This week Chris Zhang and I discuss the impact of the recent debt ceiling resolution and the conflicting signals from the equity market and the bond market.

While the stock market remains calm and confident, the bond market indicates a continuing inflationary cycle and a decline in the long-term creditworthiness of US treasuries. Chris suggests that the bond market has historically been more accurate in its predictions.

We also touch on the regulatory actions against crypto companies. Chris emphasizes that it is still too early to predict what will happen with crypto and - on a more macro level - determine the winner in the global currency battle. He believes that market forces will ultimately determine the outcome. 

As usual, some great insights from Chris on the complex dynamics and uncertainties surrounding the financial markets and the potential impact of these factors on the global economy.


Transcript (this is an automated transcript):.

MPD: Welcome everybody. I'm Mark Peter Davis, managing partner of Interplay. I'm on a mission to help entrepreneurs advance society, and this podcast is totally part of that effort. Today we've got our conversation with Chris Zang. Chris is my partner and c i o of the family office. He's got an incredible depth of financial knowledge and market knowledge.

For those who haven't heard him talk before. He spent too many years as a derivative trader at Morgan Stanley before doing this. It's a general market catch up, but we cover a bunch of things. The impact of the debt ceiling. There is some different signal coming outta the equity market and the bond market, and so there's a bit of a dichotomy.

Chris tries to interpret what those signals mean about expectations for the future. We talk about. Also what's happening in the crypto world, right? There's some action against some of the large crypto companies and we're watching a very long-term journey of crypto, finding its way to be integrated into the financial ecosystem.

So I think probably good intentions on both sides, but a lot of work and tumultuousness probably to come in that kind of. Navigation. Anyway, I think it's a good sesh. If you're interested in the markets. Here you go.

What's up Chris? How you doing, man? What's up, mark? Look this might be your last one for a bit. I know you're doing this monthly, but for everyone listening, he's about to have his first child. So they're in like 11:47 PM of the day. Of baby gestation. I don't know where this metaphor is going anyway.

Yep. How are you holding 

Chris Zhang: up? I'm doing okay in general, and just to prop myself up I'm, this is my Mark Peter Davis day. For those of you who are listening, this is what Mark looks like on a day-to-day. A little less handsome, otherwise about the same. I'll take the overall.

MPD: You're talking, you're referencing your hoodie, 

Chris Zhang: correct? This the, yeah, I'm 

MPD: like a black t-shirt hoodie, although I'm trying to up my polo game. A lot more polos now. 

Chris Zhang: Funny. Risa told me the exact same thing. I need to do that. 

MPD: Yeah. I'm trying to polo just like classy, casual. That's the old man vibe I'm going for now.

Cause I can't pull off the 27 year old punk rocker anymore. It's it's out. 

Chris Zhang: Yeah, that's right. And baby stuff is good. I I as ready as I can be. Let's see. Hope. Hopefully I'll be back in no time and talk out of, talk to everybody about markets. There we go. 

All right let's jump in.

MPD: It's, we're now in this new cadence. It's been a month since we've had you on. Last time you hit China. Yep. You gave that overview and it was awesome. A lot of people to that and were ping me and talking about it. I want to, what's hap the big thing that's happened since then is the dead ceiling cycle.

We're on the back end of it. Seems like it's sorted for this lap. Did anything, outside of the news thread on the negotiation and bickering and whatever else, did anything substantial come out of the new bills? Yeah, 

Chris Zhang: we can listen, we can talk about this for an hour. We, in fact had an had an internal chat as you know about that ceiling for quite a long time, and, I'm not gonna talk about details, but there are few implications and takeaways from it.

N number one, we have not solved any fundamental issue as a country, meaning the budget. How do we balance the budget? This is simply kicking the can down the road, and in this scenario is about two years, less than two years. This is right after the next step. Seeding talk is gonna start pretty much when the new president or the same president takes the office in 2024.

And there. And we're gonna go at this one more time. And this bill made it even more difficult for the one coming up to pass through. There, I'm sure everyone's been following the news. There've been a lot of in fight in fighting and cross party fighting, and it's just it's not a good scenario.

Everyone seemed to compromise and no one's happy, right? We'll see what happened, what happens with McCarthy and leaders on, on both parties. And chances are the fight is gonna be even bigger next time. The one thing I think people need to pay attention to, and it's probably least talked about in, in, in mainstream media, is the compromise around social welfare.

