This Is The Macro Reset | Nik Bhatia

What would cause a recession now? Defaults, financial crisis, central bank bailouts, the whole system does collapse. People lose their jobs and they still have a mortgage, they still have credit card debt. I can't see a way that it's not catastrophic. 5 to 10% is going to cause immense damage. When cash flows stop at the margin, everything collapses because of leverage. At some point, does it break? Does the US dollar dominance break?

I can see the path to the United States trying to direct capital into Bitcoin. Bitcoin is leading. The bounce that Bitcoin is showing is foreshadowing volatility coming down. Roll it back up and trigger a buy signal sometime in the next few months. Nick Bhatia, welcome back on What Bitcoin Did, man. Thanks, Danny. Great to see you. I'm the macro world. The world in general is a bit of a mess right now.

And one of the questions I've had for you that I've been thinking about a lot before this show is, you've always been the guy who is pretty balanced, pretty nuanced about your takes. You think that strong economic growth is likely. You think sort of tamed inflation has been likely going forward. And then war with Iran. Does that flip everything on its head now? Do we have to reassess the entire macro picture?

I think it's wise to take a clean slate. And that's what I've done over the past couple weeks. You have to take price as truth. And if prices are moving that don't agree with your narrative,

don't agree with your bias, then you have to take a second look. And with the volatility we've seen over the past couple weeks, both in stocks and bonds, so the VIX and the move index, things I watch very closely, they are telling me that you can't just assume we're in a strong economic growth, oil will stay fair, rates will stay fair, and stocks and risk will do well. You have to throw everything out and start over. So stocks are looking weak in terms of

a multi-year trend line that I'm watching. That's another thing that, okay, stocks have now broken down. Volatility is very elevated. So don't just assume everything is going to be good. And that's what I've basically done over the past week or so. Clean slate. I'm not changing my every bias because of what I've seen over the last week. I'm also trying to understand a lot

about the war. That way I can make some baseline expectation of what I think oil will do and then volatility and then the rest of the markets from there.

So what are you watching most closely now? I did a show with Luke Grohman recently, and he was talking about the price of oil being a very key signal and was basically saying oil over $100 for any kind of sustained period of time is a real bad situation where it can have an impact on the treasury market and global recession becomes very, very likely. Is that the most important thing to watch right now? Well, oil is at $100 today. Oh, is it?

Yes. So oil opened up tonight at around 100. It was near 100. And Brent and WTI have both been near 100. Now they're both above 100 as of tonight. So instead of thinking, well, if oil goes above 100, what will break? The price is telling you. So you look at oil today at 100, and you look at the treasury market, four and a quarter on tens, more or less. Stocks starting to break down. Four and a quarter, give me some context. Where was it, say, two weeks ago before this war?

Yeah, 10-year yields have flirted with below four a little bit earlier this year. And they've been basically in the four to four and a quarter range for several months. And so that's this tamed inflation, stable rates, everything going along well. It's been there. Now, it's back up at the higher end of the range, but it's not even close to six-month highs or 12-month highs. So that is the truth. So if oil was breaking the stock market, we would see it lose bullish momentum and lose some trend.

It is doing that. So oil is affecting stocks. negatively right now. It is not affecting the treasury market in anywhere near the same sort of way. And so that's enough information for me. Like I don't see the treasury market breaking down. It is affecting the dollar a lot. So dollar is getting very strong right now. That's also dangerous for risk and it's bad for the stock market. And so dollar right now charging up is affecting stocks. It's not, the treasury market is actually hanging in.

That's how I would describe it. So the interesting thing is that, and there's probably recency bias in this, but this feels like the most chaotic time we've had during Trump's tenure as president. But that's not, again, what the markets are necessarily saying. Like the volatility was higher, I think, with tariff announcement. Has that surprised you? That's a great point, first of all, seeing where volatility was during Liberation Day and comparing that volatility episode to this one.

What's interesting to me is I was more certain that things would calm last year than I am right now. Because war is a blind spot and it really is unpredictable. Not that I was 100% able to predict that Liberation Day tariffs would blow over in terms of not causing an inflation chaos and not causing a global recession. It didn't either.

And I was right about that prediction. So, you know, I would laugh and make fun of these people who went, not your show, Danny, but a show like we're entering the new dark ages. That was my favorite one. So in our, you know, in our team chat all year, I would, I would, you know, say dark ages, all caps, when the stock market would do well. So volatility was higher then, but I was more certain it would come down.

This time it's lower, but I'm not certain it's going to come down because of the blind spot of war. And that's why I've been doing a lot of work on the war and Iran over the last week plus, because if that's my blind spot, then that's where I have to go do the work. And I'm very quick to admit what I'm good at and what I'm not. And like, what's my market? What is my expertise and what's not? The money markets are my market. So when I'm looking at repo, I don't need to read anybody.

I don't need to read anybody. I just look at the market. I look at the rates every day, and I make my own judgment. And yes, I do read the street, people that I trust, and I do compare my notes against theirs for sanity, but I don't need to. But when it comes to oil or war in the Middle East, these are things that I have to admit where my limits are, and that's where I go spend the work.

Can you explain, first of all, why the volatility index is so important to watch and what the different dynamic is from Liberation Day? Because if you were, in your case, sort of bearish on the spike in volatility during Liberation Day, you can become a volatility seller. Yes. How is that market different now to that spike? Okay. Let me tell you theoretically about volatility and the VIX and what it is so that people that don't really follow vol can understand it.

Volatility is insurance and it's protection. And so it's the price of it. Volatility on a realized basis is what did the price move yesterday and last month. That's called realized volatility. Volatility index, VIX, and move, these are implied volatilities. It means it's the price to protect.

so it's that's why they call it the fear index because it is literally the price of insurance for your portfolio so last year how does that actually work sorry to sorry to interrupt you put options okay you buy a put and when you buy a put what you're what you're what you own is the option to take the position that you have if you're already long you take that position and you can hand it over at a pre-agreed upon price.

