Preston Pysh (06:20):
As people are hearing that they’re probably saying, “Okay, so your example, with the lumber sounds like it’s just a flash in the pan. It’s going to work itself out as time marches on,” but then when you transition into the semiconductor, it’s something that’s a lot bigger. So most people just want to hear that it’s a simple solution, it’s going to get better in six months, or whatever. So how do you see this moving forward in six months from now? Are we still in a situation like we are today? Is it worse? Does it take a long time to sort itself out, or is this thing over in a quarter from now?

Lyn Alden (06:52):
I think we could separate the structural issues from the more rate of change kind of near term issues. So the short answer is I think no one knows, because obviously, that’s going to partially depend on, is there another round of the pandemic that shuts down more countries or makes them choose to shut down? So obviously, you have to predict things like that. Then you have to predict other fiscal decisions or policies by different countries. So some of it is just inherently unknowable, but I think a framework to think about it is that you have near term issues, like let’s say, China shuts down the third largest port in the world because of COVID fears or whatever. Obviously, that’s going to persist until that opens up, and then a period of time after that.

Preston Pysh (07:32):
One COVID case is what I was reading in the news. Is this accurate?

Lyn Alden (07:37):
I don’t know. I don’t know about that specific number, but who knows? One of the countries has a zero COVID policy, as they call it. So I don’t know. So you have those kind of specific instances, like port X is shut down for time period Y, and then it’s going to trickle after that for a period of time Z and then it should eventually normalize. The bigger issue is that we might have reached peak globalization.

Lyn Alden (08:00):
So if you take a step back for a second, if you look back over 150 years of history, it’s generally been a period of forbore globalization, which we can define as global trade as a percentage of global GDP. That’s kind of the easy way … If you had to put it in one number, that’s what it would be. So up from the 1800s to the World War One, we had a period of globalization and that was kind of the rise of America, the manufacturing call.

Lyn Alden (08:26):
We were the emerging market, essentially, that was rising and industrializing and making a lot of things for the world. We became a creditor nation. So obviously, the World War One period disrupted globalization by a lot. Then after that, you had tariff wars, trade wars. That was anti globalization.

Lyn Alden (08:44):
Then you had World War Two and after that ended, and you had the rebuilding, you had the Bretton Woods system, you had this kind of reunification, we started another round of globalization. We paused in the 80s, but then after Soviet Union fell in the early 90s, and China opened up in the 80s and early 90s, we had another leg up in globalization that was boosted by information technology and automation and offshoring, things like that.

Lyn Alden (09:11):
So if you look at the United States, starting in the 70s, with the petrodollar system that a number of us have discussed a lot like our friend Luke Gromen’s discussed it. We offshored so much of our … Especially the United States did this, more so than other developed countries, but to some extent, all developed countries outsource cheap things like making a tire, for example, like clothes or like low value at things.

Lyn Alden (09:33):
The United States went further and faster than many other developed countries where we hollowed out our industrial base to a much bigger degree than say, Germany or Japan, or even Italy, like a bunch of other countries that didn’t really have that problem. So we accelerated that more than others. So we totally disconnected labor productivity from wages. So wages went flat in real terms and productivity kept increasing because we arbitraged labor around the world,

Lyn Alden (09:58):
Cheaper environmental standards, cheaper labor in different countries. We can pollute over there instead of at home. So there was this big arbitrage that helped keep costs down, but we sacrificed resiliency and we kind of sacrificed in the United States, at least we sacrificed the blue collar labor force more so than most other developed countries.

Lyn Alden (10:17):
Global trade as a percentage of GDP reached a peak in around 2008. So that was like 60% of global GDP, which is actually a really high number, if you think about it, that global trade as a percentage of global GDP was like 60%. It’s kind of an intuitively high number. So that has kind of flatlined since then, flat to down.

Lyn Alden (10:35):
We’re still in the upper 50s. So we haven’t really … It’s not like we just reversed globalization, we have not continued to globalize really at the rate that we were and that’s due to a variety of factors. So I think COVID was kind of a shock to that, where we sacrificed so much resiliency to help keep costs down, more so than normal.

Lyn Alden (10:54):
So finally, we got a shock to the system that tested the fact that we didn’t have resiliency. So now we’re starting to pay the price for how we’ve distributed this in such a complex way, that there’s so many ways for it to be disrupted, either due to a pandemic, or due to an overreaction to a pandemic, in certain countries. Whatever the case may be, small changes can ripple through the whole system and cause these cascading delays and shortages.

Preston Pysh (11:20):
You were talking about the globalization and the petrodollar system, and specifically about the productivity versus the typical worker compensation and how that divergence. I think a lot of people that maybe spend time on Twitter, see that chart get posted from time to time, where in ’71, you see this breakaway, between those two things and people say, “Hey, what happened in 1971?”

Preston Pysh (11:43):
They’re really implying coming off the gold standard driving that. Is that a US specific chart or do you see a similar dynamic playing out on an international level where the compensation for labor did not keep up with the productivity of on the chart that we so commonly share?

Lyn Alden (12:03):
That is, for the most part a US phenomenon. So if you look at European wages, for example, they’ve not really had the same problem. Same for Japan. Now, I don’t have the charts in front of me. There’s some percentage of it that is pure automation. So that’s kind of been everywhere and like I said, even those net exporter countries, like say, Germany or Japan, they still outsource a lot of their cheaper things to say places like China or Bangladesh.

Lyn Alden (12:31):
So there’s still some of that, but this is more so been an American phenomenon. If you go back to that 1971 chart, if you look at the trade deficit, it really kind of takes off at around 1974 or so, kind of a few years after that. It’s tied to 1971, but it’s really the system that came after it, which was the petrodollar system, where we started basically exporting dollars.

Lyn Alden (12:54):
So that became our major export, which displaced our other goods, essentially. We basically priced it so that our exports were no longer competitive and our import strength was very strong. So that benefited people that work in healthcare, technology, finance, government that didn’t have their jobs exported, but then they got the benefits of that system. Whereas, say the typical blue collar worker that say made cars, skilled worker, they got some benefits from the system.

