🎙 70 - Facing the Frontier | Jim Bianco

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Jim Bianco is a seasoned investor, market commentator, and President of Bianco Research. With a sharp view of the past, present, and future, Jim comes on the podcast to discuss crypto from a variety of angles. Inflation, Wall Street, Defi, Regulation, and How to Invest – it’s all fair game. This is a good one.

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Bankless Podcast 70: Facing the Frontier

Guest: Jim Bianco

June 21, 2021

Ryan 0:21

Bankless Nation we are super excited to introduce Jim Bianco to you. He is the president and a macro strategist at Bianco Research. He's a veteran of the dot-com era. We're here to talk about that, he's also an expert in the global economy, macro stuff, financial markets as well. His bio says he's unencumbered by the biases of traditional Wall Street research. I love the sound of that, maybe that's why he discovered DeFi before the rest of them. Here's what's also super interesting about Jim, he actually came to crypto not by way of Bitcoin, like a lot of us, but by way of DeFi at least that's how he fell down the crypto rabbit hole as I understand it. So we got so much to learn from Jim, the Wall Street experience from a finance guy who's gone crypto native. Jim Bianco. Welcome to Bankless. It's great to have you.

Jim Bianco 1:08

Thanks for having me, guys. Big fan.

Ryan 1:10

Well, we're a big fans of you, too. And we'll talk about how our paths crossed, like, you know, partially some tweets, you're very active on Twitter, which I love. But let's start with this. Because we want to learn a few lessons from history from you, Jim, you've been in the financial markets a while. And we always look historically at various parallels, I think the first parallel we want to look at is you were around, you were a veteran of dot-com, boom and bust. So you've seen market transformations before. And we want to look at this through the lens of market psychology to understand really what we can learn with the internet. We saw markets trying to price in this unknown tech. Right. How big is this thing going to be? We often make parallels between crypto to the internet. Can you tell us what the learning lessons are? So what is it like to watch humanity grapple with the collision between some financial market and nascent technology? What can we learn here?

Jim Bianco 2:07

Yeah, well, first of all, I'm, I was actually employed during the '87 stock market crash. So I go back that far as well, too. So I was an aged veteran by the time we got to the, to the dot-com crash of 2000. When you get new technology, you usually have two things going on at once. And this will sound familiar for the DeFi world, you've got the advocates that are saying we are building something new, something real, something that is going to be lasting, and it's very exciting. And then you drop the whole casino on top of it, you guys could wild speculation on whether or not the B2B stocks are gonna go up or the retailers are going to go up, pets.com is going to do this. And they don't care about what the long term is, I just want to make sure that this damn stock doubles before Friday is all they care about. And they kind of become oil and water. Because the people that are trying to build something real get really mad at those that are just wildly speculating with this stuff, and the people that are wildly speculating get mad at the people that are building something real. I'm here to get rich, get out of my way, you know, and so you've got a little bit of that. That's what you had in 2000. Sound familiar?

Ryan 3:17

Oh, my god, it sounds so familiar.

Jim Bianco 3:19

Yeah, a little bit of what you've got going out. But that's the way new technologies always evolve is that you get the you get the pioneers that believe that they're building something real. And then you get the wild speculation as well, too. You had the same thing. You know, you had the same thing when we went west, you know, everybody left under the arch in St. Louis. And they went west and someone were saying, we're going to build a new country and the other ones were, I'm just getting to Oklahoma to get my land rush. And that's all I care about and stuff like that. So you had the same type of thing happen there. But what I think you saw in May, what I saw, that was reminiscent of maybe even the '87 crash. Now in the DeFi world, that dominant player in May was the Dogecoin to $1 crowd, the hot money crowd that was running all this stuff up and down all over the place. The market was ripe for correction. Then along came over the bridge at the right time was Elon Musk making noise about that, you know, it's all dirty. It's all fueled by coal and it's all dirty, and the market crashed. And if you looked at some of the protocols in some of the centralized exchanges, you had a massive liquidation of a lot of those levered players. Now this is very reminiscent of what we saw when a lot of those speculators in the first part of 2000 during the dot-com crash, you blew them out. I remember watching you know on the Maker burn site watching just all the, all the accounts coming up that you can buy the collateral on. I mean, it was almost too many to keep watching, hundreds of 1000s of them on the centralized exchanges in the futures markets were blown. Now, you wiped out a class of trader in that market. That's why I think this market has been consolidated. The way you would reestablish another bull market kind of like 2000 to 2002 in the dot-com boom is you have to bring in another type of player. And then eventually you drag in that hot money one more time. Who is that different player? Well, your guess is as good as mine, but I had a guess that different player that you want to bring in is going to be, as I heard, a description out of Miami, is the old guys wearing golf shirts and blazers basically, the TradFi guys, they're going to kind of come into this market and go, yeah, I believe, and then once the market starts catching wind, then here comes all the 100 to one levered guys, and here comes the next Dogecoin whatever it happens to be, and that speculation will reemerge as well. So what I think you're going to see if this pattern holds out is I like to say a lot of people in the market, the market will move to the level of most confusion or most frustration, and what is that sideways for a lot longer than we think, it's not going to plunge and prove some people, right? It's not going to soar and prove other people, right? It's going to do nothing and frustrate the hell out of everybody. Because we're waiting for another crowd to kind of take the mantle, the long term hodler said they're they're not going to buy again, the short term guys have been burned, they're not ready to jump in until an established uptrend has been underway. So we need somebody else to come in and get the ball rolling. And they will, they will, it will just take I think a lot more time than people think. So I wouldn't be surprised if in the fall in the winter we're sitting around and we're looking at 2400 ETH. And we're looking at 40,000 Bitcoin and everybody's mad because it's not going down. It's not going up. It's just frustrating. Everybody we're waiting, and it never seems to happen.

David Hoffman 7:05

Jim, how do you feel about the velocity of the timelines of these things? The dot-com bubble that was a year long bubble and didn't immediately just pop. And in the crypto world we like to illustrate our industry as like really speed running a lot of history of money and finance. Does that also mean we're kind of speed running the whole market psychology like cycle as well, because the whole run up from you know, Bitcoin and ether up to its highs where it was right before the crash, and then the crash. And now the stabilization. How does that speak to the timeline kind of compare and contrast to what you've previously experienced in your histories?

Jim Bianco 7:41

Oh, there's no doubt that the crypto timeline is at breakneck speed right now. And at the speed that everything is unfolding with, it's been much faster, I mean, the dot-com thing you could argue that the dot-com bubble or the dot-com mania really started with Apple in 1983. And it really started going by '95. It was December of '96 that Alan Greenspan, the Federal Reserve Chairman gave a famous speech where he talked about irrational exuberance. And that was an indication that in December of '96, a lot of people said that tech stocks were getting over done, they didn't peak until March of 2000. So you'd still had three and a half more years of those stocks going. In the crypto world, that's three and a half months, not three and a half years. So everything moves a lot faster in the crypto world. Take Apple as an example. I've used it as an overlay on speculation with Bitcoin. Bitcoin has had seven corrections of 70% or more, in a couple of them 90% corrections, especially if you go back to 2013 after MtGox, and some of those others, those were some vicious corrections that they had in its price. From 1983 to 2003, Apple stock was unchanged. And by 1997, there was actually talk about them going bankrupt and it had multiple 70%, 80% corrections. That was 20 years that it took, in crypto land we're talking about four or five years. So everything moves a lot faster in this space, and it might be because of the nature of the decentralized world, that things can evolve a lot faster. You know, let's back up 18 months where was DeFi 18 months ago before DeFi summer. And where is it now? It's incredible the amount of adoption. And you know, the the technology has moved in such a massive way in such a short period of time. So the investment cycles and speculation cycles are going to be much shorter to

Ryan 9:42

Jim, we're getting a lot of insight from this and in how these markets kind of repeat over and over again, because it all seems to be the market psychology part of the adoption curve when a new technology is born. He gives us a few insights. One is there's these long term holder investors who evangelize and believe in the future, probably a lot of the crypto native listening to Bankless, then there are these short term speculators. Every market cycle has these two grips that he said, what you need in order to restore after kind of a crash is a new crop of buyers, maybe these are the people in the blazers, we want to talk about the people in the blazers in a little bit. But it also seems like these things repeat in these fractal type patterns, right? You know, some people said 2017, in 2018, like that was our crypto dot-com bubble. And now we're here, here we are again, with another run up and kind of a crash. So it's not going to play out exactly like the dot-com bubble, which kind of took years to get back to all time high. I don't know how long it took Amazon to get back to all time high, from like 2000, maybe like seven, eight years, something to that effect. So it took a while. And this is maybe happening again and again. But I want to ask the question before we leave this section on market psychology to you, which is like, so how should a savvy investor play these markets? Then what's what are the secrets? What are the keys, what have you gleaned over time as you've observed this sort of psychology play out?

