In this episode of the Fresh Fit Podcast, we have a special guest, George Gammon, who just came in from Columbia University. We talk about Bitcoin, Bitcoin, and what's going on in the banking system. We also talk about the BTFP that expires in a few days and how that could have a major impact on the financial system. And of course, we talk about why we should be worried about Bitcoin and what it could mean for the future of Bitcoin and the financial sector in general. We also discuss why we think we are in the midst of a new financial crisis and what we can do to prepare for it. Finally, we wrap up the show with our Hot Water & Coffee Corner segment. Subscribe today using our podcast s promo code: "UP" to receive $5 and contribute $5 to OWLS Lacrosse Lacrosse you download our newest app, "UP Lacrosse". Use the promo code "up" at checkout to receive 10% off your first month of membership. You can also join our FB group, Rate/subscribe in Apple Podcasts and leave us a rating and review the show! Rate, review, and subscribe to our podcast! Subscribe to our newest podcast, The Broke Buttons, wherever you get your favourite streaming platform, and we'll send you the best listening experience of the day! Timestamps, we'll be giving out 5 stars and a review! We'll be looking out for your questions and comments on the best ones! on the next episode of FreshFit Podcast! and your thoughts on the latest episode! Send us your thoughts, comments, questions, thoughts, and thoughts on our next episode, and a shoutout! :) - Timestay: and shout out! - Tom's next episode will be out in the next one is out on the aircast! - Tim's next Monday! Thanks, Tim's Thoughts on the week's episode is out next week! Matt, Matt, Tim's Best Podcast Episode: - Matt's Monday podcast - Tuesday's Monday's episode - Wednesday's podcast is - Monday's Episode - Thursday's episode! - Matt, Tuesday's podcast, - Friday's Monday s, November 14th, November 13th, 2019 - Saturday's Monday, November 5th, & so on Monday's, November 15th, and so on so on Wednesday's,
00:07:44.000And, you know, people think that, well, that wasn't that big of a deal.
00:07:48.000But if you actually look at the assets on the balance sheets or look at the balance sheets that got wiped out, it was larger than the GFC. And that's adjusted for inflation.
00:08:00.000And the bottom line is there was a lot of contagion risk in there.
00:08:03.000So if the Fed would not have set up this program that expires in a couple days, we likely would have seen a GFC type of scenario back a year ago.
00:08:13.000And now I think we're probably in inning maybe four or five of a rolling banking crisis.
00:08:20.000And I don't think it's hyperbolic to say that when you look at things like commercial real estate.
00:08:25.000And the regional banks have so much exposure to this.
00:08:29.000What is now, you can't describe it any other way than just a toxic asset.
00:08:34.000Just like residential was back in, or these mortgage-backed securities were back in 2008.
00:08:43.000I always hear these quote-unquote experts say, well, it's not that big a deal because it's just these regional banks that have this garbage on their balance sheet.
00:09:29.000Because these banks, if I'm not mistaken, Silicon Valley, all these banks, they had been giving out loans on commercial real estate, right?
00:09:37.000Well, Silicon Valley Bank is a little bit different.
00:09:42.000They had a problem on the asset side of the balance sheet, but they also had a huge problem on the liability side.
00:09:47.000So what I mean by that is if you're a Bank of America, I don't know what the percentages are, but just to keep it simple, like 90% of their depositors have under $100,000.
00:10:16.000But when you have a lot of depositors that have over $250K, so they're not insured by FDIC, that's where you get the problems.
00:10:25.000Because if they smell any type of risk whatsoever, they're going to take their money and they're going to move it to another bank.
00:10:30.000So that's what happened to Silicon Valley Bank on the liability side.
00:10:34.000But then on the asset side, they had a bunch of long-term treasuries to match up with those liabilities, which most people thought was pretty safe.
00:10:41.000But the problem there is they bought those treasuries, let's say, at a 2% interest rate.
00:10:46.000So then when interest rates go up to 4%, 5%, there's an inverse relationship between price and the yield.
00:10:53.000So if the yield's going up, the price is going down.
00:10:56.000Now, they had these in kind of a compartment of their balance sheet.
00:11:04.000So they said, well, we're not going to price these to the market value because we're just holding these to the maturity even though the market value has gone down by...
00:11:15.000So what ended up happening is they had to transfer all these commercial bank deposit liabilities, the money of all these tech companies, and it got to a point where they had to sell those treasuries, but they had to sell them at such a huge discount That it completely wiped them out.
00:11:31.000In addition to that, you had all these big players in there, these whales that made up the majority of their deposits.
00:11:38.000But a lot of those whales were these tech companies that were just burning through cash, just incinerating money.
00:11:45.000To start up, obviously, because you're not profitable in the beginning, so they were getting loans to start up their businesses.