Just to think about this topic globally. We saw what happened in, in France earlier this year, last year when they tried to hike the retirement age and decrease social benefits. This has always been, it makes sense, if work people have been working 30, 40 years and save up for retirement and counting on the government for welfare and the government has to take something away because that, that the budget's not balanced.

This is a very triggering topic and. And there's no happy medium someone's gonna to sacrifice. So any move the government has with regards to social welfare and benefits and retirements is going to be what potentially causes the next wave of risk events and protests and it's gonna be hotly debated and it likely will affect the longer term future of this country.

Regarding immigration just overall happiness and productivity, right? So that's something I really do think cannot be overlooked and such an essential part of budget and just the wellbeing of this country. 

MPD: Any ripple effect from the legislation that you're like, okay, in the next six months it's gonna push the needle left to right.

Chris Zhang: With regards to markets or in terms, yeah. Market policies. Yeah. So look the stock, the one thing I, first of all, let's talk about this in two different things, because the stock market and the bond market has behaved so differently through all of this and before and after the stock markets the public stock markets have been behaving extremely well.

Very calm into the death ceiling. A little bit of volatility range bound between, I'm talking about s and p 4100 4200 and immediately after death ceiling, I had this relief rally a little bit. And we're about, we're up about 5% on the index level. We're past months. But that's not really the only story, what behind the scenes and what people maybe care less about or at least monitor less is the bond market.

Which has been trending the opposite way this whole time. And there's this clear dichotomy between the two markets where the bond market thinks that we're still in this inflationary cycle. The Fed is gonna hike maybe one more time and we're gonna actually stay put. Meaning not, we're no cuts coming in the next year or two.

And the treasuries and the one thing we, we talked about before was just the treasury curve, the twos and tens, right? The difference between the two points have been very negative for over a year now, and is still very negative in and out of this dead ceiling talk. Meanwhile the equity equities just keep rallying, right?

Like stock markets just keep being very confident. Both markets and it's important to know, are supposedly forward looking, right? The stock price today is supposed to reflect what people think. What participant market participants think six miles, nine miles down the road. Same thing goes to the ball market.

So in a way, if you read this, equity participants are saying, we're good. We're no more risking events in near term. Earnings are strong. Tech is leading the rally. We're back to where we were. Okay. No more Covid. The ballpark is saying actually no. The economy's weakening.

People are spending less. The Fed has to spending less, but, maybe, but at a slower pace than expected. We're still in the inflationary cycle. The fest has to accommodate and high grades and. And the economy's gonna crash, right? So people are saying two different things and one of them has to be right.

Or maybe both are wrong. Who knows? But historically we, the in times like these, we can only look in history and see who's been more, right? It's been the bond market that's been more right historically. And case in point, the one thing that we can immediately go back to is, okay, let's talk about the most recent cycle.

What happen in the, sort of the crash in the market in 2022 and Covid, and if you really look at and just put the two graphs on top of each other, s and p versus treasury twos and tens leading up to the beginning of 2022, there's been this flattening of the curve already, right? We're at, in 2021, we're at.

Twos and tens are the differentials about 1.5% by the end of the year. We're already at around 80 basis points, so it's a 70 basis point drop, which is again, this indicator twos and tens is a bonds market sentiment gauge, if you will, right? How people think the longer term versus a shorter term will play out and is negative the bond market.

But if you look at stock market leading up to 2022, we're at historical highs and it's nothing bad has ever happened. Life is good. And we all know what happened afterwards 

MPD: right. But we know that stock market's got a lot of emotional decision making in the buy. Yeah. We know that. It's just the energy of the crowd.

Yeah. The bond market. I would assume there's a reason why, just to take what you said, that it's usually been more Right. Or more. Correct. I would imagine that it's because the investors behind that are generally more institutional, right? Yeah. And so you've got. You've got less emotion, and I'm sure there's emotion still, but less emo overarching, just emotional flow.

Yeah. So the question is if the bond market is the signal to look at and the bond market is thumbs down. Yeah. What is it saying? Is it saying the credit worthiness of the US is gonna go down, there's gonna be more inflation. What is it signaling? What's driving that shape of the curve? 

Chris Zhang: Yeah. What you just said makes sense.

A absolutely. It's stock. It's more sentiment driven in stock market, more so compared to bond market. Another layer to that is also macro versus micro, right? So historically, the Fed interest rate doesn't really play a role, or it's not supposed to play a role in your company profitability across the entire economy.