Jim Bianco 11:09

So by asking how a savvy investor is going to play this market, um, I assume we're talking about somebody in this space, you would refer to more as a hodler, you know, that they believe in the space long term, and they think that things are going to go and things are going to become much, you know, grow much more and become much more exciting and adoption rates are going to go up. And I think what you want to do is you want to show some degree of patience, in terms of where you're invest, you want to be expecting the types of things that we saw, and may only be the types of things that we saw in 2018. You know, like I said, if you are, you know, it's easy now to see what transformational company that Apple is in 2021. But in 2003, after 20 years of sideways action and a bunch of 70% corrections, it was easy to see why Apple was destined to be a bankrupt company. You know that back then, as well, too. It takes some time for this adoption curves to work play out. Now, if you're asking me about, you know, speculators, and how should speculators do it, there was in 1978 movie called Deer Hunter. And one of the highlights of that movie is very, Robert De Niro was in it. And one of the highlights in the movie was he was a Vietnam veteran, he went back to Vietnam. And he got himself involved in Russian Roulette games, where they would basically get paid a lot of money to actually hold an actual gun to their head, and see if they blew their brains out. If you want to be a speculator in this market, because eventually, the bullets going to be in the chamber for you, you just have to understand that if you're going to play with lots of leverage and short term on these markets, that is a very, very difficult thing. Every every speculator that I've met, that has been successful, I'll just say this, it's their full time job. They spend every waking minute of doing that. If you're part time, and you just want to chase meme stuff you're destined to wind up wiping yourself out. If you want to make it your full time and you've got some talent for it, yeah, you can do it. But there's very, very few people that can actually wind up doing this. I'm not saying it's impossible. It's just that there's not very many of them that can actually pull it off.

Ryan 13:32

This is why we talk to people on the Bankless program. It's like use DeFi, pursue it, like figure this market out. But if you want to sleep at night buy ether, buy Bitcoin, buy the DeFi Pulse Index, and then sleep well at night, it doesn't have to be that hard. And people make it hard I think when they chase narratives, chase trends, and chase memes. But let's talk a little bit more about macro markets now. So I think a second lesson maybe you could teach us from history as crypto natives in history is about macro and how it impacts these markets. Right? And so like, put your macro cap on for us and tell us what is going on in macro. I think people listening to this heard about 5% inflation in May. What does that mean? What are the long term COVID impacts on markets? What's going on with all of this money printing? We keep hearing about it, tell us the story around macro?

Jim Bianco 14:25

Well it's the story about money printing, it's the story about the Federal Reserve and the federal government through all of its stimulus programs. As I refer to it as mailing money, they mailed a $1200 cheque to everybody above or below certain income thresholds. And then there was a $600 one and then there was the $1400 check in March as well, too. And what happened with a lot of that money is it found its way into traditional brokerage accounts, RobinHood being the kind of the poster child for them putting it in, that's a form of savings, they just put it into their savings account, their savings account just happened to be, you know, a RobinHood account. So it really did underpin the market as well, too. Along the way, the savings rate in the United States skyrocketed to levels that we never thought were possible for a benchmark. In 2005 before the housing bust the savings rate was 2%. Now what is that, that means the total amount of money you make less what you spend, you had 2% leftover, and that's extraordinarily low. Why? Because everybody owns a house, everybody owned the stock market, and it always went up, that was my safety. So I could spend my whole paycheck. Then we had the housing crash in 2008, we had the stock market fall 50% as well, too. And the savings rates went to about six or 7%. Because now I can't trust my house, I can't trust the stock market as much this is circa 2010 to 2013 as well. Well, once we got all this mailed money to everybody, the savings rate went to 27%. And so a number that was far and away the highest that we've ever seen, people are stuffed to the gills with money that was mailed to them. They're spending it, they're buying stuff there. Now you can walk into a store without a mask. And it's like, oh, now I could get on an airplane and go somewhere. Interesting thing about airline travel. Just to give you an idea of where the country is. If you look at the official TSA statistics, we're about 80% of the way back on airline travel, we're flying 80% of the level we did pre pandemic, but the airlines will tell you that leisure travel is at an all time high. Wow, this is travels half of what it used to be. Because I would love to go to New York and business, but nobody's in their office. So there's no reason for me to get on a plane to go to New York, but I'm traveling with my family more than I've ever have. And a lot of people are because they've got the time to do it as well. So what's been the fostering all this money is this spurt of inflation. We have inflation in this country. That's not an opinion. That's a fact. The opinion is how long will it last and the Fed likes to use the phrase transitory meaning that it will go away fairly soon. Well, we'll see, you know, where that winds up going, I happen to be a little bit more pessimistic that the inflation rates that we're seeing are going to be a lot more permanent than the Fed thinks that they're going to be, than a lot of Wall Street thinks that they're going to be. And I also fear that if we see the economy stumble a little bit, they've already got their built in answer, well, we'll just mail more money is what we'll wind up doing. We'll just print up more money, and we'll mail it to to everybody. And that will just foster this problem that we have over and over again. And I'm sure that the libertarians that are in the crypto universe are loving what I'm saying here and like yes, that's why the crypto space is taking off. Because we don't have these kind of shenanigans and bad policies that seem to be going on along the way. So yeah, I think the real story in the in, in the economy is the story of inflation, we have it, we have it because we stuffed everybody full of money. The hope is it's transitory, it will go away fairly soon, like by the end of the year. But there's some like me, Paul Tudor Jones, Jamie Dimon, just to throw out a couple of names just the last 24 hours that have come out and said, I'm not so sure that this inflation rate, this high inflation levels are going to go away, and we'll have to see what the second half of the year brings.

Ryan 19:12

Okay, well, let's talk about that. Just really quick, because I think inflation is possibly the big story now. And like I think folks in crypto will argue we saw asset price inflation of the last 12 years in parallel, but now we're seeing it reflected in the way the government measures inflation, which is primarily CPI but a lot of people I think a lot of people listening this have never grown up at a time where inflation was higher than 5%. For instance, for a sustained period of time certainly net, like very few people have seen double digit don't remember like the 1970s when the country saw that, what does the world look like when you have sustained high inflation? How does it change?

Jim Bianco 19:55

Yeah, usually what is also part and parcel with an inflation rate is shortages. And that's what drives prices higher in the '70s. I was around to remember it. And you've probably seen the black and white images, no gas gas lines, we constantly had shortages of gasoline. Okay, like if you if you go to a store, and you want to buy a durable goods, you want to buy a refrigerator, a stove, a washing machine, and you'll go into Home Depot, and they'll say it's on sale. Look at this price. We'll beat out the competitors. You go. Great. I'll take that dishwasher. Okay, good. Well, we'll, we'll pencil you in for an October delivery. I told her, I want it but tomorrow, I don't want it in October, what we've been doing, what we do when we have high prices, what we do when we have high demand, excuse me, is we've got one of two options. We can either raise prices, or we can ration products. And what we're doing now and what we did a lot in the '70s is rationing products, as well, too. You've probably seen it, I live in downtown Chicago. And I've seen some some of the restaurants in my neighborhood that say closed today, couldn't get enough people to work. Yeah, not enough. Not enough bus points in which they're rationing labor, just pay him more money. And they'll show up. Well, I don't want to pay him more money. Okay, so you're just rationing your labor is what you're doing. So you see a lot of rationing is when you start getting high inflation. And you're beginning to see that. If you've, if anybody or anybody wants a home, and would really appreciate what I'm about to say, you can't get anything. You can't get anything from two by fours to dishwashers, got some breaks in my house, it's the frustrating thing is to find the replacement part. It's always the aisle at Home Depot never has the part that I need to fix when something breaks, it seems like maybe I'm just having a bad streak. But the data does support that idea that there's a lot of rationing. So that's what you're going to have to get used to whether it's rationing your restaurants, or rationing the products you like, or maybe even because of the demand for leisure travel, rationing out those airplane seats, so that you can go to Florida in the winter, because everybody else wants to go to Florida in the winter as well, too.

Ryan 22:16

Wow that is so strange. We haven't really lived through that. Really quick, though, Jim, because I'm so curious what happens to assets in this scenario, like what, how does the investor prepare for this kind of inflation?

Jim Bianco 22:26

Well, the first thing you got to keep in mind is there's two broad categories of assets, there's equities and fixed income, let's take the second one fixed income. If you're going to buy a bond, that's going to give you a certain level of returns every year, your fixed income and the prices of stuff rises, then the value of your bond market, the value of that fixed income is going to depreciate, bond prices are going to fall, then interest rates are going to rise. And as interest rates rise, the cost of borrowing whether it's a mortgage or business loan is going to go up and it's going to start to impair the economy. And then that will eventually impair the stock market. That's not happening now. Because one interest rates aren't really going up yet to the inflation thing is only months old, it's not many years old. At this point, and three, there's a widespread belief that these markets aren't real anyway, that the Federal Reserve could come in and wave a wand and fix it all. And it will and their their their mandate is to make sure that my stock portfolio always goes up. So there's this this this zeal to take risk in the market because we you're you don't have to worry about some kind of a downside to that spec. I think that's a little bit misplaced. I think we're giving the fed a lot more credit than they then they deserve in terms of being able to hold the markets up either through yield curve control, or any of that other stuff. yield curve control in other countries, like in Japan and stuff has shown a very spotty track record actually working to the degree that they want. We tried it in the '50s in the US and it didn't work under the name of Operation Twist as well, too. So I think we we we give the Fed too much credit. But the point is here is that if you get those rising prices, and you wind up having the bond market start to suffer, and that's the cost of capital, it will eventually filter through to everything else. But that's not the case right now. The case right now is everything's okay. You know, Jay's got our back at the Fed and he'll print enough money that, you know, everything keeps going up. And that's exactly what's been happening at least at least this year.

