Matt Dines on Navigating the End of the Bond Bull Market: Fixed Income Realities and the Promise of Bitcoin

Witness the bond market's reality through the eyes of Matt Dines, CIO of Build Asset Management. Matt joins us to dissect the challenges and illusions present in fixed income investments, particularly for the retiring generation that has heavily depended on them. With the end of the 40-year bond bull market hidden behind nominal gains and masked by negative real rates, we confront the truths that every investor needs to hear. Matt reveals how the post-GFC era, zero interest rates, and quantitative easing have distorted the market, leading to significant real losses in purchasing power. Our discussion also delves into the policy tools and market shifts since 2016, including the pandemic's role in exacerbating conditions, signaling a need for a strategic pivot in fixed income investing.

Prepare to navigate the ripple effects of the Federal Reserve's policy changes that are sending shockwaves through the U.S. Treasury and mortgage-backed securities markets. We scrutinize the repercussions for banks, dissecting the intricacies of net interest margins and repo market dynamics. As the yield curve's future remains uncertain, we evaluate the banking sector's response to these fluctuations and consider gold as a beacon of stability during volatile times. In an environment of financial uncertainty, understanding these elements is crucial for grasping the broader economic picture and making informed investment decisions.

Finally, we bridge the gap between traditional financial systems and the disruptive force of Bitcoin. Reflecting on my extensive experience in fixed income credits, we examine gold's historical role in stabilizing sovereign balance sheets and how Bitcoin emerges as a technical solution to age-old monetary issues. As we ponder Bitcoin's resilience and potential to rectify international trade imbalances, we recognize the value of our engaged audience. Your participation, live or at your leisure, enriches our exploration of these complex financial narratives.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:08

my name is michael guy, a publisher of the lee lagarport. Joining me for the rough hour is mr matt dines. Uh, matt, introduce yourself. Uh to me, to those that are watching, listening. Who are you, what's your background, what have you done throughout your career and what are you doing currently?

Speaker 2: 0:22

yeah, well, I'll try not to give uh long of an intro here, but thanks for having me on, michael, should be an awesome time. So, background I'm the CIO of a firm my co -founder and I started called Build Asset Management. Basic thesis was 2018, after 10 years post-GFC, entering our careers in the financial industry in that landscape. Entering our careers in the financial industry in that landscape, kind of had a sense that there was nobody out there to protect the bondholder, if you will. So my partner, his name's John Ruth. He's coming from more of a financial advisory perspective and you know it's probably everybody is familiar with the prevalence of target date funds.

Speaker 2: 1:01

You know, basically the shift over the last 20 years has been to shift kind of like near dated retirees into the you know the boomers hitting this massive retirement wave that we're in the middle of right now. Ship them into fixed income, right, kind of that age old proxy bet your age in bonds or own your age in bonds. You know coming out of, you know, a zero interest rate environment in the 2010s three QEs. At the time we'll get to the fourth, which was the big wake up moment, I think, for all of us. Uh, that, that the tides had shifted. Uh, basically we saw, you know, if you think, with a long-term historical perspective, build up and, and uh, credit IOUs. This had the potential to not go well for the ultimate kind of stakeholders, if you will, that were holding and allocating their savings and purchasing power to retirement in those IOUs. So we really got our firm out of the gate to basically be the alternative option within credit and fixed income, basically give a, basically give a house view to like that something needed to be done really ASAP, as this retirement weight was arriving, to save and rescue that purchasing power and fixed income.

Speaker 2: 2:14

Now I'll say COVID happened. Everybody, you know, knows that story. We didn't know exactly how this was going to go down, but we felt like there would be some sort of debasement to inflate away that debt stack. And what we've seen the last three years, and especially investment-grade fixed income, just the numbers are really staggering and I don't know that it's largely baked in with everybody yet what's happened? So you've seen the.

Speaker 2: 2:39

If you measure just by the Bloomberg US aggregate fixed income index, you've seen that draw down about 20% now. It was as bad as 25% last October, which is a little bit of a bond rally in Q4 and some minor sell-off so far in Q1, down about 20% nominally. But then you take into account the round trip on inflation. We've rode that impulse now from the top of the mountain back down is what it looks like in the data now. But that adds on another 15% to 20% in debasement. So in a short amount of time three years if you were steered toward the fixed income allocation within the industry, you've lost 35, 40% of your purchasing power, and that devastating impact is why we got into business. So I can go into what we're doing uniquely and how we've kind of zigged where the rest of the fixed income industry is at. But just even taking that view that the 40-year bond bull market was coming to an end, preparing for that, that's really just been that alone. That mindset to prepare for it, really allowed us to differentiate ourselves on performance.

