fifty dollars.

If we see long dated futures come below forty or even below thirty dollars, it's gonna be a fantastic long-term buying opportunity because I don't know what the next year or two is gonna look like, but I can tell you as we get into the early 2020s, 2021, 2022. We are so not investing in uh in CapEx right now in oil. Right now we are oversupplied with shale. Well, shale is gonna play out. There's only so many rock formations.

are capable of producing this shale oil and they have very rapid decline rates. So once all those shale oils get drilled, And those resources are exploited and we start to go into deep decline, we're gonna be hurting, and we're gonna be hurting in a big way. Well, why do I know that that's coming? And and it it's really from the fourth churning concept where I I get these big themes. As I learn in detail about those big themes, it oftentimes gives me a a reverse trade.

Uh you know, I'm I'm right now I'm bearish on oil prices because of what I see going on in the energy markets now. How did I get so interested in the energy markets? Why do I pay so much attention to them? Because I can see that a really big move in the other direction is coming eventually. Uh a similar uh analog to that would be something like the US dollar. I have a view based on my long-term fourth-churning view of where the world is headed that the US dollar will eventually

lose its reserve currency status and the US Treasury market will be in really big trouble. So does that mean that I'm short the dollar and I'm in this dollar is gonna crash camp? No, actually right now I think that we're probably looking at a buy the dip opportunity in the dollar. Uh I'm not quite sure that it's over yet, but it's it's gotta be pretty close.

And I think the dollar is going to appreciate dramatically. Well, why do I think that? Isn't that opposite of what I just said my long term view is? Well it is opposite of the long term view, but My long-term view causes me to get really fascinated with this and to understand that for now there is no viable alternative. To the U.S. Treasury bond market for central bank reserve assets. There's a lot of people around the world that want there to be one. Russia and China are working pretty hard to.

try to figure out how to create one, but it doesn't exist yet. And what that means is that as we come into some of these hard times that I see on the horizon, and and we're very much overdue for a recession now, this Bull market that we've had since 2009 is way long in the tooth. I don't know when it's coming, but you can't go forever without a recession. When we get to uh a recession.

and there's flight capital, there's so much structural uh problems in Europe and in Japan. That uh uh distressed capital in Europe and Japan is gonna experience a flight to safety trade. And I predict that it's going to push the US dollar into probably all-time highs.

So, you know, on the one hand, I have a long term view that the US dollar will lose its reserve currency status, but I can also see that that cannot possibly happen right now. And what that means is that what will likely happen next is as we run into problems around the world, more and more Uh flight capital will flow into US dollars, appreciating the US dollar to the point where it causes more problems in the global economy.

probably another emerging markets uh crisis as we had in the late nineties. And that may lead to another Plaza Accord type of deal where governments agree to conspire to do what they can to suppress the dollar. And certainly President Trump has expressed a view that he wants to prevent the US dollar from appreciating too much farther than it already had. So, you know, these things don't necessarily mean that the trade right now

is determined by the long-term view. But the long-term view is what tells me which markets are fascinating and which markets are most important to pay attention to. And then as I get into learning more and more about those markets, I develop where's the trading uh strategy.

And so my macro view now is bullish US dollars, although we've been in a uh I I I was long US dollar index futures. Uh I've gotten out of that trade just because we've had this big downdraft. I'm not sure if it's over yet. It some point I'll get back into uh long US dollars. Someday I'll be long crude oil, but right now I'm short crude oil. So I learn about the markets that are most interesting.

from my long term forth turning view, but what I learn about them teaches me which way to place my bets. And that's something that is in a much shorter time cycle than the long term view. Got it. Okay. No, that makes sense. I see where you're coming from.

Eric, I would like to speak with you about your views and your outlook on cryptocurrencies. So how do you feel about cryptocurrencies? Where do you how do you see them coming into play in the future? Oh boy. Well, we're in trouble now because uh I'm afraid I'm gonna offend your cryptocurrency fans and the audience. So I've got to first preface this, Aaron, by saying uh this is not what I want.

people. I have uh predictions about cryptocurrencies that you're not going to like, and I don't like it either, but it's what I think is going to happen. Everybody's so excited about whether it's Bitcoin or Ethereum or whatever, these wonderful innovations and inventions that technologists have come up with to say, look, here's a way to design

a currency which is basically government interference proof. You you can have secure payments online with Bitcoin. It's completely anonymous. Nobody knows who owns these Bitcoins. Um the government c can't possibly manage it or track it or seize it or control it. And uh, you know, as long as you uh have this ability to track to c to uh transact in bitcoins. It all occurs online. It's anonymous and it's fantastic. It's great. I love those concepts. So please think don't think.

uh listeners that I don't like the idea. I just don't think that it's going to be allowed to exist. And my prediction, unfortunately, I I I stress, unfortunately, I don't like this, is I think that governments are going to hijack all of the best technological innovations from the first generation cryptocurrencies like Bitcoin. So the whole blockchain ID.