David Hoffman 24:31

Jim, I want to get your perspective as to how all of that interacts and collides with the crypto markets. But before we get there, I want to tie off the conversation about shortages because I'm curious as to where the shortages are actually coming from. Are they a result of just a lack of production because people have been quarantined at home during COVID? Or is it more specifically a phenomenon as a result of financial markets and us not really being able to allocate capital appropriately due to the distorted nature of the markets. Why do these shortages exist?

Jim Bianco 25:01

Well, I have an outside the box view, you know, a traditional economists will tell you that there is a, there is a breakdown in the supply chain is what they will tell you, that we are not making stuff as fast as we used to. And I've pushed back on that. And I said, No, we are making stuff as fast as we used to. And if you look at container rates, you know, to put a container on a ship out of China to send to the Port of Los Angeles, or if you look at railroad rates, how much does it cost to put a container on a rail car in, you know, ship it across the country, rates are skyrocketing right now. And the reason is, we are demanding stuff we've, you know, this allocation of capital is if you mail people a bunch of money, eventually they're gonna want to buy stuff with it. And eventually, they're going to want to all buy kind of the same things, and we're not going to have enough of it. And that's where the shortages are coming from. So what I'm saying is, I think the problem is, is supply chains running fine. It just can't keep up with the demand that everybody wants of everything. And we've been satisfying that by saying you'll get it in October. And eventually people are gonna say what if I give you extra Will you give it to me now. And that's how you wind up with inflation, higher prices. And I think that that price, that process, excuse me, is now beginning where we're starting to see, prices start to go up, no more so than in wages, we're finally starting to see companies start to realize that the reason that you don't have enough employees is because you are not paying them enough. There was a story from last week, there was a job fair by a bunch of restaurants in St. Louis. And they had 100 openings, and they hold it and they held a job fair and only 12 people showed up, you know, the answer is you're not paying them enough. That's why they're not showing up, raise your wages, and they'll show up. And I think companies are finally starting to get that. And we're starting to see wages go up, all that filters into inflation.

David Hoffman 26:58

Yeah, that really seems to be the throughline. It's not because people are stuck at home quarantining that phase is perhaps behind us. It's really a question of, there's so much money in the economy right now that it's really distorting how people choose to engage in the world. Jim, we got a report not too long ago that there was 5% annualized inflation at the end of May. How does that number land with you? And where do you see that number going over the next year?

Jim Bianco 27:24

Well, keep in mind that that 5% annualized rate is what there's a term that economists use called the base effect, because you're comparing the data that we have so far is through April, May's numbers will be out shortly, April to April of last year, April last year was the height of the shutdown. So you're comparing the absolute bottom of last year to the current level, so you've got that big number. So over the next several months, that 5% number should moderate, a little bit. But if you look at the last three months, and that and the annualized rate that prices have gone up over the last three months is 8%. It's been booming. And that's a 40 year high. that those are now economists will dismiss that as that's the reopening because 90 days ago, we were still wearing masks, and we were still under restrictions. And now we're reopening. Yes. And that number will come down a little bit to but here's the thing, I suspect through the rest of the summer, those inflation numbers will come down. And those that think inflation is transitory. I said, See, I told you they were going to come down. But I would argue yet and watch where they bought them out, maybe with still a four handle on them. And that's a very high inflation rate. With a four handle, it might not be five might not be eight, but it might be high three to four. And why is that a high inflation rate compared to the bond market, a 150, a one and a half percent yield in the bond market, I put my money in a bond investment, I get one and a half percent. But everything's 4% more expensive in a year. That's a bad deal, is what that is, and people will start selling bonds. If that perception comes in, and interest rates will go up. And then when interest rates go up, the cost of capital goes up. Eventually, if they get high enough, maybe over 2% on the 10 year note, I think the stock market starts getting a little weak, neat, but we're not there. Now we're at 150. So the stock market seems to be fine. For the moment.

David Hoffman 29:19

Let's introduce the crypto variable into this conversation, the conversation of you know, money printing, inflation, changes in labor and just reorienting of, you know, the economy. When we add in the conversation of crypto, how does crypto collide with this conversation? Where does crypto come in? How does it fit into the conversation?

Jim Bianco 29:36

Well, I you know, fits in the conversation a couple of ways. I mean, the Bitcoin side of it is they're talking about selling money as a store of value. I think a lot of people are comfortable with that idea especially. I know a lot of people make this comparison that the younger crowd likes crypto more than the than the older crowd. I'm going to say that there's, that's the wrong causation. I think the causation is how invested are you in the TradFi system? Look, if you are a partner at Goldman Sachs, even if you're 28 years old and you're a partner at Goldman Sachs, you think traditional finance is the greatest damn thing you've ever seen in your life, and you don't want anything to change it. But if you're 28 years old and you've got $4,000, in a robin hood account, and you look at crypto, you have a much different view of it. So it's really about how far away do you get from the TradFi system is to your view. So those that are more out of the system, tend to look at things like Bitcoin and maybe DeFi a lot more positively than those in the TradFi system. And I think it really comes down to with the Tradfi system, the basic problem it has is permission, you need permission to do everything in the true advice system. So that 28 year old, I know, I don't think there are any 28 year old partners at Goldman, but there's young partners at Goldman, they have opportunities to invest in certain VC funds and certain other investments, rest the world can't touch. You know, and I used to as an aside, I used to get very angry when people used to say, oh, look at this book invest like Warren Buffett, I was like, I wish I could invest like Warren Buffett, he's presented with ideas and and investment opportunities that no one would ever give me. Because he's Warren Buffett, he he gets the special permission. I don't get the special permission, as well, too. So I think that the true you know, the crypto universe is more democratized. People like it because it gives them the opportunities it gives them the opportunities for big games that only the certain few accredited investors is the word we like to use that are allowed in the treadplate world.

David Hoffman 31:51

Jim in DeFi we are seeing some pretty awesome interest rates on stable coins, right? They fluctuate because it's DeFi, but you know, typically they've been holding above 10% and 12%. And sometimes they sustained numbers as high as 16 to 20%. And now to some degree a lot of this is subsidized by token issuance from protocols and perhaps there's a lot more risk when we start yield farming stable coins in DeFi but it's all dollar denominated, you know yield in DeFi, which is in stark contrast to the very low rates that bonds are offering right now. How do you explain this discrepancy between the yields in DeFi and the yields in the bond market? And does the inflation conversation have anything to do with this?

Jim Bianco 32:32

Well, a lot of the bond, a lot of the Treasury bond market is manipulated. And it's set by the you know, the Federal Reserve, the Federal Reserve set short term interest rates, and there's a lot of fraud, and they buy $120 billion a month of bonds, it's a trillion and a half a year, all the way out the curve all the way out to the 30 year bond as well. So what you see in the in the TradFi world isn't administered rate. And a lot of people have argued that that administered rate has been artificially low. And even some Fed officials will admit that as well, too, by the way, the best Fed officials to listen to are the ones that recently leave the Fed, then they tell you what they really think instead of just reading, talking out loud.

Ryan 33:13

Who are those folks we should be paying interest to?

Jim Bianco 33:15

Daniel Tarullo has done some really good stuff. He left the Fed in 2017. In, by the way, when he left the Fed in 2017. Now remember, this is before the pandemic, he gave a speech at Brookings and he said, you know, the dirty little secret in the Fed is they don't have a working model for what causes inflation, they really don't understand it. And to my responses, that's fine. It's a complicated subject, but you pulled yourself out is pretending that you've got all the answers. And he's trying to say that they really don't have all the answers, you would never get that when you're actually still getting a paycheck from the Fed. But once you leave the Fed, you can get a lot of interesting kind of those kind of comments from federal reserve officials as well, too. But to your question about stable coins, I think that what you're seeing in the crypto world is pure supply and demand is that it's set by smart contract, it is not administered by somebody giving permission for a certain level of interest rates at this level or that level. And not only do you see much higher interest rates, but you see a lot more volatility in interest rates, if there's anything that's similar to that, in the traditional financial world, if you looked at interest rates in the 18th century, in the 19th century, and yeah, I have looked at them, I studied them, they were just as volatile. And you saw that kind of movement around the agricultural cycle to that, you know, if you tried to borrow money, and if you tried to borrow money in the spring, when all the farmers were borrowing money to plant it was very, very high. It might be in the high teens. If you tried to borrow money in the fall when the farmers are paying back their loans. If you don't know the rates might be one or 2% wash, rinse and repeat for the next year as well. So we've seen this in the in the past when it was more of a free market. That was setting right You'd see these kind of volatility in interest rates.

