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Alf Peccatiello

lines on the record: 52
first: 2023-03-29
most recent: 2023-03-29
sittings or episodes: 1
sources: podcast

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“Well, if they want to follow my work, the best way to do that is on the macrocompass.com. So the macrocompass is my macro research and portfolio strategy firm. What I do there is I try to break down this complex macro topics in plain English and also keep people informed about macro developments and market developments by giving them actionable investment strategy so they can better manage the risks around the macro cycle while keeping in mind what's the big picture ahead. All of that is on the macrocompass.com and obviously I have a Twitter feed as well that's at macroalf where you'll find snippets of all this macro analysis and occasionally some pizza pictures because I am Italian after all.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“System as we discussed. So frustration can run very high for a long period of time because this can take a lot to play out towards the end game. And I invite people to follow the cycle, study macro, be informed, and also respect the cycles and the time lags that we are discussing while keeping an eye on the big picture. I know it can be difficult, but it also can be done and it helps people, I think, investing their money in a more risk adjustment generating better risk adjusted returns for their investment portfolios, always keeping the big picture in mind, but respecting these macrocycles and policymakers' incentive schemes that we discussed.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Yield curve control, for example. We have done it already during the Second World War and post the Second World War to make sure that we could fund the war, we could fund the rebuilding post-war. So we have said, look, these are the cost of borrowing. Even if inflation goes higher or lower, we're going to keep it there fixed. And this is curve control, right? So we've seen Japan doing that now for many years. Again, those are not sustainable solutions to structural problems. We have discussed Preston, but people need to be realistic and understand that the closer you are to the core of the system, treasuries, repo market, the value of collateral, interest rate on debt, this system can be made artificially stable. This increases long-term the instability of the system. It breeds further instability, which often pops up somewhere else. And in this case, can be the housing market, the credit market, the shadow bank.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Look, there are two things to be said there, Preston. The first is what really matters in our traditional finance system is real returns and real interest rates. A lot of government liabilities are actually indexed to inflation. So that means that if nominal interest rates are going up because inflation is going up, then you have kind of natural offset because these liabilities are indexed to inflation in the first place. That's the first comment, which makes the problem a bit less problematic, but still makes the problem exist if you have much higher nominal interest rate on your debt, even if some of your liabilities are indexed to inflation, you're going to have a problem over time. Well, the answer again is policymakers can fix problems artificially so that are very close to the core of the system. And in this case, this could be fixable artificially via”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Cannot be increased in supply. So when I say digital assets, obviously you need to shrink your field if you want to try and refer to that asset, then probably Bitcoin gets the closest to it. And look, this is a very long-term process, Preston. And I don't think it's going to be disruptive in a way that a major external event accelerates it. Otherwise, the pandemic would have been the perfect candidate, ex-ante, right? It's an exogenous event. Still didn't serve the purpose. So I think it's rather going to be a death by a thousand cuts, trying to make the system more stable, but in reality making it more unstable as we go. And then at some point, the system will have to move to something different.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“And higher level of inherent instability by trying to make it more stable. And I think that's where we are going to go. What's the end game? Look, this is a very interesting question. And the reality is there is one asset which is already sitting on the balance sheet of most of these decision makers, policymakers I'm in, and that's gold. It's already sitting on the balance sheet of central banks, of governments, and it's been already this hard asset that we have tried to pin credit creation against during the gold standard until the 70s. Gold, though, has a lot of problems with it, right? I mean, it's not fit for a new system in a new technological environment. Gold is not optimal to serve that role anymore. So digital assets can play a role into it, but then you need something that is reliable, trustable, scarce.