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- [00:00]
A
Mr. Arnold, I must apologize.
- [00:02]
B
Apologize for what?
- [00:03]
A
Two things. First, last week I used the wrong mic. I was speaking through my MacBook Pro audio still came through, but not as good as the shore mic that you're hearing me through now. Second thing is you're catching summer Marty. I'm at the beach on the weekends. I wake up early, drive back to my desk by 9am Monday morning. I got a little. Haven't shaved yet. Got a little beach flow here, still rocking, got the hat on. So sorry I'm not as buttoned up as I should be for the quality of the show and the analysis that we just.
- [00:33]
B
You just got that European vibe, you know, Hit that out of office automated message starting right after Memorial Day. Come back September. It's all right.
- [00:42]
A
No, no, no. We're still grinding. That's the difference.
- [00:44]
B
Drop in for a few podcasts. That's all right.
- [00:46]
A
We get 48 hours of rest on the weekend here in the United States. And even then, you're still talking to your clanker on the beach like, hey, I got this idea for Monday. But you get back to work on Monday. The summer doldrums don't exist when we have the world unfolding as it is right now.
- [01:00]
B
Yeah, definitely no summer doldrums over in the Middle east right now.
- [01:04]
A
No. Well, that's what I was going to say. I have to apologize for a third thing, and that's to our audience, because we said we weren't going to be hermus maxing much more. But of course, as is par for the course with this, this incursion into the Middle east, the latest incursion from the United States, it's never ending, it seems. And as we've said many times over the last couple of months, the incentives for both sides are to keep this going as long as possible. And we have the latest escalation, which is back and forth attacks from Iran and the United states. Iran attacked three ships in 24 hours. Trump officially ended the memorandum of understanding for the ceasefires, calling the Iranian leaders scum. And Iran has expanded attacks on Gulf states after the US Struck Iranian Iranian assets and in retaliation for the ship attacks. What's your take on this, brother?
- [01:57]
B
Yeah, I mean, look, guys, you know, don't blame me, don't blame us. We were on the horn with the Ayatollah last week saying, don't do this. We don't want to talk about it on the pod anymore. Please don't do this. You know, to no avail. So here we are again in this story that seems to never end. And yeah, I think it's interesting to consider what the incentives actually are for this to, for this to continue kind of on both sides. Certainly there's a hardline faction in Iran, which we wrote about a little bit in the timestamp over the week, the weekend that's getting a little more attention. There's an IRGC group that clearly just isn't interested in any kind of deal at all. There's clear internal division there, which is now I think, becoming more of a mainstream viewpoint. It was a little more the provenance of tinfoil hats a few months ago, but it's becoming a little more clear. So there's definitely an incentive to just cause as much kind of chaos as possible and prevent a deal from happening in general. Kind of the one major leverage point that the country has left. That and arguably the nuclear program. And on the US Side, we've documented extensively on the show maybe some of the downstream benefits to the US Strategic position that have come out of this just this morning. It's not on the slide here, but Trump mentioned, I believe on CNBC or maybe Fox Business that the US Will be the, is happy to be the guardian of the straight and we should be compensated for that appropriately. So, you know, it's a little potentially groundwork laying there for where things may be moving. But in any case, this is it. We're back in a spot where there's no clear off ramp until one side or the other decides to blink. And maybe midterms will be the forcing function for that. Maybe the, the Iranian oil situation, which, you know, the country was already having trouble moving a huge amount of its backlogged oil to anyone. And now that's not going to be any easier. So we'll see if that causes enough pressure to cause a relief valve here in the next few weeks. But yeah, we're back at it again, unfortunately.
- [04:02]
A
Yeah, that means that rates are reacting at the ten year jumping up last week above 4.55 currently, I guess at the time of the Screenshot was at 4.561 markets not as calm as they were when the medium or excuse me, the memorandum of understanding was in place. And I think that's one thing to keep watching here is what are rates doing in reaction to these developments in the Middle east and across markets? Obviously, we have it on the list too. We'll get to Japan, but I think a lot of people are focused on the Japanese government bond markets as well. And you have this backdrop of war and in the Middle east this re industrialization here in the United States, obviously the AI wave still pressing forward, new models, new frontier models being released that are extremely impressive. But then you have this backdrop of the United States debt situation and are tethering to these bond yields that I think everybody's keeping an eye on. And when they get to these levels, this is when you begin to see things happening from the Trump administration.
