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- [00:00]
Host (possibly Tyler or Quinn)
Crypto's premier institutional conference is returning to New York. On March 18th to 20th, we're hosting one of the world's best crypto conferences for institutional and professionals alike. It's going to be a ton of fun. I'm going to be there hosting a variety of different panels. I'll be doing a fireside chat with Mohamed El Erian, a different macro panel with Jim Bianco and Joseph Wang, and we're also going to be doing a live forward guidance roundup there where myself, Tyler and Quinn will be chopping it up live for the Guys Emporium. So make sure to get your tickets. It's going to sell out quick. I know it. It's going to be a ton of fun. So come on out and yeah, just hit the link in the show notes and you can go purchase your ticket today. All right. Welcome back to another episode of Ford Guidance. And joining me today is Vincent Delaware, the director of Global Macro at Stonex. Vincent, it's really great to have you on the show. How you doing?
- [00:51]
Vincent Delaware
I'm very happy to be here. And fun day to speak.
- [00:56]
Host (possibly Tyler or Quinn)
Fun day to speak. Lots going on, to say the least. Okay, so I want to start the show by rolling up the red carpet just a little bit. And the reason I say that is because you wrote a report in December that was titled Beware of the Ides of March. And the more I read into it before this interview, the more I was impressed with just how pressured of a call all the different aspects of that report were. Because, you know, there's a lot of different things in there. You know, you had a yet a thesis about inflation in terms of looking at these seasonal adjustments we can get into leading to an outsized hot print in January. And then we got the CPI print today, which came out, we saw a reversal. Just looking at the month over month core inflation print last month that went up to 0.4. It's come back down to 0.2. So that was a really great call. A lot of respect there. You mentioned this idea of a stagflationary concern heading into March that could lead to lower equity prices. Safe to say that's happened. There's a lot in there. So I want to start off by talking about this inflation sequential data that you've seen. So what led you to believe that we would see this hot print in January and then today's print, which is the reversal of that at the end.
- [02:04]
Vincent Delaware
Of the day, it's seasonal adjustments, right? I mean, especially in January. Really what you look at is the process of a complex seasonal model at the Fed. More so than any actual data. And seasonal models work if benchmarks to the past. So if the present is reasonably similar to the past, your seasonal adjustment is going to work. If as I believe we are in somewhat different regime when it comes to inflation, whatever seasonal adjustments you have is not going to be enough. Typically what the BLS does in January is that it says oh, a bunch of contracts reset. Right. If you think about insurance contracts or pricing policies. So if you didn't seasonally adjust, it would be much higher. Right. So they're taking down notch. The seasonally adjusted value is less than the non seasonally adjusted typically in January. The amount of that adjustment is a function of how many underlying inflation there is in the economy. And if we are in a 2% word at this is a certain number. If we as I believe in a 3, 4% world, that number is not going to be enough. So that's why we had and I think last year was the same way as well and probably the year before as well. We had these inflation scares early in the year that were later reversed. And again, that's the way seasonal adjustments work. Right. If you cheat one month, then the second one goes away. Stepping back a little bit on inflation, I may surprise you or your viewers because you know, I there's probably like at this point hundreds of hours of me talking about inflation on, on YouTube and I barely looked at today's reports because did you know that there is that meme on the Internet? It's also tiresome. I think it's about a Chinese worker over his mind. I'm getting that. It's also tiresome point. I mean guys, okay, it's been four years since we have a 2% inflation print. Yes, core PC this and super X core that. But at the end of the day, let's step back a little bit. Yeah, Inflation is not on target. And to some extent I think that's it was really cool couple years back to really get into the rent model and how the lags in shelter will work. I think most people kind of know that now and I feel like a lot of the inflation CPI days are going to be nothing burgers going forward. And that's kind of how I generally feel about today. Like the number was a bit lower but then if you dig below you realize that oh maybe corpus is not going to be so weak. So then we see this with all action in bond prices.
- [04:53]
Host (possibly Tyler or Quinn)
Yeah, I was going to say it's funny that you say that because it Feels like the bond market had the exact same reaction, which is, you know, we don't really care about these, the minutia anymore. Nobody's really talking about super core. It's just like, okay, we see what's going on in the broader world, the broader like global landscape right now and there's a lot more moving parts that are affecting, you know, bond yields as opposed to just the singular print. So were you, you weren't surprised to see the bond sell off today?
- [05:17]
Vincent Delaware
No, not really. I mean, I'm sure we'll discuss that later. I, my concern is that we've seen the low in yields and yeah, obviously it's not a good look for the bond market. Right. I mean you get a hardly anticipated CPR report that's, you know. Yeah, it was a better print than people expected, I think at the end. Not usually, but better. And then you see yields go up on that day, which is kind of consistent with my view that the underlying dynamic in the bond market is not good.
- [05:51]
Host (possibly Tyler or Quinn)
Circling back to that report from December, you mentioned this idea that we would see this head fake in the beginning of the year and then that would roll over and we start see this bit of a slowdown in the economy. You were characterizing that slowdown as being a bit more of a stagflationary tilt to it. So has that gone through how you'd expect it? Because obviously we're seeing you just look at the ISM data that came out last week. New orders are falling off a cliff, but prices paid is surging. So is this going how you expected?
- [06:17]
Vincent Delaware
Yeah, absolutely. And I mean if you would just do a search for stagflation on Google Trends, I'm sure you see the peak. I mean everybody's now is, is talking about, it's amazing how quickly these, these things shift. I mean just, just you know, a month ago. No, no, mid January was, was really, you know, we had all American exceptionalism and, and, and wow. I mean in just two months, you know, everybody now is talking stagflation and, and the, the banks that had like 7,000 targets are writing that down. I mean it's just, yeah, in a way it should, you know, maybe make us a little skeptical. Maybe in two, in two weeks there might be something else. But yeah, for now. And then I expect the data will, will transpire. And I think what's important is the stagflation is not recession. Right. And I still think we're not, we're not, we're not going to see recessionary data.
- [07:12]
Host (possibly Tyler or Quinn)
Yeah, I was going to ask what, what are those key drivers of that lowering growth? Because you know, you wrote at length in that piece as well about obviously there's this narrative and discussion that's come forth now about this fiscal retrenchment, fiscal tightening and a lot of the headlines are focused on what's going on with Elon Musk and Doge. There's the tariff uncertainty that is leading to corporations to pull back on major decisions. But I would love for you to also explain this idea of the state level spending and Covid residual because I think this is the big mover that not a lot of people are talking about. Yeah.