00:11:53.000And they're just burning through that cash.
00:11:55.000So yeah, it's great that this new startup just raised $50 million.
00:11:59.000But six months later, they're down to a million.
00:12:02.000So that means that the bank has to transfer out all those million dollars that they're spending, assuming that those customers are where they're spending the money.
00:12:11.000Those people have an account at a different bank.
00:12:14.000So they're having to send out all of those dollar deposit liabilities.
00:12:18.000Well, they also have to send an asset to match up with that if they don't have We're good to go.
00:12:45.000So you can't just say, well, it's contained to the regional banks because what's happening with the regional banks actually applies to the liquidity for even the huge banks like Wells Fargo.
00:12:56.000Now, I'm not saying that they're going to go bust or anything like that, but it becomes harder for Wells Fargo to borrow money in the global banking system if risk is going up.
00:14:44.000So what most people consider money, and I'm not going to get into the technical definition, but what most people consider money, just your average normie, is just whatever my bank account says I have.
00:14:56.000That's money, just my checking account balance.
00:15:00.000Okay, but we all know there's nothing in there.
00:15:05.000So what we're all trading, if you go down to Chipotle or you make a payment on this studio or something like that, we're just trading bank liabilities, IOUs, amongst one another.
00:15:18.000And it's just we've gotten to the point where we just accept that as though it's money.
00:15:23.000But at the end of the day, it's just commercial bank deposit liabilities.
00:15:26.000That's all that we're trading back and forth.
00:15:29.000And what gets really weird is, so that's an IOU from the bank, but what they're saying is that they owe you a dollar, which in and of itself is an IOU from the government.
00:15:42.000So they're saying, we owe you an IOU. And then we as Americans, just on good faith, trade that amongst one another as though it has some sort of value, and it's just literally, to your point,
00:16:17.000Because your money was not really some sort of asset, it was just their balance sheet.
00:16:24.000So if their balance sheet disappears, so does your $100,000 that you thought you had in the bank, but really it was just an IOU, or what we say, a commercial bank deposit liability.
00:16:36.000So when the risk goes up in the system, and to be very clear, banks don't need money to lend.
00:16:43.000See, this is where people get confused.
00:17:36.000It's not like someone deposited $300,000 and then they're like, okay, we're going to lend this money out to Myron to buy a house.
00:17:41.000No, they're simply adding $350,000 to your account, and then the offsetting asset on their balance sheet is just simply that loan that they just created.
00:17:51.000So they didn't have to have anything to begin with.
00:17:54.000Now you say, well, George, how can they legally...
00:18:45.000I always thought they're giving you a loan based on money that they have from other people putting money in there, but the reality is they just created it.
00:18:52.000So whether they had the money in the bank at all, which they're going to have it, but let's say they didn't have it.
00:19:38.000All it is is just bank ledger money that they created out of nothing.
00:19:43.000So there's nothing like regulating this to, you know, have some kind of oversight where, hey, you can't lend more than this amount, or depending on the bank and how big they are, is there like no...
00:19:54.000I mean, there's some regulations, but most of these banks just completely get around them.
00:21:43.000So basically when we're talking about those liabilities of the bank, where you could go down there and say, hey, I want to transfer my $100,000 to a different bank because it's in my savings account, that would be a component of M2. Gotcha.
00:22:29.000And what's crazy, too, is a lot of that was, we won't get into it, but the number in reality, in practice, was actually lower than that $40 billion.
00:22:39.000So that's even looking at it optimistically.
00:22:52.000Where basically they would take the checking account balances and they would move them over to other accounts that weren't technically a part or didn't technically apply to those reserve requirements.
00:23:02.000And the Fed just kind of looked the other way because at the end of the day, the banks call the shots.
00:23:11.000So the whole point there is so people realize that the only thing that's constraining banks from doing loans or—we can talk about derivatives all day long—but doing all these types of, let's just say, financial engineering to a certain extent,
00:23:26.000but a lot of it is helping the economy, assuming that it's productive lending, which is debatable what percentage of bank lending is productive nowadays.
00:23:33.000But this is the only thing that they care about is risk.
00:23:39.000So my point there is if you have a Newark community bank, which is on the brink of going bust, if you have a Silicon Valley bank, a First Republic, a Signature, We're good to go.
00:24:07.000From all those deposits going from Silicon Valley Bank over to their bank that was perceived as safer.
00:24:27.000So what that is, is that creates a credit contraction that We're good to go.
00:24:42.000And savings and checking, just a component of that.
00:24:45.000But if we break it down even further to M1, that's almost exclusively checking account and savings account.
00:24:52.000And you've got currency in circulation as well.
00:24:53.000But if we just look at that as basically what's the average Joe's kind of purchasing power, like how much money do they have in the bank, right?
