E46: Gold and Tesla Beyond The Blockchain with Erik Townsend

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Episode Summary:

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  • The last 10 years of global financial markets have been unprecedented due to the long-term effects of low interest policies and excessive money printing.
  • Financial stimuli has been propping up asset prices, specifically corporate US bonds.
  • Certain institutions are legally bound to hold these corporate bonds to protect them as long as their quality rating is B, however the real value of those bonds is quite low therefore those institutions would not hold them if their quality rating represented their real value.
  • Once the bonds drop to quality rating C, the institutions will be forced to sell them at a very low price.
  • Then investors and hedge funds will buy those assets for pennies on the dollar.
  • This will create tremendous turmoil in the US economy.
  • Kenneth & Rogoff’s research suggested when a country gets to 100% of its debt to GDP ratio, the country may not be able to return the debt.
  • However Japan has more than 200%. 
  • Japan’s economy isn’t all roses, but at least it did not blow up as many people had predicted it would.
  • Who has gained the most in the last 10 years?
  • Asset classes: Bond markets. In particular low quality corporate bonds. 
  • Erik thinks gold could go up 100% or more, but likely to go down 25% first. 
  • Erik thought Tesla would never go above 20 USD per share, however it increased to 318 USD per share.
  • He believes the Tesla share is overvalued because people perceive Tesla as tech company with big potential while in reality it’s a car manufacturing company without a viable business plan.
  • Elon Musk is arguably the best salesman and evangelist of our time, with an incredible ability to influence public opinion and investor sentiment. 
  • Elon Musk’s launch of his $600 flamethrowers distracted people’s attention away from the failures of Tesla. 
  • Bill Clinton is the only other guy Erik can think of that could ignore the law, do as he wished, and have nothing stick to him. 
  • Algorithmic trading only began around 2007-2008. 
  • The algorithms can generate profits at a speed and frequency that is impossible for a human trader.
  • Now 75% of transactions are algorithmic.
  • You can’t turn it off, because it’s the major source of liquidity in the financial markets. 
  • Erik does not believe in AI doomsday scenarios (like Terminator), but does believe AI will be dangerous for other reasons.
  • Like using this technological tool for the wrong purposes. 
  • Technology should be used to solve real world problems.
  • “How can I make money while still doing something meaningful, and not taking the Facebook approach.” 
  • I should have trusted my own judgment after selling my software company, and become an investor, rather than let the Wall Street financial professional take care of it.
  • They lost half of his wealth. 
  • When you see rules that are outdated and make no sense, serving no one, it’s your responsibility to improve on them.
  • The most value-creating decision he ever made was to stick to his guns about how software was done.  
  • Erik pioneered Service-Oriented Architecture (SOA).
  • He had no competition because he chose to do something people don’t want to do. 
  • There will be a massive future industry in creating a new global financial system and credit system using decentralized technology. 
  • And then finding a way to sell it to central bankers around the world.
  • Don’t confuse this with cryptocurrency though.
  • Cryptos, like Bitcoin, are only a small subset.
  • The distributed ledger technology theoretically allows for a decentralized banking system, but needs to improve. 
  • In order to sell your system to central bankers you must build a robust system with effective monetary policy tools. 
  • Current policy tools are slow and dull: Like policy rates. –giving out money to banks and wall street, in the hope that they will in turn use it for investing in the economy. 
  • Credit Tokens: “you have to use this money we are giving to you, for a specific purpose, within the next 3 years”. 
  • With a great system you would have real-time updates, rather than estimates based on past months and you’d be able to see credit expansion or contraction happen in real time.  
  • But first the central bankers would need to understand that technology can be used to help them in their agenda. 
  • Erik believes it’ll be faster to build and develop the technology, than to convince bankers. 
  • The other problem is speed.
  • Digital technology needs to be faster! 
  • Bitcoin = 7 transactions per second 
  • Satoshi = 15 transactions per second 
  • XRP = 1500 transactions per second
  • VISA = 48.000 transactions per second 
  • In total, including ATMs, you would need hundreds of thousands transactions globally, in order for a global digital currency system to be a viable alternative.
  • As with the personal computers, it’s impossible to imagine all the possible uses.
  • The most important thing is to build a platform that allows for applications and modifications to be made on top. 
  • If you had a gold-backed global digital currency, that would be a game-changer. 
  • Erik’s long-term hope is that the fractional reserve banking system gets replaced by a digital currency.
  • This could happen 20 years from now, in an optimistic scenario.

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1 comment

  1. Great Britain’s debt to GDP ratio exceeded unity after the Napoleonic wars, and they went on to rule the world. Not that that level of economic growth is possible anymore; the USA and Japan will both default on their debt (probably by printing money). That’s not necessarily the end of the line either; the USA did it after its Revolutionary war.

    I don’t think this go around will be as pretty. When the interest on the debt exceeds total revenue, how fast does money have to be printed?

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