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- [00:00]
A
They say that a hero can save us. What is going on? Mr.
- [00:08]
B
I was not expecting Nickelback to hit me this Monday morning. I haven't heard that song in 20 years.
- [00:13]
A
It's, there's a meme going around with it this morning, so it's stuck in my head. What's going on, dude? How was your weekend? Happy, Happy belated Father's Day good.
- [00:23]
B
Yeah, it was good. Happy belated Father's Day to you, too. Happy Father's Day to all the, all the dads out there. We need more strong fathers. So, you know, if you're, if you're still considering fatherhood, step it up, dive in. That's what one big thing this country needs right now. But as far as what we're here to talk about, I felt like it was a very poetic weekend because I sent out the timestamp early, you know, like 10am Saturday morning. And literally, you know, the whole headline, the big touchstone for the week is the US Iran deal that we finally came to. We signed a memorandum of understanding to do further negotiations. But this seems like the most real milestone thus far on this whole thread that we've been on. And then not 20 minutes later, took only 20 minutes for Iran to come out with a headline that actually they're closing straight before moves again because of one thing or another that the US Or Israel or someone had dishonored or not respected in the agreement. So it looked like maybe we're going to be back to square one. So we'll see how that plays out this week. We'll get into it.
- [01:26]
A
Yeah. And there was a delegation with J.D. vance and others. Were they in France? And apparently there was supposed to be some back room conversations happening there. There was a lot of, I tried to stay offline as much as possible this weekend, but I did catch that there was some missed photo op opportunity or some nagging on behalf of the Iranian delegation to JD Vance and his crew.
- [01:52]
B
Yeah, I think so. I mean, very true to this whole conflict. Both sides are constantly trying to portray themselves as the much stronger one and puffing out their chests and trying to make sure that their various state medias are following the narrative that they want. So I think overall we can flip to the next slide for some additional color here. I think based on what we're seeing on the oil side, if you can believe the fake news media of Bloomberg and the failing New York Times. And you want to look at oil price action over the last few weeks and even into this morning, WTI is now even lower than what you're seeing here. I think this would suggest that probably the US's framing of events thus far is closer to the truth that we're seeing on the ground than the Iranian state media portrayals. But again it wouldn't be the US Iran conflict if there were not constant fog of war on every single little detail.
- [02:55]
A
Yeah. And so the saga in the Middle east continues though one thing we've been trying to do over the last six months, or gosh, it feels like six months, but five months since this war broke out is to really just look at the data and as John said, we'll you have it here at 75.76. I'm looking at Trading View. It's trading at 74.25 now, so down another percent and a half. Looks like it's coming down. It would be good headed into midterms if gas prices came down. I know I was driving on the highway this morning. It was good to see regular prices in the threes and not the fours. And so we'll see what goes on there as we continue through the summer. But overlaid on this is relative dollar strength too. I think this is telling a different story about where money needs to go despite what might be happening in the Middle east because of what's happening here with the re industrialization and this capex build out and US equities screaming as we ride this AI wave.