- [05:13]
B
Yeah, for sure. I think an interesting point or kind of wrinkle on this is that this was the leading image, the header image for the newsletter this week. And I just thought it's kind of interesting that you have seen this is the 10 year in blue. So the 10 year move back up on kind of this news and it's over 4, 6 this morning, so it's gone up even more. But the flip side is you're seeing in the oil market this morning, I think we're back above 75 again. When these headlines started to hit early last week, we went from high 60s to 75, but then fell back. At least on WTI I think Brent had a similar move. Fell back to roughly pre war levels. Now we're back in that mid-70s range again. We'll see how it continues to move. But in the energy markets, at least in the oil market weren't seeing kind of an immediate gap up to back to where we were a few months ago. And you saw also kind of an interesting version of that or something along the same theme with move index, which is what you have here in orange as rates have gone back to kind of what has historically been over the last few years an informal kind of line in the sand for the 10 years. So the 4, 5, 46 level where it seems like generally the, the Fed and the treasury get kind of queasy, banking system gets a little queasy and there's some sort of taco event or some headline that gets yields back down typically over that period. When you've gotten to that same level here, the move index, which is the bond volatility index for treasury market that Bamal runs, has kind of not gone up correspondingly. You've got this series of if you were a line squiggler by trade, you would kind of call these lower highs each time. You're not really getting a blowout thus far in volatility with any of these spikes. You had the biggest one was obviously in the spring right before the ceasefire was announced. You had bond volatility going up the whole month. We had a ceasefire that brought everything down. You had another big spike in Mid May, maybe early June. And the move did go up then, but not quite as much. And now over the last week you've really seen it's kind of bobbing along in this range. Too early to call whether that's going to continue. But I think there's a lot of interesting analysis, especially from guys like Michael Howell, suggesting that treasury is much more, not much more, but at least meaningfully concerned with bond volatility as much as the kind of absolute level of rates. And if that's the case, and if volatility is in one way or another sufficiently managed either through just market expectations or treasury operations in the background, that maybe gives you more headroom to kind of deal with rates at the current level for at least some additional time. We've done math in the past in the newsletter showing that, that this level of race is probably over a meaningful time frame about all you can really handle. You really can't get into the five plus range without starting to really crimp the fiscal math meaningfully in an extremely uncomfortable way. But if you can keep it in this level with volatility also manageable such that you're not getting big collateral haircuts or forced unwinds, that could be an interesting way to manage this. And moreover, I think it's just telling you thus far if something like this chart continues, I think this is kind of telling you, like investors up to this point are not necessarily that queasy that worried about months and months more of what we've seen over the last week. Maybe that'll prove wrong. But I think a notable kind of set of two lines you're going to watch, going to want to watch closely over the next couple of weeks.
- [08:54]
A
Yeah, yeah. Can they maintain the volatility? Because that's, I mean the 10 year, 30 year drifting higher. I mean it seems structurally again going back to line squibbles on the chart, that the new long term trend for yields is higher. And I guess that maybe that's the sort of fallback option that the Fed and the treasury have is like, all right, if that's the case, let's just manage the volatility so markets can adjust on the go. Speaking of volatility, obviously bombing in the straight Hormuz is going to lead to volatile reactions from the Gulf states, one of which over the weekend is Qatar pausing the push to ramp up their LNG production after Hormuz tanker attacked. And so we're seeing disruption in energy markets, in this case LNG in Qatar. And when we first began covering the saga in Iran, I think this is one of the biggest things that people were worried about is the refineries, the natural gas and LNG refineries at Qatar being hit and creating a cascading effect. So it looks like that variable is back in the equation, which is disruptions to Qatari LNG production.
