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- [00:00]
A
All right, take three Monday morning, getting the cobwebs out. We're here to talk about meetings, not our meetings. I mean, you were traveling last week. I had some meetings, but I think the President, some of the most prolific CEOs of American industry and high level administration members took a trip to China last week to talk with the Chinese government, President Xi over there about maybe working together on some things. I, I don't know what was going on over there. Was it a bunch of just a facade of niceties masked with sort of, hey, if you do this, I'll do that smile. I don't want to use the term, but it was a facade of smiles to basically try to pull leverage and let you know, like, hey, I know that, you know that we know that we don't like what you're doing.
- [00:48]
B
Yeah, you never. Well, first of all, I think you got the order right in terms of importance of my meetings, then your meetings, then the President's meetings with Xi as it relates to geopolitical import last week. But yeah, with these things you never really get the full story and the full picture from the headlines. I think we can safely assume there were many deals being cut or alluded to that. Then you add posture around on a public facing basis. So we got some fairly frank Taiwan discussion in a way that I think we haven't before. That's maybe the classic, I know that, you know that we know, et cetera kind of play that we've been dancing around for 10 plus years and no real resolution there. Got some suggestion that China may open up more to the businesses of all these American CEOs in the newsletter. I thought it was an interesting phrasing of the China will open wider, which really sounds like crocodile jaws, which is maybe not so far off if you've seen American companies activities in China over the last 10 years and how that's bled through to our relationship to IP or in respect of that or lack thereof. But in any case, I think the upshot of it really was kind of holding pattern, right? I don't know that there was a ton actually to be that was gained explicitly from that meeting. We've got stray for moves which we talk about in here every week. Unclear again what the path is going to be beyond stalemate for that. China allegedly will help lean on Iran to move things forward, but again the steps there are not particularly concrete. So think everyone kind of walked away in a bit of a shrug, frankly.
- [02:31]
A
Yeah, it was very unclear to me what was actually accomplished. But The President and CEOs Jensen Huang specifically said it's one of the most prolific meetings of two states in civilizational history. So we'll see what comes of it. I think what was interesting as all this was going on. We'll flip to the slide deck you put together. I think maybe where the actual signal of last week was was in bottom bond markets with yields screaming as you point out. Here we got a chart from Zero hedge with a 30 year auction high yield over 5% for the first time since August 2007. For the 30 year we have China's. Excuse me, not China, Japan's yield curve blowing out. The 10 year, the 30 year here in the United States going up as well. The 10 year gilt blowing out. And while all these, these leaders between America and China were meeting to, to discuss where we're going from a geopolitical perspective here at home in many other bond markets across the world, things seem to be deteriorating. The sovereign bond crisis seems to be really taking off and taking hold here as it seems to me. I'm not a big TA guy, but looking at the long term charts on a lot of these yield curves, it looks like they want to break out to the upside and higher for longer in terms of structural rates for government bonds seems to be a call that I feel more comfortable making by the day here.
- [03:59]
B
Yeah, definitely. Look, that's the. We can all be line drawers and line spoilers on our own capacity, but some of these are not super hard to read. I will say the U.S. 10 year, you don't see it on here, but broke the 4.5% level last week which seems to have been kind of a line in the sand for what are popularly called taco moments, which I think are a little overstated. But either way we haven't seen it get much above 4.5%. We did last week, now kind of 4.4.6 as of this morning, but if you look on a longer term basis with that one, it's from your TA perspective still hasn't meaningfully broken out yet and that's really I think the big rate to watch. Yeah, here you go. You look like on a 5, 10 year basis we're getting back to GFC levels, but we've been kind of bobbing around in this range here for the last few years. So we'll see if we're ready to fully break out there. But I think the headline last week that really drove a lot of this was the hot inflation prints. CPI and PPI came in higher than expected, 6% even on the Producer index and even ex food and energy, which are generally thought of as more volatile, often get pulled out to talk about the core metrics well above expectations increase the market's view that the Fed not only will not be able to maintain a rate cutting cycle, but in fact we'll have to go back to hiking to control some of this. And that was really the story on the week and the debate on the week. Frankly, I was a little happy to finally not not be focusing primarily on oil market logistics in the Strait of Hormuz. That's been the meta for the last few months, basically every day. So getting back a little bit to just these basic macro and monetary policy questions was somewhat refreshing. But here you are with Scotty B. Telling us that we'll see substantial disinflation in the near term. And what we're seeing right now is the result primarily of a supply shock. And we can look through that. It's transitory, as some others have said in the past, which