- [03:54]
B
Yeah, yeah. Well you mentioned midterms and I think it's important to acknowledge that there's some analysts that I respect out there suggesting that this is basically kind of a six month detente, keep gas prices in check going into midterms and you know, you're getting up to the point where you've got to really start pivoting back to domestic policy. And so this is an attempt to keep things reasonably cool until 27 and then you go in for the real regime regime change strike. Then you know, there's some suggestion that if you look at what Saudis and the various other Gulf coast nations have already have in progress and you know what they could have in a year in terms of pipeline infrastructure and ways to bypass the Strait of Hormuz and make it less strategically relevant this time next year could look very different for how significant that choke point is. Obviously you got to, there are wide spectrum of opinions on how long any of that would take to ramp up. But in any case, I don't think it's insane to say we haven't heard the last of this. Even if this MOU fully goes through and we don't talk about the straight of Hormuz again for a year, which would be, I think, a welcome blessing to all of us. There's definitely a possibility that everyone should keep in mind that 27 brings us right back to the fore. So this may be a tactical pause more than a real settling of the situation. But I do think it's interesting that the subtitle of this week was A Week of Narrative Violations and the oil chart is that we had a lot of people from a lot of different perspectives telling us in April, like, oil's going to 200, oil's going to 250. This is a massive crisis and there's no way around it. The US doesn't have enough rabbits that can fall out of the hat. Globally. We're just in for this massive shock. And we can argue about the sustainability of the ways that the US and other countries dealt with that. There were obviously a lot of big SPR drains. It looked like certainly both the US and China did that. And there were a lot of things that needed to happen to keep caps on oil prices. Maybe some jawboning and some market manipulation, but in any case, we're down at 75. And probably, if I had to bet that chart looks like it's telling me we're not headed rampantly higher very soon. And then you've got the Dixie here, the dollar index, which we'll note is well AB above now where it was right before the war started. It's kind of just been in this range, maybe kind of breaking out from this recent range. We'll see. But again, narrative violation that this was going to drive massive dollar weakening and the final nail in the coffin of the USD that many people have been calling for. So none of this is to say that again, the US dollar is invincible or that oil can't go a lot higher eventually, or that we won't eventually enter, you know, Weimar style hyperinflation. And you know, that ushers in a bitcoin standard overnight. But I think it's all just worth keeping in mind that a lot of analysts, again from a lot of different frameworks and viewpoints, spent the last couple months telling you that this was all going in exactly the opposite direction. So I think it just speaks to the relative, the much more complicated picture that we're looking at where all these different things are intertwined. It makes it a lot harder to, to just say the U.S. despite all of its faults, despite all of its weaknesses and its sclerotic decay in a lot of areas is not still in possession of some major rabbits to pull out of its hat.
- [07:23]
A
Where else are you going to go? Especially with the AI wave?
- [07:26]
B
Yeah, it's a relative game for sure. And we'll definitely talk more about the AI buildout because I think that's going to be very relevant to some other headlines. But we talked about last week with US Capital markets. Look at QQQ this year over cqqq.
- [07:40]
A
Right.
- [07:41]
B
US versus China capital markets. The Frontier labs are here. For now. They still have meaningful lead over open source. See how long that lasts. But we'll talk about it later. There may be some things in the works to sustain that lead, but all the hyperscalers are here. A lot of brain draining has gone on in terms of bringing over the best talent from all around the world in the US over the last 30 years. So yeah, it's got a lot of faults, but so does everyone else and it often ends up being a tallest of the seven dwarves type game.
- [08:16]
A
Yeah. And I think talking about monetary matters here, it is important to recognize that we have a new Fed chair. And he had his first FOMC meeting and press conference last week where the Fed, I think in line with expectations of the market, held rates steady. I think what maybe was not in line with expectations with the dot plot shifting demonstrably more hawkish and the headlines out of CNBC were Warsh experiences worse Fed day S&P 500 performance for a new chair since 1994.
- [08:53]
B
Yeah. Which of course, because it's this kind of market, I think we quickly recovered from that the next day. But not a bit of a puke that day. On the dot plot, I think nine of 19 officials indicated preference for a rate hike later in the year. That was up from zero officials indicating that in March. So definitely kind of moving more in that direction. I think people are also trying to figure out, if you look at Warsh's red line of his speech that he gave, his official statement that he gave coming out of the FOMC meeting this week relative to the last one from Powell. You know, true to, true to form, true to what he said he wants to do, he dramatically cut out a bunch of text because he wants to move away from this kind of, you know, Bernanke esque forward guidance mantra and framework where Fed officials are constantly out there jawboning things into where they want them so that there's never any surprise or any real meaningful update on FOMC day. So if you look at, you know, what he did there, really cutting out a Lot of the language in the guidance just said, you know, we're going to make price stability happen as it relates to the Fed's inflation targeting, whatever that means. So I think there's also a bit of consternation or wait and see mode on what that's actually going to mean in practice and how much or how little he's going to reveal. But I think in general, yeah, there's definitely this narrative floating around that, and I think understandably so to some degree because of the dot plots and his comments that the worst Fed is going to be meaningfully more hawkish. And I definitely think you can make that argument based on what he said about the balance sheet. And he instituted a new task force to review the Fed's $7 trillion balance sheet. And he's constantly said that he wants to get that lower and thinks that's too high. And I think all of that is reasonable. If you're going to draw that conclusion, he's going to be more hawkish. But I think there are a lot of constraints that he faces, some of which we've talked about before, some of which we can get into in the next couple of slides. That should really color the way that people read what his options set actually is. And I don't think he's a moron based on everything I've seen. He's well acquainted, as we'll talk about probably a little more, with Scott Besant, both via Stan Druckenmiller. Generally you don't get into the positions those guys are in by being a complete imbecile or completely situationally unaware. So I think regardless of how everything plays out, not going to call exactly what weird monetary policy tricks could be used, what facilities could be invented, what kind of end arounds could be worked out with other central banks globally. But I think there are a lot of options people haven't thought through. And I think more importantly, whatever the ultimate manifestation is because of some of the stuff that we'll talk about here being meaningfully net hawkish, whatever that means. Being Volcker 2.0 still just seems to me like very, very off the table.
