The Last Trade E055: Financial Infrastructure for the Digital Age with Shalin Madan

Brian Cubellis (00:05.678) There's only three of us. There's going to be four of us. There's only three. The show must go on. You're joined by Mark Vallek of Incrementum and the Ingold We Trust Report. Mark, thank you for joining us. Welcome to the show. Thanks for having me. I know Michael and I are really excited to have you on today because I think the position in which you sit in, the firm in which you've built over the last 11 years is really unique in terms of its focused on sound money. But particularly a blend of gold and Bitcoin specifically. So I think to start off the conversation, which is learn about yourself, your journey to discovering sound money and why you're so passionate about it and how that rolled into incrementum, starting that fund and managing that over the last 11 years. Okay, well I'm native Austrian and that's why I hope you can cope with my Austrian accent. But it's not that I found Austrian economics in the Austrian university system, but actually only post -graduate when I already was fund manager in the 2000s, roughly shortly before the GFC actually hit. When it then hit, I really fell into that rabbit hole. And what amazed me back then was that basically nobody from traditional finance really looked at the financial system critically and the monetary system. So that's one thing I really wanted to investigate how this actually worked. And then with all the QE which came up back then in 2008, 2009 and so on. That was really weird. I think a lot of people actually from the financial sector really didn't know what was going on. But then things seemed to settle down and then things went on. But I didn't buy that. And I really came to the conclusion that the monetary system was not sustainable. And then I found out about gold. I found out about Austrian economics, which is really, I think, Brian Cubellis (02:24.814) interdisciplinary. So you actually fall into the rabbit hole of monetary history. And I mean, in Europe, in Austria, Germany, we had this hyperinflations 100 years ago. So there's some remnants there, which one already knows from perhaps family stories from your grandparents and so on. And if you actually dig into all these kind of topics, you really find out about this repeating fiat scam, I'd call it, which has been ongoing for several hundred years, probably. And I really thought this is not the way to how things probably should be at the end of the day, because it's not moral, it's not ethical, this monetary system with all... the transfer of wealth which is going on through creation of money. And on the other hand I also saw an investment opportunity because my previous job first was fund analysis. I was interviewing hedge fund managers and when I found out about Austrian economics I started to interview these people if they had heard of it and most of them said yes they know about it but really they did not. And then I thought, okay, there must be some kind of edge to it. And we started to come up with investment products, which basically take into account this unsustainability of the monetary system. And that's really why we wanted to found our own boutique, which really, I think, has a different view on the world of monetary system economics. and the likes. So that's my little journey in a nutshell, I guess. Brian Cubellis (04:28.493) I think it's similar journey that a lot of us have gone through and welcoming Mark to the show. Got through the difficulties there. And I, so post financial crisis, 2008, 2009, you went through this, this period of really trying to figure out why the financial system was rotten at its core. I think we all agree. Like we've, we've completely broken. money as a tool, we cannot price things accurately. And so in terms of recognizing that inefficiency in the market or the corruption in the market and then starting a fund around it in 2013, when you started Incrementum, what was the core thesis back then? Has it changed at all? And what is your pitch to clients essentially in terms of parking money with Incrementum to deploy in a way that is counter to most traditional asset managers. Well, my first entrepreneurial experience was basically already next to my job as a fund manager with Bullion dealership, which I co -founded. That was 2011. And also around that time, I think 2012, we also bought some Bitcoin privately. But that was a small allocation back then, which became bigger in terms of asset allocation. But we really knew that in 2013 we wouldn't be able to integrate this into a regulated fund because our business is fund management and 2013 was way too early to think about that. But we kept on looking at the developments in the Bitcoin scene and the crypto scene and Brian Cubellis (06:28.59) tried to push also to start regulated funds with Bitcoin exposure. And as we founded our company in Liechtenstein, which then happened to be pretty open regarding crypto, that turned out to be an advantage, but still it took years and years until we really were able to pull it off. So at the end of the day, our first regulated fund which is combining gold and Bitcoin was launched in early 2020. So that was quite a journey actually until we were able to start that fund. But next to that fund, our other strategies are basically resources. So we have a fund which has a uranium exposure, it's uranium equity funds, we have inflation diversification fund, and we have a balanced portfolio all seasons fund. So we've got actually different strategies. And since 2020, we have two strategies which combine precious metals and Bitcoin exposure. And that's... That's actually what we do. And I think the combination of real assets in terms of commodities and gold and Bitcoin monetary assets, that's, I think, something which one should be overweight in the next years. And that's at least how we personally invest. And that's what we also offer for our clients. Mark, taking it a step back. on one notice, so your, your co -founders, who we've spoken with, they, Ronnie yesterday put out, he had retweeted from Crescent cap. They put out, the rise of hard assets and it's a, we'll, we'll attach to it in the show notes, but it's effectively breaking down a research report. Brian Cubellis (08:37.933) And the quote is, to put it plainly, today's Michael Lewis, big short opportunity in our view is the ongoing devaluation of fiat currencies relative to real assets with limited supply, which are imperative to society, either as commodities or sound money. And this is, you know, what are you June 2024, you guys coming around this idea in 2013 and coalescing with four co -founders of curious was everybody. I would imagine everybody was a sound money advocate and understood why gold is money. Did everybody come at it together about Bitcoin as well or was there a learning progress to get to that 2020 point where you blended in Bitcoin and gold into one of the fund strategies? I mean, the nice thing about our partnership is we are five partners and we all run our strategies. So if we are convinced and we want to start a new strategy and we can fund it, we can do it. So, I mean, yes, we need the consensus of all the partners, but basically that's not a big issue because we think relatively alike. I mean, everybody has his own opinions, but that wasn't the issue. The bigger challenge was basically finding investors, not so much because to convince the investors, but due to this new... regulatory issue and then also crypto coming into place. So the term crypto was like really still is actually difficult for banks. But especially in 2018, 2019, they were really everybody. sounded the alarm bells when they realized, okay, this fund has crypto exposure and this is an evil thing and money laundry and so on. So you