Speaker 1: 3:54

So I think it's interesting this, because you hear that a lot right, the end of the 40-year bond bull market. But I'd argue it's been over for a while because you had negative real rates for way before COVID. I mean you've actually been in a prolonged bear market, even though you made money on a nominal basis. Yeah, the reality is, after inflation, you probably saw the stats there at a point where how many trillions of global debt was yielding negative. I mean it was clearly it was a is a bubble of negative yield. Is a bubble of negative yield?

Speaker 2: 4:22

Right, and if you just did the math on that, I published an article in Pensions and Investment that this was a road to nowhere get out before 2021. We got into the 2022 debacle. But yeah, you're absolutely right, michael, I agree with you on that one. I think if you look at the chart and now you know in post where you can draw the channels on, say, the 10 year, I think it's clear right now, the 10 year you know. If you look at the channel, the up, the up channel is now well-defined, going back to 2016. So you know the end, the tail end of that cycle, right? We we expect, or from a policymaker standpoint, right? You assume that you know you still have the policy toolkits available that you were going towards in 2008 with the QE, the zero interest rates, and you rerun the playbook in March of 2020.

Speaker 2: 5:18

That kind of violent aggression down from the 10-year starting to sell off as far back as 2016,. You see the first higher high. If you will, you still see the lower low in 2020. But this is what everybody views as the start of the bear market in bonds. Everybody clocks this back to like 2022, when the 10-year really started to aggressively sell off, but the low is actually August of 2020. Same time, gold makes its prior high from its run-up. We can talk about that later. I like to comp to the 2019 cycle, interest rates and everything and the fixed income currency and commodity complex, just to benchmark where we're at right now. But that big push down in COVID really we tried to push the beach ball as far as we could under the water and that violent bounce back right it's coming to roost. But, like you said, I think the policy cycle started well before what we saw in 2022. We just didn't most of us just didn't recognize it.

Speaker 1: 6:19

I always think it's interesting that people have a hard time understanding duration versus credit risk as the source of a drawdown for bonds. I myself am actually very bearish on bonds, but that's because I'm very bearish on credit risk, whereas I think the duration side we can maybe talk about when it comes to treasuries. Has it been surprising to you how much of the drawdown has been overwhelmingly around just the duration treasury reset side, that you haven't had the credit stress after all this?

Speaker 2: 6:51

so I think, um, I mean what we just saw in 2022, 2023, that historic duration, sell-off, right, that's, that's rare, that's a long-term cycle event, I'd say, rather than a three to five year, like short credit cycle. Um, you don't necessarily see like a credit driven, you know what we'd call just like a, like a credit event. Um, every time you get into a short cycle, right. So 2008, obvious credit event, right, that, like Lehman just set off a cascade and, uh, you know, if we didn't set up, if we didn't, you know, deploy the firefighters, it would have, it would have just continued to run.

Speaker 2: 7:27

Um, other credit cycles I could get to the like I'm thinking three to five years. So 2012, 2016, not too bad, right. 2016, you saw it really hit, uh, energy, uh, especially high yield, like a lot of shale investment that turned out to be non-economic at the time. Those type of credit events, like you can see it like sector wise and maybe that could be what we see this cycle. You know everybody always expects when's that big spike in? You know, corporate OAS or something like an option adjustment spread metric where you see credit risk really sell off? You're not guaranteed to see that every cycle.

Speaker 2: 8:03

I think this time, like when I said I mean like a massive event, like all, like you're always going to see credit stress, right, and that's where the easing has to come to, to alleviate the pressure in the system. But it doesn't have to be like 2008 or 2020. Um, it could be something more more sector, that one. It's really hard to predict. You just don't know until you get there. But yeah, what you're seeing right now with the duration, I think that is really materializing and the market is gradually walking up to repricing in terms of growth and inflation expectations is what's going on in that one, and then that has to work its way through all credits.

Speaker 1: 8:52

Yeah, and there's the other dynamic, which is that things are, you can argue, maybe desynced because of all these lags which are still playing out. So you got the lag of the shutdown, you got the lag of the reopening. You got the lag of the shutdown, you got the lag of the reopening, you got the lag of the stimulus, you got the lag of the fastest rate high cyclone history, and all this in the span of four years, which, in the context of history, is nothing. But that's what I think also makes this such a a hard environment to, I think, properly position it to.

Speaker 2: 9:22

I would agree with that. This is not simple like a typical 40-year bond bull market environment where you just keep following the same playbook, bet 60-40, and it works out for you every time.

Speaker 1: 10:10

So I guess the question is okay, you mentioned policy shifts and it seems like policy shifts are coming, as they always do. I want to then and I titled this sort of you know, powell lands, so it starts landing the gear, right, because that's what the email that you sent me. Let's lay out for the audience what's happening policy-wise on both the Fed end, the Treasury end, because they can be one and the same, okay, yeah, and because it's going to have big implications on what happens to to yields, and maybe even that that distinction of duration versus credit risk.

