Jim Bianco on the Health of the Global Financial System

Transcript

to talk about what's going on with the banks David this has been I think a running series for us ever since biology uh put up the bit signal and started a conversation around the banks insolvency the dollar hyperinflating Bitcoin going to a million dollars within a 90-day period of time of course this is on the back of a few Bank runs that we've had in the United States uh Silver Gate Bank led the charge then Silicon Valley Bank led into signature all sorts of intervention going on with FDIC and U.S government and we're trying to figure out what's going on what is actually what is the truth

so we have Jim Bianco here today and I think this is maybe the fourth in a series of episodes so our first episode with with Balaji uh where we we actually talked about his thesis for Bank insolvency in the United States and it was a very Bleak pessimistic uh Outlook and then uh but but he brought lots of evidence and then we had a conversation with Arthur Hayes who took kind of a Trader's perspective he also sided with Biology and this entire uh in his thesis except he thought it would happen over a a longer time frame so rather than 90 days to a million maybe Bitcoin takes like two three four years to get there then we had Ben Hunt on the podcast who gave the complete opposite take

rejecting both of those uh takes with a Counterpoint and now here we are with Jim Bianco today Jim is somebody who I think you and I both respect quite a bit because he's got one foot in the traditional Finance world and one foot in crypto I think we're gonna ask him David to just make sense of this whole conversation and everything that's going on yeah especially when all of these other conversations that we've had find themselves at the far end of the spectrum like biology Bitcoin to 1 million in 90 days calling for more or less Doom as we know it um triggered a lot of people made people very uh upset and really didn't uh you know whether or not you believe it you either are scared because you're of what

is what that means or you're just upset because of just how doomor that that whole perspective is and then on the like you said on the flip side of things we have Ben Hunt who's saying that is just a complete farce and I think we need to bring somebody that you and I Ryan are familiar with that the bankless nation is familiar with because we've had Jim Bianco on three other times so Jim feels like home for us he feels like known a known quantity and so even I'm assuming he has a stance in this debate a stance in this conversation but regardless of this crazy debate that's going on in the crypto World also just regular old macro is back in season as it's in people's brains and so we're going to get Jim bianco's take about what is going on in the macro world and

hopefully uh shine a light for us in these dark and chaotic times guys before we get in we got a shout out to our friends and sponsors over at infuria they just released something really cool which is like an nft API tool David what is infuria up to what do they want the developers listening to bankless to know about yeah this is for the devs out there so inferior has built all of you guys an SDK to help you build your nft application on various different blockchains uh and so what you can what can you do with this SDK well whether you are minting nfts you are buying or selling nfts as functions burning nfts it's got a bunch of different functions for you to write mint nfts and uh both ERC 721s and 115s across three different

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Bank listen Nation we are here with Jim Bianco Jim Bianco is a frequent returning guest to the bankless program head of Bianco research and also owner of Bianco research.eath Jim has become more or less our go-to source of macro analysis from someone who also knows crypto there is not that many of these people out there and Jim is definitely one of them uh Jim I remember was early and loud about the initial fed pivot into Rising interest rates all the way back in March of 2020 before much of the crypto industry including myself really understood how significant interest rates can really be now we are having Jim back on for his fourth time to help us navigate this next wave of macro chaos Jim welcome back to bankless well thank you bankless is now becoming

a cultural movement here with these banks in the last couple of weeks yeah the word thankless is a meaning a little bit different things these days yeah the banks are taking it literally I think yeah more literally than we intended this wasn't exactly what we had in mind but uh either way it's becoming hastened uh so so Jim as you heard in the intro uh we there's this debate going on in the crypto world and I know that you've got your own macro takes that are independent from all of our Shenanigans in the crypto industry about who's right and who's wrong about this like one million dollar Bitcoin bet but I do want to start the conversation there now biology thinks the United States dollar is going to hyperinflate inside of 90 days Arthur Hayes directionally agrees with him just isn't so rapid and Doomer

about it he thinks one million dollars in two to three years Ben Hunt says that this is completely irresponsible and overly doomest which is also a sentiment shared by many is out there I wonder do you have a position in this debate like where are you in the spectrum of of million dollar hyperinflation Bitcoin to this is shenanigans uh I'm pretty close to where Ben Hunt is right now in full disclosure he's a fishing partner of mine in Maine we go every August uh with some others yes uh and uh I let me let me come down on what I think is happening with the banks and where I think we need to have this debate for a bank an asset is a loan or Securities that they own

if they hand out bad loans and if they buy Securities that lose value a lot then they're unable to meet their obligations and that is a solvency crisis but on the liability side for a bank is deposits your money my money if we all decide that we want our money back then that is a liquidity problem or a liquidity crisis and that's what we're having right now people want their money back from the banks the problem is Banks don't hold 100 cash custodia would like to do that but they won't let them but that's a whole other issue altogether the banks have loans the banks have Securities

that can't be immediately converted into cash so if too many people show up at once and say give me back my money you have a liquidity crisis that's what we have going on with the banks now now a liquidity crisis can become a solvency crisis if you squeeze the banks hard enough a solvency crisis was 2008 if you squeeze them back bad enough you can turn that into a liquidity crisis but I do think it's a liquidity crisis and really the question we need to be asking is why are people asking for their money back what is it that is motivating them to ask for it back and then put banks in a bad place seems like we're going through the letter s right now between

silvergate Silicon Valley and signature um as well so Jim I I want to ask you because so uh did you get a chance to listen to the Ben Hunt uh conversation um and also the Arthur Hayes conversation for instance yeah I listened to bed conversation I heard some of the Arthur Hayes one okay so can you give us some like I guess context here so my my take was that Arthur Hayes uh was making the claim and biology was was kind of making a similar claim that this is akin to maybe not quantitative easing because we can't use the same turn but um the money printing that was going to happen as a result of um the bank term financing program the