That's, you know, if you're exercising that option, it means the price has gone below your insurance level. So you have to pay a premium and you have a strike price and below that strike price, you're protected. That's your insurance. And the put option is gonna be priced off of how far it is from the current price, the time to the expiration, but then this hidden factor, which is the demand, like how much demand is there for this option based on the amount of

sellers of that option. And when the market, meaning the banks who are the option sellers mostly and market makers, when the option sellers say, hey, the price of insurance is more today than it was yesterday. And then the next day it's more today than it was yesterday. That is the VIX going up. So it's the premium price that you pay for insurance. So last year, Liberation Day, the price of insurance went to the moon. There was a great uncertainty as to what

President Trump was doing. I felt like I had a grip on what the plan was, right? I read Stephen Myron's speech. I read every Besson's speech. I was able to gather the signal of what this would do. And my prediction was that it wouldn't cause the global economy to seize. It would not stop global trade. That was the assumption that the put buyers made, that everything is going to seize. We have to buy puts. Profits are going to go

to zero and it's going to be a recession. You want to bring it back to today and maybe your question of comparing the two, there is less of a worry right now in the market for some reason that the whole global economy is going to cease. But the fear is that $100 oil, $120 oil, $150, that that will choke off margins. It'll choke off the ability for some countries to grow, some companies to profit, and that should slow down marginal economic activity.

But it's not like a war in Iran causes ships from the coast of China to the west coast of the United States to stop moving. In fact, Asia has now come to the United States and said, by the way, all that oil that you're producing, we would like you to ship some of that to us because we're getting everything through the strait and we need to diversify. So maybe there's an aspect of less fear that we're going into an environment where you can't generate profit.

And that was the fear with Liberation Day, I believe. center of everything SWAN does. A dedicated SWAN private wealth representative, which is a real person that you can text and call, will help you build a Bitcoin wealth strategy using SWAN's comprehensive platform of Bitcoin services, including tax advantage retirement accounts, advanced Bitcoin cold storage using collaborative self-custody, inheritance planning with both trust

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Okay, so when you said you understood the plan at Liberation Day or you thought you understood what they were trying to do. Is that when it was Bessent's idea of Main Street, not Wall Street, and a weaker dollar? Was that sort of the core of the plan there? So a weaker dollar, they were able to get that last year. Dollar is coming back as we talked about, but they were able to get that. But it wasn't actually that. It was addressing this idea

of a dual public good. The dual public good is the United States provides the world with a navy to protect shipping lanes. And it provides the world with the global reserve currency. So it's a free riding problem there on both sides. It's a free ride for a country in Asia to ship to any part of the world without having to worry that their ship is going to get attacked

because the US is patrolling open seas or they're that security force. The dollar system is a free ride because Brazil and China can trade in dollars and the U.S. doesn't really accrue any benefit. And it's not like U.S. banks are financing all of that trade or collecting fees or anything like that. So it's a free ride for the world. Whether you agree with either of those things or not, it was clear to me that the plan was to address this dual public good. On the dollar side,

What was the proposal to address the public good? It was to impose tariffs, and it was to prevent non-tariff cheating. That was a key. So that's the dollar. Stop manipulating your currency, and that's the non-tariff cheating. And you use tariffs basically as the stick and the carrot. So the stick is the tariff. And if they say, okay, we're not going to weaken our currency to account for this tariff, then everything is good. And let's go to the table and hammer out a deal.

and yes there are great alliances between the united states and europe even though there's a lot there that we can unpack there is a great alliance between united states and the uk united states and europe united states and japan united states and the middle and the gulf coast countries the arab countries of the middle east and there are great alliances with countries in south america

some that are getting stronger. And the United States has very strong alliances. So what was it my projection that all of these allies would come to the table and say, no, we're not going to do this? No. And so that's what I understood last year, that the global order wouldn't, the global trade, sorry, I should say the global trade would not break down, that global trade would continue. Somebody would pay the price. I didn't think it would come that much into CPI. Which it didn't.

Which it didn't. It's funny that the studies from the Fed are saying that 90% of tariffs are passed on to the consumer. I found that interesting. I don't know if that's empirically backed. And it's also hard to know because you don't know. Like everything is multifactorial. So you don't know how much it did go in. But then other things brought it out.

So when everyone was panicking then, VIX spiked and people were calling for recession. You faded that. And I think it's clear in hindsight that you were right. We didn't have recession until the end of last year. But there's a lot of people now saying that the Iran war will cause a recession. Again, going back to like oil prices and just the sort of uncertainty in markets now. Do you think that is likely? That's, I mean, that's the question.

And that's what I have to, that's what I have to face as a researcher is that to what extent is the oil price going to stay high? How long and which countries does that affect? And how much is it going to impact the global economy and sink it into a recession? Outside of the United States, Danny, I don't know. Inside of the United States, I don't think so. That's my base case right now.

Okay, so that'd be worth breaking down because that's something I've been thinking about a lot and have no answers for, is like the oil price in the US isn't really dictated by the straightforward moves. Like all the oil in the US is generated in the US. I think some comes from Canada. So why would the oil price that is going up in this, I guess the oil price is global though, even though the supply is not necessarily global. That's right. It's about global. I mean, it's about arbitrage.

So you can source oil from anywhere. And of course, there are lots of different types of oil. That's also important. So what are different oils used for and different like the North Sea Brent, the WTI price, West Texas Intermediate, the US price, actually a landlocked price. The delivery is in Oklahoma. It's not connected to the Gulf of America via a pipeline. So it's a landlocked price. And that's why Brent price and the WTI price and the Dubai price can all be different at times. But yes,

it is a global price. There is arbitrage. There's this whole shadow fleet, right? There's millions of barrels of oil just floating out on different container ships around the world. So even that shadow fleet itself is a way to arbitrage. Or oil system. Exactly, euro oil. Okay, so what would cause a recession now? Like if you had to try and sort of make the argument for both recession and not a recession, what are the things that would lead us into recession from here?

And what do you think would mean the economy can keep on ticking along as it is?

This is, I think, what's interesting about the US right now. The US has a very strong economy and strong internals. It also has a lot of backing from the government to keep the growth up. So that's a fiscal deficit. But that fiscal deficit now is being I won say whether it going up or down that we don know especially with the war now But the fiscal deficit itself is going more and more into production That is without a doubt that we know to happen So the United States very consumer economy

70, 75% is consumer-driven. The balance of the economy is what the government spends, what our net exports are, and we are a net importer. Of course, we have a trade deficit, but also how much we invest. So money can either be, when it's earned, it can be spent and consumed, or it can be spent and invested on something. So if the United States, that's your

Wall Street versus Main Street thing. Don't just finance consumption, which ends up financializing things and the money just goes into finance production. That's the shift the United States has made. I think that's what keeps the United States economy robust. $100 oil is a tax on the consumer, and gas prices going up will marginally hit the consumer.

