6 Lyn Alden's 2021 Mid-Year Macro Outlook

And used to be, you know, you read four or five macro pieces you would read from various sources and then you sort of put your own ideas together, find a way to connect them. And what I, what I found really sort of exciting about reading and listening to Lenz macroeconomic framework was that. She just, you know, Lyn's already doing that.

Like you're already, you know, you know, you're already taking all the, all the moving parts and connecting them. So, so Lyn, welcome to the show. I'm really excited. I think we're all really excited to have this conversation. Please welcome Lyn Alden of Lyn Alden strategy. Hi

Lyn, how are you? I'm good.

Lyn Alden: [00:01:33] Thanks so much for having me here. And you know, I, I totally created me basically. We're in an environment now where we have so much information and so the value is trying to find ways to synthesize that information, filter out. Some of it interpret it. Uh, and yeah, that's what I try to do. And also sources that I rely on.

I look for, for, you know, people that can kind of take what's important out of the massive amount of information that we are just in, in like, yeah. Well,

I love that. I love the,

go ahead, Mike. Go ahead. Okay.

Mike Philbrick: [00:02:06] Um, I, I love the way lens, um, investment strategy. A website is laid out as well. So you've got the beginner, the intermediate, and sort of the, the more experienced global macro themes.

So if anyone, hasn't had a chance to look at Lyn olden investment strategy, there's a lot more there than what we might discuss today. I think we're going to try and keep it at the higher level, the more experienced level, the, the, get a, get a glimpse into Lyn's, um, sort of global macro framework and some of the implications that, you know, fiscal policy and monetary policy are having on asset prices today and what the potential outcomes can be in how you might think about preparing your portfolio for that.

So we're going to stay on the experience side, but I would also say there's, there's lots of fodder in, in her, um, investment musings beyond that. So for those who haven't had a chance to check it out, they should go and do that

Lyn Alden: [00:02:58] for sure.

Pierre Daillie: [00:03:00] That's great. So, so Lyn, I think, I think it might make sense to start from your beginnings.

Talk about, um, how you got started, how, how you came into the investing world into the, into the world of finance and, um, and then we can get into your macroeconomic

Lyn Alden: [00:03:18] framework. Absolutely. Yeah. My, my background is kind of a, is kind of a weird path to get here, but it's not super weird because a lot of engineers do you go into finance, but, uh, so for people that aren't familiar with me, my background is a blend of engineering and finance, uh, and th you know, going back further than that, I was always interested in investing.

So before I went to any sort of university, uh, it was just kind of a passion of mine. It's kind of came out of nowhere in a sense. Uh, but when it came time to go to university, I focused on engineering, uh, because my other interest was technology and the application technology. Uh, and so I pursued that for several years.

Um, but I was always investing in the side and including, you know, I had an earlier blog where I would write about different types of stocks out there. I eventually sold that to, to a larger publishing company. Uh, and it was in, uh, late 2016 that I decided to launch investment strategy, which is a more rigorous kind of approach, a, you know, more professional approach to basically provide research to people, both for retail investors and for institutional or professional money managers.

Uh, and so my overall approach is, uh, you know, mainly to focus on kind of quantified methods of what's going on. Uh, I like, you know, numbers more so than narratives, although I, you know, I try to, you know, make sure I understand what's happening qualitatively as well. Uh, but a lot of what I try to do is identify bottlenecks, identify big turning points, things like that, and pay attention to multiple asset class, to find things that you can, uh, rebalance into that you can basically lean in to things that are out of favor and kind of rotate out of things.

It's become very, uh, you know, expensive for consensus. Uh, and my primary kind of, you know, as a class of choice is, is equities because, you know, with equities, of course you can, you can dab on multiple different types of assets indirectly because you can, for example, invest in, in commodity producers, you can invest in, in stocks that benefit from higher rates or stocks that benefit from lower rates and kind of all these different levers that, that we can pull.

But I also go into other asset classes as well. And so overall that, that's how I approach things. You know, a lot of people read the work and they, they, they, you know, a lot of engineers resonate with it because it's, it's kind of like it lays out what's happening kind of step-by-step and takes a hard problem and kind of, you know, my philosophy is to break it down into small problems, solve them independently, put them back together.

And so that's really how I approach global macro and overall by, you know, what I say I do is that visit it's it's equity investing with a global macro overlay. And so I do go into, into individual companies as, but I also, you know, always take a step back and remain macro aware of what I,

Mike Philbrick: [00:05:47] and how have you found that?

I mean, obviously it's been a very active macro world that we have been existing in since 2017. And, you know, I think, I think the way that you explained some of the structural relationships, uh, in, in such an approachable way is, uh, very informative and helps the investors sort of get their head wrapped around what, what the linkages are between, you know, monetary policy steps that are taken, how the, they in effect moderate, uh, money supply.

And now this new implication with respect to maybe fiscal policy taking a larger role, maybe you want to jump into your overarching global macro framework at the moment and the, the leavers that are at play and how they might be impacting, uh, steps that the fed may have to take. They may not want to take or, or corners that they're going to be forced into.

Lyn Alden: [00:06:38] Why don't you share it? Yeah, absolutely. And you're totally right. This is a very macro heavy environment. And in many ways, that's why I had to adopt an increasingly, you know, macro overlay to the type of work I was doing. It's not really the environment. You can just kind of put your head down and focus on the individual stocks.

You have to really kind of be aware of some of the big forces that can push them around. Right. So last year alone, we had, you know, the, the biggest economic shock in modern history, uh, followed by the, you know, the biggest monetary fiscal response in modern history. You have to go back to all the way to the world war two, to find a, uh, you know, a larger response.

Uh, and so, uh, you know, my overall framework kind of combines a couple of different elements, but I would say the largest influence has been radiology as long-term debt cycle, uh, concept and the weight. What, you know, what that is, is basically that if you look at the normal business cycle, there's the short-term debt cycle.

Which is the normal five to 10 year business cycle that Ross no with, no, you have, you have a, you know, yeah. The previous recession, uh, then you have the recovery, uh, you know, the, that then, you know, we started to build up debt and the system, again, you start to, you know, get more and more kind of, uh, you know, uh, euphoria among marketers participants, a user, the fed comes in, or, you know, the other central banks come in and they start raising interest rates, uh, to kind of put a break on that.

And eventually some sort of catalyst happens. Uh, you know, we start to get slowing GDP and then, uh, sometimes you kind of narrowly avoid recession. Other times you have a enough of a catalyst, we actually get a recession, uh, and that, you know, the federal reserve has to cut interest rates and, you know, usually there's some sort of fiscal response.

And if you kind of put most of, you know, bunch of those together over time, You'd expect it to be able to click a sign wave of rising and falling debt, rising and falling interest rates. But it really doesn't quite work out like that. Uh, because each time, uh, basically there's, there's lower and lower industries and, and higher and higher leverage in the system as a percentage of GDP, uh, because each, each kind of, um, end of cycle, uh, you know, they, they pause makers kind of intervene before fully.

Do you leverage, is it busy kind of leverage? Like, do you leverage like half the way and then kind of start building up leverage from there? And so when you, when you, when you string several of those together for, you know, maybe five decades or more, eventually you run into a very different environment because eventually interest rates at zero.

That level becomes extremely high. Uh, and some of those same tools that work in previous cycles no longer work anymore, uh, because you can only get so negative in terms of interest rates before it doesn't work. Uh, and so, uh, that's where you started to see, uh, you know, even more unconventional policies.

And first you see, uh, you know, asset price purchases, uh, you know, uh, you know, asset purchased by the central bank where they can do quantitative easing, uh, in previous, uh, era as they would call it different things. But it's, it's a very similar process where you, uh, you know, basically, uh, solidify the banking system.

Uh, and then the later step after that is large fiscal injections. Uh, so that could be, uh, bailouts of corporations, uh, that could be, you know, direct checks to people that could be expanded on employment benefits. That could be massive infrastructure spending, whatever the case may be. That could be, you know, even it doesn't have to be spending either it could be tax cuts, they're not balanced by any sort of, uh, you know, uh, spending reduction.

Uh, and so that tends to be a very different environment. And so one of the risks that people can run into is that if they're assuming that, you know, recessions kind of follow the same sort of path, uh, you know, they could be caught off guard by the ending of a longterm debt cycle, which sometimes has very unintuitive outcomes.

Uh, in many ways like we saw last year, which is basically we saw this huge disconnect between asset prices and economic performance in part, because we had the largest, you know, fiscal stimulus, uh, ever, you know, in, in modern history kind of, you know, cropping a lot of that up. And so overall my approach is basically to look at the rate of change or the normal business cycle.

But then also keep in mind that really long-term, uh, you know, longterm debt cycle of how, you know, busy to expect the unexpected from policy makers. And he started running into the zero bound and when asset purchase started to become a big part of their toolkit.

Mike Philbrick: [00:10:33] And so how are you seeing that play out today?

As, as you're looking at the, uh, the landscape. I think you're sort of on record as being more in the inflationary camp now less than the deflationary camp. And we've still got those fairly strong forces of deflation from debt and demographics and some productivity gains in technology. Um, and on the other side of that, we've got, you know, the, the different inflationary forces that are, that are coming into play.

So, so how are you seeing that struggle sort of play

Lyn Alden: [00:11:03] out? Yeah, that is, I think you put it really well. They basically, there's two really powerful forces there. I mean, on one hand you have, you have deflation, you have, uh, you know, you have aging demographics, you have technology of off shore, all these different levers that, that make things cheap.

And that basically can slow down growth and, and basically suppress wages and, and keep inflation at Bay. And the other hand we have, you know, if you look at the types of inflation is a big difference between what say commodities have been doing. And, you know, before last year compared to say healthcare costs, healthcare costs in many countries, especially as States.

We have, we actually have the highest health across the world down here. Uh, but basically. Um, you know, uh, there's just so many forces, neither side, uh, and that was, you know, the case back, you know, in the previous long-term debt cycle as well. So the previous time we had, uh, you know, the ending of a long-term debt cycle was the 1930s.

