Fortress Russia Crumbles | Kyla Scanlon

Transcript

hey bankless nation welcome to another state of the nation episode today we are talking about the events happening in russia how that affects commodities there's some kind of contagion going on is there a crisis is a recession looming what does all this mean for crypto david uh who do we have on and what are we going to discuss today yeah about a month ago we had a kylis ganlon who has just been a prolific content producer about macro the stock market commodities geopolitics energy uh just a lot of just deep dives into very nuanced very complicated very very integrated subjects and this was just two weeks before the russian invasion of ukraine and so much of what was discussed in that podcast

with kyla ended up unfolding and so this conversation has progressed and now that we are almost two weeks on the other side of the russian invasion of ukraine there are so many more things to talk about how does russia's energy relationship with europe uh impact how sanctions are happening how does our global supply chain uh just in time paradigm engage interact with with supply chains itself what is the fallout of just missing wheat and oil production out of the world uh the cat the number of consequences is large and so we're trying to figure out how much contagion is there is this a global contagion event is this going to be

self-contained is this going to be a two-week adventure or a two-year adventure there's a lot of questions that i have that i think are really really important that we're all going to ask kyla here on the state of the nation yeah i think the r word has been circulating like recession and there's so many downstream effects i also want to talk to her a little bit about the fed so what's the fed gonna do on the backdrop of this we had jim bianco on a few episodes ago just talking about fed uh raising rates are they still gonna do that what would be the implications or repercussions of that so so much to unpack and discuss this is going to be i think partial macro and partial uh world events and then partial like crypto right because yeah yeah we all want to understand how

this affects us in the market today i mean bear market david i don't know we're gonna talk about that i said the b word too the r word and the b word in the same podcast yeah invoking it before we uh get there guys wanna talk about a few announcements uh david you did a fantastic layers here with coin artist that just came out and uh we've got tyrone on the podcast uh coming out uh pretty soon as well we should also mention our friends at opolis david while i pull up the opolis website why don't you tell them what it is this is specific to u.s workers i would say and within that subset of people in the u.s uh who are looking for healthcare if you're trying to be a self-sovereign individual self-sovereign worker

you know this is the the new structure for dalles you're not going to have a corporate job you're going to work for maybe a dow maybe a handful of dolls you're going to be an independent worker but you need health insurance our friends at opolis have an offering for you that's that's teed up david why don't you tell them about it yeah if you obelisk is basically a dow that helps other dows have employees have offer stable employment services towards the people that are contributing to this world of web 3 the world of dallas and so one of the biggest barriers as to why people are afraid to get into this industry is that like how do we do health care how do we have like basic stable payroll and benefits well opolis is a collective and it's a collective that offers

employment services towards members of opolis so it's basically a an employment services dow it lets you get your health care unless you get stable payroll and there's few other benefits as well and just really helping the world of web 3 endows exists in a stable way and so if you are interested in getting health care from a collective at opolis who will negotiate health care benefits on your behalf uh you can sign up for opelus you'll also get a thousand work and a thousand bank tokens if you join opolis by may 1st 2022 that is this year it's gonna come up fast because this industry moves fast yeah go book an appointment talk to these guys go figure it out it's uh really cool to get paid in crypto as well they can pay you in all sorts of various tokens this is uh the new way

payroll will work uh all right david let me ask the question i always start these episodes with which is what is the state of the nation today a combination of dealing with a hangover i would say uh crypto prices are from down from fourth out or ether prices down from 4800 down to 2500 and then we're also just watching commodity prices go up so coming to terms with like all the we just got to pick up all the confetti off the ground is what's going on in the crypto markets but uh i was asked ryan at the beginning of this like all right there's like five stages of grief like where are we um i think we might be in the denial phase it's like what are the five stages of grief again the five stages of grief oh

i just had this up uh it starts with denial uh then there's like bargaining then there's anger no then anger then bargaining then acceptance or something and so if we portray these projects onto like a bear market i think we're at the stage one which is denial like no we're gonna spill the stage one that's very early okay no way well i don't know if there's a bear market yet david so maybe i'm either right or i'm in denial uh we'll see but definitely look um everything was going really well in crypto and now macro events have just hit us in the face so we're going to talk about that today particularly the events in russia and commodities prices guys we are going to do that in just a minute we're going to bring on kyla and talk about all of these things but

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these apps at portal.arbitrum.one and you can bridge your assets over to arbitram using bridge.arbitrom.io in order to experience defy and nfts the way it was always meant to be fast cheap and friction free kyla scanlon knows a lot of things about a lot of things she's an independent content creator with brilliant and entertaining ideas on macro markets monetary policy the stock market energy markets she writes on her own sub stack she makes a ton of youtube videos a bit of absurdist humor on tick tock as well you might know her as the official bankless tick tock correspondent where she recaps the week in crypto in the most dense packet of information that you'll ever get previously about a month

ago she came onto the bankless podcast for what ended up being a prelude episode to what much of what we are talking about today on the show kyla welcome back to bankless thanks starting on yeah twice okay uh so we're gonna start at the very beginning which is of course the russian invasion of ukraine and i'm gonna ask a ridiculous question but kyla can you put us into the shoes of a madman putin i think has not gotten what he wanted to have gotten out of the war in his current state ten days into it he hasn't captured anything uh so what did hoot putin hope to have happen and what has actually kind of happened instead yeah i mean so i think that