you can kind of see down there what we might be thinking of. And therefore once that passes, we'll have this big productivity boom. And we were already seeing that before seeing core inflation come down. So therefore we're going to have room. And I think if you flip to the next slide, you can kind of see Secretary Besson is really kind of echoing what Warsh has said on his press campaign, the whatever you want to call it, his pageantry to ultimately qualify for the Fed chair role. Throughout the last year, Warsh has been parroting this line that we're going to have AI will enable this massive productivity boom that will create disinflationary pressure and give the Fed room to not hike rates, but in fact to lower them kind of in stride with that productivity boom. And I think there are a few data points that make this somewhat compelling as a narrative. And I think there are arguments that you can get into that we can discuss here that this environment fundamentally doesn't look anything like the environment of 2021, which is the last time we heard that inflation was transitory. And if you look to the next slide, both the Cisco chart on the last page and the next slide I think are potentially hinting at that there is meaningful real re acceleration of certain sectors in the fundamental real economy. This is not a US that has five or six years ago fully just offshored all of its industry and is at the mercy of international supply chains, has no real kind of economic vibrancy to it other than SaaS. And maybe we are moving into a position where the real economy actually is meaningfully accelerating on some of these trends. I think it's funny that to go back and look at that Cisco chart. We talked about Intel a couple weeks ago and how they basically have the same chart you see back into the late 90s, massive blow off top, and it takes them 25 years to finally reclaim that level. Greenspan was saying a lot of the same stuff at the last time Cisco was mooning here. It didn't fully work out then, but you could certainly make an argument that the world was not ready for. The stock market was dramatically pulling forward, the tech gains that would come from the Internet boom, and maybe we're not pulling forward in such a crazy way the gains that will come from AI. This is all very tbd, But I think to end this long rant, the point that I think we should draw from this is I just have to fade the market view or the market fear that with Warsh coming to the table, even though he will not control the Fed, with everything going on in AI, with rates getting into very uncomfortable spots already, with the geostrategic issues that we've talked about ad infinitum for the last few months that the US Is facing, whether all of this is true or not, it's kind of irrelevant. This is the story that I think they're going with, and I think you could see it actually play out in economic reality, or maybe not. But I find it extremely difficult to believe that we're going to look at a few inflation prints, even very hot inflation prints, and say, you know what? Because of the Phillips curve, we really just have to hike rates, guys. We're just going to have to cede hegemony to China. We're just going to have to lose the AI race. All these trillions of dollars, you know, hyperscaler capex that we've committed to and believe we're coming, you know what? Sorry, that's just not going to be able to happen. And stock market may tank, you know, 20, 30%, but that's the price to pay to bring down inflation a little bit. Like I got to say, I'm just radically fading that. So I'll stop there. But to pull it all together, like, I think the market reaction this week was very myopic.
- [09:45]
A
I think I completely agree with you and I think that's the one thing that we're going to figure out. I know you don't want to talk about it because we talked about it ad infinitum, but I think the negative externalities of the straight in terms of helium supplies, specialty gases, chemicals, motor oil. I mean, you have, I mean this was the meme going around the end of last week over the weekend that it's going to be the 40% supply reduction in motor oil for US suppliers by middle of summer of this year. Obviously sulfur productions down, which is bad for fertilizers. Beginning to see that this could be a double whammy here in the United States with some drought. Looks like we got El Nino coming too. And so you have sort of mother nature forces hitting the supply side as well. And I think not only is the AI race existential, and I don't think they're going to stop this train from. I think inflation is going to be, I think, secondary to concerns that exist in the AI race and the physical economy. They're going to have to try to support all these sectors to make sure that we get supply back to market, prices be damned. And I think I completely agree with you there.
- [10:56]
B
Yeah. And yeah, to be really clear, I agree with you on all that. I think we should prepare for some period of much hotter, more entrenched, experienced price inflation in terms of, in goods for all the reasons that you listed. But I just think as we talked about on the show before, with the math of US debt where it is, the game doesn't work without stock prices going up. Right. The game doesn't work without GDP going up to shore up tax receipts. And you know, the game doesn't work if we're getting to levels of, you know, whether on the short end or the long end. Right. Regardless of where you're funding 5%, 6%, 7%, kind of blended interest to roll the existing debt burden. Like all of that, all of those things falling apart, like makes the game stop. And I just, I think what you're saying, if you think the Fed's going to have to hike aggressively, is that the US is going to effectively just give up hegemony and allow a sovereign debt spiral to happen.
