Greg Foss, a 3 decade veteran of fixed-income securities specializing in HY (High Yield) joins me to talk about debt, bonds, government debt, and why Bitcoin is the answer. 

• Primer on debt instruments
• Interest rates and bond bull market over decades
• Craziness of debt markets
• Interaction between debt and equity
• Could govt repudiate the debt? 
• Could we outgrow it? 
• Why Bitcoin is the best asymmetric trade

Links:

• Twitter: @FossGregfoss 
• Paper: https://t.co/OK4dDj27Io?amp=1

Sponsors: 

• Swan Bitcoin
• Hodl Hodl Lend
• Compass Mining
• Unchained Capital (code LIVERA)
• CypherSafe (code LIVERA)
• CoinKite.com (code LIVERA)

Stephan Livera links:

• Show notes and website
• Follow me on Twitter @stephanlivera
• Subscribe to the podcast
• Patreon @stephanlivera

Podcast Transcript:

Stephan Livera:

Greg welcome to the show.

Greg Foss:

What a pleasure to be here. Thanks for having me.

Stephan Livera:

So Greg, I’ve been watching some of your work and I think it’s really great that you’ve been coming at this from the perspective of a man who’s been in the bond market directly for what is it, three decades and telling your experience from that, and then relating it into the Bitcoin world. Can you just tell us a little bit about yourself and how you got here?

Greg Foss:

Sure. so I’m old. Okay. I’m 58 years old and I have been trading risk for over 30 years, as you mentioned. My focus has always been on credit and credit risk and specifically high yield bonds. I was actually Canada’s first high yield bond trader that took principal risk positions. Meaning if a client wanted to sell a risky bond, rather than taking an order. And as an agent, trying to find another buyer, our investment bank would buy it as principal and take that risk. Obviously, if we were buying it with our own capital, we thought it was a good investment whether or not we were able to find another buyer or not. So my focus has always been on credit risk. And why is that? I guess I got to go back to first principles.

Greg Foss:

I was an engineer at McGill university, Montreal, Canada. I decided about two weeks into engineering that I knew I didn’t want to be an engineer full-time upon graduation, but I didn’t really know what else I wanted to be. And the truth was I enjoyed the challenge of the mathematics and in my fourth year at McGill when my focus at McGill was sports, when that was over, I said, boy, I better find something to do. And I decided I was going to apply for an MBA in the United States. I would apply in Canada as well, but I really wanted to go to the states and I was lucky enough to be accepted at a school called Cornell university, which is about a five-hour drive from Montreal, upstate New York, really great school Ivy league institution. And I would not have gotten in, I was an American citizen while I had the marks, I didn’t have any work experience, but the fact was, they were building a international business school.

Greg Foss:

They wanted applicants from outside of the country. So I came in through the back door, which was everything happens for a reason, but man was I lucky? So I went and I focused on finance down there. And that was pretty interesting. I actually still remember the days though, when in an exam, if there was a calculus question and all the other students would have like six books, how to solve an integral or whatever. And I’m like, my God, you don’t need textbooks to tell you this is second language for engineers or first language rather. So anyway, I came back, I had a chance to work on wall street. But I decided no, I was going to come back to Canada. I worked for Canada’s largest financial institution called the Royal Bank of Canada. And it was a great eye-opening experience because you realize everything you learn in school means nothing.

Greg Foss:

Because when I started in 1988 at the Royal Bank of Canada, Canada’s largest financial institution was insolvent, and I was working directly for the CFO. And literally I said to him, and he’s a great guy. I said Emil, we have a problem. And he goes, “I know don’t tell anybody.” I’m like “what you mean bank analysts don’t even know?”. And hence and Royal Bank of Canada, wasn’t in it alone, all money center banks in New York. In fact, the global financial markets were suffering under the weight of lesser developed country loans, LDC debt of which many countries had defaulted a lot of them in south America. So Brazil, Mexico, Argentina had all defaulted and treasury secretary Nicholas Brady came with an ingenious plan. So the banks would not have to write their loans down to the market trading price. i.e. Just for your listeners, what insolvency means is if the value of your assets is less than the value of your liabilities, you are not in default because you haven’t missed any interest payments on any loans, but the market to market basis, your book value of equity has been vaporized.

Greg Foss:

And so I looked at this and I’m like, how is it possible that the global financial institutions can actually be insolvent? Yet people still have the comfort of placing their deposits in these fine institutions. And everyone knows the answer, too big to fail, implied backstopped by federal central banks rather. And I said, well, this is, this is my introduction to the fiat Ponzi. And that was 1988. And I just, I didn’t question it. I just said, okay, it is what it is. If the Fed and central banks can print money, have the confidence to to keep their bank, their deposits in a very levered financial institution system. But 1988 led to 1998, which was long-term capital management. I traded through that. I’m like, wow, this is crazy socializing losses on wall street again. You know, we had Nobel prize winners at Long-term capital management, Nobel prize winners that placed 90:1 leverage bets based on set six or seven years of volatility statistics.

Greg Foss:

I mean, it was ridiculous yet this is what was allowed to happen. And again, socialize losses within the financial system. So fast forward — what was next — event I lived through that was absolutely the scary was the great financial crisis in 2008-2009. So everything has in my career has been a focus on examining leverage in system, examining the banking system that most people don’t understand. And 2016, I found Bitcoin after about at that time at 25 year search, my first reaction, like everyone’s oh, so, a Bitcoin nah, nah. That Bitcoin it’s nothing. And then you peel a layer of the onion, you see the blockchain in action, you see the math and code 21 million. I don’t need to tell your listeners all that. And I’m like, okay, I have finally found the solution to the fiat Ponzi.

