John, here we are, another Monday morning, another 1031 timestamp recap.
Every week, another timestamp, another Sunday night Bitcoin dump to get the juices flowing.
Hey, the liquidity alarm bell's going off. I just recorded with Michael Howard just talking about it.
It looks like liquidity is turning over. We've peaked in the liquidity cycle going to a liquidity trough.
But we're not here to discuss that. We're here to discuss the timestamp.
rain, snow, sleet. We'll get through it. We just got 30 inches of snow here in the Philadelphia
area. I've got kids home from school crying downstairs. I can hear them right now. I apologize
if you can hear them too, but the show must go on. If you haven't subscribed to the 1031 timestamp
or know what we're doing here, John writes a newsletter for 1031 every Saturday. It goes out.
You can sign up for that at 1031timestamp.com. That's T-E-N-31timestamp.com. Make sure you get
on the list. And this week, we're talking about the reality distortion field, a concept that
Steve Jobs popularized. Why did you decide to lead off with this this week, John?
Yeah, it just, it popped into my head this week after seeing a couple headlines.
You know, I just, I couldn't get it out of my mind, this idea. For those who haven't read the
jobs bio or seen his various biopics of him over the last 20 years. He's known for having a level of
some would say charisma, some would say brilliance, some would say abusive personality,
whatever, you know, some combination of all of them as most mercurial founders kind of often do.
You know, he had the ability through all those different things to warp reality to his liking,
right? To get people to do things that anyone else would have dismissed as like structurally
or like physically impossible, these feats of engineering and product design that everyone
else would have thought impossible. And he just basically brute forced it into reality.
And it kind of occurred to me, like, as I was looking at headlines this week,
everyone kind of has their own reality distortion field, but it usually for most people, it just
kind of runs in the other direction. Like you take reality and then you mold it in your head
and in kind of like, you know, group think to with those around you to kind of massage it into a
narrative that is flattering to your preconceived notions about the way the world works, how you
want it to work. And everybody is that way. I'm that way. Marty's that way. So no special kind of
carve out for us here. You know, it's like the Garfield meme, you're not immune to propaganda.
And that's true for everyone. But I feel like you really see it excessively in kind of late stage
sclerotic institutions like we kind of have right now. And there were just a couple examples of that
this week that I feel like really are a good microcosm for the way that our institutions are
trending and the way the world's trending, kind of the developed Western world. And so one of them
is the Supreme Court ruling against Trump, President Trump, and his tariff agenda originally
authorized under IEPA, which is a 70s kind of Emergency Powers Act, and a six to three decision
that included some Republican appointees, Trump appointees kind of going against him,
overturning that and saying that he can't use IEPA to justify those tariffs. And you saw quickly
like this cascade of kind of celebratory headlines in certain mainstream media outlets saying,
you know, this is a massive defeat for Trump, a massive blow to his agenda. And without having
any opinion one way or the other on the quality of this idea, the quality of tariffs, the desirability
of them, whatever, that's a whole different thing we can get into. But, you know, just to me,
just seemed like such a weird kind of victory dance that people were doing if you didn't like
Trump, because as this chart from this convenient chart from Bloomberg shows, and as Trump and
Besson and Lutnick and the rest have been previewing for like a year, there are many other kind of
ways to skin this cat from the executive branch. I think over the weekend already, maybe it was
section 301. The one in the middle was basically rolled out to justify a new set of blanket
tariffs. But the point is like, we've clearly entered a different stage of like global commerce.
The global economic reordering is proceeding apace. And the Trump administration and his
officials are just not going to look at a Supreme Court decision and say, well, you know, rats, we
would do this, this key bulwark of our economic and policy agenda, if not for that dastardly
Supreme Court. And I guess, I guess now we can't do it because, you know, checks and balances.
You know, the reality is like, because of the way that America has progressively installed more and
more kind of unaccountable executive power in the executive branch, as illustrated by, you know,
this, this set of options that is still before Trump, this is like happening one way or the
other. And I think it's just, it's interesting to watch the financial press act like there's any
reality in which Trump just throws up his hands and says, oh, well, I guess I can't do it.