why he's doing this is largely uncertain like the exact reason is largely uncertain you know you could point to nato you could point to him wanting to expand the quote-unquote russian empire uh i think that a lot of people thought he would just go for eastern ukraine and then you know be done with it but obviously that's not the goal at all it seems to be to take ukraine entirely um so i think for him he thought it'd be really easy like they took crimea back in 2014 just basically rolled in tanks and we're good to go and that definitely did not happen this time around the ukrainians have fought back really hard and really bravely and really valiantly and i think putin is a little bit frustrated with that because i think essentially russia's losing right now and i don't think he expected that at

all so i i can't speak to his inner mind or what he's thinking but i think that he is pretty shocked at how it's unfolded and that's always a little bit worrying because essentially when you back a cat like he's a cat into a corner they get a little bit antsy and so it's just like you know he's already threatened nukes they were shelling a nuclear plant or near a nuclear plant a few days ago so it you know yeah and what i'm trying to wrap my head around is like what is the trajectory of this war because putin doesn't seem to be backing down but the ukrainians seem to be more united than ever and it really just seems like an immovable object uh unstoppable force meets an immutable removable object

so like my my concern is that like this thing doesn't wrap up like in the next 10 days or the next 20 days and it actually takes months and months to unfold like who do you think caves first like ukraine or putin yeah i mean i'm not sure but i like i don't know if russia will be able to finance the war for months and months um they're running out of money their economy is essentially being strangled right now so i don't see them being able to go forward for months and months they still have some military manpower but um i i don't know how long that could last for i think the big thing and that's what the economic sanctions are meant to do is make it so they can't finance the war at all ukraine is holding really strong um and it seems like they've made

a little bit of progress in negotiations like zelinski came out today and was saying that ukraine would no longer seek nato membership and that they could talk about the donbass region which is what putin wants you know he wants russian recognition of the or he wants ukrainian recognition of the dawn bass region being a part of russia essentially um so zionski has sort of opened up that negotiation door but with putin and how he's been negotiating essentially he's been he's saying like ukraine can't have any sovereignty and that it you know essentially becomes a non-country and that's just a non-negotiable for ukraine like ukraine wants to remain a country and that is why they are fighting so hard so i think it's just going to depend on how nuanced the negotiations can get and how

willing putin is actually to negotiate and to actually not just like try and flatline the entire country but actually take this to the dialogue and diplomacy table as the u.n has been calling it yeah and we have just no idea how open putin is to negotiations that's just like a complete black box yeah i mean like i'm not sure what he's thinking in general like i like there's been a lot of think pieces or thought pieces analysis around what's the end goal here like okay let's say he takes ukraine like what's he gonna do next you're economically cut off from the rest of the world and some people say oh you could do this and that's the whole goal is like a pivot to asia russia plans to have a pivot to asia and so

like that could be part of his plan he takes ukraine and then he pivots to asia but i think you're seeing a lot of hesitancy from china and engaging with russia and i think putin thought he had a friend in china and it hasn't come across that way i think to the same level that he expected so to the point of like is he open to negotiation i think he almost has to be and i think hopefully a rational person would kind of start to realize that at this point in a war where it's like okay i'm actually not winning like i thought i would so maybe like let's have a chat but um i'm not sure what he is what he's thinking yeah kyla can we talk about the economic sanctions for a minute because that's been a massive story and obviously has some uh intersections with with crypto

right crypto being a a thing that you can't sanction uh but let's talk about the you know the financial world the the system that the world is is built upon and it's largely it's built upon like a a western-led um financial system and there are a few things that the west has uh sanctioned um and maybe we could talk about you know three of them the first is the removal from swift and i remember when we last talked you brought up this term called swifted and that was new to me but russia just got swifted now it's no longer new to me like i understand how this can happen and then there's also sanctions against the central bank the freezing of of a russian central bank assets and then

thirdly there are some direct sanctions on putin and the oligarch class like seizures of property that sort of thing so can we take these things one by one uh like first let's start with the swift sanctions what is that what what are those yeah so that's basically removing russia from the communication communication infrastructure between financial institutions so russia can't really like talk to other financial institutions it's really hard to execute different types of payments they're still still able to right now i think um functionality wise use energy payments through the swift system so that was not swifted but basically that just makes it really hard for them to sort of get things done and to do different things within like the broader financial universe um and that is not great from

like being a country that relies on outside funding and has outside investments and has imports and exports and things like that so that's really the big issue with swift it's just like you know pushing somebody out of the financial system in general which is hard right do they have a backup system for swift at all yeah so they have something called spfs which is it's like you could call it a backup but it's like not really backup you know like it doesn't really work in the same way so they have that but being removed from swift just because of dollar dominance and because of west dominance and the financial ecosystem is just difficult yeah and russia is like super tight in to the west uh not like how they used to be but

it's still like everything is very very interconnected and if all of a sudden you know your thread gets cut it's a little bit difficult to function yeah let's talk about the sanctions then to the russian central bank and this one actually surprised me i wasn't surprised that russia got swifted but this one really surprised me a substantial amount of assets were frozen as i understand it can you walk us through that yeah so this is like a super super super big deal um and not only from a rush uh you know central bank functionality perspective but also from all the rest of the world how many markets function it really places a lot of pressure on everything so essentially uh you know the central bank got sanctioned and so

that froze out about half of their assets so they have about 630 billion dollars in assets about half of those are completely immobilized meaning russia can't use them um the central bank had to hike interest rates by 20 to try and support the ruble from you know not completely bottoming out that's a big that's a big number that's a big huge number especially overnight right like um we're having trouble raising rates here in the us by like 25 basis points and to go 20 is just a huge deal and most of russia's reserves are held outside of the country and so that's kind of like this immobilization that i just pointed out and a lot of people pointed out right uh is that like okay so you can have all these reserves and russia has been building up they've been