- [10:02]
B
Yeah, so this is, you know, this is kind of the opposite story of the oil market where you pretty much saw, have seen after the big spikes in wti, as we just mentioned, you saw kind of the prices returned to roughly pre war levels. And we're still kind of bobbing around there. You can see on the right side here, this is kind of the basic, the European kind of natural gas benchmark. And all the charts over the next six months kind of look like this from August out to January of next year where you didn't really get the same retrenchment anywhere close to pre war levels. And now we're back up moving much more meaningfully toward recent highs. And so if you look at us, the US benchmark for this is Henry Hub. And that's basically just bobbing along like a recent bottom. It's because of our relative kind of positioning that we've talked about on the show, much less problematic. But this is what the Europeans are kind of looking at right now. And I think a similar, similar dynamic is prevailing in Asia which we'll get to maybe on the next slide and kind of the downstream impacts of that. But this is kind of the one, one of the big things that from a global perspective, not as much a US perspective, but a global sovereign debt perspective and a global positioning perspective that I think will be important to watch as we get closer and closer to the fall and the winter where natural gas becomes very, very important. You know, what do these charts do and how much pain can kind of the countries that are dependent affected by this kind of disruption. The Ros Laffen facility I believe is the largest LNG facility in the world. And if that continues to be disrupted for longer than the market currently thinks, right now at least if you look at kind of the move index, if that goes on longer, what's the downstream impact for non US countries that are more dependent on this infrastructure? And right now the charts are not looking great. So this will be, I think one that we definitely keep an eye on.
- [11:51]
A
Yeah, I explicitly mentioned them earlier and John just alluded to them, but Japan, their benchmark bond yield is extending its rise after hitting a 30 year high. And so I think this has long been stated. Japan has Long been stated their, their bond market has long been stated as the canary in the coal mine. They were the first country to really go out and do a QE like experiment in the 90s. And they've been riding that way for 30 years, give or take. And many people have been looking at Japan for many years saying if they lose control of their yield curve, that's when things are going to get a bit hairy for the global financial system. Because many people have been dependent on the carry trade, taking out cheap debt in Japan, buying other sovereign bonds, ripping the yield, ripping the arbitrage there and then pouring it back in. And if that unwinds, it could create a particularly hairy situation. And as John just mentioned, Japan is one of these countries that is very dependent on oil and gas from the Middle east. And if those input costs are going to go up, it's going to put a lot of pressure on the Japanese economy.
- [12:58]
B
Yeah, for sure. There's a lot, there's a lot going on in Japan and I, I want to resist the, the urge to, you know, do the something is breaking all caps headline because I think the energy piece is huge. Growing inflationary pressures in the country are huge. I think this has always been the poster child for long term QE insanity. I think that that's meaningful. The flip side is Japan has been, the BOJ has been embarked on a rate hiking cycle now for I think well over a year. And if you look also at what you know, Bessant, Scott Bessant, Treasury Secretary Scott Bessant in the US has said generally he's been, you know, endorsing this kind of rate hiking cycle. So and I think there are various policy reasons and strategic reasons that the US might want, you know, more, more normalization of Japanese monetary policy. But the, the flip side of course is you can manage it against the, the yen carry trade that you alluded to. It can't get disorderly. Right. It's got to be something that, where you know, you're not seeing crazy volatility spikes, people getting blown out of positions, needing to, you sell forced liquidate US assets. So it's a delicate balance. But I think this is obviously a key chart that is a bellwether for a lot of different things that we talk about. And I think the trend here is pretty well established. But the BOJ looks like it's going to continue its rate hiking cycle and I think the question will be can that happen? Can they walk and chew gum at the same time relative to all of the objectives that the US wants to achieve or do you get into a much more hairy situation much more quickly. But I do think it would behoove all bitcoin holders, all people who are or gold bugs or anyone who's been watching this for a long time to pump the brakes a little bit on the something is breaking narrative because I think there's a very fine line trying to be walked here between the US and Japan. And we know what the pressure points are, we know what the failure modes are. Obviously this is going to have massive ramifications when you look at the like a key marginal buyer and a key holder of U.S. treasuries in a situation like this where domestic rates are now becoming relatively much more attractive than they've been for like 30 years. Hitting these 30 plus year highs. That's obviously going to have meaningful trade offs and impacts. But I would just kind of benchmark it against and comp it against what Besson has been saying and kind of endorsing as it relates to this rate hiking cycle and ask yourself if you think that that line can be walked and that needle can be threaded because I think that there's a lot going on here under the hood.