Lyn Alden (13:22):
So their dollar maybe retained more strength than it would have, but they sacrificed a ton for that as well. They either lost their job, or their wages were severely depressed because you had your competition from other places. Then we really kicked it into high gear in the 90s, with NAFTA, and then in the early 2000s by helping to get China into the World Trade Organization.

Lyn Alden (13:43):
So we’ve had this cascading series of things that really led the United States to have this big structural trade deficit in a way that many of our developed peers don’t have. So we have a higher level of wealth concentration than virtually any other major developed country.

Preston Pysh (13:58):
Lyn, in your article that everybody needs to get out there and read. This article is phenomenal. You talk about three key attributes that are contributing to the supply chain impacts that we’re seeing right now. The first one you said was the COVID-19 lockdown. The next one was the consumer behavior change, and then your money supply growth. Can you talk to us about each one of these and how you see the importance of each one of them and how you would maybe weight them on the impacts that we’re seeing right now.

Lyn Alden (14:27):
If we look at … Obviously, we had periods of shutdowns, and then we had these kind of rolling periods of shutdowns. So those presents some just natural limitations on a system that, as we described is pretty fragile. It’s global, and it’s fragile and there’s lots of little things that can go wrong and that delay things. Like we only have so many container ships, for example. So you can have big bottlenecks and there’s key ports that if they’re shut down, there’s not a lot of workarounds. So there’s that issue.

Lyn Alden (14:52):
Then the second issue would be if you have a rapid changing consumer preferences, but you have industry that might take a few years to adjust to that, then you can have a pretty significant bottleneck. An example would be that if everybody wants suburban homes, they want to change the location at the same time, and you only have so much sawmill capacity, well, then you can have a spike in lumber prices.

Lyn Alden (15:13):
The same thing is if people buy more electronic equipment than they would otherwise, because they’re stuck at home and you only have so much semiconductor capacity, for example, well, now you have a problem. Those foundries are billions of dollars and take time to build and design. So those are specific examples of things, but there’s a whole bunch of changes that can happen.

Lyn Alden (15:32):
For example, if you can’t take the subway … If you look at say New York subway numbers, they’re super low and if people are driving more, maybe they’re not driving as much, because they’re not going to nine to five job in physical form like they used to, but maybe more people need to drive sometimes. So they go and buy a used car, for example.

Lyn Alden (15:50):
Well, then suddenly you have a constraint in how much used cars there are at the same time as you have a constraint on new car production due to those semiconductor prompts. So changing consumer behaviors against a system that can’t just instantly adjust is another issue. Then if you look at periods of inflation, people often say, “Well, we have inflation because of supply chain problems or we have constraints in the system,” but every inflationary period has constraints. That’s what inflation is.

Lyn Alden (16:14):
So every inflationary decade we’ve had is money supply going up at a quicker pace than normal. So monetary inflation, combined with real world constraints, that if our entire world was software, for example, and if money supply went up, we probably would not see very big changes in price for software, because we don’t really have a constraint there.

Lyn Alden (16:33):
But in say, the 1940s inflationary decade, you had shortages in commodities, you had shortages in labor, because you had all this extra jobs out there fighting. That’s why you had Rosie the Riveter come in and help build the planes and things like that, because you’re starved for labor and the commodities. So in the 70s, US oil production peaked, to we were more reliant on imports at a time when due to the war around Israel, we had those geopolitical issues where we were embargoed.

Lyn Alden (17:01):
So you had oil constraints at a time when we also just got off the gold standard, we were increasing money supply at a faster rate. So you had a real world constraint combined with money supply going up a quick rate. So what we see ever since 2020, is due to fiscal stimulus that is being monetized, we had a more rapid than normal increase in broad money supply, while we have changing consumer behaviors and real world constraints that are making it so that essentially that the fiscal stimulus kept demand elevated, so people could still afford things, but we didn’t increase the amount of supply of goods and services, or at least certain types of goods and services.

Lyn Alden (17:37):
So that’s where we started to run into these rolling issues where we have a lumber constraint, we have a semiconductor constraint. Now, you have affordable housing issues. So rent prices are going up, for example and wherever there’s periods of shortage, combined with broad money going up, you’re going to get periods of inflation or shortages. One or the other, or both.

Preston Pysh (17:57):
So we like to talk about Bitcoin all the time. Do you see any of these chip shortages impacting the mining industry, and what that might mean for the price of bitcoin because so much of it has to do with mining the bitcoins and just more hashing power coming online in order to drive the expense, the electrical expense of the entire protocol. How does any of that play into your calculus, or how you’re thinking about it?

Lyn Alden (18:24):
So that’s been happening for a while. Obviously, you had … I will go back to a changing consumer preference, because of the Chinese mining ban. Suddenly, you had more demand elsewhere but there are shipping constraints and stuff. So some of those older miners probably just won’t make it over those kind of sit around until they’re obsolete. So there’s that issue, but then, too, you had … Even going back as far as say, late 2020, you had semiconductor shortages that were impacting the miners, and they’re not exactly first in line to get Taiwan semiconductor manufacturing to make their chips.

Lyn Alden (18:56):
So someone like Apple is first in line, and Bitcoin miners like number 57 on the list. Obviously, I’m making numbers up, but they’re not the front of the line. So you had a Bitcoin miner machine shortages, which meant that hash rate did not go up as quickly as you’d expect from the price. So those who had the equipment were doing quite well in terms of margins.

Lyn Alden (19:18):
Then of course, we had the correction, we had the Chinese mining ban. So for a period of time, we had a somewhat of an easing in the miner shortages. So their prices came down of used miners, but we only have so much hosting facility, infrastructure around basically having them access to cheap electricity in a safe and properly designed environment.