- [07:43]
Vincent Delaware
And this was the reason, you know, to be honest, when I wrote that Ides of March report and, and all these reports talking about stagflation in Q1, I, I was not thinking of Doge on, I mean Doge was just icing on the top. Like if you had asked me, you know, three months ago, I, I would have laughed at Doge and, and thinking just like a Twitter meme and maybe I'll be right at the end. I, I, I, I guess we have, we'll see how it plays out. But I think we're starting to hear to see some of a Doge backlash, you know, in a way. But certainly the Doge thing has added to it. It's been yeah, gravy on the top for Michael, but Michael had nothing to do with, with Doge. It was just, yeah, looking at the stance of policy because I, I, I do believe at the end of the day policy drives markets and the, I don't find the federal budget that interesting when it comes to spending. It's the argument that 80% plus is something you can't touch. It's entitlements, it's defense. And what we think of the role of a government who pays the teacher, who paves the road, who invests in the grid, who pays the firefighter? In the US it's states, citizen and local government. And that's where I think the big story was. For four years straight now we've seen 10, 10% plus growth year over year in spending from local government. The first part of it was the COVID gravy train. And the gravy train hit with a lag. Right. I mean it takes time for the government. Yeah. Especially if you look at the K12 education. Like California just hired a bunch of teachers and you saw that in the job numbers. Right. I mean know the, the job numbers are not real people. Oh look, it's all government that doesn't matter. Like government employees spend too. I mean teachers, teachers buy homes. But anyway, so it was that. First it was Kobe gravy train, then it was the big infrastructure bills, the, the ira, the CHIPS Act. A lot of that money was to be spent by, by s government. And then there was the, the self fulfilling miracle of government spending is like if you spend a bunch of money, then the economy goes up and then your tax receipts go up. So then next year you have more money and you can keep spending. So that has made this great train last for four years. And 2025, fiscal 25 is the year when it's over for a bunch of reasons. One, in basically the blue states like California, they just spend it all. Yeah. I mean, you know, California had a budget surplus of $100 billion budget in 2023. Like, wow. I mean for California to have a surplus, of course, you know, it's been wasted. And then, and now we have cuts. And then in the Republican states we had significant tax cuts. Like I think 20 plus states cut taxes in the past year. And you know, states and local governments, you got to balance the book. Right. So if you cut taxes, your revenue coming lower, you're going to have to get spending. Now there's a little bit of a bu buffer from the like, how you call it, the reserve funds, like Alaska as one of them, like a little buffer thing. And these things are flush. There's about like six months of spending in these buffers that got flushed because the money was coming so fast if somebody could have spent. So it's not going to be necessarily immediate. Immediate. There's some buffers left in the system. But we're going to go from a world of 10% plus growth in state and local to I would say modest contraction this year.
- [11:27]
Host (possibly Tyler or Quinn)
Okay, understood. So I want to make this growth outlook super simple. So if we just take the simple heuristic that, okay, real GDP has been growing at dropping around 3% for the past few years. That's above trend. And a lot of that reason has been this. I'm not going to go as far as saying fiscal dominance, but there's been this fiscal impulse that's been quite heavy in it as you just characterized. Regardless of what happens with Trump policy and Elon policy and Doge and all of that, that's going to be getting pulled back from here. So you're still in the camp that this doesn't lead to a recession or anything. You're saying that the growth is going to pull back. So how far is it going to pull back. And is there anything taking up the slack there that keeps us positive? Because I look at the Atlanta Fed GDP now forecast came out over the last week and there's been a lot of noise there and a lot of concerns. We saw come down to negative 2%. Then it was like, okay, well that was just noise from imports. I think they've, they've readjusted it back to like 0.4%, which is still pretty lackluster compared to where we've been. So. Yeah, like what's taking up the slack to keep us? Do you think we're going back to Trend of like 2% or what do you think?
- [12:31]
Vincent Delaware
I mean, it's a low conviction call and I, I'll start by agreeing with you. Like as I said, I believe policy drives market and big picture policy was extremely accommodative. And so if we look at fiscal policy, we talk about state and local federal policy, I don't think Doge is going to cut as much, but there's going to be certainly if you look at the secondary, the impulse is negative. Yeah, we have less spending and then we have tax hikes. Tariffs are tax hikes. We should call them for what they are. You take private sector money and you give it to the government, it's a tax. Now you can say it's fair, whatever, but it's a tax. So more taxes, less spending, that's fiscal, monetary. My view is that monetary policy was, was never really restrictive, but it's probably getting more restrictive today. Direction of travel, just because, you know, okay, growth, inflation, slow, so the same level of rate is more restrictive than it was six years ago. We also have the, I'm sure you talk about the liquidity stuff, the duration problem, the bank reserves issue, some of these things might start to hit. I think we didn't feel the effect of QT when it comes to duration. So monetary policy, we can have this debate whether it was restrictive or not. My view is that it was never restrictive, but it's only moving in a more restrictive direction. Wealth effect, that was a huge boost of activity because everything was going up. So direction of travel is slowdown. And if I understand correctly, your question is what makes me think it's going to slow by snowdown instead of full blown recession. Right.
- [14:12]
Host (possibly Tyler or Quinn)
Yeah. Yeah.
- [14:13]
Vincent Delaware
Okay. It's really just a gut feeling and I don't want to, you know, I'd be very willing to revise that as, as we get more data. There's two, two reasons. One, the way I view the world I think recessions are going to be very hard in this decade. I think we came from a world in 2010s when we just couldn't get inflation no matter what we do. And now we're just not going to be able to get recession. That has to do with demography, with the level of public spending. Even though it's slowing in the US it's picking up in Europe, maybe in Japan, in China as well. So that would be my guess. I think if you're waiting for something like 2008 where the unemployment rate goes to 10%, I think you're not going to get that could have like soft patches and things that look recessionary, like you look at, you know, new home start and auto sales and some of these things. But that would be my guess. Yeah, maybe. And again, we have a big buffer. We're starting from 3% growth for eight quarters.
- [15:21]
Host (possibly Tyler or Quinn)
Right.