like doing everything right from uh sort of like building up their economy from the 2014 crimea sanctions they've been building everything up but all of a sudden overnight they're half of their reserves are immobilized because they're overseas yeah yeah so uh this is the sanction that putin didn't expect putin was already trying to create what we are calling the the title of this episode fortress russia right like the unsanctionable russia but it sounds like he just didn't think about or just kind of forgot to consider the freezing of a central bank and can you also explain like this has to have just so much fallout and direct impact upon like the average russian citizen too right and so these

decisions that have been made have been taken with that into account saying well we know that this is going to harm individual russians but like we just have to get to putin somehow so a couple questions how much actual fallout to the average like russian citizen is there as a result of this and just like did putin just make an egregious error which was like forgetting about like having foreign assets in foreign banks while he invaded a foreign country uh so to the answer of the first point like the russian people um it's it's so unfortunate what's happening um that's not even the right word to use because it's more than unfortunate they're essentially experiencing the consequences of this one man deciding that you know ukraine is mine now um and

so like they are cut off from a lot of different things you have visa and mastercard pulling out you have a ton of companies pulling out of russia um and they're essentially locked out from the global financial system too um so they're like losing jobs or you know inflation is is biting into them as well so i think in like medicine like getting medicine difficult so you know when a country extinction people get sanctioned too and i think the whole thing was that um the goal was to say okay like if we sanction russia's economy like putin's gonna say oh don't hurt my people i'll back down now but that made the inherent assumption that putin cared about his people and i don't know if he does maybe in his hearts of heart he he does care

about his people but i i don't think like that is the way to get to him and to the point about uh you know the the sanctions and did he overlook this i it's just like a big deal to sanction a central bank because of the contagion risk that i talked about a little bit earlier is like this is going to impact a lot of companies it's going and this is beyond the point like a war is the most important thing if not like companies making profit or whatever but uh it's it it'll have it has global consequences um and so i just don't think he would i just don't think he thought anybody would do that have we ever seen this kind of like uh asset free freezer against a central bank of this scale i remember like so it seems to be that um

entity like the us and western countries are using this more and more sort of this this financial choke point uh there's like less than 30 days ago the u.s um or maybe it was longer than that in the last three months anyways the us use this against um the uh afghanistan government after you know the taliban sort of took over again there were a lot of afghan essential bank assets i think it was like five to ten billion dollars and the us just like shut it off just like took it that's ours now and um 5 billion of which like 50 or something were going to be allocated towards a um a 911 uh

fund 911 victims fund and so that can happen to a very small government like afghanistan but this is a whole another scale we're talking 60 630 billion dollars in assets a substantial amount of the the russian central bank's reserves have we seen anything like this before russia is a really big player in the global economy um so i'm not sure if we've seen anything in recent history quite like this like we've definitely seen sanctions before um but never to this scale uh and yeah never to sort of like have this impact like this is very clearly trying to kneecap russia's economy um and i don't think that sanctions were implemented like as you

know we had sanctions on iran et cetera but it was never really about like completely decimating them and you could argue that the goal seems to be to sort of like completely immobilize russia's economy yeah the last sanctioned piece is like the uh the seizure of putin and oligarch you know property and resources and so we've seen some like yachts uh you've been on like a yacht watch haven't you like seen some of these things frozen tell us about this yeah oh yeah that was just a tic tac um yeah like uh so it's your extinctions on putin and the oligarchs which sounds like a band name like putins [Laughter]

but i like that the whole goal with that is to sort of like make the oligarchs be like whoa putin what's going on dude like they're taking my yacht and to have them sort of fight back against putin but as long as putin's can continue to finance their lifestyle which arguably he's been able to do still through with oil and gas payments they're not going to push back a whole lot against him um and then you have the strong men in russia who are like a whole nother like sort of like some like a class i guess that he's associated with um and they are very supportive of putin so i'm not sure if like just the oligarchs rebelling would be the solution but the whole goal of the sanctions is to make it really difficult for russia to finance the war and to have people get

mad at putin um hopefully one of those succeeds i'm not sure which one but from the oligarchs perspective yeah they're losing all their assets yeah and of all the sanctions this is the one that i think does the most harm for the least amount of collateral damage as in there is no contagion coming out of seizing oligarch yards yachts but there is pressure put on putin because if the oligarchs are unhappy uh putin i think has to take note at the very least uh and so there's some some silver lining in the sanctions there at least uh i i believe putin going into this considered uh that he might have had an escape hatch an economic escape hatch with china uh can you kind of tell us

that story and and what putin thought going into this war and how it's actually unfolded yeah so they like it's kind of been interesting to watch that because i've been like watching the situation since about november um and like china and russia like had a little friendship agreement announcement uh together where they were like we're gonna do you know international relations for everybody and support international diplomacy and this was oh my god like maybe a month or so two months ago um but it was a joint statement they were like we're going to be best friends and um and i think putin kind of thought that that was going to be supportive during the war and you know china seemed to have asked putin to hold off on the invasion until after the olympics um so it seemed like you know

they're still relatively friends but china has come out and spoken out against the war and has been like we really need to return to dialogue and diplomacy and i think part of the reason is that china is watching the west and seeing how the west has really just been like moving fast and so i think that kind of scares china a little bit because you know they're eyeing taiwan and i think like they're sort of you know keeping everything in the back of their mind and i don't think that they want to experience sanctions they have a lot of dollar denominated liabilities a lot of dollar denominated assets um and now the dollar as we talked about a little bit earlier can be used as a weapon in terms of sanctions like that's super worrying to china and i don't think china wants