Uh, and then, and it was bleeding into the 1940s and they had a very similar environment there. So the 1930s were extremely deep, uh, disinflationary. Uh, and it was all in because of this massive policy response, as well as, you know, external factors, uh, that you got that more inflationary kind of rebound out of it.

And so we're kind of seeing a similar thing now where the 2010s in many ways were very dis-inflationary. We had a period of, of commodity over supply. So most commodities were cheap. Uh, that helped keep a lot of, kind of basic pricing down. Uh, we have a lot of outsourcing, so, you know, things like electronics and apparel kept getting cheaper and cheaper and the real kind of worries were the services sector.

So, so anything where you're paying someone to do something, essentially, you know, whether it's education or healthcare or even things that are unrelated because you're paying for there. It's, you know, if you're hiring someone to do something for you, you have, you're basically paying for their height, healthcare, and their height, you know, uh, educational cost as well.

Uh, and so those areas where the part where we actually saw some, some actual price increases. Uh, but going forward, you know, especially as we saw with the past year, the major tools that the policy makers have, uh, to combat inflation, uh, can becoming, uh, you know, to combat deflation and create inflation can become increasingly aggressive as some of those other tools, uh, you know, basically fail to work.

And so a lot of people thought, you know, a decade ago that quantitative easing would be inflationary, uh, that was kind of the narrative back then. Uh, but what we saw last time, as well as the previous time in history, when that was done, uh, is that busy, increasing, you know, that the base money is, is not very inflationary because, you know, you're not necessarily increasing the broad money supply.

You're not getting money into the hands of people. You're not having more money, chase, fewer goods. And so there's no real reason for it to be inflationary at best. You can call it anti deflationary in the sense that it prevents a bank collapse or. Or things like that, but it doesn't really just result in what we generally think of as, as broad inflation.

However, if you directly increase the broad wind supply by quite a bit, uh, you know, through massive fiscal spending that is in large part monetized by the central bank, which is very different than what happened a decade ago. Uh, then you're more risk of inflation. It's still not guaranteed because you still have to, you know, you have to compare the magnitude of that increase in the, in the broad mine supply compared to the various factors that are, that are disinflationary and that, and that, you know, uh, press down on monetary velocity.

Uh, but overall, at least now you're in the game. Now you're now kind of inflation really is an option on the table and it becomes this tug of war between two forces. And so when I'm, when I'm kind of looking out for potential inflation. What I'm most paying attention to is the, the fiscal spending that's happening.

And then, you know, how is that fiscal spending being financed? Is there real investors buying the bonds or is, are a lot of the bonds being bought by the banking system and the central bank, and then indirectly, then you can, you can then, you know, watch the broad, my supply go up and then see, you know, is most of that pooling in the upper classes?

Or is it, is it getting wildly distributed? Uh, because again, part of the reason why, uh, you know, uh, some of the increases over the past decade have not been very inflationary is because we've actually had, you know, a pretty substantial wealth concentration. Uh, and so a lot of that money kind of wound up in the top 10% or so, and therefore winds up in financial assets, uh, rather than in consumer goods.

And, you know, the, I guess the last point I would talk about is that a lot of economists, you know, where people are talking about inflation. Most people having that debate are looking at it from economic perspective. Uh, and I rarely see them talk about the commodity cycle. Uh, so we, you know, if you look back in history, we have this, you know, roughly 15 year commodity cycle, it varies.

Uh, but basically, you know, you, you, you, you have a period of strong demand. Uh, you know, commodity prices are high that encourages a lot of, you know, producers to comment and create new supply, you know, build new vines, find new, new, uh, reserves, whatever the case may be for that particular commodity. Uh, and that's, you know, some sort of slowdown happens or just the sheer amount of new supply coming into the market, kills the prices.

Uh, and then you're left the period of, of over supply. Uh, but because a lot of those mines, like, you know, a copper mine takes a very, very long time from, from finding the reserve to, you know, basically making a, uh, I'm outputting mine, the same thing for a very big oil discovery or. You know, w you know, whatever the commodity in case may be, uh, there's that giant lag time.

Uh, and so when you have that period where you're oversupplied and prices are low, and it doesn't justify, uh, you know, uh, new sources coming online, uh, you know, that kind of sets the stage many years later for that inevitable bull market in commodities, because you haven't invested enough. Uh, and so it's important that, you know, this, this dis-inflationary period that we've had with the past 10 years has taken place during a time of commodity over supply.

This started, you know, ever since about, you know, 2008. Uh, and, uh, whereas now it looks like, you know, in some ways that might be coming to an end, especially when you look out the copper, uh, you know, where that, where that is, because there's not a ton of new supply there, we have a pretty big forecast for higher demand in the decades ahead.

Uh, and then even with energy, which has been the most structurally oversupplied area, Uh, we've actually had pretty weak cap ex for several years now. And of course, 2020 killed a lot of the cap backs. And then we combined that with the fact that, you know, with, with ESG mandates, uh, some of the, the, the financing that for example has financed unprofitable North American shell oil for the past decade, uh, is not really there in, in the same way that it was maybe five, 10 years ago.

And so we have a couple of kinds of variables coming together that potentially makes the 2020s a little bit more inflationary than then I think, you know, consensus would expect. Uh, but, uh, still that hinges on, you know, the, you know, basically the policymakers are likely to continue doing larger fiscal stimulus than people expect.

And so that, that view can always change if you were to get a sharp change in, in fiscal monetary.

Rodrigo Gordillo: [00:17:45] So you're getting kind of the double whammy of the, the supply push inflation and the demand pull inflation, right. As maybe demand stays the same, but you're, you're having a lack of supply from. Commodity producers.

And you have this massive fiscal stimulus that if done, right. It goes to everybody's pockets. And these are consumers that are going to spend most of the money that they get versus the upper echelon. Mostly just huddling it, putting it into their investment accounts and, um, and uh, real estate prices.

Right. So it seems to be like an interesting pivot point from an inflationary perspective. Uh, it could always change of course, depending on how they, how things turn out. But it is, it is something that I think investors, I just saw a, um, a poll recently of the amount of consumers that are worried about inflation.

And it was like 75%. I don't remember the last time that I saw something like that. Of course that's the macro side of me makes me feel like. I actually think the opposite side of that

Lyn Alden: [00:18:47] trade. I think it's one of those, yeah. Watching

Rodrigo Gordillo: [00:18:50] though, right? You're not taking any hard positions. What are you, um, what are you seeing and

Lyn Alden: [00:18:55] when does this?

Yeah, I mean, I often, I often tilt my portfolio rather than go all in on idea. And so I have been tilted towards this reflationary idea. And then the, you know, the question is how long to press that, how long to, to keep pushing that. And for example, I've already dialed back. Some of the things like, for example, copper stocks went straight up and so you can kind of dial back things that might be a little bit over done, but overall, I still have a reflationary tilt my portfolio and some of the things I'm watching, I mean, you know, there's kind of the near term and then the longer term.

So the near term. Is, we're going to have, uh, attractive base effects, uh, in the next few months. And so, you know, when, when inflation is discussed, what you're generally talking about as the year over year consumer price index, or, you know, a couple other ways to measure it. Uh, and, uh, so if you look back last year, the lowest points, uh, you know, for the CPI were that at April may period, at least for the United States, but that, you know, that I had assume that would apply for most rest of the world.

Uh, and so when you're comparing year over year, you know, back when we had the data point from February, but the February of 2020 was, was still pretty high back then. And so that year over year comparison was still somewhat tough. Uh, but when you look out to, uh, the April and may periods, uh, you know, that year over year comparisons very favorable.

And so you're likely to get a somewhat high headline print. It could be, it could be comfortably 3% or more, uh, just based on, you know, CPI kind of maintaining its mouth upper trend now, and then you could get, no, it'll be higher than that. If that doesn't become as transient as people think. So basically the deflationary, uh, case V okay, you're going to get the base effects and then it's going to wear off and are going to go back to normal.

And it's going to basically all of that inflationary force is going to get eaten by the larger deflationary force. Uh, the other way of looking at it is that, uh, you know, they're, they're already talking about more stimulus. Uh, they're talking about the potential for a, you know, a $3 trillion infrastructure bill, and that can, that can keep that going potentially for, for longer than people expect.

Uh, and as far as, you know, people saving it, that's so. It's kind of a spectrum, right? So we actually have seen increased saving. And that's why, you know, even though we increased broad money supply by something like 27% year over year, we, of course haven't seen, you know, 27%, uh, average price increases, maybe in commodities, we have, uh, you know, ironically many, many commodities are up that, you know, that far, uh, you know, but, uh, you know, broad, broad products are not necessarily up that much by, in large part because, you know, if you look at say personal income net estates, uh, you spike the above trend, right?

So even though we're in a giant recession, people on average had more income than they otherwise would have had, but at the same time, they're, they're barred from spending it, right. So they're, you know, they can't travel as, as, as easily or as comfortably. Uh, they, you know, they're, they're not doing like, you know, business travels much.

There's a lot of expenses that they otherwise might have had or on hold. Uh, and as a natural resort, a lot of them have saved it. They've, they've leveraged a little bit. Um, and, or they they've shifted their spend into where things are inherently cheaper and more deflationary, like, like, like technology, like, you know, basically, uh, you know, more streaming packages, but less gasoline consumption, for example.

Uh, but as that starts to, uh, end and consumers have quite a bit of, you know, excess funds, uh, that can move back into the real economy. And so it'll be, you know, inflation's one of those things. It does have a qualitative component to it because, you know, once, once people expect that their money's going to not be as valuable, you know, six months, 12 months from now, they're more likely to spend it.

Uh, whereas if they have the perception that prices are going to stay flat or even go down, they're more likely to wait for certain purchases. Uh, so there is that qualitative component, but I'm mostly watching some of these quantitative, uh, under, you know, underpinnings. So first we get through the base effects and then we see what's happening with, with ongoing fiscal stimulus, as well as watching, you know, what's happening with energy prices is OPEC basically, uh, you know, uh, you know, increasing supply.