But you see if the GDP is C plus the investment, plus the government, the C going down, if we have a strong pattern of government spending and strong investment patterns, which the evidence, Danny, is the CapEx $500 billion announcement from the Mag7, the hyperscalers the past few months. $500 billion they're going to be spending on data centers, XYZ, and all the stuff. that stuff is that all those plans will happen. You can't slow that down. And it's a national

security. I mean, it's a national necessity now for the country. You see all these guys show up at the inauguration. If that's not a coincidence that they're going to then fund the guarantee of positive GDP growth. And you see how those data centers basically on a mathematical level, they guarantee that GDP growth. No matter how much the consumer gets hit, and we can bring in the AI labor situation, no matter how many people at the margin get laid off from the current AI

wave of firings, even with all that, it will balance out. That's my opinion. Investment is deep in the United States. It's deep rooted. And the shift now is enough where if it happened 10 years ago and the United States had this AI wave and millions of people got fired, guaranteed recession because people stop spending, the economy goes into recession.

But we didn't have the fiscal deficits that we have now back then. And we didn't have this shift toward AI, data center, electrification, energy, drill, drill, drill, deregulation, and all of that. So that's what I think keeps the US economy very robust. And I cannot say the same thing for the rest of the world. And we'd really have to go country by country then to see what countries are really negatively affected by high oil prices. India, Japan, at the margin, these are some of the ones.

Now, these are very large economies. If they go into recession, what are the knock-on effects there? And then how long does all of that take to filter back into the United States and maybe cause a recession because the rest of the world, like we catch the rest of the world's cold? Yeah. And you can imagine you'd bundle almost all of Europe into that apart from some of the Scandinavian countries because there's no oil production in the most or very little oil production in the rest of Europe.

Yes. Europe is, I would say, more sensitive to the gas price. Russia being added back into Swift at the margins because of this war. Yeah, how convenient. So it's funny. I'm not even thinking about Europe. How far we've fallen, hey? Yeah. Okay, there's a dynamic in there that I really need you to explain because I don't get it.

you said in years past if we have millions of jobs laid off guaranteed recession I don't understand why that's not the case in this new AI world what stops because millions of people get laid off they stop spending into the economy economy struggles, recession if millions of people get laid off GDP continues to go up because of AI data centers or capex boom there's still millions of people not spending money into the economy So do you end up with just fewer people propping up the economy?

And does that not get even more sort of house of cards-y?

Now I'll tell you my opinion on the AI labor, which is that companies are laying people off because of AI improvements. But broadly, I think the US economy will be well positioned to adjust, capitalize on the changes, and move on. Now, there is the comparison to when United States got deindustrialized, people lost their jobs. But the United States labor participation rate over the years has gone up and down. But people retrain and they get new jobs and they enter new sectors.

So I genuinely believe that the US economy will figure it out. Even though people will lose their jobs as companies optimize, they will hire again. There's a lot that needs to be done. AI can't do everything. We still need managers for AI. We still need, I was just thinking about roadside construction. What if in five years, all the roadside construction is just being done by robots.

You don't think there's going to be a few guys there with the tablets talking to these robots and making sure they're doing the right thing. So I'm not a fatalist with the AI that we're just going to get, you know, UBI guaranteed because everybody gets fired. I'm just not there. I think that the economy will adjust. Labor market will adjust. people will learn AI also. Yeah, I want to get into that more though, because I skew more to the fatalist viewpoint.

And it's not because I want to, it's just because I don't necessarily see the alternative. Like it seems like AI is almost going through specialization phases. Like programming seems to be the first one. It's now just like, if you're not using that as a computer programmer, you're just dead in the water. So again, like you're saying, it will get to the point and maybe it is already at the point where people using AI to make their production better is already happening.

Like if everyone's vibe coding, so you become a prompt engineer essentially and you're making AI do your work. So then there's a team of developers that might be more junior developers that get laid off because you just don't need them anymore. But then as it goes through the workplace and it takes out accountants jobs and the junior lawyers jobs and all these different white collar jobs that end up getting disrupted.

If you're a 40 year old accountant, 50 year old accountant, Are you going to retrain to work on like road construction? Like these are the things that I find really hard to just say, yes, people will do that. And even still, like if you look on a road construction site now, there might be, you know, 10, 15 workers, whatever on it, on one particular road site. If that becomes one or two, like what happens to the other 12 or 13?

I just, I really struggle with thinking the retraining thing is going to work because that's what people were told to do during COVID. And that didn't really work out. everyone became computer programmers and now they're losing their jobs to AI. Yeah. You know, I can't argue with you, Danny, because we don't know what's going to happen.

And I don't have a fatalist thesis on AI because when AI has replaced, let's say, 50% of the accountants, the accountants that, you know, the 1 million accountants that have lost their job are all 100% of them going to fail to retrain? That's where I see, that's where I push back. So every marginal thing, like I have a couple friends who are attorneys. One of my friends, he's using Claude all the time, but Claude can't go into the courtroom.

Claude can't do some of the stuff, so he's amplifying what he's doing. And yes, I have friends that are entrepreneurs that are laying people off as well. So there will definitely be an adjustment, but I, I mean, it's just, you know, what you believe. And I do believe that there will be jobs like who's going to make all the robots. So people say, well, the robots will make the robots, right? Tesla's especially in their factory,

but you still need people to do things. And, um, you know, like Elon says, if everyone's just going be infinitely wealthy. We'll all have all of our time and everything will be free. I mean, I don't see that future either. Yeah. And I don't even like he paints that as a sort of utopian future. I understand why, but I also fade that as a narrative. I think people without meaning is a very strange world, but I just, I struggle to see if AI is as disruptive as you think it's

going to be. And timeframe doesn't really matter. At some point, I think this is going to happen where it replaces the vast majority of jobs. What I don't understand is what happens to all the externalities.

Like in the interim, even if people decide to retrain, even if people decide that they want to become a musician or a painter or do something creative, like there's going to be an interim period where people lose their jobs and they still have a mortgage, they still have credit card debt, they still have a car loan. Like what happens to the economy in that interim period? And I can't see a way that it's not catastrophic.

You know, you make a good point because in the end, the defaults are what trigger a financial crisis. So if you can't pay back, not only do you default on the debt, but the bank that is issued to you or the mortgage-backed security holder that owns part of that mortgage is going to suffer impairment. That's why the Federal Reserve bought so many mortgage-backed securities between 2008 and 2012.

