He is a professor of finance at Duke University and it's. Very well known throughout economics for linking the yield curve to oncoming recessions. In the past week we saw an escalation of tension between the u.s. and Iran from ordered a drone strike on Iranian general Qasem Soleimani and Iran retaliated by firing missiles at US bases in Iraq. Since this exchange, both Trump and Iran have, for the moment, seemed content not to pursue violence further, the threat of international conflict coincided with a spike in bitcoins price and reignited the narrative of Bitcoin as a safe haven asset. Do you think this international tussle told us anything significant about Bitcoin, so this story's been told many times Bitcoin, our cryptocurrencies in general could be like a new version of gold, a digital gold, and the idea here is that gold has got a very long history. Thousands of years, and often it's the case that when there is a crisis or political risk or heightened risk, the price of gold goes up. So we actually see something analogous to that where we see these political risk events unfold and the price of Bitcoin or some other cryptocurrencies actually goes up so it's a reasonable story to tell that this is a potential safe haven that is not directly controlled by a Central bank it's a reasonable story. The problem is the very short sample that, with God, so over the five years of high quality data that we have with crypto currencies, we really don't have a lot of big risk events.
We don't even have a u.s. recession in that five year, and so the story is a credible story, but we just don't have the data to to safely say well. This is a safe haven asset for sure. So, along that line, Peter Schiff said something really interesting. On Twitter a few days ago, he said that gold is being bought by investors as a safe haven, but bitcoin is being bought by speculators, betting that investors will buy it as a safe haven. What are your thoughts on that so again, the story of a safe haven asset is a credible story and you could use that to potentially speculate so you buy before or during a risk event, hoping that people will flock to the safe haven and – and you make Some money in the mean time so that that definitely is part of it. I must also say that I use safe haven and it should be in quotations for two reasons. One of our Lee mentioned. That is that the history is very short, and we don't really have a lot of evidence that Bitcoin or other cryptocurrencies will be a reliable, safe haven and number two. You need to take into account what the volatility actually is. So the volatility of gold is about 15 on an annualized basis. The volatility the US dollar is maybe three or four percent the volatility, the US stock market, maybe 15 percent. Also the volatility Bitcoin is more than 80 percent.
So you need to be very careful here. I'Ve done research on gold in particular, so I've looked at gold prices over the last 2000 years and and even gold he's an unreliable, safe haven. You never know what's going to happen for years since 1933 өсөн 1971 the US government banned citizens from holding gold. So so again, we need to be careful in terms of what a safe haven actually is mm. Hmm, hmm! So now that this, like safe haven, narrative, actually exists. What do you think the chances are of it becoming a self fulfilling prophecy? Well, the narrative exists and again we need to be careful of the narrative, because it's being spun potentially by speculators that want to talk their trade essentially, so we need to be skeptical of the narrative. There is another reason to give this narrative credibility, and that is that there's, no fundamental reason that cryptocurrency prices and I'm talking about crypto currencies like Bitcoin are correlated with anything so there's, no underlying fundamental with with Bitcoin, for instance, so that, given that lack of link To a fundamental suggests that they should be relatively uncorrelated with macroeconomic events, so so let's be clear here what we mean by safe haven. So there is a safe haven that effectively retains its value, even though there could be a catastrophe in the economy. Okay, so that's one type of safe haven, another type of safe haven actually goes up in value when there is a crisis and that's more like a hedge and – and I think that that's, the the latter is the story.
The people are telling that as the risk increases, so if there is war in the Middle East that that actually will lead to appreciation – and they draw inference from as you introduced the price recently going up a Bitcoin exactly at the time of heightened risk in Iran. How do you think crypto currencies as a whole would function hypothetically if there is a war, if it does escalate that that far so so again, Bitcoin has got a very attractive property in that it's not controlled by anybody it's attractive, because in that linked to any Particular fundamental, so that's that's, so different than other assets. So if you think of the stock market, well that's going to be affected in two ways: if there's a crisis number one, the cash flows and profits of the firms go down and number two. The risk goes up, you put those together and the stock market could easily lose more than 50 percent, like it did 12 years ago in the global financial crisis, or you look at a currency. Well, the dollar versus the euro. We can kind of figure out what the value is. We look at the strength of the US economy. We look at the strength of the European economy and we can kind of get a valuation of that exchange rate. But if you go to cryptocurrency it's, not so straightforward to do that, there's, no underlying fundamental. So that means that, hypothetically and theoretically, that these cryptocurrencies should be relatively uncorrelated with events.