to be on the other side of it and that's not to say that china hasn't been like supportive to russia they still are like i think to a few days ago they or today maybe they announced that they're going to maybe look at buying stakes in gazprom which is the top a gas producer in russia so they're still kind of hanging around um in terms of russia but they're not like taking a side it seems yeah they're just kind of like we're gonna encourage dialogue encourage diplomacy so but it is the case that china has not joined the rest of you know the west in sanctioning russia they just haven't condoned it i suppose it's just i feel like there's maybe some mixed messages coming from from china is that uh like interpretation i would say so yeah i

think that's kind of generally how they operate um and i think for them like they're just kind of trying to watch everything and like you know see what what plays out um they're not it's like super militaristic militaristically strong so like they're gonna start spending a little bit more on defense spending that was announced recently as well um i think you know the pivot to asia they seem to want to be a part of uh so they did announce this was back when they announced their friendship agreement that the russia would build another pipeline into china um so china is really worried right now about food security so i think they're just trying to like position themselves in to be in the best possible position for energy and food security at the moment you know all right so the net effect of all of

this is that the the ruble has fallen on something like 40 percent uh and with all of the outros of exports out of russia more or less cut off except for save a few uh there's no way for there's fewer ways fewer tools for russia to prop up the value of its currency which ultimately is is how putin funds finances war this is how countries finance this war that's through the value of their currency and the value of the rubles is down like 40 so kyla like how much resources does putin have left to make this war happen like what's he got left in the tank i mean it'll depend like there's talks of you know russia could they sell a lot

of gold but then now biden is talking about how do we make sure russia doesn't have access to their gold so i think like everything that they're going to try into how could biden do that where's russia's gold held well i'm not quite sure i don't know if it's like an exchange metric or something like that um i saw this just today and i didn't have a chance to like read exactly what's happening i want it like i want to learn more about that diving i i hope sensory i don't really care but like uh does putin have gold etfs or something he's holding on to and like in a vault in london or i would expect russia to have sort of a fort knox version of actual physical gold somewhere yeah it could be physical gold and maybe they have contracts that are you know gold held in other countries um

so that could be sort of the situation i don't know the composition i know they've been buying a lot of gold but i don't know unfortunately like the composition of their gold because like yeah to the point i was like oh like that that's just going to probably be something stable for them but turns out uh nothing is stable for them so if all you have is paper certainly yeah right like all you have is like iou contracts like that's not it's not really gold so yeah yes so not like and not that much resources to continue financing this war oh man oh like like there was a something that i was talking about like they'll spend their entire gdp this i think this is correct they'll spend their entire gdp on the war in about two

and a half months um so they're running out um and like was that pre-sanctioned gdp yeah yeah and so like they're still getting about a one billion dollars a day in gas payment oil and gas payments so like they still got money coming in and now with oil and gas going up in price i think they're that'll be like north of 70 billion extra dollars um per year so like they're still with oil and gas coming in like they're still doing okay uh but now this isn't as big as europe sanctioning it but the u.s is like hey we're not buying your stuff anymore uh you the united kingdom is no longer going to buy oil they're still going to buy gas so i think that's going to be the big thing is like that will be what economically um you know messes them up but i think with

uh how long can they keep on going it's however many tanks they have left well is russia able to sell a barrel of oil at the full market price i thought they were being forced to have to sell it at a discount because like in the rest of the world is paying like 110 dollars a barrel but russia selling it for a lot less well this is actually super interesting right because like russian oil has essentially sanctioned itself um and so like there's two points to this like one is how russia is treating it and then the second i saw the market is treating it so like nobody wants to really touch russian oil because like they're like oh my gosh what if i violate sanctions and it's a really big deal if you violate sanctions like you get in a bunch of trouble and so you see like um

like nobody wants to buy russian oil um so to your point yeah um that's not super good and then also russia um this is for nordstrom too this isn't oil per se but like they're talking about not no longer sending gas to nordstrom 2 or nordstrom 1 um which is the gas the pipeline between russia and germany so like russia could sanction everybody back but russia is essentially already like the the market is already essentially sanctioning russia and they're still like people are still buying oil from russia but yeah definitely not it's the same flow that they used to yeah so one of the reasons why this situation is so delicate is like we have sanctions going from the west to russia but then we have russian oil going and

like germany is from what i've gathered is more or less completely dependent on russian oil uh and so like while we have this sanction we still have a flow of value through out of russia to germany and i don't think germany has many options to keep its energy supply available to itself other than russia and so like it kind of has to and so this is this is part of the swift sanctions that actually there has been a hole in is that they have uh the sanctions have sanctioned russia except for energy payments because like we just can't break that thing because that would be way too bad yeah exactly um and germany has been like really nervous i think about energy like the economy the economy minister

said like if uh if we sanction oil and gas like we could have essentially social unrest within germany like so he is pointing out to this this like there's so much reliance on um russian oil and gas across europe like gas russia supplies i think like 30 to 40 percent of europe's gas which is a really big deal um that's like people freezing in the winter time kind of supply flow rate and so that's the big worry is that yes uh we don't nobody really wants russia to have um the inflows that they would need to finance a war but also there's these global consequences of globalization which is what germany europe et cetera has run into and now they're saying that they're

going to pivot away from russian oil and gas and they're going to return to coal so that's a good one um but not nuclear so it's just funny like this whole energy market situation is just a it's a really interesting to watch unfold yeah i think if listeners uh watched your youtube they would have picked up on the the micro expressions that you just gave off but i think the average listener might have missed that uh so germany's going back to coal but not nuclear can you unpack that for us yeah so like i mean europe is europe had a really good intention with trying to switch to green energy and they had a bunch of green energy policy