really had to basically overcome a lot of regulatory obstacles and talk with compliance officers. And then even if you had the investors, which we did, bringing like having actually the funds coming in. Brian Cubellis (10:51.789) into the fund at the time we wanted to start the fund that really was quite troublesome. But we pulled it off and then just like two weeks after that Bitcoin started crashing in one week after that actually we started the fund I think in February 2020 and beginning of March everything crashed which turned out to be a big opportunity because I mean we We bought into the crash and we stuck to our strategy which was 25 % Bitcoin and 75 % gold. And we really were actually averaging into low prices. So we really actually could capture most of the upside because the market turned pretty fast in, I don't know, mid -March I think already. So, it were quite interesting weeks for us, but we started off pretty well and now things are up and running. And I think we also obviously had the first bear market in 2022. And the concept of combining precious metals with Bitcoin, again, paid off in terms of volatility. because I think a lot of people then started investing in 2021 and then lost their nerves in 2022 because they were just like not used to this high volatility. And I think that's really a big challenge for traditional investors. And that's, I think, also one of the main advantages to offer a product which is more... which is in a volatility range which traditional investors are used to. It's like equity kind of volatility and they are used to these kind of drawdowns and they can stomach these kind of drawdowns and they did. So all our investors basically stick to us and they are, I guess, pretty happy at this point again. Brian Cubellis (13:01.518) And I guess that brings up a good point. I mean, we can get into the overarching macro thesis, particularly as it pertains to everything going on geopolitically and from a monetary aspect today. But I think since we're touching on it now, talking about the blended portfolio of gold and Bitcoin, obviously over its first 15 years, Bitcoin, a lot of the headlines around it are due to the price volatility and pairing that with gold, which is more stable from a price volatility perspective over time just due to the fact that it's been around for millennia. What does pairing these two assets from a volatility perspective do for a portfolio? Yeah, that's been a point where I perhaps, or my personal opinion is a little bit different to, let's say, the opinion which you typically hear within the Bitcoin space, which is, I think, when it comes to volatility, people expect Bitcoin's volatility to go down proportionally to the market cap. I've been hearing this for many years, actually, and you can make the argument that This did happen in the first years, but I think it didn't happen actually in the last five years, especially if you look at the drawdowns, the last two drawdowns in the last two bear markets were pretty much on the similar range. I think roughly minus 77 percent or so last bear market and the one before that one perhaps slightly higher, but pretty much in this range. and this with a much higher market cap. So this thesis, I think, is not playing out. The volatility perhaps in terms of standard deviation has come down, but the Max Rodin, which is really, I think, the better parameter to watch has not. And I don't expect it to come down much in future also. And obviously the upside was much higher than gold. That's... Brian Cubellis (15:16.046) That's also true. So risk adjusted, it's still a great asset. Don't get me wrong. But I think it will always have the challenge of being a high volatility asset. And as I said, this is a challenge for a lot of investors just due to perhaps the age or due to their risk appetite. And if you can manage this high volatility, with position sizing within a portfolio that's actually basic portfolio management, just size your position accordingly. But that's in practice easier said than done because with this high volatility come high emotions and the behavioral finance traps which come with Bitcoin I think are extremely high. So, I think not many people really have managed the risk in a good way, even though, as I said, theoretically, it's not a very difficult task to do. But in practice, for instance, I mean, we always preach to rebalance the portfolio and we do it in our strategies. And I also tell people to do it by themselves, but in practice, who really rebalanced? I don't know, in November 2022, when everything was full of FTX, bankruptcies and the media was all like Bitcoin is dying. Yeah, Bitcoiners probably took advantage of this opportunity. But the more the people who are new into that game probably did not. They did the opposite, I would guess. So that is the challenge. And... Coming back to what I was going to say, I don't think that Bitcoin volatility will go down significantly because the one advantage which it has over gold, namely, it is not a physical asset, is a disadvantage when it comes to volatility. It's exactly the physical physicality and also the physical properties as an industrial metal, which actually counterbalance Brian Cubellis (17:42.158) volatility because if you have high monetary demand of gold, basically the industrial use cases will be substituted, right? So you will have lesser demand from industry side and you will have higher supply also from the scrap gold side. And this always is like counter -cyclical in terms of volatility and I think this advantage or advantage doesn't necessarily have to be advantage, but this difference obviously always will stay. So I don't think that Bitcoin's volatility will ever reach gold's volatility as long as we are in a fiat standard. If we switch to a Bitcoin standard, then it's the unit of the count, then the volatility could actually be zero as it was. in the case of gold until 1971, right? So, but I think we will have to wait a while to get there. I'm afraid. Yeah, I think the natural notion of a finite fixed supply with infinite amount of liquidity and pools obviously keeps that volatility moving and reducing over time. But to your point, it's still... Insanely volatile. This notion of the blend is something I've been thinking about for over a year. And so when I found incrementum, I thought it was incredible to see. Mark, have you seen a blend of Bitcoin and gold together in a fun strategy? And then also, how do you think about it from a, an idea of getting somebody interested in the asset class? Because I think that's the big thing that we forget. And this is something that I think Larry Lepard helped me understand is like from an age perspective. some people just shouldn't and don't need it. Not only do they not need to, but shouldn't have to suffer a 70 % drawdown in their net worth. And so this reality of having some percentage allocated to Bitcoin, well, then you leave the rest to what are they going to hold? You know, again, we know equities bonds. It's like, does it really make sense? Or where they hold another sound monetary instrument and then they can over time rebalance if it makes sense, whether it's via conviction or just the assets price. So I've always thought of this as a very interesting way to like actually start. Brian Cubellis (20:02.958) the conversation with somebody that would historically be away from Bitcoin that understands gold because there's very few firms that do this. And that's almost a signal to the individual from a macro perspective and specialist perspective that if you can align something that's, you know, 5 ,000 plus year track record, along with some that's digital in nature, you're sending the signal that this asset is closer to digital gold than effectively aluminum or, you know, not have value at IE