Speaker 2: 10:41

Yep, all right. So last week we got two big announcement I mean it was a large information week from a policy standpoint Treasury released its quarterly refunding announcement. It's financing expectations for the remainder of Q2 and then into Q3 expectations. But focusing on the monetary policy front, everybody knows the treasury situation. Right, we've got a deficit problem. We kind of know the fixed obligations of the treasury. Right, you've got social security, healthcare in terms of Medicare, medicaid defense and in the geopolitical fault lines. You know defense is a key area right now. That one is very crystal clear in the interest coverage. Just when you add up those locked in expenditures, the fiscal room or the, you know the capacity is getting to that point where you know things are tight and this is where you hear everybody talking about the buzzwords of fiscal dominance. That becomes the primary consideration of not just the treasury but then the entire financial system, that whole financing. The government has to come through the primary dealers and then from there work primary dealers just for background dealers and then from there work primary dealers just for background. It's the, it's the, it's the big four to six us based g-sips who are the first kind of point of distribution for marketing that treasury debt that's auctioned every single week, um, but you get the treasury going. Nothing too, um, you know, surprising. And the results from the qra on mond Tuesday, wednesday morning.

Speaker 2: 12:17

But in the FOMC everybody probably watched the press conference or had some exposure to it in the market or in the financial press headlines. I'd argue, the key thing for knowing where you're at and trying to place yourself on the cycle and where we are or where monetary policy thinks we are, is read the implementation notes in the policy minutes. If you go to the Fed website you can go meeting by meeting the statements and then the press conference. They're pretty boilerplate, right, you know you're not going to glean too much information from those other than the after the fact we move an interest rate down, or or we we, you know this is how we see inflation progress or unemployment, et cetera. You're not going to get anything too new there, or you're not going to get ahead of the curve there when, I'd argue, you actually have have some ability to see where, where you know the policymakers think they are from their standpoint, is to read the implementation notes. So this is where it comes through how the FOMC is going to direct the actual coordinated activity and how the Fed interacts with the actual capital markets through the Federal Reserve Bank of New York, or I'll just call it FRBNY from now on. But that's where they actually trade against the market and adjust both interest rate policy and their Fed's balance sheet policy.

Speaker 2: 13:48

And the key thing you saw on May 1 was that the Fed announced it would basically shift its balance sheet support policy, not in a first derivative standpoint from QT to QE, but from a second derivative standpoint, right. That rate of change on QT has slowed down, so a second derivative increase. So the Fed announced QT runoff for US treasury maturing debt would decrease from a $60 billion a month max cap to $25 billion. So that's more support for treasury buying. And then, in addition to that, for the mortgage-backed security portfolio they shifted policy. I think they kept a $25 billion excess as well.

Speaker 2: 14:37

Double check me on that, I'm not 100% sure on that. But I am sure that they shifted the reinvestment of proceeds in excess away from rebuying mortgage-backed securities to rebuying US Treasuries. So that shift has gone. The second derivative shift has tilted Fed balance sheet policy to steer more inflows towards US Treasury debt. So the net effect is kind of a shift away from like a bottoming in the tightening process from a balance sheet standpoint towards more support of the US Treasury markets, and then we can talk about the 2019 cycle, because that's the most recent on date. I like to guide myself. If you're a portfolio manager or trying to do any analysis, you're never going to see the same cycle twice, but you can check the milestones on where we've been on prior iterations and if you just look into those checkpoints you start to get a sense of where you are right now and hopefully kind of give yourself some time to get on the right footing for where we are in the credit cycle.

Speaker 1: 15:51

From a supportive treasury's perspective. How does that impact the banks, the regional banks, I mean? What's the knock-on effects of that? Yeah, Okay.

Speaker 2: 16:00

So from the oh it's going to come through, net interest margins is the big one, right? So more support of treasuries you know issuance is going to be skewed towards. You know bank balance sheets doing ALM Front end is massive, right Bills capacity. Your favorite repo collateral in the financial system, global dollar system, is going to be the treasury bills. That's going to be huge as that support comes in and shifts a bid and more demand under treasuries like bills. If ultimately front rates come in. That's going to be very helpful to starting with the primary dealers and then also the regional banks and all the way down who are utilizing repo markets and also with their own balance sheet holdings as well.