- [15:39]
A
Yeah. And it's something that we've all been aware of. I mean it's famous now the Manhattan Institute fireside chat that Scott Bessant had in the lead up to the 2024 election in which he said there's a global monetary reordering happening. I want to be on deck in the captain's seat with the President as we're managing that. And to your point, you have to imagine that over the last year and a half that there has been some reshuffling and some sort of reordering behind the scenes in terms of what's happening between the treasury and their counterparts across the world. And maybe it's a setup to allow these yields to rise without the volatility that you mentioned, John. And so maybe they got the infrastructure in place under the hood and behind the scenes. Okay, we can let these things rise now. Who knows.
- [16:31]
B
Yeah. And I think it's one of the reasons you're seeing things like the SLR loosening.
- [16:36]
A
Right.
- [16:36]
B
Of trying to bring more private banking capacity into the treasury market again. But I think that all dovetails nicely into this next headline, which is the Besent Doctrine.
- [16:48]
A
The days of America being played are over. We're not going to get bullied anymore. We're not going to get pushed around. We're not going to be taken advantage of. This was an opinion piece, guest essay in the New York Times released last Tuesday. So day after we recorded.
- [17:01]
B
Yeah, I mean, I think this is an interesting vibe shift to me to see this in the Times. Now. It's a guest essay. Right. So you could argue it's not necessarily the direct endorsement of the paper, but if you read through it, it's Mohamed El Erian, who's a famous macro commentator, fixture of CNBC and all the business shows. But he basically walks through the speech that Bessant gave about a month ago at, I can't remember what it was, one of the institutes in New York Economic Club, Economic Forum. Yeah, we talked about it when it happened, give quite a lot of airtime to it right after it on one of the shows. But he basically just kind of walks through everything that Besant laid out in that speech and encourages analysts and readers to think of everything that he lays out there as permanent and kind of systemic and all working together within a framework that Bessant has. Not just kind of these ad hoc random measures that Trump is kind of throwing out without much thought. He frames it very much as something that's intentional and kind of here to stay and that other countries will borrow, too. Other countries will start doing similar kind of industrial policies, similar tariff policies to protect kind of domestic champions. And I just think this is like, if you read it, if you've been listening to the show, nothing in it is going to be super needle moving to you. And if you watched that speech from a month ago. So it's largely kind of a summary of everything Bessant was saying there. But I think again, the Times is whatever your opinion of the failing New York Times is clearly a widely read and widely respected outlet still for tastemakers and opinion makers all over the world. And for this kind of headline to be prominently featured in the Times is I think, an interesting bit of not necessarily predictive programming, but I think there's maybe some ideological pump priming going on here to get opinion makers and opinion leaders throughout the world to maybe be a little more on sides as to where the major, where the puck is going for a lot of key, key policy, you know, worldwide memetic seating is
- [19:11]
A
how I would say mimetic seating.
- [19:13]
B
That's good.
- [19:13]
A
And to your, to your point, I think that is going to dovetail directly into our bread and butter, which is Bitcoin, and it's not really our bread and butter, but we're forced to cover a crypto. And I think what you're highlighting here on this slide is a validation of what you just said is that there's a concerted effort to remodel the global economic system. And it's been pretty, the Trump administration has been pretty transparent. They believe bitcoin and crypto have a part to play there. And they are going to do everything they can to make sure that the industry is primed here in the United States to go out and build the new infrastructure that is necessary. And I think you highlight two headlines here on the left that show that there's actually action happened. The first coming from February 11, 2026. So earlier this year, ABA urges OCC to provide stronger safeguards, clear rules for charter applicants. And then less than five months later, on July 10th. So last week, right before the weekend, on Friday, Circle received final OCC approval to establish a national trust bank. So it looks like they're moving pretty quickly behind the scenes to grease the skids to make sure that the crypto and bitcoin industry can do what it needs to do.