Lyn Alden (19:39):
Those are multimillion dollar facilities that take periods of time to get online. So we had one type of shortage into another type of shortage and as an example, Compass Mining, I think they’re doing great work over there, but they just had a South Carolina facility that was delayed. It was going to come online, and it’s not there … They partner with the facility operator. I don’t know all the details, but they announced that essentially didn’t come on at the date they expected it to.

Lyn Alden (20:03):
Not to criticize them. They gave out credits to people who expected their machines to be online at a certain time. So I think they handled as best they could, but that’s an example of real world constraint, and I don’t know the reasons. They might have had supply shortages due to some of these other supply chain issues, or could have just been a labor issue domestically.

Lyn Alden (20:22):
I don’t know the specific reason, but you do have these periods of facilities not being, say fully online or fully present in time. So it’s been that somewhat of a premium. Now, eventually, that’ll be fixed but that’s kind of the real world constraint that we’re going through. That can keep hash rate from potentially going up as quickly, as you’d expect from price. Although we still had a pretty good recovery in hash rate.

Preston Pysh (20:44):
One of the things that you highlighted in your write up was this idea that we aren’t seeing inflation, like we are here in the United States in other parts of the world. Talk to us a little bit about that idea.

Lyn Alden (20:56):
So if you take a step back for a second, if you look over, say the past 20 years, the United States has grown its broad money supply at a little bit faster rate than Europe. Not by much and both of them have grown their money supply at a much faster rate than Japan. So people often think Japan is paying a ton of money, but again, we talked about I think this in previous podcast. There’s a difference between base money and broad money.

Lyn Alden (21:17):
So Japan’s broad money is actually the slowest increasing in the world. So if you rank those regions by inflation, the United States has had the most, Europe’s had less than that, and Japan’s had way less. So basically, if you have two economies, and they go through this pandemic, and one economy does not do fiscal stimulus, they’re going to have a reduction in demand for certain goods, because some people are out of a job. People are tightening their belts more.

Lyn Alden (21:43):
So there’s reduction in demand, as well as a reduction in supply. So you still have these certain areas of constraint that are challenged, but on a broad sense, you probably want to have a lot of prices going up. On the other hand, if you have another economy, where they have the same supply constraints due to the issue, but then they also print money and give it to people, then they’re going to have demand go back up to normal or even higher than normal, but supply is constrained.

Lyn Alden (22:08):
So they’re going to have more inflation. People can debate whether that’s good or bad. Basically, you’ll get a faster rebound in nominal GDP, probably a higher consumer sentiment, and things like that but you’ll also have more inflation and more constraints. Part of it comes down to the pre existing condition. So we’ve talked before about how the United States has higher wealth concentration than most of the developed countries.

Lyn Alden (22:29):
We have a higher rate of people that are paycheck to paycheck, which I think has played into the reason of why we did bigger fiscal stimulus than many other countries, because we had say, a larger percentage of our population vulnerable to not having a job for six months, for example. So that was the consequence of doing that. I think that would go back to like the Ray Dalio long term debt cycle phenomenon, where there were a lot of papers that predicted this would happen in the next downturn, even though obviously, they didn’t predict a pandemic.

Lyn Alden (22:58):
They were like, next time we have a downturn, we’re going to monetary policy three, as Dalio would call it, where we’re just going to hand out helicopter money, we’re going to monetize it, and we’re going to hold rates low, even if there’s inflation. So it’s kind of like we’re walking through this playbook. It’s almost eerie how much we followed that, and that’s really because of a lot of the pre existing conditions in the system.

Preston Pysh (23:18):
So as we fast forward into the next 12 months, have another sell off, or another downturn in the economy, I think could totally happen. So what does that lead to as far as the response goes, and you’re seeing central bankers, particularly here, the Fed in the US signaling that they’re going to tighten and then Powell goes there and does his speech and is like, “Maybe we won’t,” but everybody else is saying we are.

Preston Pysh (23:44):
They’re really throwing out a lot of mixed signals on their forward guidance, and it almost appears like they know that they need to do it but I think they’re a little concerned that if they do start to do it, that they’re going to wreak havoc in the market. So what are your thoughts on the forward guidance that we’re having right now, and then the chances that that could actually be a mistake? Then what kind of response are we going to see next, relative to the response that we just saw through COVID?

Lyn Alden (24:13):
So I really wouldn’t want Powell’s job here. He really doesn’t want another pivot named after him. So like the Power Pivot from early 2019, after the big quarter for 2018 sell off where he tried to tighten. He talked about how he was on autopilot, and then the stock market fell 20% but more importantly, the junk bond market totally froze up for six weeks. Just credit froze. So that was kind of like the iceberg under the full … That was the issue under the surface.

Lyn Alden (24:38):
Most retail were looking at the stock market whereas Powell was looking at the credit market, most likely and panicking. So he had to pivot and be like, “No, no, we’re just kidding. We’re not on autopilot. We’re data dependent and we’re not going to just ignore your signals.”

Lyn Alden (24:52):
So he did the famous Powell Pivot. I think the last thing he wants is to try to tighten into this. So what we saw back then was if you looked at GDP growth rates, it peaked around mid 2018 and started to decelerate. So we were not in a recession yet. We didn’t have negative GDP growth, but we had decelerating positive growth. So they were tightening into a decelerating economy, which opens up issues.

Lyn Alden (25:16):
So actually, we see the same thing now, where the economy in rate of change terms, GDP probably peaked in quarter two of this year. You have the base effects, you have the stimulus and all that. So now we’re decelerating in positive territory. There’s some metrics like retail sales that are outright going down a little bit, and they’re going to potentially be tightening into that.

Lyn Alden (25:37):
Now, it’s a little bit different, because back then, back in 2018, they were actually tightening. They were doing quantitative tightening, and raising rates. Now, it’s more just like, do you want to be super dovish or hyper dovish? So they’re getting less dovish, rather than actually tightening, which is your tightening rate of change turns, but you’re still not actually tightening.