Speaker 2: 16:52

The further you skew out on your coupons, you look at your two-year, three-year, five-year, et cetera, unknown what happens to the long end of the curve here. We won't know until we know, as we're shifting away from that tightening environment to constrain and squeeze out that inflation that went well above and beyond the 2% inflation target. Even if you look at the Jackson Hole 2020 big announcement was the shift to an average inflation targeting of 2% over a prior period. If you look at what we need to hit now from the next five years just to get to a 2% average over the remainder of the decade. It implies some pretty ridiculous numbers. So I don't know. No accountability, I'll say there from the AIT. But as rates come in on the front end from the AIT, but as rates come in on the front end to be helpful to banks, you would want to see more support front end comes in and then possibly some bear sleeping on the back end. We don't know. We won't know until we know. But there's less capacity. The further you go out on duration, the fewer bonds there actually are and a lot of those issues are bought up by long-term holders, so insurance companies et cetera, with a longer-term investment horizon. So from the banking system standpoint the longer-end typically has come in as we get into this phase. But that's from the perspective of the prior 40 years. I don't know what happens this time around. Longin may not like it, but that is shifting gears, as I said, putting the wheels down Still at altitude 35,000, 40,000, maybe starting to try to descend. We don't know how the Longin is going to react. But that positive slope or a more favorable slope deal curve would be positive for the banks.

Speaker 2: 18:44

One other thing I don't go along here, those net interest margins of the banks. They do not like these higher rates. There is pressure for banks to pay more on their demand deposits. They're having to start paying more on their time deposits or their CDs to get the capital to finance themselves on the right-hand side of their balance sheets. You've heard the general consensus on the Q1 earnings calls for the financials that have gone out and I've listened to the majority of these, from the large G-SIBs down to the main regional banks and in general what you're hearing is they expect another quarter of pressure to NIMS, which generally underperform expectations in Q1. That's largely driven by that increased cost of funding. Banks are having to pay more for those demand deposits and time deposits. But general expectations among the executives on these calls is that that will start to improve in Q3, q4. So that would be consistent with some sort of alleviation of that pressure, especially on the front end from rates and also with the negative slope yield curve. All of that Everything's kind of lining up with that consensus.

Speaker 1: 20:10

Okay. So I'm glad you mentioned that point about the uncertainty around the long end, because I think that's an argument for gold, where maybe there's relatively less uncertainty. I always go back to this point that gold is a diverse fire. It doesn't really correlate to very much except concerns about risk rising. There are these studies that show that it can act like a risk-off hedge for a moment in time. How much of the gold move is attributable to concerns around volatility, the global landscape from money that is not convinced that treasuries are done selling off, because I think there is an argument that gold has been sort of the alternative to treasuries for now.

Speaker 2: 20:55

Yeah, I mean, you can think about gold a lot of ways. My opinion, after going deep, this uh, for a number of years, I view this as gold is that kind of base layer equity in the system and price will run up to rebase the credit claims, uh, that have circulated in the broader financial system, the financial economy, that get far over ahead of the skis of the real economy. So when I say that, I mean I think if you haven't researched on this and come to this conclusion, maybe we're not going to convince you. I think, in this remaining 30 minutes or so, that we're not going to convince you. I think, in this uh remaining 30 minutes or so, that we're airing this live stream.

Speaker 2: 21:46

But you know, my baseline thesis is and this goes into what I, what I started as uh in the financial industry and and what we started, um, I think we're in, you know, from a broad standpoint, a uh, a global credit bubble. Um, that's hard for some people to take or swallow. But my perspective, as you look back on the last at least 50 years, but really since post-World War II environment, on the existing monetary system, it's been mostly credit funded To expand GDP. What do we do? We continuously. If inflation is running hot, pressure goes up. Whatever do we do? We, continuously, you know, if inflation's running hot, pressure goes up. Whatever we tighten, right, if the system is slowing down, we need to expand, you know ship the system back into growth and reflation. What do we do? We ease, right, and that's been that curve for at least 40 years of lower highs and lower lows on the interest rate chart. Basically, what that's saying is all you had to do, basically, to keep the system, uh, on the rails, at least in the short medium term 40 years, I guess we can call that medium term, right, it's half a lifetime, uh, but in the grander scheme of history, it's, it's, it's, you know, it's nothing right, um, all you had to do was adjust out through the uh, uh, the interest rate policy and us treasury yield curve, uh, and that just worked its way through the rest of the financial system across the globe, from, you know, all the money center banks, like you know, from new york, london, tokyo, singapore, katie mith, etc. Um, that era is, uh, probably over. Like, once you get to zero, you, you can't cut anymore. Then you start throwing the QE on top of that, but from the standpoint of gold. You grow that bubble. And what is gold there to do? That's to remark your equity on your credit claims, to mark, to market, adjust the system into solvency right. That's what you saw in the post-World War I credit bubble as all of the global powers started with the main financial system in London under the key global power of the day, uk, which was in its own contraction phase or going through its own down the other side of the mountain. You saw this in the US. You saw this globally.