btfp was going to result in sort of the same thing which is the Fed balance sheet increasing and then I I kind of line that up with uh like tweets tweets like this which is from your uh Twitter and this is a graph the FED updated their balance sheet and you say now two-thirds of quantitative tightening that's the quantitative tightening that they've been doing kind of post-covered uh you know early 2022 up till now has been reversed and so this looks like the FED balance sheet going back up which seems to like indicate that the the Arthur take is is correct or at least the biology take is correct now Ben Hunt was saying no no this is all uh temporary this is all kind of liquidity

that the FED is injecting it's not something that's going to be permanent and this is sort of where the conversation at bank list is kind of left off like I don't know who is right I don't know who to believe on this can you help us make sense of this well let's let's put some um uh Concepts on this uh quantitative easing let me start there that is the Fed printing money to buy bonds to go into the market and try to manipulate the price of interest rates lower in fact they refer to it as permanent they use the word permanent open market operations so they just invent some money they call JP Morgan or they call Goldman Sachs they

say we uh sell us some 10-year notes and they agree on a price and then they pay for it with the printed money I'm simplifying it uh for our purposes as well what you're seeing here is not quantitative easing by that definition it is an expansion of loans so the banks are showing up at the FED discount window which is a lending facility and they're saying look everybody wants their money back and I don't have cash but I do have a billion dollars worth of other Securities and loans and other assets will you take them as collateral and give me a billion dollar loan and that's what's been happening with this expansion of the balance sheet now you know I I to kind of you know Square the circle between

Ben and Arthur the FED thinks this is going to be temporary they intend on it to be temporary um we'll have to see whether or not it turns out to be temporary but I have a feeling that if it's not temporary then it is going to continue to if it's not temporary then the balance sheet is going to continue to go up and up and that could be very inflationary for the economy as we go not necessarily hyperinflation Mission like balaji's talking about but maybe more like 2022 inflation type levels that we could see come back into the market that would be a big problem for the tradify markets um otherwise if the problems with the banks this liquidity problem with the

banks subsides then you should expect these loans to get paid off by the Banks and then you can expect the balance sheet to go right back down again so it remains to be seen what kind of level of problem that we have with the banks so okay the the the the take that I've heard about this particular uh Linus graph this chart uh is that the lines going up and to the right extremely quickly and while it might not technically be QE it's something else uh I think a lot of people are just advocating for the perspective of never mind what they call it never mind their fancy language about this look a stimulus is stimulus and so the net effect of whatever operations that they're doing into the market is

increasing the fed's balance sheet the net effect of that is stimulus risk on asset favorability uh inflation and uh you know Capital asset appreciation basically you know the bull market that we're all hoping for right uh and so like never mind the names uh that's kind of what some people are thinking about or perhaps crossing their fingers and hoping for and I think what you're saying what you just told us is like hold on uh yes it is that but no it's still not that and the reason why it might not be that is that because there is a chance that these loans being made by these banks are going to be be paid off at least that's what the FED is hoping for and if they are paid off then we're just not going to see that

inflation we're not going to see a growth in the balance sheet is that the right is that the right perspective to take here Jim yeah remember these loans that the FED is handing out are collateralized they're not just printing money and hand it to the bank the bank is giving them in the btfb um you know the bank basically is saying or the FED is saying you got to give me a billion dollars of Securities um Paramount yes maybe it's a little bit less but and then I will give you a billion dollar loan so it's like collateralization that's really unique right uh well it's not unique for the FED but it is unique in that they are not just printing up money and handing it out to everybody like we did in 2020 or if I had actually shown you a balance sheet from 2008 it actually the balance

sheet in a couple of weeks after uh Lehman Brothers uh went bankrupt actually doubled the entire balance sheet doubled this is not a double you can see the the scale is at a trillion right now so this is um not quite what we've seen in the past so let's just let me just put some some uh numbers on this if the FED expands or balance sheet it you're right it is stimulus it stimulates the economy it encourages a faster economy it encourages higher risk markets if the banking problem subsides the fear I think that will come back into market right after that is now the fed's going to turn around and they're going to have to hike even more aggressively they're going to hike

interest rates to above six percent because we're going to have an inflation problem in the second half of 22 or in 23 so they're going to slam on the brakes but if all of this lending does not alleviate the banking problem and it continues don't worry about inflation because the economy is slowing there's they're going to continue to stimulate and stimulate and it'll look more like 2008 and then you might have this creep from a liquidity problem everybody want their money back to the Securities that the FED that they've uh pledged to the FED start losing more value and then you could be creeping into a solvency problem you don't have a solvency problem now but whenever you start down this road that is always a risk that

when you start off with a little problem it metastasizes bigger and bigger so I guess really the question we need to really address is why is everybody asking for their money back what has changed in the equation over the last couple of months for everybody to ask for their money back and um Ryan you've got a chart of the drawdown of uh um not that chart uh the um uh the the yeah that chart right there uh this is the size This is 43 years of deposits in Banks and it shows you on the bottom part in red the drawdown how high are you off the all-time high now what jumps out in the chart is the middle uh that is October of 2001 and

that was right after 9 11. and what happened was the world Towers came down World Trade Towers came down and a lot of the buildings around the World Trade Towers were damaged a lot of those were like the Bank of New York that are big um uh transfer Banks there was a blockage in the payment system because of damage to the infrastructure that caused that draw down into physical damage physical damage yes um and so that is a unique situation so if you remove that what you see on the chart is the biggest drawdown in deposits in at least 43 years and probably 50 years that we've seen in Banks and there's a little label on that chart for March 8th when the drawdown was still -383. March 8th is two days

before Silicon Valley went bankrupt so this was underway for a period of months this withdrawal of assets out of Banks and I think really what we need to understand is the nature of how banking has changed in the last couple of years and that's sped up in the last six months let me explain that we have now live in a world of Mobile Banking everybody listening to this podcast is probably into crypto probably a lot younger than me and Ben um and you do all your banking on your phone you've probably never even physically set foot in a in a bank branch um that is the way that the world works but for 14 years interest rates whether your bank gave you on your savings