Or they, you know, staying, uh, you know, pretty disciplined in that time when you have those couple of variables, right. Then, then you can have a pretty good handle on what's happening with inflation. But can I just

Rodrigo Gordillo: [00:22:59] ask you a question about the base effect? Uh, I've always been interested in how this actually has any impact whatsoever.

Um, it really is starting point any point. Um, what, just so the listeners that may have not heard of this before, what is the base effect and why do you think it matters so much when it's just simply year over

Lyn Alden: [00:23:21] year? So the data point can have such a large impact. So it's one of those things that it shouldn't matter as much as it does.

Um, we should basically look through it and there are, you know, there are easy ways to look through it. You can look at month over month numbers, you can look at two year numbers, right? So you can factor out that, that one year difference. Uh, and so those are some of the important things to do with you're aware of the base of experts, essentially what it base effect is.

Is, if you look at CPI over time in not your view, your term, you just look at the consumer price index, you'll see it mostly going up as, as like a straight line. And it kind of wild was a little bit, but it's mostly going up, but if you have a big enough economic shock, you get a little dip and then you, you kind of rebound to it.

And if you're going up and you're, and then you, you're 12 months late and you're comparing yourself to where you were 12 months ago, you're comparing yourself to that bottom of that dip. And so if you, if you map the chart in year of year terms that, that, you know, that year of year number that you're getting it's, it's going to be reported.

You know, the April numbers reported may the main numbers reported in, in, you know, uh, June that can look like a pretty big spike in inflation. And so it's one of those things where headline numbers, you know, they, they impact people more than you think there's algorithms out there, but you know, a well done algorithm should recognize that sort of thing.

But, you know, it's all like, you know, I was watching for example, that when the February numbers came out. And people were saying, Oh, like, you know, inflation was 1.7%, so it's still low. And it's like, well, yeah, because that's up against pretty decent, you know, uh, uh, base effects and people still haven't really gotten able to spend a lot of things that they had.

Uh, and so as you look out, you know, I think the same people that are shocked that inflation was only 1.7% are going to be like, wait, what do you mean is 3%. Uh, and, and so it's like, well, okay, look forward a little bit and see if it's actually still going for 3% after you get past the face effects, it might be, you know, if you do get enough of an ongoing stimulus, maybe it could be, uh, but if they were to, you know, throttle that back, uh, you know, then you're, then you're comparing yourself to say summer of, of, of, you know, late summer of 2020, which was by then you're out of that dip as you have more fair, like, you know, 12 or 12 month comparisons.

Uh, and so first yet it mainly just like a headline shocker that, that, you know, people that, that aren't food based effects could be surprised by. But then as you look forward, that's when you get into the deeper question of whether or not we're going to have, uh, you know, sustained inflation or not. I

think

Mike Philbrick: [00:25:46] it actually might be informative, sort of two things on, on base effect.

One is, um, the experience the individual has, they have a memory that's sort of a year long. So what did I pay for X last year? What am I paying for X this year? And so they're, they're experiencing sort of that one-year window in their, in their memory. And I think the other thing is it's been so long since we've experienced this type of environment, but in the collective memory of, um, the investing public really has no recollection of how this type of.

Um, economic regime and environment actually functions and what its implications are for asset prices. So I wonder Lyn, if you might walk us through sort of that 1930, 40 example, um, to sort of refresh memories across the board of, of how, when you get into this ending period of the long-term debt cycle, how things start to function.

I've heard you talk about this a few times, and I think the listeners would probably really enjoy that history lesson of the thirties and forties and the attempt at yield curve control and what the implications are for today and whatnot. I think that would be very insightful.

Lyn Alden: [00:26:57] Yeah, sure. And so, one way I start by saying is that if you look at, if you go back to the concept of the long-term debt cycle, uh, that the next step of understanding that is to realize that there's, there's really two totally different types of debt, there's private debt, and then there's public debt, and they can have very different implications, uh, for inflation and things like that.

Uh, and so if you look back in the, in the 1930s and forties first, you had a private debt bubble. Uh, and so going into 1929 federal debt as a percentage of GDP, that is the United States for a lot of my, uh, numbers. But if you look at global numbers, most developed markets were generally on the same sequence, uh, and just magnitudes were different based on, on different conditions at the time.

But overall, you don't generally see, uh, you know, uh, markets on, on totally opposite sides of this. And so these things kind of tend to come in clusters, but, uh, so the 1930s going into 1930s and it it's, it's very high private debt. And a lot of it was speculative. A lot of is farmer debt, uh, and you know, whereas federal that was quite low.

And then you got that 1929 crash. Uh, and then when he went into the 1930s started to get bank failures, uh, you got declining GDP. Uh, and so in that 1932, 1933 period is really, really kind of hit the bottom. Uh, and so debt, your private debt to GDP was extremely high. Uh, and they did start out with, with fiscal policies.

Uh, but you know, in the beginning they were kind of moderately sized. They weren't, they weren't enormous, but they were substantial. Uh, and, uh, so the first steps there were to do something kind of like quantitative easing, uh, in the sense that banks had gold reserves and then they had, you know, dollar base liabilities.

And so one of the things they did was de-value the dollar relative to gold. And that was essentially like quantitative easing, where you, you basically increase the, the amount of bank reserves in the system compared to their, their liabilities. And that helped, uh, you know, stop that massive destruction, uh, that was happening with, with banks going under and back then there was no FTSE insurance.

So if a bank failed, uh, you know, your, your, your deposits were just, uh, destroyed. And so unlike. Uh, you know, these past few decades that during that there's like a several year window where broad money supply actually went down. So there's just less, fewer dollars in, in existence, uh, in the broad sense. Uh, but once they, they devalued the dollar relative to gold, sort of the banking system, you basically quickly ended that you came out of that and you got that strong reflationary response and it still wasn't very high in place.

When you, when you look at the decade as a whole, you had outright deflation that you overshot a little bit, but overall the 1930s were not a very inflationary decade. It was, it was, it was a pretty flat decade when you kind of tune out the, the big, the big moves in the middle there. Uh, and so, and then as you got deeper into the 1930s, you had, you had substantial, uh, fiscal spending, but it still wasn't on a massive scale.

Uh, you know, we had, you know, uh, we saw, we saw public works projects and things like that. Uh, but a lot of it, you know, as percentage of GDP was still relatively tame. Uh, and you got a second recession in the, in the late 1930s, uh, and overall just appear to have ongoing, uh, stagnation essentially. Uh, you still were not at new off stock highs.

Uh, you weren't having any sort of roaring economy. Uh, and, and I get 37 with a

Rodrigo Gordillo: [00:30:17] terrible, um, equity market, right. Big, big down here in 37. Um, and I think that's one of similars package came in, is that what the new deal came

Lyn Alden: [00:30:29] in? Oh, well that came into a couple of different parts. Uh, and so they were kind of different components of that, but yeah, that was a, another renewed effort, uh, to basically increase fiscal spending.

Uh, but also because a lot of the world economy was going through this, of course you had tension in Europe, you had all sorts of issues. Uh, and, and for a variety of reasons that helped contribute to the war that happened in the 1940s. Uh, and so when you had the 1940s, you had, you know, multiple stagnant economies kind of go into this.

Uh, and that was a catalyst to absolute massive fiscal spending. Uh, and so if you look at the, the devastates as a percentage of GDP and the 1940s, they, they blew away anything that we saw in the 1930s. Uh, and so, you know, you had deficits of 20 to 30% or more of GDP, uh, because it was existential you're, you're fighting this, this all out war.

And so, but in that environment, I mean, a lot of the spending, even though a lot of that you have to combat is happening overseas. A lot of that is you're, you're building things domestically. You're you're you're, you know, if you look at industrial production, United States that went up, it went like almost tripled, uh, during like a period from the very late thirties to like the late forties.

And even after the war, when it, when it kind of cracked a little bit, you know, it's still retain most of that. They're able to kind of pivot, uh, to, to, you know, putting that those war machines to domestic use. Uh, and so when you, when you have that kind of massive fiscal injection, uh, to build a big economy, and when soldiers came home, they got GI bills.

So they got like free training and, you know, some of them went to college. Other ones went to, you know, basically, uh, learn, learn a trade. Uh, and so basically you saw massive fiscal injection. And during that decade, inflation was, uh, you know, substantial is comparable to 1970s. Uh, but instead of being this kind of steady inflation that kept rising, you had these massive spikes of inflation followed by like no inflation, like another massive spike.

And so if you look at 1940 to 1947, and then again, I believe in, in 1951, you had these really big inflationary spikes that were double digits. Uh, and so, but because at that point, The private debt bubble was mostly worked through. So, so, you know, the private debt had you leveraged a lot. Uh, whereas now you're ramping up the public debt, the federal debt, uh, and, uh, they couldn't afford to have very high industry rates at that time when, when federal debt was going over a hundred percent of GDP.

Uh, and so that was, uh, the, where they did yield curve control. So the federal reserve said, no, we're going to, we're going to buy any treasury bonds that go over 2.5% yield. Uh, and so that basically set up a ceiling for what yields could do, and they actually had multiple ceilings. So if you look at the short end of the yield curve, they had a limit there in the middle of the yield curve, they had another limit.

And then the long end of the yield curve, they had 2.5% a and C what you basically had was a, uh, you know, a moderately steep, but artificial, uh, low yield curve, uh, and inflation was doing whatever is going to do. And so if you look at, if you, if you chart. Inflation and 10 year yields during that, during that decade, inflation is like a wild ride with these double digit dips and then back down to normal.

Whereas the two point, uh, the 10 year yield was this, this flat line at 2.5%, the completely artificial though. They totally overrode the market. And if you look at the federal reserve balance sheet, uh, from 19, you know, from there from the early 1940s to the mid 1940s, they increased their holdings of treasuries, tenfold.

Uh, and overall you had a very strong nominal GDP growth in part because you had pretty massive inflation. Uh, but then also a lot of that was productive. And then after the war, they were able to pivot, uh, basically, you know, they never really paid off the debt. It's not like us debt, you know, fell dramatically, but they basically held steady for awhile, uh, as the economy kept growing.

