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shadow banking and private credit it went nuclear essentially in 21 and 22 everyone in the space

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convinced themselves they could generate high levels of return that were essentially risk-free

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which whenever you hear that alarm bells should be ringing because there's no such thing in finance

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how big and systemic can this become bubbles tend to take the same forms each and every time they're

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given you know a different coat of paint a different facade nothing bad has happened therefore

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nothing bad can happen, which means I take even more stupid risk. And it just gets bigger and

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bigger and bigger to the point that the imbalance is inevitably going to reverse. And then the

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question is what it means on the other side. That's the danger when it gets to forced selling

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becomes distressed selling becomes fire selling. Everything just amplifies as the dominoes fall

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one after another after another. How do people position themselves? Like what should you be

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looking at as a way of sort of surviving this? I would buy a ton of...

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Jeff Snyder welcome back to the show sir thanks Danny good to see you again it's been a while

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it has been a while I always like talking to you because I mean I think you probably have one of

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the best views into how the actual sort of financial system works in the plumbing and

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you've been saying some scary stuff recently you've been saying that you think we're in a

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financial crisis so do you think we are I think I've been more measured there are a lot of people

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will say, hey, you know, we've heard from Jamie Dimon and Mohamed El-Aryan and others who say,

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hey, I see a lot of 2008 similarities. And you're going to see what they're saying. The pattern is

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the same because the pattern is human behavior, not necessarily the actual format. But I don't

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know, you know, financial crisis, it's too early to call. We're dealing with different animals than

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what we did back in 2008. However, there is a lot of evidence that suggests that the big portion of

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the credit market did entertain a bubble and was in a bubble for quite some time, and that that

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bubble has shifted. Whether or not it's a complete and utter bust and it leads to a financial crisis

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is a matter that, you know, hasn't been settled just yet. But there are a number of telltale

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signs that suggest that is a far greater possibility than maybe most people should be

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comfortable with. And that seems to be the market position that seems to be, you know, everything

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like you keep getting developments across the system that suggest there's a lot of trouble

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brewing there. But it's still an open question about what it actually all means and where it

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all boils down to. But what is it that you're specifically seeing that makes you think

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potentially we could be? Like you say, is it in private credit? And what does that actually

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look like? What are you seeing? Yes, shadow banking and private credit. People who may not

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be familiar with the terms, shadow banks are simply, they're like banks, but they're not

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They're not registered in regulated banks.

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Essentially, investment funds.

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And after the 2008 crisis, when the regulated banking system was essentially broken for good,

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more and more throughout the 2010s, these non-bank shadow banks began to step in and fill that void

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because there was a need to redistribute credit to especially smaller and middle-sized businesses,

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the more riskier borrowers that the regulated banks were just staying away from

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because their balance sheets were impaired.

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And so you had these clean balance sheets among shadow banks who could go into some of these riskier areas and essentially relend.

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They were getting their funding from the banks who were, you know, they looked at these shadow banks as less risky than lending directly.

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So they get funding from the banks and just relend into these other parts of the economy that were started for credit.

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That went nuclear essentially in 21 and 22, the aftermath of the pandemic.

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The shadow banking just went absolutely crazy for a bunch of reasons.

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largely because everybody thought initially anyway

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it was going to lead to a permanent plateau of prosperity.

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So why not take a bunch of risk

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because it was going to lead to nothing

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but positive results going forward.

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So everyone in the space convinced themselves

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they could generate high levels of return

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that were essentially risk-free,

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which whenever you hear that,

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alarm bells should be ringing

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because there's no such thing in finance.

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There's no such thing as high rates of return with low risk.

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It's high rates of return with what are perceived to be low risk

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until they're not actually low risk.

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So you had a hyper extension of private credit,

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essentially shadow banking, whatever you want to call it.

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The Fed calls it non-depository financial institutions.

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But you had these investment funds that were out there

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raising tons of money and relending it to the real economy,

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believing that there was no downside to doing so,

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which is the fatal conceit in every debt-fueled bubble

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that we've ever seen in human history.

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So lots of money went into the space.

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A lot of it under really bad assumptions, which is all the ingredients, which are all the ingredients for a credit market bubble.

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Then last year, we started to see signs that for the first time, people were questioning all the assumptions that fed that bubble, mainly about the real economy, mainly about the situation in the labor market.

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You know, maybe Jay Powell wasn't correct.

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The economy wasn't booming and solid this entire time.

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And that there was more risk in some of these riskier parts of the credit markets than people had been anticipating.

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And then it got even worse than that, because while those are natural questions to begin asking, we started to see these irregularities. First with Tricolor and then First Brands and then Renovo and a bunch of them last fall. Then there was one just yesterday in the UK, what Jamie Dimon artfully called cockroaches.

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And the importance of the cockroaches were not just that there's a bunch of bubble behavior, overextended, overleveraged risk taking in the private credit space, but there was basically no controls over it.

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You expect that the big banks who have been burned in the 2008 crisis and repeatedly along the way would at the very least have done a little bit of due diligence and underwriting and extending credit to these shadow banks before they extend credit to the rest of the borrowing public.

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What we found out in these cockroaches is that nobody cared to do even the most minimum underwriting or due diligence.

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That's what these cockroaches uncovered was stunning levels of fraud and just basic fraud.

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Like, for example, a bank would lend funds to a like Tricolor or First Brands expecting that they were basically safe in doing some because Tricolor or First Brands are now MFS issued collateral against those loans.

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So you think, OK, worst case scenario, this this little firm, this shadow bank blows up, but I've got collateral that I can depend upon.

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I'm protected. But nobody ever checked the collateral.

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Was it real? Was it what they thought it was?

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And so in case after case after case, what became clear is that the collateral was either fraudulent, double posted.

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And what it really suggests and what it really pointed to is that nobody did any homework.

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The bubble behavior that went on for years was a lot worse than we thought it was.

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And so the importance of the cockroaches is that one after another after another, it showed.

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Nobody has any idea of what these credits actually look like, whether it's the actual credit providers, the shadow bankers themselves,

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those who are providing the leverage and the funding through the banking sector,

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or even the hedge fund investors or the institutional investors who seeded these shadow banks to begin with.

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Nobody did any of the basic standards of due diligence and underwriting.

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They just lent because everything seemed to be just fine.

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And if everything seems to be just fine, then it's easy to buy into that fairytale fantasy of high returns with no risk.

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I mean, no one doing any due diligence reminds me very much of 2008.

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It sounds pretty similar.

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But if you had to compare this to like a previous financial crisis, like the situation we're in today, obviously 2008 was all around mortgage backed securities.

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I don't know my history well enough to know exactly what caused the sort of Great Depression 1929 crash.

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But like where would this fall?

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How big and systemic can this become?

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It's not anywhere close to either 2008 or certainly not the 1930s, but it is substantial enough that it could lead to significant problems in the financial markets.

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as we're seeing a little bit now,

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but also, you know, more damage to the real economy

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and significant damage

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because the real economy is not in really great shape

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to begin with.

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So it is a serious problem.

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It's not an end of the world type of situation,

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but it's enough that, you know,

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create even more misery on top of old miseries

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that still haven't been healed yet.

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There are a lot of similarities, like I said,

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you know, bubbles tend to take the same forms

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each and every time.

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They're given, you know, a different coat of paint,

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a different facade, you know,

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different, you know, modern technology

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and modern innovations.

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but they're basically, it all comes down to the same types of behavior.

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Everybody becomes convinced that nothing bad can happen.

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In large part, it becomes confirmation bias

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because you think this goes on year after year after year.

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Nothing bad has happened, therefore nothing bad can happen,

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which means I take even more stupid risk and do more stupid things,

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do even less due diligence,

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and everybody just prioritizes volume over everything else,

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over common sense, and it just gets bigger and bigger and bigger

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to the point that the imbalance is inevitably going to reverse.

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And then the question is what it means on the other side.

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So, yeah, not 2008, certainly not 1930s, but significant enough where if it starts in private credit, which seems to have already done,

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that it could definitely spill over into other areas and create even more difficulties like leveraged loans and high yield corporate credit.

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Financial markets, obviously, the stock market's not going to do well if we continue down this road.

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in those financial markets like the stocks,

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if they start to become shaky again,

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if they start to really fall off,

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that's gonna have macroeconomic feedbacks as well.

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So it's significant enough without being,

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you know, a nightmare type of scenario.

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Okay, so you have this framework

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of the three stages of financial crisis.

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Can you explain what each of those stages are

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and where we are today?

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To be clear, it's a conceptual framework

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to give people kind of a sense of where things are.

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It's not like a hard and fast,

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stage one is exactly this,

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and at this particular date, it shifts into stage two.

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It's far more ambiguous than that.

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And then there's often ebbs and flows,

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nothing ever goes in a straight line.

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We could go from stage one to stage two and not really notice it

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because things kind of blend together.

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together. But conceptually speaking, just to get your head around what this process could look like

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so you can create a mental roadmap of what might be going on and kind of give yourself a sense of

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where you think things are in terms of progression. That's the problem that we keep coming back to.

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I know we'll talk about this a little bit more, but as we keep going through time, we get more

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escalation, more escalation, more progression, more progression, never de-escalation, which suggests

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we're moving further into these processes. But just briefly to put it together in a brief framework,

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as we just talked about with the bubble, the bubble is easy to understand. Money just flows

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into it. Nobody asks any question. Everything seems to be as good as a fairy tale. High returns,

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low risk. Nothing can go wrong. So money only goes in the one direction. But eventually something

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happens, and it's usually a combination of some things that take place, which causes people to

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say, you know what? That's ridiculous. There's no such thing as high rates of returns or risk-free.

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We need to start taking a closer look at what's really been happening. And as more people start

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asking questions, they don't like the answers that they get. And suddenly, for the first time,

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what I call stage one, is where money starts to flow out. Now, there's always money in and out,

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but by and large, during the bubble period, money flows in overwhelmingly in that one direction.

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In stage one, more than usual money starts to flow out because people are asking questions for

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the very first time.

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They're actually scrutinizing what's been taking place.

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And they're not liking what they're seeing

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because, of course, you're not going to like what they're seeing

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because we just went through a bubble

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with all sorts of stupid and garbage and everything else.

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So for stage one, some money starts to go out.

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However, that's really,

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it doesn't lead to any further consequences

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because as in stage one being a preliminary

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early part of the process,

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there are still people who are going to believe

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in the fairy tale and the fantasy.

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So there's still investors who are willing to put in money,

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especially if they think they're getting a discount for it.

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Plus you have the financial system, the regulated financial system, the banking sector,

223
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which more likely than not is going to stand behind, in this case, shadow banks

224
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as they start to experience some uncomfortable conditions with outflows.

225
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So you've got some money that goes out, but you have ways to rebalance money

226
00:14:30,340 --> 00:14:33,740
so that these shadow banks, for example, that are experiencing outflows

227
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don't have to actually start selling assets,

228
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which is what really determines a financial crisis.

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When there's forced distress and even fire sales,

230
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that's where things really get bad.