Lyn Alden (25:55):
So they have a higher chance of getting away with some of that, because they’ve already … We’re seeing so much reverse repo activity in the market. Banks are stuffed full of cash, other financial institutions are stuffed full of cash, there’s collateral shortages in the Treasury market, in part because the Fed bought so many of them and also because the debt ceiling and the TGA draw down so that the Treasury has issued fewer treasuries than they otherwise plan to do by this point, because they’re constrained.

Lyn Alden (26:23):
So you have a Treasury shortage. So if they were to buy fewer treasuries, it actually probably wouldn’t be the end of the world for a period of time. I think they have some runway to actually taper to some extent, but they clearly want to push that as far as they can before they go. The other challenge, the reason I wouldn’t want his job is because again, going back to the long term debt cycle thing, when debt is this high of a percentage of GDP, you pretty much need a long period of negative real rates in order to make the numbers work. So it’s kind of like, you got to inflate away the debt without saying you’re inflating away the debt.

Preston Pysh (26:57):
How long when you’re saying a long period of time? What are we talking?

Lyn Alden (27:01):
That would depend on the speed. In the 40s, you spent a decade with deeply negative real yields and then you had a couple of decades where you kind of broke even, and then you had the 70s, which was another decade of deeply negative real yields. So it partially depends how negative they get. It’s a question of both magnitude and duration, but that’s not a mandate. So they can’t say that out loud. So back in the 40s, in order to fight World War II, the Fed was pretty much captured by the Treasury.

Lyn Alden (27:31):
They gave up any pretense of independence and recaptured until like, 1951. So they’re kind of in that situation now, where they were kind of like pseudo, gave up independence for a period of time, monetizing debt, doing everything they can, but they don’t want to give that illusion that they’re just going to play with the debt and have people lose confidence in the currency.

Lyn Alden (27:51):
So they’re kind of playing the narrative game, where they’re saying, we’re going to be accommodative, but no, no, we’re not monetizing the deficit. We’re not going to devalue the currency significantly. So that’s a really challenging environment. So they can’t say out loud, we have to hold rates, zero while inflation is running hot, because federal debt to GDP is 130%.

Lyn Alden (28:12):
That’s not the part they can say out loud. So they have to say, we want to be accommodative until we have maximum employment. We think the inflation is transitory. So they have to dance around the issue, and it’s a really challenging thing. So that’s why as much as people like to blame the Fed, a lot of my blame is, say, back in the Greenspan era, where they did have more levers they could pull. They could have made better choices, I think. Now, they’re stuck in a corner where they don’t really have that many options. So you’re choosing between bad options, essentially.

Preston Pysh (28:41):
They definitely weren’t dealing with all the means back in the 1940s.

Lyn Alden (28:48):
That’s a good point there. Basically, information travels faster now. Whether it beam form or anything else. So in 1940s, you would get a newspaper-

Preston Pysh (28:56):
You’d get away with it.

Lyn Alden (28:59):
You’d get away with things, and now it’s like Twitter’s monitoring it minute by minute. People that work in a grocery store can tell you who the chairman of the Federal Reserve is, and information has traveled far quicker, and more people are aware of it. That’s part of the populism that we find ourselves in now where everybody knows something’s wrong with the financial system. There’s different opinions as to what’s wrong with it, different levels of information about what might be wrong with it, but it’s something that we all understand to different degrees, as information travels super quick. So it’s really hard to keep people in the dark about what’s happening.

Preston Pysh (29:35):
Kelly Evans had this awesome chart. You put this in your article, where she was showing how the personal consumption just exploded after COVID in this chart. It’s an awesome chart. We’ll have a link to your article in the show notes where people can see this. What do you think was actually driving this? Do you think it was a change in behavior for what they were trying to consume, or do you think it had to do with some of the UBI checks and some of the fiscal spending that was just stuffed into the hands of everyday Americans that was driving it?

Lyn Alden (30:06):
Certainly both. So basically, if you’re told that you’re locked down now, you’re going to end like restaurants or either closed or they’re less pleasant, because they’re operating at half capacity and travel’s either … Especially international travel is a lot more frustrating now, or in some cases blocked or just harder. So people say, “I’m not going to go on the international vacation. We want to have a home office, we want to have a better kitchen.” So basically a change in consumer preference, and they might buy more electronic equipment. They might do things like that.

Lyn Alden (30:39):
Then the stimulus made it so that more people could do that. So obviously, if you’d say, as your stimulus, it’d be some percentage of people that wouldn’t be able to make those changes and they’d probably be rotting in the street at that point. So the stimulus checks go out, they allow those changes in consumer behavior to happen but then you run into real world supply constraints.

Lyn Alden (31:01):
So if you look at that chart that you’re referring to, our purchases of goods skyrocketed, whereas our purchases of services took a lot longer to recover, because that’s things like restaurants, and travel and hotels, and things like that. Especially in the United States where we specialize in services, and we exported most of our goods to other countries. That’s an issue. So that’s why our trade deficit got a lot worse this year, or over the past year, because we kept our demand high with stimulus checks but a lot of that just goes straight out the door to China, because we’re buying more from them than they’re buying from us because they’re not doing as much stimulus and they’re not boosting their demand as much as we did.

Preston Pysh (31:45):
I know the funds that are going to be part of the infrastructure deal, and it’s a massive deal at this point. I think the last number I heard was 3.5 or $3.6 trillion, aren’t going to hit the economy for quite a while. How do you see some of this playing into it, and does this just add more fuel to the fire for the supply chain implications that we’re talking about right now, assuming that they wouldn’t work themselves out in a year from now?

Lyn Alden (32:12):
So the stimulus bills earlier were these fast acting ones. So people got money right away. So they could either put into home improvement, they could put it into something else, they could put it into meme stocks, Dogecoin, whatever they want to do, whereas infrastructure is going to be like a multi year thing. We still don’t know exactly how big it’s going to be, but we know it’s going to be filled with pork. So it depends how useful and productive some of that ends up being that.