00:25:00.000We see that peak out in 2022, and we see it just absolutely plummet since then.
00:25:09.000So people say that the Fed's printing all this money and doing all this stuff.
00:25:11.000But if you actually look at the numbers, the money metrics are actually going down.
00:25:17.000And if you look at bank credit, usually it just trends up like this, and it's consistent.
00:25:22.000Until you get a recession, it flattens out a bit.
00:25:24.000It's flattened out and just barely gone up.
00:25:27.000That is not a good sign of economic activity, right?
00:25:30.000That's almost a sign of economic contraction.
00:25:33.000And to give you some context, M2 right now, now I'm jumping around a little bit.
00:25:38.000So I was talking about M1 because that really declined.
00:25:41.000People can pull that up on a Fred chart and see that it's just, it's really kind of shocking.
00:25:46.000But also if you look at M2, that has declined over the past year as well.
00:25:50.000Now to find the last time that happened, you've got to go all the way back to the 1930s and the Great Depression.
00:25:58.000So that gives you an idea of how risk-off banks are right now, even the big guys that people think are quote-unquote safe.
00:26:07.000I mean, I'll tell you, even for me, just for buying houses, every time I do a new deal, they're asking me for a bunch of fucking paperwork.
00:26:15.000That you didn't have to have a year and a half ago.
00:26:17.000Yeah, like they're asking for more and more every single time.
00:26:19.000So I can tell you just off of, you know, obviously it's a limited and anecdotal situation, but I could do a deal and then literally a month or two later I'm doing another deal.
00:26:28.000Similar house, similar stats, but to ask for something that I already gave them.
00:27:08.000And he's been doing this for literally decades.
00:27:11.000And even with the banking relationships that he has, when he goes to the table to try to do another deal, they're saying, okay, well, we were giving you 70% LTV. Now, 40%.
00:27:43.000Yeah, and if he takes out a loan at, let's just say, 7% interest, he's having to put down like a million dollars in escrow just for the bank's buffer in case interest rates go up.
00:27:57.000So the bank is trying to offload that interest rate risk onto the borrower instead of keeping that on their own balance sheet.
00:28:05.000And that's why you see, when you look at overall bank credit on the Fed's website, you see that it's going up, up, up, up, up, and now it's just straight flat across.
00:28:14.000And again, that's not a sign of a healthy economy because...
00:28:19.000Whether we like it or not, in a debt-based monetary system, it's kind of a synergistic relationship between the banking system and the economy.
00:28:30.000You can't really have a healthy economy without a healthy banking system and vice versa.
00:28:34.000So for the common folk that want to get loans for maybe property, a car, maybe any investments themselves, are you saying that it's going to be harder to get these investments going forward or even right now?
00:28:45.000I think most of the people on the chat would have a similar experience, unless they're getting like a Fannie and Freddie loan.
00:28:51.000And the banks, I would imagine, are pretty consistent there because they don't keep that on their balance sheet.
00:28:57.000They just kind of, they flip that, so they're just taking like an origination fee like a mortgage broker.
00:29:01.000But outside of that, yes, I think loans are going to be more difficult to get.
00:29:08.000And, you know, a lot of people say, well, what's going to be great is the Fed's going to drop interest rates.
00:29:13.000In 2024, we're going to have this soft landing or no landing because we've seen the inflation rate go from 9.1% all the way down to where it is, let's say roughly 3.2, 3.3, something like that.
00:29:25.000So if it continues to come down slightly closer to the Fed's target at 2%, they're going to be able to drop rates.
00:29:31.000Well, you've got to be careful what you wish for there.
00:30:33.000Yeah, so then what I do is I drop out $25 on a remodel, just getting it up to where it looks good for a renter, nice, solid.
00:30:40.000And I'd have a renter in there almost instantly for $1,100, $1,200.
00:30:46.000And I just rinse, repeat, rinse, repeat, rinse, repeat, rinse, repeat.
00:30:49.000And a lot of these homes, too, that I wasn't buying off the MLS in foreclosure or a short sale, I was just getting straight from the county because they were foreclosing on them for not paying their taxes.
00:32:06.000And after three or four cycles of that, then maybe you can up it to 50 or 60 or something like that, a little bit more reasonable to where it's worth my while.
00:32:17.000I couldn't get a bank to do it until, I think it was 2000, right around 2014.
00:32:23.000And it was only because a good buddy of mine's a lawyer down there, and he plays basketball with the VP of commercial lending for one of the community banks.
00:33:20.000Yeah, for a lot of your viewers, is to, right now, while you can, set up relationships with these small banks in your area.
00:33:28.000Even if you can't afford to buy a rental property, or even if you're kind of making your way up the ladder, just start those relationships now, because they're going to pay dividends.