It'll affect certain sectors and this and that. But this cycle has been different because the move is so dramatic, it affects every single sector. So bonds market and more macro equity markets is more micro, but now macro is dominating micro in a way. That's why I think in this cycle in particular, I think the bond market has been more Right.

And going back to your real question, which is what's really, what's, what is this really signaling If bond market is correct, then. We're basically still in a re inflationary cycle and the long-term credit worthiness of the US treasuries, the US bond market and is going down as you can, as evidenced by the rising interest rate in the, in, in the longer data part of the curve.

You look at 10 year treasury, we're back at the highs and spec specifically on the back of this whole debt ceiling talk. The confidence. For the, for global market participants and US economy is still there, just to be clear, right? We're still doing incredibly well on global stage, but has been decreasing.

That confidence itself has been decreasing over the past few months and certainly in a trend over the past few years going lower. And you can also see that in, in other pockets of the market too. If you look at currency, if you look at really just, trade, international trade.

And you look at the rise of other currencies and we talked about China in particular, but the importance of US economy on a global stage is still there, don't get me wrong, but it's steadily decreasing and that's really the long term future that 

MPD: we really care about. This is such an interesting moment in time.

Yeah, because you've got this very clearly. Waning US economic power, at least until we, management tries to fix the financial problems that we have. Problem is we have bad management, right? But at the same time right now the s e c is at going after all of the crypto and blockchain companies.

All the big names are getting attacked and going after 'em. What's interesting about that to me is that I think while the US is the reserve currency globally while the dollar is the main store of value around the world, man yeah. Blockchain, crypto, that part, crypto particularly not blockchain, is threatening to the control, the levers that the US government has.

They can impose sanctions and penalties and, do stuff if they have reserve currency status. But the interesting thing is, while the US is in the process of losing control, if we don't right the ship, if we don't get good management in to run the country, and by the way, I don't think either party is good management, right?

If we don't have someone who's operating fundamentally differently than either party is thinking right now

the US is gonna want cryptocurrency, wouldn't you think? If. If China's currency becomes the global currency. You, then you want crypto because what it's doing is it's gutting the power of the river reserve currency country. So you don't want crypto around strategically when you are the reserve currency, but when someone else has it, crypto sounds great. So I, I wonder if there's, it's this incongruous, we're not balancing the budget. Historical cycles and patterns suggest we're going to lose reserve currency status because our government's not gonna get their shit together.

And the same time they're trying to undermine the thing that will undermine the other currency when it takes reserve currency status. Unravel that. Yeah. 

Chris Zhang: Impossible to unravel that. But lemme just say that. It's still too early to tell, right? This currency war. Who's gonna be the winner?

Including crypto. My view has always been that we are at the early innings of this and let the market dictate who's gonna be the winner. But every government's gonna try to step in and, insert themselves. And, but market always wins at the end, hopefully, at least in, in the west as to say, but, Back to your question.

Look, crypto is or blockchain general. We've all been supporters of this and s e coming after, a few companies. As we've heard in the news, their main argument. Let's start from there, is not, crypto is bad, blockchain is bad, is the players in those market could be nefarious and they could.

They could definitely create harm, let's say on the general populace who don't really understand the market. So their argument is we need to make sure that if there are certain things like cryptocurrencies that behave like securities and transact like securities and carry the same functions as securities, they need to be registered as securities and as a result be monitored by the bar government.

That's the really, that's the, that's their, the core of their main argument, the reason why they're going after, these companies. But I totally get it, the other point of view, which is look, the whole point of cryptocurrencies so that it doesn't get regulated and it's distributed and it's, controlled by the people.

So it's the same debate as usual, which is how much do you care about protecting. The mom and pops, the little guys, the commoners, the us of the world our interests, the people who don't understand necessarily don't pay too much enough attention to the market, protect our rights, our safety and privacy, versus making sure this is a completely free distributed, additive world.

Who knows? I don't know. I dunno. The right 

MPD: answer is, there's two parts of this that I'm hearing you say. Yeah. One is, The narrative I've been hearing is the opposite. It's that the crypto companies want to be officially regulated. Yep. And what they're doing is they're being told, I think they're being told they're out of compliance.

But they're not be being given an option to be in compliance and they want to be regulated and in compliance. That's my understanding. That might be wrong. Now May, maybe that's what they're saying, but they're not acting. I don't know. I'm probably the part that they cannot be, not the mercy of headlines.