- [20:28]
B
Yeah, I think that on the left, the really interesting nuance to me is the aba, the Bankers association, the bankers lobbying group, has been, I think, doing the opposite. Right. Like not creasing the skids, trying to get in the way. And if you recall, I don't know if we covered it, but earlier this year of a letter went out to the OCC and other regulators basically saying stop moving forward with granting additional regulatory approvals to Coinbase and Circle and Kraken and all the companies that had applied for different charters. We need to pump the rakes on this and have clearer rulemaking timelines and basically the classic run out the clock type move to just throw sand in the gears and make things take longer. And a few months later, the occ, which is part of the Trump administration, effectively said, no, I don't think I will, and continued to move ahead. And I think we've also gotten. Circle wasn't the first. We also got Kraken, I believe, might have been the first within this overall process to get the same designation. Someone who's more familiar with the regulatory plumbing might be able to correct me. But in any case, a very interesting headline as it relates to which side the broader regulatory apparatus is on right now. And your latest data point showing that the government is moving more and more to work hand in hand with the, I'm not going to call it the crypto industry because I can't bring myself to dignify that. So I'll call it the digital assets industry broadly. But despite a major contingency of relevant lobbyists from the banking industry trying to throw roadblocks in the way the OCC has moved forward with this. And your latest version of that, your latest indication of that was Circle this past week and that maybe dovetails over to the thing on the right which is Open USD, which was in the last timestamp newsletter. We didn't get to talk about it last week, we ran out of time but we thought we should bring it up just because if you look at the, we don't have to go into all the architecture of this but basically a new stablecoin quote unquote for a new dollar stablecoin and it's run, administered by a consort of companies that you can see here on the, on the right. And if you look, it's just like an absolute murderer's row of like all the biggest payments companies, traditional payments, traditional financial services, fintech, you know, custodians, BlackRock, BNY Tech, companies like Google. You've got Stripe, obviously you've got your, your digital assets, whether it's like Coinbase in there. But this is I think a really interesting update to your latest data point on stablecoins which I think is a term that's ultimately going to be very outdated in just a few years, but let's call them digital dollars having a certain look and a certain architecture and specifically moving forward under the guise of and the guidance of some very well connected and important companies domestically. And I think to just tip our hat or to toot our own horn a little bit, I think if you look at what's available on Open USD right now, there's not a ton available in the docs yet. But this all looks very, very much like everything that we were outlining a few months ago as it related to the future of stablecoins. So if you go to 1031 timestamp stablecoins you can read way more than you probably ever wanted to about why we thought it was going this way. But I think this is showing you the puck going in exactly the direction we were talking about, which is ultimately, you know, there's no long term meaningful role for blockchains here with this consortium of financial services heavyweights kind of running the show. And if you go look at the website you'll see kind of the way they talk about it validates that. But I think most importantly, even outside of the debate over blockchains and their use here, I think it's just a really interesting latest data point on the trend of, and we've talked about reshoring as it relates to manufacturing and US industrial capacity. I mean, I think this is a big piece of the kind of reshoring US control over the dollar, what it means to have a dollar, to use a dollar. We've talked about the massive Eurodollar market and the offshore dollar market on the show many times before. Besson has made comments about wanting to reassert US supremacy over that. And we've talked about different ways that could happen. And I think open USD is. I don't know who the winner is going to be. Maybe you'll have many winners. You'll have open USD, circle tether, other constructs we haven't thought of yet. Or maybe open USD will be the absolute winner. Don't really necessarily care so much about that. But I do think if you could pull off something like this and you could have US domiciled institutions running a digital dollar effectively that slots into the way that effectively the banking system, the payment system, all the different tools people already use, you can make it kind of invisible under the hood of what the dollar system is. And effectively if then what it means to hold a dollar is to basically hold a digital balance that is itself holding Treasuries as collateral. And that's the way that a dollar is getting defined. That moves treasury much more kind of front and center into controlling what we think of today as monetary policy. This is all very embryonic and I think it can fail in a lot of ways. And I think it's not necessarily totally clear exactly how it will all line up. But everything that I think we're seeing here on this slide and that we've talked about over the last few months is pointing in that direction of kind of reassuring US control over the dollar system and what it means to have and to use a dollar. And I think that'll maybe have some very interesting implications for financing headroom for the treasury going forward. And also what we have on the next couple of slides.