Yeah, which is absolutely brilliant uh from a software engineer's perspective. I mean really genius level stuff that's going on there. I think it's gonna be hijacked by governments to design a government backed cryptocurrency that will have exactly the opposite set. of design criteria where Bitcoin is completely uh tamper proof and the government can't interfere with it, the government can't monitor your b your transactions and so forth.

I think that governments, and I'm not sure which government, it'll probably be kind of an arms race between governments to see who can control this, but one of the potential ways that the US dollar might be displaced is the world's reserve currency. is by a government backed cryptocurrency. And by the way, this is not just fantasy science fiction stuff. People's bank of China is hiring uh blockchain engineers right now to work on the digital R M B.

and designing what it will be. And I don't know what it's gonna be. What I fear is that some government is gonna come up with a design for a cryptocurrency, which is the antithesis of Bitcoin. It guarantees that the government can always track and know exactly who has every penny of worth anywhere in the financial system. There is no cash. Cash gets outlawed. First generation cryptocurrencies like Bitcoin get outlawed and furthermore Governments enact laws that say anybody caught

having first generation cryptocurrencies such as bitcoins will be subject to have to forfeiting them. You get caught with them, the government confiscates them and you forfeit their value. That's the way governments do things and and uh unfortunately Uh what in this environment, in this social environment we're in, all that governments have to do is say this is necessary to fight terrorism.

Bitcoin is the tool of terrorists. It's a way to transact and finance terrorism internationally and anonymously. And the only people that would ever want to have anything to do with it are bad guys that are either terrorists or trying to finance terrorists. The good currency is the government-backed cryptocurrency, which stole all of its technical innovations from the Bitcoin.

and other uh first generation cryptocurrencies. But what it does is it says in order to have a wallet, that wallet has to be registered with a government someplace And any any wallet that's not registered is subject to forfeiture. And the government knows exactly how much you've got. exactly when you got it, who you got it from, and they might even have the ability to claw back transactions.

So imagine that uh that news story that came out a couple of years ago where the guy in Texas sells his pickup truck to a car dealer, perfectly innocent transaction. It's got his uh plumbing the guy was a plumber and it's got the

advertising for his plumbing business on the door of the pickup truck. Somehow, some way that pickup truck finds its way to Iraq and there is ISIS fighters with a machine gun mounted on the back of this thing and they're they're going around and killing people with this guy's pickup truck. Imagine the government saying, Okay, we we wanna punish ISIS. We're gonna unwind that transaction. And now all of a sudden the poor guy in Texas doesn't have

the money in his bank account anymore because they've decided that that pickup truck never should have been in the hands of of ISIS fighters. Well he didn't do anything wrong. My prediction is he would have to fight to get the money back because just the way The chargeback system works for anybody who's a MasterCard or Visa merchant. First, the money is gone from your merchant account, and then you get to

contest it and try to fight to get it back if you're willing to put the effort into doing it. So this whole business of IRS uh, you know, having to chase you down and figure out uh where your offshore bank accounts are, they won't have to do it anymore. It'll all be online. They'll be able to seize your bank account, freeze your accounts, With a click of a mouse, probably without a court order. I don't like any of this, folks, but if I think about what's likely to really happen.

Governments will figure out that Bitcoin is every bit as much of a threat to them as it was designed to be. And it was designed to be a threat to them. It was designed to give people the financial freedom and independence of not being

subject to the overreach of government. Government doesn't see it as overreach. They see it as their calling, as their mission, as their duty. And they in this social environment can very easily get away with just about anything by saying it's necessary in order to fight terrorism to outlaw Bitcoin, outlaw Ethereum, and instead have a cryptocurrency which is designed and built by governments, for governments,

to give the government complete and total control over everything and anybody who doesn't like it is automatically assumed to be a tax cheat or a a terrorist or someone who wants to finance terrorists or or something. It I don't like any part of that story, but I think that is far more likely to play out in real life.

than this pipe dream that liber libertarians have that, you know, Bitcoin's gonna change everything and everybody's gonna go to Bitcoin and we'll be able to have all of this free commerce occur online and the government won't be able to tamper with or interfere or tax it.