but they didn't have the necessary infrastructure in place to have you know they didn't have green energy investment that's what i say all the time no can't have green energy policy without green energy investment and so that's the big issue with europe is they're like yeah like let's rely on renewables solar wind et cetera but that's not that reliable um and so they have nuclear power plants but they're shutting those down and nuclear power plants are a little bit expensive to maintain um and i think that there's still like the the broad worry about that um which is you know that's been disproven but that's kind of the situation is that nuclear meltdowns and like a breaking of a plant yeah yeah yeah um and so i think that's the big worry with europe is that they're trying to have

renewable energy and just rely on that but they can't and so they end up relying on russia instead okay so you've brought up uh the globalization and supply chains and and so i think that's kind of where we want to take this conversation next is i think we're as a as a species we are discovering the relationship between so like globalized supply chains and sanctions and how the interactions between these two things don't actually really work so well can you kind of illustrate for us why like the state of our global economy might be extra sensitive to sanctions on russia yeah i mean i think there's two points to that like one is the sensitivity after the pandemic so like already supply chains were in a disarray

already commodities were sort of in a disarray uh and so that is already not super good um we i mean like we already kind of had a shipping crisis where the ports of la were stacked up super high with containers um and then to the second point uh we just have become so reliant on this idea of comparative advantage where it's like oh russia can produce oil essentially a little bit more cheaply than we can or whatever and so we start you know importing russian oil instead of producing it here and that's really great because it allows for things to be less expensive but it also leaves a lot of risk for if something if one of these dominoes topple all the dominoes are going to topple because it's a line of dominoes

and so that's kind of the problem is that everything is interconnected um especially like commodities and uh yeah so i i think listeners no matter where they are in the world will have noticed that the price at the pump has shot up like uh massively uh and um it's it's pretty alarming when that happens it's not just gas prices it's also like other commodities like wheat and corn for example uh can we talk about this uh commodity crisis that we're seeing and like what so why is this happening and is this just sort of a contagion is this a direct result of the sanctions is it more a result of the war is it the whole thing combined why are we seeing this

yeah so i think like um seb kennedy had a really good quote about sort of what's going on in commodities in general that prices are moved by fear not fundamentals so i do think that there's an element of like war that's being baked into commodity markets but then also like people are afraid um there's a lot of uncertainty there's and i'm not saying that to like be a fear-monger but like literally people are really worried um you know ukraine and russia together 25 of global wheat exports uh you know we already talked about russia as just being a huge expert exporter of oil i think together they're like a huge amount of sunflower oil exports ukraine is a huge producer of neon like an element of neon that goes into semiconductors and so there's all these like different things that are um going

into each other and so like energy and agriculture and commodities are sort of a common denominator to all other goods so like if the price of wheat goes up you know the price of bread is going to go up too just because wheat is an input into the bread output system um so that's kind of the worry and that's what we're seeing in the markets is that all these commodities are going up in price and that is going to make um potentially other goods go up in price as well just because of that pressure i think that's where the r word starts to come in that uh that word recession uh this is something that jim bianco tweeted out i believe earlier this week um not every recession is led by a 50 rise in crude crude oil he's talking

about but every 50 rise in crude has led to a recession other uh commodity price indicators saying the same thing i've seen people talking about you know the price of wheat going up and that being a key indicator of a recession so is that where we're headed is this what's going to happen now is uh we are now entering 2022 first quarter and we're gonna have a recession in the second quarter and maybe for the rest of the year is that what it's looking like well so i guess if you want to get really technical the official definition of a recession is going to be a significant significant decline in economic activity for about two consecutive quarters the

that was recently changed to be like over a few months so like this will it'll just depend on how long all of this lasts um i think a bigger worry is like this concept of stagflation where we have higher inflation and just a broader growth slowdown like the the labor market has been doing okay but i think just this like the price pressure um is really going to be you know what like it's a jim's chart like yeah if you see crude oil go up that much in price it's really hard not to have a big big economic slowdown because all of a sudden you know trucks have to have oil where they can ship things and if their shipping process becomes more expensive products are going to have to become more expensive businesses are going to have to charge more um and you do see a

lot of pressure or a lot of movement and like the bond market like the yield curve has gotten a little bit closer to inverting and that's always a big warning bell um so i'm not sure if we're going to have a recession uh i hope not but things are looking a little um squeezy yeah for a metaphor for the crypto native listeners out there is like when gas prices go up think about gas prices on ethereum like when get gray is 400 when gas is 400 grey like and you open up in that transaction on uniswops and it costs you a hundred dollars sometimes you just close your laptop and you just don't do anything at all and that's akin to like not going not driving your car to go do that thing or

having just the cost of going to work just higher everything just costs more in the world therefore economies just slow down and this is start what a recession starts to look like so this is the conversation that we're that we're having um another very fundamental commodity to the world is wheat and you already mentioned it a little bit but like so much wheat comes out of ukraine and also russia and from from what i've gathered some uh ukrainian uh farmers uh have said that like there is zero chance that we are being able to export the the crops that we previously would have a year ago now just because we're too disrupted it's too late there's no way to get this up and running um tyler can you kind of

illustrate for us uh for us the the knock-on effects of just like a wheat shortage in the world oh yeah i mean that's it's super worrying right like uh egypt is a huge i think the number one consumer of wheats from russia and ukraine um so you just in like africa too yeah this article does a really good job highlighting just the the risk effects of not having meat and when you don't have food that leads to a lot of political instability like we saw with arid spring so i think that's the big worry is that if people aren't going to be able to eat that i mean that's horrible um and so that's the problem and you're starting to see countries enact more protection protected