Speaker 2: 24:10

Everybody just revalued the gold stock, right, and you get 1933, 1934. You get an executive order 6102. You reprice gold. You get rid of silver deposit notes, all of that. You reprice gold. I think they moved it up to like 33, whatever.

Speaker 2: 24:26

But that's really what goes on. That's my view of what gold is. It's your base layer. It can't be debased itself, right, it's just atoms, right. Or you know, bars, um. It has flaws, obviously, um.

Speaker 2: 24:41

But gold exists to reprice the uh, the debt stack, uh and mark, to market the system into solvency, right, and that's what's happening, I think over time. You know, the big players realize, you know, especially if you're an exporter like saudi arabia, germany, japan, china, etc. You've all, you've woken up to the fact especially post uh-2008, that these IOUs you're not going to get paid back in real purchasing power gains. So everybody for the last 10 years has been preparing, slowly positioning, slowly positioning, everybody taking one-off moves and then, from the game theory, everybody adjusts their positioning and their moves based on what they see. Your counterparty do you know what have you? But everybody's preparing for that rebasement to take place and that's where you see the gold hoarding. You see the central bank buying on balance sheets. You know, very publicly materializing and go back to the 2019 cycle. Materializing and go back to the 2019 cycle.

Speaker 2: 25:45

I didn't go through this like apples to apples. So we can see where we're at right now based on what we just saw. You know Jay Powell Powell deliver last week or last Wednesday in the press conference, but really in the implementation notes, that shift to downsize QT. You know where we are in the cycle gold front runs that. So gold is is picking this up up, it's sniffing it out. Um, you know I can talk about the 2019 cycle and give us a little bit of expectation on what are those road signs, right mile markers, to know where you're, where you're at, where you're heading. Um, but gold front runs, that easing, right? Uh, so if you think about 2018, 2019, gold bottomed in august um 2018 and then it starts sniffing it out, right um. Same way we saw, you know, technically gold bottomed in november 2022.

Speaker 2: 26:38

Alongside all risk assets, really, um, spx, bitcoin, q, bitcoin, qqqs, everything I'm just thinking from the domestic standpoint, not necessarily international stock markets, all of that. But you see that run up and price start to take place as gold price adjusts to reflect that future easing. And what's going on? There is those IOUs are front running, that debasement, right. So if you think about your inflation hedge on your assets, you really have to be there ahead of time, right, you have to be only one step ahead of the market. And so that future debasement, that loss of purchasing power in your IOUs for next cycle, it's starting to show up right now.

Speaker 1: 27:57

I want to relate that to copper and maybe China as well. It's interesting, I think initially the gold breakout looked like it was kind of standing alone, but then you started seeing some co-movements in copper and other more industrial metals. What's going on with copper, and is that part of that front running of inflationary concerns?

Speaker 2: 28:22

Yep, I'm not an expert on the copper market. If we want to get into the supply guys, there's names to talk to who know this market in depth and can describe the bull market setup. What seems pretty obvious to me is, as this shift towards electrification wants to take place I don't know about EB, if we have the battery metals to come anywhere close to getting you know the same degree of kind of adoption or total market size just a number of autos on the road, us consumer, global consumers or household with actual reliable, independent transportation on an EV standard, in transportation on an EV standard. But just setting that all aside, there is a strong case to be made that there's a bull market at copper kind of ahead of us as we're undersupplied and copper is a critical element for building out the electrical grid. But what you typically see and we talked about the 40-year interest rate cycle, credit cycle on the short-term basis, so I'm talking three to five years you really see copper follow interest rates on the way down in the system. Right, we talked about that kind of one-dimensional lever you could pull for 40 years of just like raise rates, lower rates, and that'll just kind of ease the pressure through the dollar system, um, and keep the global uh economy growing coming along. What you'd see is when, when, when interest rates needed to come down and fed gets, or you know, fomc church everybody's preparing for, um, uh, kind of an easing cycle of financial conditions all of that you would see copper price come down alongside interest rates. So what that's showing everybody talks about copper as a proxy for global growth the Dr Copper reputation or analogy that you'll hear everybody make but really, if you think about copper as a proxy for growth, you see price down on copper, interest rates down. That's telling you. Global growth is down in the prior 40-year bull market framework and that's when you see that slowdown in nominal and real growth coming and you would expect a bottoming in interest rates in both and then some sort of an uptick.

