Lyn Alden: How to Survive The Gradual Print Era — Fed Chair Warsh, Gold & Bitcoin

I've been terming this the gradual print, which is to say that we are away from Fed balance sheet reduction. We've shifted toward gradual Fed balance sheet increases. I tend to take the under on those that are calling for major printing this year or next.

There are scenarios where it could happen, but those aren't in my base case. And with this new nominee, I have to look at the other side of the scenario, which is, what are scenarios that could reduce the balance sheet because we have potentially new leadership in place.

Lyn Alden, it's so great to have you back on Banklist during these chaotic times. I actually want to start with a tweet that my co-host David Hoffman said really spoke to his heart. We talked about this last week.

Okay, here it is. It's a tweet from somebody online. We'll include it.

Who's this from, David?

I just saw it on Twitter. Hungry Pawns X. Hungry Ponds X. It reflects the sentiment we're all feeling.

I honestly have no idea if we are close to a crash, a meltup, World War II, an industrial revolution, a mother of all short squeezes, a depression, a recession, or aliens. But it sure feels like all of them all at once.

Lyn Alden, what is happening in the world? And maybe that's a little too broad of a question. What in all of this noise and chaos should investors be paying the most attention to right now?

A good set of questions. I think we are basically in the fourth turning. Which I'm not the first person to say that, but the way I break that down a little differently because I look at things a little bit more quantitatively, which is to say we're on the rough side of the long-term debt cycle.

And with a long-term debt cycle tends to come other things along with it, which is why it always feels like everything's happening all at once. So, sovereign debt crisis tend to lead to more war and war also can lead to sovereign debt crisis. So, these things kind of feed off each other.

It also tends to lead to like you have decades of debt building up and then you usually have debt like decades of like laws building up and kind of like this this entropy in the system and there's usually some sort of clearing event that happens which can be a pretty dangerous or challenging time because it's kind of like the shields are down for all the the norms people are used to.

There's also kind of a institutional cycle that goes along with that which is to say many of the institutions that are kind of put in place by one generation and last for 75 or 100 years or more kind of in their form they are they're no longer in kind of the built for the technological era that we're in anymore. They're no longer built by the same people that are alive anymore.

In most cases trust in them is generally broken down. Things have moved on but there's this kind of transitional period. And these all tend to feed on itself, especially when you're going through that that longerterm debt cycle.

And this time, compared to prior historical things, we can add demographics issues like for the first time kind of ever, you just got like future generations that are smaller than prior ones kind of as far as the eye can see, at least, you know, any sort of like forecastable time horizon.

Social media of course adds chaos like instead of happening you know at the rate of newspapers and TV it happens at the rate of like real time you know peer-to-peer communications so you can meme about the downfall of empires in real time. And so I think that's that's why it generally feels like everything happening all at once.

Obviously what you should focus on is more like what's in your wheelhouse to do anything about. So I think to some degree as basically as people we have to have some degree of broad awareness ideally of multiple things.

But you generally want to have like your 80% focus I'd say on things that are in your either area of expertise things that affect your employment, your business, your family, your hobbies and interests. That's where I think people should be focusing.

Now that will include like AI for a lot of things. that'll include macro for a decent chunk of things. And then it kind of goes less from there. As you get into kind of the long tail of other issues where they might be very important issues, but there's very little that a given person can do about them or that those things will directly affect them that they can prevent in some way.

So we but it depends on where they live in the world. I'm generally talking to kind of a western audience here on average. But it obviously depends where you live. So we certainly do live in crazy times and a lot of this is quantifiably crazy.

In 2024, emerging markets generated over $115 billion in annual yield for investors with yields ranging between 10 to 40%. These are some of the highest most persistent yields on Earth. The problem, DeFi can't access them.

Bricks changes this. Built on mega, bricks takes emerging market money markets and solver carry and turns them into composable primitives you can access straight from your wallet. While DeFi investors earn 3 to 6% on stable coins and T bills, institutions have been harvesting 10 to 50% yields backed by sovereign monetary policy.

BRICS connects these worlds with institutional grade tokenization, local banking rails, compliance across jurisdictions, and real-time stable coin settlement. BRICS does the heavy lifting so DeFi can finally access real collateral and structured products on top of real world yield. Even the best carry trades can be within reach.