protectionist measures uh so hungary is no longer going to export grain and so i think we're going to see a lot more countries begin to stockpile and say oh you know we're not going to export as much this year so that that's uh the bigger worry and then you know ukraine is the top four corn exporter as well um and you know so yeah and then uh something i'm seeing going around is the nickel the price of nickel is just through the roof is this relevant to the invasion or is this something else uh so sort of like it's a short squeeze in nickel and part of the reason is like russia is only about seven percent of nickel um but you know nickels super important important for

stainless steel but nickel is a short squeeze so there are a lot of people a lot of traders are short nickel to sort of hedge against physical positions and then there's this like very large fund in china a very large company in china that is short a lot of nickel um so if all of a sudden the price kind of goes up a little bit that leads to a short squeeze so that's why nickel has been going up so much it's not really like physical supply it's just market dynamics um yeah yeah and and all commodities across the board are going up like we we've talked about wheat gas corn but like there's iron there's copper soy like commodities in general are just up across the board what should we take away from just higher globally higher priced commodities like what

should we be paying attention to yeah i mean i think it's just like a function of uncertainty and then a function of supply chain so if there's a war going on it's a little bit harder to sort of have a supply chain that functions especially near russia and near ukraine because you know crossfire whatever um so i think that's the big worry is like how does this actually play out and then russia and ukraine are the breadbasket of the world and just huge components of the energy markets so i guess the broad takeaway is that things are going to probably be a little bit more expensive yeah kyla before you do that right you said kylie said a little bit more expensive is that you uh moderating your language just because

that's kind of what you do or or what yeah like i never think it's helpful to be like things are going to be really bad and horrible and this is the end of all times like i think that there's solutions right and uh i think that if one thing that has happened during this war has been that we've seen how humans can innovate and sort of rally behind each other so i think like that is what i'm hoping for to happen is that people are like okay like we can sort of figure out this agriculture situation we can figure out this energy situation like you know u.s senior officials went down to go talk to venezuela about getting oil from them so i think that there's going to be solutions but um i do think things are going to be a little yeah like maybe i

should not hedge as much but yeah um expensive with a capital e so yeah not pessimistic over here but definitely want to be prepared i think for for what's ahead and uh there's definitely seems to be a lot to prepare for um all commodities going up uh except crypto isn't bitcoin and ether aren't they commodities they are not going up but we have a few more things we're going to cover including crypto but first we want to talk about inflation the the fed response to all of this which what's jay powell going to do in the in the face of inflation and the prospects of a recession so a lot more to cover but before we do we want to thank the sponsors that made this episode possible when you shop for plane tickets you

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thank you uniswap for sponsoring bankless alright guys we are back talking to kyla scanlon all about what is going on in the world uh commodity crisis let's talk about that on the back of this so commodity prices are increasing maybe a recession like there's whispers of a recession it's to be determined to be to be proven but just a month or two ago the talk and the macro world was all about what is the fed going to do next are they going to raise rates because we had and still have inflation at like seven eight percent cpi that is outside of the fed's mandate for what inflation is supposed to be in a healthy well-functioning

economy and now um jerome powell has the potential of a recession on his hands too what's the fed gonna do and how does any action that the fed uh does do in the back of this change things yeah so uh jerome powell testified in front of the government last week and he was very clear and he said that they were going to hike rates by 25 basis points in march and was like i don't see a whole lot of you know geopolitical contagion happening from the war this was before all the this was a little bit before all the sanctions happened so i'm not sure how he's feeling now but like to have a fed the chair of the fed come out and be like i'm raising by 25 basis

points is a huge huge deal um so it seems like they're gonna do that and continue to on that hiking path um i'm not sure if that has changed since then like the ecb was they're having their meeting this week and they were supposed to also you know talk about hiking rates but that's not happening because they're like very deep into um they're in a little bit of a worse off situation than the united states is just because of their reliance on russia to the you know locality that they're in and they're basically torpedoing towards the recession at the moment so it seems like the fed is still on their hiking path um to sort of manage inflation but i think the broader uh goal of the fed will be just stability in general like we saw

during the pandemic so i'm not sure though because it's kind of not awesome because they used up their toolkit during the pandemic like it's not really like they can lower rates right now i don't think they should because inflation is so high um but we might see some unique monetary policy action because of this yeah the the timing that this uh conflict is happening is just um unfortunately perfect uh if you want if you want bad things it's a perfect storm perfect storm thank you thank you uh yeah we're just like oh yeah we're just coming out of covid we have a small needle we can thread with like managing price stability and labor uh but i we

think that we can do it and then boom russia invades ukraine like it's really couldn't happen at the worst time and uh i want to uh actually try and get a definition under underway because like we're seeing commodity prices go like you know uh up basically making the cost of production also go up is that different from inflation is that is that separate from inflation or when all but or when all commodities go up equally across the board relatively equally is that actually what inflation looks like so they're not really the same thing like you're not like oh commodity prices inflation like inflation is theoretically it is a decline in purchasing power uh commodity price increases or the movement and prices of goods um so

they're not like the same like you can't look at you know wheat and be like oh we increased 40 over the past week uh inflation is 40 across the board right like it's more of a basket of goods um and it incorporates a lot more than just um agriculture and commodities um incorporate services as well but you know there's a st louis fed actually has an analysis around this and there is a pretty positive like a 0.7 correlation between commodity prices and inflation so like if you see to jim's chart like if you see oil increase like yeah like a recession might happen if you see the price of different energy things increase like you know inflation is going to happen like that is going to end up carrying out into different products because that