So in that respect, it potentially allows you to hold value or perhaps even appreciation, given the volatility during a crisis. But what I said in terms of volatility is important here, just because of the volatility it might be that in the crisis, you you lose value and the question is: how much do you lose relative to other assets that's the key? So, theoretically, there is a credible story to be told that, given the lack of link to fundamentals that this particular new asset class could be valuable as a crisis, hedge or at least safe haven and quotation, it's great, thank you so now I would like to switch Gears a little bit. Could you please just quickly take a moment to explain what the yield curve is and why it's so important, especially right now my dissertation at the University of Chicago linked the yield curve to economic activity. So let me first explain what the yield curve is. So you look curve is a concept that longer term interest rates usually have a higher yield than a short term interest rate, and the intuition is very straightforward that if you lock your money up for a longer period of time, then you should be paid extra. So it's a premium term premium for actually doing that versus a very short term deposit, and we see this all the time so a normal yield curve. The long term interest rate is higher than a short term interest rate.
So my dissertation at the University of Chicago noticed that in certain times we get the reverse so that the short term interest rate is higher than the long term interest rate and that's unusual and it's called an inverted yield curve and the economic model in my dissertation, Linked that inverted yield curve or the slope of the yield curve to future economic activity, and you can think of it in a very simple way that, in a time of expectations of economic weakness, people often go to the safest asset they perceive in the world. That has a lot of liquidity and that's the u.s. 10 year Treasury bond, so currently that is essentially the safest asset in the world. When people go to that bond, when they start buying the pond, the price goes up, as the price goes up, the yield is pushed down and what we saw in 2019 was an extended period of six months, where the ten year bond yield was below the three Month US Treasury yield, so we had a full inversion for six months. My dissertation showed that those inversions are associated with future recessions, so we've had since the 1960s eight yield curve. Inversions, seven of them have led to recessions and the number eight we had in 2019 and usually the lead time to a recession is 9 өсөн 22 months. So this is an indicator that gives you a lot of advance warning to a recession. The yield curve is now back to normal, so the long rate is above the short rate, but in the last three recessions it went back to normal before the recession actually began.
So that is the beauty of this indicator. It actually gives you advance warning. It gives you not just like a 14 warning, but a year or more warning before a recession mm hmm and I saw over the summer. You went on Bloomberg and you called it a Code Red, as I recall so that's important, seven, four, seven, no false signals and now we're Code Red. We have an inversion effectively for two quarters, it's really hard to ignore and you. You still believe that this is an accurate indicator that we will see a recession in the near future. I mean: is this time any different than any past times, significant enough to make it a different outcome, so I guess maybe I'm a bit biased because it's something I invented. So you know you viewers need to take that into account, but I'm also an empiricist. This is a very simple model: let's look at its track record over the last 50 years, we've had seven inversions each one followed by a recession, so that's 100 accuracy, but actually, if you think about it, it's pretty easy to get a hundred percent accuracy, because you Got ta have a model that every quarter says: there's gon na be a recession. Every single corner says a recession, so it's a hundred percent accurate, also but it's a huge number of false signals. So this particular indicator. Historically, over the last 50 years, it's got zero. False signals so seven inversions, seven recessions and we just had the number eight inversion, so that track record is a pretty considerable track record.