- [11:47]
A
Yeah, well, and get to the next slide which would make you think it's off the table because we're looking at hyperscaler capex exploding higher alongside free cash flow plummeting. So are you foreseeing some sort of liquidity crunch with the hyperscalers if the ROI on this Capex expenditure doesn't manifest in a timely manner?
- [12:09]
B
I mean, I think that's a piece of It I think probably you wouldn't really get the answer that one way or the other in 26 and maybe early 27. I think with this though, these are kind of like, these charts are kind of two sides of the same coin with just the way that capex is a detractor from free cash flow. But I think the chart on the left, we had that in a previous episode a few months ago, I think it's even higher now, so I couldn't find the best updated version, but I think it's well over 600 projected and then even more for 27. So I think the, the upshot of this or the way that this is a constraint is up until now the AI bill has really been driven primarily by these massive free cash flowing hypers, largely funding their build out out of that massive free cash flow pool that they haven't. Some of the best businesses in the world for the last 20 years don't consume a lot of incremental capital and have great unit economics and they're just spitting off all this cash. And for a long time they were just basically directing that to dividends and a lot of share buybacks that pivoted meaningfully over the last coup years into actual AI buildout. But if you look at the chart on the right, we are swiftly approaching the point at which we're back down to 2016 ish levels on free cash flow for a lot of these companies for the hypers. And if that continues, we're swiftly pivoting to the point where the zero bound is not far away and then the negative bound. Once you get to the negative bound, what happens? Well, we're already seeing it with Google and a few others. You know, Oracle's not in this, not in the group, but you know, they've, they've already gone to the debt markets. Google's gone to issue a bunch of equity which Berkshire participated in famously a couple weeks ago. So maybe my point here as it relates to how this is a constraint on war is where the direction of travel is that we are swiftly approaching the point where these guys need to go actually tap the capital markets, right? And some of that is going to be equity, but likely, you know, some of it will probably be debt too. And you know, I think that implies you need favorable financing conditions, you need accommodative, we might say, financing conditions, whether that's in the debt or the equity markets or again likely both. And this isn't just like there are a few businesses over here that want to spend a lot of money on this thing. And yeah, maybe they think it's a good idea, but we're the government. Who cares? AI has swiftly become borderline too big to fail for the Trump administration's goals. And again, we've talked about that before in other episodes. We'll talk about a little more in a few slides. But to the extent you believe that's the case, it kind of increasingly becomes like in their mind, I would think, a matter of national security, or at least a matter of deep national strategic interest for financing conditions to be accommodative enough to allow for this to continue to happen so that build out can happen and so that they can do kind of the run out playbook that they've talked about quite, quite openly.