Because if there were defaults in the system and the banks were going to take those defaults, then the whole system does collapse. We are in a $350 trillion debt-based system. $350 trillion in debt. Just numbers you can't comprehend. And, you know, my students have to think in trillions. It's what we do. Every single class, we show charts and we're comparing this 7 trillion line item to this 38 trillion line item to the 64 trillion line item.

The euro dollar system, 15 trillion in offshore dollar deposit claims, but another 60 trillion in FX swaps claims. These numbers are large. 350 trillion the quarterly number that comes from the international institute of finance it's a very large number but the system is built to roll over that debt that's where the liquidity framework comes from what is the capacity for the system to roll the debt over and when that gets hit

defaults, financial crisis, central bank bailouts, you go back up. That's just the system that we live in. And because we know that banks are incredibly levered, what percentage of people do you think need to lose their jobs and start defaulting on loans before it becomes an issue? Because I don't think the number is as high as 50%. Is it as low as 5%? What kind of range are looking at? You know, right now we have a banking system that's leveraged about 10 to one, but that's

in, that's what we can see. There's the private credit crisis that's going on right now. The leverage there is harder to see because the banks lend into the private credit operators than they lend out into the market. That is a leveraged play between the banks and the private equity, but less levered or less obviously levered between the private equity and the ultimate borrower, 5% to 10% is going to cause immense damage. That's what the nature of the system is.

When cash flows stop at the margin, everything collapses because of leverage. And I know you're not a fan of the sort of inflammatory statements of like a big prince coming, like, but in that scenario, a big prince coming, right? Sure. Yes. You can, you can understand from the Fed's framework that that's what they will do. But the key to understand is that it is the government that does it.

The central bank is simply the financing apparatus when the going gets tough. It's the government. So when, let's say, 5 million people lose their job, the government is going to put a UBI sort of program or unemployment insurance, right? Even during COVID, we had five years of unemployment insurance, four years of unemployment insurance. You'll get that type of program. The government is who borrows and spends that money.

And if the interest rate is punished to the degree where it starts breaking the system, that's where the Fed comes in for financial stability. So the Fed is reactionary. They don't actually control anything. and they're really just there to serve the government. The Fed, when it started to do QE, it was in response to what? The bank bailout. The bank bailout came from where? Congress. I mean, and Citi's bailout, they came from Congress.

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WBD. I've been told off in the comments for constantly saying I think UBI is inevitable. And I really hope you're right in this scenario, but I just can't see a happy ending to, or maybe not even, I think there's going to be a hard interim. And I do think UBI is probably the most likely outcome. It's definitely not that I think that's a good idea. I just, I think in a situation like that, where 5 million Americans lose their jobs, like the government has to do

something. And that seems like the most obvious option. So here's how I'll push back on that. The government already spends most of the money that it earns via tax revenue on social security, Medicare, and unemployment insurance and welfare, welfare payments, transfer payments. So, the government and the tax base of the United States is massive in the $5 to $7 trillion range. Three and a half goes right out the door on these entitlement programs.

You might not call it UBI, but it's a transfer payment. So, transfer payments are already completely dominating our tax base. doesn't matter what you call it going forward. Maybe we'll dial up the unemployment insurance segment of it. But you can't stop paying Social Security.

And the government does have to figure out on a budget basis, Medicare spending, because it's out of control. and it's caused the US economy to bloat to almost 20% of the GDP as healthcare. And that's way too much. So Medicare is a problem, but not in the fact that they're going to continue transfer payments, just that it's incredibly inefficient.

But surely the impact on the real economy is different between Medicare, Social Security, and UBI, because UBI is money going into people's pockets that they then spend in the economy. Social security is money going into people's pockets and spending into the economy. It's the same thing. That's exactly what social security is. The government pays seniors and then they go and then they spend it. So it is the same thing. Unemployment insurance is the same thing.

Food stamps are also the same thing. It goes to the person, then it goes back into the economy. So these transfer, that's why I'm calling them transfer payments. The healthcare money comes to the patient, goes to the doctor.

Everything is a transfer payment. My point is that if two thirds of our tax base is already going to transfer payments, is another one third of it, like let's say now all of it gets eaten up via transfer payments. And then on top of that, you have defense and basically discretionary. It's like the last thing left. And of course, interest.

well it doesn't like you could say that all of the transfer payments plus the interest is the tax base or you could say all the transfer payments plus the military is the tax base whatever it is we're at a deficit the deficit is between one and three trillion depending on what year you pick in the 2020s so and here's and here's the ironic thing about it all the market doesn't care. And by the market doesn't care, I mean, interest rates are at 4%. They're at 3%

in the front end of the curve, three and a half percent. They're at 4%, four and a half percent at the very longest end of the curve Where the crisis Where is the bond vigilante Where is the where is the market forcing the hand of Congress to stop spending the money or to stop signaling that it all be okay because we'll do some transfer payments at the margin?

This is an impossible question to ask because the market is not just one person, but why do you think the market isn't seeing this as an issue? Do you think it's that they don't see this as a likely outcome? Yeah. And is the bond market always right?

Yeah. Generally, yeah, I do believe the bond market is right. And this is actually why I got into Bitcoin in the first place. My market is the repo market, as we talked about. That's the market I started, cut my teeth on. When you trade repo and you see the size, for example, right now, the SOFR volume is about three and a half trillion, three and a third trillion.

That means that every night, three trillion, just to simplify it, three trillion in money market fund cash goes to the dealer balance sheet to fund their treasury inventory every night. The cash goes to the dealer. The next morning, it comes back. When it comes back the next morning, some of that cash is spent into the economy. Some of it that's spent in the economy somewhere else comes back in, and then it goes back to the dealer and it goes back.

Three and a third trillion, Danny, is about two to three times the Bitcoin market cap. The whole Bitcoin market cap is half the size of the overnight repo roll of the dealers. people don't understand how large the wealth of the world is when i traded treasuries you learn one thing everybody needs them and it's not that whole thing of everyone needs them it's like they need water danny it's not like everybody needs stocks or everybody needs, you know, Toro Belly, or everyone, you know, needs oil.