So you asked what is different this time and there is something that's different this time and that is that you're asking me questions about the yield curve inversion. If we were doing this in 2006, you would not be asking me. The question was not in the news people didn't really care about it. So now that it's, a topic of conversation, you've, got an indicator that's reliable. That has got a track record of seven out of seven, given that we've had that inversion and given other data that's out there so Duke University. Does a survey of CFOs and arts CFO's over fifty percent believe that a recession will begin in late 2020 and that the proportion goes even higher if we include 2021, so we've been in a recovery phase in the US for over ten years? This business cycle is the longest on record since the 1850s, so as they get longer and longer and longer the probability of a downturn gets higher and higher and higher, unless you believe that the business cycle has gone away, I don't believe that, so this is actually The time to be thinking about okay we've got these signals that are suggesting that there's increased risk of an economic downturn. It is also the case that little confused saying that the economy seems to be doing well and ployment is very high and employment very low, but that's exactly what happens before a recession. Things look good before that's the definition of a recession, so given you've got these signals now's the time to kind of reexamine the positioning of your portfolio and and think about some of the things that we talked about earlier in terms of well.
If there is an economic crisis, is my portfolio position correctly? Am I in the right assets to basically lessen the blow of a recession, so, given that there is a good chance that we see a recession in the nearest future? How do you think a recession? Would impact the cryptocurrency and Bitcoin markets I've got, I guess two views of this. One view is similar to the earlier discussion that, given the cryptocurrencies aren't directly linked to the economics, so the stock market is directly linked to the economics, so the profitability of firms decrease in a recession and that drives stock prices down. So, given that you don't have that fundamental link, then economic theory would suggest that a shock to the economy, wouldn't necessarily impact the prices of, say, Биткоин, so that's kind of one view of this another view is this: this safe haven sort of viewed that people will Want to abandon the traditional currencies, people see that they need to somehow crisis proof their portfolio and will invest in assets that are perceived as very low risk, which could be US Treasuries, which traditionally do well in recessions. It could be gold that has a checkered record, but never less. It is also relatively uncorrelated and it could be this new asset class cryptocurrency, so that some is possible that we see flows into cryptocurrencies and this causes some price appreciation. Again I say it's possible. We don't have the track record, so we we don't, have the global financial crisis to take a look at the cryptocurrency complex and to see how they do.
We'Ve got these small observations that are suggestive, that there could be some hedging ability, but, on the other hand, we've got a huge amount of volatility. So so again we need to be careful, but I do think anytime. We'Re risk increases, assets that are safe or relatively uncorrelated, potentially will attract investors in a research paper you published in 2014, titled, Bitcoin myths and facts. You said that, as of that moment, Bitcoin was too small to be an important economic force. Has anything happened since then? To change your opinion, so I've taught a course on cryptocurrencies and and blockchain at Duke University I'm. Just about to start my seventh version of the course so seven years and when I began teaching – and this is you know seven years ago, what I'm talking about the crypto currencies you're talking about Bitcoin. That was yet so I wrote that paper in 2014 and essentially Bitcoin was the crypto currency and at the time it was interesting and very promising, but it was small and the sort of stories that were being told at the time that it would be essentially the New payment mechanism, so it was a currency there's, many different uses or attributes of a currency and and one is the exchange motive and the other is a store of value motive and then just there's others. But it was fairly clear to me back then that it was going to be challenging for Bitcoin to be a payments mechanism and what we've, seen over the last seven years is that it's essentially morphed into a store of value and for speculation.
So what is different when I wrote this paper in 2014, in my opinion, is the rise of the cryptocurrency complex, so it's, not just Bitcoin there's many other types of coins, so there's in my course. I list seven different categories of crypto currencies. So Bitcoin is one you've got distributed. Computational tokens got utility tokens, you've got stable coins, so the stable coin. Complex is very, very interesting in that they're effectively challenging the the central banks so so it's a much different landscape. Today, and actually when I look at the cryptocurrencies as a whole, a much more optimistic about the future of crypto, I see the possibility that almost all assets are going to be tokenized. It is a completely different world where I've got a wallet. I'Ve got some Bitcoin in my wallet. I'Ve got some aetherium in my wallet. I'Ve got some stable coins. I hit some gold. I'Ve got some securities like a piece of IBM stock, that's tokenized I go and I pay for my groceries and I can choose from my wallet say: well, I want to pay an and gold, so I can actually do that. The grocery store doesn't accept gold, but I can instantly transfer my goal to somebody else on a distributed exchange and transferred into something that the grocery store actually wants. So I can easily do this and it allows essentially, if you really think about this – and I had no idea in 2014, this tokenization of everything potentially leads to a situation where actually we don't need the fiat currency, so it's, efficient, efficient, barter we've never had the Possibility of that before it used to be that you had to carry the two goats to to trade for the cow so know, you've got these digital tokens and I think that the challenge to the financial landscape is is very, very significant.