231
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So in stage one, you've got people questioning the bubble

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and all of the assumptions that went into it.

233
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You've got enough people who are doing it

234
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that you get some significant outflows.

235
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But in stage one, they're relatively balanced

236
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by bank emergency lines of credit

237
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or new investors bringing money in.

238
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And so largely, you can tell something is different,

239
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but it doesn't really look all that bad.

240
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And that's kind of where we went through

241
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for like the last six months, lots of stage one.

242
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We've seen confirmation for it.

243
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Hedge fund investors have been redeeming,

244
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have been withdrawing funds from a lot of these hedge funds

245
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to the point that it's created issues for the hedge funds.

246
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But we've also seen banks that have issued lines of credit

247
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or have allowed these shadow banks

248
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to draw on their lines of credit.

249
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So they haven't had to really force sell anything

250
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until recently.

251
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So what happened last week

252
00:15:29,380 --> 00:15:31,380
was one of the most well-known shadow bankers,

253
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Blue Owl, admitted they just had to sell some assets.

254
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And it wasn't voluntary.

255
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It was a forced selling.

256
00:15:36,840 --> 00:15:39,700
So that was the first instance of stage two behavior.

257
00:15:40,160 --> 00:15:42,600
Now, it doesn't necessarily mean that we are in stage two.

258
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It means that for the first time, we can confirm that something like stage two has taken place.

259
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So stage two is where we go from stage one.

260
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But the outflows either pick up or usually investors get more investors get cold feet.

261
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So the outflows begin to pick up on that side.

262
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And on the other side, there are fewer new investors willing to put money in because they're starting to ask their own questions.

263
00:16:04,520 --> 00:16:07,360
And for the first time, when you get deeper into stage two,

264
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the banking sector says, you know what?

265
00:16:10,280 --> 00:16:12,520
Even though you have a preexisting line of credit with me,

266
00:16:12,520 --> 00:16:13,520
I'm not gonna honor it.

267
00:16:13,520 --> 00:16:16,360
I'm gonna cut that thing up and just cut my losses with you.

268
00:16:16,360 --> 00:16:18,360
Because right now, all the losses are being borne

269
00:16:18,360 --> 00:16:20,280
by the regular banking system.

270
00:16:20,280 --> 00:16:35,279
So in stage two you get to the imbalance So you have money flowing out for the first time in stage one but then the money outflows pick up to the point where they not being balanced by inflows or the ability to find bridge financing And so for the first time what you see is forced selling

271
00:16:35,279 --> 00:16:38,859
Because if you have more money going out than you have money available to come in,

272
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you have to sell your assets.

273
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It's just basic maturity transformation.

274
00:16:42,499 --> 00:16:44,119
We see this in every single crisis.

275
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That's why this is a basic crisis template, not just private credit.

276
00:16:48,079 --> 00:16:54,339
So you get the forced selling that tells you that things have progressed another step into stage two.

277
00:16:55,019 --> 00:16:56,919
Can I just ask you a quick question on the stage two there?

278
00:16:57,159 --> 00:17:00,879
Because when that happens, you said Blue Owl have started this essentially.

279
00:17:01,639 --> 00:17:06,719
Is it the kind of thing that once someone spots this as a problem, it's like a domino effect?

280
00:17:06,739 --> 00:17:11,759
Because once they start forced selling things, everyone else is then put in a position where they need to start selling the same assets.

281
00:17:11,759 --> 00:17:17,319
That's the danger when it gets to forced selling becomes distressed selling becomes

282
00:17:17,319 --> 00:17:21,519
fire selling. So there's a progression within progressions. And that's why, you know,

283
00:17:21,599 --> 00:17:26,339
it's a simple example just to understand conceptually what's going on. But yeah,

284
00:17:26,359 --> 00:17:30,599
that's really what happens when you progress from stage one to stage two and eventually stage three.

285
00:17:30,819 --> 00:17:34,859
It's really just that once the selling starts, it creates these knock on effects.

286
00:17:35,659 --> 00:17:39,519
So what Blue Owl was forced to sell and their price, they made sure that everybody knew the

287
00:17:39,519 --> 00:17:43,719
price was very close to par. It was actually a bit less. There was a bit of a discount there.

288
00:17:43,879 --> 00:17:49,459
But then this week, we got confirmation of another fund called New Mountain that actually had to also

289
00:17:49,459 --> 00:17:55,419
sell assets at around 94 cents on the dollar. Now, it's not exactly an apples to apples comparison,

290
00:17:55,639 --> 00:18:00,579
but it is conceptually what you just said, Danny, which is one person sells and the next sell,

291
00:18:00,639 --> 00:18:05,079
the price goes down and the price goes down. And as more selling is forced to take place,

292
00:18:05,079 --> 00:18:09,259
the price goes lower and lower and lower. It causes more selling because everybody sees the

293
00:18:09,259 --> 00:18:13,499
lower prices and they think, oh, crap, I better get out while I still can. And so you have more

294
00:18:13,499 --> 00:18:18,899
sales, fewer buyers because there's less money in the space. Prices go lower and lower and lower,

295
00:18:18,899 --> 00:18:24,159
and it triggers that cascading effect that leads to eventually, if it goes too far, that's where

296
00:18:24,159 --> 00:18:28,939
you get to stage three, where it's everybody panicking. So that's stage two is where you

297
00:18:28,939 --> 00:18:33,179
start to see the forced sales because money flowing out is flowing out more than money is

298
00:18:33,179 --> 00:18:39,739
coming in replacing it. And then stage three is where these distressed sales create more price

299
00:18:39,739 --> 00:18:45,179
effects than the system can manage. And it leads to not just selling in the area we're talking about,

300
00:18:45,199 --> 00:18:50,239
in this case, private credit. It leads to market prices that fall farther and farther. And then

301
00:18:50,239 --> 00:18:55,159
they spill over into other market segments and other potential markets, which leads to lower and

302
00:18:55,159 --> 00:18:59,879
lower prices. And that's when you start to get the big consequences where, in this case, it won't be,

303
00:18:59,879 --> 00:19:03,479
you know, we're not going to see another Lehman Brothers fail, but we could see some of these

304
00:19:03,479 --> 00:19:08,019
private credit funds go belly up. That's that's absolutely something that could happen. And we

305
00:19:08,019 --> 00:19:11,419
really don't know what that would mean as far as the functioning of the system. But that's more

306
00:19:11,419 --> 00:19:16,319
stage three. So you get the sales, you get more outflows, you get the banks that are pulling back.

307
00:19:16,319 --> 00:19:21,739
There's less liquidity across the entire system, across the entire marketplace. Prices go down

308
00:19:21,739 --> 00:19:26,459
and then you get to stage three where it's just everything just amplifies as the dominoes fall

309
00:19:26,459 --> 00:19:27,659
one after another after another.

310
00:19:28,659 --> 00:19:29,699
And how long does this,

311
00:19:30,379 --> 00:19:32,259
I imagine this can take a matter of hours

312
00:19:32,259 --> 00:19:33,659
or a matter of weeks or months or years.

313
00:19:33,679 --> 00:19:34,979
Because if you watch Margin Call,

314
00:19:35,459 --> 00:19:36,799
it reminds me of that

315
00:19:36,799 --> 00:19:37,739
where they start the morning

316
00:19:37,739 --> 00:19:40,239
selling their stuff for like 95 cent on the dollar.

317
00:19:40,559 --> 00:19:41,319
And by the afternoon,

318
00:19:41,419 --> 00:19:42,939
they're selling it for like 65 cents on the dollar.

319
00:19:43,019 --> 00:19:45,319
That obviously happened in like a day in 2008.

320
00:19:45,879 --> 00:19:47,639
But like, do you expect this to be a much more-

321
00:19:47,639 --> 00:19:48,759
Yeah, that's the worst part of stage three.

322
00:19:48,919 --> 00:19:49,899
That's toward the end.

323
00:19:50,479 --> 00:19:52,179
You expect this to be much more drawn out?

324
00:19:53,539 --> 00:19:54,659
They're always drawn out.

325
00:19:54,659 --> 00:19:58,519
See, the problem is people have this conception that a crash happens overnight.

326
00:19:58,979 --> 00:20:02,239
Like one day everything's fine and the next day everybody's panicking.

327
00:20:02,339 --> 00:20:03,139
That's not what happens.

328
00:20:03,879 --> 00:20:08,439
Crashes, even the most violent crashes like 2008 were several years in the making.

329
00:20:08,559 --> 00:20:09,839
Yes, several years.

330
00:20:10,139 --> 00:20:11,559
Same thing with the 1930s.

331
00:20:11,939 --> 00:20:13,679
The Great Depression did not happen overnight.

332
00:20:13,879 --> 00:20:15,899
The stock market crashed in October 1929.

333
00:20:16,059 --> 00:20:17,519
It actually peaked in September 29.

334
00:20:17,999 --> 00:20:21,539
The actual depression didn't happen until 1930, 1931,

335
00:20:21,659 --> 00:20:23,179
after you got a couple waves of bank failures.

336
00:20:23,179 --> 00:20:33,459
So these are drawn out processes and it takes a while for these things to go because you got to remember at every step along the way, there are lots of people who believe this is all a big nothing.

337
00:20:34,079 --> 00:20:37,119
We're overreacting to what is just basically a small thing.

338
00:20:37,219 --> 00:20:42,599
So like I said, stage one, a lot of investors see, OK, there's some irregularity over there.

339
00:20:42,799 --> 00:20:44,819
That allows me a buying opportunity.

340
00:20:44,899 --> 00:20:46,799
I can put my money in and get stuff really cheap.

341
00:20:46,799 --> 00:20:48,659
So there's always this back and forth.

342
00:20:48,999 --> 00:20:53,839
There's never this clear, decisive signal that says we are moving in this direction.

343
00:20:54,519 --> 00:21:00,959
And so that back and forth leads to it takes up a whole lot of time as this process plays out.

344
00:21:01,079 --> 00:21:04,419
But ultimately, what matters is not the length of time.

345
00:21:04,739 --> 00:21:11,779
It's whether or not these imbalances that were created during the upswing in the bubble period can be handled without leading to more systemic consequences.

346
00:21:12,379 --> 00:21:16,119
It's a difference between a credit crisis and a liquidity crisis.

347
00:21:16,119 --> 00:21:21,999
A credit crisis is something like we saw in the 1980s and 1990s with the SNL crisis.

348
00:21:22,599 --> 00:21:30,099
You had a credit crisis in a segment of the banking sector that led to more than 1,000 banks failing in the U.S., but it didn't lead to a depression.

349
00:21:30,259 --> 00:21:35,699
It didn't lead to massive market chaos because it never really became a full-blown liquidity crisis.

350
00:21:36,179 --> 00:21:40,899
That's the difference between the SNL crisis in the 80s and 90s and 2008.

351
00:21:41,459 --> 00:21:44,339
2008 started out as a credit crisis in the same way.

352
00:21:44,339 --> 00:21:49,699
You had overextended lending for a lot of stupid reasons.