Lyn Alden (32:38):
If you spend money on things that are not productive, then it pretend to be inflationary. If you spend money on things that make things far more efficient, it can counterbalance some of that spending. So a good example would be that the Eisenhower interstate highway system, for example. That was a huge gain in productivity, even though at the time it was like the biggest public works project in modern history.

Lyn Alden (33:00):
So it really kind of depends on how effective that spending is, and over what period of time. Now, a lot of people think that certain materials like copper, or silver or nickel, are likely to have this constant source of demand over the next decade, due to electrification and infrastructure, things like that, that are basically propping those things up. Another component to inflation is that commodities tend to go through these big roughly 15 year cycles, where you have a period of oversupply, so prices collapse.

Lyn Alden (33:32):
So nobody puts money into the space, and eventually demand keeps going up over time, while there’s not a lot of new supply coming online. Prices go up as you pull more people into the space and you get oversupply again. So the past decade or so has been a period of commodity over abundance, or at least most commodities. So we’ve had more oil, thanks to shale that we know what to do with. A lot of it was unprofitable, but they lit their money on fire so we could have cheap gasoline prices unintentionally.

Lyn Alden (34:01):
So we had this period of commodity oversupply, but now going forward because of those long periods of low prices, there hasn’t been a lot of new supply coming online. So there’s no giant new copper mines. Well, there’s some but there’s not a ton coming online and we’re not investing a lot of say long lived energy projects. So I think as you head out deeper into this decade, we’re more and more likely to have these ongoing higher commodity prices, most likely especially when you combine it with currency itself losing value.

Preston Pysh (34:30):
You had an awesome chart in your newsletter as well, that kind of showed … I think you went back into the 1800s on that chart, showing the commodity prices in these large like 15 to 20 year cycles. This is another thing that I know, Stan Druckenmiller talks about with long commodity bull-bear cycles and something that I know he has traded for years are those bigger trends, but it’s an awesome highlight in your article.

Lyn Alden (34:58):
That was a chart from … It was the guys from Incrementum they put out an annual … They call it the In Gold We Trust Report but it’s really a giant macro report. For the record those guys, even though they’re like gold guys in Europe, they also like Bitcoin and stuff. So that’s their approach and they included that chart from, I believe it was some Stoeferle, but that particular version of the chart was formatted for their publication.

Lyn Alden (35:25):
You basically have these giant commodity cycles that occur at pretty regular intervals. Obviously, you have to monitor the details to see how far you are into that interval, because they’re not going to be exactly the same. It’s going to depend on just different human choices along the way. Most evidence shows that we’ve been through this pretty long period of commodity oversupply and for many types of commodities, now we’re in, or at least we’re looking at a pretty good potential for more supply constraint, and tighter supply demand spreads.

Preston Pysh (35:56):
All right, Amazon versus Alibaba. The reason I bring this up is because I know in your model portfolio that you have, I don’t think I see Amazon in there. I know that you have a position or you’re recommending a position in Alibaba. The reason I’m questioning this or bringing this up is because of all the concerns with having Chinese equities at this point, especially with some of the actions that they’ve been taking. I know some folks are even going as far as saying, “Hey, this is their big chance. If they want to take action on Taiwan, this is kind of the prime time to do it with everything that’s happening with the US and Afghanistan and the fact that they’ve already done something similar with Hong Kong.” So I’m kind of curious, your thoughts on that, and just kind of analyzing the difference between those two.

Lyn Alden (36:43):
So I actually do have Amazon on the portfolio, but that is one of the FANG stocks I do like pretty much, whereas there are other FANG stocks that I avoid at the current time. So Amazon is one of the ones I do like. For China, I do have a position Alibaba and JD as well. My view of them is that right now, they’re basically so beaten down in terms of valuation and sentiment that they make for an interesting kind of contrarian play and especially … Some of them like JD. JD is a pretty well run company, for example.

Lyn Alden (37:14):
They specialize in logistics infrastructure. So they’ve been attacked by their more authoritarian governance approach where they wanted to shape the size or direction, so they go after those and there are a lot of concerns that the United States might go after some of our tech companies in a similar way. You could argue that some of them have achieved monopoly like aspects.

Lyn Alden (37:36):
So if you look at China, for example, some of the actions they took against them were justified in the sense that you had, say, one giant platform say, if a vendor uses a competitor, they can’t use our platform. Kind of these anti competitive practices. So China wanted to cut down on those, which I think was fair but then, of course, because China, they went authoritarian. They went human rights issues, they went way too far in other directions.

Lyn Alden (38:00):
So one of the issues, I think, is that it is good to have international exposure at this time, but I think it’s certainly fair to leave out countries that you just you don’t want to invest in. So I think it’s fully fair to someone to say, “You know what? I want to have zero China’s equity exposure. I don’t want to deal with that risk at all. I don’t want to take any thought space for me,” and I think that’s a fairly fair conclusion as well.

Lyn Alden (38:21):
The counterpoint would be to say, “You can have a small position in something that is very beat down and low sentiment, and it can do very well as a somewhat uncorrelated investment.” So if you look over the past year, Chinese stocks and American stocks have been quite uncorrelated with Chinese stocks performing poorly and American stocks performing very well and you could easily have a period of time where that flips around. So it depends on what type of portfolio you want to have, but overall, there’s different types of exposures that someone can have.

Preston Pysh (38:48):
What are your thoughts on the concern of Amazon right now, considering so much of their products are sourced from China, with all the supply chain impacts that we were talking about earlier? Does this mean that it could be a rough couple quarters ahead, based on some of those things?

Lyn Alden (39:05):
It’ll partially come down to how much they can pass us prices on to consumers. So with Amazon, it’s kind of a hybrid business, because you have what you think of as the retail business and they also have the cloud computing business, which is actually where a lot of their margins come from. So it’s funny, if you look at a lot of E-commerce companies, a lot of them aren’t very profitable but because Amazon’s had that hybrid model, that’s served them very well. Certainly Amazon has risks to it.