Speaker 2: 31:04

Gold would go the other way. Right this time around March 2024, we just saw gold was taking off, um, if you know, and growing. If you look at the candles right, um, it's going throughout q1 and really you could say gold's been in the the first phase of a bull market right since, uh, that bottoming in november 2022, um, but that breakout from that like two thousand dollar resistance line that we've been pressing against since august of 2020. Right, um, where it really stopped out after that last run up in the 2019 cycle easing, um, you saw, you know copper come down that cycle, typically, um, as as interest rates came down, gross. Now you know that was, you know, covet effect. This time around on that, however, gold is broken out of that two thousand dollar horizontal resistance line. Copper breaks out with it. Right, that's kind of a tell. Something interesting is growing up, going on.

Speaker 2: 32:06

There's a different story, like if you think there's a proxy for you know copper is a proxy for global growth. I don't know yet if it's, if what copper is telling you is that global growth is stronger than expected and we've we've got an anticipated need for some easing in the US dollar, interest rates, etc. Really, the straw that stirs the drink is treasury and the deficits it needs to run. But you know, gold front runs, breaks out. Copper breaks out. It's telling you. Possibly there's something going on with global growth here. Um, and uh, you know that that alone is is different than what we've seen with higher growth, um, looking interest or sorry, inflation, looking like it's bottomed right and ticking back up in the first three prints we have on this year. You see growth expectations, you know strong, possibly accelerating inflation expectations accelerating At the same time when the dollar system is saying it wants to eat and ease and the Fed wants to put the landing gear down. This one could be interesting.

Speaker 1: 33:14

I want to get your thoughts on how that interacts with currency movement. Yeah, when I look at copper, I think that's a China play, almost it's right now. The yuan has got some interesting dynamics because of what's gone on with the yen and some of these other Asian dynamics. But how does the currency side factor into these relative movements?

Speaker 2: 33:33

Yeah, dynamics, but, um, how does the currency side factor into these, these relative movements? Yeah, um. So I'd say like, all attention should, right now it looks like it needs to be on you said china, it's definitely right. And and the japanese yen? Um, yen is, uh, the key one everybody's following, just because there's so much more credit. Tokyo's that, um, the global money center in the region alongside Singapore.

Speaker 2: 33:54

What's going on in the yen? They're at the point where they're either going to have to support the bond market or the currency. Right now, just based on, they did one semi-rate hike, boj has given some offering some kind of positioning or preparation for the market to get ready for them to let interest rates rise a little bit. They're still, you know, on the margin. You got to protect either the currency or the bond market. Right now, it looks like the balance for the Japanese yen is favor currency or the bond market. Right now, it looks like the. The balance for the japanese yen is favoring protecting the bond market. Right, ultimately, um, you know, one or the other needs to be sacrificed or, you know, to some degree, a revaluation needs to come out of out of both. Right now it looks like um, kind of the standing poll, or the unspoken policy from VUEDA and VOJ is to let the currency take the hit, but don't allow it to happen in a completely unruly fashion. So every time we break these key levels, like a 150 or the 160, we see the central bank come in and step up support. They have to sell their dollars, sell their reserves, sell off the treasuries by the end to bring the market back a little bit, to slow down that volatility. But right now, the standing policy seems to be to let that pressure relieve itself through the currency.

Speaker 2: 35:27

I'd say the same thing is what's going on through China? You've kind of the credit problem. Everybody's well aware of their real estate sector. Um, you know they're, they're they're trying to control their own kind of unwind as well. And this is where, uh, kind of the best explanation I've heard up from what we see in the commodities complex as well, as you know, copper, gold, etc. Is, uh, the front running within china of.

Speaker 2: 35:54

You know what we're looking at is uh, I say, uh, potential currency devaluation. You know they did one in 2016. Um, to you know, support the their their own credit system, their own domestic economy, uh, their own exports, which are really the straw. That's still the straw that stirs the drag, because china is not a consumption driven economy. It's still the straw that stirs the drake, as China is not a consumption driven economy. It's still exports. But that's you know. From analysis I've seen on this that seems to be the most soundest. Chinese firms, private sector, are kind of reading the tea leaves that the devaluation, you know internally of the Chinese yuan is on the horizon. It is moving from possible to probable. That bid up and that inventorying of your hard commodities is getting ahead of that debasement as firms are trying to protect their own income statements and P&Ls All right.

Speaker 1: 36:58

So I would say, as everybody can tell, you're very knowledgeable when it comes to a lot of different dynamics on market credit side. I am surprised that you are seemingly big on Bitcoin. I don't hear too many credit guys focus on Bitcoin, or if they are focused on Bitcoin, they're not credit guys, they're just Bitcoin guys. So I am curious to hear your thoughts on Bitcoin. They're not credit guys, they're just Bitcoin guys. So I am curious to hear your thoughts on Bitcoin. I believe you're involved with a fund that does things with Bitcoin, but give us some context.