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Good question. Look, I think this is rather a death by a thousand cuts than anything else. The pandemic was the perfect excuse to try and restore the system Preston because it's an exogenous event. It's something that you can't control and you can't predict. Policymakers could have said, well, the system is deleveraging. We need a new form of money within a new credit system if you want to make the credit system. Otherwise, we need a new sound money system. Let's work to it together. This could have been an option. The reality has been the opposite where they have doubled, triple, quintuple the renormal reaction they have, right? Gigantic QE programs, gigantic fiscal deficits program, artificial stability being brought back to the system. And this tells you where the incentive scheme lies, Preston. It lies into bringing in the system to a higher and higher”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“20 to 30 years pressed in a negative labor force growth, which means you don't even have enough new young people to replace the retirees. You'll have a shrinking labor force. So you have less people contributing to economic growth. When it comes to productivity, we already made most of the, we already saw most of the benefits of technology permeating many sectors of the economy. So that productivity grows behind us. We keep growing year by year in terms of productivity, but it's too little. So then you have to use these tricks. You have to create more credit. You have to get more leverage year after year after year. And again, the policymaker incentive scheme will be to try and keep the system as stable as possible. They will manage probably for a bit longer. This will increase the inherent instability of the system in the first place. So where does it end?”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“No, I don't think that's possible. Preston, it's, if you want the world to grow organically without having to engineer leverage and credit, that happens via more people actively contributing to economic growth. So a growth in the labor force and by more productivity. If you have those two, then the world can grow organically. And it makes sense, right? You're growing the pie by having more people contributing to growth and having them more productively contributing to economic growth. So then you don't need any artificially created environments or credit creation or leverage to boost growth. But look at the two things I just discussed, labor force growth, where like if you look at Europe, Korea, China, Japan, most developed economies, they will have a negative labor force growth over the next”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“In economic conditions as the result of the opposite effect that we had in 2022, it just works with a lag. So you need to wait for another three to six months. But I think we're getting pretty close to the point where the tightening in conditions, both in credit and in financial condition that we saw in 2022, the system can't handle that together with the natural embedded leverage that we have built in the system in the”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Checks reaching our inbox straight away with no direct liability attached to it, like literally new money that you can spend, no liability attached to it, right? Now, we did so much. And if you wait, if you pull all that money into the system and you wait 12 months, you are undoubtedly going to see stronger growth, stronger inflation. People have more spending power. They literally have more spendable money that you have created. And so we saw this temporary growth and inflation, right? That was the end of 21, the beginning of 2022. But guys, in 2022, we have abruptly stopped doing that. No new stimulus. Bank lending came down slowly but surely as the economy started deteriorating. So you were seeing basically a disinflationary impulse from a credit creation perspective that is at least as bad as the credit creation on the way up. So for what reason you shouldn't expect now the same magnitude or even a bigger magnitude in Preston as you just discussed as you had a strong growth and a strong inflationary impulse on the way up. You should expect quite some detail.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Yes, I think there is a risk because of the size of the market, the real estate market is by far the biggest asset class in the world. I would ask you, is it the bond market or the equity market? People would say, I think the equity market, you need to combine the bond and the equity market together, and you still are not the size of the global real estate market. This is how big it is. It's a very leveraged system because of the mortgage market underlying it, right? It's a very credit-driven system. We have just discussed the incentive schemes over the last seven to eight years for institutional investors to go and pile up on leveraged products in the space to try and generate some yield. So I think there are quite some, quite a confluence of negative factors that could make this pretty bad. The fourth one is the following. This always surprises me, Preston, but in 2020, we printed the ridiculous amount of money. And I mean like real economy money. I mean like money for Preston enough directly in our pockets, which was just bank loans given away like there's no tomorrow.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Even further because what you're seeing is a credit crunch, basically. So further deterioration in credit conditions for the real economy, which will probably accelerate the downturn, and especially when it comes to real estate products and the real estate market. I see things going pretty much sour over the next few quarters.