Stephan Livera:

Yeah, yeah. And so it’s like we have been living and for basically for all of us, pretty much our entire living lives, we’ve been living under this fiat money regime, and that has been creating all of this additional credit and debt that would not have otherwise existed. And so we’ve seen these and perhaps one way to think of that is that the markets for government debt has been more accessible for them than it quote unquote, should have been. So maybe that’s one way to explain it and as you’d probably be able to explain this very well as we’ve seen this, multi-decade bull market for bonds because interest rates have been coming down over time. Could you outline a little bit about that dynamic for us?

Greg Foss:

Yeah. Great question. So when I started, okay I started trading for my personal account before I graduated from university, but let’s just take my professional career. In 1988, tenure interest rates in the United States were about 12%. They had come down from 20% in 1982 when Volcker turned the screws on on inflation. So from 20% in 1982 to one year ago, when 10 year interest rates bottomed at, in the United States at 60 basis points, 0.6 of 1%, there’s basically been a 40 year bull market in bonds. And what does a bull market in bonds mean? Well, a bond is a fiat contract that does not change the coupon. Hence the name fixed income, the coupon is fixed. So the coupon doesn’t adjust. What adjusts is the price of a bond in order to reflect the open market level of interest rates.

Greg Foss:

Well, everyone thought they back in 1982, can you imagine buying a 30 year government bond that had contractual coupon of 20%? That looked pretty juicy, right? You know, that was, what did that mean? Well, that meant the equity markets would have to have anticipated rates of return since equities are more risky, of 20% plus you know, perhaps they could have done that over a 20 year period, but no bonds have outperformed equities on that basis just because it started with a contractual coupon of 20%. And now we are at 1.4% in the 10 year and it is a completely different paradigm for fixed income managers for any risk manager only because of mathematics. Okay. You don’t change that coupon, that coupon is fixed. The price of the bond will change to reflect the risk in the market.

Stephan Livera:

Yeah. Yeah. And this is bringing me back to finance classes in university where they’re teaching us, okay. The bond price and the yield are inversely related, right? As the yield comes down, the bond price has to go up. And that’s essentially been the dynamic for these multi decades, which is kind of crazy when you think about it.

Greg Foss:

It is cool. But here’s a neat thing. I’m going to relate bond pricing to physics. Okay. Just for your listeners. And some of you may zoom me out now, not zoom me out, but turn me off. But here’s the neat thing. You remember your physics formula where distance equals velocity times time, plus one half acceleration times time squared. Remember that? Well, a bond price is this, the change in the price of a bond is negative duration times change in interest rate. Plus one half convexity times change in interest rate squared. So bond pricing and physics are related by the same Taylor series formula, which at the end of the day, it should be second nature to people given they all understand the distance formula from physics. Bond pricing, but no everybody gets glassy-eyed when you start talking bond prices and changes in interest rates, it’s almost like what? Convexity? Duration? Well just think then of convexity as being acceleration and duration as being velocity. Okay. First there is a derivative, second derivative is that’s as granular as I’m going to get, but don’t overthink things. Bonds are actually a beautiful mathematical formula, nothing more, nothing less. Hundred percent defined by mathematics, no subjectivity, because the coupons are fixed. It’s a contractual return. The only thing that can happen is they fail on their contract.

Stephan Livera:

Yeah. Interesting. So, yeah, like that’s the thing, it’s this little contained system. And then when we’re trying to analyze this from an economic perspective, then we have to think about, well, what is the value of the currency, right? The underlying currency that we’re dealing with and that that’s kind of where things can change, right? And because based on that, and people’s subjective valuation of that. And I think, I guess zooming out as well. Another way to think of these, well, particularly government bonds is it’s essentially people are buying this instrument and it’s paying out the coupon or the maturity value. And essentially it’s a promise that the government is going to tax it’s taxpayers, the citizens and the residents in the future, and then pay you the bond holder, those returns. That’s essentially what’s going on. But it’s like this, especially when you’re talking about these long 30 year bonds, it’s a real generational compact, isn’t it? it’s a real sort of sense in which there’s resources being transferred from those future taxpayers, right?

Greg Foss:

So a hundred percent correct, except when you can print money. Okay. So it would have been ideal if there wasn’t an ability to print money and you had to balance the budgets, as well as your debt service obligations, based on the revenues that you take in from your taxpayers, that would have been an ideal scenario that would have guaranteed, that governments would have kept their deficits under control. However, enter the ability to print money, enter the ability to pay someone back with manufactured money that wasn’t part of the original contract. So here’s the dilemma that we have now, you will lend the government and the respect of G7 nations still are in fairly good shape. Canada’s not really in that good shape, to be honest, but even Canada, you have a high degree of probability. If you lend them a hundred dollars today, for 10 years, you will get your coupons semi-annually and you will get your hundred dollars back in 10 years.

Greg Foss:

The problem is that now that they’ve printed so much money and debased their currency, the purchasing power of that hundred dollars in 10 years will be far less than the purchasing power that you have today. That’s a problem. It’s pure mathematics, but every fixed income manager needs to be aware of that. It needs to hedge that 100% certainty of debasing of the currency. It didn’t used to be a hundred percent certainty Stephan because the debt balloons had not expanded to a point that they have today. Now it is a hundred percent certain that fiat currencies will debase because of the total global debt, which is about four times total global GDP or your tax base, which you just laid out very eloquently. That’s your tax base. Well, if your total global debt is four times the size of your GDP, and let’s put a coupon on that debt of, let’s say 3%, because you know, you have US 10 years at one and a half percent or 140 basis points.

Greg Foss:

And then you have high yield debt. You have all sorts of other structured products, et cetera. The average coupon, if that’s 3% on the blend of your numerator, four times 3% is 12% growth in the debt balloon just because of the coupon, not even including all this other deficit spending. And it’s almost impossible for global GDP, the denominator to grow at 12%, just to keep up with the numerator, the organic growth of the numerator. Therefore they need to print money to solve that debt spiral. Now the worst part of all this fallacy is that governments now are printing more money and deficits are also growing because of stimulus. And they say, well, we’ve paid for this. We’ve already paid for this stimulus package. What a crock of baloney. Okay. You don’t pay for something when you buy it on credit.