That's not gonna happen. The government's going to outlaw this stuff because it's not in their interest. It's in the people's interest. Government doesn't do what's in the people's interest. Government does does what's in the government's interest. And I fear that the best innovations of Bitcoin will be stolen and hijacked by governments to build something. Uh I I call this this new cryptocurrency the Orwell, because that's really what it is.

Now you obviously speak to a lot more macro traders than I do. Has anyone you've spoken to share a similar view on this subject? On cryptocurrencies specifically, since I espoused that view on my podcast, I've heard from several people who are blockchain engineers who've said, you know, yeah, we basically resigned ourselves To this idea at least a couple of years ago. A lot of people in the uh in the cryptocurrency space.

have a similar view, but they see it differently than I do. I I fear that what I just described could be inevitable. The way that a lot of people in the cryptocurrency space see it is they say, okay, we know this is coming. We're going to have to think about competing

You know, if the government introduces the official cryptocurrency, which is government backed, and they're telling people that only bad guys would ever want to deal with Bitcoin, uh, how do we, if we're the Bitcoin side of this, position ourselves to compete. And they think of it in terms of i if you uh are selling the benefits if if it was a free choice of, you know, do you wanna put your you gotta get out of US dollars because there's not gonna be cash anymore.

Are you going to get into Bitcoin or you're going to get into the Orwell, which is what the government's telling you to get into? Here's why you should get into Bitcoin. So I think there are a lot of people in the cryptocurrency space who see the threat

of a government backed cryptocurrency that has all of these features that are designed to uh control and tax people as opposed to features that are designed to protect people from excessive government control. They see it coming. They see it as a threat. But they're thinking about it in terms of how they compete with it. What I fear is they won't be able to compete with it because it will be just outlawed by government. And unfortunately, if you look at everything that's going on in society,

When the government announces that something is bad and it's it's the tool of terrorists, it gets outlawed and very few people push back on it. So I think that. if uh if if there is a chance to not have the Orwell take over as the uh the the uh government imposed cryptocurrency. It has to be through some kind of marketing campaign where the bitcoins and Ethereums of the world uh sell the message to people that look, we don't need the government

to control our lives and to be able to tax everything. It's better to have free commerce. It's better to have a Bitcoin type of currency than an Orwell type of currency. Uh I hope they can be successful enough, but you've got to win over enough people.

uh to overcome the government's ability to just outlaw the other currencies. Uh I hope that they can succeed at doing that, but that's the place where I've heard about it from other people, is is people in the cryptocurrency space thinking about how they're going to uh organize their messaging to sell people, to sell the general public on the idea that a government controlled cryptocurrency is a bad idea and a private cryptocurrency is the right thing. Sounds pretty frightening.

It is frightening and and unfortunately this is what happens with these cycles in history is the the time and and you've gotta be careful to uh if there's any lesson I've learned Uh, I was born in nineteen sixty five. My generation was brought up. in public school to think that our job was to question authority and to not let the government push us around and abuse our rights. That's not what they're teaching in grade school today.

And you've got to understand, even if you feel, uh, you know, uh I'm fifty-two, if you are my age and you feel like that would never happen because the people would never tolerate it. Well, wait a minute, you and I and the rest of our generation might not want to tolerate it.

But younger generations are starting to be brought up to really believe that, you know, socialism is better, greater government control, it's more important to uh do something uh about uh enforcing on and dealing with tax cheats and and bringing people who cheat their taxes to account than it is to have financial freedom.

That mindset is not something that resonates naturally to my generation, but we're not gonna always be in charge. And there are other generations that feel very differently. So my message to anyone is don't just think about how you feel about these things.

uh talk to other people in other generations and how would they vote if the government is saying that in order to cope with tax cheats, in order to to deal with these filthy rich one percenters who are not paying their fair share We've got to eliminate cash. Eliminate first generation cryptocurrencies like Bitcoin, outlaw them, and instead have a government-sponsored cryptocurrency which allows the government to make sure that those nasty one percenters are not getting away.