Bricks brings DeFi's promise to the emerging world and brings emerging market yield to your wallet. Let the yield flow with Bricks.

Few people in crypto put real skin in the game when they make public top or bottom calls. The D5 report is one of them. The week before the October 10th flash crash, Michael from the DeFi Report emailed his entire newsletter saying he's going aggressively risk off and sold the majority of his book from crypto into cash.

This is when ETH was about $4,000 and Bitcoin was 110. Michael runs the DeFi Report, an industry-leading research platform built on data, cycle awareness, risk management, transparency, and most importantly, skin in the game.

We like Michael at Banklist. We like his analysis. And that's why you hear him on the Banklist podcast about once a month. And the DeFi Report is giving Bankless listeners one free month of access to the DeFi Report.

So, if you're looking for some sharp datadriven analysis to make better informed decisions around your portfolio, you can learn why and how Michael called the top and what he's doing next, all in the DeFi Report Pro. Check it out. There is a link in the show notes.

I'd like to just take a moment and really define illustrate what you mean by the fourth turning. We're in the we're in the fourth turning.

This is kind of a intergenerational phase change concept popularized by Michael How I think his name is his name.

Neil Neil. Yeah. Um it's pretty similar to Ray Dalio's long-term debt cycles, but it puts it into a framing of crossgenerational interg generational like roles that they play across about like 80 years.

So when you say a fourth turning, there's four chunks of an 80 year period and 80 years is one big cycle. And we're what you're saying is we're kind of at the end of one big cycle. And it's a pretty big deal to be at the end of an 80year cycle of a fourth turning of of Raalio's uh you know uh long-term cycles.

And may maybe to really to illustrate that we're on the other end of what came post World War II, the the world order that came post World War II, which was, you know, 40s to 60s a great era for the world. Like lots of prosperity, lots of growth, lots of lots of growth all over the place. And what you're kind of illustrating is we're on the downside of that.

That world order is kind of coming to a close. It's a big phase change across generations. And it's one of the most chaotic times to be in if you believe in this fourth turning cycle uh concept idea. Maybe Lynn, you can kind of just like illustrate a little bit more about what does it mean to be inside of the the downside, the chaotic side of a of a fourth turning.

Yeah, that's a good way of putting it. And and you know to the criticism of forth hurtings let's start with those is that people will say it's kind of like astrology in a way like demography generations kind of like you know cultural woowoo and you know I think that there's there's truth in that which is why I I tend to focus on the more dallio side of that topic which is that the parts we can quantify.

I I generally find that that Neil How and his partner's framing of it is useful because the social aspects are less close to my area of focus, but I find them useful. But the parts that I find the most interesting are that historically the the kind of the sovereign long-term debt cycles match up with the fourth turnings.

Which I don't think it's an accident because kind of part of going through fourth turning is is having a sovereign like debt issue. And and these things kind of they have cause and effect. like it's not like these things randomly pop up every few decades. It's that these things kind of build and they can only kind of go on so long.

So so the economic cycle, the debt cycle is that you have kind of structurally falling interest rates. You have rising debt as a percentage of GDP and for a while that's both private and public debt. So every time there's a crisis they cut interest rates, they try to re re you know restart the debt engine, the the fractional reserve bank lending engine, the the sovereign debt engine.

And you'll get these little periods of deleveraging, but you never delever back down to the earlier part of like that that particular kind of five or 10 year cycle and you start building up from there. And when you string enough of those together, you get to very high debt levels and you get interest rates all the way to zero.

And then you have this basically maximum fractional reserve in the system. And what what happened both in the 30s is last time that happened as well as you know the the 2008 crisis. Those were kind of the peaks of the private debt cycle bubbles. And what happens when you get private debt maxed out as a percentage of GDP, you can't really cut interest rates meaningfully lower.

That's when they generally shift toward printing money and then gradually shifting the debt from the private sector more toward the public sector. So that happened throughout the the later 30s and into the 40s. Obviously there are other factors going on, but they were they were interlin. And then we've seen that over the course of the 2010s and here into the 2020s.

that more of that shift from where we're not as leveraged in the private sector as you were in the eve of the global financial crisis in in kind of the US and many developed countries but are that that's been put toward the sovereign and when it's when it's on the sovereign level it can't really go anywhere other than currency devaluation because most sovereigns at least the ones that have their own currency will rarely ever default nominally so they'll default through purchasing power debasement sometimes trimming prior guarantees about retire retirement or things like that, they'll make a series of kind of smaller defaults more invisible defaults to deal with that.