Greg Foss:

Have you paid for that already? When you go to the store and you buy something on your credit card, have you really paid for that? No, you’ve just entered into a contractual obligation to pay for it in the future. But when you can print money, that gives you an ability to let’s say, paint over the reality of the situation. The problem is what if people finally call the bluff and say, you know what? I don’t want to keep rolling my debt in this continuous expanding balloon. I’m going to stop. I want my money back today. And if enough people say that i.e. a bond auction fails or something of that nature, wow, this could be ugly quickly. And that’s why you need to hedge against the contagion that could happen in credit markets. If somebody finally said, enough, that’s it, I’m not, I don’t want to lend a hundred bucks for 10 years to get $65 of purchasing power back and people who don’t do their math well you’re a prisoner of the debt spiral and people that do do the math, but don’t know the solution they need to find Bitcoin.

Stephan Livera:

Yeah, exactly. And it’s funny because people have different conceptions of, well, let’s put it this way. There are different ways that the system can resolve, right? One of them is, as you said, a lot of money printing, another other way might be a more explicit default. And maybe the argument is like, if the government engages in a lot of money printing or the monetary system does a lot of money printing. So in that example, we might think of it like there’s different ways the central bank might do the print and spend, or it might be more like commercial banks and retail banks loan and spend and in their creation of loans. That’s creation of new money that is also contributing to this whole debasement. Now the other angle, the other way, potentially. Now I’m kind of just devil’s advocate here. Right? What if governments repudiate the debt? They just say, all right, well yeah. We’ve built up all this debt and yes, it’s four times our GDP. I mean, just globally imagine, we’re just not going to pay it back. What happens then?

Greg Foss:

Can you imagine what happens then? I can’t even imagine. So let’s hit your first point implicit versus explicit default. I argue that 1971 when the US arbitrary, not arbitrarily, but unilaterally went off the gold standard. I would argue that’s an implicit default. Okay. an explicit default, which is your second choice where we’re just not going to pay. Like these are contracts of law, right? Does this mean that the world unravels on the basis of a contractual obligation? If someone just says unilaterally, well, that’s it I’m not paying, I don’t know what that would do to the world. And I don’t even want to think about what it would do, but if people and any politicians that throw that out I would argue that’s a dangerous statement because they’ve never sat in a chair that manages risk.

Greg Foss:

Okay. And that’s the important thing when you compare academic thought versus actual risk management thought where you’ve sat in a chair, let me tell you, in 2008-2009, I was working at a hedge fund. And we actually had this figured out and we were making a lot of money because we were short the right things. And we were long the right things, but it was still the scariest time I’ve ever been involved in markets because every single point of confidence was getting destroyed. Okay. Lehman brothers failing was just an absolute ground breaking event because a financial institution that was termed as too big to fail was allowed to fail. That’s one financial institution within one country. Albeit the most powerful country in the world that was allowed to fail. I just can’t imagine what would happen.

Greg Foss:

And I sat there and let me tell you, okay, so I was scared. I literally was riding the train to work in March of 2009. Wondering if this was the last day I was going to go to a financial trading desk many times. And if they got itself together and the fed did exactly the right things when they had to, with these things called TARP and all these programs, the problem is they never paid it back. They pulled forward the future, but never paid it back. And every time they try to using the quantitative easing and taking their foot off the gas there was a taper tantrum. Gosh, I don’t even know Stephan. I have no clue what would happen, even if a major state like California decided to repudiate the debt, let alone the country. So I suppose it’s possible that I will…

Stephan Livera:

Yeah it is crazy implications.

Greg Foss:

I think the world would unravel in a second. Okay. based on my experience in 2007 through 2009. Credit makes the world work.

Stephan Livera:

Yeah. Like walking through one of the implications of that. So remember for a lot of people, their assets, their investment portfolio has equities and bonds in it, right? Like lots whether they are retirees or people saving for retirement in their superannuation or in the US it’s 401k. And I’m sure it’s, I don’t know the term for Canada for the Canadian equivalent, but essentially all these people are saving chipping in and they have been either advised to do to have some allocation to bonds and to have some allocation. And because of that, there’s all these people who are just going to would just lose all of that value instantly, right? So

Greg Foss:

When the equity markets, so the equity market, if you thought 666 was the load that it put in the S&P 500 in 2009 I will almost guarantee you in, and I don’t even want to play this game that the S&P would go to under 100 points if it even had any value at all. Okay. Because remember credit is a prior claim. And if a prior claim doesn’t have a hundred cents on the dollar, the equity is worth zero. Okay. And now the government doesn’t have equity behind it, but what does it have? It has the citizens. It has its obligation to the equity or to the everything that’s built in the nation. And if they stop paying the foundation of a principle of risk and the pension funds, as you mentioned, many of them are men. Not many of them, all of them are mandated to hold a certain amount of fixed income. It’s would blow me away. I just have no idea what the world would look like. And I suggest that we hope that we don’t even have to discuss it, let alone experience it.

Stephan Livera:

Yeah, of course. And an interesting point, you were touching on there as well, is the relation between debt and equity, right? So just for listeners, maybe if you’re not a business commerce finance guy, right? So equity represents our ownership share of a company. And typically that might be paying dividends, or it might entitle you not always, but to a voting option on what the company does depending on if it’s public and so on. And then on the debt side, obviously that’s you’ve got to pay out that company has to pay that out. And a lot of companies nowadays dependent on debt, but there’s also that relation, as you were saying, in terms of, I’m not sure the correct term, but essentially seniority of the stack. Right? So generally people say debt.

Greg Foss:

The priority of claim.