Ryan 33:31

Jim since we're getting into DeFi, so like I think we we concluded this some fantastic lessons about market psychology, you know, boom, boom bust and how we can apply that here and also how macro applies to crypto. So thanks for schooling us, Jim, this has been absolutely fantastic information so far. And I could kind of see why you have a reputation for being kind of a contrarian and a different thinker on some of these subjects, like one of the framings, you just illustrated even when we're thinking about crypto DeFi, that I think is new for me or helpful for me, it's not so much you said, older generations versus younger generations, it's really a matter of incumbents versus outsiders. Right. And so the people who are attracted to a DeFier, these kind of contrary and outsiders who don't have ties into you, the banks, it's kind of like bankers versus crypto natives. And the bankers will probably be slow to realize these things. Why? Because they're getting disrupted by them. But let's talk about banks for a minute, because this is actually how, you know you've been on our radar for a while Jim, like your Twitter and good comments and heard a lot about you. But I think this tweet, really sealed the deal for David and I were like, oh my God, we got to get Jim on the show. Because this is a picture of Hayden Adams who we talked about in one of our weekly roll ups. I think this was featured in like the Wall Street Journal. And it's just hilarious, because if you can't see this on YouTube, we've got the screen up, but it's just a picture of Hayden Adams, creator of Uniswap. And he's in this like, crazy outsider, not a suit and tie, a crazy outsider looking unicorn t shirt, right? It just kind of like appearing from behind the bushes. And you said, "bankers meet your worst nightmare. This is Hayden Adams, and he's coming to destroy your effing bank. He did not ask for permission. He's built it. And two years later, he's threatening your bank." I love that like choice use of hyperbole there he's like, but like, there is truth to that message that like, here's a guy who created some code, helped create some code. And we had somebody on the podcast recently, I think it was Spencer Noon, who said the value of each line of code in Uniswap is about $18 million. So he creates some code, very small team. And now he is disrupting major trading venues, right, starting with crypto trading venues. But how how soon until that leaks into the NASDAQ, the New York Stock Exchange. So anyway, we're like, we have to have Jim on the podcast to talk about DeFi, which is possibly bank's worst nightmare. But can you talk to us because you've been in the belly of the beast? What's wrong about the current? Like what is so bad about the current banking system and financial system that needs to be disrupted?

Jim Bianco 37:53

Well, first, can I give a shout out to Hayden Adams, man, you are my hero. By the way, I was talking to a reporter from a German magazine. And they're now thinking that Siemens laid you off and then you created Uniswap, that might go down as one of the worst business decisions in German history, letting you go like because eventually Uniswap will probably be worth more than Siemens, you know within like four or five years. So I'm just a gigantic fan of what you've done. And just keep going and keep keep disrupting the business. Let me talk about banks. And let me not get pissed off here when I start talking about it. So 1871. Western Union invented the wire transfer in 1871. And if you wanted to send $300 to somebody say in San Francisco, it would cost you 3%. And back in 1871, they had to put 300 damn dollars in a pouch on a horse and somebody had to ride it to San Francisco. It cost you 3% to send money in 1871. In 2021 to do a wire transfer it costs 3% and takes two days. Not one damn thing is changed in 150 years. When it comes to the banking system, nothing is changed. When you look at remittances across the world. There are over a billion migrant workers right now around the world. They are working in some of the worst conditions ever, either out in the sun or in terrible mines or an awful factory conditions to make some money to send back to their families. The average remittance is about 10 to 15%. They work one month a year to basically pay the bank and it's $500 billion of remittances a year that they're paying the banks for, to just send their money back to their family, we could give them a month of their life back, or we could give their families 13 months of pay for 12 months of work by by disrupting these terrible payment rail systems that we have right now. They are broken, they are destroyed, they are highly regressive. They create inequality. And they create a lot of problems. That's why you have 1.7 billion people unbanked around the world, and you have 10s of millions of people underbanked in the United States as well, too. They've had 150 years to fix this system, the Federal Reserve has been running the payment rails of the United States for 107 years. And it still takes two days to send money using the Federal Reserve payments is all but don't worry, we got fed now coming 107 years later, and we might get to real time payments by 2025 is what their hope is for the moment. So let's start with this is a terrible system that is slow, ineffective, expensive, and it falls right down on the poor. Now, whenever I say this, people are like, oh, I don't know what you're talking about. Venmo, I could Venmo people money in a second. Yeah, 'cuz you're rich, you have a bank account, you have enough money in the bank that they've already ripped your eyeballs six ways to Sunday with fees that they give you this free little app, either Venmo or Zelle. And that you can send money to the other people that you're having dinner at within one second. But boy, you've paid for that, you've paid for that in a big way before you get to that point. But I've as I said, if you want to pay 30 bucks to the front to the guy that fit the pendant dinner bill, go down the street to a bank you have no relationship with and say I've $30 here, I would like to send it to Ryan, let's see what they charge you for. And let's see how long it takes you to send that money. That's the problem with the banking system right now is that it has been slow and incumbent and a lot of the regulators are at the fault of it. They've been very, very slow to actually fix this system. within that system. There's this mentality of a permission system. And I'll give you an example from this week. I think this is going on. It's a tremendous mistake. Goldman Sachs got all of their employees back at work full time starting last Monday. Two days ago, JP Morgan, either next week, or the week after is going to have all their employees back full time. Why are they at this point? Why is there this zeal by a lot of big bankers, everybody's got to get back in the damn office 10 hours a day, five days a week, because their job is to give everybody permission. And they take that job very seriously. And we don't want to be giving permission to everybody over Zoom in our underwear. We want to show that we are serious about giving permission. And we want everybody back in the office. And why is that going to be such a tremendous mistake. Because what the pandemic gave to the big banks is a gift. It forced them to decentralize, send everybody at home, let everybody work at home. And guess what? They had record profits, and it worked. And in that world, they could see, we don't need to have this iron control over everything that we think we need. So what they've shown me is not only don't they understand the absolute inequality of the current system, especially remittances, they really don't get decentralization, because you already were decentralized, because you sent everybody home. And now you're forcing them back into that big building in Manhattan to centralize them all over again. So when DeFi comes and it keeps coming, I'm going to keep remembering this and I keep saying they just don't get it at its core. If they can't even let their employees work at home a couple of days a week, or trust their employees to do the job that they were paid to do whether it's at home or in the office down the hall from me, they're never going to get a permissionless decentralized system as well too. So let's start with that. It is terribly broken in a lot of those regards. Now you bring in DeFi and DeFi is looking to fix a lot of those problems. Stable coins is a potential payment rail, you know on the collateralized lending side with with a lot of the lenders as far as protocols as well too. When it comes to Wall Street again, Wall Street is you know, with their with their order book system, again a very capital intensive permission system that only certain people can do certain things with, to replace that with the constant product, automatic market maker that these are revolutionary changes that on Wall Street. Not only don't they some let me back up a year ago, they were dismissed out of hand that this is just bullshit by a bunch of kids. That doesn't mean anything today. They're not sure what to make of it. And they're there. They're hoping that they're saying yeah, seems okay. But our system is still better is where they are. But they are coming along. A year ago, no one in the TradFi system was asking me about DeFi. Today I'm doing eight to 10 meetings a week with TradFi customers to discuss DeFi. And basically, they want to know what it is and how it works. And the biggest thing you guys will love this, the biggest thing that they seem to fall on, I hear this over and over again, I open a Coinbase account, I bought some ETH, where's this DeFi thing? And I was like, have you ever thought about moving your money onto like Dharma or MetaMask, onto a wallet?

David Hoffman 46:22

What's the DeFi app I need to download, right?

Jim Bianco 46:25

Exactly, exactly. Where's the DeFi link on my Coinbase? You know, that's like, the shocking part about it, as well, too. And then when you tell them that they have to go do that. They get a little bit apprehensive. And by the way, right there, their pensiveness is a little bit well placed, the UX experience is terrible. On Lex Friedman's podcast with Vitalik a couple of weeks ago, he was talking about when he got the Shiba coins put into his account, he went to Target, he bought a laptop, and he called his family to get his private key so he could transfer them into a different account. And he said he was stressed and he had to write a JavaScript program, you know, in order to get them. It shouldn't be that stressful an experience to move for any kind of money. So if you really want to get this, really want to get the laser guys into this business, the UX experience has got to get better. For a lot of people I understand it will get better, it will get better. But right now that is the biggest hurdle that they face. What's this electronic wallet thing?

Ryan 48:21

Jim Bianco here just spitting fire. You laid it out. I've never heard anyone lay it out this way, it is super, super interesting. Basically since 1871, the cost of a wire transfer hasn't changed, right? So like we live in a world, we're talking about inflation earlier, but the the gift to humanity, that the thing that causes us to progress is actually technology. Technology is a deflationary force. That's how we have a better quality of life as as a human species. And it's so interesting to me, because software has eaten entire industries. But it hasn't yet touched the banking industry has it, as evidenced by the fact that 1871 to now a wire transfer really hasn't changed. It costs the same takes the same amount of time. Moore's Law hasn't even affected it. And I think what you're saying here, Jim, is because it's basically been been siphoned off like, technology hasn't been able to impact banking the entire industry. Until crypto, it's been permissioned. It's been sort of, you know, super tightly regulated, it hasn't been open to any of the innovation that we've seen the internet bring. And is that the difference? Is that what's changing with DeFi, like, so the basic thesis is, and Andreessen Horowitz might say is this, it's just software eating banking. Is that what you subscribe to that we're talking about here?