In fact, not everyone needs, in fact, not everyone needs oil. Yes, oil is an input to almost everything in our economy, but even oil on a macro scale, or let's say at least in an investment portfolio, Nothing is like treasuries. It is so needed that the US government can spend anything it wants and its interest rates don't go above the companies in its own domicile with much better economics. Meaning, do you expect Apple with all this debt to default?

Well, no, if you look at their cash flow and you look at how many iPhones they sell, you know that there's always going to be money. I say always, but in the next five years, you can project it out. Still, Apple's bonds get purchased 30. And who did the 100 year? Google did the 100 year. And then Amazon did a 50 year. But those interest rates are still higher than the United States Treasury borrows at. Why does everyone need it?

you said like they need water? Because of layered money. Everything else is a lower layer. Everything else has a degree of counterparty risk that cannot compare. We, you know, you think about gold and gold for 5,000 years of having this store of value and first layer money principle. all of that got transferred to treasuries. And yes, gold is, if you measure it, gold is now in the $40 trillion range as a market cap, which is larger, the same as treasuries.

So you can make that argument that now gold is of that similar value. But not everyone needs gold. In fact, most people in the financial system don't need it. They like it and they want it and they're buying it, and the price is going up, the price is going up because of this treasury dynamic also, which is that the treasury doesn't get punished. So you have to, other things like real estate gold have to go up in response to the fact that the treasury is going to be able to

continue to do things, and just borrow and borrow, and not get punished by the market. Now, there is a point at which that stops becoming true. And 2022 is a great look at that. Because when we talk about tame inflation, that being part of my thesis, it's part of my thesis, because in 2022,

it became untamed. So we have this recent example, and two year window of complete chaos in the treasury market, basically some of the smartest people I'll say, Jeremy Grantham, for one, I know this because somebody I like a lot sent me this article in 2022, Jeremy Grantham said, Hey, we're going to a 1970 style inflation. So you had some of the pros of the industry. I faded that too, but you know, it was funny. Cause I remember that, that it was really a

game of two narratives. Then it was people saying it's either going to be like the 1940s or it's going to be like the 1970s. And maybe it's worth explaining the different dynamics there and what actually has played out since. The 1970s was a demand shock and this was a supply shock. That's basically the main difference. The 40s with the war spending is much more similar to the demand shock and that fiscal, basically the fiscal engine behind the inflation. And that's what I,

about the Fed to go back, the Fed isn't really in control. It's the government that spent the money that caused the inflation. The Fed is the reaction and the Fed enables. The Fed is the enabler. We don't have to diminish that. The Fed is the enabler, but it's the government that does it. And that fiscal deficit marginally faded, and then inflation marginally faded. So what would cause the world to stop needing treasuries in the way that they do today? That's my point. There's nothing.

There's nothing. You can go to option A, option B, option C. We can go through all of them. We can talk about gold, Chinese government bonds, German government bonds, Apple's bonds. I mean, whose bonds do you want or what asset do you want? Whose deposit? Whose counterparty? There is nobody. There is no structure of the dollar system without treasuries at the center. And it just doesn't exist. But if we went out 50 years, you think this is still the case?

I mean, that's really, you know, a really long time. That's a really long time. My point is like, you seem to be super bullish on this idea, but like, does it, at some point, does it break? Does the US dollar dominance break? Like, even if it's the last fiat currency, this is like the dollar milkshake thing. Even if it's the last one to break, does it still break at some point? Instead of looking 10 years in the future of 50 years, let's look at now.

And the United States, the last 10 years have been filled with the BRICS narrative or the digital Renminbi or cross-border trade between China and Russia, China and India, all of these things. Those are the narratives. So what is the system in which it changes? Maybe a Chinese system. Maybe an SDR system. So that was a special drawing, right? The IMF, it's a basket.

So you tell me, are we going more toward a dollar dominant system, more toward a basket system, or more toward a Chinese currency system? I would argue the dollar system has gotten stronger over the last year. And I would also argue that there were the Chinese system and this idea of BRICS cross-border settlement, a lot of momentum since 08, 09.

The first headline I remember reading, China and Russia traded currency for oil or currency for energy. And that was 2010, 2009, 2010. I remember that. So it's 15 years ago. But the United States dollar is still 90% of global transactions, 90% of FX pairs. The Basel system, Basel III, is getting deeper and deeper ingrained.

the breakdown of world the world trade organization disrupts any momentum that the multipolar system was trying to work toward so the only thing left you have it to challenge it is china so if you i mean that's why list out the potential challengers. There's gold, there's Chinese government bonds, there's German government bonds, there's Euro bonds, which don't really exist yet, right? Euro, EU denominate, like EU

issued Eurozone bonds. I mean, they've done some, but it's not really a market or like a BRICS bond or like a bricks gold back token or tether gold, right? And so that's why Bitcoin is so exciting, Danny, is that when you think about what is the base for future collateral and future banking, Bitcoin has a role there. And you can see it, like I can see the path to the United States trying to direct capital into Bitcoin instead of into treasuries to make it less

vulnerable to the rest of the world owning treasuries. But that doesn't mean that treasuries will not take the same place within the financial system.

So when you look at the things that are going to strengthen the treasury market, people always talk about stable coins here. They're still pretty small, but they're substantial.

um how much of a role do you think i'll play i know you've just written a piece on this yes stable coins are going to be very important because take the simple example of i know you travel a lot us dollar paper cash is good most places like if you go to europe people won't really want your dollar your dollars you're in africa right yeah so so you know this and and you know on the ground that this is the case. People always want dollar cash. Why? Because

they want this store of value. They want dollars. And paper dollars are the easiest way that normal people abroad can actually hold dollars. So imagine now that they can hold stable coins. It's similar without paper. That's like a good starting point to see how large the market could be. If you just unlock that type of demand with stable coins, you create a few hundred billion or a trillion or two trillion in new treasury demand that stable coin issuers will funnel

into treasury, treasury repo markets, T-bills, and that should help the market. But I believe it's the vision is much greater than that. And this is what's exciting. I feel like I was behind

the government on this. Because now that I understand the genius act better, what I can understand is that somebody knew, somebody knew this was going to be the plan, which is that you have to get stable coins into the collateral base of the world and the world's banking system so that they can also use stable coins, not just treasuries, to basically borrow against. Why do they care about using stable coins as opposed to the sort of euro dollar shadow banking system that we have today?