And that's kind of the stage we're in now and we've been going through. And then like I mentioned, these things tend to coincide with legal resets in a way, changes in the social contract, loss of faith in institutions that were built in like you know the prior four generations ago.

Obviously that exact time frame can differ. I mean some institutions like the US constitution obviously will persist through multiple of these massive cycles whereas other ones might only persist through one but basically there's when you look across the board at public trust in media public trust in Congress public trust in big corporations they're all you know especially especially the first two they're all really kind of the low end you know there are some institutions like military or small businesses and things like that that people have more trust in but those really kind of big structures people have less trust I think mostly for good reason.

And so everything's kind of on the table when you're going through a sovereign debt crisis while people also don't trust the government or don't trust some of the institutions that were that we've kind of had in place for many years. There's rising polarization and so a lot more big outcomes can happen.

And then in addition when you have that kind of rotation from the private sector to the public sector of debt, you tend to get more of a centralization. And so in the in the 1930s to 40s you had the whole FDR centralization. You had really big industrial policy.

Obviously whenever there's a massive war there's going to be like sovereign centralization but even without that you just have that more industrial policy or that more top down capital allocation that tends to happen. And we've we've been seeing that generally more recently.

Obviously the who to bail out in the global financial crisis was a pretty centralized decision and then how to bail out and who to bail out during the whole lockdown crisis was another set of kind of just centralized control. And then in more recent times as we see just kind of you say trade issues coming to a head and these big imbalances that have been building for a long time again based on institutions that were set up during this like the earlier part of this just kind of structural cycle that we're in the dollar reserve currency and all the mechanisms that support that.

We've got more like top down industrial policy around rare earths or around semiconductors around AI to some degree around trade basically saying that you know we're going to do this you know supposedly for the country rather than free trade for example and that these things tend to come together like they they don't tend to happen in isolation.

A sovereign that's in a major imbalance rarely just says well we're going to let the market do what we're going to do. they start using the tools that they have available to try to contain or redirect that issue. With the difference of course being that compared to the last time that developed countries went through this which was the 40s that you know the 1940s you had obviously major war at that time we also had very centralized media.

So now it's everything moves faster the information moves faster. So that obviously introduces a lot of complexity as nation states try to go through this while people can kind of in some ways figure out more quickly what's happening.

I mean it is incredible to see the symmetries here to the last fourth turning which was lasted from 1929 to 1945. That was sort of that that chaotic period, right? And now um the fourth turning now if you kind of line the dates out would have started around 2008 and last until about 2030 to 2033 It is interesting that both forth turning on the social level and maybe you read that as horoscopes or you know some do that lines very nicely with Dalio's long-term debt cycles.

It's kind of an equivalent period of time. But I like what you've been saying, Lynn, because this really rings true, I think, for me and probably for many listeners, that we sort of generationally by, you know, kind of the fourth generation, we we we tend to forget why we set up these institutions in the first place. They atrify atrophy in many ways too. They become prone to corruption and we just like forget the purpose of them.

Maybe one of those institutions that has been essential in the world order that we have lived in since the 19 1945 and beyond is the Fed and that nicely ties kind of I guess forth turning types of events and then also they are at the center of debt cycles as well.

I reached out and asked you to come on Bank list as part in trying to understand what was going on with the Fed, in particular, Fed Independence. On January 11th, the Fed Reserve Chair Jerome Powell had this announcement and he put it out on Twitter. It was a video announcement and he said that he was under criminal indictment by the Trump administration.

He said the stated reason was that he had you they were accusing him of lying about budget overruns in a fed building construction. But then he said the actual reason and he went right to the American people with this. Right. He said the actual reason was that Trump wanted him to lower rates and he didn't do it. He preserved Fed independence.

You were your tweet above this clip was just simply whoa. Like this is new. Whoa. What happened? And then you followed up and you said this was the most direct clash between the Fed and the executive branch since 1951. The 2020s equals the 1940s thesis is still on track.

