The Rise Of Fiscal Dominance In 2024 & Beyond | Lyn Alden

Market Overemphasis on Rate Changes

• The market is overly focused on small rate cuts or hikes and their timing.
• A more significant variable to consider is fiscal policy.
• Unemployment could rise to 5%, and some areas of the economy might look recessionary while others remain strong.

Introduction and Sponsor Mention

• The episode is sponsored by Mont, a compliance-focused financial institution.
• The host expresses excitement about the guest’s work and the opportunity to connect.

Muted Rate Hiking Cycle

• The U.S. has more fixed-rate debt compared to other countries, making rate hikes less impactful.
• Smaller markets like small businesses and commercial real estate were more affected by rate hikes.
• The U.S. federal government has a shorter average debt duration, leading to higher interest expenses and deficits.

Potential Muted Rate Cutting Cycle

• Future rate cuts may not be very stimulatory due to the lack of high-rate debt to refinance.
• The market is overemphasizing the importance of small rate cuts or hikes.

Economic Slowdown

• High rates are starting to impact the private sector, especially weaker areas.
• Unemployment and continuing claims are rising, indicating a softening labor market.
• Consumer spending is softening, particularly among higher-income individuals.

Divergent Fiscal and Monetary Policies

• The U.S. is experiencing divergent fiscal and monetary policies, with high deficits and high interest rates.
• Different sectors are impacted differently based on their exposure to fiscal deficits or short-duration debt.

Recession Improbability

• A recession seems unlikely due to high fiscal deficits.
• Fiscal austerity could potentially lead to a recession.
• Recessions in emerging markets often look different, with ongoing growth but inflationary pressures.

Real vs. Nominal Economic Performance

• The U.S. could experience a recession in real terms while nominal GDP remains decent.
• Unemployment could rise, and some areas might look recessionary on a real basis.

Economic Conditions and Market Impact

• The economy is experiencing fiscal dominance and large deficits.
• Energy prices and housing affordability are significant concerns.
• Unemployment could rise to 5%, potentially leading to a recessionary environment in some sectors.
• Despite these issues, nominal GDP might still appear decent.
• Upcoming Fed rate cuts are expected, with a 100% probability for September.
• Market rotations from tech to small caps have been observed, influenced by floating rate debt.

Market Predictions and Investment Strategies

• Small caps and cyclicals might receive support during a stagflationary period.
• High-quality banks are trading at low earnings multiples due to anticipated credit losses.
• Midcaps and value-oriented large caps are preferred for rotation trades over small caps.
• Mild Fed rate cuts are expected to have limited impact on the majority of the economy.

Fiscal Policy and Election Impact

• Fiscal policy will be crucial in the next year, influenced by election outcomes.
• Fiscal dominance is seen as a spectrum, with the US entering it around 2017-2018.
• Deficits as a percentage of GDP have been increasing even during economic expansions.
• Interest rates no longer offset high public debt, leading to a fiscal spiral.

Tokenization and Blockchain

• Mantra is a compliance-focused L1 blockchain onboarding financial institutions into web 3.
• Mantra is among the top four RWA projects on CoinGecko.
• The blockchain uses Cosmos SDK and offers IBC interoperability and CosmWasm smart contracts.

Fiscal Dominance Definition and Measurement

• Fiscal dominance is defined by large structural deficits compared to private sector debt issuance.
• The US has been in fiscal dominance since around 2017, with Japan being further into it.
• High public debt levels were previously offset by falling interest rates, which is no longer the case.

Election Outcomes and Policy Implications

• Potential tax cuts or hikes are a focus, with corporate tax cuts being permanent and individual cuts set to expire by 2025.
• Election outcomes will influence the likelihood of tax cuts being extended or expiring.
• Larger deficits and lower taxes could exacerbate fiscal dominance.
• The Republican party is currently more favorable towards digital assets, which could impact regulation.

Political Influence on Regulation and Trade

• Younger senators and representatives from both parties are more open to embracing new financial policies.
• Regulation and views on trade tariffs and currency differentials can be influenced by the political party in power.
• A second Trump term might see a more aggressive approach to tariffs and currency policies.