- [15:21]
Vincent Delaware
So we can have a significant slowdown without falling below 0 for, for 2 quarters. So yeah, maybe when you suggested 2, I would probably be on the take the under on that. Like, you know, and then for GDP is so weird because you get this inventory effect and these imports that will create so much volatility in the next number. So I think what you want to look at personal income, things like, things like consumption and income that are better measures of what the economy is doing. So what I look at are the daily treasury statement. You know, it's basically how much the government spending and how much taxes are going in. I can tell you that as of last week, I ran the numbers of last week without income and employment taxes. So, you know, every, every time you and I get paid, the federal portion of our check is wired to the Treasury. That's that number we talk about. So it covers everybody. It's a hard cash number. It was up by 7% over last year.
- [16:20]
Host (possibly Tyler or Quinn)
That's this chart, right?
- [16:22]
Vincent Delaware
Yeah, yeah, yeah.
- [16:23]
Host (possibly Tyler or Quinn)
Okay.
- [16:24]
Vincent Delaware
Very, very robust. Now you could say it's going to hit later, but sure, possibly. But as of now to go from 7% growth to zero this time. And then the second reason is more of a vibe thing. And I kind of go back to this idea of we cannot seem to hold focus for more than two weeks. And remember four weeks ago this was all about US Exceptionalism and the golden age of American growth. And now it's all about stagflation. My guess is in two weeks there's gonna be something else. And I'm kind of like reminded you, you know, like the SVB stuff. Like two years ago almost the same time and there was this panic about the recession and then companies, you know, if you read earnings transcript back then they would say, yeah, well we saw a little bit of a dent, but it lasted for two weeks. It takes a lot to get Americans from no longer shopping. I think banking crises are worse ring to it than what are we talking about the uncertainty about tariffs? That would be the, I don't see the US Consumer adjusting the spending plan significantly because Trump is tweeting about tariffs.
- [17:46]
Host (possibly Tyler or Quinn)
I do want to ask you something about that specifically is that obviously there's this uncertainty about whether tariffs will actually happen or not. But something you just mentioned a couple of minutes ago is that, but regardless of whether that comes to fruition or not, we've already seen this huge tariff running. So we have a ton of imports that are hitting the shore. So there's like, there's always, there's going to be some meaningful impacts regardless of what happens from here on out, right?
- [18:07]
Vincent Delaware
Yeah, yeah, absolutely. And that's, I think that's kind of one issue with the art of the deal strategic tariff man approach. Right. It's the idea that, oh, you don't, you have this free car, right. That Trump can keep playing. And we've certainly seen that with, with Colombia, with Mexico, with Canada, threaten them and then at the last minute, you know, you, you claim victory and, and, and you, you do a complete 180 and, and you don't put them. And, and from the perspective of Trump, it's like a, a tool that he thinks he can wield without, without cost. Right. He can extract concessions from his, from his neighbors without actually ever putting the tariffs. So it's, it's free. Well, it's not free because when you threaten stuff, people change their behavior. And you certainly see that in the imports. Right. That, that g debacle. Right. Because I think we'll pull some gold from Switzerland or some stuff like that. Yeah. So even if you don't put the tariff, well, if you're an importer, you've already brought forward your inventory and that messes up your plan. And maybe you, you did not invest where you thought you were going to invest. So you create friction in the economy and, and, and you've slowed your economy. And what did you do in exchange? Like some, some vague promise to put some mounted horse guards on the border to catch feton. I mean, like what are we getting here? You know?
- [19:25]
Host (possibly Tyler or Quinn)
Yeah, yeah. It's insane. Yeah. So I mean that's the thing is that there's, there's, there's so Much noise right now as we try to figure like to your point it in two weeks it could change again. But I know you mentioned that you really focus in on the daily treasury. Is that like the most like real time hard data? Because obviously we have these leading surveys like isms and know like you know inflation expectations but my opinion is those are very hard to find signal in because they've been like heavily politicized and nobody actually knows what's going to happen. But what you're saying is regardless like the real time hard data is. Is still pretty okay.
- [19:58]
Vincent Delaware
I've long been generally skeptical of of surveys and and I mean I I was meant to work for the the French Ministry of Finance which main job is to squeeze this dry lemon of any for French economy as much for taxes. So that that hence my obsession with taxes which I'm I still understand why people don't look more at it.
- [20:23]
Host (possibly Tyler or Quinn)
Right.
- [20:23]
Vincent Delaware
I mean if you can see how many people how much taxes people are paying, you know, you don't need to ask you know, 50 purchasing manager how we feel today or a couple thousand businesses, you know how many employees they have on payroll or like all this stuff since seems to me like a big scheme to hire PhDs who would otherwise be baristas or Starbucks. So that's in general I think in particular now for the reasons you explain. One is the insane politicization of of all the soft data. You know, I mean I should not ask. I don't if I know how you voted in November. I'm not even going to ask you how you feel about inflation or growth because that that got that going to give that's going to give me the answer. And you see like the, the you initially break the inflation expectations are they in Democrats? And I mean you see basically since Trump that the two lines completely cross and reverse. So it's like how much credit can you can you put into these things? And then thirdly and something that we talked about in other podcasts is to me the greatest story American story growth story is the rise of the gig economy. We are becoming Brazilian again where typically you go to an emerging market economy and you have this huge informal sector where 90% of the population is employed and then a tiny formal sector for you know, the government and union and then as development happens that one shrinks at the expense of the other. I think the US is going the other way around the and you know, I think it's a great thing in May and it could be a great thing, you know, gives people more Flexibility, certainly more in tune with the vibes. Right. We don't want to, you know, spend our lives at a corporate job. Like that's what Gen Z wants. That's what technology allows us to do. So that's fine. But that just means that your, your official statistics like the establishment survey is going to miss the boat. You need to look at, you know, how much money people are making on Uber only fans, Instagram influence. I mean, ask a 12 year old what he wants to be. I mean he's not going to be, you know, my kids don't want to be firefighters or astronauts. They want to be, they want to be YouTube influencers. Good luck with that. So that, hence my focus on tax collection because to the extent there's a data set that would capture that stuff, that would be it. And, and, and I realized that tax collections are not leading indicator. So I'm, I'm probably going to be late on that. You know, it's like if you want leading. Yeah. You kind of have to do that survey thing. But then again you get in the vibe problem right. Where you just capture. Yeah, yeah. So that's why, that's why, you know, I would rather be a little late with, with looking at real time indicator than, than, than getting it badly wrong by looking at leading indicators that the historical tracker of being wrong. The other thing I'll point is that the Fed itself kind of has lost its, its ability to be proactive.