Lyn Alden (39:31):
I’m not like overweight Amazon. I just have a pretty small position in Amazon, but I do think that we’re still having basically a structural period of E-commerce gaining over physical commerce, at the same time, as cloud computing is still gaining market share as well. So overall, I think, basically, Amazon’s been in this like more than a year long price consolidation for a while.

Lyn Alden (39:53):
So actually as expensive as Amazon is, they’re actually relatively inexpensive compared to their 20 year average. They’re moderately below average. So I wouldn’t be surprised to see another leg up in their price overall. At the same time, they haven’t done financialization the way that say Apple has. So I describe it as like a rocket ship going into space. They let off the first boosters and then they continue with another thrusters as they go further up.

Lyn Alden (40:18):
So if you look at something like apple, they had this huge period of growth, massive growth with the iPhone and everything. They build up a ton of cash and then they said, now we’re going to start financializing. So now we’re going to issue debt, we’re going to buy back our shares, we’re going to pay dividend. So they got that second leg of growth.

Lyn Alden (40:35):
If you look at their revenue, it actually hasn’t been growing very much at all, but they really optimized that per share aspect. Whereas there are other giant companies like Facebook and Amazon that have not pulled that second lever yet. They haven’t financialized yet. They’re still in the rapid growth phase. So I think that they still have that lever ahead of them to pull.

Lyn Alden (40:55):
So it’ll be interesting, but the big risk is that you could have changing politics in the United States, where everybody’s overweight the S&P 500, including international investors. Everybody’s piled into US markets and then we have a change of pace, and we decide, okay, we’re going to raise corporate tax rates or we’re going to go after Amazon and Facebook, and Apple more so than more so than we have before. Maybe not to the extent of China, but maybe more than the slap on the wrist that we’ve done in the past. So every gets piled in, and then that’s when you go after. So that’s kind of the risk of everybody on one side of the boat at the same time.

Preston Pysh (41:30):
So I know you’ve been a critic of Ethereum. I’m obviously a critic of Ethereum. So I don’t know how balanced of a conversation we’re going to have here, but they recently did their 1559 change in monetary policy. What are your thoughts on what’s happening with Ethereum right now? Has your thesis changed? Has it stayed the same? I’m just kind of curious where you’re at.

Lyn Alden (41:53):
It’s not really changed. The funny thing is, so in my premium research service, I kind of separate price action from what I actually think of the fundamentals. So I’ve been saying since January, I was like, okay, once this breaks above 1,400, the previous highs, this thing could run. When Bitcoin has a bull market, some of these other things can go up even more. So I’m saying … I was actually pretty tactically bullish on Ethereum, despite every time I say that I’m like, but you’re dealing with a very different set of technical reliability here than when you look at something like Bitcoin. So it’s like, I do that in order to preserve objectivity.

Lyn Alden (42:31):
If I just didn’t cover Ethereum at all, it’s like, well, you’re clearly just putting your blinds on and only covering the chain you like. So I say, okay, Ethereum is big enough. I’ll certainly cover it and just like my view on price action for a period of time, it can be quite different than my view you with the fundamentals. So I’m just saying, they’ve constructed a supply squeeze that is pretty well engineered.

Lyn Alden (42:50):
So on one hand, you launch Ethereum 2.0 staking. So it’s one way staking. We don’t know when Ethereum 2 is going to be launched. They’ve changed the dates number of times. So you have this one way lockup period. It’s kind of like the gray scale trust that Bitcoin was going through. So you have this one way lockup period.

Lyn Alden (43:07):
Then you do EIP 1559, where you’re burning Ethereum now. So they like to call it ultrasound monetary policy, but it’s the fact that you now have a less inflationary protocol, but the mere fact that you could change the monetary policy is different than if you just can’t change the monetary policy at all so someone later could change it back potentially.

Lyn Alden (43:30):
So they’re in that environment now where, as long as that’s in place, you’re creating a supply squeeze. So kind of like how you have Bitcoin going off exchanges, you have Ethereum going off exchanges. So you have a pretty powerful price mechanism, but I think the long term longevity of that is more in question than the one for Bitcoin. As an example, Ethereum just had another unintended chain split and the price just didn’t care because security is just not the number one priority of that protocol in the way that it is for Bitcoin.

Lyn Alden (43:59):
So Bitcoin makes these very slow deliberative, consensus changes. We can take all the time in the world because we don’t put difficulty bombs in the chain. Whereas Ethereum has these difficulty bombs that give the developers an upper hand in terms of putting changes through so they can fork to new chains and the community shifts over to them pre readily.

Lyn Alden (44:22):
Another big challenge I think about Ethereum is that a lot of it is built on decentralized finance, but it has these big centralized points to it where you feel like you’re decentralized, but at the end of the day, you’re not really resilient to state attacks.

Lyn Alden (44:36):
Actually a good analogy is the supply chain issues we talked about earlier. We got prices pretty low by sacrificing resiliency to globalize our supply chains, arbitrage everything we could. So now they’re saying prices are only higher because of the supply chain issues. It’s like, well, they’re only low in the first place because we sacrificed resiliency. So now we’re paying some of the price for that.

Lyn Alden (44:58):
So if you sacrifice, decentralization to do something that is kind of neat and fun, that can work for a period of time, but you never know when you’re going to be exposed to an attack. Maybe Gary Gensler wants to crack down on you, maybe just different state actors want to go after you. You’re not really set up for that type of resilience. You don’t really have that hydra honey badger aspect that say, Bitcoin has.

Lyn Alden (45:22):
So in addition, we’re seeing smart contracts can migrate to other smart contract changes. So you saw, for example, Tether used to run on Bitcoin on the Omni layer and then it switched over to Ethereum, which was more suitable for it. Then when Ethereum got expensive, it shifted over to Tron in many cases. So now we’re seeing interest in Solana, for example. So they can shift to more and more centralized blockchains that they sacrifice decentralization to be more efficient, but then they don’t make full use of the blockchain because they’re not decentralized, which is kind of the whole point of a blockchain.