Speaker 2: 37:25

Yeah, so for background, my core belief and I've been following this for 12 years. I've been following the credit system for 12 years. I know what's happening and fixed income credits that have been obviously on the track record as a manager. You know the uh top tier um, the percentiles, etc. On that base. So you know when I say this. I know it's weird when you say you're at the intersection of bitcoin and dollar credit. There are not many of us, um, but of the few uh that are, it tends to be the ones who at the at the front of the pack within the credit system and have a deeper understanding than just hey, I bid the same chart for 40 years. What's working for me? These are the people who tend to think deeper about what's going on. Same way, I describe gold. Right, it's your base layer, it's your equity layer.

Speaker 2: 38:16

Typically, not all central banks hold it on their balance sheet. You know. You even have some as far as, like uh bank of england and the you know postcom era I want to say 2002 or 2003 kind of bragged about getting rid of all their gold holdings. Um, you know, with that short-term mindset, you know that's how you can spot the mark at the poker table, if you will, when they don't fully understand, uh, the credit system and that, as the sovereign, you know well, your financial system, and then ultimately, your sovereign balance sheet gets ahead of its skis, um, on its own credit stack relative, you know, the, the financial economy gets out of balance with the, with the nominal or with the real economy, um, that debasement has to take place. And if you have the gold stock right, um, you know, let's assume, or knox is full, now for a minute, um, that's where you can revalue your gold, gold claims, um, paper over your problem, debase the currency. Um, this is how the self-sovereignty have always done and that's, that's, that's the core use case of gold. Right To get into that with Bitcoin.

Speaker 2: 39:22

I'll start with this Right, we've been through the circle of cycles. We know how gold is. Right, I mean you can most of the gold that's ever been harvested, you know, out of the earth's crust, like it's sitting within your, your custody banks. You know within your nation states, uh, it's sitting in baltimore, new york, london, tokyo, etc. Um, all of that gold is just moving borders to, to new hands. And then you, ultimately, over the long cycle, as you say, you makes the gold makes the rules. We've been through this before. Right, if we keep doing the same thing, we're just going to have, you know, centuries bo, centuries, booms, busts, et cetera, like bubbles. I'd say this about Bitcoin yeah, we can keep following the gold cycles. We kind of know where that ends, where it gets us In the worst case it ends.

Speaker 2: 40:09

You know what this turns into is actually an international balance of payments problem, international trade flows problem. As we talked about those ious, we're delivering saudi arabia, china, everywhere. Who's buying those? They ultimately get the base and you're paid back and a ledger money that is not going to hold its purchasing power. That really is the landscape for all major international you know conflicts we've seen throughout history. It's it's, it's a, you know, sufficient and necessary condition for really destructive wars, right, um? So I'll leave it there.

Speaker 2: 40:44

There are really serious flaws and you know what I described and you know setting goal is your, is your base layer, equity layer, um, and it always breaks gold IOUs. We learned this in kind of the late 1800s as we got the telegraph and electronic, I'd say, settlement trading of these dollar IOUs really outpaced the speed at which transactions and banks could settle with counterparties. Right, gold is heavy, it's really hard to move. It's actually extremely hard to verify, right? Unless you're sitting at the bars underground on the LME and just moving from vault to vault, whatever. But then you get into the same problems. You just build up paper claims until they have to be washed away, right? So, from a core problem standpoint, you see the flaws in gold. It obviously got to this point, um, you know, enabled the biggest credit bubble in history. You know what comes next, right?

Speaker 2: 41:43

Um, I didn't understand bitcoin, I would say until the mid 2010s at least. And then, as you heard, a lot of people make the bull case on bitcoin, I don't think I fully, um, you know, accepted it as believable. It's like, yeah, beautiful solution, this works. Um, it is, uh, the unique, uh, I'd say, product, if you will. The properties it offers are unique and you really can't, because you would try to adjust them and what you would want out of a ledger money. You can't change the features of Bitcoin without doing any better.

Speaker 2: 42:20

So we saw multiple iterations, hard forks, attempts on Bitcoin. If you followed the fork wars of 2017, 2018, that was all about block size and potentially giving up the decentralization of the network, all of that. You saw these efforts from Ethereum, other smart contractors, and say, hey, we actually Bitcoin's too simple, we need to run programs and create the world's simple computer. At the end of the day, after realizing this and it really hit me in March 2020, core properties of Bitcoin. It's always been solving. It's always been offering the same value prop, since you know the Genesis block, where it's stamped in there, uh, uh, the article from the times of London, chancellor on brink of second bailout of banks Um, at the end of the day, it has been it.