- [11:56]
A
Well, I think that's the interesting dilemma we find ourselves, if you remember, what was it September of 24 when Powell lowered rates for the first time? The 10 year and 30 year move inversely to that. Does that become the norm moving forward? The treasury yields disconnect from the federal funds rate and if so, what are the repercussions there?
- [12:20]
B
Yeah, I mean, I think the question then is like, how creative do they want to get on the long end?
- [12:23]
A
Right.
- [12:24]
B
Because there was a time when we didn't have to deal with that for like a Long period. And we've had you called it a bunch of different things, different versions of qe, Operation Twist, any number of other facilities. But in principle, the Fed has control over that. It's just a question of how aggressive they want to be out in the open market. And Warsh has talked about being more dovish on the front end and more hawkish on the balance sheet. So lowering rates, but also kind of reducing Fed balance sheet. And I think it's a fair base case that that's a lot like Besant scolding Yellen for funding too much on the front end and then coming in and doing exactly the same thing because he has to for the entirety of his tenure so far. And I think if you flip down one, you'll see or yeah, two here. This is a really interesting headline related to this point. And this is not the Fed, it's the Treasury. But if we're thinking of a world where the Fed and Treasury are working much more in tand them and hand in hand, and now you've got two Druckenmiller proteges at both the Fed and the treasury who know each other very well, if we're thinking in that world. I think this is also something, this is the kind of thing you want to keep your eye on, of the treasury potentially beginning to take on a lending repo role for treasury collateral. So the treasury repo market, as we've talked about on the show before, a key piece of overall financial system plumbing. And we've seen tightness in that market in the past, which causes all sorts of issues. And most notably September 2019, the market basically broke and the Fed had to step in. And we've seen the Fed do different things in the past, including reserve management purchases started late last year as a means of keeping this market smoothly functioning. And now you're seeing this headline that the Treasury Borrowing Advisory Committee floats this idea that the treasury could start using its excess cash, however you want to define that part of the treasury general account, it's cash balances effectively to lend into that market. So effectively. And that would be when cash is in the tga, that's thought of as pulling cash out of the private sector. And it's kind of a negative liquidity impulse. And so getting it back out would be a positive liquidity impulse. But it's interesting because it turns them into a lender against their own debt. So the treasury repo market is fundamentally based on collateral. The collateral is treasury bonds or notes, different bonds across the duration curve. But in any case, the issuer of that debt is the treasury. And now it's coming in potentially and lending against the collateral of its own debt to keep that market running smoothly. So it's getting into very ouroboros, snaking its tail kind of territory. And I don't think this by itself is the solution that allows us to run infinite deficits. And this is not directly comparable to the Fed monetizing the debt in the ways that it's done in the past or growing its balance sheet by several trillion dollars overnight, like it did in Covid. But I put this on here because I didn't see it discussed a ton and I think it's really interesting and I've not seen anything like it before. But B, this is the kind of thing I'm talking about where there are a lot more dirty tricks and rabbits up the hat that I think can be pulled out between the Fed and the treasury to kind of keep the game going for longer than people think. That will have inflationary impacts that has very unevenly distributed impacts across society. So it's not me saying that's a good thing for society and for the US and most people in the us, but this is the kind of thing that I think we should watch for, right? Just more and more weird, exotic, creative ways that have not been used before to kind of keep this game running. And I think last thing is just like you don't have to. It's the classic comment that you don't have to be faster than the bear, you have to be faster than the slowest guy running from the bear. And I think that's the strategy right now. The US doesn't have to be fully sound in everything that it's doing, but it has to be more sound and more sustainable than all of the rivals that it's trying to continue to subjugate and all the rivals in this great game that it's trying to beat.
- [16:22]
A
It sounds a lot like the Japanification of US markets. And it's funny as we're discussing this, as I think the end state of the Japanification of any bond market is being reached there where it seems like they've completely lost control. And you have, I think, the former head of JP Morgan in Japan coming out and basically telling Japanese citizens to prepare for hyperinflation. And we'll see how it plays out here and what timeline it plays out here. Like you said, you have to be the fastest man running or just faster than the slowest man running from the bear. What does the timeline look like here? Does Japan's end state being laid bare for everybody else send a signal to the market that pulls forward some of the negative consequences of a policy like that? Because people say, oh, if you do this, this is what happens. And it's a very interesting time in sovereign debt markets right now.