- [15:03]
A
Yeah, I'm sure we'll touch on this later too. But just looking at the chart on the left specifically with the hyperscalers, and you look at Meta, Google specifically, and even Microsoft, and you think about where they are in terms of keeping up with the Frontier Labs, most notably Anthropic and OpenAI, and they seem to be falling behind. I mean Meta is, I think it hit the tape last week that their internal AI team is in complete disarray. They're calling it like a gulag. All their engineers have been reduced to data labelers essentially. Google Gemini hasn't really kept up with Opus and ChatGPT. And then Microsoft openly saying like, hey, maybe we're mismanaging Copilot here, maybe we explore implementing something like deepseek in Copilot. And so you have a ton of investment in this space and objectively looking at it just on the model side, it doesn't look like they're keeping up. But I think SpaceX, like we discussed last week, has proven that if you do build this infrastructure, you do have optionality because you can then sell it to Frontier Labs as well. Maybe some of these open source implementations will need to buy compute as well. So it'll be interesting to see how this plays out and if they can keep up. And you think of Google, they have optionality on the TPU side and obviously they have a massive business that can leverage AI to surface things to people. But not diving too deep into that rabbit hole and staying on some of the conditions surrounding the economy that may put pressure on Chairman Warsh. You have the Home Buying conditions index here as well, which doesn't look great.
- [16:39]
B
Yeah, for sure. Look, I mean this is from a recent Apollo Chart pack and I think there's even a more updated version, but you could pick through 20 different charts in there. And you're getting kind of the same message that this is a remains a very unaffordable, difficult home buying environment, which is partially the result of mortgage rates, 30 year mortgage rates being much higher than they were just a few years ago and well outside of kind of a recent channel. So this is putting a lot of pressure on a huge amount of the voting base on both sides of the aisle, but certainly the MAGA voting base, the Trump voter base. And I think this is the second piece that Trump and Besson have been very clear that whether they've instituted or not, I can't remember, but they've talked in the past about wanting to declare a national housing emergency.
- [17:24]
A
Right.
- [17:24]
B
That we need to radically improve home affordability. I think there are a couple of ways you could do that. And think about that. I think it's maybe in conflict with the notion of kind of keeping asset values sufficiently inflated for the boomer cohort to be happy. So that's kind of a different question. But I think this is the second piece that makes it really hard to see a world where you can allow the long end to kind of meaningfully re rate higher. Just like it affects, you know, your hypers, your frontier labs, your SpaceXs like you're talking about, that all really need and benefit from accommodative financing. And there are bonds in the stocks with those. Right. So if the 10 year goes much higher, the longer goes much higher, that has direct effect as we've seen very recently in 22 on equity valuations and what people can pay, what people are willing to pay. Same thing here or similar thing here, where the long end is a meaningful benchmark for 30 year mortgage rates and long dated debt that people use for home buying. Again, this is the second piece where to the extent that you believe that the government is generally getting everyone on sides. We've talked about that in past episodes and there's a headline I have on a couple of slides down, but just Warsh's relationship with Besant. They've both acknowledged the need or a desire for a new Fed treasury accord. They both seem, if you look at what they're saying, quite on sides with the Trump administration's general view on growth and running it hot. And if you were to believe that while the Fed is just kind of this truly independent thing that's sitting over here and doesn't really, it's up on a mountaintop contemplating the forms and fully, dispassionately just considering how to most dutifully execute The Phillips Curve, then yeah, maybe you wouldn't agree with this, but based on the historical moment that we're in, which we've gone to great pains to document on this show, increasingly it feels like correlations go into one across all these institutions. If you are in Warshaw's position and you take that view, you got to take this seriously. Right. As a major constraint on how hawkish you can really be to the extent that this is a major piece of the administration's goals.
- [19:34]
A
Well, I mean, just to continue this thread, not only is that true in the private sector, but I mean, I think in the public sector, particularly non discretionary federal outlays as a percentage of receipts, if you're thinking about the national debt and what elevated interest rates do to affect the interest expense on that debt, I mean, looking at the different scenarios that could manifest in the coming years, it could get out of control pretty quickly.
- [19:59]
B
Yeah, we've talked about this chart before on the show. I think this was on one of our first episodes and it's by no means gospel and there are a lot of different levers within the model that you can play with. But basically I think the upshot is we're not in a position where blended interest on the debt we have to roll can go meaningfully higher given how we're already bumping up against non discretionary spend rel relative to tax receipts.
- [20:26]
A
Right.