Trump’s Stance on Bitcoin

• Trump has shifted to a pro-crypto and pro-Bitcoin stance.
• There are rumors that Trump might announce a policy to buy Bitcoin as a strategic reserve asset.
• The concept of a reserve asset is different from a reserve currency.

Current Reserve Asset System

• Historically, countries held gold as a reserve asset and issued currency against it.
• In the modern era, US Treasury securities have replaced gold as the primary reserve asset.
• Countries use reserve assets to protect their currencies during times of weakness or to keep their currencies weak for competitive advantages.

US Reserve Assets and Potential Policies

• The US has low exchange reserves relative to its economy, mostly in gold.
• The US could strategically devalue the dollar by accumulating reserve assets.
• There are rumors that the US might add Bitcoin as a reserve asset, which would be an unusual policy.

Bitcoin as a Reserve Asset

• Developed markets holding Bitcoin as a reserve asset would be a significant milestone.
• Bitcoin’s supply growth is lower than gold, making it an attractive asset.
• The potential for the US to hold Bitcoin could remove some of the tail risks associated with it, making it more valuable.

Bitcoin and the US Dollar

• Bitcoin proponents are often accused of being anti-dollar, but holding Bitcoin could complement the dollar.
• The current structure of the dollar system benefits certain sectors like government and Wall Street but may harm manufacturing.
• There is a case to be made that the dollar’s reserve status is de-industrializing the US manufacturing capability.

Dollar Reserve Status and De-industrialization

• The dollar reserve status may be de-industrializing U.S. manufacturing capabilities.
• Benefits of the current dollar system are not evenly distributed; government and Wall Street benefit more than manufacturing and defense sectors.
• De-industrialization affects national security and supply chains.

Pro and Anti-Dollar Sentiments

• Arguments against the dollar often stem from its association with U.S. power or its impact on the industrial base.
• Pro-America narratives may embrace Bitcoin as an alternative to the dollar.

Crypto and Bitcoin Mining

• Positive views on Bitcoin mining and retaining crypto assets could become more prevalent.
• Upcoming events like Permissionless 3 in Salt Lake City highlight the growing interest in the crypto scene.

Oil and Energy Markets

• A decade of underinvestment in energy has led to higher oil prices.
• Trump’s ‘drill baby drill’ policy aims to increase domestic oil production.
• Biden’s administration has not been as anti-energy as expected due to inflation concerns.

Economic Factors in Oil Production

• Economic viability is a key factor in oil drilling decisions.
• Offshore oil production is expected to make a comeback over the next decade.

Investment Strategies in Energy

• Investing in oil companies is generally favorable, but spreading jurisdictional exposure is recommended.
• Republican administrations may reduce tail risks like windfall taxes for U.S. energy companies.

Natural Gas and Export Facilities

• Increased export capacity for U.S. natural gas could narrow the price spread between domestic and foreign markets.
• Republican administrations may be more favorable to greenlighting export facilities.

Strategic Petroleum Reserve

• The Strategic Petroleum Reserve has been politicized and used as an economic tool rather than a last-resort reserve.
• The reserve is currently low, limiting its capacity to influence the market in the near future.

Energy Market and Strategic Reserves

• The reduction in strategic reserves has limited capacity for future use.
• This reduction is seen as a bullish catalyst for energy markets.
• Previous semi-bull markets in energy were muted by the drawdown of reserves.

Inflation and Asset Classes

• The speaker is constructive on the oil and energy space, indicating a view of higher inflation.
• Long-duration treasuries are seen as a secular bear market due to volatility and low return potential.
• A three-pillar portfolio is recommended: stocks, shorter-duration bonds and cash, and hard assets like energy producers, gold, and Bitcoin.

Copper and EV Market

• Long-term bullish on copper due to construction and development in emerging markets.
• EV adoption is expected to continue globally, even if the US slows down.
• The speaker is less bullish on EVs compared to others, focusing more on dense energy sources like oil, uranium, and natural gas.

Nuclear and Uranium Market

• Long on uranium since 2020, with significant performance.
• Utilities are expected to increase uranium inventories.
• Small nuclear reactors present an interesting potential.
• Uranium is seen as a non-correlated, long-term investment.

Conclusion and Contact Information

• The speaker’s work can be found at lal.com and in the book ‘Broken Money’ available on Amazon.