52 - The Crypto Milkshake Theory | Brent Johnson

welcome to bankless where we explore the frontier of internet money and internet finance this is how to get started how to get better and how to front run the opportunity i'm ryan sean adams i'm here with david hoffman and we're here to help you become more bankless david how you doing today absolutely fantastic feeling a little bit more educated about the state of the dollar and what the world that what this crazy world of the 2020s is going to bring us we had brett johnson on who you guys might know as the formula the the

guy that put together the dollar milkshake theory which has been going around especially in crypto twitter uh especially in macro twitter in macro circles about uh it's a mental model for understanding how the dollar is going to behave moving forward and in sort of this new paradigm that we all find ourselves in uh brent did a really good job kind of laying out what he thinks as the future of the relationship between the federal reserve and the people the federal reserve and the dollar the dollar and the rest of the the global politics pretty pretty decently wide

ranging conversation focusing on the macro conversation it was it was a good sequel to the lynn alden conversation and so you know getting people that that you know macro is not my core competency so getting people like brent onto the podcast to hear what they have to say i think is really valuable yeah it's interesting he's uh dollar bullish despite money printer going bur and he explains why and i felt like it was very much the same message as we've heard from lynn alden and ray dalia and others but it had this asterisk beside

it which is like hey the short run maybe it's bullish for the dollar and he goes into the case why we also talked about we proposed the crypto milkshake theory to him uh and asked his thoughts on um on crypto and he talked a lot about having assets outside of political jurisdiction uh non-sovereign escape routes those sorts of things and uh we got into the case for for why crypto he's i i suppose not bullish on it but um

let me let me do that again he's got kind of a mixed review i would say about crypto up to this point so it was good to discuss that with him as well david we also talked about gamestop that is a stock maybe maybe we should give some background on what's happening with gamestop right now because we get into the details i'm not sure that listeners will be as tuned into the details as we have been this week what's the background on the gamestop thing that we get into later yeah it's already turning out to be one of the crazier stories of well i guess

we're just into 2021 so yeah 2021 starting off with the crazy story in the world of financial markets for those that have watched the big short uh there was that character uh that had his feet up on the desk that was calculating and drawing up on the whiteboard and he's the guy that predicted the housing crisis and so he shorted the housing market and it took forever for him to become right but then he ended up becoming right and right this is what that movie was uh was uh he wasn't the main character of the movie but he played a central role in the story of

the big short this same guy uh looked at the stock price for gamestop this and this happened not too long ago so the same guy that the big short movie was wasn't about him but featured him the same guy in the real world the guy that the actor played looked at the value of gamestop the company by tallying up all of its assets and then it looked at then he looked at the gamestop price uh and then said that well the value of the company is way should be way higher than what the value that the share price indicates right and

yeah the share price of gamestop is famously one of the most shorted stocks of all time it's like kind of a blockbuster 2.0 like no one is going to a retail store to buy or borrow a game and so it's it's been heavily shorted and the the branding power the mean power behind this call that this uh very savvy investor made worked its way into uh subreddits like wall street bets and fintwitt and you know some other internet platforms where typically it's a bunch of retail traders and so people retail traders piled on

the wall street bets trade by buying spot markets by putting just buying shares of the company even buying calls of the company to get a short squeeze on gamestop and what happened was a bunch of retail uh investors retail speculators caused a short squeeze that ended up bankrupting a large a pretty large fund and and causing other financial harm to other funds that were on the short trade so really it's a story of retail versus fund and i and we fit this uh conversation in with brent

about you know what we've been talking about on the fourth tourney or what we've been talking about on the bankless podcast which is the fourth turning which is something that brent has also talked about we go into those details as well that's the background on gamestop i think the listeners will find that part of the conversation be very interesting all right super cool david well before we get into our episode with brent johnson we want to tell you about the fantastic sponsors who made this episode possible ave is a borrowing and lending protocol

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wealth brent welcome to the show you are a macro thinker known for your dollar milkshake theory which we're going to talk about and i love on twitter that you are willing to push back against uh maybe maybe austrians bitcoin maximalists and other dollar bears uh brent it's awesome to have you on the show thanks for joining us hey thanks for having me always uh always happy to to talk to new people and i'm looking forward to it this is gonna be a lot of fun so i think you just came from the uh jerome powell

meeting you tuned in as a lot of folks do what is powell thinking these days what are jerome's updates for us well you know i think it's pretty interesting because he would listen he was very dovish um he really couldn't have been a lot more dovish other than to say they were going to increase you know qe but you know the markets uh the markets kind of we're having a tough day anyway and they didn't exactly rally on his comments so i i kind of find it uh pretty interesting because i think it kind of plays into a number of different themes that we see in the market right