353
00:21:49,819 --> 00:21:51,239
A lot of stupid things took place.

354
00:21:51,639 --> 00:21:54,459
A lot of leverage that had been added onto it.

355
00:21:54,699 --> 00:21:55,639
So you had a credit crisis.

356
00:21:55,779 --> 00:21:57,839
There were losses that need to be taken by the system.

357
00:21:58,139 --> 00:22:05,359
But they were so big and so large and so misunderstood that it led to liquidity, the markets breaking down.

358
00:22:05,419 --> 00:22:07,339
It led to the entire monetary system breaking down.

359
00:22:07,399 --> 00:22:09,139
It led to the banking system breaking down.

360
00:22:09,139 --> 00:22:14,639
So it led to much further consequences, which is a credit crisis became a full-blown monetary crisis.

361
00:22:15,999 --> 00:22:30,159
And in this current iteration that we're going through, we really don't know how shadow banks, the interplay between banks who are funding a lot of the shadow bank activities and the shadow banks themselves, how that could spill over into other areas.

362
00:22:30,159 --> 00:22:40,459
So at the very least, what we're looking at is potentially a credit crisis with some signs and symptoms that suggest it could become a liquidity crisis if it continues.

363
00:22:40,699 --> 00:22:46,039
And the reason why we think it's a credit crisis is because it's just the stupidity, the cockroaches and everything we talked about at the beginning of this video.

364
00:22:46,999 --> 00:22:48,839
Can you explain that to me? Because I'm not sure I fully understand.

365
00:22:48,959 --> 00:22:52,779
Like, why would a credit crisis not become a liquidity crisis?

366
00:22:52,899 --> 00:22:54,379
Like, what are the different things there?

367
00:22:54,379 --> 00:23:00,959
Yeah, because in a credit crisis, what it really means is that there are hidden losses in lending, right?

368
00:23:01,419 --> 00:23:03,659
You lent to people that you probably shouldn't have.

369
00:23:03,719 --> 00:23:04,599
Those loans are worthless.

370
00:23:04,779 --> 00:23:06,059
Everybody has to take their losses.

371
00:23:06,319 --> 00:23:07,259
They're widespread.

372
00:23:07,939 --> 00:23:10,619
But it doesn't necessarily lead to all the stuff we just talked about.

373
00:23:10,799 --> 00:23:14,039
You can have a credit crisis that never goes past stage one.

374
00:23:14,379 --> 00:23:18,959
So the credit crisis is there's lots of losses to be taken by this person, this person, and that person.

375
00:23:19,099 --> 00:23:22,979
But it doesn't lead to distressed sales because maybe it's not that big of a deal.

376
00:23:23,539 --> 00:23:30,379
Some of these funds that take losses are not sharp enough that it leads to a complete draining of their liquidity facilities.

377
00:23:30,859 --> 00:23:36,419
They're never forced into selling assets at distressed prices, which is really what gets into the crisis.

378
00:23:36,859 --> 00:23:37,999
So there are lots of losses.

379
00:23:38,579 --> 00:23:43,399
In some cases, firms go out of business, banks go out of business.

380
00:23:43,399 --> 00:23:51,939
But it doesn't lead to systemic problems further down the road because it doesn't create the downside across markets.

381
00:23:51,939 --> 00:23:54,039
It doesn't lead to the real depression in prices.

382
00:23:54,599 --> 00:24:00,159
The sort of domino effect that you talked about when, you know, a lot of forced selling,

383
00:24:00,259 --> 00:24:02,319
distressed sales lead to further distressed sales.

384
00:24:02,579 --> 00:24:06,679
The link in the chain is broken by something that proves to be more resilient.

385
00:24:07,259 --> 00:24:11,379
Therefore, just as a bunch of credit losses that need to be taken by the system, the system

386
00:24:11,379 --> 00:24:15,859
takes those losses usually over a prolonged period of time, but it never really goes past

387
00:24:15,859 --> 00:24:17,659
stage one or maybe early stage two.

388
00:24:18,639 --> 00:24:21,999
So is the idea there that it doesn't snowball into sort of public markets?

389
00:24:22,159 --> 00:24:28,319
Banks are able to sustain that with their balance sheet instead of having to go and like tap repo markets in the Fed and things like that.

390
00:24:28,399 --> 00:24:30,439
Is that the right way of thinking about it?

391
00:24:31,099 --> 00:24:31,279
Yeah.

392
00:24:31,319 --> 00:24:34,279
So you can think about it like in the example of the S&L crisis.

393
00:24:34,279 --> 00:24:40,759
You had a lot of smaller banks who were exposed and actually got into repo, but a lot of smaller banks are exposed to mortgage crisis.

394
00:24:41,219 --> 00:24:49,599
But they didn't have to sell their assets because there were larger banks, these euro dollar banks, who were available to buy the assets from them before it became a cascading effect.

395
00:24:49,599 --> 00:24:56,579
So in other words, there were bigger banks that were willing to supply funds to the marketplace as needed to keep it all relatively stable.

396
00:24:56,699 --> 00:24:59,299
And relatively is doing a lot of work, a lot of the work here.

397
00:24:59,299 --> 00:25:23,139
But it was relatively stable that it didn't become a systemic break like 2008 or 1929, 1930, because there was capacity in the system to be able to absorb not just the losses, but those who took the losses, but also to stand behind and provide new funds and new liquidity as necessary to maintain, you know, some minimal level of capacity before it really did snowball into something bigger.

398
00:25:23,139 --> 00:25:29,699
If you had to put like a percentage on it, how likely do you think it is that we go into sort of full blown stage three here?

399
00:25:30,399 --> 00:25:33,819
Oh, it's really, really impossible to tell.

400
00:25:33,919 --> 00:25:36,539
What I would say is that it's a non-trivial risk at this point.

401
00:25:37,959 --> 00:25:42,639
So, I mean, greater than nothing, but certainly not, you know, potentially a base case.

402
00:25:42,699 --> 00:25:46,059
Though I will say the markets have been pricing something like this for years now.

403
00:25:46,059 --> 00:25:48,439
and as we continue to go along,

404
00:25:49,019 --> 00:25:51,659
everything seems to move in the same direction

405
00:25:51,659 --> 00:25:53,059
as what markets have been telling us

406
00:25:53,059 --> 00:25:54,319
to expect the entire time.

407
00:25:54,399 --> 00:25:56,979
So that's not exactly a positive scenario to begin with.

408
00:25:57,319 --> 00:25:59,279
And what I mean by that is markets have been saying

409
00:25:59,279 --> 00:26:02,359
over the long run, interest rates were gonna go down.

410
00:26:02,679 --> 00:26:03,899
They were gonna go down by a lot

411
00:26:03,899 --> 00:26:06,019
and they were gonna stay there for a very long time.

412
00:26:06,499 --> 00:26:08,079
And so for the last several years,

413
00:26:08,239 --> 00:26:10,539
I've been sitting here telling other people to sit here

414
00:26:10,539 --> 00:26:12,439
and think about how do we get from there?

415
00:26:12,759 --> 00:26:13,679
Or how do we get there?

416
00:26:13,719 --> 00:26:14,839
How do we get from where we were,

417
00:26:14,839 --> 00:26:18,859
say in 2022 and 2023, where central banks were hiking rates and everybody thought interest rates

418
00:26:18,859 --> 00:26:23,739
are going to go into the double digits, to the market telling them, no, interest rates are going

419
00:26:23,739 --> 00:26:27,459
to go down. They're going to go down by a lot and stay there for a very long time. And as we

420
00:26:27,459 --> 00:26:31,859
continue to progress, you see weakness in the economy. We see job losses take place last year.

421
00:26:31,919 --> 00:26:37,039
That's the macro side of it. And on the financial side of it, we've got a private credit bubble that

422
00:26:37,039 --> 00:26:42,159
is certainly going bust. That would fit into a range of scenarios that lead us to interest rates

423
00:26:42,159 --> 00:26:44,059
going down and staying there for a very long time.

424
00:26:44,139 --> 00:26:45,619
So if it does get to stage three,

425
00:26:46,079 --> 00:26:47,979
that would certainly fit the forecast

426
00:26:47,979 --> 00:26:50,479
that the markets have been sending for several years now,

427
00:26:50,799 --> 00:26:52,619
several years during the entire period

428
00:26:52,619 --> 00:26:54,639
when this stupidity was building up

429
00:26:54,639 --> 00:26:55,739
in the private credit space.

430
00:26:55,899 --> 00:26:59,219
So that's why I say the potential for a stage three

431
00:26:59,219 --> 00:27:01,199
is probably higher than we would like it to be

432
00:27:01,199 --> 00:27:02,779
because it fits within the scenarios

433
00:27:02,779 --> 00:27:04,879
that we've been looking for for years.

434
00:27:05,639 --> 00:27:07,599
That still doesn't mean it's a done deal,

435
00:27:07,639 --> 00:27:08,499
it's gonna take place

436
00:27:08,499 --> 00:27:11,039
or that the results of it will be catastrophic.

437
00:27:11,039 --> 00:27:13,539
it just means that there will be significant enough

438
00:27:13,539 --> 00:27:15,659
disruption, disorder, and deflation

439
00:27:15,659 --> 00:27:17,659
that it does lead to a situation

440
00:27:17,659 --> 00:27:19,919
where we have, you know, the economy's down,

441
00:27:20,059 --> 00:27:23,099
more job losses, unemployment's rising on the macro side,

442
00:27:23,159 --> 00:27:25,499
there's financial volatility, there's losses to be taken,

443
00:27:26,099 --> 00:27:27,599
there's going to be, you know, disruption,

444
00:27:27,779 --> 00:27:28,799
certainly in the stock market,

445
00:27:28,859 --> 00:27:30,359
if it goes that direction.

446
00:27:30,939 --> 00:27:32,879
All that kind of stuff that you associate with it,

447
00:27:32,879 --> 00:27:35,199
that would fit into the overall framework

448
00:27:35,199 --> 00:27:35,919
that we're looking at.

449
00:27:36,339 --> 00:27:38,659
So the chances are high enough to be paying attention.

450
00:27:39,099 --> 00:27:40,939
Yeah, I mean, that's probably the best way

451
00:27:40,939 --> 00:27:45,039
to put it because, you know, when you put a number on something, you got the numbers change.

452
00:27:45,099 --> 00:27:47,859
The probabilities change all the time as we get more and more information.

453
00:27:48,479 --> 00:27:52,459
So, I mean, that's I think that's probably the best description I've ever heard anybody

454
00:27:52,459 --> 00:27:52,739
say.

455
00:27:52,819 --> 00:27:55,399
It's enough to pay close attention to it.

456
00:27:55,879 --> 00:27:56,639
Hey, I'll take that.

457
00:27:57,079 --> 00:28:01,719
When you say the markets have been pricing in like low rates for a long time, even during

458
00:28:01,719 --> 00:28:04,619
sort of the fastest rate hike in history, they've been pricing this in.

459
00:28:04,659 --> 00:28:05,139
Is that right?