account or your checking account or was available in the market was the same it was both zero so there was no reason to think about those interest rates well a year ago the FED started raising rates and because of quantitative easing the bank said I've got enough deposits I've got enough assets I don't need or I don't need any more so they didn't raise their rates so as rates went from one two three to four percent the the interest rate you got on your bank account was zero in fact JPMorgan Chase still advertises on their website that if you open a savings account with them your interest rate you will get is one basis point one but if you are a preferred customer they'll double it so

you'll get two basis points if you are a preferred customer so that has worked for 14 years because Market rates before that but once we got past four percent that was about Thanksgiving Behavior started to change people started to pull their money out of the bank and put their money into a money market fund because it was yielding four 410 420 or they bought treasury bills or they went to a fintech firm that was giving them more money or they they um uh went to an ETF that was having a higher yield I'm keeping all the Trad five examples in here and so what we started to see was more and more movement they became yield Seekers let me put this in crypto terms for you this

is d510 yield farming is what has happened now it has come to tradify they have now noticed that if I'd spend five minutes on my phone I could pick up a lot more yield and just like the one the d510 yield Farmers they tend to be a bit mercenary they they have no allegiance to where their money is they have allegiance to who's giving them the highest yield and so they seem to be jumping around whether it's to T bills to money market rates and so all of these people started asking for their money back because they didn't want to get two basis points or they didn't want to get um all these low yields now we had two types of banks that were

being squeezed at the same time the crypto Banks and silvergate signature and the tech Bank in Silicon Valley Bank they were seeing deposit outflows because after FTX there was a loss of confidence and people were kind of withdrawing from silvergate and from signature and because of all the tech problems the tech startups were not able to do series B's and series C's to replenish their accounts and they were bleeding money as well too the executives at those Banks knew those problems existed and were managing those problems but then over here on the right they were looking at their deposit their regular like yield seeking deposit accounts and they would make a statement that was true that you are more likely to get divorced than you

were to change your bank and so they said these people will never move they will just sit there and they will never move then around Thanksgiving it's like wait a minute they're starting to leave now too I didn't anticipate this they were already managing a problem of depositors leaving because of crypto and because of tech then you piled on to this the yield Seekers are starting to leave too that forced so Silicon Valley Bank into a difficult position they needed to get more cash to meet deposits they consulted with Goldman Sachs and they decided to sell 40 billion dollars worth of Securities off of their balance mortgage Securities treasury Securities

agencies Securities and realize a 1.8 billion dollar loss they thought and this is my supposition that oh our stock will have a bad day it'll be down 20 and we'll raise extra Capital because Goldman will help us raise extra Capital uh to cover that 1.8 billion dollar hole and by the end of the year this will all be water under the bridge what they did not anticipate was the gates of hell were going to open their stock would be down 61 that day and by noon the next day they were going to be taken over by the FDIC last offer you on that noon the next day because of phones and because of digital the history of the FDIC or the California Department of Finance which took them

over and then put them in FDIC receivership there's always been that when a bank fails if it usually gets taken over Friday after the close the money that was leaving Silicon Valley Bank was so fast and so Furious they couldn't wait until 5 PM when the bank would close they took it over around noon that day because the money went otherwise there would have been even more deposit outflows so this is something that Bankers are now going to have to really get their head around what is it that has changed about the deposit base of banking and what is it that is influencing them what do we do about it obviously the answer is raise your deposit rates but that kills your

profitability and I'll come back to full circle if you want to learn a lesson from somebody who's dealt with this instead of kicking crypto in the teeth why don't you take a look at d510 and yield farming and how that there was that struggle with yield farmers in their mercenary attitudes about you know just you know in fact we we automated it with a year involved you know just we're just gonna every five seconds look for the highest yield and bam we're gonna go there and get the highest yield and if somebody else offers a higher yield we're going to jump there that's starting to happen now in Trad five banking because the the technology is making it very easy last thought for you I think the biggest mistake everybody in the traditional world makes is here's a

new technology oh well I could use this in case of Mobile Banking I could close some branches I could reduce my overhead I can increase my margin what a great thing this mobile banking is but often what what new technology does is it changes business plans it changes business models it changes Behavior it does more than just allow you to skimp a couple of margin points off of your costs and so they didn't realize that they were opening up a whole new business model by Going Mobile Banking they didn't see it because we were stuck with zero interest rates for many years but as soon as rate started rising and the public started realizing for five minutes of my time on my phone I can

make thousands of dollars by moving to a money mark could fund or buying a treasury bill and they started doing this and now these Bankers are going to have to Grapple with what you think you understand about your deposit base no longer applies they are not more likely to get divorced than switch the bank that has now changed and really changed the last 90 days and it's going to be very difficult for the that to be unlearned the public stopped doing it and while maybe we won't see another bank go into receivership Maybe I don't think we're going to start we're going to see the outflow stop from the banks people are going to continue to say I don't want two basis points from Chase I would rather move to a money

market fund and get four and a half percent and we're going to continue to see that until those rates Converge on each other so so Jim this is this is just kind of the question I'm wondering if you'd still sort of help me help us collectively bankless listeners square that the Ben Hunt versus Arthur and Balaji type of debate okay so we see this chart you just made the case that we're going to see increasing outflows we saw massive outflows this kind of looks like a bank run here that's what maybe a bank run looks like is everybody uh you know mo digitally using their mobile app withdraws funds from from the bank right so what what Ben though was saying is

um these withdrawals will kind of stop right this need to for the FED to add to its balance sheet will stop after this liquidity crisis is over it almost felt like Ben was like saying okay well the the bank run is kind of over or it's in its end phase whereas I think what Arthur Hayes was saying it's basically like hey this ain't stopping people are going to continue that you know it might be a slow motion train cat crash where people over rather than right away over 24 hour period of time people over weeks and months withdraw funds from the bank there's a sucking sound from the bank into money market funds into these higher yields like defy uh pool accounts that sort of thing and what that will lead to is not a decrease in this number