- [23:46]
Host (possibly Tyler or Quinn)
I was going to ask about exactly that.
- [23:48]
Vincent Delaware
Yeah, yeah, yeah. So it's like that the Fed is. Oh, that they messed up so much and they talked so much about being data driven that I don't think they can move policy before the actual real time data. Like you can't just say, oh, that survey was bad. And I'm going to suggest that they messed it up too much. So that's why I think it pays to, you know, be kind of humble and like, yeah, you know what, I don't know what the economy is going to do, but I know what the tax collections were today.
- [24:13]
Host (possibly Tyler or Quinn)
Yeah, absolutely. I feel like that, that you know, being burned last September a little bit and even the year before as well, it feels like there's just been multiple times. And so now we're getting to this point where I was looking at that Powell prepared remarks last Friday and amid all this market volatility and talk of panic, he sounded pretty upbeat and not really changing his tune. So. Yeah. Do you feel like that's setting up a potential mistake for the Fed just because of how many Times they've been burned. And now if this is actually at the time when the economy starts to actually wind down from this above trend, 3, 3% GDP growth we've had, this is the time where they're actually going to sit for too long on their hands.
- [24:52]
Vincent Delaware
It's possible. I mean, I, I don't spend a lot of time watching the Fed, but I think there's a risk of that. I, I also don't, I'm not a big monetary policy guy. I mean, I also don't think that, okay, even if they did it right, even if I'm going back to. It's also tiresome stuff, even if it did cut by 25 basis point and change this word from the, from the statement from moderately accommodating to cautiously whatever and then move two dots on the dot plot. I mean, you know, if the economy is going into recession, you're not going to save it that way. And if the economy is fine, then you're just going to have to like, you know, move it back upwards.
- [25:36]
Host (possibly Tyler or Quinn)
So crypto's premier institutional conference is returning to New York. On March 18th to 20th, we're hosting one of the world's best crypto conferences for institutional and professionals alike. It's going to be a ton of fun. I'm going to be there hosting a variety of different panels. I'll be doing a fireside chat with Mohamed El Erian, a different macro panel with Jim Bianco and Joseph Wang, and we're also going to be doing a live forward guidance roundup there where myself, Tyler and Quinn will be chopping it up live for the Guys Emporium. So make sure to get your tickets. It's going to sell out quick. I know it. It's going to be a ton of fun. So come on out and yeah, just hit the link in the show notes and you can go purchase your ticket today. Okay, for the second part of the conversation, I want to deep dive into bonds, fixed income, bank reserve liquidity and all of that because in your note you did mention, you know, to your point, these funny little changes afford guidance and dot plots and stuff is not going to move the mark. But what you are making the argument of is the real things that move the mark are a lot of these dynamics of who are the marginal buyers of duration really. And so I just want to pull up this chart that you have here of just obviously yields have been just through a full on Webster over the last couple months. We got all the way up to on the 10 year near 5% and there was concerns about like a Liz trust type of moment in yields. And then now we're on the other side of things and we've got tens at 4.2 or whatever they are. Now here you're characterizing what's been going on throughout that whole process. So can you just unpack what, what does this chart say and how are you viewing this, this whole whips over the last couple of months?
- [27:08]
Vincent Delaware
Well, so when it comes to the treasury market, I, you know there are, there's the absolute liquidity which is what matters always, right. Buyers versus sellers. But there's I think a second layer which is okay, which buyer and which seller because you have very different functions and, and an ability to hold an asset depending on who, who buys. You know, if it's a central bank that's just buying Treasuries because it's trying to cheapen its currency, you know, they don't care that it moves against them and they can absorb the losses and it's a policy move. So you know that's going to stay right. If it's, it's an insurer that has to raise the capital ratio, same thing. This is like really hardcore funny. My impression, not my impression, the data is that in the past three months the liquidity has gone to the treasury market. Obviously yields have come down and auctions have been well bid. But it came from sources that may not be able to hold for that long. I mean one is the treasury general account, which is the Treasury's checking account at the Fed. Usually they keep around 800, 900 billion in there. And now we have this continuing resolution debt ceiling discussion which makes it harder to issue short term debt. So they have this buffer and they took it down not as much as 20, 23, 22 when yen went all the way to zero, but still a couple hundred billion I think as of last week. So again it's not immediate. They still probably around 700 billion in there. So you can keep doing that. But you know that whatever, you know, eventually you have to refill your checking account, right? And when you refill your checking account you have to issue debt. So that's not long confronting. The second source that I noticed, which is somewhat more unusual, are primary gears balance sheets. So US debt is not so generally directly to the public, right. It first goes to 12 or some number, I think Stonex, one of them now primary dealers that bid for it and then they distribute to the public. So at any given point they have Treasuries on their balance sheet. They may hold some of these Treasuries for other purposes like capital ratio and urine stuff. So window some of that. But generally I think that the average is about 200. They have about 250 billion on average and now it's about 400 billion. 450 billion. So some I, I would assume that normalizes and, and that gets distributed to end buyers like they, they're just intermediaries. Right. So it's like a, a pipeline. Right. So you got, you got more stuck in the pipeline but eventually it comes out and then the last one has been really the story of the past three years now is, is we had all this excess liquidity that the Fed injected after Covid and, and they had to create this facility, the reverse report facility because, because everyone had too much money. So you can park your money on the fed funds right there in the reverse repo facility. And then that's been coming down from about I think a peak of 2.5 trillion to about 600 now. So again there is money in the reversible facility still. So we can keep going for probably another couple of months more than that TGL we can keep depleting and then the balance sheet private years. I think, you know there is demand for Treasuries right now. So I don't think they'll have problem getting it out of the market in the market. So it's not immediate, but it's not a sustainable like past. I, I would not think that you know the, the past maybe May June. I, I think we'll go back to the, the same issues we've been talking, you've been talking about for a long time about this duration problem and how do we fund the deficit. These things have not been solves and they will come back to haunt us.
- [31:08]
Host (possibly Tyler or Quinn)
Right. And so you know the main argument you're making here is that yields have come down lower for temporary and artificial reasons as opposed to. It's, it's not the headlines of oh doge is cutting so much that the fiscal deficit is going to decrease and therefore yields are coming lower. It's more so just like a coincidence and it's, it's more these temporary flows.