And it just says a lot about the divided reality that kind of, we still live in where a certain
contingency, a certain constituent constituency has a, has a dominant narrative that they'll use
to kind of mold what they see as reality. And then there's kind of reality itself, which seems to be
maybe going progressively in the other direction. It is laughable. I mean, we're 11 years into the
Trumpian politic, if you will, if you include his campaigning for the 2016 election in that
timescale. And it's just, will anybody ever learn? He's going to get his way one way or another,
whether or not, again, to your point, we agree with the way in which he gets, it doesn't really
matter. He's going to get his way. And it was funny. I think Scott Besson had a presser, what
was it, Friday afternoon, like within hours of the Supreme Court ruling. Well, okay, here,
We're pivoting to enact the tariffs in these ways, through these means and in these avenues.
The show must go on.
And then Trump quickly followed up with, all right, 10% tariffs across the board.
You know what?
Wait, actually 15% now.
And so we live in this very, very weird reality.
Yeah.
You know, the subtitle for this week was there's no fishing in the Rubicon, which is like an
image I really like of, you know, Caesar famously crossing the Rubicon, this pivotal moment in
kind of the fall of the Roman Republic.
and saying perhaps apocryphally,
like the die is cast, the die has been cast.
This is like going, this image of kind of going
across this line that you can't go back from.
You don't go halfway across the line
and then like sit there in the river and fish.
Like if you go, you gotta go.
And I think over the last year,
so much has been said by both Trump
and people in his administration and industry leaders, right?
Not even just Trump himself, but like companies kind of,
even if they're just currying political favor,
like CEOs acknowledging the erosion
of the industrial base in the US
and the position that puts us in from a defense perspective, a national security perspective,
outsourcing everything to China to the point that we can't go to war without China's permission.
That was always happening for decades, but now the band-aid has been ripped off and everyone
knows that everyone knows because of this past year.
We have what Trump has done this past year.
And so once you start down that road you don go back You don get to say like well the Supreme Court said I can use IEPA for tariffs So I guess we just gonna you know let all bygones be bygones and act like that didn happen Like everyone knows that everyone knows And so you know there no
fishing in the Rubicon, like, you got to keep going for better or worse, right? That's probably
gonna involve a lot of pain. I'm not saying that's like, a wonderful thing that I wish on the country
or the world, whatever. But just like, the reality is, probably we're not turning back just because
of, you know, a procedural dispute over how Trump does it. No, there is no turning back. And
They're getting more explicit with this, too.
I mean, it's not directly connected to the tariff rolling from the Supreme Court and the quick pivot right after.
But I'm not sure if you saw.
I don't know if this was an old clip that resurfaced last week.
I'm pretty sure it was a new interview, but Marco Rubio was on Fox News talking about the fact that the dollar reserve status is not ever going to be what it used to be.
Like the world is moving towards a multipolar, multi-currency sort of regime, and the U.S. has to be prepared for that.
And so that was, again, I don't recall if it was a resurfaced clip.
I'm pretty sure it was a fresh clip from last week.
And I was like, wow, the fact that they're actually admitting this on Fox News is pretty, not startling, but pretty crazy just to see.
Yeah, I didn't see the clip and I don't know if it's new or not, but I think it aligns with everything that they spent two weeks in Davos saying like last month, right?