on the FED balance sheet but an increase up to the tune says Arthur Hayes of close to four trillion dollars which is like the size of covid and Ben whereas Ben was saying No this is temporary we're not going there this is the btfp is a one-year program and it's just liquidity injection and then it's kind of done Arthur was making the point that like done no it's never done like the FED starts something then the financial system adjusts everybody becomes dependent on it and it becomes the new normal and suddenly you have a Fed balance sheet that is never going down it's just perpetually going up can you help help us square that like is it is you is your um your idea basically like hey we don't know it could be one or the

other it's too soon to to call it right now and we'll just have to see it how it plays out or is one of these theories uh clearly right right well first of all um so everybody understands that btfp if that's too much for you just remember buy the pivot that's basically like this right now and that's what everybody's hoping for is that the fed's gonna it's gonna cause the FED to Pivot uh and yes as I'm more towards Arthur in this respect what Ben I think was trying to say I'm gonna put words in his mouth and he can yell at me in Maine next time he sees me uh uh is that uh is that the initial Panic get your money out of all of these

Regional Banks might be subsiding okay I'm with you on that but I'm with Arthur on the idea of okay so we're not going to see a massive amount withdrawn from our bank in the next week or two that finds up going into FDIC receivership at least best guesses is that problem might be behind us but the outflows will continue over weeks and months until there's a reason to stop them and the reason to stop them is my bank account's giving me four percent a money market fund is giving me four percent I have no reason now to leave my bank as far as the the traditional people both my bank accounts giving me two basis points and a money market fund is giving me four I have every reason to eventually I don't

have to drop my life and do it today but in the next few minutes when I've got some time I'm going to get on my phone and I'm going to move my money to a higher yield so that is going to continue over time though these Banks should not only rely on a lending program to meet those offers because remember these banks have to pay an interest rate a market-based interest rate on those loans these loans are not free so yes they're saying here's a bunch of collateral give me a billion dollar loan but they're paying four percent for that money the banks are so they don't want they don't want to hold that loan forever because it's going to be a significant draw on their profitability they will eventually sell

Securities reduce their lending uh in order to pay back those loans by running the bank with more cash and less Securities and less lending now let me make a point here about a bank that seems to get lost in the the discussion and to my mind it goes to why they denied custodia I mean I I think they were wrong in doing it but uh if you ask the fed and everybody else what is the purpose of a bank the The Regulators and the bankers would answer to hand out loans it is the lifeblood of the economy eighty percent of commercial real estate loans come from a Regional Bank fifty percent of personal loans 40 of

commercial industrial loans come from a Regional Bank that is their purpose if you ask normies what do you think the purpose of a bank is they would say it's a warehouse where I put my money and they give me an interest rate well that's this is the Crux what custodia was offering was a safe warehouse for money and the FED looked at this and said we can't have this if everybody did this no one would hand out a loan and that would hurt the economy that's why I could just support him to provide some context on custodia custodia was Cynthia lemus's uh no uh Caitlyn long excuse me Caitlin Long's fully reserved Bank in Wyoming so a different kind of Bank a bank that's

designed to be more than 100 fully reserved so the opposite of a fractional bank so that's that's why Jim is talking about custodia specifically here sorry I just want to add that contact Jim yes yes and basically what they wanted was a license where if you have reserves with the Federal Reserve they pay you an interest rate so they were saying you give me a dollar I will put their beer dollar into a Fed master account the safest possible place you could possibly put a dollar is in the FED master account because if it's not worth anything in the FED master account that means that all of society is done at that point yeah exactly and so and then I would then hold it in in in a form of cash in the fedmaster account so if a

hundred percent of the money wanted to leave that bank in five minutes they could convert they already have the cash to convert it the FED is afraid of that banking model because they think banking the purpose of banking is to hand out a loan you and I might think the purpose of banking is to Warehouse my money and that's where the rub comes in between the two organizations the the two thoughts um at that point so what the FED is looking at with the banking crisis is they're worried that lending is going to slow that's called a credit Crunch and they are right because if this deposit bleed continues and continues a banker is going to sit there and go I don't

trust the liability side of my balance sheet I don't know where my deposits are are they leaving are they staying what causes them to stay what causes them to leave I thought I understood it I don't so what are we going to do about it all those all of those loans applications that we we have right now they're on hold I'm not going to hand out any more loans until I figure out what's going on with my deposits and then you're going to have a bunch of commercial real estate guys going I'm ready to go with my office building I'm ready to go to build a new apartment I'm ready I need that personal loan I need this business loan to expand my restaurant and the banks are going to just say no no to all of that and that could really hurt the economy so that's the way the FED looks

at it I know that the the problem maybe with the topology argument is we're looking at it as a money warehouse and we're not remembering the other side of the equation and that is the The Lending part of the equation so that's why this deposit flow thing is critically important do the banks understand why they're losing money well I would argue they're really struggling with it because 90 days ago 120 days ago this wasn't happening this is new since rates went above four percent they don't want to believe the answer is kill my profitability that I have to pay four percent for deposit rates and invest that money in a four percent loan or a

four percent T bill which leaves me no margin as the bank they don't want that to be the answer but grudgingly more and more I think they're going to have to accept that that is going to be the answer and until then money is going to continue to leave and leave the banks and where does that matter no more lending and if we have no more lending than GDP and everything else could really take a dive earnings can take a dive because the economy is so uh it is such a lifeblood for the economy to make sure that we continue to have lending but Jim can they raise those rates without going insolvent is is kind of the question and and I know Ben did not like the term insolvency so I'm not even right quite sure what what term to actually use here but certainly a term