With cheating on their taxes the way they have been for too long. You and uh and I might say, wait a minute, that's BS. A lot of people. would say, Hey, that's welcome. Let let's bravo. Let's get the government going on that so that we can do something about those those nasty one percenters, whoever they are.

And uh it's really not one percenters. Though the the the true one percenters, which are really about one tenth of one percent, know how to game the system. They're gonna be taken care of no matter what. in terms of economic freedom for the rest of us, I'm afraid that we're in a generational period where the government will likely be able to put an end to things like Bitcoin. Right now it's not big enough to to, you know, cause any problems. But I'm afraid that it's gonna be outlawed eventually.

So when you talk about a government backed cryptocurrency, are you talking about, you know, just as an example, just the US government has like uh the equivalent of US dollars as a cryptocurrency or are you talking about government backed in the forms of like, I don't know, several countries involved in this, you know, having one like maybe not global but kind of universal Well the prediction that I make about this is there's gonna be an arms race.

And i if you think about the Cold War arms race, you know, it it's who can get control of space and who can get control of intercontinental ballistic missile capability and so on and so forth, you know, who can get it first. I I think that the arms race will be between The private cryptocurrencies and government

uh backed and it will also be consortiums of multiple nations. I think that China and Russia are probably already working together on this because China and Russia have been working together on this de dollarization idea that Sergei Glasiev, who's a a Russian scholar and an uh advisor to Vladimir Putin, have espoused that they need to try to get

They need to try to use whatever influence they have to get people to stop transacting in US dollars so that the US stops having this exorbitant privilege of being able to go into debt for free. Uh I think that that the outcome is unknowable.

It just is the outcome of the arms race was unknowable. But there's gonna be an arms race. It's gonna be a realization Just as at some point somebody figured out, wait a minute, if if you've got control of space, which means that you've got You know, satellites in orbit that could drop a warhead on any spot any minute, you've got total c okay.

suddenly there's a space race, you know, and and supposedly it was about landing a man on the moon for the sake of humanity. It was really about let's develop space technology for military benefit and both the US and the Russians were doing it. I think that What

People are gonna figure out both the the private cryptocurrencies as well as governments around the world is they're gonna say, Wait a minute, the US dollar cannot go on forever. Robert Triffin was right in the nineteen sixties when he said that eventually the US dollar had to be displaced by something else as the world's reserve currency.

At the same time, you've got a lot of pressure from governments around the world right now that they want to ban cash. And they want to ban cash for one reason, which is, you know, not fighting terrorism and so forth. That's the one that sells well to the public. The one that they really want to ban cash for is it enables negative interest rates as a monetary policy tool. The reason for that is if you uh if you have cash

You try to go to deeply negative interest rates, it creates a financial incentive for people to hoard cash, which could cause a run on the fractional reserve banking system. You can overcome that problem by outlawing cash. So governments want to outlaw cash, they see this as the future.

What's going to happen is just as there was that aha moment where somebody said, wait a minute, whoever controls space is basically top dog military. They've got unlimited power over everybody else. They're going to say, wait a minute, whoever figures out The cryptocurrency that could replace the US dollar as the world's reserve currency, whoever that is, is just in an incredible position of advantage. We've got to figure out how to make it be us.

So I think that whether it's, you know, the Ethereum people th from a private uh cryptocurrency standpoint or Russia and China working together. Uh US government seems to be slow to get to the game here, but eventually they'll figure it out. And they'll say, No, no, no, you know, w the US dollar has to be.

the world's reserve currency forever. We just need to turn it into the digital dollar, which will have this new feature of being completely trackable for the sake of fighting terrorists and tax cheats, because those are the the bad guys that the public will resonate with and want to

help the government to fight the fact that it's really to be able to monitor and control all of your financial transactions, they're not going to tell you that. Um but it has to be the US dollar because well the you know US dollar is the center of the world. Uh this is gonna be an arms race and I think that You'll see competing technologies. The US government looks like it's going to be slow to join the game in terms of trying to develop a government-sponsored cryptocurrency.

See. Uh they at the same time they have more money than anybody else. So once they figure out that they're late to the game, they'll probably spend a whole lot trying to develop it. uh the the private pri cryptocurrencies are gonna make uh the very good argument, the very valid argument, that it makes much more sense to put your faith in something like Bitcoin, which is mathematically

safe. It's not controlled and governed by anybody. It's designed in a way with open source source software where you can independently verify that it is safe and it's a way to transact business that is immune from any government's interference. You know, that if you're a libertarian, you're just loving that story. The thing is, libertarians are considered nut jobs by most of society.