crypto. So just curious mark have you seen this in any thoughts on like how you would ensure this could be introduced from a net new position to somebody Yeah, I mean you mentioned Larry LePort Like him a lot. He I think we think in very similar ways in this relation also Charlie Morris has a combined product. I don't know if you know him from bite by tree so But these really are the only guys I know who actually offer combined strategies. I don't know if Larry actually offers a combined strategy, but who really actually think that the combination makes sense. The three Musketeers, I think it's a rare breed if you like gold and Bitcoin together, but also like big names like Ray Dalio, who I would consider probably the king of strategic asset allocation. He said, I think two or three years ago, I like my gold with sprinklers of Bitcoin on it, which I think is a really nice quote. And I thought it indicated our thesis pretty much. And it's not only him. I mean, if you follow discussions in the mainstream financial media, it seems to me at least gold and Bitcoin are mentioned more and more together. So I think this is a natural convergence which is happening when you discuss about these topics. And then I think also that, and we wrote about this, I think in 2019 in our Ingold Redrust Report, we thought back then that this will be kind of going forward, kind of perhaps a little bit similar to like an equity bond portfolio. It would be like a building block. Brian Cubellis (22:26.254) of a traditional portfolio gold Bitcoin building block, which you can basically add to your equity bond allocation. And I think there will be more and more managers who offer some kind of strategies like these because it just makes sense in terms of risk adjusted reward. So. Probably there are more by now. I know of us three. As I said, perhaps there are more managers by now. Brian Cubellis (23:06.03) Yeah, I think it's a good point to jump into the current state of the market and why gold and Bitcoin have had really good years over the last, I mean, Bitcoin since the beginning of 2023 is up, I think, well over 150 % at this point or around there. Gold, obviously, has been breaking out to the upside, hitting new all -time highs. And I'm going to juxtapose that to the geopolitical backdrop, you have the US government, $34 trillion in debt, 220 plus trillion in unfunded liabilities. You have what many would say is somewhat of a political crisis here in the US as well as everything's become hyper -partisan. Obviously, we have the Russia -Ukraine war, which led to the seizure of Russian treasury assets and we've had Many conversations, not we, but BRICS countries particularly have had many conversations about diversifying away from the dollar system due to the risk that has become apparent there from a custody perspective. And at the same time, you can see this in charts as well, particularly with China accelerating their offloading of US Treasuries at the same time that they're accelerating their buying of gold. And so in terms of where we stand today in June 2024. Mark, would you consider this like a massive inflection point that is somewhat anomalous over the last 50 years? Especially when it comes to gold, I think that's actually the biggest surprise. If you look at the Bitcoin still seems to be following its four -year cycle. So I think that's basically more or less doing what one could have expected. Right. But gold, gold actually is now showing a new playbook. And that's also the new light, the light motif of our new Ingold We Trust report, the new Brian Cubellis (25:19.469) gold playbook and what do we mean by that because you did a good job of already pointing out a lot of arguments or explanations for gold's good performance recently. But if you look at the most influential factor traditionally regarding the gold price that were real yields in the US dollar. right so you have rising real yields then typically you have falling gold price and vice versa so if you have basically I mean the opportunity cost of holding gold is is is real yields basically right so that that correlation worked pretty well for for many years and and that really got crushed in I'd say mid 2022 and one of the big reasons probably was the seizure of Russian assets, the sanctions. I mean the whole world was shown that treasuries or European bonds for that matter are not the riskless asset, contrary to what one has to I think still fill out in the CFA program. You have to say, okay, treasury bonds is the riskiest asset, but it's not, right? There is a counterparty risk related to that asset. And I think central banks woke up to that reality. And you can see this in the statistics. They have been wrapping up their gold purchases hugely. You had quarterly... purchases of roughly, sorry, yearly purchases of roughly 250 tons during the last 10 years. And starting from 2022, you now have 1000 tons, so basically quadrupling of the central bank purchasing. And this is what you're now showing is basically this divergence of the real rates relative to the gold price. So one could actually make the case, Brian Cubellis (27:45.677) Since real yields have risen, especially in the US, and are positive also, one could make the case, quite a strong case, that at least according to the old gold playbook, gold price would actually have to sold off significantly. The opposite happened here. This is basically the new reality when it comes to gold purchases. The big advantage of gold is that it has no counterparty risk and this is obviously hugely respected again by central banks around the world. We do live in some really, I think, serious... times when it comes to geopolitics, the last leitmotif was showdown and we talked about the geopolitical showdown, which is obviously ongoing and started especially going, was kicked into high gear in 2022. Yeah, this is one manifestation of the geopolitical showdown. Gold is being redistributed as neutral reserve asset. And Logan, if you scroll down one more slide to page 10, I think this is also a really interesting chart in illuminating that people are favoring physical gold over ETF products specifically. I'm sure this is a product of central banks buying directly, but building on this point and this chart specifically, do you think there has been an investor appetite to favor physical over paper exposure via something like an ETF due to, I mean, many people would say they're conspiracy theories, but I think they're pretty well documented at this point with gold price fixing in London and other bullion depositories. I believe in 2020, there was a problem with COMEX and the London exchange as well, the LME. Brian Cubellis (30:11.533) Do you think people are demanding physical because they really want to hold the good thing and they don't trust the paper markets? And if so, could that demand for physical, bullying, corrupt, what many believe to be price fixing that has been going on for decades? Yeah, that's a big topic, that's a big question. I mean, the graph which we just saw, perhaps you can just put it up once more. I think one has to think about who are we talking? I mean, this is a global market, obviously, for gold and the very different types of investors. And what we are seeing here is gold ETFs, right? And gold ETFs are usually used by financial investors. who don't really, I think, have these kind of fears mainly. So I think that's really interesting. Basically, these investors are acting according to the old gold playbook. They think they see that bonds yield some, they have an interesting yield again, and therefore they sold off their gold holdings. And as I said, if the traditional playbook would have helped, probably the gold price would have fallen, right? But if you think about it, these, as I said, are Western, or probably most of them