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Means Preston. Look, I think policymakers have the tools to try and backstop this liquidity crisis that we saw. There are going to be a couple of casualties, but overall they have the tools to backstop this because it's coming from an epicenter very close to their control. It's the treasury market and they have almost a duty from a policymaker perspective to backstop the value of the collateral. And as we have seen, they have some very creative tools to make sure that artificially the system can be kept stable for a bit longer. On the credit side, they don't have these tools and it's not even their job to have these tools, to be honest. So the answer is, look, my out of consensus call on the macrocompass, which is the research firm that I run, was the recession in the US would start in late second quarter this year. So there would be like May or June. I think this cold is now being...”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Look, the amount of credit creation going through the system was already pretty negative before this banking stress Now you have banking stress, in that case money flows to the safest form of collateral you can have, credit dries up further. Nobody wants to land very aggressively in an environment where there is banking stress. So this will compound the credit flow weakness that was already existing before this stress.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“To try and generate some yield over the last seven to eight years. And I look at the state of the commercial and residential housing market today. I tend to think that while people are focusing on liquidity risks, that the Fed can backstop if they really want to, they can, and they are trying hard to do that. Missing the big picture, which is the credit stress, which is growing under the surface.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“And before the default of this commercial mortgage-backed securities, both companies had gated the redemptions on the two largest real estate investment funds they had, which in plain English means that if you were an investor that invested into these real estate investment trusts and you want your money back, Preston, you can't have it back. You can only have a little bit each quarter. And why? Because if Prestonoff and everybody withdraws money from these funds, they are forced to sell the assets, which means they need to sell offices, stores, multi-houses, etc. in this market where there is no buyer. This will lead prices to go down and this will lead probably to a fire sale coming up next. When I hear all of this and I look at the first default of a commercial mortgage-backed security and I think of the amount of leveraged real estate securities that have been bought by shadow banks, pension funds and insurance companies and”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Mostly in the real estate market. Fast forward to today, mortgage rates in the US have gone up from 3% to 7%, and we are seeing housing sales down 40% on a year-on-year basis. The market is basically frozen. Buyers are cut out, they can't afford, sellers are trying not to sell because why would you sell if you're not forced to? You're locked in a mortgage with a 3%, which basically means the market is frozen. Now, I think the stress is coming to surface now. We have had the first default of a commercial mortgage-backed security of over $500 million by Blackstone. Blackstone and KKR are effectively the largest real estate investment trusts. The world”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Such securities. I mean, during the great financial crisis, we learned about all sorts of securities you can create on top of a loan, on top of a mortgage, CDOs, CLOs, et cetera. The regulation had made it more complicated to make it that leveraged, but there were many securities leveraged loans, CLOs, commercial mortgage-backed securities that offered higher yields. So banks in a low interest rate environment went ahead and bought a lot of them. The same happened to insurance companies and pension funds for the same reason. Preston, if you need to generate returns to meet future obligations, being your pension contributions to be paid out, for example, and your bonds are yielding nothing, you're going to look for yields somewhere else. So what I'm saying is when the system was too much artificially compressed and stable, this bread instability”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Negative levels for European banks not to lose money, they need to charge their depositors as well, right? Because if their assets are making negative returns, the only way not to lose money is to charge your depositors as well. By law, European banks couldn't apply a negative interest rates on deposits. In most cases for years, which meant that they were basically destined to lose money unless they did something on the asset side, Preston, and they did so. They took more risks. How do you take risks? Well, you either take more interest rate risk, but European banks are very well regulated, so it's very hard for a European bank to take a huge amount of interest rate risk. They need to hedge it very closely, which means you take other risks, credit risks. So you buy securities that offer credit spreads on top of the risk-free rate. The housing market is a hive for”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Very smart thing to do. And I see one big issue overall Which is credit markets. So look, credit stress is something that is very hard to fix for the Federal Reserve. We're talking about companies having a weaker balance sheet. We're talking about real estate market taking a deep dive. The Fed has a much harder task in controlling those because they're further, further