- [20:27]
B
So once we're at a point where that's over 100% durably you're printing, you're either defaulting on these, you're radically instituting radical austerity, you're cutting defense spending, which is the exact opposite of what we've said we're going to do. And what we want to do doesn't really work either with a run it hot reshoring playbook or you're printing the difference. Right. Not necessarily saying that we're going to get into Bernanke, Yellen, Powell, like radical balance sheet expansion. Maybe that'll happen depending on what kind of crisis events may or may not crop up. But again, just to frame the overall constraint that I think the war spaces on the budget side, even in a run it hot scenario where we do get crazy GDP growth because of everything we're seeing with AI and funneling more into defense spending and industrial reshoring. Generally rates are pro cyclical.
- [21:21]
A
Right.
- [21:22]
B
So the rates on the long are going to be pro cyclical historically. So it's not necessarily self evident that just because you had hot GDP growth that you would necessarily get a Massive compression in rates, typically, you would kind of see it go the other way. So I don't think it's as easy as maybe some analysts kind of want to want to think it is. And this is just the third piece of, you know, the federal budget does not leave Warsh in a fantastic position to again, get meaningfully more hawkish. However, you kind of want to define that.
- [21:52]
A
Yeah. And you alluded to it earlier, but I think one thing we've been consistent on is if they're going to try and thread this needle and navigate these interesting times and they've been choreographing this, the Fed and the treasury are going to have to work together pretty closely to make sure that everything stays on the tracks.
- [22:09]
B
Yeah. And both sides have said that. Right. It's not just Besant kind of strong arming Warsh, or maybe he is in the background, I don't know. But it's not just him kind of going on CNBC and suggesting this while Warshires away from it. Their public statements suggest they're kind of in lockstep on this. I think, again, that can mean a lot of different things. I think the treasury clearly has a lot of cards up its sleeve as it relates to how it manages issuance. And that's been discussed a good amount in the past couple years. But again, I think this just highlights that you're not dealing with these two discoordinated or adversarial institutions that are looking at totally different frameworks and optimizing fertility, different things that might have been true in the past, but it's going very much the other direction now, it seems, based on these statements. And there's historical precedent for that, too. Right. We've talked about on the show. But like in the 40s. Right. In kind of a similar wartime economy, you had an explicit Fed treasury accord where the Fed was subservient essentially to the needs of the treasury and the exigencies of national defense. So we'll see if that fully plays out here. Maybe some other lighter version of it does, but there is meaningful historical precedent for it that both of these guys have explicitly highlighted in public statements. So it's not the craziest thing in the world.
- [23:27]
A
No. And I mean, shifting gears to the, I guess the seriousness with which the administration views A.I. i mean, we talked about Fable 5 last week, but that story is not not only about Anthropic and the US Government. It's about sort of AI as a general theme and how the US Government views it as a national security issue. And we're beginning to see the manifestation of this reality. I think Fable 5 being pulled and having export controls put on it was a big shot across the bow. And then we're getting more information about what was actually happening behind the scenes, not only between Anthropic and the US government, but the US government and other governments and UK being one of them, which was requesting a carve out from the embargo on Anthropics, Mythos and Fable models for British nationals and companies, which was denied. And so you're beginning to see the US government hold this AI tech close to the chest.
- [24:28]
B
And I think this was also for this was for all G7 countries too. So it's not just like, well, China can't have it, Iran can't have it, obviously, or kind of more marginal middle powers, theoretically the US's closest allies, all of our NATO allies, are being denied this. And I think just speaks to your point, like we said last week, how the US is going to flex and try to flex every single muscle it has, every advantage that it has. And right now, frontier intelligence is one of those advantages. And I think if you're thinking that this is just the result of a spat between Lutnik and Dario, or the Hegseth doesn't like Anthropic because they wouldn't do XYZ a few months ago when the Department of War was demanding different things, you know, I think that's just a way too narrow view. Like this, again is, I think it's a piece of a much bigger story that we've been documenting here for a while. And same thing with these other headlines that I throw on here, right? The Hegseth came out with a pretty, pretty scathing rebuke of NATO and said he's going to review the US's relationship to NATO and try to shift a lot of the burden back onto European countries and basically demand that they spend a lot more on defense spending, despite the fact that a lot of them are in even worse debt positions than we are with their social safety nets. And then Cuba, we've been getting these veiled threats from Trump for the last few months and finally seems to have resulted in all the arm twisting, has resulted in a bunch of new reforms to the country's economic policies that move it allegedly much more toward privatized economy. You can argue about how effective any of those will be, but certainly I think it's close to 100 different meaningful reforms for the first time since Castro took over. All of these, I think are just of A piece with kind of what time it is and being aware of the situation that we're in and how the US is viewing its influence around the world, rightly or wrongly. And I think that just goes back to what we were talking about with Warsh and Besant. Right. That they seem to be on sides, they seem to be on the same page and that page seems to be delivered directly from above. And I think all these things kind of look disconnected, but when you start looking at it with that lens, I think it's all really kind of the same story.