And just really briefly, for anyone that doesn't know what the euro, like we shouldn't go into this in too much detail because it's a whole rabbit hole. But just very quickly, what the euro dollar is. Sure. U.S. banks, if you have a checking account in the United States, you have a dollar deposit. You can also have a dollar deposit in London, but the United States government and the Fed don't have any regulation or jurisdiction over that.

So you have this whole dollar system going on outside of the United States, and all these banks are banking people in dollars. Dollars are being sent from country A to country B. United States not involved. This is the free riding also that we talked about. free riding off the dollar system outside of the United States is commonplace. Everyone just uses it. That's the Eurodollar system started really in the 50s because the Russians didn't want to

bank in New York, right? And because they didn't want that risk. And this just grew completely organically and is a huge market. It's very hard to know how big the Eurodollar market is exactly. Do you have any kind of idea of the scale? We do know that there's 10 to 15 trillion in deposits. So those are easier to see. What we have a more difficult time seeing is the FX swap market, which is how many dollars are lent out against existing foreign currency.

So a foreign currency holder can post that currency and borrow synthetic euro dollar funds against that currency. And we have some numbers, 58 trillion is one. It's really tough to measure. Yeah, it's really tough to measure. But there's a whole dollar system outside the United States. By the way, they also use treasuries. Because when they get dollar deposits,

they have to have something in reserve against that. So owning a deposit at a New York bank is one way to have some of it paper in their vault, paper currency is another way, but might as well just own some treasuries, especially because the treasuries can they can post as collateral, and then free up liquidity if they need it. So it's a very large system. It is still anchored in treasuries. But the United States doesn't really have any governance over the system.

And that's the subject of my paper is how the United States can reassert governance over the offshore dollar system with stable coins. Okay, so let's get into that. How do they do that? Okay, so the paper will have a lot of the details, but the simple explanation is that if you can get stable coins into the hands of companies that export goods to the United States, so we pay for our imports with stable coins, you actually start circulating.

tokens that have United States governance. That's the key. And that's what I saw the Genius Act laid out. It's not in there, which is interesting. Between the lines. It is between the lines. But if you can see that, and that's part of the reason that the Bitcoin Policy Institute had me write this paper, because I have advantage of the offshore dollar system. And I also have advantage of the treasury market, the TBO market, the repo market.

So I can see the relationship between the fact that the United States imports a lot and the fact that the euro dollar system is robust. There's a direct relationship between these two things. So if we can insert stable coins in the middle of that, you have the chance to really change the

ballgame. So what is the actual difference for the US government in that situation? So on one Inside you have the Eurodollar shadow bank, no real insight into what's happening there, no real governance control over that. What changes with the stablecoin, and what does that allow the government to do that they can't do with the Eurodollar system? So you said it when you said when we don't have oversight over it, we can't really see it.

So if you put dollars into a system that you can't see, you can't see what they're using it for, you can't see how much they're leveraging it. I see. That itself is a massive risk to the country. Think about the national security implications of two companies engaging in trade between each other in dollars with their local banks. And let's pretend that that activity is going against the national security of the United States.

We would have no idea and no control over it and no way to say, hey, Russian bank, stop transacting with this other bank in dollars. We don't have control over that. And it is fair to say that stablecoins are a way for the United States to exercise governance outside of the country where it hasn't been able to. Do stablecoins fix structural over dollar valuation or trade deficits? No. By themselves, they cannot. That's not the tool.

It is revolutionary to get a token into the world's hands that the United States has some governance over, that at the margin can eat away from the euro dollar system's ability to multiply and fund activity that is counter to the United States. That's the free writing problem. That's what, as an American, that's what I can see is a problem. When I wrote about the euro dollar system in both of my books, I was writing about the fact that we don't have any, it's outside of

the purview. That's the term I used, I think, in layered money. The offshore dollar system, it's outside of the purview of the Fed. Well, who cares if it's outside of the purview? That's not the point that I see anymore. That's the key. It's that you're using it for things that are not aligned with the United States objectives. And so it is a very US focused idea. It does challenge, you were asking like, how does the world work without the Eurodollar system? The truth is it

doesn't. So you can't just kill the Eurodollar system, but you have to find a way. You can slowly bleed it. You have to find a way to mitigate the risk. It's funny because like when you look at where it came from and where it is today are very different. But if the US government were going to do this intentionally from the very start, I don't think they'd have picked the team at Tether that they have. Like, because Tether's full of Bitcoiners.

I know they do their stablecoin thing but Paolo a Bitcoiner And I wonder how much they feel their hands are tied to Tether And that like this has become almost too big to fail for them So they have to bring it into the system, even if they maybe wouldn't necessarily want to. You're talking about the US government? Yes. Okay. So Tether is part of the problem in that Tether has popularized stable coins more than half the market. And it's the original and it has the best network effect.

but it's part of the problem because outside the government. So you have USAT, right? Their new Genius Act focused token. What are the odds that USDT market cap slowly bleeds into USAT over the coming years as just like part of the plan? I would say decent. It's non-zero. You might not agree. No, I was just thinking about it. I don't know if I disagree, but I think the thing that I always struggle with is why anyone in America would want to use a stable coin. it's not for Americans. Exactly.

So in that scenario, if like the vast majority of adoption of Tether is going to be in the global South where people are trying to escape hyperinflating currencies or even just like high inflation currencies, does USDT not still grow faster? So here's the thing. USDT has, man, you're making me like give away the whole paper today. Here we go. Sorry, guys. Yes. USDT has established somewhat de facto genius coin properties, meaning it owns a ton of treasuries.

It owns it. It's participating in the T-bill market and short term collateralized obligations, repo, etc. It is participating in the repo market to a very heavy degree.

so it's already trying to act like what the genius coin stable coins will be and if it can if it can act like that it can maintain its market but it can also maintain that uh hey we're trying to be we're trying to be on the cutting edge because if genius act stable coins have certain aspects of backstops or regulation or, you know, regular disclosures, they're going to be more legitimate on the market than Tether. How long has the Tether FUD, they're not back, they're not back, always gone on?

Now they've done their best to, you know, self audit and disclose. But how much do we really know? And how much can we disclose in the United States court regulatory operation? We don't know. So the United States has to respond to Tether. Genius Act is basically the Tether Act. I mean, that's basically what you can call it. You can't hide from the fact that Tether won the first

part, right? Clear victory for Tether. How does the United States respond? Does it enable a system to grow Tether or does it try to create something to challenge Tether? So I would argue the Genius Act is there to challenge Tether. How long will it take for Tether to fall below 50% of the global stablecoin market cap? 40%, 30%? I don't know. But I would argue that it will diminish as the United States is able to kick this thing off.