Stephan Livera:

Yeah. That’s the one. So debt is senior to equity. So meaning if there’s some problem, the person who has a debt claim is getting made whole first. So could you outline a little bit of that relation and how that plays out in terms of the bond market and the equity market relationship?

Greg Foss:

Great question. Thanks for that question. So that’s what I spent my life doing. Okay. Because I did not trade that much government debt. I traded the government debt when I needed to hedge an interest rate position, but I did not have viewpoints on government debt as credit. Everyone just assumes that those are the highest credits. And, but let’s talk about a corporate obligation. So as you mentioned, bonds rank ahead of equity in the priority of claim in the event of something bad, happening, bad happening means they are not able to pay their obligation, their contractual obligation on the debt. Well, unless that debt is worth a hundred cents on the dollar, the equities were zero. Okay. That’s very simple. Now think of a company that’s doing well, that has bonds outstanding and equity outstanding. It’s a publicly traded company with debt and equity.

Greg Foss:

When I say doing well, let’s say their projected cash flows are coming in stronger than anticipated. Well, the fixed income obligations that they have, the bonds outstanding, that’s a fixed coupon. They don’t increase the coupon on the debt because they’re doing well. No, that accrues to the equity holder and they are then able to pay, as you said, dividends to the equity holder, or they can go out and purchase other return assets that enhance the value of their enterprise value, being a combination of the debt and equity. That’s what they’re allowed to do. That’s their fiduciary responsibility to equity holders is to grow the wealth of the equity. Now, the bonds are a form of a contract that enhances enterprise value when things are going really well, meaning you can pay a 4% coupon on your bond, a 4% yield. When you think you can invest in things that will return 4% or higher, and those returns accrue to your equity holders.

Greg Foss:

So that’s all, when things are going well, when things aren’t going well, and let’s say your cash flows come in far lower than anticipated. Well, your equity price is going to be going down because the equity analyst who some of them aren’t that dumb, okay, there are some good equity analysts out there, but most of them are dumb because most equity analysts don’t even look at the value of the bonds or the trading price or anything before they do their equity analysis. It’s actually crazy, but that’s just the way the equity world works. It’s getting better. There are good analysts out there that do that analysis. But the point is, if the cash flows are coming in under projection and they don’t increase the fixed income coupon and they don’t decrease it either, meaning they still have to pay that 4% coupon.

Greg Foss:

Well, what happens then if you become free cash flow, negative. Meaning, wow. You know, you’re burning through cash. You have this debt obligation, out there chances are the equity’s getting repriced lower as the bond as is their bonds. And if their bonds were issued and they usually are issued at a hundred cents on the dollar or par for a 4% coupon, the market will be saying, oh, that 4% coupon is not good enough to reward me for the risk of this company. I need 6%. I need 8%. Well then again, it’s the price of the bond goes down. It’s not because of interest rates pushing it down though. It’s because of the credit quality, okay, same bond pricing formula, but the price is going down because they need a yield that will reward them for the risk of that counter party, not making whole on their obligations.

Greg Foss:

And that happens all the time to the tune of a default. And that’s all that happens. What corporate bonds have a component it’s an expected default loss. The problems come into play when unexpected losses come in Stephan. And these unexpected losses are caused by caused by things like exogenous events you know, contraction in liquidity throughout the system. So always look to the bonds first for a true evaluation of what the credit or the enterprise value of a company is. Equity analysts are just, they’re the world’s greatest optimists, equity analysts believe that trees grow to the moon and that’s fine, but they’re usually wrong. Okay. They’re usually wrong. Always look to the credit markets first.

Stephan Livera:

Yeah. Interesting way to put it. Yeah, I like that. So thinking back to equity analysis classes and things, the fundamental way people might think about things is what people, traditionally, things like DCF discount cashflow. So they might think, okay, this company is going to return whatever, $10 million a year for the 10 years. And then I’m going to take my interest rate and think of that as my opportunity cost of capital and then divide 10 million. So 10 million for one year divided by one year of the interest rate and 10 million divided by two years worth of that and so on and so forth, and then build up a value. And then that’s one way to think about equity valuation. And then as you’ve correctly said in the bond world, in the fixed income world, we are thinking of it more about that company. How credit worthy are they? How able are they to make their payments at the time they come through? And obviously there’s a relation there because if that company now is very unprofitable and not making cash, well, then they’re a credit risk. And so that should make us more wary of buying that bond, or that company’s if it’s a company buying that company’s bond, correct?

Greg Foss:

A hundred percent. There’s credit metrics out there, very simple to calculate credit metrics, things like EBITDA, interest, coverage ratio. So EBITDA is a number for your listeners. It’s a calculation is earnings before interest taxes, depreciation and amortization EBITDA is essentially your pre-tax cashflow before interest. Okay. Pre-tax cashflow. Now, you don’t deduct interest from your DCF calculation because then you’d be double counting the discounted cash flow, essentially accounts for the interest rate. So that’s why you use EBITDA. And then in the denominator is your interest expense. So a company with 10 times the amount of cashflow to interest expense, you’d say, well, that’s pretty darn solid, right? And it’s true. That would be a highly rated corporation, a AA credit, for example. And then you get down into the high yield area where I specialized and EBITDA interest coverages of less than three times is typical for the high yield bond market.

Greg Foss:

Okay. Which means you only have three times as much cashflow as your coupon on your debt. All right. Well, that’s interesting, right? And what happens if you actually have negative EBITDA interest coverage, meaning or not negative, but less than one times. Well, I hate to say this guys, but that’s where your fine governments are right now. Okay. They don’t even have in many cases, the amount isn’t that crazy? Because if they were a high yield borrower, they would be ranked or rated solidly as triple C type of credits. Blows your mind? Yes. Should it? Yes. For a credit guy, who’s done this for 30 years. I’m like so many people have no clue. And the only thing that bails them out in the eyes of the rating agencies is their ability to print money. Okay. Full stop. That is the fiat Ponzi in action.