00:33:38.000And also, too, I think if I would have had that relationship built back in 2012, I think I could have done the deal.
00:33:45.000It's just I didn't have any relationships built.
00:33:47.000It's about who knows you and trusts you.
00:33:49.000That was probably one of the most thorough explanations of how the banking system works on fucking YouTube.
00:34:05.000So I think another tip that I might give your viewers, and this is what I do with my own personal portfolio, is I have two main banks.
00:34:16.000I've got that small bank where I can actually have that type of relationship with the higher-ups.
00:34:23.000But there, you've got a little bit of risk, especially with what's going on with regional banks and commercial real estate and all these things.
00:34:31.000Now, one of the great things about this bank is, you know, when he was basically interviewing me, I was also kind of interviewing him.
00:34:38.000And I asked him, okay, how did you guys weather the GFC? And they didn't take a hit at all.
00:34:46.000Like they had a bulletproof balance sheet.
00:35:46.000And we see that risk going up and up and up.
00:35:47.000So then the question becomes, what happens March 11th when they kind of do the rug pull on the BTFP? Now, if you would have asked me a month and a half ago...
00:35:58.000So is basically the federal government going to stop supporting these regional banks that kind of took a downslide?
00:36:04.000Is that what's going to happen on March 11th?
00:36:32.000You're good to go because that's going to be insured.
00:36:35.000And at the end of the day, even if FDIC can't cover it, Janet Yellen is going to step in and figure out some way so the depositors, especially under $250,000, don't take a haircut.
00:37:21.000So if you want this in cash, you can't get that FDIC insured.
00:37:26.000Or you have to jump through a lot of hoops to do it.
00:37:28.000So an easier way to go about that, and I think a safer way, is to just buy like a one-month T-bill or a three-month T-bill and continue to roll it over.
00:37:37.000Because the $250, your counterparty is the bank.
00:37:48.000But with a T-bill, your counterparty is the government.
00:37:53.000And if we want to talk about too big to fail, I would argue that the J.P. Morgan will go bust before the U.S. government will.
00:38:00.000Even if they're technically insolvent, they're still not going anywhere.
00:38:04.000So that's a way that you can have that type of insurance and sleep well at night, even if you, let's just say for whatever reason you're running a big business and you want to have, let's say you're Kenny.
00:38:31.000Okay, well, he could spread that out through a million bank accounts and have to go through all those logistics, or he could just have a couple main accounts, dump it in there, go to T-bills, like one-month T-bills, and if he needs the liquidity, his CFO can go ahead and sell those T-bills, goes right in the account.
00:38:47.000You're never at the max threshold, and then you don't have to worry about that...
00:38:53.000Whatever, that's $9.5 million not being insured, or you don't have to worry about that counterparty risk, especially when we're likely in inning four or five of a rolling banking crisis with the BTFP expiring in two days.
00:39:55.000And if you want to incorporate that into your overall financial strategy, just go ahead and set up an account with a broker who can make that happen.
00:41:19.000So anything over 250, that's probably the smart play that you have.
00:41:23.000All the super, super smart guys that I know, that's exactly what they do.
00:41:28.000Even if they're below 250, they do that?
00:41:31.000No, I'm talking about the Kenny types, where that would really apply.
00:41:36.000Because for that, you need a bunch of money sitting in an account because things need to get fixed, mortgages need to be paid, etc., if you got debt on some of the properties.
00:43:44.000So that's kind of our objective is to get from Santiago down to Kind of the tip of South America, then go straight back up through Argentina to Buenos Aires to meet Doug Casey using nothing but gold, silver,
00:44:04.000Is that when I'm buying gas or getting a hotel room, that's going to be denominated in the local currency.
00:44:11.000So you're subject to whatever Bitcoin may do that day, which as of right now, it can be incredibly volatile.
00:44:20.000Well, a lot of people, although that might be a great speculation long term, or some people might consider that investment, and I totally see the argument for that.
00:45:29.000Yeah, Jaleel says, hey George, FNF, just need some advice I previously mentioned before that I'm looking to invest and start my own multi-million dollar company and since we are in digital world, I'm looking to start it up on my own website and start my eBay store.
00:45:45.000I mean, look, I was just telling the guys prior to recording here that I didn't start creating content really on YouTube until, I think it was August or September of 2019.
00:45:59.000And now, as far as in the macro space...
00:46:04.000I don't know anyone other than maybe Schiff or Mike Maloney who are good buddies that have more subscribers or get more views.
00:46:13.000You know, I've done that all, and it's not because I'm great or anything.
00:46:25.000I was telling the guys, I was looking at my YouTube analytics the other day, and since I started in 2019, I've done over 3,000 YouTube videos.