telling the global elite how things were going to change. And I mean, everyone from Trump to Vance
to the trade rep, Jameson Greer, you know, he gave a speech to that effect, basically calling for like
a new Hamiltonian system to people in Europe. And so, I mean, like the, there's been too much kind
of publicly said about like all this and yeah, you're not gonna be able to put that genie back
in the bottle now. So yeah, I just think there's still a lot of heel dragging in kind of mainstream
thinking. And, you know, that's just at odds with, with reality. And the other, the other kind of big
headline that led me to think about like reality distortion field over the weekend was just the,
the fed minutes that, that came out this past week, which is basically had interestingly,
like had suggested, you still got this divided fed. We're still kind of like arguing over the
path of rate cuts and how fast should they go? How many should we have this year? You've got
some officials saying, well, maybe we should have two sided language to suggest that there's still
possibility for rate hikes later in the year, you know, very much opposed to the direction that
the administration wants to take things and, you know, potentially opposed to what's even
theoretically doable and feasible with the path of, you know, the budget and the administration's
priorities this year and the next few years. And so that kind of whole narrative, this whole like
hand-wringing about, should we go 25 basis points now, or should we wait three months, like whatever,
I found to be very at odds with the latest treasury documents on the quarterly refunding
announcement that they put out every quarter, just highlighting the expected budget funding
and deficits and a bunch of different dynamics that go into what they're going to need to go to
market with. And so if you pull up that second chart, I think it really speaks nicely to exactly
the divide at play here between kind of what the Fed thinks it can do and what Treasury thinks it's
going to do. It's a bit of a complicated chart, but basically the red bars on top of the blue
bars are, if you can see down at the bottom, SOMA bill purchase effects. So this is the idea
of what the Fed is going to absorb and it's on its balance sheet from treasury bill issuance.
So like short dated bills and this maps roughly, you're just eyeballing it here, but maps roughly
to about like $480 billion annually, which if you remember the pace of the RMP program,
so reserve management purchases from December 25, it was like 40 million a month initially.
And then suppose that was supposed to kind of come down and be, you know, kind of roll off to like 20 or less over time.
Well, 480 is 40 times 12. And so I don't know that they're necessarily just kind of like flatlining that pace.
But either way, like this speaks to an assumption that the Fed is going to be out there buying more bills consistently for the next like at least eight years.
on a much more consistent pace and at a much higher clip than Powell was suggesting in December
when they first rolled out the R&P concept. And so I think this chart is basically telling you
like net new information relative to at least like Treasury's assumption about what's going to happen
versus what the Fed was originally pitching where a couple months ago, where the R&Ps were supposed
to be front loaded at 40 and then slowly kind of roll off and not necessarily be necessary for all
that long. This is looking at them. This is looking at that kind of program as something
that is going to be a structural, a structural buyer that's in place for, for many years to come.
And so that's piece one of just like, we've got the, you know, the hand wringing at the fed
dithering over like, you know, what we should do with like short end rates. And maybe we should
even raise rates. And meanwhile, treasury is kind of doing, doing the Leroy Jenkins thing and just
saying, you know, no, we're going to be, you can, you can have whatever conversations you want on
rates, but we're explicitly building funding plans and the budget with your consistent
participation at these levels.
That's number one on this chart.
And correct me if I'm wrong, R&P was instituted to help smooth over overnight repo spasms?
Yeah.
So the language around it was about ensuring adequate, I forget their exact language.
They've got three gradations of reserve levels in the banking system.
there's like there's ample and then like some something that means like sub ample and i forget
but it's there like three of them um but we had moved allegedly into a regime of like less than
you know fully excessive and starting to get into like a somewhat less comfortable position in the
banking system and so rmpe was among other kind of factors intended to address the what was being
seen as like an increasing move toward like a shortfall of or a scarcity of reserves in the
bank system. And also smooths over your right, the repo dynamics that were acting up a lot more
late last year and have smoothed out a little bit early this year. So this is like, to your point,
I think like kind of stop gap type funding that we can eventually roll off. Surprise, surprise,
is assumed to actually become something kind of structural and consistent and long-term in Asia.
Yeah. Nothing is, there's no such thing as a temporary government policy. No, it's the sort
of conflict of what's actually happening behind the scenes and what they're saying during these
meetings the fomc meetings can be more stark it's like well you're saying maybe we need to write
hike rates there we go we may need to and then the back end you're injecting liquidity to make
sure that everything's okay the overnight banking system yeah the other the other piece on this
chart that people may notice is you know you got these blue dots and these these orange dots up on
top and it's hard to read the legend,
but basically the blue dots are the CBO's estimates for,
for borrowing for deficits over this period.