- [26:19]
A
Yeah, sorry for butchering that transition from the ABA headline to circle, but you corrected it correctly and then all good. You're very humble saying we wrote, you worked on that stablecoin piece. It was all you. So go read John's stablecoin piece. I mean, we gave some feedback, but you did a lot of the legwork there to put that thesis out there and extremely thorough. Go check it out. 1031 XYZ stablecoins. But as John said, Bitcoin may not be front and center with these policies in most people's minds, but in the background, again, it does seem like the push for Bitcoin Strategic reserve is very real. It's happening. And what we're seeing now is that the hurdles that we're facing come down to who's actually going to be running the Bitcoin strategic reserve, which department is going to be Treasury? Is it going to be Commerce? Who's actually going to steward the United States Bitcoin strategic Reserve?
- [27:17]
B
Yeah, I mean, I think this headline got played, if you saw it on the Bloomberg terminal or something. I think it got played as pretty negative. And certainly, I think if you wanted this to happen or if you thought it should move forward, then any incremental hurdles for the SVR would be a problem. And that's all fair. But I think the more interesting piece of it is just the way that this is framed is two government departments vying to run the strategic Bitcoin reserve and kind of this turf war between treasury and Commerce that to me signals that a, all the people that are the architects of what we just talked about with reshoring the US Dollar system and kind of reframing what it means to use a dollar and interact with the dollar system, they continue to care enough about the SBR to be the ones to throw their weight around and try to be the ones who run it and administer it, I think is pretty meaningful. And it tells you I don't know how long it will take to sort this out and what the various kind of statutory questions that have to be resolved, you know, ultimately will be. But I think the much more meaningful piece of this headline, in my view, was that all the relevant decision makers who are at the controls of everything we've just talked about, are continuing to push to get this done just in the way that they want to benefit their department's fiefdom. But that probably doesn't happen if this is either fully on ice or just completely irrelevant to them.
- [28:43]
A
And it's funny. Is there an ego battle between Besant and Howard Lutnick I can't imagine eking in because we know they've had a very good relationship at the beginning in the lead up to. Wasn't Lutnick buying for Treasury? Yeah, sort of boxed out. And then I think Bessent has had some choice words for Lutnick, or at least reports have said that he's had choice words for Ludnick. But we're not here to gossip. We're here to talk about. This is the last slide we have, which I think is positioning in reinforcing and laying out the thesis for our listeners here of Why a bitcoin strategic reserve makes sense for the United States when you consider the incredible lead we have in terms of bitcoin adoption in the United States and the amount of bitcoin that the government currently has domain over.
- [29:29]
B
Yeah, this is pretty self explanatory and I think we've talked about it on the show before. But just to wrap up, this is river put this out last week. I think this is their update of a series of slides that we've talked about before, but just showing. I highly recommend people go look at this. I think it's called America is the Bitcoin Superpower. You can just see the U.S. government has basically an uncontested lead in bitcoin holdings. Now we can talk about the provenance of those holdings and I think as Americans we should maybe be concerned with how some of those holdings were attained. But nevertheless, just thinking about it from the government's perspective, the strategic implications perspective, that advantage, as well as just the amount of bitcoin that's held privately by both individuals and companies and one company in particular in the US I think positions bitcoin as or positions the US as uniquely advantaged in the bitcoin sphere to the extent that it wants to exercise that advantage. And I think if you look at what we've talked about for the last 10 minutes, all the incentives point to the US and the Trump administration having every reason to kind of move forward and press this advantage to the extent that it's interested in kind of rearchitecting the dollar system, the financial system and what it means to kind of interact with US Productive capacity through the dollar system. So again, I don't want to overplay this one. It's pictures worth a thousand words, pretty clear to people, but we can leave it there.
- [30:59]
A
Might want to get something just in case it catches on. Wise man once said, don't sleep on bitcoin. We'll see you guys next week.