460
00:28:05,759 --> 00:28:07,119
And where have they been pricing that in?

461
00:28:07,119 --> 00:28:11,039
forward markets, interest rate swaps, the yield curve.

462
00:28:11,779 --> 00:28:14,639
The euro dollar futures curve, the old euro dollar futures curve,

463
00:28:14,719 --> 00:28:16,599
the far superior euro dollar futures curve,

464
00:28:16,679 --> 00:28:18,579
inverted back in December of 2021.

465
00:28:19,539 --> 00:28:22,159
So that was the market saying whatever the Fed's going to do in the short run,

466
00:28:22,259 --> 00:28:25,099
interest rates are likely to go lower after a certain period of time.

467
00:28:25,559 --> 00:28:26,439
So never since then.

468
00:28:26,499 --> 00:28:28,079
The curves have been completely upended.

469
00:28:28,519 --> 00:28:30,439
So you had inversion in the yield curve,

470
00:28:30,439 --> 00:28:33,679
the treasury market yield curve, March of 2022.

471
00:28:34,439 --> 00:28:37,059
And it had been inverted and heavily inverted.

472
00:28:37,119 --> 00:28:42,019
and historically inverted from March of 2022 on and off in the initial stage,

473
00:28:42,059 --> 00:28:44,039
but all the way until September of 2024.

474
00:28:44,499 --> 00:28:50,179
So the market was saying, eventually, once the Fed gets its inflation hysteria out of its system,

475
00:28:50,519 --> 00:28:52,579
rates are going to go down and they're going to go down by a lot and stay there.

476
00:28:52,639 --> 00:28:56,199
So from the very beginning, from the very beginning of 2021,

477
00:28:56,199 --> 00:29:00,019
the markets have said, over time, this is what we should expect.

478
00:29:00,139 --> 00:29:04,459
Not interest rates going into the future, going into double digits, soaring into the skyward.

479
00:29:04,719 --> 00:29:06,139
It's not the 1970s.

480
00:29:06,139 --> 00:29:07,459
There's no lingering inflation.

481
00:29:07,779 --> 00:29:09,859
We should expect things to go the other way.

482
00:29:09,979 --> 00:29:12,299
And I mean, to me, that seemed to make sense

483
00:29:12,299 --> 00:29:14,539
because the economy tailed off right in 2022.

484
00:29:15,099 --> 00:29:17,319
It didn't fall into a recognizable recession,

485
00:29:17,319 --> 00:29:18,679
but it was every bit the recession.

486
00:29:19,179 --> 00:29:21,099
We've seen the job market weaken along the way

487
00:29:21,099 --> 00:29:22,599
in the macroeconomy, not just in the US,

488
00:29:22,679 --> 00:29:24,079
but across the entire world.

489
00:29:24,539 --> 00:29:25,679
And that makes sense too.

490
00:29:25,979 --> 00:29:28,399
You think about what happened in 2021 and 2022

491
00:29:28,399 --> 00:29:30,319
while all this financial irregularity

492
00:29:30,319 --> 00:29:31,559
and stupidity was going on,

493
00:29:32,019 --> 00:29:34,379
the entire world of the vast majority of it

494
00:29:34,379 --> 00:29:35,459
was impoverished.

495
00:29:35,459 --> 00:29:40,159
You had prices that soared ahead and incomes that didn't come close to making up the difference.

496
00:29:40,239 --> 00:29:43,099
So in other words, everybody fell further behind almost at once.

497
00:29:43,439 --> 00:29:45,319
It was like this one big slap in the face.

498
00:29:45,759 --> 00:29:48,459
How is that ever going to work out any other way in the future?

499
00:29:48,759 --> 00:29:57,119
Especially as these middle market players, these shadow banks were extending credit on really stupid assumptions that everything was just going to work out fine.

500
00:29:57,399 --> 00:29:59,939
It just got worse and worse and worse over time.

501
00:29:59,939 --> 00:30:03,079
but it did so in a way that wasn't recognizable to most people

502
00:30:03,079 --> 00:30:05,519
and what they think of and when they hear the term recession.

503
00:30:05,839 --> 00:30:11,019
But the macroeconomic-based case has always been from 2021 onward

504
00:30:11,019 --> 00:30:13,819
that we would end up in this situation for that reason,

505
00:30:13,819 --> 00:30:16,219
because you can't impoverish the vast majority of the world

506
00:30:16,219 --> 00:30:19,119
and expect it all just to work out fine and dandy.

507
00:30:20,519 --> 00:30:24,199
So when you say that rate cuts are basically baked in the cake at this point,

508
00:30:24,499 --> 00:30:29,619
like Kevin Walsh is obviously almost likely coming in as Fed chair in May, I think.

509
00:30:29,939 --> 00:30:33,099
What do you think the difference he will make there will be?

510
00:30:33,299 --> 00:30:37,959
And maybe it's worth explaining why you think the Fed doesn't matter as part of that answer for anyone who's not heard you before.

511
00:30:39,099 --> 00:30:40,939
Thanks for anticipating my answer.

512
00:30:41,039 --> 00:30:41,859
I really appreciate it.

513
00:30:42,699 --> 00:30:43,639
No, it won't matter.

514
00:30:43,759 --> 00:30:52,159
Jay Powell, Warsh, or anybody else who got the job, whether it was Waller or maybe even Jeff Schmid from Kansas City, who is the biggest hawk on the committee, wouldn't matter.

515
00:30:52,839 --> 00:30:57,239
What the markets are saying is that conditions develop to the point where the Fed has no choice.

516
00:30:57,239 --> 00:31:04,119
like 2008. Before 2008, the Fed had no intentions of lowering interest rates. In fact, when they

517
00:31:04,119 --> 00:31:08,819
look at inversion and euro dollar futures in 2007, they said, what the hell is the market pricing?

518
00:31:08,939 --> 00:31:13,099
We don't see anything bad taking place. We're not going to cut rates. We just raised them. We just

519
00:31:13,099 --> 00:31:17,779
stopped raising rates. Why would we cut rates? So it's not, it's what the market is saying is

520
00:31:17,779 --> 00:31:23,799
regardless who's at the Fed, conditions are going to be such that they have no choice but to respond

521
00:31:23,799 --> 00:31:25,599
in the way that we think they're going to respond,

522
00:31:25,679 --> 00:31:27,539
which is if we have a credit crisis

523
00:31:27,539 --> 00:31:29,039
that leads to higher unemployment,

524
00:31:29,459 --> 00:31:31,979
it doesn't matter what anybody at the Fed says today,

525
00:31:32,159 --> 00:31:33,379
they're going to lower rates

526
00:31:33,379 --> 00:31:34,739
and they're going to lower rates by a lot.

527
00:31:35,239 --> 00:31:36,519
It's not the Fed's choice.

528
00:31:36,519 --> 00:31:38,879
It's the conditions around the Fed

529
00:31:38,879 --> 00:31:41,579
that the market says the Fed will have to respond to,

530
00:31:41,959 --> 00:31:44,699
which is why lower interest rates,

531
00:31:44,879 --> 00:31:46,339
contrary to popular perception,

532
00:31:46,819 --> 00:31:48,839
lower interest rates are not stimulus.

533
00:31:49,319 --> 00:31:50,859
It is officials reacting

534
00:31:50,859 --> 00:31:52,759
to what's taking place in reality.

535
00:31:53,279 --> 00:31:59,999
So that's why interest rates go down during recessions rather than interest rates go down and stop the recession from happening.

536
00:32:00,459 --> 00:32:04,899
They're responding to the recession that's developing or the financial crisis, whatever comes along with it.

537
00:32:05,259 --> 00:32:06,739
So that's what the market is saying.

538
00:32:06,739 --> 00:32:16,779
The market is saying the Fed is likely, balance of probabilities, to respond to whatever conditions they are, respond in a way that they did in previous cycles.

539
00:32:16,839 --> 00:32:19,839
They're going to bring rates down, not all at once, as we've seen.

540
00:32:19,839 --> 00:32:21,059
I mean, this is a drawn-out cycle.

541
00:32:21,159 --> 00:32:23,759
It's one of the most drawn-out rate-cutting cycles that we've seen.

542
00:32:23,919 --> 00:32:26,359
But over time, eventually, they get there.

543
00:32:26,439 --> 00:32:28,399
And they get there because they don't have a choice.

544
00:32:29,439 --> 00:32:30,959
I don't know if I've ever asked you this question,

545
00:32:31,059 --> 00:32:32,359
because I know you don't like the Fed.

546
00:32:32,499 --> 00:32:34,039
But do you think we should get rid of the Fed?

547
00:32:35,259 --> 00:32:36,819
It's not that I don't like the Fed.

548
00:32:36,999 --> 00:32:39,439
It's the, well, I mean, there's lots of questions about the Fed.

549
00:32:39,619 --> 00:32:41,739
The Fed isn't what people think it is.

550
00:32:42,019 --> 00:32:44,839
And the Fed isn't what the Fed advertises itself to be.

551
00:32:44,919 --> 00:32:46,399
That's what I really have a problem with.

552
00:32:46,399 --> 00:33:02,738
The Fed has you believing that it this money printing engine when it doesn have a money printer And in fact if you put a gun to Jay Powell head he would admit it to you In fact it a dirty secret they never talk about One thing you never hear come out of Jay Powell mouth is money money supply money circulation money anything

553
00:33:02,978 --> 00:33:04,558
They say monetary policy,

554
00:33:04,778 --> 00:33:06,658
but that's really interest rate policy.

555
00:33:06,758 --> 00:33:08,058
It's not monetary policy.

556
00:33:08,158 --> 00:33:09,539
They are not targeting a money supply.

557
00:33:09,638 --> 00:33:11,218
They're not doing anything with money supply.

558
00:33:11,778 --> 00:33:13,598
So they've given this impression

559
00:33:13,598 --> 00:33:15,738
that they're a monetary institution when they're not,

560
00:33:15,818 --> 00:33:17,158
which is my biggest beef with the Fed,

561
00:33:17,158 --> 00:33:20,258
is they are pretending to be what they are absolutely not.

562
00:33:20,998 --> 00:33:22,438
So can we get rid of the Fed?

563
00:33:22,558 --> 00:33:23,718
That part of it, yes.

564
00:33:24,098 --> 00:33:27,338
Now, that doesn't mean that some parts of the Fed are salvageable.

565
00:33:27,578 --> 00:33:31,838
For example, I use the Fed all the time in terms of information.

566
00:33:31,838 --> 00:33:35,318
It is one of the few sources of information into these dark spots

567
00:33:35,318 --> 00:33:38,838
that we otherwise would not have because of the Eurodollar system

568
00:33:38,838 --> 00:33:40,918
and its opaque nature offshore,

569
00:33:41,539 --> 00:33:43,378
hidden in the footnotes of bank balance sheets,

570
00:33:43,418 --> 00:33:45,458
and a lot of stuff doesn't even show up on bank balance sheets,

571
00:33:45,458 --> 00:33:47,518
or shadow bank balance sheets in these days.