And so through a combination of inflation and real growth, they're able to get out of that, that, that trap. Uh, but it was, it was a painful time for anyone holding cash or bonds. Uh, because let's say you were holding a ten-year treasury, uh, in the beginning of the 1940s, by the end of the decade, you, you know, even though you got all your purchasing power back, you may something like 25% because you got 2.5% a year.

Uh, but you're, you're, you're, you're purchasing power in real terms, went down by over 30%. Uh, and that's, that'd be even worse if you're holding cash. Uh, and so overall that's, you know, that's, I often compare that environment to the, the 2010s and the 2020s, because going in, if you look at the charts of the, of the, you know, you separate private debt from public debt, if you look at industry rates and, and say the monetary base as a percentage of GDP, uh, you know, a lot of what happened during that, that, you know, uh, 1930s, 1940s period looks a lot like what happened starting with the great financial crisis.

So we had this, this private debt bubble build up. We saw massive collapse that we saw ramp up in, in the monetary base to basically recapitalize the banking system. Uh, but that wasn't outright inflationary because just at the 1930s, you're just countering a massive deflationary private debt bubble collapse.

Uh, and then as you go into the 2020s, uh, you know, we have basically a pretty slow decade of growth throughout the 2010s. Uh, it was somewhat disguised by the massive kind of, you know, a rise of tech companies we've had. So the stock market did pretty well. Uh, and, and, you know, so individual assets did well.

We were, we were obviously a lot more comfortable than we were in the 1930s, where you had worst technology. You had, you know, the, the dust bowl you had, you know, all sorts of, uh, issues, but in many ways it was essentially a mild depression where you had to grow. Those was way below the trend line. Uh, and then as you go into the 2020s, of course, we had this external catalyst of a virus.

And then we saw massive fiscal spending. The likes we haven't seen since the 1940s and a lot of it was monetized by the central banks around the world. They see having to buy a lot of the bonds associated with that spending. Uh, and so like the 1940s, we saw a really big ramp up in broad mine supply. And so now the question is whether or not, you know, to what extent that might translate into higher inflation, uh, in this decade,

Mike Philbrick: [00:36:27] it sure does.

Ryan. It's a great analog. What, what are the, uh, what are the differences in the, um, initial conditions? Um, are there anything, are there any significant differences that, that you would want to highlight between the forties and, and

Lyn Alden: [00:36:41] where we are today? Yeah, there are several of them. One is that demographics were stronger back then.

Uh, so you had a younger population and a faster growing population. Now, now in most, most developed countries in the world, you have an aging population and a slower growing population. Uh, and then, uh, to, um, you know, by then they had actually, de-leverage quite a bit of the, of the private debt. Uh, and even part of that, it wasn't necessarily from paying alive at all.

Some of it was paid off, uh, but some of it was inflated away in the early part of that period. Uh, but mainly stopped increasing and therefore started going down as a percentage of GDP. Uh, whereas in this cycle, uh, you know, if you look at private debt and public debt, you did see a pretty clear bubble happened in that, that, you know, just nine period.

And, you know, for example, us household debt went, went down pretty substantially over the next decade as a percentage of GDP. Uh, but it didn't go down nearly as much as it did back then. And so now we're in this period rehab, you know, you still essentially have what, what is a private debt bubble, uh, just less extreme than it was.

And just Nate does nine, uh, in many ways. And then you have on top of that, a much larger, uh, you know, public debt bubble. Uh, and so we're entering this period a little bit tricky because our deflationary forces are larger. And so they, you know, they basically takes more of a higher magnitude of their actions in order to have a inflationary response.

And so we're kind of testing the limits of that. Uh, another thing that's different is that, you know, especially for United States in the 1940s, we were the largest creditor nation in the world. So after world war one, you know, Europe Otis a lot of money, uh, you know, we had a trade surplus. Uh, we were the emerging power, uh, and, uh, and so, uh, and then of course, 1940s, we, we became the, you know, kind of solidified ourselves as the global reserve currency.

Uh, but now in this current system, uh, you know, ever since the 1970s and as States running structural trade deficits, structural current account deficits, uh, we have a negative net international position, meaning that, you know, unlike back then foreigners owned more of our assets and we own a foreign assets.

Uh, and so, you know, currently Japan's the largest creditor nation in absolute terms. Whereas not as States is, is the biggest detonation in absolute terms. If you look at it as a percentage of GDP, it's a little more complex, but then the States is still one of the worst. Among developed countries, uh, whereas countries like Japan, uh, Germany, uh, and then smaller ones like Singapore, Taiwan and Singh and Switzerland.

Those are all the large credited nations relative to size of their economy. And so overall, uh, if you get that, that sort of really big fiscal environment, it tends to be more inflationary for the ones that are, that are the detonations, the ones that are running those more structural, uh, current account deficits.

And so back then the United States devalued less than many other countries except for Switzerland. Uh, whereas in this environment, uh, in 2020, we saw the dollar go down more than most other developed country peers. Other lately we are in a little bit of an upswing. Uh, so overall my base case is it in the 2020s.

If we were to get this analog to continue, uh, the dollar could weaken more than some of the other developed country peers.

Mike Philbrick: [00:39:55] Can you, can you just talk about that a little bit more and end it and connect the linkages between yield curve control and how that manifested in those bursts of what may be considered transient inflation in the forties and what the implications are for today is that just to help everybody sort of connect the mechanisms together, how the relief valves for all down, if, if countries decide that they're going to have central banks decide they're going to pursue a yield curve control type of

Lyn Alden: [00:40:28] yeah, so mostly, and that's one reason I try to separate a longterm debt cycle from a normal business cycle, because normally what we associate with higher inflation is higher bond deals.

So if, if inflation is going to go up, we're going to get higher bond yields. Like we got in the 1970s, uh, and that's going to have certain implications. Uh, but the curve ball there is that, you know, in extreme environments, the fed the central banks around the world can override that. And say, no, no, I know that bond yields should be higher to compensate, but we're not gonna let that happen.

Uh, and so, uh, that's something I've been writing about for a couple of years now. Uh, but at the current time is not even hypothetical. We're seeing, you know, uh, Australia has formal yield curve control is not as extreme as the federal reserve in the 1940s. So the federal reserve, that was the most pure form of your curve control, where they set the maximum yield of the entire duration spectrum.

Uh, whereas Australia is just saying like, we're going to pin the three-year yield. Uh, and, uh, you know, so they're basically artificially suppressing part of the yield curve, uh, and Japan, uh, you know, uh, doing that with their, with their tenure, I believe. Uh, and so we're, you know, we see these rumblings of yield curve control, uh, and we see that, you know, over the past year, the federal reserve and their meeting minutes has, has cited those.

Uh, and it basically says that they have that as a, uh, you know, one of the tools that is available to them. Uh, and they're watching some of those other countries to see how it works out for them. Now, if you go back to 1940s, the federal reserve didn't want to do it. Curve control. Uh, you know, in fact they hated it because essentially what happens is they, they, you know, more or less gave up their independence, uh, for that period of time, uh, in the face of an existential crisis.

Uh, and so, uh, they were basically were co-opted into, to indirectly monetizing government deficits. Uh, and then even after the war ended, uh, so the fetters are basically came back to the treasury and said, okay, we can stop this now. Right. And then, you know, the, you know, Truman's like, well, you know, we need a little bit more.

Uh, and, and so there is this kind of ongoing issue, and you've probably got that inflation spike in 1951. That's when they said, okay, we have to split this up. We have to go back to, you know, some degree of independence here, uh, less, we turn into, you know, banana Republic. We have to kind of regain some of your market pricing for money.

Uh, and so that event, she was able to split. Uh, but it's, you know, it's, it's very, it's basically one of those things that once you check in, it's really, really hard to check out. That's the last time it happened. They were basically locked in place for, you know, about nine years. Uh, and so, you know, if you have a, you know, a large stimulus, uh, one of the ways that, that, you know, the, the, the overall basically, if the effect on nominal GDP can be kind of stunted is if rates rise enough and basically make, you know, mortgages on affordable, uh, and basically, you know, put a break in economic activity and that's where you can get the, you know, that combination where they say, okay, we're going to do massive stimulus and we're going to Capulets.

And then, so if you don't cap deals that, you know, the release valve is the bond market. So the bond market sells off, you know, yields go up, uh, and the currency stays relatively robust, uh, and eventually economic, you know, uh, you know, uh, nominal performance kind of tapers off. Uh, whereas if you do a yield curve control, there's no free lunch.

So you prevent bonds for falling, uh, in nominal terms. Uh, but the, the release valve ends up being the currency. Because if, if, you know, if, if current, if bonds are not able to reprice, uh, basically to compensate for that inflation, uh, then they start underperforming very, very poorly in real terms. Uh, and the currency gets sharply devalued, uh, and you know, then there's other variables to consider.

So for example, if you were countries running a persistent current account surplus, uh, you know, you have a lot of underlying currency strength that, that, you know, you, you have to play with. Whereas if your country's running, uh, you know, a persistent current account deficit, and then you suppress yields, uh, you're kind of getting that double whammy of you can have a pretty significant downturn in your currency, uh, compared to some of the others that are, that are on the opposite side of that spectrum.

And so that those are some of the variables I'm watching at the moment. We're in the part where, you know, yields have been on an upswing. Uh, you know, most ways of measuring it. There's, there's still negative and bill terms, uh, but they're on the upswing. And so that's, you know, that's helped shore up the dollar.

And so the question now to watch is as we get you, as we go through these base effects, as we potentially go through further grounds of fiscal stimulus, what is the bond market going to do? And what's that gonna, what's that gonna do to the housing market? What's that going to do to the costs of government financing?

What's that gonna do to, uh, you know, see highly valued tech stocks and because the economy's so financialized that potentially, you know, uh, forces, policy makers that try to suppress yields, and that's what you get into that, that other leg, that other release valve potentially taking over. And so one of the things I'm monitoring is the, you know, the pace of that.