We've had you on in the past and I know you've talked a lot about the 1940s being similar to where we are now. And you are so well adversed in the history. I'm wondering if you could map that out. Why was this a wo moment? Why was this like the 1940s and what happened in 1951?

Sure. So basically after the great depression began so throughout the 1930s and and then especially in the '40s the Federal Reserve lost a lot of its independence. I mean it started basically with the Treasury taking its gold giving it gold certificates in place of its gold which a non a non-redeemable certificate is basically a memecoin.

It's like, "Here's some gold meme coins that legally will shore up your balance sheet, and we're going to actually take the actual gold." So, the Fed had some gold sitting on its balance sheet. And Treasury went, "Yoink. We're going to take that, and we're going to give you IUS instead."

Yeah. I Which they still hold, by the way. They basically plugged a hole in their accounting that was massive at the time that is now tiny because of how nominally everything grew, but they still have those gold certificates on their balance sheet. And so we had kind of a more treasury takeover of things.

And that was also at a time of course when it was banned for individuals to own gold which is crazy to think about in land of the free you couldn't own gold for like decades legally at scale. It was literally like the executive order at that time was literally if you have gold bring it in. You have to force sell it to the government at a haircut at like a 40 50% haircut discount something like this.

Well, the way they did it was you could sell it at that price which was pegged and then as soon as they had their kind of deadlines met then they went and devalued the dollar relative to gold. So it's like that they didn't people didn't know that that haircut was about to happen.

Okay. Um so it wasn't yeah it was a little bit of a rugpole. Um yeah it's like old school analog rug pulls going on. Um and I mean Britain did kind of similar stuff around World War I. So that was basically when you have a world like a total war scenario that happened in multiple countries and that was kind of the US's particular history and so really starting from the 30s um the the Fed was severely weakened basically they they increased the monetary base with this kind of gold revaluation to kind of shore up the commercial banking system.

You know it's not like these things are done in isolation. and they they they pick enemies and say there are people hoarding gold. There are people hoarding XYZ for the sake of of public well-being. We're going to have to do all these things. We have to ban the gold hoarders. We have to centralize things.

So we do that. Now obviously most places you could be living in the world like America was one of the best places you could be living. It's like in many ways a lot of places went kind of fullon authoritarian and the US only went like halfway there. it it was kind of the logic at the time.

So we did all that and then of course as you know you're going through the whole great depression in in multiple countries this was in some ways still a hangover from World War I. I mean a lot of the imbalances that World War I caused then fed into the Great Depression. It kind of created these bubbles that then popped.

Then we're going through the Great Depression. Obviously when you have a bad economic environment, political extremism grows in multiple places. This this in multiple ways contributes to World War II. It's not the only factor, but it's it's a factor. World War II happens.

And then there's basically another reason to centralize everything, which is we have to go it's like a total war. So both in the US and the UK and elsewhere, you're doing price controls, you're doing you know supply shortages saying like you know Americans can't have this because they need it for the war effort.

And then part of that was the Fed was totally captured by the Treasury. So they did yield curve control. They said, "Look, we we have to rack up all this debt to go fight this war." Uh, but we can't have market clearing interest rates when we have all this inflation happening, when we have 100% debt to GDP going on.

So the Fed was forced to do yield curve control. So they held the short end of the curve at just over zero, just over 0%. They held the long end of the curve at 2.5%. And they just held that pretty much firm. and they they made little micro adjustments as they needed.

But then throughout the 40s like it the peak inflation officially was like 19% year-over-year. The average inflation even outside of the peaks and the valleys was was very much above target. It was like the 70s while all the yields were pegged like submerged below the inflation rate.

So if you were holding currency or bonds, you just got absolutely killed. You'd really want to be in equities real estate or bootleg precious metals which were illegal. um or or fine art maybe kind of these you know scarcer assets and then the Fed was in the later period after World War II ended the Fed's like hey can we have our independence back and then you know the Treasury is like well we still got to rebuild stuff guys it's like who wants to give up power right so there's you know there was like this legal wrangling going on and eventually they passed the Treasury Fed accord which which more formally separated them it kind of gave the Fed a significant degree of independence which of you know, no central bank is entirely independent because the, you know, the officials are picked by the government in some capacity.