away from the epicenter of the system, the repo market and treasures that they can so much influence. Now let's look at the housing market, for instance, and I want to talk about real estate for a second because it's interconnected between shadow banks, banks, pension funds, insurance companies, etc. Between 2014 and 2021, Preston interest rates were basically zero in the US the whole time. They were negative in Europe, by the way. It has deposits and it has assets. And if interest rates are at”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Luke Preston, this is the right question because if we have now defined that the Federal Reserve will try, their incentive scheme is to do their best to keep the collateral values stable, the Treasury value as a collateral value, as stable as possible, and they have the tools for it. For instance, their new bank term funding program that we discussed before, giving par value to treasuries, even if their market value is way below par, they have the tools to ensure that. What you need to look for next is, okay, if the Fed wants to keep the system artificially stable, they can, what is that the Fed cannot control to a certain extent? That's where normally you find the release valves historically. And you pointed to the shadow banking system and in general other actors in the financial market that are less close to the Fed. And I think that is a...”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“And I think people instead expect the dollar to steadily depreciate in a destructive mode. But I think the path of least resistance is that you see one of these incredible rushes up in the dollar that just deleverages everything else around it. And then people will realize that that wasn't the right system in the first place.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“And it's hard to say when, Preston. I mean, these are very long cycles. They take decades to unfold. I do agree it will in the end. We have seen global reserve currencies change every 80, 90 years on average. We don't know if it's going to be 80 or 100 years. But the most important point is to destroy the system from within for the system to implode, you finally need first the dollar to appreciate so much that it basically kills everything else around it and only then you will realize that the system doesn't work anymore.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“This is a very interesting system because the Brazilian company now in the euro dollar system ingrained in the global dollar system needs two things. To be able to sell their soybeans, the nominated in dollars as much as they can, that brings in earnings, right? But it also needs these earnings to service their leverage on dollars. So what happens at the moment, then the global trade stop, that the growth global growth comes down is that the company will scramble for dollars because it still has dollar liabilities to service, dollar leverage.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“The dollars flow freely outside or otherwise for other people that cannot create dollars is going to be very hard in periods of stress to cope with the system that depends on the resource, the dollar that you are in charge of. Your job is to keep this flow of dollars free and smooth for the outside world. So now what has happened is something very interesting because if the system keeps growing like it did, the euro dollar system over the last 20 years, what happens is that take a corporation in Brazil that sells soybeans or whatever they sell, some commodities, right? If most of your invoicing is in dollars, most of your trades are denominated in dollars, what you have done to enhance your business model over the last 20 years is also leverage in dollars, issue dollar bonds, get some dollar loans from a bank.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“So oppressed. So far, we talked about the sources of leverage and instability within a closed economy, right? We discuss basically as if there is no external influence when you talk about an economy. But the reality is that global economies are interconnected. And most importantly, the dollar plays a central role when it comes to the global economy nowadays. And it has been the same basically since the 70s. This has led to something very interesting, which is the birth of the euro dollar system, which is nothing else than a machine that allows entities not residing in the United States to get access to newly created dollars. So it's basically a dollar funding machine for entities sitting outside the United States. If you run the global reserve currency in our system, you have one job and one job only to keep your hegemony, you have to make sure you...”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Now amplify our returns today, and by the very virtues of it, we're also increasing the instability of the system. So I do agree on that assessment.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“But this was the result of excessive credit creation. Credit was ample and available to everybody in Japan that was basically an over-reliance on stability of the system and more and more credit. What happened the moment that there was a sign of stress is that the system went into deleveraging and look at the Japanese growth for the next 20 years. Preston, it had negative consequences for the productivity of the system and it basically made effectively everybody poorer in real terms growth went nowhere for 20 years in Japan and this is the risk you run when you deliver such a leverage system. So it's a very inerrantly unstable system that we keep artificially stable because that's the incentive scheme. Kick the can down the road, lever up more, keep the system stable so we can create more credit, generate more asset returns.