1:29Paul ViottiYeah, well, we’ve been having a great ongoing conversation. I think the first time I appeared on your show was, uh, back in February of, uh, of 20 -- uh, 2022, right? So a little bit over a year ago. And there were some predictions that, that we were -- that we made, uh, then that seemed to have played out, uh, in a lot of ways as, as we expected. Um, and I think We’re in the middle of some interesting dynamics right now, and I think there’s a lot of confusion out there in terms of what the future holds, right? Where are markets gonna go? We’ve seen this latest return of crypto. Most people know about Bitcoin, right? Which I think hit a low a few months ago of $15,000 and is now -- was sort of flirting with a $30,000 level. So what’s going on with that? I think today I want to talk about some broad macro trends and how we can expect that to, to, um, you know, impact crypto in addition to other markets and other fun things to talk about, like what’s the role of the banking sector in this, what’s going on in terms of, uh, international finance. I think it should be a fun conversation. So where, where would you like to start?
2:44Kamal HubbardYeah, absolutely. I think the Fed is in -- like you said, there’s a lot of confusion about what’s going on with the Federal Reserve. So let’s just start there. And obviously quite a bit has happened. We’ve had some bank failures and some interest rate hikes, which you talked about. We were going to face this and there was going to be some tightening. But maybe let’s go back to the beginning of the year or thereabouts. I think maybe right after, if you could think in your mind, right after what happened with the collapse of FTX.
3:26Paul ViottiExactly. Yeah. So that, that, that took everybody by surprise. Right. And caused a cascade of reactions, I think. I mean, my impression of that, and this is a slight Right, sidebar deviation from our main thread here. But that, I mean, from your perspective, was that really just due to mismanagement or basically outright fraud?
3:52Kamal HubbardCertainly malfeasance, right? Like when there’s so much gross incompetence that there’s malfeasance, it becomes criminal, right? So I don’t want to come out and say that it was fraud. But I do feel like they thought they were so smart that they could fix everything and ended up not doing it. Where I do think the -- where I feel more comfortable with the fraud is the use of customer funds, right?
4:24Paul ViottiRight.
4:25Kamal HubbardLike, your customer funds are supposed to be their funds and you’re essentially supposed to be custodying them. And to use those to pay back or to pay Alameda or to allow Alameda to use those funds, that kind of goes against just a general principle, which I do see as fraudulent. Some of the other stuff, like I said, is just -- they just didn’t know how to run a company, you know, and they didn’t reach out and find the right people to handle their books properly. But I think there’s a whole nother show out there about, you know, the crypto black hole, right? And you know, which is essentially if you take cash, buy crypto, that crypto goes up by so much and you cash it out, right? How that affects conventional accounting and books. So, you know, like I said, that’s a whole nother show and that is a very deep, deep dive.
5:26Paul ViottiIt is. And it, but it ties into this one in the sense that, so, you know, one of the fields that I focus on is public administration, right? And so it begs the question, what is the role of the public sector in terms of regulating these institutions, right, that on their own accord do not always behave well? And on the more charitable side, we can say it’s because they just didn’t know how to run things. There was so much exuberance or enthusiasm, right, that they got in over their head. So I think in the broad sense of things, there’s you know, you want to let markets thrive and innovate without touching them too much.
5:26Paul ViottiBut if you don’t have enough oversight, then you get meltdowns like FTX, right? Which a lot of people were a part of. It seems it’s a big thing even with celebrities right now, some of them being sued for their involvement in advertising for those entities. I think it’s a good tie-in. One of the things that I want to talk about today is something called the Keynes-Minsky-Kendall-Burger model, which is a mouthful, but it really addresses where financial bubbles come from. And I think we’ve seen it. We’ve been in the midst of a big one across all asset classes for a while, and we’re seeing things play out pretty much as expected from my perspective.