572
00:33:48,058 --> 00:33:49,918
So the Fed does have some use.

573
00:33:50,158 --> 00:33:54,398
It uses its power of subpoena and regulatory authority,

574
00:33:54,539 --> 00:33:57,158
macroprudential power to force some kind of transparency,

575
00:33:57,698 --> 00:33:58,578
not nearly enough.

576
00:33:59,058 --> 00:34:02,378
But the idea that the Fed controls the economy

577
00:34:02,378 --> 00:34:03,458
and the monetary system

578
00:34:03,458 --> 00:34:06,398
and then can generate predictable positive outcomes

579
00:34:06,398 --> 00:34:08,318
by moving the federal funds rate around,

580
00:34:08,798 --> 00:34:10,298
that's total horse crap.

581
00:34:11,318 --> 00:34:14,658
So it's just a statistics and PR agency at this point.

582
00:34:14,658 --> 00:34:24,919
Yeah. I mean, you listen to what I mean, how do the feds when they talk about interest rate policy, what they say is it works through long and variable lags that immediately should raise alarm bells.

583
00:34:24,979 --> 00:34:31,038
What they're saying is if we raise rates, we have no idea when the effect of raising rates will take place.

584
00:34:31,138 --> 00:34:36,738
At some point, the outcome that we were anticipating by raising rates will take place and then we'll take credit for it.

585
00:34:37,118 --> 00:34:39,858
In other words, it could take three years. I mean, think about it this way.

586
00:34:39,858 --> 00:34:46,218
the Fed as you mentioned already most aggressive quickest rate hiking campaign in its history yet

587
00:34:46,218 --> 00:34:51,919
here we are three four years later still talking about inflation risk why is that the case long

588
00:34:51,919 --> 00:34:56,898
and variable legs they anticipated the outcome and they're waiting for that outcome to show up so

589
00:34:56,898 --> 00:35:01,419
they can take credit for it it's essentially turning correlation into causation which is what

590
00:35:01,419 --> 00:35:06,858
the Fed has been doing basically its entire history but more so since the euro dollar development in

591
00:35:06,858 --> 00:35:12,078
the 60s and 70s. So whenever the Fed does something, most people don't pay attention to what it is they

592
00:35:12,078 --> 00:35:16,698
do. And if it correlates with the outcome the Fed is, you know, they've taught you to believe in,

593
00:35:16,878 --> 00:35:21,278
you think the Fed is responsible for it. But like I said, you know, if that was the case,

594
00:35:21,298 --> 00:35:24,798
we would never have recessions because the Fed lowers interest rates heading into a recession.

595
00:35:24,898 --> 00:35:29,178
We get the recession anyway, which leaves the Fed to say, well, it would have been worse if we

596
00:35:29,178 --> 00:35:34,198
hadn't lowered rates. That's the other way they get around this. Long and variable lags or jobs

597
00:35:34,198 --> 00:35:39,718
saved like in 2008. Well, it would have been 1930s if we hadn't acted with QE. So that's my problem

598
00:35:39,718 --> 00:35:42,698
with the Fed. It's giving people the wrong impression about what it is and what it actually

599
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What do you think about the sort of eroding independence of the Fed

631
00:38:22,578 --> 00:38:24,818
with Trump pressuring Powell and then bringing Walsh in

632
00:38:24,818 --> 00:38:26,298
and presumably Walsh is going to do,

633
00:38:26,419 --> 00:38:27,678
I'm sure they've had long conversations

634
00:38:27,678 --> 00:38:29,698
and he'll do whatever Trump really wants there.

635
00:38:30,358 --> 00:38:32,439
It's just another extension of the mythology.

636
00:38:32,718 --> 00:38:35,298
The idea that the Fed is this all-important institution,

637
00:38:35,439 --> 00:38:38,558
which by the way is absolutely central to its policies.

638
00:38:39,238 --> 00:38:41,678
Its policies are expectations policies,

639
00:38:41,798 --> 00:38:43,538
which means you have to believe in it.

640
00:38:43,538 --> 00:38:51,999
I mean, the Bank of Japan's former government, the colorful Hirohaiko Kuroda back in 2015, gave away the game when he said, it's like Peter Pan.

641
00:38:52,419 --> 00:38:54,398
If you believe you can fly, then you can fly.

642
00:38:54,618 --> 00:38:56,238
That's what their policies really are.

643
00:38:56,318 --> 00:39:11,138
What they believe is if you believe that the Fed lowering the federal funds rate, which is not an important rate to begin with, but if that somehow helps the banking sector or the financial markets or the economy or something, if you believe that and then you act on that belief, then you become the policy.

644
00:39:11,138 --> 00:39:13,118
which is, again, horse crap

645
00:39:13,118 --> 00:39:14,898
because that's not how the world actually works.

646
00:39:15,278 --> 00:39:16,638
But in order for that to work,

647
00:39:16,979 --> 00:39:18,678
everybody has to believe the Fed

648
00:39:18,678 --> 00:39:20,439
is this all-powerful institution.

649
00:39:20,598 --> 00:39:22,078
So everything the Fed has done

650
00:39:22,078 --> 00:39:25,278
and how it has evolved since the 1990s in particular,

651
00:39:25,439 --> 00:39:26,919
and there's a reason why the 1990s

652
00:39:26,919 --> 00:39:28,158
had started down this road,

653
00:39:28,618 --> 00:39:31,198
it has to maintain this aura,

654
00:39:31,758 --> 00:39:33,898
which is why we have these press conferences

655
00:39:33,898 --> 00:39:36,419
with Jay Powell standing up in front of the podium

656
00:39:36,419 --> 00:39:38,578
with that bank of flags, really impressive,

657
00:39:38,578 --> 00:39:42,138
and all the most major mainstream media asking them questions.

658
00:39:42,298 --> 00:39:43,118
It's a ritual.

659
00:39:43,479 --> 00:39:52,278
It is a religious ritual so that the Fed maintains this aura of power and capability, right?

660
00:39:52,898 --> 00:39:58,258
And so the idea of the Fed's independence falls under that entire paradigm

661
00:39:58,258 --> 00:40:01,078
because if the Fed's independence is threatened,

662
00:40:01,238 --> 00:40:05,618
that somehow threatens the mythology that has been built up around the Fed.

663
00:40:05,618 --> 00:40:10,818
when the marketplace, the marketplace where all of this would make it, if the Fed's independence

664
00:40:10,818 --> 00:40:15,118
mattered one bit, like the treasury market would have said, oh, crap, this is a big deal.

665
00:40:15,919 --> 00:40:20,878
We've heard about the Trump administration threatening the Fed's independence since last

666
00:40:20,878 --> 00:40:25,598
year. And we went through the same thing in 2019. People forget we went through the same stuff in

667
00:40:25,598 --> 00:40:32,218
2019. The market does not care one bit because the market knows the difference here, the difference

668
00:40:32,218 --> 00:40:34,018
between mythology and reality.

669
00:40:34,218 --> 00:40:35,979
If the Fed's independence is threatened,

670
00:40:36,378 --> 00:40:39,098
no one really cares because it won't make a difference

671
00:40:39,098 --> 00:40:40,178
where it actually matters.

672
00:40:40,598 --> 00:40:41,999
But you say it's horse crap,

673
00:40:42,138 --> 00:40:44,358
but like markets, real markets do move

674
00:40:44,358 --> 00:40:45,778
when Powell says stuff.

675
00:40:45,939 --> 00:40:47,898
So you think that's just enough people

676
00:40:47,898 --> 00:40:49,518
believing the mythology essentially

677
00:40:49,518 --> 00:40:52,838
and trading on that mythology rather than actual reality?

678
00:40:53,718 --> 00:40:55,098
Yeah, in the short run, absolutely.

679
00:40:55,838 --> 00:40:57,538
Huh, interesting.

680
00:40:57,698 --> 00:40:58,959
You can line up, look at,

681
00:40:59,118 --> 00:41:00,758
you can run any correlation you want

682
00:41:00,758 --> 00:41:02,578
between Fed policies and market movements.

683
00:41:02,718 --> 00:41:03,939
They don't last beyond the short run.

684
00:41:05,138 --> 00:41:07,258
Even QE, everybody thinks QE money printing

685
00:41:07,258 --> 00:41:08,658
led to the stock market going up.

686
00:41:08,818 --> 00:41:10,298
There is zero correlation,

687
00:41:10,758 --> 00:41:12,798
zero correlation between the Fed's balance sheet

688
00:41:12,798 --> 00:41:13,479
and the stock market.

689
00:41:14,058 --> 00:41:15,338
See, I've heard you talk about this before,

690
00:41:15,338 --> 00:41:17,558
so I know your sort of reasoning there,

691
00:41:17,658 --> 00:41:18,758
but for anyone that's not,

692
00:41:18,838 --> 00:41:20,218
that might be a bit of a shocking statement.

693
00:41:20,338 --> 00:41:21,898
Do you want to explain why you think that?

694
00:41:23,058 --> 00:41:23,898
It's not why I think that.

695
00:41:23,919 --> 00:41:24,858
It's what the numbers say.

696
00:41:26,439 --> 00:41:27,999
But there is this short run impact.

697
00:41:28,078 --> 00:41:29,578
And by the way, it's not just the stock market.

698
00:41:29,578 --> 00:41:31,058
The bond market fell for it, too.

699
00:41:31,459 --> 00:41:37,718
If you look at bond market history back to the early QE days, even Eurodollar futures fell for it, which is embarrassing.

700
00:41:38,358 --> 00:41:42,158
When the Fed first announced QE back in December of 2008, what happened?

701
00:41:42,618 --> 00:41:45,218
The opposite of what was supposed to happen, right?

702
00:41:45,258 --> 00:41:53,578
The Fed was going to buy a bunch of U.S. Treasuries, which you're taught to mean if the Fed's buying U.S. Treasuries, then Treasury prices should go up and bond yields go down.

703
00:41:53,919 --> 00:41:54,598
That's not what happened.

704
00:41:55,238 --> 00:41:59,158
The very first QE, bond yields went up, and they went up by quite a lot.

705
00:41:59,158 --> 00:42:23,878
What that was, was the market saying, we believe this, this QE stuff might actually work. It might get us out of the crisis. So the bond market had a response. The stock market had an initial response, and then it got disabused of that notion pretty quickly. But in the short run, there are these psychological impacts where you think, well, maybe this stuff could work. And if it's going to work, then I certainly don't want to own a U.S. Treasury because safety and liquidity is not what you want to own in a reflationary period. You want to own stocks.

706
00:42:24,318 --> 00:42:26,158
So if this stuff works and you believe QE works,

707
00:42:26,218 --> 00:42:27,618
you're going to want to buy a ton of stocks.

708
00:42:27,718 --> 00:42:28,959
Same thing happened in QE2.

709
00:42:29,519 --> 00:42:31,218
Bond yields went up rather than down,

710
00:42:31,318 --> 00:42:33,538
and stock prices certainly went up in August of 2010

711
00:42:33,538 --> 00:42:35,459
when Ben Bernanke announced QE2.