that apology and Arthur Hayes did is basically like there's that Delta between what the money markets can provide what the banks can provide and his case was for the small Community Banks they're basically insolvent because they can't possibly meet that higher depositor interest rate without going going under somehow like that Delta well it depends it depends on what you mean by going under insolvent means that the bank has lost money and can't meet its obligations what raising the deposit rate will do is make them unprofitable or less profitable in the best case that's different from insolvency um I could I I can own I can own a restaurant that is both solvent and

unprofitable at the same time I can own a business that's solvent and unprofitable that those can be kind of two things now over time unprofitability can lead to insolvency uh but that's really where the concern is that's one of the reasons why I if you've if you look at what the bank stocks have been doing they've been going down and down and they really haven't been bouncing and people have been saying but the banks aren't insolvent I'm like yes but they're not profitable or the fear is they're going to lose their profitability because they're going to have to raise those deposit rates and all of their margin is not going to have to be paid to depositors that's why the bank stocks aren't going up it's not because they're worried that the banks are going to collapse it's just where's the profitability going to be in this

environment now the hopeful fix from a lot of bulls on Wall Street is at the first sign of a credit crunch the FED panics Cuts rates there you fix the deposit problem into the marketplace problem you took the funds right back down to two percent and the banks can still stay at one percent and therefore you've you've fixed the problem without it going the other way well the only problem with that is that requires tangible evidence then I'm going to use a technical term here that the is hitting the fan and it's hitting hard and yet we don't have that tangible evidence just yet and I'm talking about the economy we don't have that tangible evidence just yet but that's kind of the bull case oh don't worry the banks won't have to raise their deposit rates the

FED will panic when they see it's hitting the fan and they'll cut rates so this part of this analysis I'm I'm seeing a lot of overlap with my conversation with with Arthur Hayes where he was saying that um the long tail of banks is what uh gives credit to the long tail of the economy and I think you said something like this earlier in this episode Jim where just the regional banks of the world of the United States give out loans to their particular region and so if the whole entire banking sector starts to become unprofitable and starts to not Finance not give credit to parts of the the long tail of the United States uh the the net effect of this is the economy starts to suffer because the economy doesn't grow especially again in like in the long tail the big banks are

fine and the big business is totally fine but it's really it's just like the the Mom and Pops the main street of America is starting going to lose their credit and and also banks are going to lose the value of their shares and that part of the economy is going to Halt at best uh and so I just want to make sure that that you're in alignment with with what Arthur Hayes saying because these two analysis I'm seeing line up pretty well here yeah yeah exactly so let me let me put a a clarification on that and then something that the majority of people in the United States work for a company of less than a hundred employees I do you guys do a lot of people do that's where all of the job growth is that's where a lot of the the uh that is

where a lot of us work those businesses have specialized needs which Regional and small banks have catered to so if you run a restaurant in suburban Chicago I'm in Chicago and you need a loan you go to a regional bank and there's a guy who's 45 years old who's been handing out loans to restaurants for 20 years and in 10 minutes he understands why you need the loan and now you're just talking terms and it's very simple and it's very clean if you decide to call a JPMorgan Chase branch in downtown Chicago and get a 23 year old kid a year and a half out of school you got to spend a month explaining him the business of a restaurant before he's willing to extend that loan to you and so that is the that is where the regional Banks come in

commercial rent commercial real estate lending is always local it's what Market are you in and so you have bankers at these small banks that specialize in that and if those small banks are in trouble then you're going to see this now where I agree with Arthur in I would almost say let me put this in in biology terms I agree apology one million dollars in Bitcoin and I agree in 90 but maybe not days maybe it's weeks maybe it's months maybe it's quarters but it's nine it's not going to be 90 days it's going to occur a lot slower but it will occur over time is where I think we're going we have a new technology with the

blockchain we have new understanding about banking uh we have new uh Technologies we're cryptocurrencies that are going to make that are going to compete a fully reserved Bank look um Ave is a fully reserved Bank the compound is a fully reserved bank that's essentially what their business model is um custodia is proposing to be a fully reserved Bank uh so is other more traditional ones that have been proposing this called the narrow bank and the reserve trust which are similar but not in a crypto space uh as well that is going to probably come over time and we're going to see a movement towards that way of Finance holding our money getting interest rates just not in

90 days 90 days like you said is that's the world on fire that is the the absolute world on fire everything crashing down Among Us that gets you a 40x return in Bitcoin you know by this summer and this crisis is not that it can be a slow bleed it can take time and it could and it could metastasize into something worse but it's going to take some time it's not going to happen that quickly this is not 2008. this is not the banks handed out a bunch of loans they're all bad we just hit our hand on our friend go holy crap we just now realized that they have all bad loans they largely don't it's more about they weren't giving anybody interest rates and everybody wanted their money back

and they had now they don't have cash they've got a bunch of illiquid stuff and they're trying to convert it into cash and they're trying to figure out how to stop people from leaving every week because they're going off to get higher yields like I said they're yield farming is what they're doing and that's new for traditional bankers Jim there's a few other topics I I want to talk about I think this really leads us right into the topics of interest rates especially if you're telling me that the long tail of America the long tail Bank serving the long tail of the economy is on on the limit of what they can really do that that brings up the country the conversation of interest rates can we really raise interest rates anymore with even allowing that part of the economy to still maintain itself so

I want to talk about that next but also there's this idea of like these uh swap swap lines with the the rest of the world so I want to get your opinion on that and also just maybe play around with the idea of okay let's let's hypothesize what if we do get scope creep in the btfp what if it does stick around for longer in the ways that Arthur thinks that it does so I think these are the topics that I want to bring up I'm sure Ryan's got more as well but first a moment to talk about some of these fantastic sponsors that make the show possible uniswap is the largest on-chain Marketplace for self-custody digital assets uniswap is of course a decentralized exchange but you know this because you've been listening to bankless but did you know that the uniswap web app has a shiny new Fiat

