Submitted by QTR's Fringe Finance
This past week I had the pleasure of interviewing one of my favorite hedge fund managers, Lawrence Lepard.
Last week I also released more than 30 pages from Larry outlining his take on the macroeconomy, gold, bitcoin and the state of the U.S. dollar. You can read Part 1 of his letter, which talks about the U.S. fiscal doom loop, here and Part 2 of his letter, which describes 7 reasons why the Fed must print trillions again, here.
In our hour and a half discussion last week, we covered topics like the war in the Middle East, geopolitics, the treasury market, gold, bitcoin, a potential regional banking collapse, reasons the stock market could go up or down, and both fiscal and monetary policy.
“Just as was with the Covid thing, [the wars in Ukraine and Israel] has been a convenient way for them to print a shitload of money,” Larry said about the conflict in the Middle East.
“While you were speaking, I Googled the Reagan budget deficits. I remember starting out in business in '83 and '84, relatively early in my career,” he recalls:
“People went crazy over how Reagan initiated deficit spending. In 1983, the federal budget deficit was $55 billion for the entire calendar year. This past year, as you're aware, it was $2 trillion.”
Larry says about our worsening financial picture in the U.S.:
“By the way, you know, we're gonna have to start thinking about what comes after, you know, a trillion. I mean, I think it's a quadrillion. And, uh, because, you know, at the stage, at the rate that we're going, it is becoming exponential. And that's, of course, why I believe that this monetary system is doomed. It's just— there's— it's absolutely doomed. I'm— I hate to say that, and I'm not trying to be a doomsayer or fearmonger. I just think it's basic math.”
“There appears to be zero fiscal restraint in Washington D.C. They are behaving as if there’s no consequences but the 10 year is saying ‘oh, there will be consequences, alright,’” he adds.
Larry also talks about the bond market and treasuries. Talking about Bill Ackman covering his bond short, Larry said:
“I think he, um, I think he sees that the bond is very overextended, and he's playing for a bounce, assuming the economy is going to slow down. And I don't disagree that that could happen. I mean, some of the very good technical analysts that I follow suggest that, you know, the bond— the long bond, which, you know, the interest rate almost got to 5%— in fact, it did briefly get over 5% on the ten-year, you know, that could drop back into the low fours for a little while before turning and then going much higher.”
And ultimately Larry thinks treasury yields are going higher:
“I think, over the longer term, interest rates are going much, much higher. And the reason I think that is, I think inflation is not subdued, and I think that people are going to lose confidence in these bonds and they're not going to want to hold them. So, um, how long do you think that takes to play out? Uh, probably within the next six months to a year, I mean, I would expect that.”
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Larry believes that gold and bitcoin will be the safe havens for years to come:
“As Luke Groman says, I mean, we're starting to look like a third-world country, and that's really the biggest development that's taking place. And that's where, and you can see it in sound money. I mean, you know, real interest rates have gone up 500 basis points in the last year, 18 months, and yet gold is still very close to its all-time high. And Bitcoin has done quite a nice job of recovering out of the hole that it dug after FTX blew up. So, um, I think people are starting to figure out that this issue.”
“But the point is, as more and more people come to realize that they can never stop printing money, they can never stop debasing a currency,” he concludes.
“The two obvious areas that are going to reflect this are the price of gold and the price of Bitcoin, because they're the two sound money alternatives. So as those assets appreciate, more and more people are going to think, ‘Jesus, I'm the sucker here, right? I'm getting paid in money, and I know that it's not going to hold its value.’ If they have any savings, they feel compelled to invest them into one of these two assets. As those assets go up, nobody is willing to save in Treasury bonds, and the cycle continues: rinse, wash, repeat.”
Finally, Larry concludes, talking about distortions in markets from central planning:
“We all know, and I think we all believe—even Keynesians would admit—that free markets provide the highest and best way of allocating goods and services and providing prosperity. You don't do it with communism; you do it with free markets. By setting the rate, by having 12 policymakers and 400 PhDs at the Fed who set the interest rate, that's not a free market. That's the Politburo saying grain should be this price. And when they did that back in the '60s and '70s, they either had way too much grain or way too little grain. Right? Because the farmers figured out, well, it works or it doesn't work. So letting a bunch of elected or appointed officials set the price of the most important good—the base-level good, which is money—in the economy is just a recipe for disaster.”
Here is the full discussion:
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