So right now, you know, I'm not rushing into some of those, those currency devaluation trades, uh, because we are still on the up twin in terms of yields. And now the fed so far has not been just like the 1940s. They've been slow to get into it. Uh, because they, you know, they've cited directly that the basic they sacrificed their independence, if they are bays are forced to cap yields.

Rodrigo Gordillo: [00:45:38] Well, you know, it's interesting cause there's a, there's clearly a blueprint to do the, a yield curve control. And I think I heard a quote that the, um, the fed governor at the time said that the federal government or the federal bank is free up government of government, but not free from government that is there, they are independent.

But if the government wants to do all the things that they want to do, they're not free from ignoring it. And therefore they're going to have to act. Right. So, you know, that that's actually the written, it was written in a letter and it provides a bit of a blueprint for, for people to say the same thing today, uh, federal, uh, governors of all countries to do it.

And, uh, and so it's certainly not out of the question. Um, but I do want to continue down that path. So. I think what's interesting here, when we think about global macro, for those, for everybody listening here is that we tend to feel like global macro is this long-term prediction of what's going to happen in the next 30 years, but really global macro analysts come in all shapes and sizes, right.

People that are trying to analyze the next month, the next six months, the next year, the next decade. And I think when from your work Lyn, I think you're, you're very clear as to your overall framework, but also making sure that you're watching the rates of change of all of these parameters before you position your tilts one way or the other.

Um, so you just kind of acknowledge that and, and you're, you're waiting for a particular change in the dollar and so on. What would the trades be that you're making in order, like either way? So if we see the federal government come in and put your control, that means it's inflationary. Um, you're an equity focused individual.

What is it that, uh, what type of

Lyn Alden: [00:47:22] traits would you be looking to put in? Basically there's a couple major levels. So there there's, when it comes to the rates question and yield curve control question, some of the big ones we have are bank stocks, uh, gold stocks or gold itself, uh, as well as the value versus growth tilts or the U S versus Ford equity tilts.

Uh, and so for example, if you expect an environment where they're going to let yields go up, uh, we're going to have a continue steeping yield curve. Um, uh, then you're in an environment where you want to be into bank stocks, you know, perhaps, uh, I've been, I've been kind of a, you know, uh, somewhat, uh, bullish on them for a period of time here.

Uh, you also generally, uh, you know, grow stocks they've been selling off recently because cause those yields are rising and many of those growth stocks were very overvalued. And so I think a lot of people try to. Make too absolute of a kind of comparison. They say, you know, uh, in this environment, uh, yields would up and growth stocks, uh, did fine.

And therefore there's no correlation. Well, it's like, well, it's not that it's not that simple because in previous cycles, for example, uh, growth stocks were not necessarily overvalued. And so they were less sensitive to those rising, uh, you know, uh, rates. Whereas if you're in an environment where everybody poured into growth stocks, because there's so much disinflation yields got so low, they didn't know what else to invest in.

So everybody just piled into all the tech stocks causes huge run-up and then you start to get yields rising. Well, that puts a lot of pressure on those, on those valuations. And so that's what we've seen recently where you have bank stocks doing well. Uh, whereas some of those re you know, there's, hyper-growth names have been having correcting.

Uh, and so as long as that trade continues, you know, gold is, is somewhat in a corrective phase growth stocks in a corrective phase. Whereas value stocks, bank stocks, uh, certain types of emerging markets or foreign equities are doing quite well. Uh, I've been bullish on a lot of the base commodities, you know, uh, copper has been one that I've been riding, for example, recently kind of trimming that a little bit.

Uh, and so that, that those are the types of trade out. I I'd like to see from that, you know, that more rising rate environment. Now, if you were to get a move on yield curve control, uh, you know, banks and still do reasonably well in that environment because they still have, uh, you know, a positive yield curve.

It's not like Japan where they have just totally flat yield curve. Uh, however, uh, when that yield curve stopped steepening, that's less ideal for banks. Uh, and that something becomes a lot more attractive for something like gold because gold, closest correlation is, uh, real rates. And so if you look at the 10 year treasury minus, you know, either the CPI or the inflation expectations that the breakeven rates, uh, you know, that that is a very strong correlation inversely with gold.

So gold is very, very well. Uh, when, uh, real rates are negative. And so if you get that yield curve control environment where let's say inflation goes to, you know, 4% and the fed caps yields to 2%, well now you're at negative 2% real yields and gold would love that most likely, so gold stocks or gold, uh, you know, directly held gold, uh, can do very well in that environment, as well as, uh, some of those other base commodity stocks.

And I would actually say that, uh, you know, Stanley Druckenmiller gave a great interview the other month, uh, where he talked about he he's kind of viewing it similarly where his base case was higher inflation. And then his next question was will the fed, you know, intervene with rates or not. And so he says, if, you know, if they don't intervene with rates, then his, his play is short treasuries.

Uh, and if the fed does kind of come in and, uh, you know, keep those yields from, from getting too disorderly, uh, well then he's long commodities cause they would benefit from that, you know, that, that more inflationary environment with more negative, real yields. Uh, and so that's kinda, that's a similar way I approach as well.

With the exception that I've been using long bank stocks, uh, for some of my, like, you know, basically the equivalent of a short treasury trade it's, it's a S a S a play on a steep thing, yield curve. Uh, and you know, that, that kind of like the copper stocks that might've got a little bit of ahead of itself now.

Uh, but overall that's, that's the type of thing I want to be in. If I expect steepening yield curve, rising rates, pretty strong economics growth.

Rodrigo Gordillo: [00:51:31] Are you looking at you listening to the narrative to, in order to start shifting, or are you looking at technicals with narrative?

Lyn Alden: [00:51:37] So partially it's the narrative, but mainly it's it's quantitative data.

So, uh, you know, basically watching, uh, inflation play out, watching the growth of the money supply, watching what's happening in Congress. So watching the, the stimulus relax thereof, uh, and then seeing how that's going to play out in markets, and then watching fed action say, okay, they, you know, what are they going to purchase more to try to suppress yields.

Or are they going to let that run? So you have some central banks like Australia or the ECB that have been more explicit about, about their desires to keep the long end of the curve suppressed. Whereas the fed has taken somewhat of a more hawkish tone. Of course, it's all relative. So hawkish in the sense that rates are zero and that they're buying assets every month.

Uh, but compared to some of their international peers, they're saying, you know, we like a CPO curve. We're not going to, you know, we're not that, you know, you can read between the lines that they are watching certain levels or watching for certain things to break. Uh, but they're kind of, you know, taking a more hawkish stance relative to some of their peers.

And that's where you say, okay, you know, at the moment, at least the trend change is, is, is higher yield, steeper yield curve, uh, you know, kind of ongoing corrections in growth stocks and gold and things like that. Uh, but then the, you know, if we do to get that pivot, uh, that's what I'd be more interested in.

Maybe looking at those growth stocks again, uh, and I've already kind of monitoring some technicals, uh, as it relates to gold and things like that. And so is that combination of, of. Some of those trend changes as well as technicals.

Pierre Daillie: [00:53:03] What do you think is, what do you think is one of the, uh, biggest misperceptions right now that's occurring in markets in terms of how investors are behaving?

Lyn Alden: [00:53:14] I would say that, I mean, there's a couple of things. One is treating this like a normal business cycle, uh, that basically that, you know, that, that you can get out of it in a similar way that the previous cycles played out. Uh, because, you know, there's, there's basically, there's such an economic impact and people went into this, you know, with so much leverage and, you know, the bottom 50% in the United States in many countries has basically no dry powder.

They have no emergency fund. They can barely go a month without kind of keeping the lights on, uh, without an income. Uh, and so basically that if any point you were to get that more dis-inflationary outcome, uh, in this environment, that's when you're prone to civil unrest and things like that. And so you have that kind of forcing function that, that keeps the fiscal taps on, in a matter of speaking.

Uh, and so that's, that's one of the things I'm kind of watching, uh, play out. Uh, the other thing is just, you know, people are prone to be procyclical and emotional when it comes to things. And so, uh, you know, uh, you know, back during the, the worst part of the pandemic people would pile into to, you know, uh, tech stocks that are doing fine and say, I don't want to touch banks or energy with a 10 foot pole.

Uh, but they got so extremely cheap that it's, you know, it's like you say, well, I mean, you know, I don't know, I don't know exactly when this is going to turn around, but it's, it's getting to the point where I wouldn't want to not have exposure to some of these things, uh, because when they do that can be pretty strong.

And now at the same time that you know, that the reopening narrative can get so excited, uh, that basically is saying tech stocks are done. I want to just pour into energy and banks. And it's like, well, maybe, but you can also go back and look at some of the things that are selling off in the other direction to see if there may be, are certain levels that you want to have on your watch list and maybe start kind of, uh, you know, easing out of some of those reopening trades.

And so that's kind of how I'm playing it, where I monitor evaluations, I monitor rate of change of economic data and basically just try to not have a knee contrary and reaction, not just, you know, sometimes it's good to ride with the momentum, uh, but be aware when things start to get somewhat heated and be willing to shift into some of those out of favor, uh, names, especially because as an equity investor, you have a pretty long time period for that thesis to play out.

Uh, and so in some ways, you know, equities are, are some of the longest duration assets. And so basically they give your, your trade enough time to play out where you're saying, I don't know if this is going to turn this month or this quarter, uh, but it's getting into the zone where it's, it's cheap and it's out of favor enough, uh, that I think that when, when he's ready to chain change indicators roll over or roll up whatever the case may be, uh, that, that trade can start working out.

Mike Philbrick: [00:55:43] I think, I think it's also really important for the listeners, um, to, to. Be mindful of Lyn's language. She didn't say sell everything and buy this one thing. And she said, tilt her portfolio. Right. Which is not to say that you're abandoning all of those other sectors out of hand, but you are tilting the portfolio.

So you have a base portfolio that's fairly diversified. And then based on whatever your risk parameters are, you will, you will pick an amount that you're going to tilt based on maybe your confidence interval, as well as your comfort with tracking error in one.

Lyn Alden: [00:56:20] Exactly. Yeah. I underweight or overweight, certain sectors or certain stocks or certain asset classes based on how attractive they are, uh, you know, with, with a valuation overlay.