00:46:35.000And that doesn't include all the podcasts and everything.
00:46:37.000I mean, it's just been an astronomical amount of content.
00:46:40.000But I wouldn't trade it for the world.
00:46:42.000Because now I get to sit here and have great conversations with guys like you and Kenny and Kiyosaki and all these incredibly amazing, gifted, intelligent people that I get to talk to almost on a daily basis.
00:47:47.000They do like, I don't know what the exact number is, but it's like $200 million in revenue per year.
00:47:52.000And they're on pace to be a $1, $2 billion company.
00:47:58.000And so, you know, look at what he's done just through creating content.
00:48:01.000And now all these brands realize, and I was listening to an interview with the CEO. And he said, look, we tried to create content and we learned really fast that we suck.
00:48:24.000But that's what the CEO had to learn the hard way.
00:48:26.000So if you can start your eBay business and you can start getting good at YouTube or creating content, because we all suck at the beginning.
00:48:44.000So if you can just suck right now and get that out of your way and start to get good, and then you can use that to complement your eBay store, you're going to have a massive edge.
00:49:48.000And I've been having to go to physical therapy quite extensively to try to work on that.
00:49:54.000And that's one of the reasons why I'm taking this week off, because it's just, it's killing my neck.
00:49:58.000I mean, it sounds ridiculous that we would actually get injured from doing this stuff, but it is quite taxing on your body to sit here for 12 hours a day in front of a computer.
00:50:53.000You're trying to survive, but you just realize that you're playing the long game.
00:50:57.000And if you need to do what you need to do right now to take care of your health, that should be priority number one.
00:51:04.000Because the worst thing that you can do is just fade off into the distance like we see so many YouTubers do over two, three years because they get burnt out.
00:53:10.000And I'd have three days off to where I could allocate 100 percent of my time and energy into the business.
00:53:14.000So that might be something you'd want to consider is getting a normal gig.
00:53:18.000And then just, hopefully it would be a gig that was somehow similar to what you wanted to do with your own business so you could kind of learn on the job, but then you just build up your side hustle on the weekends and to a point where you're making more than your day job and you just kind of cut the cord.
00:53:36.000That's exactly how we tell them to stay away from, yeah, that's exactly what we tell them.
00:53:42.000Ted goes, George, if money exists on ledgers and the bank can just, and guys, we're reading 20 enough from this point forward, but I'll read the ones that came in before.
00:53:48.000George, if money exists on ledgers and the bank can just create it, why does risk matter to them?
00:53:53.000Are the liability tracked beside on the bank ledgers?
00:54:09.000So they've got to be very careful about that, because if they don't get paid back, They're going to be the next Silicon Valley bank.
00:54:16.000So even though they can quote-unquote create money, they're highly incentivized in a free market.
00:54:24.000I should preface by saying in a free market where they're not getting bailed out and all these things.
00:54:29.000But if we had a free market where the Federal Reserve and the central planners weren't stepping in, they're highly incentivized to lend productively.
00:54:38.000And that's actually a good thing, because that's like what we saw in the late 1800s, where we saw M2 money supply go up by 150% from 1870 to 1900.
00:54:50.000Which, to give you some context, is the exact same increase in M2 that we've had since 2008.
00:54:56.000So most people think that, you know, money, printer, go brr.
00:54:59.000It was actually the exact same in the late 1800s.
00:55:05.000Between roughly 2008 and today, we've had about, I forgot right off the top of my head, about 125% consumer price inflation, if you compound it, you know, every single year since 2008, roughly.
00:55:20.000If you look at, I think exactly it's 1885 to 1900, about a 15-year period, so we're comparing kind of apples to apples there.
00:55:32.000They had the same increase in the money supply, but they had almost 50% deflation.
00:56:14.000Now all of a sudden you've got all this extra cash at the end of the month and you're doing the exact same job at McDonald's and you've barely gotten a raise.
00:56:22.000That's why productive deflation is so beneficial to the average Joe and Jane.
00:56:29.000And in my view, that's what you would see even with the type of banking system that we have set up.
00:56:34.000Where they're able to create their own money, which they were.
00:56:36.000We're on a gold standard, but they're still creating their own money back in the 1800s.
00:56:41.000It's just the government and the Federal Reserve was not in the equation.
00:57:54.000Okay, Leon Phillips goes, George, big fan of the Rebel Capitalist.
00:57:58.000Question, knowing all the craziness going on in the world and all the paper currencies have failed since the Tang Dynasty, how long do you think we have before the U.S. dollar goes bust?
00:58:20.000I'll read the other ones, and then we can go down that road.
00:58:22.000This actually does apply directly to the banking system, and I think it would really kind of just complete the circle that we already started.