Jim Bianco 49:49

Yes, yes, there's two industries right now that haven't seen the big you know, software eating them up, and that is financial services and health care. What they both have in common is they're heavily heavily regulated and heavily permission. And it's impossible to break through with those until you get to what DeFi is, is in a decentralized permissionless world, which is why, like I said, I'm a fan of your, your, your podcasts. And, boy, the center of it in my mind, the center of this conversation is decentralization is that, you know, I don't think this industry can go forward, unless it is becomes truly decentralized and permissionless. As an example, stable coins have become the bedrock of this industry, I think stable coins are going to become the massive use case that are going to bring DeFi to the real world, that I can envision a day where people are using stable coins, they are already in Asia to some extent that they are paying for everything from trade finance to drinks at Starbucks, and then DeFi, we'll just service all of the stable coins. But when your two largest stable coins are centralized in tether and in Circle, and Dai has half of its reserves in tether and in circle, this is the wrong business model for the stable coins, they have to go fully decentralized permissionless outside of the reach of the permissioned world. There's a story today, the day we're talking, Bloomberg has a story that regulators are alarmed that stable coins are over 100 billion in value, and that they don't have any backed insurance, like FDIC behind them or anything else. Well, first of all, neither does the dollar, you know, that's a money market fund. It's supposed to have backed insurance or bank account. These are not bank accounts. These are mediums of exchange. So they fundamentally are MoE, they're confusing the, the two together, but more to the point where they're also saying to us is because of this centralized natures of tether and Circle, we can do something in that space. And we can really, for lack a better way we can really fuck with these stable coins in a lot of ways. And so what we really need is a decentralized, permissionless stable coin. That's when you're going to get the software eating the financial services world when it becomes outside of its reach.

David Hoffman 52:33

So Jim, I just want to ask what's it like to be Jim using DeFi, what's a day in the life of Jim as a DeFi user?

Jim Bianco 52:43

I'm probably on Uniswap. I love, love the way that you could trade on Uniswap, I've become a big fan of the business model of the automatic market maker. Right now, I could see a lot of applications for it. Look, what is there, if I read you guys can update me on it's like 72,000 liquidity pools on Uniswap, or some crazy number like that. You could never in an order book world get 72,000 actively traded markets like you can with the automatic market maker, that you can in Uniswap, it is a revolutionary. It is a revolutionary idea. It is a revolutionary concept. And by the way, speaking of revolutions, I want to throw out another thing too. There are certain people in life that are so far ahead of everybody else that they become, you know, it takes the world a generation or two to understand what they were doing Shakespeare, you know, Da Vinci, maybe Newton, Vitalik's in that category right now, because I think, you know, when he developed the white paper for Ethereum and that he was still in high school or just months out of high school? You know, he dropped out of college. Yeah, yeah, he, his freshman year, it was his freshman year, Theil paid him a lot of money to develop it or something like that. And then, you know, the white papers, the ideas of stable coins and quadratic voting, and the ideas on the automatic market maker from his Reddit post and stuff like that, you know, it's going to take the rest of humanity, a generation or two like Einstein, to basically grasp what he's doing. And that is truly unbelievable, what has been happening, as long as it stays decentralized. If If you ever become centralized, and they keep putting centralization, and then somebody can take it over and somebody can run it and somebody can give permission, then all these ideas go away. So I really think the industry really needs to really think about decentralization first, second, third and fourth. But the fact that the stable coins aren't decentralized, nobody seems to be bothered by it. Throw out another one to Michael Saylor suggesting a Miners Council. Boy, what a terrible idea, does that mean then I have to join a miners council to be a miner? Does that mean I need permission from the Miners Council in order to mine Bitcoin? I mean, it is just antithetical to everything it stands for it. But yet, people like him keep coming back to these decentralized mentalities. It's going to take the world a while to break it down.

Ryan 55:24

So I want to ask Jim, so, by the way, totally agree with you on decentralization, right? Hence, the title of this whole movement that we're in, which is Bankless, right, let's make this Bankless as possible. And if you know, tether is still a bank product, at the end of the day, it's just an ERC wrapped bank product. So we do want store values, monetary units that are as bankless as possible. Like I want to get back to like, what's good, but also what still sucks about DeFi, right? So you're commenting about the like people in suits and blazers coming to you and saying, hey, Jim, I bought some ETH. But like, where's this DeFi thing? I want to ask you like, what is it like from your perspective? How hard is it to move from the Coinbase world, let's say, which is the step that I feel like a lot of people are in right now to the DeFi world, like so. Because we've been doing this for a while, sometimes we forget what it feels like to do the first time the very first time you send a transaction, you're like, Oh, shit, did that. Like did I do that? Right? Like, Oh, no. Like, it's like, so yeah, tell us about that. Because like, we know, parts of it still suck. And by the way, I'll just caveat this by saying like, even though it still sucks now, it is so much better than it was a year ago, and is infinitely better than it was three years ago. And we're seeing like this massive, like progress and user experience. But how hard is it still for the guy in a blazer who's in Coinbase to get to DeFi? What's your experience been with that?

Jim Bianco 56:55

Well, so keep in mind that the guy in the blazer is also metaphor for, for the moment, the people that have all the money, right? And the guy in the blazer, now I'm talking about people in their '50s and '60s, you know, and as you get younger, you get more adept with technology, the guy in the blazer is very happy because he's on the cutting edge, because he does a group text with his children, you know, and he thinks that high technology for him, you know, and that he was able to open his Coinbase account without asking one of his kids for help. Man, I'm really going along here. And I'm really doing this, because in their world, their world is about making decisions and giving permission, and everybody else executes everything under them. And this world, they have to kind of learn to do it themselves a little bit, because the whole idea about DeFi isn't, you know, that I want, you know, you open up an account for me and you go figure out what my seed phrases and stuff like that, it kind of defeats the purpose when you start, when you start bringing in people because you don't want to do it, which is why you see the exploding popularity of of like institutional services by Coinbase, I guess Aave's starting kind of a permissioned instead, or centralized, excuse me institutional services too. They're not ready to make that leap and do it on their own, they definitely want somebody's hand held to hold their hand as they go through in the system. So yes, it is way better. I started trading in this stuff in 2017. You know, just the magic of Bitcoin going up and down and stuff like that. That's where I began with it, but then really fell in love with it when I started to understand DeFi, you know, around 2019, and then the summer of DeFi summer last year, as well, too. But to get them to that point where they can shed themselves if that centralization, I think is going to take a much better user experience. And it's going to be necessary, because of all we're going to hope for with DeFi is that the coin base institutional business is going to explode orders and orders of magnitude over because they're going to do it for everybody. We're not going to get to that decentralized world that we're going to want. Because there's going to be some level of decentralization or some level of regulation that is going to be stuck on top of this design on top of this DeFi world as well, too. So yeah, it is it is kind of a harrowing experience in the some of them that have done it feel better for doing it. But that's the first thing they say to me, man. Why does it have to be this hard? I have said oh, you should have seen it a couple years ago.

Ryan 59:43

Yeah, it's like I totally agree with you. Right? And yet at the same time, you're here you're doing it. Mark Cuban is out here. He's doing it, like he's taking the journey, like learning Solidity. So here's the other thing I would say. Maybe once Jamie Dimon couldn't do much, right? But like part of it is, part of it is they just haven't spent the time to figure it out. Right. So like it does require a time investment at this stage it can be learned but like, I remember the early days of the internet, it took some time to figure out the internet. I feel like that's kind of where we are. So like, no matter what age you are, I wonder if you agree with us, like no matter what your technical experience, what age you are, you can figure it out if you're willing to invest the time. We have Bill Ford, a Bankless podcast member, community shout out, Bill Ford pings us on Twitter all the time, Bill is 77. And he is opening Uniswap pools, he is a liquidity provider. He is like on the journey with us. So yeah, what do you think about that? What would you say to that?

Jim Bianco 1:00:55

One of the things that you see with people that get older is they beat the clock in their head at 62. Seems like a lot of work to learn this stuff. You know what, I bet I could keep juggling these plates for another three, four more years, I'll take my gold watch. And then the guy is 45 behind me, it's his problem to learn it not mine, and I'll be on I'll ride off into retirement. And my answer to them is always the same. This stuff comes on your lap faster than you think. And again, it comes down a lot stronger than you think. And I understand that. I've heard people, I've heard people say that exact phrase to me that, you know, I don't have the patience to learn it. I could milk this for another three, four more years. And then I'm done anyway, it's a terrible attitude to have, because it sounds like you're uninterested in everything in the world. But unfortunately, there are people that get to that stage as well, too. So the Bill Fords of the world, and that's great, you know that you want to keep reinventing yourself, you want to keep learning and you want to keep pushing boundaries, keep you young forever, is what is what you will wind up doing. But unfortunately, there's a lot of people that are just not ready to go there. And again, what is the other thing that makes them not want to go there? They're probably at the top of the heap at the trad fi world. And they're making very good coin in the trad fi world. And it's suiting them just fine. And why do I need to learn what my replacement is going to be? I really don't want it to work in the first place, you know, so there's a little bit of that as well, too.