now and some of these things i i don't necessarily agree with um the fact that stocks only go up and that uh you know you know the fed prints dollars and gives them to the banks and the banks go out and lever up and buy stocks and therefore you know just you know short the dollar and buy equities and everything will be fine and you know i i i certainly understand that logic and it's certainly been hard to argue with over the last eight months but i think it's going to be a little bit more difficult than that over the next couple years can we talk about that for a minute because it it seems like uh

everybody in finance tunes into what jerome powell says and i don't know if it's always been like that but it's certainly true that what central bankers say these days carry a whole lot of weight maybe more weight than they ever have like is that weird is jerome powell god of finance now is i is this kind of new and is it weird well i don't know that it's new i agree that it's a little bit weird i i think it's very weird that you know

normal everyday people who otherwise wouldn't even work in finance actually know who the federal reserve chairman is i think is kind of odd because you know the whole central bankers as god have it's kind of become a meme in unto itself um and that you know the central bankers around the world you know to a certain extent become celebrities and rock stars and you know i i don't necessarily think that's healthy um but you know it is what it is and at the end of the day my job is to you know play the world as it is not as i'd like it to be and you know that fact right there is something that that i

think is very important and that i think many people overlook i think especially when it comes to investing i think many people invest for the world they would like to see uh rather than the world as it is and i don't necessarily have a problem with that if you're you know if you're trying to change the world and you're all in on your investments that you think are going to do that then you know i can respect that but if you're just if your goal is just to make money i don't necessarily think that's the right way to go about it the to me the role of the central bank historically has been to be this like

silent man behind the curtain right you know maybe tinkering and playing with levers and dials but otherwise being hidden from view and the the attitude is that you know a quiet or silent fed is a good fed right like if they're not in the news cycle they're doing their job um and that that used to be the the perception of the federal federal bank uh and i think that has been decaying over time and has a trajec trajectory of doing going elsewhere from that perception maybe you could give us maybe a a brief history lesson as to

like perhaps the trajectory of people's attitudes or perceptions of the federal reserve from what it was in in times past to where it is now to where you think it might be going in the future how do we how is society changing their thinking around what the federal reserve does i mean that's a good question it's it's kind of a very complicated one i i think you're for the most part right i think it used to be that they were kind of the man behind the curtain and you know i would argue that in the last 10 years they are no longer the man behind the

curtain they're actually the magician on the stage and they're actually putting on a performance and you know there's a certain group of people who like the performance and are trying to profit from the performance and there's another group of people who are saying you know you just think he's doing magic but what he's actually doing is a trick and this trick is going to come back and and haunt all of us and you know and and so there's there the end there's some friction between those two different for those two different camps and i think the fact that you know

central banks have now like i said walked out on stage and you know they've even said that this is the trick that we're going to do and the fact that they're trying to do it i don't think that that's a long-term healthy thing i think i think it's it's a it's a bad thing you know and the other thing i'll say is you know and i've said this before i'm not a fan of central bankers at all um i am in fact very critical of central bankers but based on the design of the monetary system i understand why they're there

and to if again if you're playing the world as it is and if you understand why if you understand the design of the monetary system then you understand why they're there why they're necessary and nothing that they do will surprise you because they are their job is to step in now to your point their job is to kind of be the man behind the curtain and kind of be silent but the real role of their job is when there's a problem and when there's a crisis their job is to step in and be the lender of last resort to

provide you know whatever means necessary to to perpetuate the system so i try so while i don't agree with what central banks do and and i wish there was a system that didn't require them the system as it is today does require them and so i'm never surprised when they do what they do um for the people who criticize central banks and say well they you i'm not going to buy equities because they're just propping it up um you know through qe or whatever it is

and if it wasn't for them you know stocks would be much lower well i get that thinking that's fine if you don't want to play but to think that you know that they're not going to do those moves and you know that they shouldn't do those moves well it's fine to have that opinion but they're going to do those moves that that's why they were pre that's why they were put in that position that's why they were created so i try not to get too critical of the fed of making the moves they make as much as just as much as just kind of criticizing the overall system but i still have to play

against the moves that the central bank is making so you can't just ignore it either the lender of last resort i think could be a focal point of a conversation because i think when pete when we talk about you know first the man behind the curtain and then the magician on the stage what we're really talking about is that that last resort threshold is actually a subjective thresh threshold that requires people to believe where the last resort is and it seems to be that

there is this marching this creeping higher and higher and higher of where that line is crossed and all of a sudden like what the the things that end up on the balance sheet of the fed are becoming closer and closer to like the spot markets for so many like u.s equities maybe talk about that dynamic and how that has changed over time sure well i think the first thing you need to know and i'm not gonna have time to go through the whole reason for this uh but i would say that again based on the design of the monetary system

ongoing crises are a guaranteed feature rather than whether a bug or a feature of the design of the system as this the basic long story short the system the system is one where you have some collateral and then that collateral is used and then that collateral is money and then that collateral is used to loan new money into existence and so for the system to survive it has to grow and in the early days that's fine