Stephan Livera:

Yeah. I mean, you anticipated my next question because I was going to ask like, okay, let’s break down the difference now between corporate credit and then government credit. And as you were just saying, they’re getting this special privilege, right? It’s seignorage it’s this ability it’s they control the monetary system or they intervene in the monetary system to tip the scales in their favor. And so if we look at governments around the world that the dirt is going crazy, oh, one other, here’s one other one that I wanted to get your response on. Right? So another one that people might say, if I’m an establishment Fiat shill, I might say, look, Greg, look, we are actually just going to outgrow the debt. You see, our economy is going to grow. And that is going to make us all fine. What would you say to them?

Greg Foss:

They failed math. Well, they failed math and I just, I walked you through that when your numerator is four times the size of your denominator, which is growing yourself out of, remember, I told you, you just needed to grow at 12% annually across the world, just to keep pace with your interest obligation, let alone. Okay. So you’re going to grow yourself. You’re going to grow yourself at 25%. Are you okay? That’s fantastic. Let’s see you guys grow at 25%. You guys can barely even grow at 7% after the most — the global pandemic that shook the world to its foundation. Are you going to grow at 25% for the rest of time? Stephan, no, you are not stop fooling yourself. Do the mathematics and understand that it is a mathematical certainty that you will need to print money for the rest of time to solve this debt spiral. Now I hope this debt spiral does not turn into a death spiral, but in corporations, these debt spirals frequently do turn into death spirals.

Stephan Livera:

Yeah. Yeah. And so for listeners who aren’t familiar, it’s often in the large well-developed economies, something like 3% growth is seen as good, right? That’s like good growth. And so basically the levels to even hit sort of seven or 8% is kind of like those really high-risk emerging markets sort of thing. And even that, it’s just insane to think that these governments are going to grow their economy by 12%.

Greg Foss:

It might be one time. Yeah. It’s impossible Stephan. And let’s agree. They didn’t in the world of statistics. It is with 99% confidence that I say it is impossible for it to happen. Okay. I’m 99% certain that it is impossible for it to happen. And I’m a hundred percent certain mathematically that leads to accelerated debasement of the fiat currency.

Stephan Livera:

Yeah. Yeah. And I’m also wondering as well, you were touching on this earlier that some pension funds or probably many pension funds are mandated to hold these fixed income instruments. And I think this is probably the case in many cases or in many places around the world where for regulatory reasons, or for some form of practical reason or the way the system is constructed, people have to hold some of these bonds. So I guess one other question people might be thinking is, well, what if the government mandates more bag holders, right? They sort of mandate more and more people to hold their bag?

Greg Foss:

Well, and I mean, to the extent that it’s a closed system that money would have to come from somewhere, which would mean likely outflows from other assets, including equities. Now it’s my personal belief that the Fed that the governments actually care more about the performance of the equity markets than anything else. I think they feel that if the equity markets are doing well, it’s a reflection of confidence in the economy. And therefore chances of them being reelected are high. You know, if they mandate someone to own, I guess you could mandate it. And then people would look at you and say, so you’re mandating me to lose more money. That’s how you’re mandating me are you? I mean, I think there could be a revolution on that front as well. When I say revolution not a violent revolution, as much as what let’s, let’s peel a layer of this onion a little more carefully, because obviously there’s something here that I am missing for those people that haven’t been enlightened by the mathematics yet.

Greg Foss:

And I don’t think that would happen. I don’t think I know it wouldn’t work. I think that the equity markets would crater. I think that all other assets fixed assets, hard assets rather would get more of a bid but you know, then you’re saying, well, should I actually have a house in a country who’s mandating me to lose money? Maybe that means the value of your house is going to be mandated to lose money as well. You know, it’s really difficult. I’m a, I’m a capitalist, I’m a free market capitalist. I do have a heart. I do understand the need to help your less fortunate a hundred percent, but you cannot do everything to avoid the mathematics of an open market system. Look, that’s what capitalism did — it allows for the free flow of capital to the performing assets that will treat that capital best. So capital always goes to where it is treated best. And if you are mandated to lose money, dang, I’m not sure you could mandate the capital to go there, but I would almost assure you that the capital would get out of that country as fast as possible. Like it would find other countries that aren’t doing that. And if they did it on a global basis, well, then it is over. I can only say what’s the solution. What is the solution? We know what the solution is.

Stephan Livera:

Yeah, of course now I think one other, of course, I’m just kind of throwing questions out there.

Greg Foss:

Oh, you know, I love it. Yeah, love it.

Stephan Livera:

To get people, to see how broken the fiat system really is, right? And I think one other area now, again, this varies by country, but for example, in Australia has a very large superannuation pot of funds. it’s trillions of dollars. It’s a massive asset. And we know, look, I mean, realistically decades from now, when many of those people are, who are saving, let’s say they’re 20 or 30 years old. Now, by the time they are able to access that pool of funds, who knows because by then the government may have, as you said, might mandate certain things. They might say, oh, look, it’s for the nation. You should be investing in our government bonds because we’re going to use those to build the roads or things like that. And these are some of the ways that governments around the world may try to mitigate or lessen the impact of their prior irresponsible fiat decisions.

Greg Foss:

You know, I can’t argue with that. It would be very scary. Again, it’s just another way of saying it would be very scary. I I’m proud of Australia for building up that fund. You know, the United States, the largest economy and the most powerful nation in the world is got, everyone only looks at their government debt. They have about a $30 trillion accumulated deficit. You know what the biggest elephant in the room is actually their non superannuation fund, which for Medicare, and Medicaid, they’re actually have unfunded liabilities of another $170 trillion. Okay. So you have 30 trillion of funded debt deficits, and you have 170 trillion of Medicare and Medicaid liabilities. That’s the elephant in the room in the United States. People are counting on that, but it ain’t going to be there. It’s math — again, mathematically impossible for that number to be there. It’s not guys. I mean, yeah, it could be. So I live in a world of hopium and glue sniffing, right? No, it’s not, it’s not please stop doing that. It needs to be absolutely divulged that you are not going to get your Medicare and Medicaid benefits. Okay. It’s a hundred percent it’s mathematically impossible and it’s with 99% confidence. I say that.