The idea that the government should be able to monitor and control everything for the greater good of humanity in order to fight terrorism and text sheets, that resonates with the majority of the population.

that's what they're gonna vote for. And uh I think the private cryptocurrencies are gonna do everything they can to educate people to see it a different way. I I wouldn't be surprised if Russia and China Uh one of the angles I've thought about, I haven't really figured out the details, is Russia and China collectively have enough gold between them that they could do a government sponsored cryptocurrency.

that differentiates itself between b from other cryptocurrencies by having some kind of gold backing behind it. So it's it's a combination of a gold backed currency and a cryptocurrency. that enables uh a cashless society and and online transactions and so forth. Uh another question that you have to ask yourself is suppose you're not the US government, but you're one of the smaller governments, let's say Russia and China.

Do you go down the whole path that I described of the Orwell, the currency which is totally controllable by governments? Or do you say, Wait a minute, if we're Russia and China and we try to do that, the US is gonna do one that's probably gonna beat us? What if we take a uh if you can't beat'em, join'em approach. What if we partner with the Ethereum guys and and by the way, Putin already met with the Ethereum guys. So stuff's happening in this space. What if we partnered with them?

And we it was government backed and so that kind of gives it credibility. But rather than fight the the private guys, at least for now in the in the first generation, we'll go ahead and get on board with this privacy thing so we can sell it. to the people who respond to that message and uh we'll try to assert it that way. Are they gonna do that or are they gonna go the approach of monitor and control everything for giving the government more control?

Um, I don't know. You know, there there's an argument that clearly governments always want control if they can get it.

But if they perceive that government control is going to be an objection to whatever the US comes up with, maybe what Russia and China do avoids that kind of control and looks more like Bitcoin in order to appeal to a different audience. At some point I think before this fourth churning is over by 2030, we're gonna have a showdown and we're gonna get to figuring out what the cashless

uh w could even turn into a global currency, but the replacement for the US dollar as reserve currency is gonna look like. And uh I I think it's a completely open game. The the the arms race has just begun.

Just to close us out here, can you actually speak about the real dangers of becoming a cashless society? Like what are the implications of that? Well, there's a lot of dangers. I mean the first one i is, you know, the Orwellian reference. You're you're you're getting to a point where You could have abuses of human rights by governments, which is something that a lot of people don't worry too much about. I I worry a lot about it.

Um, you definitely get to a problem that almost nobody thinks about anymore, which is, you know, things break. We do have power outages. If you had a truly cashless society, And and imagine you've got a world where everything, you know, your your cell phone has an RFID chip in it or anything. You can just swipe it and use your your thumbprint to uh

to authenticate yourself and pay for anything instantaneously online with this uh your system. It probably has credit integrated with it too. So you can, you know, pay with borrowed money if you want to and it's it's all integrated. Sounds really cool. Well, what happens when the power's out and the thing's not working and there is no cash anymore? So there has to be cash, at least small amounts of cash, just so you can deal with situations

Where, you know, the you're offline. You're you you're not in uh there's no Wi Fi, you know. What do you do on a on a boat to pay for you know, you're on a cruise someplace and you're out of range of the of of uh internet connectivity. How do you pay for a beer? Uh there has to be some kind of cash. How does that get resolved? That that's gotta be be part of this. Um I I think that it has a lot of complexities. And the other thing is that, you know, no matter how

hack proof anything supposedly is. Uh you know, I I was a hacker when I was in high school. It's uh it's a question of just the hackers figuring out a way to think outside the box. And figure out a way to do something that couldn't be done before. Cryptocurrencies do uh rely on encryption to some extent.

Well quantum computing potentially has the uh ability in coming years to just orders of magnitude change and how long it takes to factor uh a key and in i in this is a a computer science thing, but when you have all these big encrypted uh systems. It's always possible to crack that code by a process called factoring, which is you figure out all of the prime numbers that eventually got multiplied together to come up with that encryption key. It's a very, very compute

uh centric cycle. So the way they design these things is say, okay, uh how long would it take the world's fastest computer to factor this uh this key that we're designing. Well, the two hundred and fifty years. Okay, it's safe because we're gonna expire the key every twenty minutes, so there's no possible way anybody could ever crack it.

