Dialogue with macro investors: How should we allocate assets under the new leadership of the Federal Reserve?

Podcast source: Bankless

Guest Introduction:

Lyn Alden is a renowned global macro strategist and investor who has long studied long-term debt cycles, the evolution of monetary systems, and the role of hard assets such as gold and Bitcoin. She is the author of "Broken Money." Her research framework is characterized by cross-asset allocation and historical cycle analysis, and she often understands financial market changes from the perspective of long-term debt structure and policy constraints.

Why is the current global environment characterized by high levels of chaos and uncertainty?

Lyn: I usually explain it using the long-term debt cycle rather than simply using a culturally charged framework like the "fourth transition".

The world is currently in the latter half of a long-term debt cycle, characterized by decades of continuous increases in the debt-to-GDP ratio, structural declines in interest rates to near zero, and a shift in leverage from the private sector to the government sector as private sector debt becomes increasingly difficult to expand. This is achieved through "soft deleveraging" via inflation and currency devaluation. This phase is often accompanied by declining institutional trust, political polarization, a return to traditional industrial policies, and increased trade frictions, making it appear as if all variables are simultaneously out of order.

Historically, after a private debt bubble peaks, policy tends to shift towards a coordinated approach between fiscal and central banks, using monetary expansion and lower real interest rates to maintain debt sustainability. This process doesn't happen overnight but lasts for many years. The current stage shares some structural similarities with the late 1930s, except that information spreads faster, the population is more aging, and social media amplifies volatility, making the experience more intense.

Is the Federal Reserve's independence being eroded?

Lyn: This kind of open conflict is indeed rare, comparable to the period before 1951. During the Great Depression and World War II, the Federal Reserve was largely dominated by the Treasury, implementing yield curve control to support high debt financing and maintaining negative real interest rates for a long time. After the 1951 Agreement, the Federal Reserve regained relative independence, but this independence has never been absolute, because when debt levels are extremely high, maintaining the stability of the Treasury market itself becomes an implicit goal.

The current situation is not entirely politically controlled, but rather that high debt and fiscal pressure are gradually narrowing the policy options available. Often, the alignment between the central bank and fiscal authorities is not due to direct orders, but rather systemic constraints that force them to take similar paths. The issue of independence is only truly tested when disagreements arise, and we are now indeed entering a phase where these disagreements are becoming more open.

Will there be massive monetary easing under the new leadership of the Federal Reserve?

Lyn: My baseline assessment is that we're entering a phase of "gradual money printing," not extreme quantitative easing. First, the Fed Chair is only a member of the FOMC, and policy still requires consensus within the committee. Second, short-term interest rates cannot fully control long-term interest rates, which are key to housing and fiscal financing. If policies are too aggressive, they could push up long-term interest rates and weaken their effectiveness; therefore, policy decisions will be constrained by reality.

The banking system's liquidity is currently nearing its bottom, leaving limited room for further balance sheet contraction, but expansion is also likely to be slow. Interest rates may lean dovish, but balance sheet expansion is more likely to be moderate rather than an immediate large-scale expansion. Overall, the next few years are more likely to see a gradual increase in liquidity than a one-off policy shift.

Why has gold performed so strongly?

Lyn: It's a combination of both. Structurally, central banks around the world are placing greater emphasis on reserve diversification following geopolitical frictions and asset freezes, increasing the importance of gold as a neutral reserve asset. Simultaneously, financial and trade frictions between the US and China are prompting some countries to reduce their reliance on dollar assets, thereby increasing their gold holdings. In the short term, market momentum, arbitrage trading, and leveraged fund fluctuations will amplify price changes, so periods of overheating during the upward trend are not unexpected.

I don't believe gold is in a long-term bubble, but volatility or pullbacks after a rapid rise are normal. The overall trend remains related to changes in the global reserve structure and adjustments in the monetary system.

Where will the future monetary system go?

Lyn: I prefer a multipolar world order. The global economy is now much larger than it was in the early post-World War II period, and no single country's currency can adequately fulfill all its reserve and settlement functions. In the future, multiple regional currency centers may emerge, supported by neutral reserve assets as a bridge. Gold remains the most mature option, while digital assets such as Bitcoin may play a supplementary role in the longer term.

This shift will not happen suddenly, but will be a process that lasts for many years, accompanied by fluctuations and adjustments. The US dollar will remain important, but its "privileges" may be gradually diluted.

Why has Bitcoin lagged behind gold in this cycle?

Lyn: This round of performance did fall short of my previous optimistic expectations, but I don't think this changes its long-term value. One reason is the reassessment of risks by institutional funds, including long-term uncertainties such as quantum computing. These factors are factored into the left-tail risk in the model, thus reducing the allocation ratio. In addition, changes in some structural fund inflow methods may also have diversified direct buying.

Bitcoin's long-term logic still lies in its decentralization and network effects, but its adoption rate may be slower than many expect because most people do not directly feel an urgent need for an alternative monetary system in their daily lives. Compared to gold, Bitcoin is still in a much earlier stage, hence its different pace of development.

Is the four-year cycle still valid?

Lyn: In the early stages, the halving had a significant impact on supply, thus exhibiting a clear cyclical pattern. However, as the proportion of new issuances decreases, market prices are more influenced by holder behavior, institutional funds, and macro liquidity, reducing the importance of the halving itself. Nevertheless, market psychology has inertia, and many investors still use a four-year cycle as a reference, which may continue to influence market behavior in the short term.

How to allocate assets?

Lyn: I prefer a three-pillar structure.

The first pillar is high-quality stocks, including those in the US and overseas markets, with a moderate increase in international allocation to diversify risk.

The second pillar consists of hard assets, such as gold, Bitcoin, and energy infrastructure, which provide protection in a long-term environment of currency depreciation and supply constraints.

The third pillar is cash and liquidity, used to cope with volatility and provide allocation options when the market experiences a significant pullback.

The core of this structure is not betting on a single narrative, but rather maintaining diversity and flexibility in an uncertain environment while avoiding excessive leverage. The world today is more likely to experience slow restructuring than sudden collapse; therefore, investment strategies should focus on the long term and diversification.

Conclusion

Lyn Alden's overall assessment is that the world is in the latter part of a long-term debt cycle, with policies gradually shifting towards more moderate and sustained liquidity expansion, and the monetary system evolving towards greater multipolarity. In this process, the roles of gold, Bitcoin, and various other assets will continuously change, and investors need to maintain a structured and patient approach amidst uncertainty, rather than relying on a single grand narrative.