are US financial investors, and they, rightly so, do not have to care so much about counterparty risks for now when it comes to bonds. It's probably mainly... I don't know, central banks from countries which perhaps are not so favorable to the US. And I think you could make the argument these financial investors are acting rational, right? Because they, I mean, 5 .5 % yield on the short -term treasury note. That's quite interesting if you have official inflation rate of, I don't know, 3%. Brian Cubellis (32:27.021) points or something like that, right? So you didn't get two and a half percent real yields for decades, in fact, right? So gold isn't so interesting for Western investors, but it's much more interesting for Eastern investors, if you will, or the global South, if you want to call it that term. And... And this is also the divergence, I think, Western investors haven't really woken up to the fact that perhaps counterparty risk also will at some point be imminent for them. And also on the inflation side, that's also one point which we point out. It's... the inflation expectations really are stable. I mean, it really amazes me that the mainstream financial investor from the West really thinks we are done with inflation. Everything is good now. That was really like only two year anomaly. But given the fact that we are so indebted and this trajectory is really only going to go up, especially with the higher financing costs. I think if you look at history, that suggests that we will have another inflationary wave coming sooner or later and then Western investors may change their mind pretty fast on their gold exposures. Yeah, it's so fascinating on like the regional differences and this notion of counterparty risk and who cares and who doesn't. Mark, I'd love to, Mark Connors on your side, we've talked about this before in your previous roles on Wall Street when it comes to pricing risk and explaining risk, like how much of that is happening right now with the interest in Bitcoin or is it looked at as we've traditionally seen as like a high, you know, beta like tech play and people are coming at it from a, you know, perspective that's completely different than this and where have you seen those themes start to like converge? Brian Cubellis (34:33.421) So you're giving me a little bit of PTSD from being a risk manager during 08, when you kind of just put some information out about the changing yield structures or some of the failures in the, like where the hard assets went soft at the banks as far as asset backed securities and what that would be. Michael, no one cares about counterparty risk. They really don't. And I say that knowing things can change. But it is a show me game. They really need to be showed the door. They need to be showed the risk. Everybody, all the major financial institutions have been and still are incentivized to take the path of least resistance. So Lehman did it when it started to get hot. They didn't sell their assets. All they did was move down the yield curve, the term structure from wholesale, which is safe out one, two, three years to overnight, which is cheaper. in order to keep their game going. And then we know what happened when JP Morgan and others finally said, we're not going to lend to you. So I don't think counterparty risk is there. I think in the last 10 or 15 minutes, but Mark was talking about, which is one of the biggest to continue the incentive structure topic that I talked about, incentivize for ease, not for preventing stepwise risk of counterparty failure. The Global South, where people are starved for stability, that's where Bitcoin and gold, I think, are going to be there. The fact that we can still invest in the S &P and have a company like Nvidia pop up from nowhere and to give us value. I mean, the S &P is a good thing and bad thing. It helps maintain buying power, you know, at like a 7 to 12 percent gain because it's a momentum fund. It's got who knows what the next name is going to be. as I said, no one saw Nvidia coming, but here we are with our equity focused portfolios doing fine. I think that the regionalization of awareness will be number one. The second point I want to talk about, which is gap risk and counterparty risk is, I mean, again, Michael Tanguna, this is what you've been working on on the risk free curber. Brian Cubellis (36:58.829) cap -end pricing model, you know, what is the hurdle rate for risk? And Mark, you also touched on it. I mean, I think that gold chart you had really does speak to that. And talking about counterparty risk, if we can show that's not really just a short -term preference, but a step -wise, you know, a sea change in people saying, this is now my risk -free rate. And there's a reason why treasuries have a higher yield and gold is being bought even though real rates are high because the game's changed. And, you know, I'll stop there, but I agree, we're all here for a reason. We are uncomfortable with the current financial system and we think it's just starting to shift. And that gold treasury's chart may be one of the best windows onto that dynamic. Brian Cubellis (37:55.309) Yeah, the part that you referenced that we all know of is the counterparty risk doesn't matter until it does. And the situation we're in, we know, everyone knows it's been listed in this is we're, there's a one way train where we're headed. So you have to be ahead of the counterparty risk. Most of the West aren't concerned about it, but like, this is the key driver is like, it's coming to that point. And that's why gold and Bitcoin have these properties that you can free yourself from counterparty risk or actually provide redundancies in it. And that's like the benefit of the Bitcoin side of like, we're almost like the canary in the coal mine. They're not your keys, not your coin and all these things. We've already seen the collapses of a quasi, you know, bank runs. And so they give you that kind of like, you know, strength or the, the, the, they give you the, the fortitude to figure out what are the best practices. And so nobody cares, but they're, they're going to have to, and I think that's the idea here is you can, if you can create the solutions that are. Seamless and also get ahead of it. I think is a big It's a big thing This reminds me of when we launched the trust and we allowed for in -kind delivery and individuals would reference like Sprott and ounce and some of these other ones that mark probably is familiar with that allow for redemptions But then the second comment was like, nobody ever Nobody ever uses that or I'm the only one that uses it because and it's like yeah Nobody uses it because you know in the West you're not concerned about your bank going down You're not concerned about counterparty risk. But again as we know there's too much debt, not enough dollars, counterparty risk will rear Ted at a certain point and you don't want to be left with your whole, you know, life savings sitting on the other side of that trade. Well, that brings up another point too, in terms of counterparty risk on the international geopolitical level. And then at the micro level, in terms of people being to access the money in their bank accounts, I think there's been two recent developments in those two different areas I think we should definitely touch on, which is at the geopolitical international level, many people focus on Brian Cubellis (39:58.413) what the U S and Western nations did to Russia's treasury assets a couple of years ago. And it seems that, I believe it was last month. There was a retaliation on behalf of Russia saying, all right, you're going to freeze our treasury assets. We're going to free some Western bank assets that are held within the country. And they did that, last month, but I think it flew under the radar. But to me, that signals