So one is just how cheap and expensive they are. Uh, but then part of determining how cheap or expensive they are is expecting what's going to happen with feature earnings. And so paying attention to that rate of change indicators, uh, to see how that's likely to impact them. Uh, and so find the things that are oversold and cheap.

And that potentially have that, that catalyst kind of rolling up rolling over, uh, is, is kind of where this nice sweet spot. My, my general approach is I ideally like to hold an investment for three to five years or more. Uh, but you know, this has been a really crazy, you know, 18 month period. Uh, and so there are some things I bought thinking, you know, I'll hold on this for three years and then it goes up like, you know, 150% in like six months.

And it's like, well, now it's almost, it's so good that it's so good that it's bad now. And you know, you kind of rotate out and kind of clear that a little bit. Uh, and so it's been an unusual environment, but that's generally how I like to approach it.

Pierre Daillie: [00:57:25] Yeah. Way ahead of schedule. What do you do with all that extra time?

Right. You didn't expect to earn 150%, for example, in such a short space of time.

Lyn Alden: [00:57:37] So yeah. Well that's on some investments. And so it's one of those things where, you know, the copper stocks, the Bitcoin, like certain things like that, just kind of flew up. Uh, and there's, there's always parts that you don't get completely.

Right. And so, for example, in 2020, going into that, uh, you know, I had a decent amount of tech stocks, uh, and everyone's talking about like, Oh, you got to get into the, into the work at home stocks. I'm like, well, don't, we all know that now isn't that trade Don. And it's like, no, no, that, that people will pile into that longer and higher than you think.

And so, for example, uh, you know, by the time we got into like summer 2020, I was like, you really should have had more of these things. Like I have some, but I wish I had even more because I didn't expect, I didn't expect zoom for example, to go as high as it did. I didn't expect some of those really kind of, really kind of hypergrowth kind of stocks that really benefited from this trend to go high as, as high as they did.

And so, you know, basically you, you don't catch everything all the time, but overall, it's trying to have a portfolio that makes sense to you. That is filled with things that you find that are reasonably valued and they're benefiting from the underlying trend.

Mike Philbrick: [00:58:42] So go, go

Lyn Alden: [00:58:43] ahead.

Rodrigo Gordillo: [00:58:46] I'm going to switch topics. I was going to see, she said the word.

She said that

Mike Philbrick: [00:58:51] she said, she said the big coin word. So we, now we now we'll start the podcast.

Rodrigo Gordillo: [00:58:59] And then it's not just a wholesale change. We're gonna, I'm gonna, I'm going to tie it into the previous

Mike Philbrick: [00:59:05] asset classes, allocation, laser eyes.

Rodrigo Gordillo: [00:59:09] Um, we are, um, we're, let's tie in inflation to this. So let's assume in a period of accelerated inflation, what you need to look for is a scarcity, right?

Gold is a scarce asset and has X amount of production a year. It's clearly gonna, it's got the network effect. It's probably distributed. It has the benefit of, of, uh, keeping pace with real rates. Bitcoin has a lot of those elements and, but it has a lot of other elements too. I mean, there's, there's an element of.

The digital gold aspect, uh, scarcity, and, um, generally broadly distributed can be come more broadly distributed, and then you have the innovation side of it, which is given it, all of it volatility right now, if we go into a period of deflation, which one wins out here in your view, like how do you, how do you price Bitcoin in your model?

Mike Philbrick: [01:00:04] I think, I think even a slightly broader question, just to open that up a little bit more is what are the main factors or functions that go into the pricing of Bitcoin in your mind lend your, your. Obviously put a lot of time and thought into this. So what are those main inputs that, that you're seeing and then how does it,

Lyn Alden: [01:00:22] yeah, it's a really good set of questions and I have to a couple of different layers and it's always tricky to find out which layers the most important.

Uh, but by, by having a, you know, kind of a framework that puts layers is that's how I've seen it play out. And so for example, the biggest correlation that Bitcoin has is mostly just with its own adoption cycle. Uh, and so basically if you look at, say, say puppet Quinn aside for a second, if you look at a really high performing growth stock, it almost doesn't matter if it's in a recession or an expansion that stock still growing.

It's just doing its own thing. And of course the valuation might fluctuate to some extent, uh, as cause, you know, Mark is sentiments going over the place. Uh, but they're going to be less impacted by a recession or, or an expansion than say a bank stock or an energy stock. We're an industrial stock. Right?

So, uh, so partially Bitcoin is you're, you're monitoring the health of that. You know, what does the adoption look like? What what's happening in industry are insurance companies buying into it? What is, what are the hardware wallets doing? What are some of the other applications? How is lightning network developing?

And so one is I'm watching the underlying fundamental growth of the ecosystem and the user adoption over time and how that's, how that's being perceived. And so, you know, if you look at the last 12 years of Bitcoin's existence, the tightest correlation is with its own having cycle. And so for people that aren't familiar, uh, Bitcoin generates a number of new Bitcoins every 10 minutes on average.

And in the beginning, when it was designed, that was 50 new Bitcoins were created on average every 10 minutes. And then after four years, that was pre-programmed to get cut in half. And so then it went to a four year period where 25 Bitcoins were created every 10 minutes. And then after that, it was pre-programmed, it's shifted to 12.5 Bitcoins every 10 minutes.

And now we're in that fourth period where it's 6.2, five Bitcoins every 10 minutes. And that's, that's, that's that's set to continue. Uh, for the foreseeable future until you basically ask them topically approach, no more Bitcoin. Uh, and generally what happens is that you, you know, in the beginning you had a big spike up in price.

You get a blow off top, and then eventually the, the, the, the overall ecosystem finds an equilibrium price where it, you know, it's, it becomes relatively tamed by Bitcoin terms where it's, it's in this big kind of choppy sideways pattern. Uh, and that's when you get a supply shock, right? So you get this, you know, the having cycle comes in and says, okay, well now we're going to cut new supply in half, uh, at a time when demand is still relatively persistent.

Uh, and then eventually you get that drives price up. And that brings in momentum traders. And then that, you know, that fuels that an adoption narrative, uh, that eventually gets to extremes and as a block top, uh, and then it crashes and then it eventually finds another equilibrium. And four years later, the having happens again and there's a supply shock, and then it drives the price up and ment and traders come in.

And you basically, you've gone through this cycle about three times. Uh, and so overall, if you look at the historical chart of the price and log terms, uh, and put the, having times on it, uh, it's a really uncanny relationship. It's the closest thing you see to like a clockwork algorithm pattern, which makes sense, because Bitcoin is, is an algorithm and it's its price chart ends up looking rather algorithmic.

Now, when you then go to the more micro layer, uh, especially during that period where it's finding a consolidation, so it's not in an extreme bull market phase, then it tends to have more correlations with some of these macro factors. And so, for example, when we had the big liquidity shock in March 20, 20 Bitcoin down, went down just as hard or harder than anything else, because it's, you know, it's partly a liquidity play.

Uh, it also just tends to benefit from, uh, overall risk on risk off behavior. Uh, so it, it generally has more risk on asset, especially when it's in that, that more consolidation period. Uh, and so overall, what I'm watching now is that it's still largely in a post having cycle bull market as far as I'm concerned.

And so I watched some of the odd chain indicators to see how that plays out. So for example, you know, because Bitcoin, because it's an open source blockchain, even though you can't necessarily see what individual people are doing because of the layer of, uh, of extraction between someone and their address, uh, you can still track what's happening with the overall public blockchain to see, okay, what percentage of coins are having moved in more than a year?

Uh, what's happened with new coins, are people selling their coins for a higher price or a lower price, and they bought those coins. Uh, and so there's a bunch of different indicators you can watch. And you can compare them to previous cycles. Uh, and so what you see generally during a bull market is some of the longterm holders, uh, you know, trim their positions, uh, into that because, you know, they're up five, five X or 10 X or more, uh, they sell to the new generation of buyers.

Uh, and if there are times where you start to get a correction during that bull market, a lot of those long-term holders stopped selling. Uh, and so that kind of helps solidify the supply. Uh, and basically the price has to keep going up if you're going to get those coins out of their hands, because a lot of them, they're not holding their coins on exchanges, they're holding their coins into cold storage.

So for them to sell. It means that, you know, the price has to do something, you know, it could be that they paddock and sell, but those are long-term holders. So they tend to be more about looking for higher prices selling to, uh, and so this very large percentage of Bitcoin that is basically just off the market, it's just in cold storage and you need to pretty much pride out of their hands with higher prices.

So watch things like our coins going to, or from exchanges on average, uh, our long-term holder selling. Are they, are they holding, uh, what are some of the extremes like if you compare the market capitalization of Bitcoin compared to the realized capitalization of Bitcoin, which is essentially a measure of cost basis, kind of the average price at all, all current Bitcoin were purchased at originally, uh, and this kind of comparative indicators like that to see what's happening, uh, within the broader context of what's happening with, you know, uh, you know, some of the custodians what's happening with insurance companies what's happened with, you know, did, did another company and say that, put it on their balance sheet or not.

Uh, you know, how's the, you know, development of lightning is some of the applications that make it easier for people to get access to it. And do you, some of the other layers on top of it is that the overall high approach it, and so for example, I, you know, when I initially covered Bitcoin professionally back late 2017, uh, I, I, I passed on it.

I am realized it in November, 2017. I said, you know, it's, it's like 7,000, uh, it's gone up really far. Um, and I have certain concerns about some of the things happening in the ecosystem. Like the Bitcoin cash split from Bitcoin, uh, and said, you know, I said, maybe you can play with a couple percent, but I'd be very cautious here.

And so I took no position. And of course we, you know, you almost tripled from there. See, went up to like 20,000, then you, then you crash. And he went down to like 3000, then it just underperformed for a couple of years and it was choppy. Uh, but it was an April, 2020 where I said, okay, now it's 7,000 again.

But it's, but it's my view, significant de-risk and stronger fundamentally, uh, in terms of where it is in the having cycle, uh, what price action has been recently, uh, in some of the developments in the ecosystem.