So this is a really bigger deal than I thought in 2014, though those those fall quite closely to my thoughts as well actually – and that leads very nicely into my next question, which is: can digital currencies or tokens like Bitcoin, Libre China, Central Bank, digital currency or Some other tokenized security undermine the global hegemony of the US dollar. Yes, so so I think that if you're, we need to be careful here, because, if it's, just like a US dollar coin or a JPM coin or a Libra that's, essentially linked to the u.s. dollar, so Libra is supposedly going to be a diversified portfolio of of Currencies but my guess, it'll be probably 75 US dollar, so so, when you just essentially create a stable coin, you're still linked to the central bank and indeed the central bank will come up with its own stable coin. That'S kind of obvious to me that one risk in terms of the current set of coins out there is that there's, a euro coin there's a Fed coin. This is it's kind of obvious to me that in the future, we're not gon na be using paper for currency yeah. It just doesn't make any sense, just like we're, not gon na, be using credit cards or driver's licenses or or passports yeah blockchain. That provides a way to solve all of these problems, so so I think that the central banks will jump in with their own versions of of crypto sand at one country that's a kind of low hanging fruit is Sweden, where only 1 of transactions are done in Cash in physical cash, so so that's a country that probably be one of the first ones to go.
So the landscape is going to be very interesting. Where now you've got the central banks actually competing with the stable coins. So that's gon na be very interesting to see how that plays out again. This is a situation where the central bank still has control. The central bank is only realizing that, oh well, if we have a digital currency, then we can efficiently collect, for example, a vit like right now. The V 80s in Europe are really high, because people use cash, so you can get whenever big discount. If you pay. Somebody in cash, rather than doing like a electronic transaction that could be traced, so you avoid the vit with the digital currency, it's, basically hardwired into the system with the national crypto Fayed. So I think that these central banks are realizing. Oh well, there's, so many advantages here so number one advantage. We can efficiently collect tax number two advantage. We can discourage illegal transactions because we know what's actually going on number three advantage. You make transactions more fish and that's good for the economy and that's, something that hundred percent of economists would agree on and is very few things that economists are unanimous on so uh efficient transfers of money, that's a good thing for an economy in general number. Four. You can instantly execute monetary policy, so you want to do a helicopter drop, no problem, it's a line of code, so there's all of these very attractive characteristics that once the the central bankers, kind of figure it out it's kind of obvious that they should be in The space and, of course every major central bank has got a team actually working on this, so your your question is originally about the dominance of the US dollar, so I don't think that's gon na go away anytime soon and soon I mean five years.
However, this idea that I'm, pitching that once we tokenize all of these digital assets, is just less important to actually have dollars that I can hold a portfolio of whatever. So I've got a token. That represents a piece of a self driving nuber and I get income from that. I can use that for spending, so there's not the same need to actually have US dollars so and it in in the past it's really hard to save. If let's say you don't have dollars in your agriculture, how do you save well, you have an extra cow or you've got some gold that you put under the mattress today: it's all digital and actually can save in other types of assets. So I think that's, a really big ideas, very disruptive for finance and the current landscape will look a lot different. We'Ll have to give it five years, but we'll see some small changes and then all of a sudden we'll go off the current cliff. I do think that the central bank currencies, as we know them today, are at risk. Thank you, everyone for watching that was Campbell Harvey a professor of finance at Duke University. My name is Jackson and always remember to like subscribe and huddle coin Telegraph like subscribe and huddle.