an escalation in terms of counterparty risk at the global level. in these monetary payment systems and banking systems that have been erected. And so it took a couple of years for Russia to retaliate and seize Western funds held within its borders, but it did that last month. And does that create a moment where it becomes more normalized to do these things? Does that accelerate all the themes that we've been talking about for the last 45 minutes? And then on the micro level, the FDIC came out with the report. quarterly report on the state of the banking sector and the number of banks, quote unquote problem banks as defined by the FDIC increased by 20 % but the amount of assets held by quote unquote problem banks increased 5 .2X so I believe $180 billion and then the FDIC also announced that there is over $500 billion in unrealized losses sitting on these bank balance sheets in the US predominantly driven by commercial real estate and residential real estate. And so is there, Mark Valick, a scenario developing where counterparty risk is going to be at the fore because of two things, the rationing up of the back and forth at the geopolitical level, and then also another banking liquidity crisis potentially on the horizon. Yeah, I mean, we talked about the chip. geopolitical tension a little bit already and that's ongoing and probably will, I don't know, hopefully not, but seems to be escalating or at least doesn't seem to be de -escalating unfortunately. But I think it makes sense to step back for a second because I mean when we talk about counterparty risk, what are we talking about systemically? Brian Cubellis (42:21.997) And I mean, we wrote a book, Austrian School for Investors, investing between inflation and deflation. And we thought about this title, obviously. And this investing between inflation and deflation is, I think, brought along because we are in a debt, we have a debt -based financial system. And not many people are talking about that fact because this, discussion between deflationists and inflationists has been ongoing since decades. And I think both have a point, right? Because, I mean, when we talk about counterparty risk, in an extreme case, we are talking about debt deflation or hyper deflation. And theoretically, that can happen in a debt -based system that's basically always looming over us. we talked about the financial crisis, the crisis 2008, that would have been a huge debt deflation if central banks wouldn't have done what they did. I mean, I wasn't a fan of that, but I can understand, systemically I can understand why they did it exactly to prevent this debt deflation. So this is always basically systemically a possibility. And I think it both extremes. get more and more likely. I mean, this balance is more and more difficult to be achieved, been achieved. So to one extent, perhaps even has to salute central banks, how they've been able to manage it so long. But if we really get to a point where the central bank would theoretically print too slow or react too slowly, then this is a real threat. But in practice, we have this unbacked fiat monetary system. And I think 2008 and 2020 basically already showed the way forward. I think it was very unlikely that they print too slowly. Brian Cubellis (44:44.493) because I mean, I don't know how many billions, trillions did they print in 2020, I think five, six, seven within a few months. It was really crazy amounts of currency which they created and they had the reason to do so, right? To prevent this debt deflation. And I think this will be at the end of the day always the route, the way out because it's the easy way out, but on a short term, basis, we could see some kind of deflation or counterparty risk. And this is, and then now coming back to gold and Bitcoin, that's, I think, the beauty of these assets. They basically, especially if you have the premise that Bitcoin also has no counterparty risk, which I think one can make the argument, but definitely with gold, I think that's very clear. you are hedged in both of these extreme cases, right? And I think this is important to understand. And I think this is also another big argument in favor of these two assets for either of these extreme scenarios. Yeah, that's a great point in the sense of like you have counterparty risk on both sides of the curve on the short term, if you're just counterparty just goes to zero and then on the long curve because of the erosion of your purchasing power, if you're not holding gold or Bitcoin effectively. Right. Right. And that's the beauty of these assets. They are without counterparty risk and they basically are not inflatable. So gold is being inflated but on a very low rate. So with one and a half percent per annum and that's why I think that these are increasingly important supplements for your portfolio. Mark Connors, one of the question for you on the going back to the educating, you know, we do a lot of this. Brian Cubellis (46:49.005) on this pod is for individuals that are into Bitcoin to go to their family, friends, colleagues, peers. Conor's on your side. How do you feel about that notion of whether it's a blend or being able to start with somebody that's into gold and talk about a strategy that has this blend there? It seems like there's something there that hasn't really been done that could really accelerate the learning curve for a lot of individuals. Yeah. It's almost like, well, look at what we have, the ETF. So people say, I know that animal. And it's, you know, today I think is the second largest inflows after almost a little over four months of having the ETF. So that's an example, Michael, of just give them what they know. Folks my age and I think younger aren't as much into gold. They're getting a little bit more awareness, Mark. So maybe you'll be getting, you're getting more calls that way from, you know, people in their 40s and 50s. who may be having a longer view of things or aware that things don't last forever, I should say. So I think, well, I'll start with the general portfolio and then I'll touch on how Bitcoin can be presented to a person already aware of gold's qualities from counterparting and inflation and debasement. And I think it's about loss. So I just had a friend over the weekend, we were chatting. And he said, I'm in, you know, I want to make an investment. How should I do it? And he said, Mark, listen, we're good. If it goes to zero, like, you know, he's like, we're good. I'm just going to put a little bit in. And I mentioned that because people are not familiar with it. So they are going to go worst case and they're going to be investing a small amount. And they're there either it's you, me or other people, Michael, I know Marty's been doing this forever, who get people to the starting line. and ready to jump on the gun when the gun sounds for them to buy it. When we get them to that line, they're only going to want enough where it doesn't cause a divorce or pain or other disruption in their life because they can't really price the reason we're talking about. So since you can't price, it's hard. All models have that default risk. That's like the solve for it. It's always the hardest part of the model. There's not enough data. Brian Cubellis (49:15.981) So instead of trying to price that difficult thing that even modelers can't do in finance, they simply say, there's something here. I really can't get my head around it. I want to start with enough that I can lose. Not ideal approach, but it's practical. And that's why I think everybody gets to that 3 % allocation on even though we don't like the 60 -40, on a 60 -40. Because I've shown in our work and other people have that a 3 % rebalanced allocation of Bitcoin, and again, sorry for the 60 -40, but that's what we know, back to what people are familiar with. It does, it barely