5:26Paul ViottiSo when we think about something like crypto and FTX, let me go through the phases here real quick, and then we’ll circle back and we’ll get to talking about the Federal Reserve’s role in all of this and how it’s going to affect crypto and the like. But so in this time phase, we want to think about a new market opportunity. So in this model, there’s a phase 1 where there’s an unusual investment opportunity that presents itself. It could be a new technology, for example. So we could go back to the early days of the internet. I like to compare where we are now back then in the early to mid-1990s where there’s this new technology, for example, an unusual opportunity that presents itself and you get in this first phase, you know, some early investors, right?
5:26Paul ViottiAnd then some time goes by and there starts to be some really impressive profit. We’ll call that Phase 2, impressive profits where those who are already invested in that new asset are doing well and their friends and colleagues and neighbors start to notice that and they want to get in too. So that’s when we get the beginning of a bubble, when people are, you know, you’re looking at your friend who bought a house, for example, and, you know, their equity rose by 20% last year. And you, you get into this, uh, phase where everybody’s jumping in and nobody wants to miss out. So there’s a fear of missing out, or as we say, FOMO component of that.
5:26Paul ViottiThen, so phase 2, I think for us, uh, in terms of in California, right, and the United States, in terms of real estate and in terms of stocks and in terms of crypto, they’re not all in sync, but has been pretty long. In this model, phase 3 begins when the supply of dazzled new investors is exhausted. So you run out of that supply of people that have FOMO that want to get in before it’s too late. And that’s when we start to see crashes occur. And then finally, to round it out, there’s a phase 4 where there is a reversion to the mean or prices come back to earth again and investors start to buy in.
5:26Paul ViottiAnd we’ve seen that play out a number of times in our -- in the last few decades. So we had the tech bubble of the late 1990s, which culminated in a crash. And then the financial crisis of 2008 was an example of that. And, you know, I was looking at late -- the latest data. I think we’re right on the cusp of that significant correction. I could be totally wrong. I don’t think so. But where especially in real estate where right now, if you were to go out and look for a mortgage, I think you’re facing like 6.3%, 6.5%. And compared to just about a year and a half or 2 years ago when you could get a comparable mortgage for 2.2%, and we’re talking 30-year mortgages, right?
5:26Paul ViottiThe amount of house that you can afford is, you know, could be a third less. So whereas you might have been able to afford the $600,000 house, the same money will get you the mortgage for a $400,000 house. And we’re coming right up, right up to that late spring, summer season where sellers are going to start putting their homes on the market. And I don’t think there’s going to be any kind of tailwind there to support the buyers, right? It’s going to be a really hard thing to face. And I think this is where people’s perceived net wealth goes way down, right? Because if you have a sense that you’re in California, for example, where the mean prices of houses are astronomically high, But if you think you’re living in a million-dollar house and you find out that actually the market now assesses that to be $800,000, that’s a huge hit to your perceived net worth.
5:26Paul ViottiAnd it affects behavior in all other facets of your life, right, in terms of investing, consumption, et cetera. And you can get into a negative feedback loop, and that’s where corrections and recessions come from. And of course, to tie it into the Federal Reserve. All of this is, is to some extent by design because, because of the presence of significant inflation that they’re trying to, to get out of the economy before it becomes embedded. So I’ve just said an awful lot there, but did you want to follow up on any of those particular points?
11:44Kamal HubbardWell, yeah, I mean, I think you’re, you’re right. Like, Indications show, or at least that we’re heading towards a recession or some sort of correction. We’re talking about the US, or I mean, the housing market is definitely, I mean, like you said, California home prices are astronomical. So much so people are leaving California and going to other states, which are driving up those home prices. And we also have this very large commercial vacancy rate in major cities like San Francisco, for example, and Oakland and other cities across the country. How would you say that maybe moving away from the residential side of things, but looking more at the commercial vacancies and possible defaults there, how do you see that affecting the either the banking system or the overall macro lens of things?
12:47Paul ViottiYeah, I think it’s a significant component, right? So we have the residential side, and that’s the part that most of us can relate to because we all live in houses, right? But few of us are actually commercial real estate landlords, for example, right? But no, it is, I mean, especially in the Bay Area, you’re looking at, and you also know, right? In terms of you know, where you are, that you’ve got lots and lots of commercial buildings that are just sitting empty, right? And of course, all of those are tied to mortgages as well. And I’m not an expert in this particular subset, right, of finance, but that has an enormous impact on the value of that asset class.