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websites Phantom has already saved over 20 000 users from getting scammed or hacked so get on the Phantom waitlist and be one of the first to access the multi-chain beta there's a link in the show notes or you can go to phantom.app waitlist to get access in late February hey bankless Nation if you're listening to this it's because you're on the free Bank list r process feed did you know that there is an ad-free version of Bank list that comes with the bankless premium subscription no ads just straight to the content but that's just one of many things that a premium subscription gets you there's also the token report a monthly bullish bearish neutral report on the hottest tokens of the month and the regular updates from the token report go into the token Bible your first stop shop for every token worth investigating in crypto bankless

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bankless premium it's under 50 cents a day and provides a wealth of knowledge and support on your journey West I'll see you in the Discord make a station here we are with Jim Bianco trying to uh put together what is going on with banks in the United States right now how that's going to affect treasuries inflation interest rates everything where we should uh store our value in the future Jim I you know I'm starting to put some pieces together here and you're really helping to uh to square things between some of the episodes I we we had um you know lately particularly the Arthur episode and the Ben Hunt episode and I think one thing that Ben Hunt was saying which I think you're echoing is um look banks are important as a facilitator of credit in the United

States and this is what Ben was very much reacting to if you go and you replace the bank system with this warehousing technology as you called it um then then you lose credit and no one wants to lose credit because if we lose credit we lose basically the last 100 years of civilization I mean our entire modern world is based on credit and I think that's why he was reacting in such a like you know in such a way to the argument and then but here on the other side is Arthur Hayes and biology and they're thinking about like where to store value they're thinking about the monetary system and they're looking at treasuries and they're looking at the FED balance sheet they're saying no way treasuries are safe so Ben you're saying that treasuries are safe safe compared to what you know they don't see a um a

future of real Returns on treasuries moving forward maybe there'll be some nominal returns but they won't be real inflation will be higher than the actual returns and so they're saying Get Out escape the system and then Ben is saying well like even if that happens over the long term in 90 days you guys are causing a bank run biology and that's irresponsible like you are making the problem even worse and so this is the back and forth and you're kind of helping us to square it you seem to be sort of somewhat in the middle like you see both of these sides and uh you see the elements where Ben is right and you appreciate the value of credit but then I I want to ask you this question about treasuries so oh what is the prospect for treasuries do you think that they

will in the years to come or the decades to come actually provide real returns not nominal returns but real returns to the the typical the average investor yeah so um a real quick about uh the the banking system um it was actually invented in the 15th century fractional banking was invented uh uh by the medicis it was invented by the Catholic church and so it's been around for 500 years in fact the one of the first Banks ever created was Monty depaschi disenya which is in Siena Italy still in existence today it was founded in 1472 and the uh the folklore is is that they turned down Columbus financing him to the Free World and then he had to turn to the queen of Spain uh as well

but point is banks have been a tremendous facilitator of credit intermediation you know getting money to people that need it versus money that don't need uh the people that have it and want an interest rate it is done wonders for The Human Experience for the last 500 years now I'm fully open to the idea that there might be a better way to do it and crypto and Defy is exploring those opportunities of finding different ways to do it but to blow that up in 90 days is a very dangerous thing to do for the for the economy and as far as Ben's argument as far as you know by saying that you're going to create a bank run

let me back you up to Wednesday March 8th that was the day that silver silvergate Bank failed right after it failed you had Liz Warren Democrat from Massachusetts and shared Brown at the house or the Senate excuse me Financial Services committee both tweet out basically dancing on the grave of silvergate you crypto Bros you got to learn your lesson this is uh you know that uh and that they were happy that a United States Bank failed that might have been the first time that a congressman in the United States ever celebrated a bank failing then the next day Silicon Valley Bank realizes a 1.8 billion dollar loss and the gates of hell open up did they Inspire that did

they put a sour taste in everybody's mouth by saying congressmen like it when Banks fail and now we've got another bank suggesting that they have a problem my point is now of course if Liz sworn was here with us she would be ripping my head off for saying it but the point is you don't want to go there you don't want to go there because the whole financial system operates on confidence and if confidence is broken it is very difficult to get it back so just a quick word about this long system it's worked there might be a better way to do it but exploding this thing is not going to be the right way to go about it now to your question about treasuries you're right interest rates treasury interest rates interest interest rates are still at four percent

or five percent they're still yielding less than the inflation rate the inflation rate which is around six percent right now so if you put your money in a safe instrument like a treasury you're getting less than the inflation rate your real purchasing power is getting eroded and so this is going to be a problem I do think that over time as this yield farming thing becomes more popular you'll eventually will get some positive rate and inflation might come down a little bit more uh so you might get some positive rate but you're right that this is a concern and if you want to turn it around maybe I'm not getting enough in a four percent

um money market fund with a six percent inflation world but sure better than two basis points that I'm getting at at Chase so that is an incremental movement that you're seeing people but if the question is where do interest rates go next let me answer the question this way a month ago you had me on a month ago I would have said the economy's doing okay interest inflation is probably going to continue to be sticky the fed's going to raise rates to six percent that's where I was a month ago and all the evidence was pointing towards that and even Jay Paul in his testimony earlier this month before the banks failed was even strongly hinting at that now you've got

this banking thing now you've got this question about deposits now you've got a credit crunch that could be changing that whole scenario towards now the economy is going to slow the fed's going to have to cut rates for the Bulls on Wall Street this is the worst reason to cut rates because everything's going down the crapper you wanted them to cut rates because you thought inflation was going away and there was no need for high rates which meant you could have had a bull market and and try to find risk assets but instead you might see the FED cut rates because things are getting deteriorating and getting worse unemployment's going up business activity slowing down can't get credit from an important part of the business the collective of all of the

regional banks that is the concern that I think the FED has and and everybody else is in fact if you listen to the FED whenever they talk about the banking system sound usually the next sentence out of their mouth is they're still Lending because for them they're not as concerned about whether or not you got your money back or I get my money back they're more concerned that lending lending lending lending and that lending occurs in a predictable and easy to see ways because without that the economy is in deep trouble well the way that I'm hearing this is that the people the crypto people and the risk on people aren't happy because even though we're getting you know interest rates cut perhaps uh it's it's like you said happening inside an