David Hoffman 1:02:40

So, thought experiment, some of these people that we're talking to, the people in the blazers, the people who you know, are approaching the end of their career, but perhaps they are still like financially minded and still kind of want to know what's up with the world of finance. Some portion of these people are going to open up a metamask wallet open up a Ledger, you know, trade on Uniswap many wounds. What is the incentive for the people who do make it over the hurdle? Are they coming into DeFi to get yield on stable coins? Because that's what interests them? Are they coming in because they like DeFi tokens as perhaps a new frontier of capital assets, what's going to be the incentive that actually does convince some of these older generations, blazer, blazer folk to actually come in and play around in this industry.

Jim Bianco 1:03:24

What I've said to them is, when you come into this industry, and you start learning about this industry, you're going to see a lot of similarities to the TradFi world that you've been dealing with for 25 years, and 30 years, and you will instantly have a leg up on everybody, you know, the constant product model or the v3, you know, liquidity curves, that's mortgage convexity. If you're a mortgage trader, you will, you will instantly get that. Well, I know what this is, I deal with this all the time in the mortgage market, finding the optimal point on the curve with negative convexity and stuff. So a lot of this stuff is not necessarily new to you, it's just being presented in a different way. The borrowing and lending facilities, if you've got any banking experience, when you go to an Aave or Compound, you're going to inherently understand what they're doing. Now you may not understand about the exact protocol and about how you transfer the money in and all of that, but you'll get that real fast because you understand the concepts of what's going on because the concepts are the same between TradFi and DeFi as well too. So it's not new to the extent that we've developed whole new ways of doing the basics of borrowing and lending. They're still the same, but we're just doing them in a different way. And you know some have dismissed it as a bunch of people trading useless magic beans, because that's usually their self defense mechanism to say, yeah, the cognitive dissonance, that's what you're looking for, that they don't need to, they don't need to invest any time or effort in any of this stuff.

David Hoffman 1:05:35

So instead of, you know, talking about the individual, and why the individual might come over and play around in de vie, let's zoom out and talk about Wall Street as a whole. Do you see Wall Street adopting DeFi and trying to innovate or resisting DeFi? Or is there going to be a, you know, big brain drain out of Wall Street? Or is Wall Street going to actually try and like turn this ship? What do you see as like, the more likely outcomes? And how do you parse these things apart.

Jim Bianco 1:06:00

I'm going to be a little bit pessimistic and say Wall Street's gonna fight this all the way down the line until it's forced to accept it. And I'll come back to something I said earlier, I think the thing that can make everything go is stable coins. And then if you get stable coins to the point where they really start to take off in Asia, they are, you know, looking at the stable coin index, and reading some stuff from class notes, my understanding is that stable coins, turnover is about 150 a day, or 150 billion a day, it's about two thirds of all of the volume, because half of it is it's usually a pair with another coin, as well, too. But about a quarter of that is well to wallet transfers. And what you're seeing more and more, especially out of Asia is and this is an exact example that it was presented to me is a Vietnamese manufacturer owes an Indonesian supplier $15 million for raw materials at the end of the month, well, they could use the Vietnamese bank and the Indonesian bank and report to both governments. Or I can open up a wallet and you can open up a wallet and I'll send you 50 million to tether and we're done with this transaction in five minutes, for a couple of dollars as well, too. As that becomes more and more accepted around the world, Wall Street's gonna have no choice but to basically be dragged into this, as well. Because as that becomes more and more accepted, the lending and borrowing and the automatic market makers, they're going to be servicing for the basis of the stable coins, because these stable coins will be the basis for the real world application first. Second of all, when it comes to regulation, yeah, there's a lot of regulation that needs to be sorted out. But what gets me disappointed because they're looking at it the wrong way. You know, we got to stop the drug dealers, you know, the old tropes from five years ago and stuff like that. But better regulation or better ideas is how about legal recognition for a DAO other than the state of Wyoming? You know, so that you can have DAOs do a lot more. My understanding you guys correct me if I'm wrong on this is one of the reasons Visa is doing a deal with Circle is cuz it's a, it's a legally recognized corporate organization that it can have a deal with, it was afraid of the tether reserves. Well, a DAO's not legally recognized. So I don't know how they can do a deal with that other than in the state of Wyoming. But that's not enough. So if you were to do that, how about an explanation of what is a security? And what is a token? And why don't why doesn't the SEC define the two as two separate things, instead of not saying anything? So we could selectively beat token holders over the head when we want to when it suits our purpose? How about giving us a definition of that as well, too? You know, so how about rug pulls? You know, you'd like to disincentivize that. See, the problem with all of this is if you start doing that, you know, give definitions for what tokens are in and have specific plans for what pools are, then you're starting to acknowledge acceptance of it, you know, and that we're trying to help it move forward. I'm just not so sure a lot of the regulators are ready to go that way. And that's why it bothers me. They can't stop it in the long run. But boy they can make it miserable in the medium term.

Ryan 1:09:42

Jim, I was just going to ask you about Hester Pierce. She did one of our Bankless podcast episodes not long ago. She did give me a glimmer of hope that there are at least you know, some regulators in government who really want to foster this industry. And I think we've got a lot more to talk about on the regulation front. We want to kind of get your thoughts on that, particularly how Wall Street and regulators interact together, you know, this Wall Street always gets its way dynamic. But let's park that for a minute. What does Wall Street think about the fight, right? You use this phrase a couple times, Wall Street thinking about crypto as like useless magic beans, which is interesting, because that is kind of a framework for Bitcoin if you don't believe it is a store of value, new monetary phenomenon. If you don't believe in kind of the meme, back to nature of this strange internet currency, then yeah, it's just a useless magic bean. But we've had some folks on like Matt Hogan, I don't know if you know who that is from Bitwise, say things like, yeah, Wall Street and institutional investors, they don't understand some of them don't understand new monetary phenomenon like Bitcoin, but they do understand DeFi tokens. Why? Because these are capital assets that they can model the way they model equities, net present value future cash flows, what's the growth going to look like. Back to the what we were talking about with Uniswap is my myod, what a tech success story. Right? Like the Mark Zuckerberg story, I guess, just decentralized. He creates this protocol, a few 100 lines of code. Now it's doing hundreds of millions a month in volume. It's got the biggest liquidity pool of any decentralized market in the world. It's competing against Coinbase. Like, what a story, don't you want to own the capital asset behind that story? And so you're talking about like, Wall Street adoption? Wall Street likes to make money. Great, Jim, like I've heard that about them. And there's money in these DeFi capital assets. Talk to us about that. Do you think DeFi tokens are actually an easier pitch than an asset like Bitcoin?

Jim Bianco 1:12:11

Yeah, they are an easier pitch because they do understand them. And a quick word, the best thing that's happened to Bitcoin is DeFi and the thing that has helped DeFi go is that Bitcoin existed in the first place, they need each other that's the way I look at it. I mean, I believe the flipping will happen too. But yeah, to your question, they understand, they understand the tokens because it's so similar to what they've seen in this space. And ultimately, I'm in the Jeff Dorman camp, right that I could see a day in the future where a company's capital structure is not just stocks and bonds, but it's a whole variation of tokens as well, two tokens that represent assets or future liabilities, or intellectual property, or anything all along the way that they could be generated income, and anything else. Why is a trillion dollars of M&A done on Wall Street, because the traditional model of stocks and bonds is inefficient. And companies and M&A, mergers and VC firms will come in, and they'll buy these companies because they think that they can unlock value because of the inefficiencies of the current system. And again, the problem is that the people that tend to buy these companies go private, you and I can't invest in these in these private equity firms, because we're not accredited investors and we don't know who they are. And we don't have the high dollar amount minimums that we can invest in, as well too. But you break that down into a token world, and then all of a sudden, anybody can start to start looking at that value as well too. And I'm going to channel my inner Jeff Dorman again, the token world can open up whole new possibilities to a lot of other companies. Metcalfe's law with network effects. It works with Tesla, it works with Apple. Why? Because who owns an Apple product, or who owns a Tesla, probably people that also own those stocks. But if you introduced a token that represented some kind of value that was cheap, and maybe gave you a breakout meal at McDonald's, and you bought this token, and you got some, some, you know, 10% or 15% off on a meal, I'm making this up as I go along. And you participated in the success of McDonald's and its price went up, the token price went up. you've, you've become an advocate for those firm, just like the great thing that Tesla has, is what does somebody who pays $150,000 for a Tesla probably also have the stock and that they run around and tell everybody how great the company is, because they benefit if the stock goes up. Boy, would McDonald's love to have that relationship, too. They can't with the current equity system. It's shut out too many of those people that typically eat at McDonald's, but a token world could open it up to them. So there's a lot that can be done with tokens that you know, we're just scratching the surface on. And Wall Street is starting to pick up on this. You talk to a lot of Wall Streeters, you know about investing in DeFi, you'll hear a phrase picks and shovels, picks and shovels, that they all want to invest in the picks and shovels, right, they all want to be in the chart or they want to be in Chainlink, or they want to be in some other thing that like Ren or some other thing that is is is working on interoperability or something along those lines. And that's great, then that's great. And that's necessary. But why not move beyond that a little bit, and they're not quite ready to go there. But if we could get a definition of what a token is, and open up all of the use cases for tokens beyond what we've got now, you could definitely see a lot of more forward thinking Wall Streeters start looking at these tremendous opportunities. And we're just beginning with it.