12:47Paul ViottiSo I think In terms of whether or not the current oversupply of commercial real estate is going to cause stress on the banking system overall, that is an interesting question, and I would need to look at that specifically. But it’s certainly a component in terms of the dark clouds ahead. My friends tend to -- they’re always laughing that, you know, especially in the last couple of years, that that I seem to have this persistent bear outlook on things, right? Sort of dismal accounting of at least the near-to-medium future. And I think that that’s the case because we’ve had some -- the market has given us some head fakes as well where we can go.
12:47Paul ViottiI think that in the stock market, for example, the lows were around, if I recall, last October, where the S&P went from within the course of about a little less than a year, it went from around 5,000, the index, down all the way to 3,500. And we’ve seen kind of -- we’ve seen a bounce off of that level. One thing that happens though in these climates is a phenomenon called the return to normal. So there’s, within every bear market, there are, we tend to look at these things called bull traps. So we have sort of bull market, right? Where you’re optimistic and the sky’s the limit and everything is going to go up.
12:47Paul ViottiAnd you have in the bear market where you’re more pessimistic. When we’re dealing with a financial bubble, its crash and the aftermath, it’s not unusual to get a period. And I would say we’re in this period of where there’s a perceived return to normal, where things seem to have gotten a little bit better again, and you start to get a lot of optimism and that we’ve already gone through the storm when you haven’t even really started it. And so, I think that’s where we are at the moment and that You know, putting quite the interesting question of commercial real estate aside, because the economy is predominantly driven by consumer behavior.
12:47Paul ViottiAbout 68% of overall economic output or GDP comes from consumption, right? So I think when people start to see the value of their homes go down again because, um, you know, they’re not worth what they thought they were. They, they hold back, uh, they stop spending, and this puts us into the correction. But this time, the, the correction is, is, uh, it’s not coming from, you know, it’s not a surprise. It’s one that’s engineered by the Fed, uh, by design. And it’s, it’s, it’s a, uh, you know, it seems unavoidable. Um, so the last year or so, have you noticed, uh, inflation in any aspects of your life over the last 6 months?
16:49Kamal HubbardYeah. I mean, hey, I think a lot of people have seen eggs, right? Gas, which, I mean, I know there’s OPEC and supply and demand factors there, but food just in general across the board. I mean, eggs are The most, to me, the most market increase is on eggs. But yeah, just food in general. Food prices have been amazing to me. Yeah.
17:21Paul ViottiFood prices and, you know, rent, of course, and mortgages, you know, been going up. And actually another area is automobiles or cars, right? Yeah. Yeah. And that sector has has been just crazy, right? Where I think, you know, the average auto loan now, a person is making payments of, you know, between $800 and $1,000. That would have been unthinkable 3 years ago, right?
17:51Kamal HubbardYeah.
17:52Paul ViottiSo, inflation can have really negative effects and it tends to hurt those at the bottom of the well the most. They’re the ones who are the least likely to be able to renegotiate their, their, you know, their wages. It takes a long time for things to catch up. So it hurts us all. It, and it hurts, it hurts the poor arguably the most. And there’s this, this sad paradox, you know, at least in terms of, of conventional, conventional macro, that the Fed, which is a Right? The Fed is not the government. The Federal Reserve is, you know, it’s essentially members of the banking sector and the chair is appointed by the president.
17:52Paul ViottiBut you have this autonomous group making decisions and the primary decision that they make is where to put interest rates, broadly speaking. And right now they’re going up because They’re trying to pull money and liquidity out of the system. So the overall effect, right? If you want to go out and buy a new house now, you’re able to buy a whole lot less of one for the same money that would’ve gotten you more a couple years ago. If you are running a balance on revolving credit or your credit cards, right? Interest rates are sky high. That pulls money. out of your pockets. And, and, uh, or in terms of the, uh, on the side of not just consumers, but go to the other side to companies and firms financing their cash flow and, and their, their investments, right?