Well, until somebody figures out some massively parallel computing solution that can crack it in that amount of time. So, you know, there's always a way for things to get hacked. And if you have everything on a cashless system. Uh you know, there is and even if if somebody can't steal the money, if they can just shut it down.

so that it stops working and that causes society to grind to a halt. Uh imagine somebody ransoming governments of the world saying, you know, give me a billion dollars to turn the the power back on, basically, to your your cashless

society system because they found a way to defeat it somehow. Um th there's all kinds of risks. And what always happens, especially with governments, is they assume that based on current assumptions about available technology, about available computing horsepower, that it's gonna be impossible to crack something. And what happens is, you know, it's it's the old mistake of of every you know, soft every generation of software engineers.

There's no reason to accommodate more than six hundred and forty K bytes of memory because it's impossible that anybody would ever want to write a program bigger than that. That was the limitation of MS DOS. And of course, memory got cheaper, and all of a sudden, you know, these days six hundred and forty K is nothing. But that was the big limitation for years and years because somebody made the assumption.

That nobody would ever want it. Somebody will make the assumption that, you know, a key of a certain strength can never be cracked. And it won't be crackable for a while until it is. And then it will be. And then what happens? So there's all kinds of risk to this, but I think the biggest ones really

are that we get to a point and and this is just my personal political view. Some people, you know, certainly can have the opposite view, but it it's the George Orwell uh prediction. I think that if you get to the point Where the government is can monitor all financial transactions of all people on the planet.

That's a really, really bad thing, not a good thing. It doesn't make us safer. It makes the world more dangerous, n not less dangerous. And, you know, I'm I'm not gonna get into uh you know, a f philosophical thing about my personal political beliefs. I know a lot of people feel the opposite way. I I guess I'd say look at history. I don't know. It it's it's very interesting to me and it's also very frightening at the same time. Like I can see how things could very easily go wrong.

But anyway, let's uh save the rest of that for another day. I mean, I'm sure we could very easily turn this into a three hour podcast. But Eric, it's been an absolute pleasure having you on the podcast. Now I know you also have your own podcast, Macro Voices.

Uh if someone wants to tune into that podcast and and check it out, where's the best place to go? It's macrovoices.com is the website or you can just uh put macro voices into iTunes and subscribe for free. Uh similar to your show, it's always free and

It's a different format. What I tend to focus on, you you've got well actually I w you know, between Kevin Muir last week and and me, maybe we're gonna have a little macro takeover or chat with traders. But uh, you know, where your heritage has been very focused on traders and and, you know, technical analysis and so forth. My podcast is all about these longer term views and uh getting macro experts on the show. So it's macrovoices.com or find us on iTunes and it's a free subscription.

Okay. And you're also on Twitter as well if someone wants to follow you. Uh what's the best handle? Sure. At Eric S Townsend, E R I K S as in Scott Townsend's T O W N S E N D, or at Macro Voices, either one. Very good. Cool man. We'll we'll have to do this again sometime, eh? Um I've really enjoyed it. Thank you.

I have too. I've very much enjoyed it. And, you know, the things that I predict in terms of, you know, what could happen, that's one scenario. I'm not necessarily saying that's gonna happen. What I am predicting very strongly though is governments are not gonna stand by And let

The libertarian features of cryptocurrencies just blossom. There's going to be resistance. Exactly how it plays out, I don't know. Nobody knows. But it's it's gonna be an arms race and it's gonna be very interesting to see what happens. Have you done some episodes about this on on your We've talked I think I've probably talked more about it in this podcast than I have on my own podcast, which is interesting.

I think it was the end, uh Pippa Malmgren uh who's a a fantastic interview if you want to do more macro stuff. Uh had her on the the program recently. She's a geopolitical analyst. She's been an advisor to several US presidents. She brought up cryptocurrencies and it was in the postgame segment after her interview that Patrick, my co-host and I talked a bit about crypto.

Uh but I think that's the only time we covered it on the show. Okay. Okay. Well I'll dig up a link to that episode and I'll make sure to include it in the show notes. So yeah. Once again, Eric, thank you very much for doing this. My pleasure. You've reached the end of this episode of Chat with Traders, but rest assured there are more episodes. Love it if you leave a-