Do you think there's a chance that at some point the U.S. government decides that this private company is too big to fail, cannot remain a private company? Maybe there's some kind of economic shock and it becomes part of the U.S. government. Tether? Yeah. So Tether's not a U.S. company. Or U.S. AT. Right. So is there a path to the US forcing Tether to do in-kind to USAT? Yeah. I mean, there's absolutely a possibility. And there's no way to know whether Tether hasn't already planned to do this.

So I would watch USAT closely. and I would guess... I just don't know what the incentive for Tether to do that would be when they print so much money. Okay. This also has to do with the alliances we were talking about earlier when we were talking about Liberation Day. What is the incentive for Vietnam to raise the middle finger to the United States? it's similar to Tether's incentive to do it. There's not, meaning there's not much incentive. It's only downside risk.

Yes. And I mean, you have to think about how these countries just laid down, including the European Union. I mean, you know, most neutral people in Europe were like, good God, this deal has nothing for us. and you just laid down to the United States. But the only country who hasn't is China. And if you look at the rare earth, look at what happened with the rare earth. You can make the direct comparison to Tether. I know it doesn't seem like it, but United States put tariffs.

China said, we're going to stop rare earth exports to you. The United States says, oh my God, this is going to kill us. We need the rare earths. So they called them back and they said, please. And then China said, okay, we'll keep it going for a year. Now, what happens in a year? I don't know, but everyone needs each other. The United States needs the rare earths, but China needs our consumer. They need each other. So, I mean, what if you sanction Tether, right?

If Tether is owning treasuries, it means they are using a custodian or a banking partner that is custodian treasuries at DTC, the depository clearing. The United States has governance over that. And so the question is, what is Tether's incentive? It's not a market incentive. That's the answer to your question. It's not a market incentive. It's a survival incentive. And I have been feeling myself getting more and more.

Along, let's say, in the early QE era, I was sure that the United States treasury market would eventually collapse, that this can't go on forever. And as I age and see years go by, what I can see is that the soft power and the hard power of the United States is probably the highest it has ever been in history and heading higher. And that is my base case. That's my thesis.

It's gone more that way.

and it's not to defend everything that the U.S. does either but if I look if I just observe power and I observe the way liberation day went and this Iran thing is going to be a big test for that soft and hard power and who knows in six months this conversation might not age well if Iran goes really really poorly everything falls apart and the United States loses a bunch of power because of decisions that it's made, which is part of my goal, which is, you know, thinking about this war,

just wiping the slate clean and really just looking at the markets. What is the price telling you? But yeah, I have noticed myself observing the power continue to increase and just being a realist about it. I think that there's a heavy degree of realism that I always knew I had, but it's getting stronger and stronger. To take this back to the very start of the conversation, we were talking about Bersent wanting a weaker dollar.

Everything we've spoken about in the last hour says he's not going to get that. Do you think that is out of the window now? The dollar is a big challenge to the United States. and going stronger and stronger and stronger is going to damage plans. It will damage the United States plans to reshore production because it won't really be feasible at a very expensive dollar. Even if that production is all robotics? Yeah. Because somebody else can do it cheaper if the dollar is too expensive.

It's not just the US or just China. It's the third country that has to pick between the two. So they're going to pick the cheaper one. Obviously, quality matters. But a strong dollar is going more and more. Or let's say, if the dollar gets 10% to 20% stronger, a lot of the agenda around the margins is going to crumble. So it's going to become a lot less feasible. And the dollar is going stronger now. You have a rush flight to safety in the dollar. This is another example.

The treasury market didn't really get a bid to safety because oil, inflation, higher interest rates. but the dollar has done incredibly well. As is Bitcoin. And Bitcoin is doing great. Listen, I'm very bullish on Bitcoin. I started stacking again. Let's go. You know, not to overshare, but like as a business operator, I've been investing in my company and I haven't been investing the marginal dollar in Bitcoin for a couple of years. So it feels really good to buy Bitcoin again.

I think it's positioned really well. These prices are just too good. Yeah. It's one of those things where you just kind of have to smash. But Bitcoin has done well during this war. I'm very hesitant to get too far ahead of ourselves because I think there's probably multiple reasons. One, that it dropped 50% just before it, which I mean, how many sellers were really left? But is it even a sign that it's becoming more of a safe haven asset in these sort of big geopolitical events?

No, I don't know. What I think is that it was just leading. I think it's still very macro-driven. I think the correlation, well, I don't think. The correlation with the stock market is still very high. But now you see Bitcoin going up, stocks going down. So people are like, well, how is it still correlated? Because there's a little bit of decoupling. the way that correlation is calculated is you look at daily returns and you compare them to

each other. So on days where one goes up and the other goes up, that's a positive correlation. If you look at each day of Bitcoin's down move, it did match a lot of the stock move, only that stocks, when it went back up, stocks stayed flat and Bitcoin was going down. Now stocks have come down a little bit. So I really believe that Bitcoin is still macro driven. And our liquidity index gave a sell signal on January 14th. That applies to both stocks and

Bitcoin. Bitcoin reacted right away. It's down about 20% from that January 14th level. And stocks stayed flat. But now they're going down and showing more weakness. So I do think Bitcoin is leading. And that's why I'm, my bias right now is to believe that the bounce that Bitcoin is showing is foreshadowing volatility coming down, which will boost TBL liquidity, our index, roll it back up and trigger a buy signal sometime in the next few months.

So I've seen some of your recent videos and you were saying that you think equities are ready to roll over, but you're feeling sort of neutral to maybe ever so slightly bullish on Bitcoin. If you still believe they're correlated, how is that the case? Is it just the fact that it's a leading indicator? Yes. Yes. It's a great question. And the correlation, those are numbers that don't lie, right? If there's 60% correlation, you know, between these two assets, that is statistically

a fact. Now, that's part of my framework, but also part of my framework is the price analysis. So when I look at the price of Bitcoin, it looks like it's making higher lows from the low 60s and looks decent. And I look at the stock market, it is rolling over and has just lost a support line. So on a pure price basis, stocks look weak and Bitcoin looks decent. Not strong, but decent. not bad. Stocks do not look good and they look not great. They look bad. And so how do I tie

these two? It's maybe a little bit of the leading thing, but also knowing that Bitcoin, there's two sides to it, that Bitcoin can go up and on up days, it can go up a lot where stocks go up and they go up a little. And then on the down days, stocks go down more and Bitcoin goes down a little. So Bitcoin can actually massively outperform stocks, even if correlation stays high. Or, and this is equally as likely, we look at time series of correlation. So we see correlation go up and down over time.