Rodrigo Gordillo: [01:07:20] So where are we right now? You said it was, uh, still benefiting from that having cycles still a bit of a bull.

Are you still seeing, uh, hurdlers go to the exchanges and selling, um, or has that died

Lyn Alden: [01:07:35] down a little bit and less down a little bit over the past month or so? And so most of the indicators I'm tracking look to be somewhat mid cycle in terms of the bull market. And so it's less of a, kind of a slam dunk in my view than it was back in, in say spring of 20, 20, and some summer 2020, where, you know, you can buy it for 7,000, you could buy it for 9,000.

You can buy for 10, 12,000. Uh, so that my view was a kind of a very asymmetric play. Uh, now that you're well over 50,000, in my view, it's somewhat less asymmetric, uh, where, you know, your, your probability of getting 10 X gains in the next year is less than it was back then. Uh, and your downside is somewhat, somewhat greater.

Uh, and, but I still overall, my base case continues to be for higher, uh, you know, unless we see certain signs play out. So we start making start making lower lows. Uh, that's where it gets concerning. But, you know, looking at what's happening with the on chain indicators, you know, some of the long-term holders have sold into this rally, uh, but still a very small percentage compared to previous rallies.

Uh, and then particularly over the past month, as Bitcoin has been a little bit more choppy, uh, that long, those long-term holders pretty much stopped selling and just, you know, they just kind of kept holding from there. Uh, and so basically they're basically saying that the price isn't high enough for them to continue selling into.

Uh, and we also saw some indicators that, you know, people are still essentially refusing to sell at a loss. And so if new investors come in at these higher prices and then Bitcoin has a correction. Some of them are willing to sell, but once they start selling it at a loss, they pretty much stop. Uh, and that, that tends to be what happens during a bull market in Bitcoin terms that, you know, the only time that you see mass selling, uh, for, for lower than their cost basis is during those, those deeper bear markets.

And so overall I think the base case looks healthy. The one thing that's, that's kind of different from previous cycles is that, you know, because Bitcoin was earlier, earlier in its like, uh, issuance rates, you had the number of coins on exchanges, keep going up. Uh, so even during a bull market, uh, you generally have these short periods where coins relieve exchanges, uh, but an average co you know, coins or exchanges kept going up.

Whereas in this cycle, we're, we're something like 15 months into a period of coin just keeps coming off of exchanges. And that's never really happened before. And so in some ways that's, that's more bullish than anything I've seen before. Uh, but it's, it's hard to say exactly what that means, because we don't have a lot of historical context for that.

Pierre Daillie: [01:09:55] W, what do you have to, what do you think about the, um, recent, uh, talk around the energy consumption question about how much energy it takes to produce a coin now with the minors?

Lyn Alden: [01:10:10] So a lot of that is tied to its market capitalization. And so Bitcoin has some, they caught a difficult adjustment where every two weeks it changes the difficulty of the algorithm, uh, based on, uh, you know, how much hash rate there is on the network and a busy if, if Bitcoins are being generated more slowly than expected, uh, it decreases the difficulty of the algorithm and vice versa.

And so overall at the current time, you know, Bitcoin takes something like it's less than 1% of global energy. Uh, and then more importantly, it basically is optimized to kind of seek out some of the cheapest sources of energy. And so, for example, there, there are places in China. Where they have overbuilt electric dams, hydroelectric dams.

And then during the wet season, they have a ton of excess electricity. And so a lot of Bitcoin miners go there and here are pulling off this electricity that would otherwise be wasted. Uh, and so in that sense, it's not competing with other forms of energy. Now, there are many parts of the world, uh, you know, uh, some of other China's provinces.

Uh, where it is, you know, using more conventional electricity, but basically the overall incentive structure of how it works is that it's designed to basically, you know, seek out inefficiencies and find these, these places, stranded energy. Another application I've talked, uh, talked to people in is that you can have say flaring, uh, where natural gas is wasted and some of these miners can come in and say, you know, we can just, we can just bring our, uh, you know, basically, uh, a box with miners and put it next to your, your, you know, your, your oil assets, if we can, we can, your, your natural gas assets.

I mean, and we can just basically, uh, you know, use some of that flare gas and, and, and give you back a big portion of the cost. And it's basically what you're doing is you're just, you're, you're, you're making use of the gas that would otherwise be wasted. Uh, and so overall, you know, it's something to monitor how much energy it takes, uh, but compared to gold mining compared to, uh, you know, some of these other things overall view it as, as pretty efficient.

And it's another one of those things to consider where. I, I view it like a, well, it is a piece of software, but essentially I view it like a software product where tastes a lot of work to make. Uh, but then the difference between giving it to a million people and a billion people is a marginal difference per user.

And so Bitcoin is one of those things where for, to exist is relatively expensive in the grand scheme of things. And it's still less than 1% of global energy, but on an absolute scale, it's as much energy as a small country. Uh, but then as more and more people use it, that doesn't necessarily, you know, uh, scale linearly with user adoption.

It eventually becomes a point where it's like sending an email where you're baking. You're basically taking no marginal usage of the platform that already exists. And so that's kind of how I view that conversation playing out where there are people on both sides that I think, uh, you basically are, are.

Not quantifying it appropriately. Some people saying there's virtually no energy impact. Other people are kind of saying that every transaction you do blows a whole nose zone layer. And it's the, the overall conversations a lot more nuanced than that, where it's for one, it's not really charging for the most part per transaction, it's really about the fact that it exists.

And then to have the fact that it scales a certain way. We're over, over time, it uses a smaller amount of energy relative to its market cap. Uh, but it still does use higher energy up to a certain point. And

Rodrigo Gordillo: [01:13:21] also, I mean, there's other areas that are currently using a ton of energy in Oakland. We're not measuring.

So the traditional Fiat system consumes a ton of energy there's servers everywhere in the world to try to make that work. But nobody's talking about that, right? So if we start digging deeper, I think this ESG, you know, uh, narrative has come from the EU to, to stop the institutions from adopting a too quickly.

Uh, because like Len said, the incentive structure for minors is not to be in a convenient location where they can mind happily it's to be in the cheapest location and to find sources that are being wasted and to co locate there in order to be able to maximize or minimize the cost of their input. And their major cost of input is input.

Cost is, is energy. And so you have minors that are going to look for the cheapest energy sources and grid, uh, power grids everywhere in the world. Don't operate at a hundred percent of their capacity. They operate at a very, very low capacity rate and grades for them able to deal with a peak energy requirement.

Right? And so the vast majority of time there's excess energy that is being wasted. Now you just, you can't, you can't contain that and you can't store it. And so you're able to have agreements with these companies, power companies, where you get the access. Energy, um, as long as they don't need it, if they need peak energy, then they're cut off.

Right? So we'll, we'll

Mike Philbrick: [01:14:52] the nice thing is they can, they can actually feed back to the grid when peak energy is on and sell to the grid at certain times, and then take that power and use it to mine, Bitcoin.

Rodrigo Gordillo: [01:15:04] Um, so it definitely is a narrative that is a bit, uh, still, still developing. And I think, like you said, and both sides haven't have taken extreme positions, um, and the moderate, the moderate reality will come out soon.

Lyn Alden: [01:15:16] And it's, it's one of those things that goes through cycles. And one of the analogs I compare it to also is, is Iceland. Uh, and so Iceland is a country that has very low electricity costs, uh, due to just their geography and their geothermal access. Uh, and so one of the things that they did was they, how can we export this electricity?

No, we can't. We can't build transmission, transmission lines across the ocean, but what we can do is find a, uh, an industry that is very, uh, electricity intensive. And use it. And so they, they basically, uh, make aluminum out of the, or, uh, because it's a very electricity intensive process. And so countries will ship them aluminum or, and they'll end the export that finished aluminum.

Uh, and, and so that's essentially what Bitcoin does where it's one of the few sources of, you know, basically where you go to the source of energy, uh, rather than trying to bring the energy to you. So

Mike Philbrick: [01:16:06] on, on the, um, let let's, let's broaden the, the Bitcoin universe a little bit. And w what do you think of the other, um, the other crypto assets, like ether and other parts of the network that you're seeing, what your thoughts are on maybe stable coins or, um, products like global strike, and, and where, where do you seeing the value chain opportunities for investors and are things outside of Bitcoin, even, you know, stores of

Lyn Alden: [01:16:35] value at all?

Yeah. So there are a couple of, as a bunch of questions to get into. So one is within the Bitcoin ecosystem. I, you know, I, I know a lot of, uh, several the venture capitalists that, that, you know, basically benefit from investing in some of those companies. And certainly if you know what you're doing, I think that's a good space to be in.

Right. So there are, there are lenders, there are, you know, I think strikes doing great work where basically for people that aren't familiar with, that, uh, they're using the lightning network, which is the faster, basically the second layer for Bitcoin. Uh, and so if we take a sec back for a second, if you could, you know, one of the biggest criticisms of Bitcoin is that it can only, only handle so many transactions per second on the network.

Uh, and so they say, okay, compared to visa, that can handle thousands of transactions transactions for second, Bitcoin can only handle like 10 transactions per second. Uh, and so it's, it's got that fundamental limitation, but it's not really an apples to apples comparison because visa is just a layer on a, another system.

And so on the, on the lower system, you have something like fed wire, which, which deals with which large, fewer transactions. And on top of that, you have these, these, you know, uh, non, non settlement transactions like visa, where they handle these, these smaller transactions. And then they, they batch their payments together on the base layer at a later time.

And so Bitcoin. It's more like that fed wire system where it's doing irreversible, you know, uh, you know, uh, potentially bigger transactions. Uh, and, but on top of that, you can build these faster, uh, you know, uh, uh, uh, payment networks when you're less concerned with security because you're, you're, you know, you're buying something small rather than doing a massive settlement.

Uh, but you're still benefiting from that underlying security of the base layer. And so that's what for Bitcoin it's called lightning, but there are also some other ones there there's liquid. Uh, and so there's a couple of different, uh, scaling mechanisms that can busy make it cheaper and faster to, to do payments.