is a common denominator so like oil is super like energy is so inflationary because that ends up showing up across the board because energy is such a common denominator to everything like everything like you know this pin is is made with oil like ah right so it's just like super interconnected and so if you do see the the price of different things move like that will show up in inflationary pressures eventually yeah so kyla used this term stagflation right and that's a scary term but but that means basically you know recession so gdp going negative while we have precipitous inflation is that the correct definition of stagflation and um we saw that during the 1970s there was also an energy crisis in the 1970s is this

a similar pattern or which is kind of going to play out the 1970s again i'm not sure if it'll be exactly like the 1970s like this geopolitical risk i think is a pretty big deal um but yeah um i'm not sure like that that's a super hard thing for the fed to manage like the concept of stagflation because it's like you can't really hike rates because um to manage inflation because you have a growth slowdown and if you hike rates like that is going to cause things to slow down even more um so i'm not sure what will end up happening from a policy perspective or if it's really similar to the 1970s yeah so we'll have to see what uh what powell does then he's kind of in a rock and between a rock and a hard place uh with

respect to raising rates or not yeah um yeah and it's uh i'm not sure i'm not sure what the right answer i like obviously who knows what the right answer is and they they were already in a in between a rock and a hard place um like i don't envy their job at all but i think like they probably had their foot on the gas in terms of easing for a little while too long um but also like war is inherently uh something they can't manage super well um from what i gathered before all of this russia invasion of ukraine mess uh like businesses were already having trouble keeping up with uh being competitive with wages for their

employees uh and and so i'm wondering like when uh the cost of goods for so much of just like the economy increases can businesses support that like how many businesses might end up getting washed out if like these persistent commodity prices do stay high yeah i mean so this is interesting too from a fiscal policy perspective because biden made a comment during his state of the union which was i think last week like time is literally not even a concept anymore but i think it was last week and so he he was basically telling companies to cut their costs to manage inflation like just do that which that doesn't really work because

everything is so expensive right like the ppi like it's it's high too it's not it's producing price index like producers are feeling the inflationary pressure as well and to the point about wages not growing like yeah so i'm not sure how businesses are going to be able to manage it because theoretically when inflation is so high your employees should probably get a little bit of a raise just to manage the cost of living a little bit better but if businesses are also fighting you know higher input costs like whether that be from maybe like they use wood or they use wheat for their bakery that that creates a lot of problems too so i think it's just like that you've already seen um a lot of worry i think

from managing these costs so i'm not sure how businesses are going to respond i'd imagine it's going to be difficult and the the same conversation's probably true with individuals right like we've already seen milk prices go up we're already seeing gas prices go up like these same challenges that our businesses are going to have to face are also going to have to be faced by individuals yeah i mean i think that what's happening is obviously like incredibly unfortunate but when you have energy prices increase like this it really puts a lot of pressure on lower income americans because energy is a larger portion of their total expenditure so i think that you're just going to see um

probably like an increase in wealth inequality um because it's a little bit harder to manage the energy increase the gut the price of gas increasing and the price of like gasoline is not a huge expenditure as it protects a percentage of total expenditures for the average american but that just puts pressure on the bottom line and um you know americans have a lot of excess savings because of covid but that's going to be blown through pretty quick just because of how much gas is increased in price like i i don't drive a car but i know that i think it's like it's on average like four dollars a gallon everywhere which is like that you only used to see that in california um so it's gotten so expensive and that's going to hurt everybody yeah

and then lastly before we kind of zoom out and look at this thing whole holistically and also with crypto as well um supply chains was this was a big conversation that we had when we had you on the podcast supply chains are already in a predicament uh how are supply chains being stressed by just the events of the last like 14 days or so yeah i mean so like there's a good bloomberg article called the only container ship in ukraine there's just one little container ship in ukraine just stuck there and i think that's probably pretty metaphorical for just how all supply chains have to operate right now like there's a lot of like how do we get things across the border like not across the border but like from point x to point y like how does that actually work um you know russia and

ukraine are such big components of you know as we talked about extensively the commodities market and so i just think that you're seeing pressure again on supply chains and pressure again on the functionality of them and sort of how everything is supposed to flow it just isn't flowing the way it's supposed to and to the point earlier about dominoes like when one supply chain domino tips all the supply chain dominoes start falling um so that's yeah so kyla do you have a perspective on how this affects crypto how this impacts crypto and i feel like um people we talk to you in the market are kind of undecided and then maybe the market itself is somewhat undecided because of course crypto is sort of a

risk on asset in that when people are feeling bullish and when there's you know high growth prospects uh they're more likely to pile into crypto and yet it's also supposed to be this non-sovereign store of value that means it can't be censored by a central government it can be an outlet for the people whether they're ukrainian or whether they're russian to actually escape from their sanctioned and devastated financial system and uh it it can also be sort of a inflation hedge at least in the long run maybe that's the hope against um some of the government inflation of their fiat

currencies and bonds and so right now crypto is down has been going down since since kind of the beginning of the year what do you think how do you think the story plays out in crypto yeah i mean i think it's been interesting right so there's probably two parts to it like um you know to your point like crypto is meant to be this escape route this tool but i think the worry of regulations kind of bite into that a little bit and i so i think to that point like um russia is this is very clear and the u.s treasury pointed out russia is not going to use crypto to obey sanctions like that's just not something that you can do on a public ledger uh but you have seen like ukrainians and russian people being able to use crypto to

you know save and store their wealth which i think is super important but then you've also seen this broader question around you know a decentralized asset on a decentralized exchange and what role does that centralized exchange like coinbase fdx ftx etc um well i guess they're not technically centralized but coinbase for example like what role do they play in complying with sanctions um so i think that's sort of the question is like you have this thing that is inherently decentralized but how does that actually work from a more centralized perspective um and i think that's like what everybody's trying to figure out and then biden is sighting in this executive order that's supposed to be this big and this has