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“The system will create and rely on more and more and more credit. And the other side of credit is that because you now have a mortgage, it means it sits on your balance sheet, Preston. It's a liability. You are indebted. So for the system to keep working, you need to have more stability and it just reverberates further and further. What happens at the first sign of stress is that in a system like that, the deleveraging is also very, very rapid and very painful. Japan has experienced something like that in the 90s. Japan has basically told us what's the way to go, what are the pros and the cons of bringing the system to the extreme. It has already shown us that about 20, 30 years ago. In Japan in 1989, the Imperial Palace of Tokyo was supposed to be worth more than the entire state of California. I mean, when I say this, this is pretty fun.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Is stable, and you're sure that your job will be there for the next 20 years. You have a set of cash flows ahead of you, right? It's your salary. Your salary will be there, will actually grow a little bit year by year. So your incentive scheme is to make use of credit, to go to a bank and ask for a mortgage. A mortgage is nothing else than money being created now against your future cash flows coming from salaries. So what you're doing is you're relying on the stability of the system, which means you will have a stable job over time as well, and you're now getting credit for it. You get the credit creation, your mortgage, you go ahead with money that you didn't have, and now you do have, that's the credit being created by a bank and you buy a house that otherwise you couldn't afford and you push asset prices higher. And so banks have collateral values that go higher. So you see what the incentive scheme is here, right? If everything is stable,”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“That they are running unsecured risk on a bank, they get a reminder, and then there are signs of stress. So the system only works any credit-based system actually only works if there is trust in its stability and if the collateral holds its value stable or increases its value over time. Those are the two really major foundations behind the credit system. From time to time, we challenge those, right? Because the system in itself, if it works, leads to something very interesting, more and more and more leverage. Because look, what's your incentive scheme, Preston? If in a credit-based system, if everything is smooth, what you'll incentivize to do is to make use of leverage because there is no volatility, there is no signs of stress. So how you amplify your returns is by making use of credit, by making use of leverage.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Look preston, the system is based on trust, as you said before. So it's, well, from a technical perspective, trust on the value of collateral being treasuries in most cases. From a user perspective is the trust that the unsecured loan that you have made to the bank basically by having money more than 250,000 dollars in a bank. I didn't know that because presently most people don't know that.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Is predicated around the stability of collateral, and it is that important that the Fed has chosen to ignore the market value, ignore what is the market-assigned value to these treasuries, and give them a value of 100, an artificial value of 100, just to make sure the system doesn't implode on itself.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“I mismanaged my risk. I used the treasuries. I didn't hedge the interest rate risk. You guys hiked the interest rates. The value of the treasuries went down. I'm in trouble. Well, you're telling me I can ignore this reduction in value. I'll use the facility. So I'll lend you the treasuries and you'll fund me. What this means is that the Federal Reserve is expanding its balance sheet again, which is something that we didn't see for a while as they were engaged in fighting inflation, trying to keep interest rates higher, shrink their balance sheet. This has now changed again, and there are some differences between decent quantitative easing and yield curve control that we can discuss. My main point is, as I told you before, the tagline is remember that your money is the liability of somebody else in the system. Choose whose liability do you want it to be. Now the tagline is the Fed and the system.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Unfolds, but what unfolds from it is also political challenges, its unemployment rate much higher, it's misery. It's nothing that the politician would want to see because nobody gets re-elected if he's the one to pinpoint for the great financial crisis. So this incentive scheme you're describing effectively make it so that The policymakers' incentive scheme is to keep the value of the collateral stable or rising. And that's what the Fed has done. The Fed has basically said, give me the treasuries, I'll fund you at $100. So what happens then is a couple of banks go in and they're like, yeah, yeah, please, I'll do that because I'm in trouble.