This may just be gross borrowing not deficits but either way CBO and even the OMB like both significantly higher you notice than the total amount that a treasury is forecasting
And, you know, I think it's also like, I believe what this is telling you is
treasury is taking a very optimistic view of the borrowing that will be necessary over this time
period relative to what's already baked into, say, the CBO estimates, which are famously
themselves usually too conservative relative to what actually plays out if you look on like a,
you know, five-year forward kind of basis. So I think this chart is also effectively assuming
like that we, because of GDP growth and because of having, you know, the AI productivity boom and
miracle that we're going to have that worst and best I think we're going to have, you know,
we can move into a period of much less borrowing and smaller deficits thanks to the massive growth
from the real economy that we're going to have. And so as I look at this, I'm also like, even the
gross amount is like pretty, pretty rosy of what you'd have to borrow. And if the idea is as, as
the QRA documents we're talking about for, for this cycle, one of the big focus points is not,
is how can you manage the degree to which a private balance sheets have to absorb incremental
treasury issuance? And so if the idea is that we want to hold that blue bar down to these levels,
or at least keep the proportions the same, but the total amount has to actually be a lot higher
than we're showing here.
And it looks more like the blue dots or the orange dots
than the bars that are shown on the page.
Then you get to a position where it's like,
well, the backfill is gonna have to be that effectively
the red bar has to get a lot higher, right?
So not only are we assuming that something like RMP
continues on a consistent basis for much longer,
maybe even to, if, you know, something,
if there's a hitch in the AI story,
if we don't get crazy GDP growth,
if we have even modest recession,
if, you know, AI takes even a small amount
of white collar jobs
and you need a lot more spending on the back end,
or if we need even more aggressive ramping
and national defense spending, whatever,
perhaps that red bar also has to even itself
get a lot higher effectively, right?
So I think, again, just there's this like,
this conflict between what we want to happen,
yeah, what we hope can happen
and what our assumptions suggest can happen
and then kind of like what reality is throwing at us.
And so again, some reality distortion
can add play in our key institutions here.
How do you think Bitcoin,
I mean, obviously it's not going to play into these privately held net marketable borrowing markets, but it will be affected by the policy as it's instituted at the time it's instituted, as we know.
Similarly, with government policies, the projections are always way off base.
So I think it's safe to assume that these bar charts will be much larger when, as time passes,
and we actually get to the point where they have to make the decisions on the issuance of these treasuries and these RMP facilities.
Where does Bitcoin play?
I think bringing Bitcoin in now, particularly just talking about the elephant in the room,
which is Bitcoin's performance over the last six months, the last four months, really,
since it hit all time high in late October, early November, we had another drop off last
night.
We got on the one day chart.
We puked up.
We're recovering from them.
But obviously, in the last month, we had the fall from 90K to 62K, taps 59K at one point,
hovering at 65,850 right now.
Many people are wondering what's going on with Bitcoin.
It's supposed to be this digital gold asset
that's supposed to, I mean, we talked about it a few weeks ago, Bitcoin is not a hedge, but many people
perceive it to be such. And people are looking at Bitcoin's performance
particularly juxtaposed to gold, silver, and even the NASDAQ
and looking at this massive disconnect. And I'm worried, is Bitcoin broken? Is it
dead. What's going on here? Yeah, it's definitely a point of concern that we think about all the
time as folks who are highly levered to Bitcoin's price action. I mean, there's the old saying that
Bitcoin is dumpiest before pumpiest. And I think that's a very, very technically sophisticated way
to look at it. But I think probably it's maybe a little overdone at this point, depending on how
on Bitcoin Twitter you are. But I do think there's a degree of accuracy in the idea that Bitcoin is
this liquidity smoke alarm. And, you know, you referenced your talk with Michael Howell earlier.
I won't like spoil that for people and can't wait to listen to it. But, you know, it's pretty clear
that we have not had in the last few months, if you've been following his work or anyone else who
tracks similar metrics, a major liquidity tailwind. You've had, if you look at the Fed's balance sheet
over, you know, a lengthy time period, you've had these major step ups in the size of the balance
sheet. And then we had a few years of, you know, QT runoff that was very aggressive, kind of backfill
by activist treasury issuance.