because it's a very small number but you know like any exponential system if you took a hundred dollars and you increased it by one half of one percent every year initially it would look great and you'd get this nice little growth curve but at some point even if you only grow at one percent a year that curve will eventually go exponential and once it starts to go exponential the amount of growth that's needed just to have it survive becomes an exponential number

and that's what we have then the design of the monetary system is an exponential system and so it is designed to grow and if it doesn't grow it crashes now you may think that's a good thing or a bad thing but it just is and it's it's just math and it's not even difficult math um and so i what i would say is when they first started off with the fed you know 100 years ago the problems were relatively low the problem with the system was very relatively low because it was brand new but over time as you get you know it

grows and it gets bigger and it gets bigger and it gets bigger and the debts get bigger and gets get bigger and less get bigger and then you start to have these crises and then when you realize the only way to solve the cr the short-term crisis is to make the problem bigger it shouldn't be surprising that the the next crisis is bigger and the frequency which with with which crises start to happen increases as well as you start to go up that exponential curve the problems are bigger and they're more frequent

and i think the reason that while you know the central bankers were largely behind the scenes for a long time is because we were on that kind of a relatively flat but steady part of the curve but in the last call it 20 to 30 years you know that curve has started to steepen and in the last 10 years it started to to go up pretty rapidly and then last one year it started to go straight up and so it should not if you again if you understand the design of it the the

magnitude and the frequency of the crisis should not be a surprise to you um and the react and the central bank reactions to these should not be surprised to you now i know i'm kind of going off on a kind of a wrong rant here but the reason that we get into this big inflation versus deflation debate and which one are we in is the bigger the debt gets debt is deflationary if more money has to go to service debt and pay off that debt then

there's less money that can go for productive measures so the so as the debts get bigger it's setting up for a deflationary shock now to counteract this central banks do everything they can to generate inflation and they have a number of programs and tools of which they can do that and so you will see these periods of inflation expectations rising but so far you know whenever they rise they end up crashing and then they rise and then depression and every time they start to go up you get a number of people saying

this is it this is the final time hyperinflation the dollar is going to be you know printed away and it's going to be worth zero but every time that's happened for the last 30 years it ends up rolling over into another big crash um and i think what's happening now is we're getting closer to the end game quote unquote uh so for the people who say you know this is all going to come tumbling down and and you know it's the death of fiat money or it's the death of the central banks and i don't necessarily disagree with that i

think it will take a little bit longer to play out than many do i still think they have more tools in their tool chest than many do but i don't necessarily argue with the idea um that we are entering the end game or getting close to that game because you know we've had a number of these little mini debt cycles but now we're getting into this super debt cycle and i think the super debt cycle is kind of coming to an end because all the debts of all the previous bailouts are now on the country's balance sheets and the central bank's balance sheets there's really nobody else to go to unless they come up with

some new supranational entity the bad bank type thing where they can offload the debts onto that and i'm not saying that's impossible but my point is i think we're getting towards that end game um i happen to think the end the path to that end game is going to look a little different than a lot of people who also agree that we're heading towards the end game but um we do have a reckoning coming so we do want to talk about kind of the end game and and help our listeners understand the dollar a bit more and uh

through through the lens of the dollar milkshake theory which is a theory that you've coined to sort of describe what's happening um before before we do i just want to echo what you were saying about um central bankers like uh i i think people oftentimes are too quick to to demonize the individuals when really what you're saying is that these are just people stuck in the the gears of the existing monetary system right it's almost like their decisions are preordained or inevitable their

decisions are a product of the system already so all of the the criticism in you know 2020 we were talking about like money printer money printer go bur the entire year right it was as if the central bankers were forced due to the system uh to to to make that a reality there's political pressures there's economic pressures there's this the the um the cohesion of the system as a as a whole really required that um can we talk about what decisions you think

jerome powell and other central bankers are going to be faced with now so this is you know 2021 just got off like you know jerome powell just had a call uh 2020 was the year of money printer go burr our is 2021 going to be the same thing is are powell and and the other central bankers going to be forced to print just more and more money or how does this play out well the short answer is yes um you know the you know there's few memes that i hate

more than money printer gober but it's not going away why do you hate it well because i think i think it i think it in many ways i think it's it's not that it's wrong but it's kind of misleading um because and this kind of gets back to you know the magician on the stage is on the one hand jerome powell will go on 60 minutes and say well we printed a lot of money okay

now that's the smoke screen that's what he wants you to believe and the reason he wants you to believe that is he wants you to go out and spend money because if you believe him and you go out and spend money and take out that new loan and you know et cetera et cetera et cetera because your doc you're afraid your dollar is going to get devalued well then it can to so if everybody did that because they believed him then you can kind of get a self-perpetuating or self-fulfilling prophecy because that is what you need to get inflation you need people to go spend money you need people to take out