712
00:42:35,818 --> 00:42:37,738
So there is a short-run relationship

713
00:42:37,738 --> 00:42:41,038
with perceptions of what the Fed could do,

714
00:42:41,238 --> 00:42:43,459
especially if these policies are new and untested,

715
00:42:43,538 --> 00:42:44,979
even though they had been tested in Japan.

716
00:42:45,178 --> 00:42:47,238
The idea was the U.S. execution

717
00:42:47,238 --> 00:42:48,718
would be different than the Japanese execution.

718
00:42:48,838 --> 00:42:50,939
But either way, there is a short-run impact

719
00:42:50,939 --> 00:42:53,479
where people think maybe this stuff could work.

720
00:42:53,479 --> 00:42:57,718
I don't really know what it is. I don't know what it does. But hey, possibly it could work.

721
00:42:57,758 --> 00:43:01,439
The Fed is doing something big. Everybody's talking about how big it is.

722
00:43:01,738 --> 00:43:05,578
So maybe I'm going to buy some stocks and sell some treasuries because it could work out that way.

723
00:43:05,578 --> 00:43:09,838
But it never lasts that long because in reality, that's not how the world really works.

724
00:43:09,878 --> 00:43:13,158
That's certainly not how the monetary system works. It doesn't work on Peter Pan belief.

725
00:43:13,439 --> 00:43:17,358
It works on actual money and monetary circulation more than anything else.

726
00:43:17,738 --> 00:43:21,318
So there are short run periods and people only remember the short run periods.

727
00:43:21,318 --> 00:43:24,939
They only remember the times when the Fed announces QE and the stock market soars.

728
00:43:25,118 --> 00:43:32,298
They don't remember all the times when the Fed stops, you know, QE and the stock market still soars or when they're doing something different and the stock market does something different.

729
00:43:32,519 --> 00:43:35,358
So over time, there is zero correlation.

730
00:43:35,558 --> 00:43:46,858
There are short run correlations, but they don't maintain themselves over time because in a dynamic marketplace, you know, markets are doing the QE and the Fed's balance sheet don't really matter to the operation of intermediate and long term properties.

731
00:43:47,578 --> 00:43:53,118
But during like COVID, when the Fed did print a bunch of money, forgive the, I know you maybe

732
00:43:53,118 --> 00:43:55,238
don't agree with that framework, but you know what I'm saying.

733
00:43:55,538 --> 00:43:56,578
That's what everybody says.

734
00:43:56,718 --> 00:43:57,138
I mean, yeah.

735
00:43:58,118 --> 00:44:01,218
But no one would say that the economy was in a good place while the world was locked

736
00:44:01,218 --> 00:44:04,019
down, like the real economy, but stock markets did soar.

737
00:44:04,058 --> 00:44:05,439
So is that not correlation?

738
00:44:06,278 --> 00:44:08,378
But was that the Fed or was that something else?

739
00:44:08,939 --> 00:44:10,378
Was that just simple correlation?

740
00:44:10,698 --> 00:44:13,118
So I would argue that it wasn't the Fed at all.

741
00:44:13,638 --> 00:44:14,638
What else would it be?

742
00:44:15,398 --> 00:44:16,238
The federal government.

743
00:44:16,238 --> 00:44:21,738
It was the federal government reopening the economy or at least creating a pathway to reopen the economy.

744
00:44:21,738 --> 00:44:26,578
That led to further second and third order effects, including the price illusion, which was really the price shock.

745
00:44:26,758 --> 00:44:35,718
So you had the economy that was shut down artificially, not for economic reasons, which allowed it to be reopened artificially, which led to a complete turnaround.

746
00:44:36,158 --> 00:44:41,778
So in 2020, it was slow at first and it really got going at the end of 2020 into early 2021.

747
00:44:41,778 --> 00:44:43,198
That wasn't the Fed printing money.

748
00:44:43,198 --> 00:44:45,758
that was the federal government reversing its policies

749
00:44:45,758 --> 00:44:47,138
or at least creating a pathway

750
00:44:47,138 --> 00:44:49,118
to plausibly reverse its policies

751
00:44:49,118 --> 00:44:51,078
and people reacting ahead of that.

752
00:44:52,898 --> 00:44:53,378
Okay.

753
00:44:53,838 --> 00:44:56,258
One of the other questions I have around the Fed is,

754
00:44:56,358 --> 00:44:57,979
like, they've obviously got the dual mandate,

755
00:44:58,118 --> 00:44:59,419
one of which being jobs.

756
00:45:00,858 --> 00:45:02,318
How are they going to manage...

757
00:45:02,318 --> 00:45:02,658
There's actually three.

758
00:45:03,278 --> 00:45:03,538
Okay.

759
00:45:04,358 --> 00:45:06,439
Well, we explained that in the answer too.

760
00:45:06,738 --> 00:45:08,038
But how are they going to manage that

761
00:45:08,038 --> 00:45:10,479
with AI seemingly starting to take jobs?

762
00:45:10,538 --> 00:45:11,138
I don't know if you saw,

763
00:45:11,218 --> 00:45:12,178
but Block announced yesterday

764
00:45:12,178 --> 00:45:13,959
that they're getting rid of nearly half of their employees.

765
00:45:14,898 --> 00:45:15,959
Which is not AI, though.

766
00:45:17,138 --> 00:45:19,138
Well, I mean, there's obviously a lot of people

767
00:45:19,138 --> 00:45:21,298
that say they hired way too quick in like 2020, 2021,

768
00:45:21,718 --> 00:45:24,019
and they had a lot of like a way too big headcount.

769
00:45:24,038 --> 00:45:25,338
That's what Jack Dorsey said.

770
00:45:25,398 --> 00:45:26,378
That's what he said himself.

771
00:45:26,538 --> 00:45:29,118
He said, hey, look, we fell for the illusion too.

772
00:45:29,238 --> 00:45:30,558
We did what Amazon and everybody else did.

773
00:45:30,578 --> 00:45:32,238
We hired way more people than we needed.

774
00:45:32,598 --> 00:45:34,519
Now they're just blaming AI for the layoffs

775
00:45:34,519 --> 00:45:36,338
when it was really just being wrong about the economy.

776
00:45:36,898 --> 00:45:39,058
But I think given enough, like given a few years,

777
00:45:39,118 --> 00:45:40,979
I think AI will start replacing real jobs.

778
00:45:40,979 --> 00:45:45,218
And I think even though that may not be the only reason that Block have done this, I do think it's part of the reason.

779
00:45:45,378 --> 00:45:49,778
Jack has been at the forefront with this vibe coding revolution.

780
00:45:50,378 --> 00:45:55,078
What do the Fed do if AI does start replacing a large number of white collar jobs?

781
00:45:55,798 --> 00:45:58,558
Nothing. The Fed can't do anything. The Fed can't meet its mandates.

782
00:45:59,019 --> 00:46:01,078
They have to pretend to do something, though.

783
00:46:01,459 --> 00:46:03,218
They have to pretend. That's really the issue.

784
00:46:03,218 --> 00:46:07,778
And so, again, the mandates are full employment, stable prices.

785
00:46:07,778 --> 00:46:17,658
And the third one that people don't know about, which was forced on them in the 1970s because the Fed did not do what everybody said it was going to do or what the Fed is supposed to do.

786
00:46:18,098 --> 00:46:19,038
That's not a thing, too.

787
00:46:19,098 --> 00:46:20,419
Just to digress a little bit here.

788
00:46:20,798 --> 00:46:22,078
I'm going to rant a little here.

789
00:46:22,519 --> 00:46:26,459
People don't realize the Federal Reserve was a joke for the vast majority of its history.

790
00:46:26,618 --> 00:46:27,698
That's not me saying it.

791
00:46:27,718 --> 00:46:32,038
That's the mainstream media, the marketplace, the banking sector, everybody, politicians.

792
00:46:32,838 --> 00:46:38,178
After the 1930s, the debacle in the 1930s, the Fed was relegated to the back bench.

793
00:46:38,538 --> 00:46:39,939
It was underneath the Treasury's thumb.

794
00:46:40,038 --> 00:46:44,999
And even when it so-called got independence in 1951, nobody looked at the Fed to do anything.

795
00:46:45,358 --> 00:46:47,999
It was basically left to try to manage Treasury auctions.

796
00:46:48,138 --> 00:46:51,919
That's what the Fed did from early 1950s to the 1970s.

797
00:46:52,198 --> 00:46:58,698
And then the Fed sat there unable to explain where the great inflation came from, let alone stop it.

798
00:46:58,698 --> 00:47:06,318
So up until Volcker in the 1980s, even after 1980s, it really wasn't until 1990 that people started to look at the Fed differently.

799
00:47:06,318 --> 00:47:10,118
And it wasn't because of anything the Fed did. It was because of the great moderation that showed up.

800
00:47:10,138 --> 00:47:12,838
And the Fed couldn't even explain why the great moderation showed up.

801
00:47:12,878 --> 00:47:20,618
But the point I'm making is this idea of the Fed being an all-powerful technocratic institution is a modern invention.

802
00:47:21,138 --> 00:47:27,999
It is something that was created largely out of the inability for people to explain where the great moderation came from.

803
00:47:27,999 --> 00:47:40,898
And so Fed officials, starting with Greenspan, but really Ben Bernanke was the chief one, started taking correlation and said, look, we evolved away from quantitative monetary measures in the 1970s and beforehand.

804
00:47:41,238 --> 00:47:43,578
We started targeting the federal funds rate.

805
00:47:44,218 --> 00:47:46,658
Maybe that's where the great moderation came from.

806
00:47:46,878 --> 00:47:53,638
So this ocean of prosperity in the 1990s was our doing through moving the federal funds rate around.

807
00:47:53,638 --> 00:47:56,758
If you stop and think about it, you think about how ridiculous that sounds.

808
00:47:57,078 --> 00:48:04,658
But because nobody had any idea where the great moderation came from and because it was such a unique period of prosperity, maybe it was the Fed.

809
00:48:04,758 --> 00:48:14,118
And so the legend of the Fed was born out of a singular instance in an otherwise long history of being a complete and utter failure and joke.

810
00:48:14,578 --> 00:48:17,098
So what we're really seeing is the Fed return to type here.

811
00:48:17,499 --> 00:48:22,939
It's just going, people are realizing slowly that the Fed is still the same joke that it was.

812
00:48:22,939 --> 00:48:28,459
It's just that it hasn't completely fallen into, it hasn't been completely accepted that way just yet,

813
00:48:28,479 --> 00:48:35,258
because there is still a lot of people who depend upon either having Jay Powell the god or Jay Powell the villain,

814
00:48:35,479 --> 00:48:37,758
which is very useful to a lot of people, right?

815
00:48:37,898 --> 00:48:40,898
Why does the politicians keep the Fed around?

816
00:48:41,358 --> 00:48:45,999
Because when times are good, the president can point at the Fed chief and say, I appointed that guy.

817
00:48:46,358 --> 00:48:48,198
He made the economy great. I'm a genius.