And so one of the applications that, that is benefiting from that as strike. Which says, okay, now Bitcoins are really kind of liquid. Uh, you know, uh, system is large enough, it's ubiquitous ubiquitous enough. And we can do very, very cheap lighting transactions that are, you know, a fraction of a percent where to send something.

And so one thing they can do is they say, okay, say, if you want to send money between now to States and Europe, you know, between the dollar of the Euro, instead of, you know, managing all the different currency pairs around the world, we can treat Bitcoin as a common currency pair. So we can do dollars to, uh, dollars to Bitcoin, send them over the lightened network and then do Bitcoin to Euro and all the transactions take place in less than a second.

So you have very little exposure to Bitcoin's price, uh, as they're basically using the network more than the asset, and just basically using it as a, as a underlying payment vehicle. Uh, and so it can be sufficiently abstracted so that the person using the app doesn't, he really doesn't even care about the fact that they're using Bitcoin.

They just want to convert dollars to euros and then send euros to Canadian dollars. And then it, Katie wants to send to Australia and you basically just have this kind of interlocking thing where the underlying comments non-IT nominator is Bitcoin. Uh, and one of their applications is, is for remittances.

And so, for example, if you want to send money to a, you know, an emerging market, for example, like say you you're working in, in a country, but your family back in your, in your Homeland, you want to send them a small amount of money. You can send it over strike, uh, and they, your family can accept that a stable coins.

They can withdraw it from certain types of ATM's. And overall, I am, I'm very bullish on stable coin volume in general. Uh, that's been a pretty strong uptrend, uh, and I expect that to continue because that has certain advantages over, uh, you know, traditional banking systems and banks starting to embrace it more, uh, you know, and that would go for more of the reputable type.

And so, for example, I'm not exactly a fan of, of something like tether. Uh, but when you look at something like, uh, you know, circle, uh, or, or Gemini, uh, you know, those are, those are putting out, uh, you know, more, uh, regulated products, uh, where you're basically, you know, you have a dollar or another currency in some cases wrapped up in this, in this, in this asset that it benefits from the liquidity of being a crypto native asset.

Uh, and when it comes to some of the other protocols, ministerium is interesting because it's, it's the largest utility protocol. It enables a lot of these stable coins and things like that. I have certain concerns about the fact that it's, it's changing its underlying protocol. Uh, it's somewhat less decentralized than Bitcoin, uh, in terms of say how much control the developers have, uh, compared to the nodes, for example, uh, it's overall just kind of, uh, uh, a different ecosystem of the different purpose.

And one of the ways I view it is that, you know, like most things in life, but especially, you know, money is one of the strongest network effects, uh, where, you know, if you have thousands of different types of money, you really is going to congregate in the top one or the top two or the top three. Uh, and so, you know, the vast majority of those coins out there don't really have sufficient network effect really it's, you know, in terms of storing value.

Uh, even if you're, obviously, if you're fine with volatility, it'd be more along the lines of Bitcoin. And if you're going to do sorts of development and kind of, you know, run your stable coin and run out of things like that, it's more about a theorem. Uh, and so overall my, my primary preference has been towards Bitcoin as an investment.

Although I do continue to monitor what's happening with these utility protocols like Ethereum Cartano, things like that. Uh, as well as what's happening in the broader stable coin space and what that means for banks and how that can impact existing, uh, you know, companies that, that, you know, either have to adapt to it or potentially at risk from having some of their market share taken.

Mike Philbrick: [01:22:06] Do you think that's, that's a, that's a, a real threat yet? The, the actual banks and banking systems and profitabilities via, um, the, the, the

Lyn Alden: [01:22:15] Bitcoin revolution, not currently. I mean, so for example, there's over $500 trillion in assets, worldwide of which Bitcoin is 1 trillion. Uh, and then the rest of the crypto is maybe another half a trillion.

Uh, and so it's still a very small percentage of global assets. Uh, now that the thing to watch out for is that it's, it's been exponential so far. Right? So, you know, people, people talking about a trailer, Bitcoin is, I mean, that sounds like unbelievable to people like three years ago, Uh, or even a year ago.

Uh, and so, uh, if, if that, if Bitcoin basically continues to add zeros, you know, my base case is it'll slow down over time. Uh, but if that gets up to a $5 trillion asset or a $10 trillion asset, that that starts to become pretty meaningful, uh, you know, in the, in the global scheme of things. And so overall, I, I view it, you can also separate store value from medium of exchange.

And so as a store value, putting a couple of trillion dollars in someplace doesn't really affect the banking system. Uh, but overall they have, you know, they have started to adapt to some of the stable coin, uh, things that are happening, uh, losing out on some of that, that payment processing, uh, volume they could potentially get.

Uh, and so, especially in the, in the, in terms of low fees for sending international payments, uh, and where people want to have their money, uh, that I think has been impactful. And so, for example, you know, you have something like square, uh, where you can, you know, you have this account, you can buy Bitcoin on it.

You can now send Bitcoin and other square account cash app account, uh, and you have that competing with some of the traditional banking systems. And so overall I do think that's pretty relevant in terms of, especially in terms of attracting a younger depositers, uh, and establishing, you know, banking relationships with, uh, younger consumers overall

Pierre Daillie: [01:24:03] Lyn, fantastic.

One, one, uh, w what happens when all of the Bitcoin is mined? What's the, like, once the, the mining business is done with Bitcoin, what's the, what is the future

Lyn Alden: [01:24:17] beyond that? So that at that point it's mostly fees. And so one is that the last Bitcoin won't be mined for about a century. Uh, but it's, it's already at the point where, you know, 18 and a half million out of the 21 million habit mine.

So it becomes as, and time smaller. And so the short version is that. Miners, you know, they, they have two sources of revenue. One is they get the block subsidies, which is the term for the new Bitcoins that are created every 10 minutes, but then they also get fees. And so let's say for example, you know, a new block comes out every 10 minutes, but it can only hold so many transactions.

Let's, let's call it 3000 transactions. Well, if 4,000 of us want to transact in that 10 minute period, uh, you know, a thousand of us are out of luck. And so how, how do the miners choose who they're going to organize into that block? And, and mostly it comes down to what is the fee that they're willing to pay in order to get towards the front of the line.

And so, you know, there are some really large Bitcoin transactions. I mean, there were like, there were like $500 million Bitcoin transactions where someone pays like 10 bucks in fees to, to send all that. But let's say I'm trying to, I'm trying to send someone a hundred thousand dollars. No, I'm willing to pay a feed in order to make sure that goes through quickly and securely.

Uh, whereas if I was trying to send someone, you know, $300, I might want to say, well, you know, we can, we can wait a little bit until the network's not as congested. I want to keep that fee low. Cause I don't want to pay a $20 fee on a $300 transaction. And so fees are the way that that Bitcoin uses to make sure that the more important and generally larger transactions have priority.

And so what miners do is they optimize it based on their revenue. They say, okay, who's willing to pay the most fees, uh, for the complexity of the transaction. And then they go ahead and implement that. And so over time you've had the transaction fees become a larger portion of minor revenue, although they still are a pretty small portion of minor revenue and for Bitcoin to be successful in the long run.

And this overall, I had an article on this because I think this is one of the bigger risk factors for Bitcoin. At least it's something that it has to navigate successfully if it's going to continue to be successful, as it has been, is it has to keep increasing its fee market up to a certain point. Uh, and so, you know, uh, basically as you get into the, say the late 2020s, that's where the block subsidies are pretty small.

And by then, you really want to see a pretty, a pretty persistent fee market. Right now, the fee market is somewhat irregular, uh, and it really kind of comes out during these, these big bull markets. Uh, whereas during bear markets, the fees had been pretty low. But if you get more and more adoption, uh, while that base layer only can do so many transactions, then you can get to a point where there's kind of a permanent fee market.

And Bitcoin really has to reach that, that level. Uh, if it's going to be successful longterm,

Pierre Daillie: [01:27:02] that's fascinating.

Mike Philbrick: [01:27:06] Well, what would, it's been, it's been a, quite a bit of time here. We, uh, we have, what are we close to your closing questions up here?

Pierre Daillie: [01:27:14] We have one more question, which is a, would you rather question, um, would you rather spend a week in the past or a week in the future and why

Lyn Alden: [01:27:33] that's tricky? I mean, I guess if you're talking in terms of financial podcasts, if you spent a week in the past, you can go ahead and you can buy Bitcoin at $2. You can invest in Amazon and Apple. You can do things like that. If you know the future, then you can come back and invest in whatever is going to become the next Apple, Amazon, and Bitcoin, or, you know, you can be, you can, you can check, okay.

Is Bitcoin going to be like $10 trillion? Is it not? Is it, you know, you can, you can go back and say, uh, you know, what is the, what is, is, is Roku going to be the next, you know, Microsoft is what's going to happen with some of these big tech stocks. And so really you could financial, you can make use of either one, obviously, uh, depending on when you want to experience the benefits from that.

Uh, and then, so I'd have to say the feature, I guess I do the feature I've already experienced the past. And so I guess, going to the feature and the shaping, coming back to shape some of my decisions about that feature is probably the way I'd go. But there's certainly a case for either one. Yeah,

Pierre Daillie: [01:28:33] for sure.

It's not the easiest. That's great. Not an easy question. When you, when you actually start to think about it,

Lyn Alden: [01:28:42] Yeah,

Mike Philbrick: [01:28:43] it's a little brain teaser to finish things off. Well then thank you so much. And I will remind everyone who has made it to the end that, um, you know, Lyn, uh, Alden investment strategy.com is where you can find Lyn's work.

Um, and it is, uh, as you can tell from the, uh, the podcast video interview, whatever, however, you're interacting with this, her knowledge is both broad and deep, and, um, we encourage you to, uh, interact with, uh, with her service and, um, and, uh, also probably write a review on this particular podcast and smash the like button and share it with your friends as well.

So I think that would help us all.

Lyn Alden: [01:29:24] Yep. Thanks for having me. I really, I really enjoyed the conversation. Certainly a fun one. Thank you,

Pierre Daillie: [01:29:29] Lyn. Thank you. Fascinating. Thank you.