changes the worst drawdown in any five -year period. It's like 21 .4 % versus 20 .8 for the standard 60 -40, because it does dovetail, because it isn't correlated, because you're rebalancing. So that to me is it, get them in with the, you know, what do you want to call it? The sugar wrapped approach and then let them feel it and go on from there. So that's what I, what I think. I think it's hard to sell the insurance wrap. Some people like it. Most people feel uneasy. They're feeling the unsoundness. They're feeling that they're missing out. And if you've given enough approach, like we got four people here who have some time, not that we're long in the tooth, but hopefully we're long on knowledge in this space. And if we're to spend time talking about it, I think we're getting attention. So. That's what I think. I think, yeah, sales, you got to minimize the downside through traditional viewpoints of what we call a tear sheet, the statistics. Anyway, and Mark, I don't know what your thoughts are. I'd love to hear how people are approaching that mixed portfolio that you're talking about. Yeah, it's very different depending to whom you talk, obviously. I mean, perhaps general thought regarding gold and Bitcoin. I mean, I personally, I go to events like traditional fund events, traditional finance event, if you will. I go to gold events and I go to Bitcoin events and I really enjoy the Bitcoin events most. Why is that? Because there is some kind of positivity and some kind of Brian Cubellis (51:37.837) constructive vibe there, right? The gold events, mostly, I think the vibe is rather negative. Perhaps you could, you have the fear, perhaps a little bit more there and perhaps you have, I don't know, the greed or perhaps the fantasy on the Bitcoin side, right? And then the traditional finance that's like a... a dinosaur which is dying. It's really bad going there. But in this kind of, I mean, so if because you mentioned insurance, right? I mean, it's I think it's it's easier to sell like a positive vision, right? And then a negative vision. If you talk about insurance, you talk about some kind of things which which which may go wrong. And a lot of things which are going wrong, unfortunately, it could become even worse, right? But But still, I think people rather like to think about positive things. So the positive vision about Bitcoin, I think, is really a strong argument. Obviously, I mean, I know what you're saying. It's a very big topic. And for beginners talking about the Bitcoin standard and all the ramifications of the current monetary system, that's too much. You can't start with that. I get that. But... But talking about like a positive vibe and changing the system, I think this is a better sell than talking about the insurance and some, all the things that potentially could go wrong. That's my feeling. It's kind of unfortunate like this how far we've come because I think like when we go back, well, this will just be standard. You know, Marty talks about a lot of like going from a level of you own the asset. free of counterparty risk and you can start to move up the stack as you want to get comfortable. But it's like, we talk about notion of counterparty risk and all these other concepts. It's just like optionality, right? Doesn't anybody want optionality or the ability to be free of, you know, the, you know, you think about like, everybody's joke around, we have, you know, these different products we offer, but anytime we have a conversation, if somebody's between Coinbase or 12 words on a piece of paper and any pick any device, it's always a 12 words. Brian Cubellis (54:01.453) And the device, unless it's somebody that's like 90 plus years old, simply because like they have the optionality, like they can take their assets. They can't wake up one day and their phone says like, sorry, you're, you can't log in or, you know, anybody listening to this, try to go to Coinbase and move assets around. They don't make it easy if they let you take it off. And so this notion of like, how do we get back to having some kind of responsibility for just knowing who our counterparties are and thinking through them critically. Like that's how I think about it. It's less about, but I've obviously been looking at this for a long time as everybody here. but that notion that we're this far out, we reference how much trillions have been printed, where inflation is, it's probably closer to 20%. Honestly, you go to the store, but we're still like, eh, it's okay. You know, I want to Nvidia and that's my purchasing power. And the bar keeps moving, right? Cause I think Mark, you referenced nine to 12%, but I'm convinced like whatever the number of the SMP, we're still plus 5 % in real terms from an inflation perspective. which leaves basically nothing out there other than probably Bitcoin and some gold hybrid if that to like outpace inflation where we're going. Cause it's only accelerating is the thing that I don't think most people talk about. We talked to the pension this past week and we talked, I talked to one yesterday and they were talking about, well, we're good. We're funded. I was like, are you like in real terms or nominal terms? And he was like, nobody brings that up. Like when they actually gonna get their 60 ,000 or 80 ,000 pounds, is it really gonna by anything relative to what they thought they were when they started out. I mean, yeah, and that's, go ahead, Marco, sorry. Excuse me. I just wanted to say, I think we also all probably especially US investors, which typically have a US equity bias when they invest. They are very biased regarding the last 40 years. So the collective mindset has been very positive when it comes to equity investing. But there are scenarios. Brian Cubellis (56:01.197) where you actually have, where you had, I think 16 years from 1966 to 1982, where you didn't get anywhere with equities and in real terms, you actually lost a lot of money investing in equities during a stagflation. I wouldn't be so sure that like going forward, the equity, the S &P and Nasdaq or what have you is basically your perfect inflation hedge. I mean, that could go pretty, turn pretty sour once you have a longer terms, longer timeframe with higher interest rates, right? If you have a second inflationary wave, you saw 2022, I think that could come back again, right? So I wouldn't, I think historically you had stocks and gold, basically a combination of stocks and gold keeping your purchasing powers. And these two assets basically switched, each had their run a few decades, right? And equities also, I mean, it's not a given that equities rise. I just wanted to throw that in. Well, it's actually the opposite. Productivity goes down. and number of dollars created go up, which causes more dollars chasing fewer goods from inequities. Yeah. And think about how many companies are staying private now because of the restrictions of being public. So the access to some of these companies that maybe are highly productive are choosing to stay out of the public reporting realm. Because I mean, I think taxes, the income tax and property tax rate are always focused, but the number of taxes that are coming out and fees are the hidden taxes that are bedeviling homeowners, sales, you know, individuals and companies alike. So, you know, Marco, good, good point on equities historically, because sure. I mean, gold went up, what, 14 or 16 times in the 70s on high vol. So, you know, that's... Brian Cubellis (58:21.613) I bring it up as a Bitcoin focused firm because that's what we're seeing higher ball, you know, and then on the upside. and I think that is, as you said, over 40 years, that's there's not institutional memory about how things had been, or maybe not always are as we've seen in the last, in the prior 40 years. Well, that also brings up like the