And we watch that. Bitcoin's greatest runs, the correlation goes high or low? What do you think with stocks? It's great. Low. Yeah, it drops. It goes to zero, basically. It doesn't go to negative. It loses all correlation. It loses correlation when it goes crazy to the upside. So in that case, then correlation will drop and Bitcoin will get to some escape. Now, I don't, I'm not. So I see. So it's not the inverse of stocks. It's just not even correlated at all. Correct.

So in your scenario, I'm thinking about conversations I've had with Checkmate now. And he thinks we're probably in for like a period of what he calls chop solidation. That would make sense while equities maybe roll over and have to figure out where their actual support is. And then when we move higher, we really move higher. Yeah. So that gets on.

Do you remember last time we spoke, we were talking about the four-year cycle being potentially over. And I think you weighed a 51% chance that it was over. Do you think that the four-year cycle is alive and well, or do you think we could still prove that this time might be different? You know, it's a great question. I'm actually, since the 51, I moved a little bit higher that I think it's over and I'm still there.

I still think it's over. And I have a friend who's like, you know, the October high is like literally the exact date. How can you say that? But also a 50% drawdown is not really close to the 70s and 80s that we've seen in previous. And then it would also mean that we won't get an all time high until 2029. I can't see that. And so that's where I have a real problem with the thesis. And, um, I, I, I do think it's over and I, it's very empirically, you know, too early to call still,

which is, which is fascinating. We can keep having this conversation for like two more years. Well, maybe not. Maybe we get a new all time high this year and it's, it's officially over. But I like that. I like the idea that check said about, uh, you know, stocks going lower and kind of dragging Bitcoin flat until stocks can bounce and then they will both go up together. I think that's a, I mean, I think that that's a sound take and maybe, you know, how I'm also

seeing it. And I love how people use his word chop solidation. Yeah. He's memed that into existence. Yeah. He invented it. So it's a good one. All right. Last thing I do want to talk to you about is the Fed. Cause we've spoken about the Fed a lot in the past. It's the job that I envy the least. Like, it must be terrible to be the chairman of the Fed. And we've now got a new one coming in who's dealing with war, stronger dollar, stable, all the dynamics that we've spoken about

today. What's he going to do? You know, I don't think that they can do much. The market is what

leads. We've talked about that for a long time. The treasury market will eventually tell the Fed what to do. And it tells the Fed where inflation is and where inflation expectations are. Is the Treasury market going to tell the Fed or is Trump going to tell the Fed what it does? The Treasury market will absolutely tell the Fed what to do. You know, presidents have actually for a long time gotten the Fed to do what they want or tried to get the Fed to do what they want.

But the mandate is not to just go with the flow of the White House. it's to support the functioning of the U.S. economy. And when, you know, the reason why Trump has not been able to get the Fed to lower rates in the last six months, or when was the last cut? Toward the end of last year. So the last few months, the reason that he hasn't been able to get them to move lower and at a pace that is more aggressive is because the Fed doesn't have to respond to the president.

And so it does have to respond, though, to the treasury market. When the treasury market gets skittish, the Fed does come. And right now, the treasury market is saying that the Fed doesn't really need to cut rates. But Powell doesn't have to respond to the president. It feels like Walsh is coming in to respond to the president. You know, Trump put Powell in there, though, also.

in his first term. So it's kind of like Supreme Court justices too. They have a long term and they can be, you know, political and reward the president that put them there, but they can also not. We look at the Supreme Court decision on tariffs. I think two judges that he appointed voted against his emergency powers. And I mean, that's proof in the pudding there.

it is no matter how much people like to think otherwise it is still a system of checks and balances uh he's going to get creamed in the in the midterms um but it's also not going to stop him from doing the things that he still has the power to do yeah do you think at some point they have to get rid of the jobs numbers if ai does what we think it might potentially do and stop worrying about jobs and just worry about inflation? No, I, no, I don't. I mean,

employment is still, it's still central to an economy. So the United States is, has a lot of trouble with labor data. I'll say that, right? We see the revisions that they've done those March to March revisions that we've gotten two years in a row where they were like, by the way, there were a million extra jobs that didn't ever get created.

So the government already has a lot of trouble with labor statistics itself, but the obsession of over labor and job cuts and job hires and, uh, job listing quits and all that kind of stuff is going to persist and shareholders care about it too. Mm-hmm. So they care about how many people are employed at companies. They also care about how many people are employed in the economy because that's how people buy those products.

So, um, listen, the government is a disaster in terms of, I mean, so many things, efficiency, um, just being late to things. The government is a disaster. Thankfully, the United States has a very robust, robust private sector. We have deep capital markets. And part of the free riding problem to just bring that back one more time.

Part of the free riding problem is that everyone uses the dollar because of our legal apparatus and how, how sophisticated our capital markets are and how sophisticated the investor base is to get transparency out of cashflow generators so that we know which ones to buy and which ones to not buy. And you still get fraud and you still get all these things, but we do it pretty

well in the United States. And we don't really need the government to tell us how many people are employed Fair Nick this has been awesome Thank you for letting me steal your Sunday afternoon Of course You need to tell everyone where to go to see the Bitcoin layer It is one of the newsletters that I just don miss I think it one of the best in the business

Tell people where they can go and check it out. Thanks, Danny. Yeah, thebitcoinlayer.com. If you go to thebitcoinlayer.com slash subscribe, you get right to our newsletter page. We put out research articles. I'm writing every Monday. I want to get people started on the week. I wrote this morning, actually, And I'll go home and work on it tonight, publish that for people tomorrow. On Thursdays, I do a video that's my global macro updates behind the paywall now.

I still have the YouTube channel interviewing people and doing shorter macro updates there. But really focused on trying to give people signal, give them a buy-sell indicator that's quantitative. It's not me. I was way more bullish on January 14th than my indicator told me to be. But that's part of it. You want some human opinion. You also want a quantitative framework. So we're delivering that to our readers, thebitcoinlayer.com. Awesome. Thank you so much, Nick. Thanks, Danny.

I will see you soon. Thanks.