Stephan Livera:

Yeah, absolutely. And so people are living in a dream world, right? They just think this government money in the future is going to be somewhere around, but it’s really not somewhere down the line. Now, of course, politicians, they want to kick the can, nobody wants the bad things to happen on their watch. They would rather push it off into the future and let the next guy deal with it. But fundamentally at some point, the world is going to have to pay the piper and many governments around the world will not be able to fund these, as you said, the unfunded liabilities of pensions and all of these aspects. So let’s get into the solution then and why we need to change. So why did you come across? You know, why do you know, obviously many listeners of this show are bullish on Bitcoin, right? We’re pretty much, a bunch of us are hardcore orange pilled, if not all in, close to all in Bitcoin. But from your perspective, why bitcoin?

Greg Foss:

So I did find Bitcoin in 2016 and I mentioned I was somewhat skeptical. And then I saw the blockchain inaction on tradeblock.com. And as an engineer you know, I’m visual. And I see this thing working and I’m like, what? This is a living, breathing, beautiful thing where you’re seeing the blocks being built every 10 minutes from the mempool. You’re seeing transactions taking place all around the world. You know, you’ll see a $27 transaction go across. Then you see a hundred thousand dollars transaction. Then you see a $2 million transaction and it’s flashing before your eyes. And I’m like, good, God, this is a thing of beauty. So I did fell down the rabbit hole. Like I continued to research it. And Bitcoin was at $800 US at that time.

Greg Foss:

And I got a nice little allocation in my portfolio. And I also did invest in a company in Canada that wanted to bring the first closed end Bitcoin fund to the Toronto stock exchange. And we were successful. We actually in Canada have Bitcoin ETFs now because of that ruling that we won against the Ontario securities commission, we have Bitcoin ETFs that every single Canadian can buy and put into their savings. That what’s called an RRSP, which is the equivalent of a 401k or whatever you call it in your country. These are tax deferred benefits tax advantaged funds that you manage personally, that you can put Bitcoin in as a store of value. Now that’s a beautiful thing. And I want to preface it by saying this, Bitcoin is a better buy today at the price that it’s trading at today on a risk adjusted basis, five years later than it was when I first started buying it at 800 bucks a coin. Okay. And why is it better? Well, it’s better because unfortunately we had this thing called COVID and COVID accelerated the absolute debasements certainty with countries like Canada. Okay. Canada came out of the global financial crisis in good shape because we did not have subprime loan exposure in Canada, our banks we’re in good shape, but Canada has been the worst of the G7 countries since COVID of printing their way to prosperity. Okay. We are absolutely out of control in our printing. Our deficits have expanded the purchases by the bank of Canada of our own debt have been through the roof. It’s just a game of chicanery and I’m calling it out. Yeah, because I’m a proud Canadian who has a 300 year heritage in north America.

Greg Foss:

My last name is Foss. It’s actually Norwegian, but we came to North America in in the 16 hundreds. All right. So a hundred years before independence. And I’ll just say that I didn’t, and my family didn’t fight in the various wars that they did and all this for our country, to in the last 25 or 26 months almost decide that we are going to destroy everything we’ve worked so hard to to build. Now, I understand, again, I’m a capitalist with a heart. I understand the need to help the less fortunate, but at some point you gotta stop. At some point you cannot pull forward all the future benefits that should be accruing to our children because we are selfish and I have three kids, and that’s why I am so concerned.

Greg Foss:

And so invested in Bitcoin as a hedge to the certainty of government tomfoolery, and they continue to surprise me by their level of incompetence. That’s one thing that’s increasing is their level of incompetence. Okay. and that’s very concerning as a dad with three kids. So Bitcoin for me will be the store of value. That I will transfer to my children with a high degree of confidence that the number will be substantially higher in 20 years than it is today. Much like it was it’s gone from 800 bucks to where it is today. I will still say this Stephan, they’re whole rounding errors. These prices are still so stupid, cheap compared to where Bitcoin can go. You cannot overthink the fact that, oh my God, I bought some at 60,000 and now it’s gone down 50%. You guys are not doing the math.

Greg Foss:

This thing can go so much higher. It’s the best asymmetric return investment that I have seen in 30 years of trading risk. You need to allocate accordingly. If you own zero Bitcoin, you are taking such an extreme amount of risk relative to a proper portfolio allocation. And what is that proper portfolio allocation. I’ll leave it up to you guys to decide, but it is bigger than zero. Okay. Just get off zero and then we’ll talk. And I’ll tell you that I have a bigger allocation than 10%, but I do not have a hundred percent of my net worth in Bitcoin. I never manage risk that way. Okay. I always have somewhat diversified portfolio. The one thing I own zero of right now for the first time in my career is any fixed income instrument. I have zero. And in fact, I have debt because I want that debt. I want me to be able to pay down the debt that I owe the bank in 10 years with dollars that will be worth only 65%. Okay. You should be using the bank as your leverage to pay down a contract with a debased currency. It’s a beautiful thing for the borrowers. And that’s what Michael Saylor has figured out. Michael Saylor is rewriting the rules of capital markets in front of Wall Street’s eyes, and too many people on wall street are too stupid to understand it. It’s hilarious.