been in the works for a while this week he decided to sign it i guess but um that's supposed to be this big sweeping order around how they're going to oversee cryptocurrencies how they're going to impact or how they're going to work around with cbdc's and just the economic impact of digital assets in general so i think that i think it's just a lot of uncertainty in the crypto market and then i think this is like a broader theory but i think a lot of crypto has gotten a lot of institutional dollars recently and so it ends up sort of trading like tech would uh like a risk asset like you said uh so i think that's like there's just a lot of different uh factors that are moving it right now

i actually think that this uh conversation from regulators about uh targeting the crypto centralized entities like the coinbases the binances uh which have actually started to fall in line with the request for for sanctions is a fantastic uh way for the politicians and regulators of the world to like claim victory in a sense like oh like crypto is aligning with our sanctions like good job and like kind of leaving the underlying networks where they should be as underlying networks that can't really answer to sanctions uh so i think the fact that like decentralized entities are actually responding towards sanctions is actually giving them like a sigh of relief i think it's like oh okay we can regulate

this industry it will respond to our needs and also i do want to before we kind of wrap up here i do want to touch on um something i know you're paying attention to which a thread that jake schravinski put together which is that when you sanction someone it's not that you banned them from sending money outbound it's that you restrict countries from receiving the inbound payments uh kyla can you kind of uh uh explain that nuance and how that's related to all these sanctions yeah so i haven't seen that exact thread that he uh posted i know i saw the one where he was explaining like um you know uh russia is not going to use sanctions to sort of evade or not going to use crypto to evade sanctions but i think yeah to

that point like um crypto yeah i actually don't quite know how to answer that one but yeah yeah more or less just for the listeners more or less it's it's when you sanction a country uh you what you really do is you make it illegal to accept that country's money uh so like the the payment rails can still exist but like you make it illegal for a business to accept russian money or to accept russian oil and so it's not like we are restricting russia from sending money outbound even if it was using crypto you're what you're doing is you're making it illegal to accept russian money from the business perspective or from the receiving perspective and so like the whole permissionless side of crypto rails actually is less relevant here because

really what you're doing is you're you're using your influence saying like if you accept russian money it doesn't matter if it's crypto or ach or wire transfer it doesn't matter but if you accept russian money you'll go to jail because of sanctions uh and so like that's a i think that's a nuance that's not really um uh uh being um made relevant i think in the conversation with regards to crypto and sanctions anyways just wanted to bring that up no that's a good point yeah as we kind of close this out then um i'm curious how does how does this end like next steps not not end but what happens next i guess is a question and then cyclist ford um what's a reasonable worst case for all of this

and then also what's the reasonable best case and you know realizing that like the truth often falls somewhere in the middle and reality is somewhere in the middle but worst case outcomes of all of this and then best case outcomes of all of this that you can see right now uh so to be candid worst case nuclear warfare oh yeah i forgot about that part yeah um yeah and it's not like putin can go up and press a big red button and send dukes but uh yeah like he's threatened them twice essentially well so just the end of the world is the worst case yeah yeah i mean if you're if you're speaking in terms of like extremes yes of course

like that's going to be on that end of the distribution and that is scary uh and then i think like the best case scenario would be that they negotiate putin goes back to russia or whatever or hopefully gets booted out of office gets replaced by somebody who is willing to you know give russian people the life that they deserve and to treat them with the respect that they deserve and not invade other countries and there's negotiation maybe ukraine doesn't become a part of nato that's fine i think they seem to be open to that idea and there's just i think that you know the best like what's been

interesting about this war as you have seen the west become so much more united you've seen europe like finally wake up and kind of like become countries again which has been i think really important um instead of just like oh like we're gonna be friends and hold hands forever like that that's just not how geopolitics works and so i think that the best case scenario is that ukraine retains sovereignty that this war ends as soon as possible and that the world you know i think from a geopolitical relations perspective is a little bit more connected but i do think that we're going to have to start seeing some more production within each country versus perhaps relying on a global supply chain you know i do think it's actually uh worth repeating that there is a best-case

scenario that does involve basically everyone in the world just rejecting putin and him actually being ousted from russia i think people are are it's it's not perhaps the most likely path but i think people are seeing a path towards the actual removal of putin from russia just because he's pissed off everyone basically yeah i mean i can't imagine the russian people are going to welcome them back with open arms after this you know well he's still in russia but yeah i can't believe it's only year two of the 2020s guys what a mess so far huh it is uh it is chaotic someone christened this the weird 2020s but it's um it's certainly a chaotic um

a couple years so far and i think it's a perfect opportunity for people to kind of get get prepared and understand again not be pessimistic but be prepared and i do think that um crypto is going to stay a part of this story as people maybe need to escape at various times their their existing financial system and leave with some of their assets um kyla thank you so much for guiding us through all of this and this number of complicated topics they're all being interwoven you do a fantastic job of doing all of that uh and we appreciate you spending time with us today yeah no thanks for having me on guys uh you gotta go subscribe to kyla's youtube as well uh as her sub stack she

writes fantastic analysis there's more videos like this on her youtube as well you can find everything at kyla scanlan.com will include a link in the show notes also if you like this don't forget to like and subscribe to the bankless youtube channel make sure you do that as well of course guys risks and disclaimers none of this was financial advice uh we wouldn't presume to give you financial advice on bank list never do uh bitcoin and eth are risky uh so are the fiat currencies of the world you could definitely lose what you put in but we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bankless journey thanks a lot hey we hope you enjoyed the video if you did head over to bankless hq right now

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