environment an environment where the economy is suffering and it sounds like the FED isn't really happy because uh they don't get to kill inflation and they have to cut interest rates anyways it sounds like a it's a movement where no one's really happy which actually kind of for some reason makes it seem to make sense kind of yes yes and that's why you're that's why you're seeing within the traditional markets the the volatility and interest rates is some of the highest we've ever ever seen some of the movements in the two-year note yield in measures of volatility in the bond market which is called the move index which is like the vix of the bond market just missed an all-time high all-time high last week and it's because of this uncertainty is the economy going down

and is the Fed going to have to aggressively cut rates well there's an argument a strong argument to be made there but what if the economy doesn't go down and we just stimulated and already overstimulated economy man we're going to have an even bigger problem there's the move Index this is like the vix of the bond market March 15th which was last week it hit one of the highest levels we've ever seen that would be like the vix in the stock market being at 80. is where the bond Market's equivalent is if you're familiar with the vix in the stock market that's like where we were in March of 2020 or where we were in the middle of the financial crisis in 08. in fact you could see the only other time that we saw that the the vix has ever been higher was October of

08 in the middle of the financial crisis so the bond market like I said on the one hand it's saying yeah I see the story the economy is going to go down the fed's going to have to wheel around and cut rates aggressively but then there's also this other story that no we're just extra stimulating and creating more inflation when this is over this this banking crisis is over the fed's going to have to raise rates even more aggressive so since you've got these two wide tail outcomes you see this wild volatility in the bond market right now because the market is unsure as to what to expect next and so it's trying to vacillate between those two scenarios and it really comes down to what do you think about the banking

crisis is it a crisis or is it not some people still think it's going to go away in a couple of weeks there maybe you know you never know I still think it's going to be like this dull drip of money just continuing to hemorrh not Hemorrhage but bleed out of the banks I I don't think it's going to be a hemorrhage where people are panicking and Banks left and right are going to have to close by the day but you can't rule that out either but if it is that dull drip it does pretend the idea that the FED will be cutting rates if it goes away they're going to have to raise rates even more aggressively there's no middle outcome here so it's like one extreme or the other and we're kind of caught in the middle where we're not going to get anything this is just

showing you the blue line here is What's called the terminal rate this is where the market thinks the FED is going to stop raising rates in the orange line is the actual funds rate and for the first time since they started raising rates they've converged so the market is starting to price in defense that there will be no more rate hikes but it's all predicated on this banking thing is going to last and going to be a bigger problem than the FED thinks but maybe not as big a problem as biology things so there's somewhere in the market somewhere in the middle with this right now so Jim I remember the when we had you on during the uh the the pivot the big pivot March of of 2022. I remember seeing a tweet of yours prior to bring

you on you talked to something about like a face change in the market it was like a new a new paradigm for even though that that that phrase uh means a lot of things to a lot of people it's very overused it's very overused but uh a phase change I think was really the phrase that that stuck with me uh and then for for all of people like me who hadn't really experienced interest rates in the way that we have in the last year uh fast forward to where we are now and I now really really know what that phase change really means and and so for the last year the whole entire crypto industry and most of all of Wall Street has been like when's the pivot wins the pivot wins the pivot and what I'm hearing from you is like that's no longer really the big question and even

though that perhaps we are signaling that the end of the heightening interest rate cycle is here that's not really the the the the the moment that we're all looking for right but it does kind of seem that aside from that that we are doing a a phase change thing as in we are going from one type of Market structure to a new type of Market structure and I think if the listener just went back and listened to this episode that we just recorded all over again they would understand what that phase change means but I'm wondering if you could really just summarize it for us in a really Punchy or just like summary a tldr like what is this phase change doing for the market the the marketplace for the last year was hoping for a pivot meaning that the

FED would stop raising rates and cut rates because they were hoping for it to be a positive reason their the inflation is done inflation's going down things aren't as bad Jay as you think they are stop raising rates and so they celebrated every idea that the FED would pivot for a positive reason what we might be doing is Phase changing to a negative reason the fed's going to give you the pivot but they're going to give you the pivot because we got a credit crisis in Regional Banks hurting the economy causing businesses to lay off people and reduce activity and responding to that that's not a good reason to be pivoting that's not a reason to be buying stocks if that is

the reason that we're pivoting what is coming out of this is something that I've been probably in all three of the previous episodes I've been on with you I've I've said I really want to see the crypto space decouple from tradfi that if it wants to be an alternative way of managing money uh you know through defy a currency to control inflation through the cryptos then start acting like it and don't act like a levered version of the arc fund well that started to happen now in this recent period the correlation between the NASDAQ and Bitcoin to use one metric is gone away

and if this continues to be the case and I hope it is you could point to crypto to say now they're finally starting to show that they're independent that they are somewhere you go in periods of stress it isn't just like I said you know if you're bullish on if you're bullish on the stock market you'd really like you know buying Arc and you'd really love owning Bitcoin all for the same reason well now the reason to own Bitcoin is different than the reason though in the stock market that in the long run is really good for crypto it's finally starting to break and hopefully crypto will continue to show itself as an alternative and not just a levered bed of the existing system so this is

part of what this phase change is doing at least been making people rethink interest rates but maybe rethinking the role that crypto has and thank you that it's not just a 3X version of the art fund anymore and that it's something more than that I think this is kind of the interpretation I've really gotten out of this whole uh just banking crisis thing and and also this episode is that now now that we are doing this whole we're we're at the end of the heightening cycle for interest rates and the same things just seem much more real as in the FED has to respond to the actual real decline in the economy that's threatening it crypto has to actually answer to this uh New Perspective that

so many people have about what it means to be Bitcoin or what it means to be a bearer asset uh and I think just because where we are in the market cycle I think if we want a bull market in our assets it's no longer going to be because of an easy money Paradigm it's going to be because that asset class earned it and earned it on real terms and for some reason it just kind of feels that the last three years of me doing this podcast with Ryan we were just talking about the the disconnect between the stock market the the Wall Street and the actual economy those were just two different games and like my gut instinct here Jim and I want you to check me on this is that that Eric Paradigm is that phase change is ending and start we are

starting to actually respond to the real parts of the economy the real GDP the real signs of Health in our financial assets am I naive and that kind of gut instinct no that's that's the hope that's the hope of that What's Happening Here is we're starting to see the problems within the tradify world you know I said something nice about Banks but also keep in mind two things can be true at once they've been a fantastic tool for credit intermediation but they're also levered a French a fractional Reserve System is you know you give me a dollar and I turn that into eleven dollars of loans and security so I'm inherently levered so they're inherently unstable so for that 500 years that we've had Banks we've had