17:52Paul ViottiThey too are, are facing higher borrowing costs. And so the goal is to pull enough money out of the system, um, to, to cool inflation down. That’s, that’s the goal. But it, it basically never happens in such a way that the tightening of the money supply doesn’t cause a recession. So there has to be some amount of pain before you get a return to normal. And there, when you look at it from the bird’s-eye view of the system, it sounds good. Okay, tighten the money supply and let’s bring inflation down. The historical rate is about 2%. right, that they’re aiming for. And they’re going to keep doing what they’re doing until they see movements in that direction, right?
17:52Paul ViottiYou get a lot of speculation on Twitter and other platforms about a Fed pivot and things like this. Okay, they’re going to reverse course. But I think the first time we had a podcast back in February of 2022, I said that the time period to compare this to, the best time period would be between about 1980 and 1983, the early ’80s when we had a recession. That was another engineered recession by the Fed, and they did it for the same reason that we had inflation that was getting out of control. And the only way to reverse that was to put the clamps on the economy.
17:52Paul ViottiSo from looking at the system from above, okay, that sounds good. But then if you look at the actual pain that that’s going to impose on people’s lives in a recession, it’s another story. The human suffering is significant, but something has to give somewhere. We’ve already seen that, right, in the Bay Area, especially in terms of tech. Tech jobs are often the first ones that they’re the most sensitive to economic contractions, right? I think Facebook is planning on laying off yet 4,000 more.
21:36Kamal HubbardYeah.
21:36Paul ViottiWorkers, for example. So, you know, I think, but to me, this summer is sort of that tipping point. We’ll have to see if I’m right. There’s no reason to assume that I’m the one that knows this stuff more than anybody else. But the way that I look at it, just putting two and two together, it seems like the so-called return to normal, that little burst of optimism that we’ve gotten is going to probably go away. And that will affect everything from stocks to real estate, commercial and residential, and the amount of money that people have available to put into other novel asset classes like mainstream crypto and altcoins as well.
22:22Kamal HubbardWell, so I guess just one more thing before we kind of turn the page on this that maybe I should have raised a little bit earlier when you’re talking about residential. We’re starting to also see a lot of the moratoriums on evictions being lifted now too, which comes at a difficult time, right?
22:43Paul ViottiYeah.
22:44Kamal HubbardWe’re seeing massive layoffs, like you said, in the tech sector and other places too. As there’s a looming recession now, eviction moratoriums are being lifted. And if people can’t pay for a roof over their head, that’s going to have some major implications as well. So I don’t know, just your thoughts on that and how that could also affect the overall landscape.
23:12Paul ViottiYeah, terrible, terrible timing. It’s the perfect storm of the perfect combination of events that could really increase that pain. So yeah, eviction moratoriums being lifted, another big looming factor. to watch, which will have huge implications. We have to realize that since March of 2020, generally speaking, people have not had to make student loan payments, right? They’ve been on pause or in forbearance since then. And the Supreme Court is going to be reviewing the Biden administration’s desire to give most student loan holders at least a $10,000 break on what they owe. And I think if a person ever had a Pell Grant, then it would be $20,000, right?
23:12Paul ViottiBut we’re looking at a lot of student debt out there, and that’s on pause until August, if I’m not mistaken. But in terms of the exchange between the various branches of government, so if the judicial branch or the Supreme Court says that no, the executive branch doesn’t have the authority to waive student debt, we’re going to get that happening late this summer and this fall too. So in a climate of inflation, what’s going to happen when a student, the average -- let’s say somebody has $400 a month of student loan payments and then all of a sudden those come back. Right? It’s -- there could be a number of really negative factors like that that put us in a downward spiral for a little bit of time.
23:12Paul ViottiAnd yeah, so I think that’s a great point in terms of things like the moratorium having a huge impact.
25:10Kamal HubbardAll right, well, I think we will take a break here. Make sure to make it not just a good day, but a great day with crypto. Crypto with Kamal.