question of if. There is a subsector of allocators that are being somewhat complacent and really just running the playbook for the last 30 to 50 years and thinking that that's going to be the playbook. I think we believe that things are changing rapidly and people better wake up to that fact. But with that in mind, Mark, what do you think the world looks like on the other side of this transition to hard assets, geopolitically? from a monetary perspective, do you think we are at the beginning stages of a massive disruption of how international commerce and banking actually operates? I mean, the one thing I learned is you don't really don't know the future. And I mean, it's always interesting to speculate. But my gut feeling is Bitcoin will save us. But I also have the feeling that we like going through like a birth of a new system, if you if you will, has a lot of pain. Birth is a lot of. pain involved unfortunately with the new life form and I think we have to go through this, this is my honest feeling. I think from a geopolitical standpoint most of the western world hasn't really realized how fed up a lot of parts of the world are with... Brian Cubellis (01:00:28.429) with actions of the West during the last decades, I guess. And they haven't also really realized how serious the situation is actually. I think so, unfortunately. But hopefully humanity can keep the stuff together and avoid the worst. But when it comes to like the economic point of view, when it comes to debt, I mean, That for me is really clear. We need some kind of a revaluation of... For me, the bigger question is, will the Spheod system be able to be kicked in another round? What do you mean by that? Can we reflate the system significantly once more? And I think that really has to... be done in the next five years or something like that. Because that sustainability really is a problem. And not only gold bucks are talking about this anymore. I mean, you talk to Jeff Gunlach, you listen to Jeff Gunlach, you listen to Ray Dalio, listen to all the big... guys basically micro investing really like sounding the alarm bells louder and louder. And it's also really not very difficult to see, I think, especially when you look at the refinancing costs. So in my view, in order to keep the fiat system alive, really what has to happen is probably an inflation, another round of inflation and then Basically, the question is if they can stop the inflation, probably need to devalue the dollar 50 % or whatever to get to more sustainable debt levels. And that could be achieved in three years or four years with like 10, 20 % inflation for two, three years. But then the difficult task is getting it back to lower rates. I mean, one has to say the Fed did not Brian Cubellis (01:02:47.213) did do quite a good job bringing the inflation down, even though perhaps officially it's much lower than reality, but inflation rates have come down. Prices obviously have not, but it's all about the inflation rate when it comes to sustainability. But I think we need much more. The system needs much more and we'll see what that will do to society also. and to think about all the pension funds and think about insurance companies. The big pools of capital will be hit very hard by another round of inflation. I don't really see a way around another round of inflation. So that will be quite a challenging environment in the next years. That's a scary thought because I think the last stat I've seen in terms of the US, it's for every $8 of new debt issuance, you're creating $1 of GDP growth. That is an incredibly disconcerting stat. Then you couple that with the economic data that's been released in recent months, whether it's the Michigan consumer confidence. number that came in well below expectations. We had a terrible jobs report this week. There's again that FDIC report that the banking sector is a bit wobbly right now. And they've done everything they can to bring down the rate of inflation. As you mentioned, they've done a pretty good job at that. But we find ourselves in a situation where prices are still high. You have a potential liquidity crisis on the horizon. We're issuing insane amounts of debt. trillion dollars every hundred days since last year and it's not doing enough. So $8 of new debt for $1 GDP growth and that's not doing a trick. To think of what that number actually has to hit to drive growth that re -inflates the economy is almost mind -numbing, somewhat scary. Brian Cubellis (01:05:08.813) Yeah, yeah, I think or Mark I was just on that on that point about the eight dollars get you one dollar You know the term we used to have in the trading desk for a trade that that was unprofitable was yeah, that's hard to make up on volume so like you can't even be faster or because it's just gonna lose your money every day Marty on that and the Corollary or byproduct of that debt creation is as we're seeing and we started to show about the increase in gold purchases by central banks, especially China, India, Russia, and Japan, is that the next buyer has not been created yet on the treasuries. So what the Fed is doing now, instead of the treasury being an asset, post Bretton Woods, to be stored and used and leveraged to protect your currency. It is now a liability and it is being pushed back into the market just when the producer, the treasury is making more. So the Fed is now or the banking system is looking at changing this, this, Byzantine, regulation called, supplementary leverage ratio that was emergence in emergency putting during COVID. It means, Hey, listen, banks, you can buy as many treasuries as you want. and we won't charge you. So in other words, you get free interest, even though then it wasn't a lot. They're looking to bring that back in. So back about the bank failures that Marty and Mark, you talked about about the FDIC was a 60 odd banks, half a trillion dollars of losses, unrealized. And Mark, you mentioned banking losses and a run in banks. I think the Fed's okay with this. I think they, as you said, Mark, They will turn on the money printing machine when they need to. The treasury will print debt. The Fed is not going to be buying. What they're going to be doing is having the purchases being done by the banks. So their balance sheet may only go up a little bit, but now the remaining money center banks will be the repositories. And that'll be where effectively monetization of debt happens. I know that was a big, long segment, but the Fed is... Brian Cubellis (01:07:33.357) created new tools and this is another one. And all it means is that the debasement will continue, but with a different flavor. Yeah. Are you referencing the fact that, they manipulated Basel three recently to take treasuries out of the reserve ratio. And so now that you give the commercial banking system, basically the, the go ahead to go buy as many treasuries as they want. So create another demand driver. outside of the Fed, so it looks like they're directly monetizing the debt. Yep. And this is boring stuff. I mean, we care about it, because that's what we do for a living. But, you know, It's going to have an impact and it's a driver. I think, Marty, this is one of the reasons why we're seeing Bitcoin up, punching through the low 70s again today for a number of reasons, but that's one of them. Well, with that reserve ratio, Mark, Valak, I don't know if you have any thoughts on this, but was that, I mean, there was a large discussions here in the US, particularly around the end of BTFP. It was a 12 month program initiated in March or April. of 2023 that came due and people were speculating about whether or not the Fed would extend that facility. They didn't, they stayed true to their word and wound it down. But then shortly after this reserve ratio requirement was changed, it was that effectively