Preston Pysh (45:59):
Do you find that the protocols that have an underlying token that is more inflationary, that that will attract more utility for the use of smart contracts? So if you’re looking at Ethereum and it’s got this “ultrasound” token to it, are they dis-incentivizing the people that would be using it for smart contracts because of the token is becoming more and more valuable?

Preston Pysh (46:27):
So Nick Carter’s argument, I think this is his argument, as far as whatever working capital you’re using in order to service that smart contract, it’s not something that you actually want to use. Almost like if we were going to apply to fiat currency, when we debase the currency here in the US, it attracts other foreign currencies into the country in order to be used to consume goods and services. Is that something that we would see on the protocol layer?

Lyn Alden (46:55):
There’s a couple layers to this. So one of the well-formulated arguments goes back to 2017 from John Pfeffer. He wrote that paper, like the institutional investors’ case for Bitcoin or something like that. I forget the exact title, and he basically made the argument that smart contract protocols are more like … Say copper or oil. They’re more like working capital, or it’s a casino where you use those chips when you’re there, but then you cash out.

Lyn Alden (47:19):
You don’t store your value in casino chips. You get out when you’re done playing in the casino and you store it in something more universal that’s money, and that it’s really hard for a platform to optimize to be both money and efficient smart contracts. So Ethereum’s got so much going on in the base layer. So it’s more complex, more prone to being buggy like we’ve seen with the unintended chain split and more issues going on there in order to do more in the base layer.

Lyn Alden (47:49):
The problem is, so they’re sacrificing some degree of decentralization to do more things, but then if another chain comes along and says, “We’re going to sacrifice even a little bit more decentralization to be even more efficient,” things can migrate over there. So partially it can come down to how inflationary the monetary policy is.

Lyn Alden (48:06):
So they want to keep those transaction fees low, but it also comes down to how centralized the nodes are. So for example, Solana is getting attention because of how high it transaction throughput is, but if you look at the node requirements, they’re super high. You need like a data center to run one of those. So the bandwidth requirements are insane. The CPU requirements. So it’s not just about inflation versus deflation that affects how efficient a smart contract program is.

Lyn Alden (48:31):
It’s also about how hard it is to run a node and any sort of sacrifices you’re willing to make to have this more enterprise grade thing that is say higher transaction throughput and therefore lower fees, better usability for the person who wants to trade stable coins or de-fire whatever they want to do. But then you sacrifice auditability and the ability to run your own node, kind of the whole block war size in Bitcoin and we know how that resolved.

Lyn Alden (48:57):
So some of those are basically making the opposite decision and saying, “We’re going to make a node even harder to run than Ethereum, and we’re going to have say more transaction throughput.” So we’re seeing that kind of play out. So they have a couple of different levels they can pull if they want to increase efficiency, but every one of those levers comes with trade-offs.

Lyn Alden (49:15):
So with EIP 1559, I’ve seen some good analysis that showed that essentially what they did, if you look at transaction fees before and after, it cut out a lot of the lowest cost transactions. So it’s like you eliminated the really cheap ones. So overall it has increased transaction fees, but we’ve also had NFTs and other things like that increase chain usage that also contributed to transaction fees going up.

Lyn Alden (49:39):
So generally we’ve seen a tendency where over time things will migrate to whatever chain is cheaper. So Ethereum does have some degree of a network effect but it also has these cheaper competitors that came later. So it’d be interesting to see how that space plays out. I essentially view all of them as equities. All these different equities, and they’re mostly focusing on speculation.

Lyn Alden (49:59):
So it’s kind of like a bunch of casino stocks, essentially, where you have Bitcoin on one hand, that’s actual money. It’s got this credible decentralized auditable process with it, optimized security above everything else. Then you have a bunch of these other equities that are like these somewhat decentralized, somewhat centralized operating system that mostly focus around lending, leveraging, trading, other tokens that themselves are often these other types of platforms to do the same thing. Then now speculation on art essentially. So they’re very speculation based and they have a lot of the qualities of equities rather than money.

Preston Pysh (50:36):
Gary Gensler just gave himself a high five listening to you.

Lyn Alden (50:39):
Well, the SEC, they have the general guideline for what constitutes a security and you-

Preston Pysh (50:46):
And you’re there.

Lyn Alden (50:48):
Yeah. You issue tokens ahead of time, and then you have some sort of centralized team that is going to work to increase the value of those tokens. So that’s what a lot of those models look like.

Preston Pysh (50:58):
Especially when you get into the staking, that’s paying interest.

Lyn Alden (51:01):
Yeah, and also proof of stake in general. So if you look at how corporations work, they work on proof of stake, and that’s a good thing for corporations. So if you’re the founder of the company and you control 51% of the stock, you should have more say in the company than someone who bought one share, for example. Whereas if you were organizing how you do voting, if you got more votes based on how much money you’d have, then Jeff Bezos would have like a million times more votes than a school teacher and we would quickly become an oligopoly.

Lyn Alden (51:31):
So you’d have a handful of people that can dictate policy. So that’s not good for democracies or money, even though it’s for equities. These equities are these optional things that you can choose to participate in if you want to, or you can go to another one, whereas money is something that’s more universal or voting. It’s more universal. So proof of stake is generally not how we organize things in those fields.

Preston Pysh (51:55):
How do you see a lot of the policy playing out in the coming year or two? Do you see the SEC stepping in and really kind of exercising and working with Congress in order to get the buyer bill, the draft buyer bill pushed through, or do you see this as being something that’s going to be extraordinarily really hard for the SEC to do anything at this point?

Lyn Alden (52:16):
There are certainly people that are closer to the regulators that might have more insight. He’s pretty much said that he would need more budget to really go after this. So it almost seems like they wanna outsource that to the exchanges and basically put more on them to restrict the types of tokens they let on their platform to. So it’s kind of like, if you’re not sure if something is an unregistered security, it probably is.