- [31:29]
Vincent Delaware
Yeah, absolutely. I mean I think narratives matter and the fact that those, I mean I thought those would be a total nothing burger. It's, it's not like there's a couple hundred. Was it 10,000 people? I think yeah, there's some layoffs for sure. The, the dry ass or some layoffs like if you see home prices in D.C. i mean the pain is real, but it's certainly so going back to my daily treasury statement data. So I look at okay, how much money is coming out and if you look at federal salary expense, it's up by 12% this year. And again it doesn't mean that Doge is total BS, right? Because in the Elon offer you had like until September, right. And then you could just, you didn't even have to show up to the office like here you'll have full pay, full benefits. So whatever Doge does not going to show up until, until September. So it could be that, that, that we're not seeing Doge yet. But yeah, the point is I really wouldn't bet on a significant reduction of the US deficit to the point that if you look at the term premium, which is the premium of a long term treasury of a short term Treasuries and It's collapsed by 50 basis points since and it seems a bit maybe on the margin doge will shave off 0.02% of the deficit. But is that worth 50 basis points of some premium? I don't think so.
- [33:01]
Host (possibly Tyler or Quinn)
Yeah, so I mean really I just had a look and the 10 years at 4.3 today. So if for it to get below 4 is it basically like we need a recession for that to happen at this point?
- [33:09]
Vincent Delaware
I mean anything is possible. But yeah, that would be my guess that yields are going to creep back up. If I were to summarize, my market view is I think the bottom in yields is in and the bottom in stock is not.
- [33:24]
Host (possibly Tyler or Quinn)
Got it.
- [33:24]
Vincent Delaware
Because the bottom yields is.
- [33:27]
Host (possibly Tyler or Quinn)
Yeah and I, I know you mentioned that a lot of that has to do with like this, these, these rebalancing flows especially of like target date funds. So can you explain how that impacts the current situation which is to your point, equities have been just about, they just about hit a correction at this point. At the same time the bonds have rallied pretty significantly. So what's the impact there in terms.
- [33:44]
Vincent Delaware
Of the flows going back on target date? And I'm sure you had migraine many times and he's done some fantastic work there. But it really matters because it's the, and since 2006 it's the, the default retirement option is okay, we, we'll put everyone, you know, people don't save enough for retirement and, and they don't rebalance. So we'll force everybody basically to, to be by default invest in a target date fund. So if you're, you know, you want to retire in year 2060, you'll be 60 40, you know, whatever with, with a set allocation, usually a very high allocation to stocks which I think is be worried but and, and then that fund is going to be managed by like a Vanguard or TIA Craft and then, then you know, they're not, they don't have analysts there. I mean they have an algorithm. You know the algorithm is okay, how much money do I have? What's my portfolio? What do people like? They should be in and then they just buy and sell based on that. And so if you have a fixed allocation between two asset class classes, you always need to sell the one goes up by the one that goes down. Right. Because if you don't do it, you drift away. So I actually ran the number as of yesterday. Let me see if I can find it on a HIPAA hypothetical 6040 fund. Then by, yeah, by Monday it would need to shift, I mean I assume it was all in long term Treasuries on the bond side which is not, I mean it's going to be more the Barclays Ag that so, but whatever the numbers are not too far off. It would need to shift 7.4% of its holding from the bond side into the equity side to offset the move where we've seen stocks go down by 10% and treasuries rallies by, by, by 7, 8% and you know we're talking about a 4 trillion industry target date funds and then there's probably more so other kind of in other strategies that have a fixed allocation. So you move 7% out of 4 trillion and typically my, my impression is that these things tend to happen not necessarily like the, the third Friday of, of the, like don't get, don't, don't convince, like don't get me to say this, this is the day. Okay. Although historically it has been if you look at the four market bottoms it did hit right on the, right on the third Friday. But I, I, I suspect it's going to be somewhat different this time. So in last two weeks of March some of that rebalancing activity is going to take place. And that rebalancing activity means that target date funds will have to sell bonds and buy stocks. So if the past is precedent, I would expect that stocks will be better in the last two weeks of March and yields will slowly creep back up as target date forms, rebounds.
- [36:33]
Host (possibly Tyler or Quinn)
How do you think Scott Bessant's going to feel about that? Because it feels like, you know, we're all speculating still but it feels like a lot of what they want is lower yields and they don't mind if equities come down a bit lower for the cost of it. So if that starts to head in the wrong direction, how do you think he'll feel about that?
- [36:49]
Vincent Delaware
Yeah, I think you're right. Not too good. I think the focus of this administration and this nutrition is very clear. That's one area where they've really been on target when it comes to communication. Like with Scrum. Sometimes you, you think like you're watching the Apprentice, right, Where people like, you know, air out there, the dry laundry in public and contradict each other and King Trump watches them and is smiling. But on the messaging, when it comes to treasury, the stock market, everybody says the same thing, don't judge me on the stock market. The stock market is Biden's stock market. Now, I don't know how well that's going to be because I feel it's already too late for them to tell that, honestly, Americans. But the more time passes, the harder that line is going to be. But our goal is to get the 10 year yield lower. And then listen, I think they're right. If you want Trumpism to work, you really need the 10 year yield to be much lower. And yeah, the stock market, it was really overvalued. At some point, you know, you're going to, you are, you're going to get a correction. I mean, if you're going to tighten policy the way they are tightening it, there was going to be correction. So maybe, maybe you get that correction first while you still have your capital. And that's kind of the conspiracy theory element, right, that Trump is, is, is, is setting up for a market rebound next year. He's like, okay, at some point I'm going to have to get a bear market, better get it early so that I can, I can run on primary and not in the middle of the bear market.