Ryan 1:17:16

So Jim, this is kind of the hope right? So like David and I can't go on CNBC. But you can, like we consider you part of Wall Street as it were right? Kind of a bridge, right, Jeff Dormans. Tons of these bridges are being built to educate Wall Street on what these tokens can do. And the hope really is that there's enough wins for large corporations for Wall Street for even incumbents that are willing to kind of move first that that can fuel crypto adoption.

Jim Bianco 1:17:48

Now I want to pick up this thread because I think it's related. Just say just a quick word. The problem with CNBC or Bloomberg TV is they've had me on, and it's like they listen to you. Yeah, because the question is, so Bitcoin broke 40,000? Is it going to 50,000? Or is it going to go to 30,000? You know, and they just want to talk about the horse race. Yeah, they want to talk about the horse race of where the coin is going to go next. And when you try and bring in, you know, start talking about DeFi, in one interview I was on and I was trying to bring DeFi in the guy cut me off and he goes, do you think Dogecoin is gonna go to the moon? That's all they want to talk about. So it's going to take a while. It's going to take a while for them to get there as well, too.

Ryan 1:18:30

And maybe new media sources will arise. What do you think about that?

Jim Bianco 1:18:34

I'll say the sky is the limit at least because, you know, just between you and me when we are looking at their ratings, I bet this podcast is beating a lot of the TV shows that you're talking about. Right? Think about that David. Yeah, I think you know, because their ratings are not quite as what you think they are right now. Now they're, you know, the problem with the CNBC and the Bloomberg and the Fox Businesses of the world is they're the the economic equivalent of the Weather Channel, right. Everybody watches them when there's a hurricane, you know, when the market, when the markets blew up last year, you know, everybody was tuned in, but when the markets get quiet like they are now, you got nothing to talk about.

Ryan 1:19:15

Yeah, they're not talking about fundamentals. That's what we do every week here on Bankless. Right, right. So let's say there are enough wins for Wall Street and some of the incumbents to get on board. Because as you said, there could be some wins here. Like, can we talk about, let's pick up that thread on regulation for a minute? Because one, you understand really how that works. So in your experience, I think a lot of crypto people tend to think of the big banks and existing government regulators as not one in the same but tied together. And I want to ask you if that assumption is actually true, so like, whether Wall Street is pro crypto or not, and maybe they're kind of neutral, they're uncertain about at this phase. Let's characterize them as if they got on board with crypto does Wall Street get what Wall Street wants? If big bankers and Wall Street get enough wins here? Are these the movers and shakers who actually are able to go to regulators and make things happen? Is that how this game is played? Jim, what have you seen in your experience.

Jim Bianco 1:20:20

There is, you know, the phrase is there is a lot of regulatory capture in this business and regulatory capture in English means that, you know, I, I work at the Fed, and then when I decide to leave the Fed, I usually go to work for Wall Street. And so no one wants to crap on Wall Street, cuz it's a potential future employer. You know, and the same thing happens, you know, with the SEC, you know, if I'm an SEC guy, and I want to, uh, you know, there's a, there's a nice General Counsel job waiting for me at some bank or some brokerage firm. So yeah, you know, you want to ferret out the bad actors, but you don't want to get too, you don't want to get too tough on Wall Street, as well. I mean, GameStop is a good example of that we still have to talk about, you know, protecting everybody from Robin Hood, but not about the decision to me to stop trading, you know, stop trading GameStop on the Thursday that everything was going crazy. And who did that benefit? And what was the purpose of that? So there is that regulatory capture. There's no doubt about that. And then on the regulator side, Dan Berkowitz, a CFTC Commissioner gave what I thought was a terrible speech like two weeks ago, and basically was saying that DeFi is illegal according to the Commodity Exchange Authority Act, and that maybe we should be thinking about shutting it all down. I've got these laws, and I'm supposed to follow these laws. And it's given me a good career. And this is my reason for being is to make sure that Wall Street follows all these laws. And you guys over here in the DeFi world, you're not following the laws? Well, they're innovating. No, no, no, no. It says on page four, that this is the way it's supposed to work. And it doesn't look like you're following page four over there. So we got to shut you down, that we haven't read page four. That seems to be a big mentality that you've got onto something. Like I said, you've got the Hester Peirces and Gary Genslers. But what I'm afraid of is they are two voices that might argue for it behind the scenes. But you have to convince the Jay Powells and the Janet Yellens of the world that this is the way that they want to go. And by their public speeches, they don't seem to be ready to go there as well, too. So this is going to be the problem with regulation. You know, you've heard this, I've heard Dimon say this too. You know, I'll summarize what he said, JP Morgan, I got 30,000 pages of regulations I have to adhere to every day, go hand 30,000 pages to Hayden and tell him it's his problem. Now, he's got to follow the same 30,000 pages that I have to follow. And that's the way that they want to hopefully shut it down, they want to say you have to follow the same rules that we have to follow. And I'll give you a great example of that. So the Fed has its payment view, you know, the Fed has its payment rails, Kraken bank, Kraken bank, which is a subsidiary of the Kraken exchange, wants access to the Fed's payment rails, what they want to be able to do is transfer crypto, I'm sorry, transfer fiat. If you open an account, they just want to be able to use the Fed's payment rails narrowly to transfer money. It's out for review. And all the banks have come back with their comments to the Fed basically saying they have to adhere to every one of those 30,000 pages of regulations like we do, even though they're just doing this one tiny little thing. They just want to be able to transfer money using the Fed's payment rails. That's the way that their mentality is, that they use regulation as a moat. They use it as a moat to keep everybody out. And that's why I come back to what I said before. Without decentralization, you're not going anywhere. And you have to get decentralized as fast as you can, so that they can't reach you. And a final thought on this. I still think that when it comes to DeFi and it comes to what you're seeing in the crypto world, the US is fairly behind everybody else. And especially in Asia, and especially in the developed third world. They're ahead of us as well, too. If you look at what's going on in India, with the payment rails that they've got in India, they've got now I think it's called UCP. They're way ahead of us. And it's instantaneous payments as well, too. There's over a billion electronic wallets in the third world connected to shaky CeFi institutions. In Kenya m-pesa is a gigantic success story. It is a peer to peer, phone to phone, money transfer system. There are subsistence farmers that live in mud huts in Kenya, that are basically when they're out maybe even behind an oxen, and they need to pay for stuff they're sending the money with their phone to somebody else in another town to get something to their phone. They're ahead of all the boroughs in midtown Manhattan paying for their lattes, at this point the rest of the world is way ahead of us. They're just waiting for this, they got the apps, they got the phones, they know how to use it, they are and they're moving forward with it. And if we're going to slam down on everybody in the US, and the EU is going to follow us and slam down on everybody else, it's going to be bad. The new financial world is going to be developed in one of two ways, with us or without us. And if we're going to over regulate this and keep mumbling about drug dealers and ransomware and that we have to shut all this stuff down, then the rest of the world can just do it without us. And we'll be in a much worse position than if they do it with us. So that's why I think we're at an important crossroads when it comes to regulation. Again, I don't think they could shut it down with regulation. But don't underestimate how awful they can make it with regulation before we escaped the clutches of the regulatory reach and get to a truly DeFi decentralized world.

Ryan 1:27:01

Yeah, I agree with these takes. Mark Cuban has been talking about it, basically like his worry is the US will get left behind. And so like, you could lose the next Wall Street, it might be on Ethereum and like be distributed and Wall Street becomes irrelevant in that situation. I want to ask you this Jim. So like, how do you feel like what's your gut take on how this is going to shake out? So one possible scenario is, at some point, your government called regulators like kind of final boss, final boss raises its head and says, Ah, here's what you need to do. And then, like innovation floods outside of the US, for instance, to other geographies where it's less restrictive, and then the US kind of cools down on that. Do you think that will play out? Or do you think that there's a chance? I'm just we're just looking for a chance? I tweeted this out the other day, is there anybody in Congress who's actually used DeFi before, is there a chance that we get more Hester Peirce's who are actually open to this innovation, and they leave the US open to the possibility and to the blossoming of DeFi within its borders, what's your gut on how this is going to play out here.