Lyn Alden (52:38):
We’ll see if they get budget increases and we’ll see if they start doing some shock on all and go after some of these platforms that they think are the most egregious, or if they just kind of grandfather certain things in and let things keep going as they are. They’re kind of attacking multiple fronts.

Lyn Alden (52:52):
One thing you, they’re responsible for say approving a Bitcoin ETF in a certain form. They’re also … We’ve seen Gary Gensler talk about payment for order flow, like what Robin hood does, for example, that’s unrelated. Then there’s the question of what tokens they want to go after. So they have multiple battles on multiple fronts and they only have so many people, but there are people that understand the inner workings of the SEC far more than I do.

Preston Pysh (53:19):
Lyn, what are your thoughts on the borrowing and lending in this space? You’re seeing a lot of the exchanges now offering interest rates for either staking or like, if you have your Bitcoin, you make a deposit. What are your thoughts about the risks associated with some of this, this custody and this re-hypothecation risk and is it worth it, or is this something that you just avoid altogether? What are your thoughts on it?

Lyn Alden (53:46):
Well, so I minimize my exposure to it. I put a small percentage of my Bitcoin into BlockFi a while ago. It was basically an amount that … Partially it’s because I wanted to explore the ecosystem. So I wanted to see the ecosystem being built around it. So I talked to the CEO to discuss their risk and everything. I talked to one of their BCs. So eventually put a small amount in that was just a small percentage of my stack, but as industries have come down, that’s obviously become less attractive.

Lyn Alden (54:14):
Now you’re kind of taking on risk without reward, and then staking on exchanges is kind of a different story because that’s another centralization risk. So running say an Ethereum validator, assuming Ethereum 2 goes through is a pretty expensive ordeal to run a validator. So a lot of people would rather outsource that to an exchange.

Preston Pysh (54:35):
What if it never goes through?

Lyn Alden (54:38):
Well then that’s a whole nother can of words, but even say it goes through, or even take, say another proof of steak protocol that’s already gone through, that people are already staking it on exchanges. So the custodian’s the one that really has the power there. It’s like how Vanguard and BlackRock can vote on behalf of their trillions and trillions of dollars worth of shares for their passive owners.

Lyn Alden (54:59):
So if you go back to say the Bitcoin block war, you saw that when we were talking about how big they wanted to change that block size to, you had like 80% of the mining hash rate in favor of block size increase. You had major exchanges in favor of it and they still couldn’t get it through because they couldn’t compete with the node network.

Lyn Alden (55:17):
So the user node network was decentralized enough that even the big quorum of large companies in the space couldn’t get that through, whereas if Bitcoin was a proof of stake system back then and all those big custodians in exchanges said, “No, we want this change to go through, and we know we’re the ones that hold the validators or most of them. So we’re going to go ahead and vote to do this.”

Lyn Alden (55:39):
So it risks centralizing the system in a similar way that our current system has become rather centralized, where you have a handful of billionaires that are super well connected and can contribute massive amounts of money to political campaigns and financialize that whole thing. It’s kind of like if you could buy votes.

Lyn Alden (55:58):
So proof of stake, I just inherently view as equity like and prone to centralization, which again is only good for a system that you can say opt into or opt out of compared to something that like, say Bitcoin, is trying to make a reasonable shot for being global money where you want to minimize centralization risk as much as you possibly can with a project that has that level of ambition.

Preston Pysh (56:23):
So Lyn, I don’t have any other questions for you. I know we could probably talk for the rest of the night here, but I just want people to know how much I love your newsletter. Anytime I ask you to come on, you’re just so generous to come on with your time, but I’m a huge fan and anything that you publish, I read with a highlighter. I print it off. I’m holding here, like anything that Lyn does, I immediately print it and go through it because you’re just so thoughtful on so many different areas.

Preston Pysh (56:54):
One of the things that I like about your newsletter is you actually go in there and you call out individual companies. You have various types of portfolios that you’re providing to people that pay and subscribe to your service, but it’s so beneficial for me to see what you’re looking at, because I know your depth of knowledge and your filtering of everything that’s out there is unprecedented. So I just want people to know your newsletter is amazing. I can’t promote that enough. We’ll have a link to it in the show notes.

Preston Pysh (57:24):
Is there anything that you want to highlight, maybe your Twitter profile or whatever, so that people maybe listening to you for the first time and they want to learn more about you, they can find you?

Lyn Alden (57:33):
I appreciate that. So people can find the bulk of my work at lynalden.com. That’s where I have a free newsletter that comes out every six weeks. I have public articles. I have a low cost research service. Then at Twitter, I’m @LynAldenContact. So people know me from different areas. So I cover Bitcoin a lot, but I also cover other asset classes and macro in general, because we are in such interesting times.

Lyn Alden (57:55):
So the long term debt cycle, the fourth turning, whatever you wanna call it, we’re going through some pretty interesting changes at this current time. So I at least do my best to try to explain what’s happening, explain what I think things mean and it’s always probability bases.

Lyn Alden (58:09):
You can’t predict the future, but you’re saying, okay, so this sector looks very expensive or this policy change has the risk of this happening. Then we kind of monitor that over time and see which things played out, which things maybe went in a different direction and why, and people say they find it useful because it’s just a very complex environment that we’re in.

Preston Pysh (58:31):
If I just piggyback off of what you’re saying, you’re exactly right. You’re never saying this is going to play out. What you’re doing is you’re showing this array of potential outcomes and not just in one sector. The breadth of what you’re covering is mind blowing in these write-ups that you’re doing and you’re saying, “Hey, this is what I kind of think is the most probable, but this is the other side of the story.” It just arms me personally, with so much just knowledge. I just love it, but anyway, thanks so much for coming on the show. I love doing this and hopefully we’ll be able to do it again in the near future.

Lyn Alden (59:07):
Happy to. Thanks for having me.

Preston Pysh (59:09):
Hey, so thanks for everybody listening into the show. If you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you’re using. We really appreciate that and if you have time, leave us a review. So thanks for joining us this week and we’ll catch you next Wednesday.

Outro (59:24):
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