- [38:30]
Host (possibly Tyler or Quinn)
So yeah, you know, obviously paired with that is also this confusion of, yeah, what are the goals? Obviously there's, you know, wanting to pump up markets later on closer to midterms, but there's also the idea of goal of okay, if we want to lower yields, is that because Scott Besant is trying to clean up the duration mess that is the portfolio at the moment and what could be happening on the side of Jerome Powell as well. So I'll bring up this chart to just really frame up this conversation and listeners. I listened to the Andy Constant interview a couple weeks ago. This is a lot of the similar stuff that's going on here. And so there's a few different parts I want to tie in before I let you unpack this. But okay, if they want the 10 year down, this is at a time where bills issuance has been the dominant strategy for Treasury. So my first question is, do you think they're trying to get the yield down so they can refinance those bills at longer duration? And then the second question is, do you think Powell is on the board for this because it allows. His goal is to try to match the duration of the SOMA portfolio to what's being issued on treasury right now. And as you have in this chart here, it shows that it's the complete opposite right now. So the treasury duration is 3.5 years. The SOMA duration is 14 years. So yeah, how do you take those two goals or hypothetical questions and how does that all come together here?
- [39:51]
Vincent Delaware
Thank you. First of all, yeah, that, that, that interview with Andy was awesome. I love how like both of you clearly set it up because these things can be, you know, complicated. And you, you did fantastic job. And he's very good at almost like professorial, especially with the gray beard. Yeah, yeah. People should rewatch it because I, yeah, I think it's a very important issue, one that we've kicked down the road for a long time and then at some point we're gonna have to deal with a mess. When is that point, I guess is your question. I, I suspect there's gonna be more can kicking. Is this the, is the, I think that the reason Besant wants to, wants to lower your yields. I mean surely there is part of that idea that you, you explained like rolling over. So he has all these bills, I think 60 of, of issuance in the past two years has been in deals which is really em, like. And I mean any treasury that doesn't like to see that. Right. Kind of like on, on quicksand here. But he really, he really wants loyalty. I think it has to do with mortgages. Like he, he wants the, that, that's one way Trumpism works, right. Is 10 year yields full and people refinance. And finally like the, the housing market clears, construction goes back up. That, that whole like positive growth story. Also, you know, yields are, you know, the, the debt servicing cost is more than the Pentagon. Right. A couple trillion trillion plus a year. Right. So you pay that interest. So this is, I think this is the main argument that yes, the treasury and Trump want low yield. Stock market is an afterthought. So if we accept that, I think it makes it less likely that they will do quote unquote, the right thing and, and then flood, you know rebalance the split between bills and coupons. But it does provide I think a somewhat of a flow for yields. Right. Because if, if they see that the, the, the demand is good, you know that there's this, this backlog of supply that they want to get out of the boundary but I, I don't think they are in any legal or, or regulatory obligation to do so. I mean this is mostly on their own making. I think there's this rule of thumb of what 30% of, of the, the debt has to be or bills. Yeah.
- [42:38]
Host (possibly Tyler or Quinn)
22 I think is like their, their, their goal but to your point it's not forced, it's not actionable.
- [42:43]
Vincent Delaware
Yeah. And then on the other side we'll see what the Fed says and, and does. By the way if I may recommend John Hilson Raf just joined Stonex and maybe you should have him on because he would be better than me at explaining that how the Fed thinks about it and they have these big policy power where they're going to review that and I think the balance sheet is going to be the main question. More so I think than SCP, all that stuff. I would focus on what they want to do with the balance sheet. The problem as you mentioned on your interview with Andy is when they bought, they bought too much duration during QE and then as time passes by definition the paper mature first. Right. Bills mature first so your portfolio becomes heavier and heavier in long term Treasuries and also the mortgage backed securities are not maturing because people are not refinancing and the mortgage back were always with mature basically 30 year. Right. So their balance sheet on what I saw on the soma holdings about 14 years. So imagine if you're a bank, I mean they are not right. And we have to be careful with these comparing the government to the household or the Fed to a private bank. But still if it were a bank it would be SVB where your liabilities are bank reserves. So deposits with maturity of one day and reverse people facility and then your assets are a bunch of mortgage backed securities and long term bonds. Now I don't think it matters because contrary to SVB people cannot yank their money out of the Fed. But it means that every time yields go up they have to report a very bad H4 1 loss on their capital.
- [44:42]
Host (possibly Tyler or Quinn)
Yeah, like you have here.
- [44:43]
Vincent Delaware
Yeah, this one goes on Twitter all the time. Usually it's with some asinine comment on the. You know first gradually and then all at once or the Fed is bankrupt or Whatever. No, it's not, but it's still not a good look.
- [44:58]
Host (possibly Tyler or Quinn)
Yeah. How much credence do you give to the theory? So obviously, you know, the big goal here is they need to recalibrate towards duration. There's this talk about a Mar a Lago Accord, and this also this talk about potentially issuing century bonds as an exchange for security guarantees. That's an interesting premise where it's like, okay, if the goal is to get yields down and then try to, you know, create some sort of agreement that is like, okay, you take these, these undred year duration zero coupon bonds, you're gonna, you're gonna, you're. It's guaranteed to be a loss because we're issuing them at the lowest of yields. But that's just the cost of doing business for having your security guarantees. Do you have, do you see any credence to that theory?
- [45:42]
Vincent Delaware
Yeah, I mean, practically, I have no idea how to the details, how that works. I think the devil is in the detail, but I think the people who've been proposing this theory are very smart. So really it's Sultan Posner and Steven Miran. For those who haven't read it, I know Sultan Steph is behind a big paywall, but Stephen Miran, a great paper when he was Hudson, Hudson Bay Capital.
- [46:11]
Host (possibly Tyler or Quinn)
We interviewed him for it in November. It was cool.
- [46:14]
Vincent Delaware
You know, are there days when you just marvel at how awesome your job is and how crazy it is that.
- [46:23]
Host (possibly Tyler or Quinn)
Like, I get to just ask people that I respect highly and learn from them? Like, it's, I would do this for.