- [26:47]
A
Yeah. While this is going on in the background, our baby, our reason for living, our. The reason we get up in the morning and do the things that we do and do this show is bitcoin been range bound between 60,000 in the mid-70s, I would say for the last since the Iran war popped off. And as many people wondering what's happening here? What's happening? Bitcoin's range bound. And I think you have a, a bunch of headlines and sort of reports here on the last slide to highlight like, hey, while all this gets going on front and center with the geopolitical saber rattling the, the AI raced towards AGI and the sort of political positioning and geopolitical positioning there, bitcoin is still chugging along in the background and things are happening.
- [27:39]
B
Yeah. I mean, I feel like every week it's kind of like highlighting these. And I know it's not sexy or exciting, but when you get an asset that's well off recent highs and it's just kind of chugging along in a certain range. Not to say that it can't go lower or that we won't pop out of this range sometime soon. But these are the kinds of things that I just, whether it's bitcoin or anything else, have always wanted to focus on just what's actually happening fundamentally. And there are just a few here that I highlight. And again, I feel like it's. It's basically this every week these drips of stories. But two on the top are from bpi, our friends at the Bitcoin Policy Institute, which does great work. A couple of the folks from BPI went over to visit regulators and policymakers at Taiwan's central bank after they got wind of a really good paper BPI put out about why bitcoin could be a strategically advantageous thing for Taiwan's central bank to hold. Apparently did a couple days of meetings and I believe scheduled even more discussions for the future. And on the right, just a discussion that I thought Was interesting with Representative Nick Begich, who recently proposed the ARMA bill, which is kind of an updated revamped version of the Bitcoin Strategic Preserve bill that would codify that into law and have the US Buy a million bitcoin over a certain amount of time. Don't know if that's the pathway it'll ultimately take, but it did get, I think, close to 20 co sponsors and I think Congressman Begich comes off pretty well in this interview. But you see these things on the policy side just continuing to drip through again at a time when none of this has to be happening. We're kind of in a bear market. It was pretty unexciting relative to a lot of other things, yet you still see the stuff in the background. Same thing on the institutional side. New products from BlackRock and Franklin Templeton, neither of whom have any obligation to keep this running right now. They got a thousand other things they could be focusing on with AI and everything else, but you're still kind of seeing these products get more and more penetration into the wealth management channel, the RIA channel, and become more and more available and with time with real blue chip sponsors like BlackRock and Franklin Templeton. Not very third tier also Rands, but household names again during a bear market. So we've made this kind of comment before on prior shows, but just ongoing steady cadence of drip feed of fundamentally positive news for bitcoin and indicators for what's actually going on with it in the background outside of price entirely. So I'm not going to call that your bull juice for the week because again, each one of those individually is fairly BO perhaps, but taken collectively with the kind of backdrop that we're looking at, both with bitcoin's price action and just macro in general, and all these things we talked about ahead of this, if you're paying attention, if you have a decently long time frame, I think this is exactly the kind of stuff that you would be looking for and the kind of stuff you'd want to see.
- [30:24]
A
It's happening. It's boring. Embrace the boring nature of bitcoin right now, though. It's when stuff actually gets done and stuff is happening. And that's all we have today. We'll be back next week. John, a pleasure as always, sir.
- [30:37]
B
Always. Adios.