It will differ by by country. In the US, you can kind of think of almost like a fourth branch of government. Kind of like the Supreme Court in a way where the members are, you know, nominated and then confirmed and then they have these fairly long terms. The Fed, of course, it's a it's a public and private hybrid.

So, we're talking about the the Federal Reserve Board of Governors here and including the chairman. So they there's this kind of staggered thing which is saying okay it is it is serving the government but it's not as though it's easy for administration to say cut interest rates right before the election and and things that are kind of very short-term oriented. It's supposed to basically be a kind of a black box that they can't really touch too much unless there's some extreme reason that could lead to impeachment or or um you know just removal for cause which is you know in in the modern environment becoming more relevant.

And so what was kind of interesting about this recent one is that you know we've had more outspoken criticisms of the Fed's policy sometimes on the right by Trump and sometimes on the left by like Elizabeth Warren for example and in this environment you know Trump's made no secret of the fact that he would like lower rates for better or worse I mean people can agree or disagree the decision pal's kept them higher even though he has been cutting them and of course it's not just his decision it's the entire 12 member FOMC at the Fed.

And what's interesting is that, you know, when Pal's been criticized in the past, he would generally kind of roll with the punches a little bit or kind of legally his way through it. You know, when asked if he's going to step down, he'll say no directly. But like other than that, what made this this one more interesting was that they kind of he kind of took the scorched earth response, which was, you know, not only he's like basically, you know, not not even like avoiding it. saying this is going on, but also here's what I believe the heart of it is going after Fed independence.

And so I I was it's by no means the type of capture that happened in the in the 30s and 40s yet, but generally speaking, whenever you have debts this high, you start to usually get some degree of soft capture at least. So I wouldn't say that the Bank of Japan has true independence. I wouldn't say um you know that the ECB is like uh you know u immune from political influence given what's going on in Europe.

And I wouldn't say that the Fed has true independence at this point even though they still have some degree of control. And the further we go into fiscal dominance, kind of the the the tools of the Fed start to narrow themselves, even if they're not captured. And then they do risk outright being captured either because they kind of the administration could put um like new board members in over time that are more, you know, less about kind of the historical reasons why you might hire raise or low interest rates and say, "Okay, well, now we're going to do things, you know, the way that the president wants," for example. um or sometimes more legal attacks.

You can say, "Well, we're going to try to legally see if we can remove these members, see if this counts as for cause uh so that we can accelerate our our change over of the board." U because generally speaking, to to fully remove control would go through Congress, which would be harder. So then it's like, well, how can you around the edges get soft control?

This is what's so fascinating. So you're saying in uh the 1930s and the 1940s, the the Fed really had no independence. it was kind of an arm of the Treasury and the executive branch and maybe of that legislative act in 1951. is started to establish more independence and that's the regime we've been in until kind of these modern times and now we're in somewhat of a hybrid where it's unclear whe how how independent the Fed really acts and I want to run one theory of the case by you with respect to like kind of Trump because he is a central figure in this uh in this forth turning in uh many different ways but one idea behind Trump is Trump is the guy that just says the quiet part out loud and he's just saying something out loud basically like I control the Fed. I can fire the Fed if I want.

But it has been the case at least until 2008 with all of the uh intervention that the Fed did in the aftermath of the uh great financial crisis in 2008 that the Fed really wasn't independent at that time that it was a political entity. Now, Trump is just coming on the scene and he's just, you know, calling it like he sees it. He is just saying the quiet part out loud. And the idea, I guess, is that the Fed hasn't been independent since 2008. What What do you make of that? And what do you make of the idea that that's kind of what Trump is doing right now with the global order? He's effectively just saying the quiet parts out loud.

I I think that's a pretty fair characterization. I mean, I I would say it depends on the particular part of the global order we're talking about. I mean, I think in some areas he's accelerating it more than just saying it out loud and other parts he is saying it out loud, things that have already been building for a while. Uh, so sometimes saying them out loud accelerates them or sometimes the goal is to accelerate them.