- [17:17]
B
Yeah, no doubt on the bear point. If you flip down to the next page, this is just, I thought, worth updating on. As you think about the game of chicken that we're in. We talked about this last week, how much the independent refiners who are primarily the primary consumers of Iranian oil are doing. You've seen now a headline over the past week of major supply cuts. You see one person out of the industry saying without cutting output, the losses are unbearable. This big pressure on China's oil industry, and I think it's just the latest data point pointing to this running away from being faster than the slowest guy running from the bear who ultimately has to blink first. Is it net energy importer that's meaningfully squeezed by the Hormuz situation or is it, if you think back to that first slide of a country with over 100% debt to GDP that's running up on 100% of receipts being consumed by non discretionary payouts, is it their sovereign debt getting to a point where it's unaffordable and then having to pull out from the situation and default back to some level of normalcy? So just something to track here again in the rates versus energy war that we're seeing between the US and China, both are suffering quite a bit, I think, on these different metrics.
- [18:36]
A
Yeah. And last but not least, we've been talking about it, but I think this is probably the most high signal headline that's come out of the straits in a couple months here, which is the fact that Iran, I mean, the headline says maybe turning the Strait of Hermes into a Bitcoin based insurance market, local reports say. But I mean we did some pretty heavy research over the weekend to confirm this is true. It seems to be true that you have a state sanctioned, I think they're calling it Hormuz Safe. Hormuz Safe, which is basically an insurance product. While you're crossing that the IRGC is demanding payment in Bitcoin and I think this is an interesting headline. They don't talk about it in the snippet that we have up on the screen now, but I think it's well known in our space that Tether worked in conjunction with OFAC and law enforcement entities connected to ofac to freeze $344 million worth of of tether that was deemed to be held by IRGC friendlies or the IRGC itself. And a few weeks later it looks like they're turning to bitcoin specifically I would imagine because of the censorship resistant properties and the inability of OFAC to tap the CEO of Bitcoin on the shoulder and have them freeze UTXOs in particular wallets. So I think this is the most bullish, I mean depends on how you read this. But as a bitcoiner looking at this, non emotionally just looking at it as the sort of value prop of a permissionless settlement network being validated in the wild. I think this is the biggest geopolitical related bitcoin headline in many years. Maybe since El Salvador leaned into it back in 2020. 2021.
- [20:27]
B
Yeah, totally. We'll see how it develops. It may or may not be true, but this isn't from Bloomberg, this screenshot, but no less than Bloomberg has reported on this as credible, allegedly comes out of Iranian state media and starting to get airplay on outlets that you would consider to be very credible and very plugged in. We'll see how it develops. But I, you know, this is not even the first time we've kind of heard about something like this. We talked about it maybe a month ago, you know, kind of a version of this, you know, the ROGC taking tolls in bitcoin and potentially a variety of other things like as you mentioned, stablecoins. So I feel like there's a lot more smoke here and I think there may well be kind of a fire, particularly since as you said, like it intuitively makes a ton of sense. It's what I think bitcoiners have long theorized with one path for bitcoin adoption has been adversarial sovereigns that don't necessarily need to or want or not able to trust each other. We've always said bitcoin is money for enemies and this would be certainly quite a validation of that thesis. And especially if it turns out to be a bitcoin only kind of market, even to the extent that it gains a little traction. I don't necessarily expect this to be the long run equilibrium for flows and straightforward moves. But to the extent it gains, it exists at all and any payments are taken and it is bitcoin only. I think that says a lot. That validates the thesis that we've been hammering on for years, especially relative to everything else that we just talked about. With the need to manage creatively the massive sovereign debt burden that's out there in the US and elsewhere, kind of coming up on potentially the end game of at least this phase of monetary history and kind of writing new chapters with creative people at the helm, like, who have a particular agenda they want to get through. With all that going on and Sovereigns starting to discover and take seriously this particular value proposition, I don't know, it might make sense to get some just in case it catches on, right?
- [22:31]
A
It may be catching on.
- [22:32]
B
Maybe catching on.
- [22:33]
A
Maybe catching on, John. It just may be 17 years in Bitcoin may be finally catching on. And with that, we'll see you guys next week.