You know, you've talked about it a good deal on your show,
treasury shifting much more to front-end issuance.
And that was a pro-liquidity impulse for a while.
But, you know, we may be running up on the limits of that,
especially when we also now are looking to spend much more
into the real economy and potentially out of financial assets.
You know, we're giving a bid to, you know, manufacturing.
We're giving a bid to data center construction.
We're giving a bid to industrials and defense.
And, you know, increasingly the there's there's less potentially capital out there in a non Fed supportive world to flow into, you know, classic financial assets.
And so I think if you to me, the story of the Fed's balance sheet really tells the tale.
We're kind of flatlined now at this. We basically came back down like right to where where that level went to during kind of spring 2020.
So we've worked off everything post call it like May, June, 2020, which frankly, it's pretty incredible that Bitcoin did what it did against that kind of like monetary base headwind.
And now we're just kind of hanging out. Right. And I think it's going to be, I think the market is digesting a lot of, is digesting that, digesting the AI story and how that's going to affect a lot of different asset classes, which we could maybe get into.
And then I think digesting also like what is the stance of this incoming Fed? You know, if Warsh gets confirmed, which is not a not a given, is he going to be, you know, fully subordinate to the treasuries or let's let's say in partnership with, you know, what what Treasury wants to do and what Besson wants to do?
And what will that actually mean in terms of like liquidity, broad liquidity support and the direction of the Fed balance sheet?
I have, you know, as we just discussed, I have my suspicions about where that ultimately ends up.
But historically, you also have needed like some kind of crisis panic moment for policymakers, especially monetary policymakers, to really kind of recognize to get out of their reality distortion field, recognize the situation that they're in and, you know, step on the gas to do the only thing that they really can do.
Right.
So I think we in kind of a holding pattern of processing a lot of different crosswinds And yeah it tough to say what the next three to six are gonna look like not just for Bitcoin but yeah you know for everything Yeah and it will be interesting
if some sort of liquidity crisis emerges
between now and Warsh's nomination process
because what do you think Jerome Powell would do
in the interim, sort of a lame duck,
Fed chair, a Fed chairman right now.
And like, you could see the politics around that.
if there's a liquidity crisis that emerges between now and Warsh's likely nomination and Jerome Powell's
tasked with fixing a problem that arises. I can see him putting his hands up saying, hey,
I'm about to leave. I don't want to make any decisions that the new Fed chairman will not like.
I'm just thinking on the go here, but that could be an interesting situation.
Yeah. I think ultimately every Fed chair does the same thing when push comes to shove.
So I don't know like how, how strong his stomach would be to just kind of let, you know, to lose the long end or to let equity indices fall like 30% just to basically give Trump the middle finger, especially because that paints, that allows Trump to paint like a wonderful narrative that this idiot Powell kept rates too high.
And then when, you know, the moment of truth, when he could have saved the economy, he, he, he stepped back and, you know, there's a reason for the DOJ to, you know, put Powell in jail for life.
Right.
So if I'm him, I like, I probably, you know, I don't know if I want to try to be a hero on that basis.
But so, yeah, I don't really think that he would throw his hands up and just kind of like do nothing.
I think the pressure is going to be too great from a variety of fronts.
But also Powell doesn't necessarily have, you know, I can't remember the exact mechanics by which like the decisions get made by the FOMC.
But, you know, it isn't ultimately Powell's final decision.
And so if you want to vote on a board of 12.
Yeah, right.
So if there are a bunch of governors who are yet to say like, yeah, you may be gone in three months, but I'm here for the next like 10 years or whatever.
And also I need I'm trying to retire on a reasonable time frame as well.
And my bags need to be sufficiently pumped.
I don't necessarily think that there's going to be a ton of appetite for just outright.
Oh, wait, type, you know, collapse.
Yeah.
Over 26 minutes.
We're trying to keep this at 30 minutes.
I know you said there's some stuff in the real world economy we could expand on.
But let's push that to next week because we do need to pat ourselves on the back.