- [46:29]
Vincent Delaware
Free and then we can, you know, I remember talking to him on Twitter, like, like we just, like, like four years ago, that 2020, that would have never happened. Right? And like there are a bunch of like, you know, I, I guess I'm an aging millennial now on, on Twitter, I can like, like actually be part of conversation. And, and I mean, what you guys have done with, with Jack, I mean, it's just that that whole podcast thing, I keep being amazed by it and, and how cool it is that, that we, we get to be part of that conversation, which I like. You know, four years ago that maybe there would have been like five people being closed door that would really understand the ins and out. And yeah, if we want to really understand how things work and pay attention, we can find this. And it's amazing. So yeah, I lost my train of thought. Oh yeah. What do we think about? So, yes. So yes. So I think the people who are proposing me are correct. I think it's an elegant solution to a system that we know is unsustainable. I recommend people would go back a couple books I like. One is the Battle of Bretton woods and that goes back to explain the debate between Keynes and White about how to set up the global military system and all other issues that we talk about. Basically, I think Keynes was right. If you want to use a national currency as the world reserve currency, you're going to create a whole lot of problems 20 years down the road. And we are down the road. I mean, 20 years. The anniversary of Brett's boots was the breakdown of the gold standard in 1971. And to me this is another. Which gets me to the second book by the way, which I think it's called Three Days in Camp David which talks about narrates the three days where basically Nixon decided to walk away from the US commitment to redeem central bank's reserves in gold at $35 an ounce, which was like a huge default. I think we are in that. I mean again, the system leads there. I mean at some point it's insane, but at some point you got to do something. The. The centennial bond. It's. Yeah, it's. It's ugly. But what are your other options? What else I think is the least bad option, honestly. And if it's implemented well, yeah, it's good for us, right? We basically, we screw over the Europeans and the Japanese and the Chinese and they pick up the bag like they in 1971. And if we manage liquidity correctly.
- [49:11]
Host (possibly Tyler or Quinn)
Will.
- [49:11]
Vincent Delaware
They even feel it? Like it doesn't matter? I don't think the central bank of people banks of China when they bought treasuries 10 years ago because it kind of stopped anyway. They didn't do that for the coupon income, okay. They did that for currency management. And I don't think they should, by the way. I don't think we can't run our country by paying a universal basic income to adversarial central bank every time we raise rates. I mean that's not a sensible way to run the global metric system. So yeah, the idea is we get everyone on the table and we tell them, listen, we just. We really don't want to pay you. But at the same time we don't want you to sell your stuff and cause chaos or do like start a BRICS currency or. I mean I don't really believe in this stuff. So what we'll do is we'll give you that new bond, the Bradley bond, Centennial bond. And it's great. It's like the Gold Ring card. It's amazing. What does it do? Oh, it means you get to pay more for it and it doesn't pay you anything, but you can deposit at the Fed and get dollar liquidity. So from, you know, as a central bank, you don't care. You're not here to turn profit. Right. So you still have liquidity. The stamp's not breaking. All that happens. I walked away from my obligation to pay coupons. But we're not going to call you the default because it would look bad. We're just going to limit it to the official sector. So that's not going to impact the treasury market and cause Europe to blow up and destroy the financial system. And because it's so complicated, even though It's a default, 99% of the people won't understand it. It's some sort of wheat currency swap. And yeah, it'll just fly. And then the US will have saved 500 billion a year in interest expense and the world will be a better place.
- [51:07]
Host (possibly Tyler or Quinn)
Okay, the final piece I want to add to this whole yields discussion is bringing forth what's going on in other countries. Obviously we have Japan, yields that are soaring. We have the German boon story, which I'll just put this chart, which I love. It's always crazy when you apply a move to a normal distribution and then just look at how many standard deviations out, it turns into a 120 million year event, which is just insanity. But this is just showing the surge in German boons. And so I want to ask you, how are you thinking about the surges in other global yields and how that comes back to this, this US situation as well, you know, is that also going to keep yields elevated?
- [51:48]
Vincent Delaware
Yeah, no, it's part of this kind of general era of rising yield, rising government spending, structural higher deficit, and typically, you know, the US being the, the, the world economy that the hegemon experiences these transitions before and Europe and Japan were stuck for a bit longer in this era of fiscal repression, low inflation. But the transition that the US has undergone since COVID seems to be hitting in Japan and Germany. So the immediate driver for Germany was this complete 180 from the German government. Funny coming from the CDU. Historically, the party of austerity and debt breaks. And the new chancellor, Ferris Maers just said, hey, we're done with this. We are rearming. Ursula Vandalay and the European Commission went along with him. Say, we're going to take off military spending out of our stupid rules that make no, no sense anyway. She threw a number of 800 billion. Now you look at it, it's not really 100 billion, but the vibe shift is really real in Europe and yeah, same story in Japan. And then I think it matters because Europe and Japan were the biggest exporters of capital. And what we are seeing is a nationalization of capital. At the end of the day, I think people need to really understand that it's like a reflection. What happens with trade is perfectly offset with the capital account. That's how balance of payment works. And there's nothing else. Right. I mean, there's two parties to every transaction. So if you sell something, someone buys. So whatever's happening in the trade side happens in opposite direction, the capital side. So my impression of, you know, what Trump wants to do and the world wants to do is we've gone too far with this whole globalization idea. It's not good. It's not good for Europeans. We'll say it's not good for the planet. We shouldn't be importing milk from New Zealand and shipping it when we have great cows in Ireland. And the Americans view it more from a kind of a national security job argument, like, oh, we've outsourced our jobs to China and there's more to the American dream than just cheap stuff at Walmart. And, and, and, and, and we need to walk it back. And I think there's a global consensus on, on, on, on thinking that we've gone too far with free trade. So we want to solve the deficit part on the trade side. Now, like I said, there's always, there's a counterpart, the, the, the, the counterpart of that deficit. So the US has been the consumer of last resort in terms of goods and the rest of the world has fed the US with money. That is the other side. Right. So before 2014, that money used to go in treasury markets, the sovereign wealth fund, Central banks accumulated the reserves. Since 2014, that has gone really into, I would say stocks, honestly a max 7 stocks. Okay. I mean, I spend, my, most of my trips are to Europe or Latam talking to pension funds. I mean, it's ridiculous how much they have in US Assets. And the reverse is not true. No US Pension fund has a significant allocation to Chilean stocks. We are trying to solve, if we are solving the trade stuff, and I believe we are, if Europe is going to build its own weapons, if the US Is going to produce its own steel, then the capital side is going to be impacted and the savings that are generated by Europe and Japan will stay in Europe and Japan and this is the part that I think matters for yields and means that we won't have this great recycling. And this is why what's happening in Japan and Germany will come back to the treasury market. And one reason why I don't think yield. The bottom is in for yield and I think over time we'll see. I guess by the end of the year we had 4.5 on the 10 year and we'll see 5% plus because the marginal saver. The gnomes of Zurich. I think this was a. I forgot it's when the pound was getting kicked out of one of the many European monetary system because they couldn't run a budget. And then there was this posh British Prime Minister. Oh, we will not let you know the, the great British Empire be dictated by some gnomes in Zurich.