Stephan Livera:

Oh yeah. It is really hilarious that Michael Saylor has essentially shown people with an open playbook, right? He’s openly telling people, this is how you do it, because I think it’s really just tracing out the implications and understanding the issues of a Fiat money system, right? Even the Austrian economists have been talking about the problems of fiat money for who knows how long for decades, a hundred years even, and people like Guido Hülsmann. Who’s also, I’ve interviewed on the show episode 51 for listeners who are interested. He’s also spoken about how just naturally this is the incentive for most people, even if — imagine if you’re a young person just come out of university and you’re going and starting in your first job, what’s the incentive is to go into debt, get a mortgage now, because over time, the real purchasing power terms of your loan is coming down over time because they are going to have to inflate.

Stephan Livera:

And so, meanwhile, you get to hold your house. And so that’s the incentive. So we might criticize the Fiat system and say, Hey, this system is wrong. It’s bad. It’s unjust. It’s causing all of these negative outcomes for society. And yet it seems that the way that most people have an incentive is to try to play the Fiat game. Now, of course, if you play the Fiat debt game wrong, you can get wrecked and you can lose. But if you are clever about how you do that, right, like if you’re doing it, and an example would be looking at Michael Saylor and MicroStrategy is to understand the way they have structured their debt to try to make sure, okay, I can make the payments on this thing. And meanwhile, I’m holding, I’m borrowing the weak asset to buy the strong one as Pierre Rochard spelled out in his thesis, speculative attack in 2014 listeners, 2014. So there have been people out there talking about this stuff, but it just seems like the broader financial press financial markets world is still not quite aware. I wonder why? why do you think that is? Is it just that they are sort of engaging in herd behavior — group think or why?

Greg Foss:

Well, first of all, I couldn’t have said it any better than you just did. So congrats on that. Very concise explanation of why you should actually consider borrowing in fiat because you are borrowing in the weak asset to buy the stronger asset or appreciating asset. Why hasn’t the world figured this out? It’s a great question. And I think it comes down to more than anything. It’s just education, right? You do not learn this. They do not teach you this in school, because if they were to teach you this in school, they would be teaching the people about the problems of the system. And it was Henry Ford who said over a hundred years ago, he said, if the average American understood how banking really worked, there’d be a revolution in the morning. and that’s true because the average American doesn’t understand how the banking system works.

Greg Foss:

They don’t understand how much leverage is in the system globally. And more than anything, a lot of people are counting on the government to take care of them. I guess they’re — I’m not going to call them sheepish, but that’s not a bad description. Okay they are scared. And they want the government to coddle them. Look that’s understandable, but again, it’s not realistic. Especially when we have built up a debt balloon and pulled forward future earnings at the expense of our children. So education, I think is the answer. And this is why podcasts like yourself some great ones out there. I’ve been blessed to be on some really great podcasts. Yesterday I was on with Peter McCormack, and we were on with a young kid.

Greg Foss:

His name is Dylan LeClaire, and Dylan is 20 years old. Okay. And I’m three times his age and he is three times smarter than I am. And he’s taught himself all of this. Okay. And it’s so beautiful because that’s the type of education that will change the world in the hands of people that aren’t going to be dead in 20 years. Like I am that can actually change it for the next you know, he’ll be alive for the next 60 years. And I’m pretty happy about that, Jack Mallers, I’m pretty happy that he’s so young. I met this guy over a zoom call, Stephan. That I introduced to Peter yesterday who happens to be going Oxford university. He is a student, if I’m not mistaken at Oxford he has put together an online exam for Bitcoin.

Greg Foss:

How well do you understand Bitcoin? It’s a great idea. And he had me beta test it and everything, and I mentioned his name and I’ll mention it on your show as well. His name is Stephen Allen, and he’s from Oxford in the United Kingdom. And he is another example of someone who’s going to help change the world for the better through education, because he’s putting an online exam on for anybody to be able to take in order to learn more about Bitcoin, because you don’t learn this in school, you are brainwashed with the Keynesian way of thinking in school and are the academics who are teaching. You are conflicted beyond belief. You’re listening to idiots like Steve Hankey at Johns Hopkins, who absolutely is so conflicted. It’s a disgrace and his disingenuous blather all the time is so penalizing to the thought process of young people. So you have to balance the two, right? and so my money is on the young guns, my money’s on the Jack Mallers of the world the Stephen Allens, the Dylan LeClair’s okay. It better be because you don’t have much choice if we were to put our money on the government and the academics out there, quote unquote academics.

Stephan Livera:

Yeah. certainly. And I think we are starting to see the younger generations realize that the fiat system is screwing them. And so it’s time to take action and get into Bitcoin, meaning set up a DCA plan, get started with stacking. You know, whether you take a lump sum to start on and start DCA. Of course it’s one of those things where when you’re young, you don’t have as many assets, right? Obviously you haven’t had the time to build up those assets. So a lot of the pool of the current wealth of the world sits more in the boomer and gen X, perhaps generations. And so I guess they will also invest as well into Bitcoin when they realize it. But I think people can see the way the wind is blowing. And I’m also curious as well.

Stephan Livera:

So this is something I’ve been commenting on the show for a while is a Bitcoin financial system I think would be a lot more equity-based and there would actually be a lot less debt in that system. I think there would still be some debt. It would probably be more expensive and harder to come by. And we would actually be living in a world where equity was more prominent, like the equity in terms of how we fund businesses, how we structure businesses and the way people go about things in that hyper bit colonized world. I’m curious. Do you have any thoughts on that idea?

Greg Foss:

Great. yes, absolutely. Now it has to be a process. It will again, there will need to be a parallel system for a good long time. And I just want to draw on something that Nick Szabo pointed out when I was down in Miami, he called so you’ll have a parallel system, hopefully, that you know, because the current fiat system still exists. We don’t want it to end overnight. There’s a risk it does end overnight, but let’s hope that it continues. Think of fiat as being your checking account. And Bitcoin is being your savings account, your store of value, your ability to store value over time and space. That’s Bitcoin, that’s your savings account. And then your checking account is what fiat’s good for, it’s good for global trade.