I mean, we warned everybody who was listening, I think, a few weeks ago now at this point that there were many people out there saying that the precipitous fall in Bitcoin's network hash rate a few weeks ago and the large downward difficulty adjustment of 11.7 percent was a signal that miners are leaving the Bitcoin network because of quantum fears.
and a transition to HPC compute to service the expanding AI economy.
Well, time has passed and we've had yet another difficulty adjustment.
And it was a rather large upwards difficulty adjustment of 14.6% towards the end of last week.
And that was because hash rate stormed back on the network, pun intended.
And I think it's become clear in retrospect that the fall in hash rate that we witnessed a few weeks ago
was due to the large winter storm that blew through the country, which necessitated that
miners that are participating in demand response programs turn down to make sure there was enough
electricity supply on the grids when the temperature dropped and people turned on
their heating systems. And on top of that, I think there was also a number of mining facilities that
were literally shut down because of inches of ice that overtook their operations. But time passed,
The sun came out, the temperature rose, things thawed out, demand for electricity on the grid fell and miners were able to turn back on.
Yeah. Yeah. I think we were making that exact case a couple of weeks ago.
So not super surprising that it played out. The cynic in me looks at this and says, well, this is just a dead cat, dead cat bounce.
But I, I, the optimist, which, which wins out says that that's just all part of the long-term trend of, of hash rate pumping forever.
Um, but yeah, the one thing I'll say here is like, there were a lot of like tourism posts
over the last couple of weeks pointing out this chart and saying, well, obviously, you know,
it's a combination of a hash price is so low and a lot of miners are capitulating and they're
going to be net sellers forever. And also like, they're just pivoting into AI and HPC capacity.
And that's the reason for all this. And I would just say like, look, boys, like the last like
two years has been like the HPC story didn't start like last week, right? Like this entire
chart that you're seeing here, like HPC has been alive and well as like a, you know, a mining
diversifier story for like multiple years across this entire chart. And yet hash rate continued to
pump, right? Like hash price was, has been in a narrow band, you know, not a very impressive band,
but a narrow band of like 30 to 50 bucks a petahash for basically this entire time that you're
seeing on this chart and hash rate continue to pump. Right. So we can get into like maybe on
another episode, what that means and who might be driving that. But, you know, to look at like a
two week chart here and say, well, it must be because HPC or must be because hash price and
minor death spiral, whatever, like, you know, you're identifying forces that have been at play
for years at this point. And despite all that, like hash rate was up into the right, like the
entire time, basically. So, you know, maybe, maybe as always zoom out a little bit, don't make any
reads based on a two week chart. And, you know, think through how some of the trends at play have
been affecting it for longer than that. And check the weather, check the weather, check the weather.
Yeah. Yeah. Just last thing there, tie it up. I mean, one, like there was quantum people out
there saying i mean that's the least valid of any of the arguments is put out there ai hbc compute
we know there's publicly listed bitcoiners that are openly and aggressively transitioning to ai
data centers and that's okay but like to think that that transition would result in just like a
precipitous fall and hash rate is idiotic these are businesses that are run well i mean if they're
going to diversify out of bitcoin into ai hbc compute they're going to sell their machines and
who are they going to sell them to? They're going to sell them to people that want to plug them in.
So yes, individual mining operations may be pivoting to AI compute, but they're going to
sell the rigs. They're not just going to unplug them and sit on them. That would be a waste of
capital, shareholder value, if you will. And then the other thing that I wanted to mention here is
quickly escaping me. But in that same vein, I think, oh, and we could talk about this another
time. The big, beautiful bill, I think, bring hash price into perspective. It is relatively low,
not impressive, but I think there are countervailing forces, particularly via tax policy,
that are making people sort of price agnostic in terms of hash price because of the sort of
depreciation write-offs they can get by buying mining equipment and plugging it in. So yeah,
that's the timestamp recap. A little over 30 minutes. John, thank you for writing. Thank you
for joining me. I'm very much enjoying the show. I hope you are too. Same here. Look forward to
every week. All right. See you guys next week.