818
00:48:48,419 --> 00:48:50,058
And when the economy's bad, what can he do?

819
00:48:50,058 --> 00:48:54,499
like Trump. That Jay Powell's an idiot. He's dumb. He's stupid. He's incompetent, right?

820
00:48:54,698 --> 00:48:59,618
The Fed is nothing more than a political lightning rod. So to bring this back to your question,

821
00:49:00,038 --> 00:49:06,218
sorry about that. With artificial intelligence, the Fed would, if we get higher levels of

822
00:49:06,218 --> 00:49:10,658
unemployment, I think they would be more measured in their rate. They would still

823
00:49:10,658 --> 00:49:14,038
bias toward lower rates, but they would be more measured because what they would say is, look,

824
00:49:14,419 --> 00:49:30,718
this is a labor supply demand issue not something that monetary policy what they call monetary policy can actually fix And then the price stability again not within the Fed mandates And the third mandate which is stable interest rates just to explain that

825
00:49:31,577 --> 00:49:35,357
what the Fed has said is why they never refer to the third mandate.

826
00:49:35,438 --> 00:49:37,398
And it is required by Congress.

827
00:49:37,457 --> 00:49:40,597
It is in the law, the amended Federal Reserve Act.

828
00:49:41,137 --> 00:49:44,317
The reason they don't bring up a third mandate is because they say,

829
00:49:44,317 --> 00:49:48,998
if we take care of the first two, by default, the third one takes care of itself, right?

830
00:49:48,998 --> 00:49:52,998
If we have maximum employment and stable prices, then we will have stable interest rates.

831
00:49:53,137 --> 00:49:54,698
So we focus on the first two.

832
00:49:55,137 --> 00:49:57,278
Therefore, we don't have to worry about the third.

833
00:49:57,738 --> 00:50:01,498
When everything that we've seen during this period shows that that's not the case.

834
00:50:01,657 --> 00:50:02,877
We don't have stable prices.

835
00:50:03,157 --> 00:50:04,317
We don't have full employment.

836
00:50:04,617 --> 00:50:07,177
And interest rates, they are certainly not stable.

837
00:50:07,317 --> 00:50:10,398
And even when, even 2010s, you could characterize the interest rates as stable.

838
00:50:10,837 --> 00:50:13,398
They're supposed to be stable at moderate levels.

839
00:50:13,398 --> 00:50:15,518
That's the word that is used in the statute.

840
00:50:15,898 --> 00:50:18,798
They sure as hell weren't stable at moderate levels during the 2010s.

841
00:50:18,837 --> 00:50:22,298
They were entirely too low because low rates aren't stimulus.

842
00:50:22,418 --> 00:50:23,557
They're a reflection of conditions.

843
00:50:23,918 --> 00:50:26,637
So the Fed fails on every one of its mandates.

844
00:50:27,198 --> 00:50:28,938
AI is not going to help suddenly help them.

845
00:50:28,977 --> 00:50:30,278
It's just going to add to their challenge.

846
00:50:31,117 --> 00:50:39,817
Yeah, it's because one of the things that, again, you may disagree with this, but if AI does actually start replacing real white collar jobs to be proven out, but we'll see.

847
00:50:39,817 --> 00:50:42,337
And I think probably base case for me would be it will.

848
00:50:42,337 --> 00:50:48,238
what happens to all the people that are unemployed and do you think we see some kind of UBI

849
00:50:48,238 --> 00:50:53,898
and if we do do you see that as actual stimulus because it's real money going to real people in

850
00:50:53,898 --> 00:50:59,218
the economy rather than just creation of bank reserves again is if you think about it ceteris

851
00:50:59,218 --> 00:51:03,418
paribus taking the last part first it looks like stimulus but it's actually not because you have to

852
00:51:03,418 --> 00:51:07,677
account for the conditions that led to it in the first place so we're redistributing money through

853
00:51:07,677 --> 00:51:13,817
UBI, assuming that's what happens, but it's intended to offset a hole that was created

854
00:51:13,817 --> 00:51:19,278
from the loss of jobs. So would it actually be stimulus? Well, in a centrist-paribus world where

855
00:51:19,278 --> 00:51:23,938
you're starting from scratch, yeah, it looks like stimulus, but it's actually, would UBI be an

856
00:51:23,938 --> 00:51:28,317
effective replacement and alternative for lost incomes, lost earned incomes through productive

857
00:51:28,317 --> 00:51:33,418
jobs? And looking at it that way, which is the proper way to look at it, it's not stimulus,

858
00:51:33,418 --> 00:51:35,817
It's actually, it just nets out of zero.

859
00:51:35,817 --> 00:51:38,617
You can argue it's better than zero, right?

860
00:51:38,637 --> 00:51:39,718
It's better than the alternative.

861
00:51:39,918 --> 00:51:41,117
It's potentially better than the alternative.

862
00:51:41,198 --> 00:51:43,457
I don't think the long-run consequences would be better than the alternative.

863
00:51:43,558 --> 00:51:47,817
But in the short run, you could say it's better than having people have no jobs and no incomes.

864
00:51:48,377 --> 00:51:53,817
But it's certainly not stimulus because it's not offsetting what real earned income does for an economy,

865
00:51:53,898 --> 00:51:57,977
which is most consumers are more likely to spend more freely.

866
00:51:57,977 --> 00:52:03,957
businesses too when uh they're when when um incomes are generated through natural organic

867
00:52:03,957 --> 00:52:08,538
and economic processes then when they're redistributed through some predetermined

868
00:52:08,538 --> 00:52:14,317
bureaucratically arbitrarily determined number which was what ubi would be by by the federal

869
00:52:14,317 --> 00:52:19,538
government or any government for that matter so ubi would not be an effective offset to lost jobs

870
00:52:19,538 --> 00:52:23,258
so the question is whether or not we have lost jobs i'm probably a little bit more optimistic

871
00:52:23,258 --> 00:52:24,117
than you about that.

872
00:52:24,258 --> 00:52:27,097
I don't think AI eliminates jobs.

873
00:52:27,198 --> 00:52:29,398
I mean, yes, it will definitely eliminate some jobs,

874
00:52:29,477 --> 00:52:30,198
but I don't think that's what,

875
00:52:30,258 --> 00:52:32,438
we're not looking at a catastrophic loss of employment.

876
00:52:32,898 --> 00:52:35,218
I look at it as AI being a potential,

877
00:52:35,538 --> 00:52:38,058
you know, human-robot partnership

878
00:52:38,058 --> 00:52:40,398
where it makes human workers so much more productive.

879
00:52:40,957 --> 00:52:43,097
In that case, it doesn't eliminate workers,

880
00:52:43,278 --> 00:52:44,857
it eliminates hours worked.

881
00:52:45,317 --> 00:52:46,977
So I can see us going, for example,

882
00:52:46,977 --> 00:52:49,657
from a five-day workweek to a four-day workweek

883
00:52:49,657 --> 00:52:51,738
with some people actually having a three-day workweek

884
00:52:51,738 --> 00:52:54,797
because AI will make human workers so much more productive

885
00:52:54,797 --> 00:52:59,538
that just like when we went to a five-day work week in the 1920s,

886
00:52:59,998 --> 00:53:03,677
businesses will first start out using that as a recruiting tool.

887
00:53:04,177 --> 00:53:05,157
Look, come work for me.

888
00:53:05,258 --> 00:53:06,297
I'll pay you really well.

889
00:53:06,357 --> 00:53:07,718
Plus, you only need to work four days a week.

890
00:53:07,758 --> 00:53:09,498
And eventually, that filters for the rest of the economy

891
00:53:09,498 --> 00:53:13,317
as that level of productivity really does take place in the real economy,

892
00:53:13,357 --> 00:53:14,218
which I think it will,

893
00:53:14,718 --> 00:53:17,877
although I think it'll take a lot longer than people are anticipating right now.

894
00:53:17,877 --> 00:53:20,857
It might be 10 years from now rather than next year or the year after.

895
00:53:20,857 --> 00:53:26,177
But I think long run, yes, there will be some jobs that are eliminated because that's the natural economic process.

896
00:53:26,258 --> 00:53:29,518
But by and large, we're not looking at mass dystopian levels of unemployment.

897
00:53:29,918 --> 00:53:32,957
We're looking at a positive future where we all have to work.

898
00:53:32,998 --> 00:53:33,918
We don't have to work as much.

899
00:53:33,957 --> 00:53:47,837
We can all work a hell of a lot less and still produce the same amount of output and probably produce a lot better output because AI, if it works the way it's intended to and what people think, I mean, it has the possibility to, we'll all be better at what we do.

900
00:53:48,797 --> 00:53:50,058
Well, that's a way more optimistic outlook.

901
00:53:50,058 --> 00:53:53,518
I like that. And that's what deflationary technology should always have been.

902
00:53:53,677 --> 00:53:57,558
Like it should be us at an office less and being more creative more.

903
00:53:58,018 --> 00:54:00,137
Yeah, you do more. You get more out of less, right?

904
00:54:00,198 --> 00:54:03,637
That's what free market economics and capitalism is supposed to do.

905
00:54:03,837 --> 00:54:10,977
You have a set of finite parameters and you learn how to use your techniques and processes better

906
00:54:10,977 --> 00:54:15,538
so that you get more out of what you're doing for putting less in.

907
00:54:15,538 --> 00:54:24,177
So just to go back to the potential that we're entering or in a financial crisis, how do people position themselves?

908
00:54:24,297 --> 00:54:27,778
Like what should you be looking at as a way of sort of surviving this?

909
00:54:28,577 --> 00:54:31,538
Well, I mean, the easy answer is just safety and liquidity.

910
00:54:32,538 --> 00:54:38,477
So, I mean, duration and treasury markets, because, well, not necessarily long duration, but some level of duration.

911
00:54:39,377 --> 00:54:47,677
If we do get to a situation where rates are going to go down by a lot because the marketplace sees that even before you get to confirmation of the crisis coming,

912
00:54:47,758 --> 00:54:52,938
but the market sees the probabilities rise to a certain point, what you're going to see is short-term interest rates,

913
00:54:53,418 --> 00:54:56,857
medium-term interest rates are going to go down a hell of a lot more than long-term interest rates.

914
00:54:57,278 --> 00:55:00,738
So the yield curve will steepen out substantially, but do so from the front end.

915
00:55:00,738 --> 00:55:01,998
So like the two-year, for example.

916
00:55:02,477 --> 00:55:05,377
The two-year right now is a little bit under 3.4%,

917
00:55:05,377 --> 00:55:07,258
setting a new multi-year low,

918
00:55:07,898 --> 00:55:11,577
which is another signal leaning in the direction of that type of steepening.

919
00:55:12,317 --> 00:55:15,538
If that's correct, the 10-year is sitting at 4%.

920
00:55:15,538 --> 00:55:18,357
If we assume the 10-year doesn't go, it's actually a little bit low 4%.

921
00:55:18,357 --> 00:55:20,058
But if it doesn't go any lower,

922
00:55:20,538 --> 00:55:25,857
the yield curve wants to be about 200 basis points steep, upward sloping.