Greg Foss:

It’s good for you know avoiding barter because everything has a price and you can pay in this currency. You just don’t want to store your value in a currency that’s programmed to debase. So you choose your investment accordingly. We frequently talk about the allocation, because we are privileged G7 countries that you know, we don’t think of the problems that the lesser developed countries have, but when I was in Miami, I got to meet the privilege of meeting these kids from Guatemala who were working on an exchange called IBEX Mercado, which is basically, they’re saying, look in Guatemala, they are helping people buy Bitcoin. And these people buy it and they don’t sell there. They’re like 90% buy tickets.

Greg Foss:

And I was, I actually called them out when I was on stage. I said, these guys want to do Guatemala, excuse me, Bitcoin lake, based on a lake in Guatemala called Lake Atitlán or something that was going to be based on El Salvador’s Bitcoin beach, little, did we know that six and a half hours later Jack would be on stage? Jack Mallers would be on stage with the president of El Salvador and saying, Hey, we’re going to make this legal tender in El Salvador. It still makes my spine tingle. This is an example of countries who are leapfrogging corporations to invest in this beautiful technology. Okay. So there’s use cases and then there’s investment cases. And right now I’m just so excited to even be in contact with these guys from Guatemala, because they are getting called in on the ground floor.

Greg Foss:

They are going to El Salvador, which is only three hour drive away. And they’re getting — their consulting. Let’s say the chamber of commerce for businesses in El Salvador that are now trying to wrap their heads around the lightning network and everything. And I just got a note from them yesterday, and they’re like, it’s so fun to see when the merchants understand the potential. So you have the investment side, and then you have the use side, and you got to remember that both of them have to exist in order for the network value of Bitcoin to continue to increase, because that’s what the value of Bitcoin is subjectively and implicitly. The value of Bitcoin is the value of the network. Okay. And as that network grows? The value of Bitcoin goes higher. I wrote my paper on intuitively valuing Bitcoin using credit default swaps of sovereign nations.

Greg Foss:

That stuff is all good. And there is a value I come up with, but the real value of Bitcoin, the intrinsic value of Bitcoin is the value of the network itself. And if you’re onboarding a country, you have to think about that. We onboarded a country of 6 million citizens. Dang, that is pretty exciting. So my paper just to summarize comes up with a value of Bitcoin based on credit default swaps for sovereign nations, Bitcoin of around 150,000 US Dollars today that intrinsic value using credit default swaps will increase as the debt balloons of all the nations increase. So number go up. Yes. Where’s it going to guys again? We’re in rounding error prices right now. Let’s talk in 20 years when Bitcoins over $2 million a coin in today’s value in 20 years. All right. I’ve never seen a better asymmetric return opportunity in 30 years of managing risk. You need to have an allocation just in case I’m right. Okay. Just in case it goes to over 2 million bucks a Bitcoin and it is in my opinion, a high degree of likelihood.

Stephan Livera:

Yeah. Fantastic. Yeah, absolutely. I think it’s one of those things where it’s just, the knowledge is not evenly distributed. And so if you’re early in this and you understand you’re listening now in 2021, and you understand this, you are so far ahead, so it’s important to get, take action and you know, start stacking and also start building start contributing in some way that you can, whether that’s writing or educating or building a business or reviewing Bitcoin core code — get involved. So yeah, so I think that’s probably a good spot to finish up. So Greg, any final comments there and of course, where can listeners find you online?

Greg Foss:

I’ll start with the last question. You can find me online on Twitter, which is something I’ve actually just found in the last 12 months. Okay. I’ll be very honest with you. Like I knew what Twitter was. I didn’t understand the power of Twitter cause I’m a boomer. You know, I’ll say this, I graduated from undergraduate. Having never used a personal computer. Oh, shame on you Foss. No, no personal computers didn’t exist. Okay. You need to understand where I’ve come from. And so you can find me on Twitter this beautiful social media platform, where there is so much information and that information generally is free, which is a beautiful, beautiful thing. I’m under Foss, Greg Foss. So @fossgregfoss. I’m based in Canada. And if you’re ever coming to Canada, I live in Toronto, but I am a partner in eight Irish pubs in Montreal.

Greg Foss:

So if you ever come to Montreal, look me up. We’re going to go to some Irish pubs in Montreal, on my nickel. Stephan, I wanted to call you out and say, what you’re doing is so beautiful for the educational process. There’s guys like you, Marty Bent all these people Breedlove and Jeff Booth. Here’s another Canadian. Okay. I need to call out my fellow Canadian, Jeff Booth, who wrote the best book I’ve ever read in my life. It’s called the price of tomorrow. And I don’t say that because he’s Canadian. I honestly took more notes in that book than any book I’ve ever read, including any textbook I’ve read at school. So what you’re doing, I want to be part of this. I have three children I’ve been privileged. I’m doing this because I have three kids, not because I’m trying to get the number to go up so that I can sell my bags to someone else.

Greg Foss:

F you guys that are, are saying stuff like, oh, you guys are just trying to get the greater fool theory. Anybody who has not done — I’ve been researching Bitcoin for over six years and I’ll just tell you, I’m still learning. So let’s summarize it with what Matt Odell said, anybody who pretends they understand Bitcoin is not only fooling themselves. They’re trying to fool other people. Most of the people who don’t believe in Bitcoin have done less than two hours work. And the people that really understand Bitcoin are continuing to learn. And they’ve done hundreds, if not thousands of hours of work on this beautiful network and this beautiful technology called Bitcoin. For your kids, please do some homework. Okay. It’s time for the boomers who will transfer wealth to their kids to do some homework as to the best way of transferring that wealth to their children.

Stephan Livera:

Fantastic. Greg, I’ve really enjoyed chatting with you. Certainly. It’s been really great to talk about all these finance and economics ideas with you. So thank you for joining me.

Greg Foss:

It was a pleasure. Thank you so much for having me and good day, mate.