new loans you need people to be worried about the devaluation of their dollar but then on the other hand he will come out like he did today and like he does in every other fed meeting and he'll say now let me remind you the fed can't spend money all we can do is lend well now which is it are you printing money or are you lending right and if you if the fed lends money to the banking system and the banking system does not then

lend money to main street that money that they've quote unquote printed which again is it's bank reserves it's not actual cash they're not actually they're not actually giving the banks cash it just sits in the banking system and it does not become inflationary um and so you know again i think it's it's it's like it's like the magician and the magician's assistant right there they're they're doing these moves on stage they're telling you that it's going to be inflationary and all you got to do is wait and you're going to have this large inflation but you know at the end of the

day they need you to do the trick for them they can't actually cut the lady in half right they need you and your mind to just believe that they're going to cut the lady in half and then put her back together because you as a whole when i say you the public is the one who creates the inflation now one thing i would say is that and so again because all they can do is lend all they can do is make the problem bigger and as the problem gets bigger it becomes more deflationary

okay which will end up being a bigger crash and this goes to what we were talking about earlier about how you know it starts off low and it gets bigger and the crises get bigger and you know the central banks have to come out and use more and more tools and do bigger and bigger policies eventually eventually the only tool left to them is to get the laws changed and no longer lend money but start spending money and once that rubicon is crossed that's when the inflation the lasting

long-term inflation that leads to hyperinflation happens and that's why all fiat currencies eventually return to their intrinsic value which is zero but it takes a very long time to get there and and and for for that to happen to a currency the public has to lose faith in it completely lose faith in it um and i just don't think that we're there yet and even if we are there and this is the point i've made several times but i feel like it just always

falls on deaf ears and nobody really wants to listen to it is that every other country is in the exact same situation that we are in so if we were doing these policies and we had this design of the system which was guaranteed to make the central bankers print and all the other countries had different system or were in better economic shape and didn't have to deal with the same types of problems that we are dealing with and as a result their currencies were quote unquote

harder or less prone to inflation then i would completely understand the argument of money printer go burn therefore dollar goes to zero but that's not the case that's not the world that we live in the world that we live in is that all the other countries all the other major central banks are in just as bad a shape as we are and they not only are they going to need to do as much as we are they've been doing it for longer than we have been and not only that

but you also have to understand that there's two dollar markets now i'm kind of jumping around a little here but but it's important there's the u.s domestic dollar market and then there's the offshore euro dollar market and just for listeners who are not familiar with this market the euro dollar market is not the same thing as euros that are used in europe so euros are the currency of the realm in europe but euro dollars are just dollars that exist outside the united states and the fact is is that the euro dollar

market is so big that it can't even be measured and it's much bigger than the u.s domestic dollar market and entities outside the united states use and need to use dollars just as badly as entities inside the united states now that same dynamic does not exist for other currencies brazilian reals don't have a lot of value outside of brazil japanese yen

more so than many currencies have value outside of japan but nowhere near the same size as the dollar so again they're much more valuable inside japan than they are outside of japan nobody needs chinese yuan outside of china nobody needs south african rand outside of south africa but everybody who operates on the world stage even if they don't want them needs dollars again want versus need

dollars to operate on the global stage and so everybody has the same supply dynamic problems everybody is going to have to increase the supply quote-unquote of their currency the problem is is no other currency has near the amount of demand that the dollar does so when all these programs get ramped up all over the world the fact that in fact even though we may print more and faster than other central banks and i don't think that we will but even if we do

the the demand dynamics of the dollar make it such that we can quote unquote get away with it better than these other currencies and when that happens the dollar will rise versus other fiat currencies now it may fall versus gold it may fall versus bitcoin it may fall versus wheat or corn or some other real estate or some other hard asset that is not getting debased but the problem is is if the dollar

rises versus other fiat currencies it puts enormous pressure on the entire monetary system and it leads to huge huge problems i mean the stronger dollar versus other fiat currencies is literally a wrecking ball for the global economy and that's why i say that despite the money printer go bur and despite the insane policies of the federal reserve actors the dollar the end game for the monetary system is not the dollar going lower the in the the dollar going lower

perpetuates the system the dollar going lower is what the central bankers want but the end game for the monetary system is when you see the dollar going higher despite the fed's efforts to do otherwise muted ryan nope once more wow okay i was double muted there so brent you made so many good points here um and we want to get into them you know one of the points that i think we want

to flag to to touch again is this idea that all of the central banks are in the same position right with respect to fiat and we want to raise the question about what about non-sovereign stores of value uh so this is the question of crypto but before we do let me try to kind of summarize what i think you're saying you're saying that the money printer go bur meme is overly simplistic because when somebody sees that meme and they see see the picture of jerome powell in like memetic forum and he's like