- [56:57]
Host (possibly Tyler or Quinn)
Yeah, okay.
- [56:58]
Vincent Delaware
Yeah, okay. The bankers in. But the gnomes of Zurich won that battle. By the way, the pound was kicked out and the treasury, the, the, the, the, the, the great British pound was. The gnomes of Zurich rule the world. And my impression is that for a long time the gnomes of Zurich were very happy to first send their euros or their yen as treasury reserve and then send them into the US capital market. And if the gnomes of Zurich, either because they want to or because they are forced. We're only talking about. There's no free market if you're a big pension fund. I mean half of them are filled with politicians or retired. But this retired politician will go on there. Or if the government tells you, hey, okay, you're going to change your allocation from US stocks to German defense, you will do what you're told. It's not. That doesn't have anything to do with the capital market expectation or you know, equity risk premium. You do as you are told. And you see already these noises in Europe. I think it was Christine Lagarde. Yeah. She mentioned, oh, we need to mobilize European private savings into some. I mean two months ago it had been some climate change. Now it's Ukraine, you know, whatever.
- [58:33]
Host (possibly Tyler or Quinn)
But Ukraine repairing fund or something.
- [58:35]
Vincent Delaware
Yes. And corruption and blah blah, blah. So I mean if we have. Now it's about building the army now if we have the peace, it will be about rebuilding Ukraine. If Ukraine is rebuilt, it will be about, you know, the green transition or whatever. But the Europeans are not stupid. I mean they see, okay you, they see Trump and Biden before him really just constantly using them as punching ball. On the trade side it's like, well, okay, but on the capital side we are stronger than you are. And then we have this super high savings rate. Europe may not grow but it's still super wealthy and we're not going to just piss it away to get kicked in the teeth. And I think that's a great trend of the past 15 years is the renationalization of savings.
- [59:23]
Host (possibly Tyler or Quinn)
Okay, so to wrap up here, distilling all of that down into a market view, obviously the trade of the year has been long European stocks, short American stocks. Do you think that trend is just getting started?
- [59:36]
Vincent Delaware
It could, yeah. I mean there's only room on the valuation side and then there is obviously a bit of a self fulfilling. I think with most market movements you have to ask yourself is this a mean reverting process or is this a self reinforcing process? And I would think that the, especially if you look at the chart, long term chart, do the MSCI US divided by the MSCI acqui x US and it seems to belong to a latter category of the self reinforcing ones where you have these super long 10 year cycles. Right. Basically in the 90s it was us beating everybody. And then from 2001 to either 2008 or 2011 depending on which market you have, you have just constant outperformance by international assets and then since 2011 just you. So and I think that the reason why self fulfilling ultimately has to do with, with, with, with with the dollar and currency mechanisms that make it, reinforce it. Right? I mean you, you buy the asset and the currency goes up so your return keeps getting high and higher. So I could see a, a path where you know the, the max 7 domination $milkshake plus max 7 domination flips back and it's like well they start bringing back and now European stocks are performing and the Euro is outperforming and then your boss at the pension fund is calling you, well why do I have 50% of my asset in, in these U.S. stocks that you know that.
- [61:14]
Host (possibly Tyler or Quinn)
And it's unhedged.
- [61:15]
Vincent Delaware
I mean it's. Yeah, it's unhedged. I'm getting kill price and I'm getting another 10% down when and I mean think of it as a Japanese pension fund. Like Here, what's the 30 year in Japan? Not 2.6, something like that. I mean these levels are just mind blowing. So why take all that risk? Why go abroad in a potentially adversarial. I mean from the perspective of Europeans and I don't Japanese so much but we just think this is all weird, like we don't like it, we don't understand it and we just don't, you know, like we're very conservative people. Right. So we don't want to be caught. Oh. Like just not a good look to have like 60% just go back. I mean everybody tells you to buy your defense stocks, buy European defense stock, buy the Japanese bonds. You have better yield than you had in 40 years. At this point. You have no currency risk. You please your regulator, you please your politicians. So then. And the more you do it, of course, the more the trend.
- [62:13]
Host (possibly Tyler or Quinn)
Yeah, yeah, yeah. And then you add in the fiscal impulse too, you know, the, the 500 billion.
- [62:17]
Vincent Delaware
Yeah.
- [62:17]
Host (possibly Tyler or Quinn)
And the unshackling like that. That can further amplify the multiplier too.
- [62:21]
Vincent Delaware
Yeah, absolutely. I mean broad picture. If we just go back to this idea that, that that markets are policy driven. In the US we have fiscal austerity with both cuts in spend and tax increase. Again, tariffs are attacks. Monetary policy that's kind of like, you know, neutral. Ish.
- [62:47]
Host (possibly Tyler or Quinn)
Nothing.
- [62:47]
Vincent Delaware
Yeah, but not much going on there. The only thing that's going on is this kind of duration problem that we know is going to back out. We're going to have some balance sheet people issue. So monetary policy is not going to be a source of big support. Overvalued currency and overvalued assets. Right. And we look at Europe or Japan, it's the exact opposite. Right. We had austerity, we are moving towards that. The impulse is going to be more positive. We had very negative sentiment. And then on the monetary policy, I don't see the same issues in Europe as we have in the U.S. so yeah, I think that trade long euro, not just Europe, but really rest of the world. Rest of the world. Yeah. It's finally the year where it works.
- [63:37]
Host (possibly Tyler or Quinn)
Yeah, that is a huge macro shift. Okay, well Vincent, that was a really great conversation. Congrats again on the call in December. That was very, very prescient up to the month as well as saying ides of March. So well done on that. Where can folks go if they want to hear more about your research and work?
- [63:53]
Vincent Delaware
Twitter. If the easiest way is to follow me at Vincent V I N C N T deluar D E L U A R D and then if you go to my profile pin tweet, there is a link to get a free trial of my report. And yeah, if you put an email that is not a crazy yahoo.com email, we will honor that request and you can reach out to me by messages or my Stonex address. And then also if you are a Stonex client, reach out to your coverage and ask to be added to my distribution list. I write one report a week every Wednesday. And, yeah, otherwise, I'll keep doing this podcast because I. I've really been so grateful for all these conversations. So thank you.
- [64:56]
Host (possibly Tyler or Quinn)
Yeah, thank you, Vincent. That was awesome.