00:59:13.000With the discussion of meaning of money, does that mean that tools like 401k are literally dependent on the feeling or confidence of the people?
00:59:19.000Why are promises of such social security had to be supplemented by 401k, which itself is now not seeming adequate for financial security in 30 years?
00:59:40.000Don't do it with the fucking magazine in there, please.
00:59:42.000Do it with a completely empty gun, nice and safe, and just draw from where you normally would be.
00:59:48.000Take yourself in like, you know, sitting down, maybe in a car, standing up, positions that you would be in normal life, and just draw from there and work on your speed.
01:01:25.000My greatest attribute, yeah, I think that's one of the biggest advantages that I've had, is that I had no training whatsoever.
01:01:33.000So I just had to use common sense, and I just had to say, okay, well, let me figure out how this works, and then come to my own conclusions.
01:01:40.000And then I read about what the Austrians say, and I say, oh, that makes sense based on how I view it, or maybe that doesn't make sense.
01:01:46.000So I don't really subscribe to any school, but again, philosophically, all about freedom, liberty, and free market capitalism.
01:02:29.000And if you go back to the 1960s, like the gentleman was saying, the UK and Germany have never been in a recession without the US joining them.
01:02:38.000Just kind of an FYI. That's how globally connected everything is.
01:02:43.000And one of the arguments that you hear in the United States all the time is, well, it's impossible for us to have a recession because we've got low unemployment and the stock market is at all-time highs.
01:02:52.000But if you look at Japan, low unemployment, stock market at all-time highs.
01:03:01.000Stock market at all-time highs are very close to it and low unemployment.
01:03:05.000So that doesn't mean that we're out of the woods yet.
01:03:07.000Does that show that the rich are getting richer and the poor are just staying poor?
01:03:09.000Is that disparity just widening with those two things going on?
01:03:14.000That's one of the, you might say it's an intended consequence, but that's one of the knock-on effects for sure.
01:03:22.000But really, I think in today's day and age where everyone is so hyper-focused on what the central banks are doing, I had a great conversation with my good buddy, he's MacroAlpha on Twitter, but he said, in today's world, bad news is good news.
01:03:40.000Until the bad news gets bad enough, and then bad news is bad news.
01:03:44.000So what he's saying is bad news is good news because, oh my gosh, that means the Fed's going to drop rates.
01:04:29.000That's the inversion of the curve, which almost every single time going back to 1950 has resulted in a recession.
01:04:34.000So you just have to watch that like a hawk, and when that two-year treasury yield drops under the 10-year, it's no longer inverted, that's when you usually have the problems.
01:04:43.000Is there a website we can show the people real fast that displays this?
01:04:47.000Yeah, you can just pull up a CNBC of each chart, or you can just go to the FRED website, which is the St.
01:06:22.000So I guess if we're going to keep it nice and simple for the audience, they should be looking at this, and when it's below the black line, what should they be focusing on from a financial standpoint?
01:06:42.000Like what Kenny's doing right now in his business is he's still looking at deals, but he recognizes the macro implications and the probabilities.
01:06:51.000So he's not going out there hiring a bunch of employees.
01:06:54.000He's not getting super, super aggressive.
01:08:06.000Once we see unemployment, as an example, start to go up, let's just say, or we have, let's say, the banking crisis play out.
01:08:14.000We get into ending nine of the banking crisis because of commercial real estate, or we see something escalate in the Middle East, or Taiwan, China, something like that.
01:08:37.000That makes the two-year treasury drop below the 10-year treasury.
01:08:42.000The curve, uninverts, goes above that black line.
01:08:46.000That's why the stuff usually hits the fan after that, because the result of the uninversion is a result of the Fed dropping rates as a response to something negative happening.
01:10:25.000Putting that into play into repo and a lot of...
01:10:28.000They're taking quite a bit of additional risk for not that much more interest.
01:10:31.000So what I would prefer is just a short-term T-bill because I think you could get an even higher rate on a one-month T-bill and then you just don't have the counterparty risk.
01:11:14.000But they got caught up in this whole thing because they were not only involved with derivatives, but they had a lot of people were buying insurance policies just to make, let's just say, a mortgage-backed security look like it was AAA-rated.
01:11:30.000So, oh, look at this, this piece of toxic sludge.
01:12:30.000So yeah, they're saying that they still have nominal GDP growth, which means they're technically not in a recession, but they're just having literal, not disinflation, but deflation.
01:12:39.000And I don't know how a modern economy can have outright deflation and not be in a recession or an economic depression.
01:12:47.000So I think that China is going to be something to really watch in 2024, and that could obviously spill over into the United States.
01:12:56.000You've got to ask yourself when you're looking at risk.
01:12:58.000Okay, we had a real estate problem in the United States.