Jim Bianco 1:28:30

I think it's going to end up in the long run is going to play out as a win. In the short run, let's talk about what we're trying to say straight up. Money is a public good. We're trying to turn it into a private good. We're trying to get away from government control of money. Boy, that's a very, very powerful thing, you know, the government control of money, which is why the only crowd that I detest more than the maximalist crowd is the crowd on Twitter that keeps you know, you know, kind of taunting me about how they're going to shut it down, and you're going to feel like an idiot, once they've shut it all down. And I've said I call them the Stockholm Syndrome crowd that you know, you've been a hostage for so long, you've now taken sympathy with your captors, you're now actively rooting for your captors to win. And I was like, and that makes your life better? How is the current financial system improving, well, if you're at the top of the heap, it improves quite a bit. But for everybody else, it really doesn't. So I think that there's going to be some kind of a pushback on this. Because what you're gonna hear, what they're hearing from the big financial firms, I think is we can compete like this because you've strangled us with all this regulation. And so the answer is that the Wall Street firms are gonna say get rid of this regular And let me compete with them, they're going to say go strangle them to is basically what they're going to do make it a fair and even playing field. That's what that means. That means vary them with regulations, make sure that the Uniswap Trust needs to hire 500 lawyers in order to basically operate every day, as well, too. That's what they're going to try and do. And it's up to this space to be put in a position where they can't do it. as well. I've heard some outrageous things that that regulators are thinking about, I don't know if you guys have heard this, too. But they're now talking about this idea about liability for the creators of smart contracts. So if somebody uses Uniswap for an illegal transaction, I guess they're going to arrest Hayden is what they're suggesting, or some something like that. Now, these are fringe elements within the, you know, within the anti DeFi or anti crypto world among regulators. But this is the kind of things that they're thinking about. And so, yeah, it's going to be a bumpy road. But what else is new in the DeFi world, it's already been a bumpy road, to get to this point. But really, hopefully, where it will go is let's use the Uber model . And what I mean by the Uber model is, okay, so the rideshare came up, and everybody loved it. And everybody was on the ride shares. And then the city councils and the mayors said, we have done a deal with these taxi companies that they've got these exclusive rights, we got to shut down the ride shares. And the constituents said, no, we like this, don't touch it. That's why I didn't ask for permission, right? The UX has got to get better, you got to get more people on the system. So when they push back with the regulations, everybody says, no, you leave it alone, I like it, the way it is, and you've got to get that, you've got to get people into this space. A lot more. When you get to that critical mass, then you'll be like, you know, like the Ubers of the world.

Ryan 1:32:10

Guys, what Jim is saying is a billion or bust. That's why on the mission we're on with respect to education, it's like we need a billion people on the DeFi journey in order to turn the tide here.

David Hoffman 1:32:34

There's also been one of the side goals of Bankless, and also why we call it the Bankless Nation. Because one day like there's going to be a call to arms because we are going to need the Bankless Nation to rise up and put a foot down and say like, no, no, no. Like, this is our industry like we regulate ourselves here.

Jim Bianco 1:32:50

I was gonna say, isn't there a couple of improvement proposals among some of the protocols to band together to create like an Education Fund or an education group, basically, to send to Washington to kind of walk the halls of Congress to kind of teach them what this space is about? I think that's great. The next time somebody in Washington just starts mumbling that only drug dealers use crypto, that somebody should be in their office the next day to say, let me explain this to you. Let me understand there's this thing, you know, Etherscan, and it isn't as dark as you think it is. And there's a lot of other things that about this space that you're getting misinformation about. That would be great. Because they got to be careful, look at the poker industry, right? A guy who works with me was big on the poker sites, he would say, I would be getting a check for my withdrawals from a different foreign bank every month because the poker guys thought that they were brilliant that they kept jumping one step ahead of the regulators. Then they realized what made everything go was Net Teller, which was like their version of Coinbase. They just shut that down and they ended the poker business. But do you also want to win, and you got to work within the system that we have as well too. And that education idea is a great idea to work within. Look, this is the this is the deck we have, that's the TradFi world that we have. Okay, but the answer is not that we're just going to completely dynamite it and pretend that it doesn't exist. We got to work with it, to solve to change it into what we want it to be. And if we fight it, we might wind up there. I don't think we are. But we might wind up like the like the like the online poker guys were 10 years ago. They'll just slim that sucker down. And that's the end of everything. If you have money in a poker account, it was gone.

David Hoffman 1:35:07

Shoutout to the Coin Center guys who are really the people that are working with congressmen to really illuminate the positives of this industry and make sure that this bad information stops sooner rather than later. That's definitely our spearhead for the industry with regards to regulators. Jim, as we come to a close here, you've been a journeyman of many, many market cycles in many, many different markets. And the average listener on the Bankless podcast is, you know, Gen X, Zoomer, younger folk, perhaps their first entrance really into finance. I know crypto was my first entrance into finance. And in the crypto world, we tend to get really caught up in the short term, right, we focus on the next two to six months. But as someone who's played in the markets for decades, what advice do you have for people who, you know, just haven't experienced as much as you've had in different financial markets? How can people just, you know, keep grounded? And what advice do you have for people that playing in these markets in the long term?

Jim Bianco 1:35:59

You know, I think that what they need to understand is, first of all, education, education, education, why are you doing what you're doing? What do you think you're going to get out of it? Even if it is that you're chasing some hot meme coin? Or something like that? Okay, well, what's it going to take for your hot meme coin to fall out of favor because they always do? It seems like at some point or another, do you really understand some of the things that you're saying? Yesterday, Kim Kardashian was tweeting about how Ethereum Max burned 400 trillion coins or something like that. Man, we were laughing. Does she understand what she's saying?

David Hoffman 1:36:43

I don't think so.

Jim Bianco 1:36:44

Yeah, exactly. So just don't repeat these things that you hear other people say, but fully understand what you're doing, expect a lot of volatility in new technologies. Whether it was you know, the digging of the canals in the early 19th century, you know, to the internet to what we're doing in crypto now. There is always wild booms and busts along the way. And there's always going to be some dark days. And I'll give you one quick example. Let's say it was 1999. And I came to you. And I said, e-commerce is going to be the biggest thing you've ever seen. And you said, okay, great. What are the two big plays, pets.com and Amazon. By late 2001 pets.com went bankrupt and you lost 100% of your money. Amazon stock went from $100 to six, and you lost 94% of your money. Well, then Amazon went from six to 3300. After that, we all know what happened to e-commerce later. And by the way, we now have Chewy, which is what pets.com was trying to be years earlier. So the other thing to keep in mind is that there is the concept that we've got this DeFi crypto world, it's going to grow and grow and grow. And then we've got the protocols because people said to me, well, if it's so easy, everybody's gonna make money. It's like, well hold on a minute here, you might think that I might think that DeFi is going to be the biggest thing going. But I bought a bunch of pets.com. And I bought a bunch of protocols that went to zero, because I think the majority of the protocols go to zero, but the ones that don't redefine everything, that's easy to say, it's very hard to do. Yes, Uniswap looks like it's going to be one of the redefining protocols of our lifetime. So did Yahoo. And then Google came along after that, I'm not saying there's going to be son of Uniswap that's going to be better, but I don't know that there won't be either. So keep an open mind about this stuff. And don't get married to these ideas that you know that this coin or that coin or or you know, that Matic is going to change the world. And that it's, that there's no scenario where it would never not change the world. There will be someday as well to, there always is. So I mean, that's kind of the best thing I could say is that, or is a old mentor of mine said when it comes to investing, you always want to be a renter, not an owner. A renter means you want to, you'll be willing to get out of the position when things change, because they change and you're willing to get into the position when things change, and make it more attractive as well, too. And yes, you can be a renter over a longer period of time, not just a short term speculator. But yeah, I believe in the DeFi space, I do think that a lot of the protocols will go away. Everybody thinks that. And I do think it's going to be a lot harder to pick those protocols that are going to be the giants in 10 years than it does like now because a lot of those protocols that are being the giants in 10 years might not exist today. They might still be to come as well too, because it's very, very early days.

David Hoffman 1:39:58

Jim, let's see the shirt. We haven't got a good look at the shirt yet. Classic. All right for the podcast listeners. It's the classic evolution of man. And we go also simultaneously from seashells to gold to coins to credit cards to Bitcoin. Thanks for wearing the shirt. That's an awesome shirt. I need to get one of those.

Ryan 1:40:16

Yeah, thank you, Jim. It's been fantastic to have you. Thanks so much for joining us on Bankless. I enjoyed it. Thanks. Guys, so many good lessons there. In this conversation with Jim Bianco, I was reminded as Jim was talking about Amazon and losing 94% of its value. That's exactly what we lost from the top and 2018 to the bottom, 1400 all the way to 80. We're here of course because we believe in this Bankless movement over the long run. It sounds like we are gaining allies as we go. Jim is one of those maybe, Wall Street is coming next. Some action items for you, follow Jim on Twitter at Bianco Research, great Twitter account. And he drops insights like the kind he dropped in this podcast on the regular. Also, David, how are we doing on those five star reviews? My friend? I think we need some more because we can always use some more. But what's the status?

David Hoffman 1:41:19

Yeah, well Jim says that more people listened to Bankless than watch some of the TV finance new shows that are out there. And I think we should double down on that. And if we could get Bankless to the top of the iTunes business and investing charts, that's how we would get that done. Maybe we will be hosting the future of finance commentators like Jim Bianco here, but only if we get those five star reviews. So if you could give us those five star reviews wherever you listen to podcasts, we would greatly appreciate it

Ryan 1:41:43

There you go guys. Bankless risks and disclaimers. Of course, Bitcoin is risky. ETH is risky, DeFi's risky. Everything in this space should have caution tape because it's risky. You could 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.

Transcribed by https://otter.ai


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