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“My first reaction is wow, this goes to show how much the system is built on the stability of this collateral. Because think about it, in 2008, the main collateral behind the banking system was house prices. In 2007, we were lending against the belly of the houses like there was no tomorrow, and we were over leveraging the system with more complicated structures, and it was all based on one predictment. House prices in the US cannot go down Preston. This was the predictment. As soon as the collateral value started going down, because house prices started collapsing, then you had a massive problem because it generates a deleveraging of the system that cannot rely on the value of the collateral strengthening anymore. And you saw what happens, what kind of creative destruction, as you called it before.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Treasuries to services deposit outflows. The Fed cannot allow this to happen, right? And it's basically, again, a system which is based on trust on the value of this collateral. And if that goes away, the whole system implodes. So what the Federal Reserve does in this case is comes to the rescue and it says, ladies and gentlemen, this collateral is worth 100. You bought it for 100. It's 100. Just give it to me. I don't care whether the price is 60, 70, 50, or 80. I'll take it at 100 and I'll lend you money against that at par against its nominal value at 100. That's a yod curve control. Wow. I mean, we'll talk about the difference between this QE and there's a lot of mechanics to explain.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“You can also see the reaction of the failure, Preston, because what was about to happen was that some banks that were under-regulated were effectively mismanaging their risk and they were facing a deposit outflow, which was very large. To services deposit outflows, they were forced to sell their treasuries. The treasuries that the very regulators told them they could own because they were as liquid as cash. But of course, because of the interest rate hike, this treasury values were much lower. So they needed to take a massive capital aircraft, capital loss to sell these treasuries. And at some point, they found themselves insolvent. So what happens then is if you leave this unchecked, it will generate a fire sale on treasuries because more banks will find more losses on their balance sheet, more depositors will get nervous. They will withdraw deposits and it will force a self-fulfilling mechanism where everybody has to sell.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Look, the entire system banking system is effectively based on the assumption that collateral must hold its value. And the collateral of the traditional financial system is treasuries. Everything runs around treasuries. It's very simple to understand as well, Preston, because if you go to a bank and ask for a mortgage and ask for credit, they will price your interest rate on that mortgage, on that credit, on that loan effectively based on where treasury rates are plus a credit spread on top of it, right? So imagine also treasuries are the foundation of the repo market where banks effectively exchange money with each other in a secured collateralized way. And that collateral is again treasuries. Basically, you have to think of treasuries as the foundation really of the entire machine.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Was deemed to be small enough not to be sufficiently regulated. So this was a pretty miserable regulatory failure, I would say, in the US.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“So they basically use the loophole that wasn't regulation to take an extremely large amount of risk, they had a concentrated funding base, and they were wiped away because of that. But Europe, on the other hand, to answer your question, I mean, in Europe we do a lot of things suboptimally, let's say, when it comes to finance or banking, but regulation is much, much tighter. So, for instance, in Europe, Preston, there is no small bank that can be under-regulated that easily. Regulation is tighter in the first place and it just looks after also what's called a small bank. Also, again, guys, small banks, $250 billion in assets, that's not a small bank. Let me give you a European parallel. The third largest bank in Germany has $180 billion balance sheet. So that's the size we are talking about, that in the US,”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Basically, the regular set to banks go ahead and buy bonds. We'll treat it as if they were cash. Now there are some proportions for large banks they cannot own a bunch of corporate bonds, a bunch of risky credit. They need to own a lot more treasuries. For SVB, that wasn't the case. Remember they were not subject to this liquidity coverage ratio, which meant they went ahead and bought $90 billion of mortgage-backed securities on a 200 billion balance sheet. And guys, I've been in the business. It's just a gigantic amount of mortgage-backed securities. Basically, the regulators have in the US made one big mistake, which is under-regulate small banks. So give them basic incentive schemes to act as cowboys. And the moral hazard at the SVB case was also very high because these guys didn't hedge their interest rate risk properly. They didn't apply basic risk management techniques.