Chris Zhang: The part that Exactly to your point the part that they cannot really be compliance is the registration of securities. Imagine. Bitcoin has to be registered as a stock, right? That's impossible. That defeats the point of Bitcoin. So how, what do you do? I don't know the answer to that.

That's has no, they can make laws out. 

MPD: Yeah. It's gonna be complicated. The second piece, which I think is more of a macro policy that's, that kind of trends beyond crypto is the government has generally said as a philosophy, if something, Is complicated. We're not gonna let people with less wealth by it.

And I think they're using wealth as a proxy for intelligence. Yep. And sophistication, which doesn't hold. Agreed. And I think it serves to promote asymmetric opportunities. There's a, yep. Look, we're in venture capital, right? Yep. Venture capital when you with the right firms, is a wonderful high performing asset class, but accredited investor laws and a bunch of these laws don't allow people with normal incomes to buy into these assets.

And that doesn't feel great to me because I know what we're capable of yielding and the kind of money we make people. And I would love for other organization, other people to be able to participate in that. Not just limited to the wealthier institutions. Now the one good thing is the institutions are usually representing the rest of the population.

If there's a retirement fund and we're managing their money and we make them money while we're creating wealth for everyone, all the retirees coming outta that system. So that's the good thing. That's where it's working. But I wish there was, I don't have all the answers, of course. Just got a lot of questions and some bad opinions.

But I wish there was a more egalitarian, more flat way to give access to these investment opportunities. 

Chris Zhang: Agreed. I, we, I couldn't agree more there. I'm registered with the S e c I know the law. I know the rules. I know what, know the their main goal is trying to protect. But to me, at the same time, the reality is that the EC economic, the number one contributor to economic inequality is access.

And to your point, a credit investors qualified purchaser, these are all defined by your net worth your existing investments in the space. And it doesn't make much sense. And basically it comes down to the richer you are, the better access you have. How does that make sense? What 

MPD: if you're a PhD student studying rocket science or econo economics? Yep. And you have no money. You're not allowed to buy into funds that you could probably understand better than I could by 10. Doesn't, makes sense. Doesn't make sense. Now, maybe that's an edge case I'm coming up with.

But people can get ripped off in if, in any of these things, this is the problem, right? Like I call this the butter knife problem. It's a butter knife. It can cut butter. It can kill you. Depends on how it's used. It's a tool. Yeah. Fire's the same thing.

Cooks your food or kills you, burns your house down these securities. The public securities are regulated, but there is bad behavior within those companies. There's information asymmetry for sure. And alternative assets are the same. There are bad actors. There are, most of the people are not.

And so it's this butter knife issue of, we're telling everyone they can't cut their butter, which is, I think, distressing people like butter. 

Chris Zhang: Yeah, that's a good analogy. What else we got? That's 

MPD: it, man. Just a good little sash. Good catch up. 

Good luck with, 

MPD: Baby sit. I'm guessing we're gonna catch you on the other side of that.

And a quick reminder for everybody. Chris is an s e c registered r i a, so nothing he said should be construed as investment advice. Thanks, mark. 

Chris Zhang: Talk to you soon.

MPD: All right. Always awesome to have Chris on. Thanks everyone for listening. We are coming up on our summer break. Hasn't happened yet, but we've got a couple more episodes coming up. And then will tell me when it's time for me to tell everyone that we're on pause. But we'll be back next week with more content.

If you have any questions, if there's anything we can ever help with, you can get me on Twitter at m p d. Hope everyone's well. Good weekend.


Interplay Family Office LLC (“Interplay”) is registered as an investment adviser with U.S. Securities and Exchange Commission (“SEC”). Registration of an investment adviser does not imply any level of skill or training. Information about the qualifications and business practices of Interplay is available on the SEC’s website at Interplay only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Offering of asset management services through Interplay is pursuant to an investment advisory agreement.The views expressed in this <<insert advert type, i.e., podcast>> are subject to change based on market and other conditions. The <<insert advert type>> may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.Information communicated during the <<insert advert type>> does not involve the rendering of personalized investment advice but is limited to the dissemination of general market information. A professional adviser should be consulted before implementing any of the strategies or options presented. The <<insert advert type>> is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Neither Interplay nor its advisory persons render tax or legal advice. Please consult your tax and legal advisors for advice concerning your circumstances.