In the Fed's case, I there's kind of multiple factors here. So, I do agree that really ever since the the run-up to the global financial crisis, you had much less uh Fed independence. Um, and what made it kind of a a more invisible type of of uh connection there is that there generally was a lot of agreement between the Fed and the executive branch, which was uh they both said, "Okay, this is really big crisis. Uh, we we hit kind of peak fractional reserve bank lending. Um, so we're going to be super doubbish on things." And there really wasn't any disagreement.

And so when you don't really have disagreement, there's really no test about independence. It's only when you have some degree of disagreement do you have uh you know kind of more overt uh potential tests to those independents. And so uh you know in in Trump's first term toward toward the later part of his term uh Powell and the Fed were raising rates. Uh Trump was not thrilled about that.

They started to cut them in in late 2019 when we had more recessionary indicators even before everything that happened in 2020. They obviously were super doubbish in 2020 and 2021. there's kind of another moment where they all agreed on what they're, you know, in hindsight there's pain from it, but at the time there's really no there's really no disagreement at the moment. But as we got into 2022, uh it was kind of like that moment in in say the 40s where like the war is over and the Fed's like, "Okay, so like we're going to get a little more hawkish now." And then the executive branch says, "Well, not yet."

So we had the Fed trying, you know, they were they would said, "Okay, we totally misjudged inflation." I mean, they were they were really they did not expect inflation to occur. They had forecasts uh for low rates when inflation did occur uh which many of us were kind of pointing out that it very much likely was going to occur but they started to then you know rapidly turn more hawkish uh and this was this was during uh the Biden administration but then they they kept it up uh in the Trump administration uh and uh you know Trump's very outspoken about wanting more doubbish policy and I think there's also whenever you have a period of higher uncertainty about what policy should be I mean this is like you know central bank rates are literally price controls on like the price and time of money.

So, they're in some ways the most important price controls around. Most people if you you say should this thing have price controls on it, most people would say no. But that's how the that's how central banking works. You have price controls on money and time. Um and so you have on one hand you have still above target inflation, but it's mostly outside of the Fed's wheelhouse because it's not excessive bank lending that's causing the inflation. uh it's more fiscal deficits that have been that have been causing it in this cycle.

So it's different than the 70s and rates don't really affect that. And um uh two you have big variables like AI where uh you know very experienced people can have very different assumptions for how deflationary AI might be due to how rapidly its productivity gains uh might impact the economy and how spread out or concentrated those impacts might be. Uh and so for example, the new Fed nominee, the new chairman nominee is saying that AI is likely to be so disinflationary that we can probably cut rates and not risk inflation because you have this other deflationary force and and that is I mean there are a higher number of kind of variables than normal.

So you can get pretty divergent views on what what the best policy rate should be right now. Should they be hawkish try to curtail still above target inflation or um should they be more dovish uh in expectation of productivity gains? Um and that's where you you know there's a disagreement right now and that's where that that Fed independence is more tested and I would say it's again it's still way more independent than it was in the 30s and 40s.

But it's just uh it's being challenged in a way. It's being chipped away at to to some periphery degree right now. Powell is on his way to phasing out of course. So you mentioned the new nominee, his name is Kevin Walsh. Let's uh say he gets through the process and he gets confirmed by Congress. Uh Kevin Walsh was picked of course by Trump, right? So that's an interesting element of the independence of course as the executive branch does pick the uh the Fed chair.

I can't quite figure out what Kevin Walsh wants to do. I mean and I think there's two questions here. There's one is what's his bias and what are his proclivities and then the second question is what can he actually do in the position like how long is his leash even if he wants to do a particular thing is he you know too constrained and is the path at some level already laid out for him so that he can't do what he wants.

Some people are talking about him as a hawk. Indeed like what was it you 2010 2011 he was on the FOMC and he like rage quit because of quantitative easing. So that's interesting. But then he also talks a little bit like a a populist. So he talks about the last 15 years of the Fed and talks the way we talk, which is basically like, hey, the Fed had some irresponsible monetary policy and pumped up asset prices and that was great for Wall Street, but it kind of sucked for for Main Street and Trump populism fixes this, right?

And so you have that element of what he's saying. And then there's the other element that just feels very much like Trump is going to pick no matter who he picks. He's going to pick someone who's going to cut rates. I mean, that's why he's been hammering Powell. So, I have no idea what to make of Kevin Walsh. Like, what do you think he's going to do when he gets in there? And