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Some money in the meantime, but they can also be used to service these deposits. Guess what? The regulator said, well, we'll treat treasury bonds, mortgage-backed securities as well, basically as cash from a regulatory perspective. Listen to this. If you're a bank in the US after the Great Financial Crisis President, you were told that you must own a bunch of liquid assets to meet this regulatory requirement. And it could be cash at the Fed, reserves at the Fed, or Treasury bonds and mortgage-backed securities and some corporate bonds because effectively you had no liquidity haircut on treasuries, so they will treat it as cash by the regulator, and also you needed to own zero capital, and I repeat, zero capital against any potential losses that these treasuries would incur or these mortgage-backed securities would incur very, very little capital required.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“If you are a bank below $250 billion, you don't need to stick to something called liquidity coverage ratio, LCR. So this is another rule that the regulators put up to say, hey banks, you need to have a lot of liquid assets on your balance sheet because if Preston, Alpha and everybody else at the same time goes to the bank wants their money back, you need to be able to service this deposit outflows. Now, this liquidity coverage ratio does something very interesting Preston, which basically is, I mean, if I ask you what's the most liquid asset you can have in the traditional finance space, you would say cash or any form of cash. It's just liquid there. If Preston comes and withdraws money, I can just give him the cash and I'm done. But banks also want to make money. So they ask the regulators, is there something else I can own on my balance sheet? I don't want to stack of cash there. I want to own some liquid assets that you will consider to be liquid.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“That was the threshold below $250 billion in assets, you are basically exempt from the main stringent regulation that regulators have applied to large banks after the great financial crisis. So namely, you don't have to stick to something called the net stable funding ratio. It's a lot of words, but in reality it's just a ratio that”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“It all boils down to the incentive schemes that regulators have given banks in the US and in Europe because obviously banks are there to try and make money and they have to try and not take too many risks because they are so important to traditional finance space, their stability is so important that they're heavily regulated. The US has failed pretty miserably, I should say, in regulating small banks. So let me tell you what I mean. In the US, if you're a bank below 250 billion dollars in assets and mind me, Preston, this is a pretty large bank. I mean $200 billion in assets is not peanuts. It can be a pretty large bank anyway.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“From the liability of a bank to the liability of the government. So we will make you whole basically through that process. People are finding that out, but this is the first big picture observation I have in the traditional finance system. Your money is always a liability of somebody else person. So choose wisely which liability you want it to be. An unsecured liability of a bank that's pretty risky because you're often not even rewarded for that risk in the first place. This bank deposits don't yield much in the first place. Or do you want it to be a liability of the government of the United States through many of its forms? It can be a bank deposits below $250,000. It's implicitly guaranteed. It can be a T-bill. It can be a money market fund deposit, which is basically guaranteed by the government. But pick your fighter. You always, your money is always an unsecured liability of somebody else in the traditional finance space.”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Lender unsecured to a bank simply because the government of the United States issues the very currency, issues the very money that we use in the system. So effectively the government of the United States can always try to blow a hole in their balance sheet through deficits and print more of this money that we use in the system. So effectively you are somehow a bit more protected in nominal terms by having money as a liability of the government than as a liability of a bank. People are now finding that out because depositors of SDB have been wiped out effectively. The FDIC came in and said no no we're going to make an exception. We're going to guarantee your deposits even above the $250,000. Basically the government is saying you were an unsecured lender to SBB will make you now whole by transforming your money”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT
“Unsecured loan to a bank. As we are seeing, if the bank has any stress, any mismanagement has mismanaged the risk, has run a certain amount of interest rate risk, which was not hedged. Your money can be at some point even just wiped away. So that means you are effectively lending unsecured your money to the bank above the $250,000. That's always been the case, Preston Bay design. If your money at a bank is below $250,000, you have the implicit guarantee of the government of the United States. So you fall into the second bucket, which is your money is the liability of the government in this case rather than the liability of a bank. But it's always the liability of something in the traditional finance space. Now, the liability of the government of the United States is a better proposition than being a senior”
2023-03-29 · We Study Billionaires · BTC123: The Legacy Banking System in Shambles w/ Alf Peccatiello (Bitcoin Podcast) · IDENTIFIED FROM THE TRANSCRIPT