Bank runs and bank failures and Bank crisises it was the 1906 seven financial crisis that crawl was the Catalyst for the creation of the Federal Reserve we invented central banks the the Suites invented the First Central Bank in 1668 yes 1668 because they needed a backstop for a levered fractional Reserve System well this is part of the problem that we're maybe come remembering that while banks are necessary for loans and they serve an important purpose uh more than being a money Warehouse they're also inherently unstable so two things can be true at the same time which is why we have to have a crisscross of regulators and a Federal Reserve with a money printer to back them up and now we're

starting to say in a better way to do this without it always being like we're always perpetually one foot on the banana peel waiting to slip and fall and that's where crypto and defy are waving their hand over here and saying we got a better way in the benefit might be 2022 because you might say yes but your prices all went down and you had all these problems at 22. yeah but the main D5 protocols the unit swaps the aves the balancers the curves the makers they just worked you didn't like the prices they worked they didn't need a bailout they didn't go down they didn't stop they didn't crash they just worked isn't that what we want out of our financial system is it just works it's a utility that's always there

it's like the lights on I don't have to worry about you know the transmission lines or the power plant I just turn on the lights and that's what I want out of my financial system it's just there when I want to do a transaction when I want to swap my money I don't have to think twice about it but for 500 years while we've had this banking system that has been graded Credit Union mediation we've constantly had to think about what if it has a problem and so that is a positive that could come out of last year with crypto it just works e and we proved it because we we put it through a stress test last year and the first problems of stress tests after 500 years we still can't get the traditional banking system not to have problems so this is going to

be I think very positive for crypto going forward because it just raises its hand go I got a different way here I got a different way uh and take a look at it from that perspective and I think that's what we might be seeing which is why the you know we're starting to see the Divergence with tradfi so Jim this has been tremendously helpful can't thank you enough for for coming on and help us make sense of this uh this journey of episodes we've been on to try to understand this I have I have one last question for you so in this new phase change gym um like what are you doing from an asset allocation perspective like what has changed for you part of uh biologies and Arthurs um message to us is uh is very simple right um biology was by Bitcoin that was his

message Arthur was you don't want to have inside money you want to have outside money and inside money uh to him his definition was inside of the banking system the Fiat regime all that debt you were just talking about the banks of accrued that's inside money you don't want to be left holding the inside money bag so you want to exit right so hard assets was uh part of his play what do you think in this new new phase chain how a phase change how are you positioning well you know I've got my my I've got my standard crypto Holdings and that those haven't changed for a year and a half and these those won't change um for the next year and a half everything from Bitcoin to ethereum hell I even have some still have some of my people tokens and my ens drop and I've

got all kinds of other all kind of other fun stuff you know one of the one of the problems with crypto is um I I was just looking at my zapper account going man I forgot about that wallet yeah you're one of us yeah I got I got something and I I had to add it to my zapper account to make sure it was being properly uh because it's so easy to create a wallet but within the Trad five world I'm a yield farmer right now I have got almost all of my money in a safe four and a half to five percent treasury bill money market fund or therefore equivalent the only money I'm keeping in the banking system is money I need to meet immediate expenses I'm not

doing that because I'm afraid of the banking system I'm doing that because I'm like I'm not giving Chase two basis points or I'm not gonna allow Chase to give me two basis points I want more out of my money and now that I see a very unsafe World I'll take my four and a half five percent thank you very much uh and I'll wait until I get some clarity on what's going to come next in the market the long-term return on stocks is supposed to be nine percent that's what at least the academics have told us I could get five with a money market fund or a treasury bill with zero risk zero risk again yes it's a treasury bill oh but the treasury is not going to pay

okay fine we're back to the barter system and it's you know some version of a Mad Max movie if the treasury stops paying us but if you accept that over the near term that's not going to happen near term being the next couple of years that's a pretty damn good place for a traffic person to be you're going to get 60 of what you would expect out of the stock market with no risk um whatsoever while you wait to see some clarity in what's going to come next so that's pretty much where I've been and I have some other screwy things I still have some gold and I think I've still got that from the for from the George Bush Administration I've owned it there for that long and I've got some other uh types of deals as well but the big thing that I've done is I've become a yield

farmer like I've described and I probably started it like a lot of other people did around this late summer or fall when I started realizing why do I keep all this money in a bank when it's giving me nothing when I can move it into a money market or buy a t-bill and get or and get a lot more that is super interesting so Jim there with the the dry powder sitting in the hottest yield Farm around which is the uh the good old-fashioned money market not in crypto anymore I always wanted to defy someone to return yeah Trad five this time David let's try five let's try spring yeah Jim this has always been a lot of fun thank you so much for enlightening us on all of these things um I feel better David I don't know how you feel but this this world is making a bit more

sense after this exchange yeah yeah we should have just gone straight for gym the first time uh no we had to take this journey hesitate the Meandering route yeah thank you so much we appreciate you thank you I appreciate it bankless nation of course gotta end with risks and disclaimers none of this has been Financial advice crypto is risky so is D5 so is the banking system your good old savings account ain't what it used to be 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