01:13:02.000That's what the GFC—that was kind of the catalyst.
01:13:04.000It was really about the monetary system, but that was the catalyst to it.
01:13:07.000And that spread out throughout the entire world.
01:13:10.000Okay, well, if that can be centralized in the United States, why can't a real estate problem in China do the exact same thing?
01:13:15.000If you understand that interplay and the interconnectivity of the banking system that we were talking about before, you see how something happening in China can increase risk.
01:13:27.000Just like Silicon Valley Bank, which makes all the U.S. banks pull back, which tightens liquidity, and now all of a sudden, people start laying off their workers and doing all these things because they're going to the table, they're asking for more money.
01:13:41.000They can't get that liquidity that they could, and then that trickles through the economy, and that could be something that takes you into recession.
01:13:48.000It's just all these risks that you need to be cognizant of.
01:13:50.000I'm not saying the world's coming to an end.
01:13:52.000I'm saying don't bury your head in the sand, and that's what 99% of investors do.
01:13:57.000Yeah, you've got to pay attention to the conflict because they absolutely affect the markets.
01:14:02.000I remember when the war first popped off with Russia and Ukraine, lumber and just house-making tools went up in price, which obviously increased the cost of homes right away.
01:14:14.000Small things like that definitely can affect you.
01:14:54.000All I'm doing is taking your account balance or the IOUs, the commercial bank deposit liabilities, from $500,000 all the way back down to zero again.
01:15:03.000So we just created $500,000 and then we destroyed $500,000.
01:15:07.000But why was that $500,000 destroyed to begin with?
01:15:10.000Because by me lending you the money or lending it into existence, there was $500,000 in demand that was also created.
01:15:37.000People have to understand that concept.
01:15:40.000So once we understand that concept, now we take it outside of the United States.
01:15:45.000And we realize that 99.9, I mean, it's close enough to 100, to say 100% of the dollars outside of the United States were lent into existence.
01:15:56.000The same way that we just talked about.
01:15:58.000So let's just say that there's $50 trillion outside of the United States.
01:16:03.000We look at an aggregate balance sheet.
01:16:21.000Oh, they're going to dump the dollars, and then the dollars, they're going to have nowhere to go because demand for dollars is going to go down, and then those dollars are going to circulate.
01:16:29.000That's going to put downward pressure on the dollar.
01:16:33.000But if they dumped their dollars, what does that do to the demand for dollars that That are on the liability side of that balance sheet that created them to begin with.
01:18:23.000Because if the maturity of the debt, let's say, is 30 years, well, okay, now all of a sudden, you're buying those dollars from me, but your loan payment isn't for another 30 years.
01:18:35.000So you can spend that money however you want.
01:18:38.000You can buy real estate in the United States.
01:18:39.000You're not worried about that because your, let's say, your balloon payment...
01:18:43.000Is way off into the future, and you'll find a way to get the dollars between now and then.
01:18:48.000So that money circulates with velocity, and that's what could create further downward pressure.
01:18:54.000The kicker there is that the maturity of the loans outside of the United States, very short term.
01:19:02.000In fact, most of the experts that I have spoken to would say that the average maturity for a dollar loan outside of the United States is under six months.
01:19:13.000So even if everyone dumps dollars and goes to the BRICS currency, those dollars have to be purchased by another entity that owes those dollars, let's just say in two weeks or three weeks.
01:23:46.000And so then it gets even crazier because what would Jerome Powell do in that circumstance if we had consumer price inflation, let's just say go back up to 10%.
01:24:25.000So effectively, in that scenario, you could have a global Silicon Valley bank.
01:24:31.000Because that's what happened to Silicon Valley bank.
01:24:34.000The asset side of their balance sheet went down in value because interest rates went up.
01:24:39.000So the value of those treasuries went down because there's an inverse relationship between the yield and the price.
01:24:45.000So if there's $50 trillion of basically treasuries, it's just a loan asset that has interest rate risk.
01:24:53.000So if the interest rates skyrocket in that type of environment, we go back to the 1970s, now all of a sudden the value of those assets goes way down and the banks are insolvent.
01:25:03.000You say, well, that's great because then people have to pay back less and they've got all these nominal dollars.
01:25:09.000But yeah, then the banks go bust and you remember that those dollars aren't green pieces of paper, they're simply bank ledgers.
01:25:17.000So if the banks go bust, the ledgers are gone.
01:25:20.000Now all those dollar assets are gone as well.
01:25:47.000And I know a lot of people in the space, and very few of the even experts understand those dynamics that we just went over.
01:25:55.000So if your viewers can even understand 10 or 20% of that, that's going to...
01:25:59.000Yeah, I mean, hell, I'd be lying to you if I told you I understood 100%.