Speaker 2: 43:08

It has been invented as a technical solution to exactly that problem of economic coordination and, uh, counterparty trust, trustlessness. So, within a ledger money, um, it just offers a you know, a unique uh value proposition, if you will, and slowly, in my opinion, if you look at the charts. And we've gotten rid, we've lost the ability after 40 years of easygoing in this bond bull market. It also came through other asset prices. So all you had to do is buy dips, buy financial assets like equities and bonds, and you did fine. You didn't have to buy commodities, you didn't have to buy real assets, and so what I'm saying there is the ability to actually read a chart is it's been washed away from most of the population.

Speaker 2: 44:02

I would say it's within, uh, the financial industry and, uh, you know everybody who thinks they know how to, I guess, advise client portfolios, everything like that position. It's really come into challenge, especially the last three or four years. But if you look at the bitcoin Bitcoin chart, I think what's undeniable there is you're seeing a really strong bull market of higher highs and higher lows 15 years in now. There is some value proposition that is driving that People don't like. Over the long term of 10 to 15 years, people do and we lean into what's working and then that draws in people to understand what's going on.

Speaker 2: 44:39

I don't have the ability to persuade anybody on Bitcoin right now to change your beliefs, but if you really want to dive deep on this, I'd say pick up this book from my friend. I'll give my friend a shout out here. Parker Lewis has got this book Gradually and Suddenly. It's a framework for understanding Bitcoin as money. That will really tell you. You've got to put in your 100 hours plus, your 200 hours plus to really understand what's going on.

Speaker 2: 45:04

But what Bitcoin actually is is it's an economic consensus mechanism.

Speaker 2: 45:09

It's a protocol the same as HTTP or your IP protocol within the internet tech stack, but what it is doing is transmitting value in the digital age to move across pipelines and economically coordinate.

Speaker 2: 45:27

It permanently solves the economic coordination problem, permanently solves the monetary inflation problem, and what you're seeing over these cycles is more people adopting onto that protocol there. Until we see something come up better in the product space my baseline, as kind of someone who follows charts, positions, portfolios, trades, assets for the day, that chart will continue, or that underlying chart will continue, or that underlying wave will continue until an equal or opposite force comes in its way. It could be state violence or it could be a better money. But until we see those two things, I believe that economic coordination continues and those value propositions that Bitcoin offers make it unique. Those value propositions that Bitcoin offers make it unique. So, once you dive deep, I would say that really, really educate yourself on what's going on here and what this is, because you know, I'd say, that the case for not understanding is potentially putting you further and further behind the curve where this is going. I could go on forever on this topic.

Speaker 1: 46:34

No, it's great, and actually I would like to have you in as part of a Bitcoin roundtable at some point. We'll talk about that, Matt. For those who want to track more of your thoughts, more of your work, where would you point to?

Speaker 2: 46:45

Yeah, so follow me on Twitter. I'm at BuildCIO or X, I guess we have to call it now. You can also learn about our firm at GetBucom. And then, michael, you mentioned our Bitcoin back direct lending fund. I didn't get into this deeply, but we are uniquely one of the firms we work with, a partner really awesome firm on Bitcoin custody called Unchained, out of Austin, texas. You can find them at unchainedcom. They offer what I consider the best in class value or custody solution for high net worth family office institutional clients for Bitcoin custody In a world where your Bitcoin claim is not a credit, as you are.

Speaker 2: 47:30

When you just log in on Coinbase or, let's say, in the past, an FTX or a BlockFi just shows you a number on the screen. The key thing of what Bitcoin offers as a bearer asset is that public ledger to see your units on the ledger. Unchained offers a unique custody solution in that and then in terms of liquidity and lending against that margin loans, we have a unique product there as well. Offsite, like our partners issue onshore loans on the standards of the domestic US bank system. So Fedwire, et cetera, and all that entails.

Speaker 2: 48:13

Our fund is exclusively the buyer for pooled investment funds, so Build is a registered investment advisor SEC registered investment advisor you can look up our form ADV but we offer a fund that gives direct exposure to those secured loans over loans, over collateralized against the borrower, which is a commercial entity. Entrepreneurs spam real estate developers et cetera to tap the Bitcoin they're holding on their balance sheet as a store of value asset and access dollar credit to invest, grow their business, et cetera. So you can find out about that at builtbitcoincom, uh, to learn a little bit more about what we're doing on that thesis and if you want to dive down this rabbit hole, engage with me on twitter, um, or reach out on our uh website and we can explore the that, that deep, deep rabbit hole a little further everybody.

Speaker 1: 49:09

Please make sure you follow matt dines. I'll try and have him back for another future episode. Appreciate those that watch this this live and appreciate those that are watching the edited version on all these different platforms. Thank you, Matt. Appreciate it Awesome. Thanks, Michael, it was a pleasure. Cheers everybody.