continuation of BTFP, maybe not the exact same facility, but one can argue that the facility isn't necessary because the treasuries aren't part of the reserve ratio. Brian Cubellis (01:09:19.469) I think thoughts, Marc, just articulated are very interesting and I thought about similar things. I mean, money printers are in the business of printing money, right? And they're getting more and more sophisticated in it. And I think there are various reasons. I mean, people like also the people in these positions, they are also aware of these problems. And I guess they are thinking about, solutions or at least ways to be able to kick down a can another mile or however long they can do it. So that could be an interesting way to do it, an elegant way to do it, more sophisticated way to do it. I mean, it doesn't solve the problem, but it postpones the problem. Another interesting way I think, I think, Paul Ryan talking about this regulatory framework for stable coins and specifically referencing them being, I think, 16th largest buyer of treasury bills, right, already without the regulation and basically making stable coins through a regulatory. scheme or regulatory improvement even more interesting for offshore investments and being able to basically perhaps, he didn't say that but that's my view, counter the de -dollarization which may be going on from central banking side via the private banking, sorry, via the private sector. So de -dollarization, I don't know, for offshore. investors, people from, I don't know, India to Dubai or wherever, sending back and forth stable coins, which would perhaps be regulated, have the stamp of approval of a US regulatory system could be quite attractive for being used even more as they already are being used. And specifically with the thought of attracting new dollar buyers, right, as treasury buyers. Brian Cubellis (01:11:42.925) So they are thinking about these things and the preps probably will come up with new innovative ways. I think that probably may also be the reason why, as far as I know, it doesn't look like as if the FAT coin would come. So I think that's quite a smart move, basically outsourcing this to the private sector and having overseas investors. invest into stable coins and sucking up fewer treasuries on the way. So this game is going to be perhaps longer than we anticipate. But yeah, at some point, I don't know, I mean, the problem still remains that the budget is in a structural deficit. And so you always... have to keep to pull another rabbit out of the head. And I guess at some point you run out of rabbits. Yeah. The money printers in the business of printing money. That's the title. I know we're tight on time. I think the thing I wanted to at least say before we wrap is, Mark, I appreciate you coming on. I think this is a big narrative that's only going to increase this dynamic between gold and Bitcoin. Because you talked about we don't know how long this lasts, whether it's five to 10 years plus. But I think a lot of times on the Bitcoin side, we forget that, like the notion is out there. And I know we probably don't believe it here. Anybody hears it? Bitcoin goes from one trillion to 10 trillion and then gold stays at par. And the reality is gold marches up at the same pace or, you know, not same pace, but relative. And this will continue. And this is how we get out of all of this. And so that dynamic will continue to exist with institutions, individual investors. And I think we'll start to see that these synergies play out more as more people are educated on the, you know, we've been on two sides of the spectrum, I think is why they haven't converged too much. You have somebody on the gold side. They're generally older and come from. Brian Cubellis (01:13:46.349) Austrian background and then you have something on the Bitcoin side that's more tech forward and not thinking about gold and I like to joke around like when two disparate ideas converge or have sex that's when a magic happens and I think that there's a lot of interesting stuff when gold and Bitcoin coming together for the next call of 10 to 20 years that I don't think we talk about well enough on the Bitcoin side. Brian Cubellis (01:14:11.981) The gold bugs and the Bitcoiners are fighting each other, need to put down their swords and realize that we're all philosophically aligned around sound money and the fact that the governments and central banks have completely corrupted money. I think we're all fighting the same fight. The implementation may be different to varying degrees, but philosophically at its core, I think we're all very aligned. And it's a lot fun. It's a lot better time on the Bitcoin side. I like how Mark said he went to both conferences. And that's the thing you hear from Larry Lepar. He's like, yeah, I just kind of got tired of losing. He showed up at the conferences. He found a bunch of young people that, you know, you said greed and some of those notions, I think that exists, but there's also this notion of we can actually build a scalable world. You said it's going to save us. There's that hope that lives on the other side of, you know, you need digital money for a digital world. Right. I hope so. And we all think that's going to happen. And let's hope it will. And we'll hopefully enjoy the fruits of new world at some point. Yeah. And with all this being said, I do want to make sure that we plug the annual report from Ingold We Trust back by Incrementum. This year's report's over 420 pages long. And... It's just, if you're looking to dive into the intricacies of what's going on in the geopolitical landscape, how markets are reacting to these actions on the geopolitical stage and why Bitcoin and gold specifically make sense within a portfolio and what portfolio construction may look like. I think this is a piece that should be read widely by anybody who's taking this stuff seriously. Yeah, thanks for the shout out. It's available for free on ingoldwithtrust .report. By the way, we've been writing about Bitcoin, I think, since 2015 and have a chapter in there every year. And our last year's contribution, we wrote about exactly what you just mentioned, Marty, regarding the civil war between the sound money. Brian Cubellis (01:16:30.605) within the sound mining camp and basically said, let's unite and actually that's the differences aren't so big. And actually that both go together. This year, I wrote a small chapter regarding free gold and potentially free Bitcoin system, which I think is also an interesting thought perhaps once central banks start integrating Bitcoin into their reserves. because that's actually I think still the fundamental of the system still is gold. Even though we have that most of the system is debt based, but the equity of the system currently still is gold. That's why central banks do have gold. And once they start adding Bitcoin to their reserves, that could basically perhaps reflate the system in a positive way. So perhaps... One doesn't have to read all the 400 pages, but I think for everybody there's something in there. Go check it out in goldwetrust .report. Mark, thank you for your time. Thank you for being on the cutting edge of all this, really advocating for Bitcoin to the gold crew for many years now. Because again, like I said, and you just reiterated, I think we're all aligned, need to put down our swords and this fight is bigger than... the individual assets that we may favor over the other. So yeah, that was great. Mark, Connors, Michael, anything else you guys want to add? No, thanks for joining Mark. We very much appreciate it. Hopefully we'll see you in the States or we'll see you in Europe sometime this year or next. Yep. Thanks for the invitation, gentlemen. All right. Thanks again, Marco. Thanks Marty. Thanks Mike. Have a great day everybody. Take care.