01:26:01.000I understand, obviously, the general concept, but like, holy crap, like that's...
01:26:05.000Yeah, the main takeaway is the probability of the dollar crashing against other currencies is extremely low to the point where I really wouldn't worry about it and I wouldn't make any investment decisions.
01:26:15.000I would argue that the tail risk is not that the dollar goes down, it's that the dollar goes up.
01:26:24.000I mean, because as you say this, you know, I'm thinking about all the times that the economy was terrible in the United States during COVID, blah, blah, blah.
01:26:52.000But that's an interesting concept where even if Saudi Arabia or one of these countries that does all their transactions in dollars, which keeps the dollars so powerful, said, you know what?
01:27:13.000It absolutely can go down, let's say, 90 on the DXY, 85, something like that.
01:27:18.000But what most people talk about is a dollar crash, and that was your question.
01:27:21.000You have the dollar basically going to zero, like being Venezuela or Argentina or something like that, where the dollar just completely collapses against other currencies.
01:28:12.000But I can tell you how the dollar is not going to lose reserve status, and that's from the top down.
01:28:19.000There's never been a king that's come out, Walter, and said, I declare as of today, my currency is the global reserve currency, and you, business owner, are going to obey me.
01:28:42.000So what you have to look at is not what the central banks are doing.
01:28:45.000It's what the actual real economy is doing, what the banks are doing, and what these global enterprises are doing, and the small and mid-sized businesses.
01:28:55.000So if you go to Turkey, I was just in Istanbul, and you go to a coffee shop in Turkey and they open up the cash register, you look in there, you see Turkish lira?
01:29:18.000And it's because, you know, you don't have to like it, for heaven's sakes, but it is what it is.
01:29:23.000It's just the way that the system is set up.
01:29:25.000It's set up in a way that fundamentally makes it more stable than other currencies, although, at the same time, not stable against goods and services in the United States.
01:29:52.000But I'm saying the entities in Saudi Arabia, right?
01:29:55.000So you've got to understand that the dollar, and I think we've explained that to the degree to which your audience can understand how much of a network it is.
01:30:04.000And it's literally, it has the most powerful network effect in human history.
01:30:13.000I would argue it's a more powerful network than the internet itself.
01:30:25.000So if you want to argue that the BRICS currency is going to take over from the dollar, you have to argue how that network works.
01:30:32.000Is going to take over from the existing dollar network that includes all of these banks, all of these corporations, all of these entities that benefit from the way the system is set up right now.
01:30:46.000And it's the exact same thing as someone trying to come out with a startup right now and saying that they're going to create a new internet.
01:30:54.000That took years to build, like, multiple years.
01:30:56.000Yeah, and if you are going to build one, it's not going to be a government coming in and saying, hey, we've got a new internet that we want you to use.
01:31:31.000It's going to be the private entities choosing that they want to use a different currency because that economy has grown to the point Where you're like, hey, I've got all these customers, therefore I want to keep their currency because I want to do more and more business with them.
01:31:48.000You've got to just ask yourself how the United States dollar became the world reserve currency.
01:32:03.000Because the U.S. economy was growing and growing and growing and growing and growing, so you had all these businesses that wanted to do business with the entities in the U.S. saying, yeah, this is a no-brainer.
01:32:26.000But again, it didn't happen because of a king or a president or a queen or a prince or whatever saying that from now on, the world is going to use dollars.
01:32:40.000It was the real economy choosing to do that because the United States economy was growing to such an extent.
01:32:47.000And by the way, the pound sterling didn't crash.
01:32:50.000So that's the way the dollar will lose reserve status, is the Chinese economy, all these other economies will grow slowly and slowly and slowly and more and more and more over time to where the entrepreneurs and the businesses want to start using whatever currency they have.
01:33:06.000But that takes a lot of time to play out.
01:33:08.000And again, the main takeaway is even if that does or when that does play out, the dollar doesn't crash in that scenario because of the dynamics that we just talked about.
01:33:17.000And by the way, let's just say that Saudi Arabia, their third option, would be to pay back the debt.
01:33:23.000Let's say they have $10 trillion in debt.
01:33:25.000So they're like, we don't want these dollars anymore, but we've got to pay the bank next Tuesday, so we might as well just pay them today.
01:33:33.000Okay, well, what happens to the amount of dollars?
01:33:37.000It goes down by $10 trillion because they just paid off the loan.
01:33:42.000Now they pay off the loan and it goes down to $40 trillion and then the dollar denominated debt goes down to $40 trillion as well.
01:33:51.000So what's fascinating about this is the less demand there is for dollars outside of the United States, the lower the supply of dollars goes.
01:34:10.000And that coincides exactly with what we talked about before, where they're basically generating money out of nowhere when they give you a loan almost.