923
00:55:26,058 --> 00:55:28,418
It had been inverted for a long time, as we discussed before.

924
00:55:28,498 --> 00:55:29,498
It is uninverting.

925
00:55:29,498 --> 00:55:32,337
It hasn't gone through the entire un-inversion process.

926
00:55:32,477 --> 00:55:39,877
When it does get through the process, which it will, the yield curve should be about 200, 300 basis points steep between the front end and the long end.

927
00:55:40,278 --> 00:55:47,198
So just doing some quick back of the envelope calculations, assuming the 10-year doesn't move any more than where it is right now,

928
00:55:47,597 --> 00:55:54,538
the front end of the yield curve would have to be down around 2% in order for it to completely un-invert and be 200 basis points steep.

929
00:55:55,177 --> 00:56:01,117
So there's a lot of opportunity in that part of the yield curve, right at the two-year spot on the curve, and then even treasury bills, though.

930
00:56:01,218 --> 00:56:03,097
I mean, there's no really price speculation in bills.

931
00:56:03,637 --> 00:56:10,278
But if you're buying a two-year treasury right now, not only are you getting around 3.5% of a coupon, you have lots of price appreciation built into it.

932
00:56:10,677 --> 00:56:19,058
So a curve steepening, bull steepening type of trade would work really well here, assuming that it continues to go in this direction, though.

933
00:56:19,058 --> 00:56:21,898
So like I said, we've been looking at this for years.

934
00:56:21,898 --> 00:56:27,258
And as we continue to go through year after year after year, we see more evidence of that taking place, not less evidence.

935
00:56:27,518 --> 00:56:30,377
So it's a relatively easy thing to do.

936
00:56:30,538 --> 00:56:32,398
But that's, I mean, tragedy market's easy.

937
00:56:32,998 --> 00:56:34,457
You want to take a little bit more risk.

938
00:56:34,498 --> 00:56:36,558
You could buy gold or something like that.

939
00:56:37,198 --> 00:56:38,498
I would buy a ton of Bitcoin.

940
00:56:38,498 --> 00:56:44,698
If Bitcoin gets down around, you know, 50,000 or less, if the market overshoots on the downside,

941
00:56:44,817 --> 00:56:47,898
I'm going to pack up the truck for Bitcoin or something like silver.

942
00:56:47,898 --> 00:56:50,238
because those are the things that you're going to want to own

943
00:56:50,238 --> 00:56:52,977
in a period of instability, gross instability

944
00:56:52,977 --> 00:56:54,317
in a whole lot of different ways,

945
00:56:54,357 --> 00:56:56,038
including the economy and the marketplace.

946
00:56:56,317 --> 00:56:58,918
So yes, there's a lot of caveats and a lot of ifs

947
00:56:58,918 --> 00:57:00,038
and a lot of probabilities,

948
00:57:00,038 --> 00:57:02,698
but as those probabilities start to pile up

949
00:57:02,698 --> 00:57:04,977
and it looks like more concretely,

950
00:57:05,038 --> 00:57:05,857
that's where we're going,

951
00:57:06,377 --> 00:57:07,438
that's where you really want to be.

952
00:57:07,837 --> 00:57:10,857
All the traditional tools that safe haven

953
00:57:10,857 --> 00:57:13,477
to get you through unstable periods.

954
00:57:14,297 --> 00:57:16,137
That's cool to hear you talk about Bitcoin in that way

955
00:57:16,137 --> 00:57:19,238
because you've always been sort of a little skeptical of Bitcoin.

956
00:57:19,957 --> 00:57:22,558
Is it just the fact that it's pulled down so much from its highs

957
00:57:22,558 --> 00:57:23,857
that you're interested at this point?

958
00:57:23,918 --> 00:57:25,938
Or have your sort of opinions changed on it slightly?

959
00:57:26,857 --> 00:57:28,938
No, my problem with Bitcoin, it's not really a problem.

960
00:57:29,337 --> 00:57:32,198
It's understanding what it is and where it's going.

961
00:57:32,438 --> 00:57:34,597
Not price, but actual function.

962
00:57:35,198 --> 00:57:37,097
Bitcoin is not replacing the US dollar.

963
00:57:37,097 --> 00:57:41,718
Bitcoin is competing with gold as a safe haven portfolio asset.

964
00:57:41,817 --> 00:57:43,778
That's why it behaves a lot like the Nasdaq.

965
00:57:43,778 --> 00:57:46,317
It's competing with the stock market or gold.

966
00:57:47,317 --> 00:57:57,418
So people look to Bitcoin as potentially a, you know, since it has a relatively small market cap, there's potentially, there's more and more people get interested for any reason, doesn't matter what it is.

967
00:57:57,457 --> 00:57:59,538
There's a lot of upside potential from Bitcoin.

968
00:57:59,718 --> 00:58:10,938
Even though it doesn't replace the dollar, it doesn't become the next big currency, it can still become a highly appreciative asset, speculative asset or, you know, a store of value asset, certainly.

969
00:58:11,617 --> 00:58:19,938
So if Bitcoin goes down with that level of price appreciation, the asymmetry works in your favor because there are so many long run positives to owning Bitcoin.

970
00:58:20,117 --> 00:58:25,038
If we see Bitcoin at 20,000, you've got to be buying every last thing that you can, every last bet you can get.

971
00:58:25,558 --> 00:58:35,277
So my issue is I don't see Bitcoin becoming a currency system, but I see it becoming what it already is, which is a preeminent digital form of portfolio asset.

972
00:58:35,357 --> 00:58:36,657
And there's nothing wrong with that.

973
00:58:37,457 --> 00:58:39,777
We can use a digital form of portfolio asset,

974
00:58:40,018 --> 00:58:43,058
especially one that has limited supply

975
00:58:43,058 --> 00:58:43,957
and limited availability.

976
00:58:44,698 --> 00:58:45,998
There's nothing wrong with that whatsoever.

977
00:58:46,877 --> 00:58:49,597
It's not a competition for the dollar.

978
00:58:49,698 --> 00:58:50,837
That's really where I have the argument.

979
00:58:51,597 --> 00:58:53,538
So we've had that conversation on the podcast before

980
00:58:53,538 --> 00:58:56,097
and your issue is around like the inelasticity of Bitcoin.

981
00:58:56,578 --> 00:58:58,078
I'll just link that in the show

982
00:58:58,078 --> 00:58:59,218
rather than getting to that again,

983
00:58:59,297 --> 00:59:01,738
because we've covered that in pretty good depth, I think.

984
00:59:02,998 --> 00:59:05,857
So one of the things that I like

985
00:59:05,857 --> 00:59:07,977
in terms of the framing of how Bitcoin performs

986
00:59:07,977 --> 00:59:09,817
in the short term, how the price moves,

987
00:59:10,137 --> 00:59:12,258
is Luke Groman's theory that it's like

988
00:59:12,258 --> 00:59:13,938
the last functioning smoke alarm for liquidity.

989
00:59:15,058 --> 00:59:17,018
Obviously, Bitcoin rolled over at the end of last year.

990
00:59:17,157 --> 00:59:19,857
Do you think that is global liquidity drying up

991
00:59:19,857 --> 00:59:22,317
or like the smoke alarm that it's about to dry up?

992
00:59:23,377 --> 00:59:25,297
Yeah, I think it's both a liquidity signal

993
00:59:25,297 --> 00:59:27,177
as well as a risk-taking signal.

994
00:59:27,538 --> 00:59:28,957
It's sort of the marginal,

995
00:59:30,218 --> 00:59:33,177
it's at the margins of people's perceptions

996
00:59:33,177 --> 00:59:34,538
of whether or not they want to take risk

997
00:59:34,538 --> 00:59:36,198
or whether or not want to remove risk.

998
00:59:36,477 --> 00:59:40,018
That's part of the institutionalization of Bitcoin

999
00:59:40,018 --> 00:59:41,877
through Wall Street and funds and everything else.

1000
00:59:41,918 --> 00:59:42,857
That's what it kind of becomes,

1001
00:59:42,957 --> 00:59:45,637
is sort of the easiest thing to sell in a downturn,

1002
00:59:45,857 --> 00:59:48,018
in this downturn anyway, assuming that's what we have.

1003
00:59:48,718 --> 00:59:51,518
Portfolio manager, hey, Bitcoin had a tremendous year last year.

1004
00:59:51,578 --> 00:59:52,718
It's really easy to get out of it.

1005
00:59:52,777 --> 00:59:55,058
Plus, as it becomes, price goes down,

1006
00:59:55,177 --> 00:59:56,538
portfolio managers don't want to own it

1007
00:59:56,538 --> 00:59:58,218
because their clients will fire them for owning it.

1008
00:59:58,218 --> 01:00:01,058
So it becomes the marginal risk setter.

1009
01:00:01,218 --> 01:00:03,337
It tells you something about the perception

1010
01:00:03,337 --> 01:00:06,058
across the financial markets to take additional risk

1011
01:00:06,058 --> 01:00:07,898
or to take additional risk off the table.

1012
01:00:08,398 --> 01:00:12,157
So for me, yeah, that's one of the things that really stuck out

1013
01:00:12,157 --> 01:00:15,977
is that Bitcoin had, it really is, you know, it hit the high in October,

1014
01:00:15,977 --> 01:00:17,998
but it started to roll over in July.

1015
01:00:18,238 --> 01:00:21,677
When we see a lot of stuff roll over in July, private credit in particular,

1016
01:00:21,797 --> 01:00:23,918
you look at the BDC prices in the stock market,

1017
01:00:24,457 --> 01:00:26,477
you look at leveraged loan prices, for example,

1018
01:00:26,857 --> 01:00:30,398
there is a pretty solid correlation, at least a rough correlation,

1019
01:00:30,398 --> 01:00:32,957
between Bitcoin as a risk gauge

1020
01:00:32,957 --> 01:00:35,558
and what we've seen in, for example,

1021
01:00:35,657 --> 01:00:37,297
the reversal of the private credit bubble.

1022
01:00:37,758 --> 01:00:39,317
So that's how I would look at Bitcoin.

1023
01:00:39,918 --> 01:00:42,877
And like I said, if Bitcoin goes lower for whatever reason,

1024
01:00:42,877 --> 01:00:45,477
just because it happens to be the easiest thing to sell,

1025
01:00:46,277 --> 01:00:48,677
that just presents a tremendous buying opportunity.

1026
01:00:49,438 --> 01:00:50,857
Yeah, I mean, down here in the 60s,

1027
01:00:50,857 --> 01:00:51,877
I think it's already good value.

1028
01:00:52,038 --> 01:00:54,018
It may go to the 50s, who knows, but...

1029
01:00:54,018 --> 01:00:55,097
You know how this goes, Dan?

1030
01:00:55,177 --> 01:00:56,758
I mean, markets always overshoot.

1031
01:00:56,857 --> 01:00:57,957
And Bitcoin's history, right?

1032
01:00:58,038 --> 01:00:59,218
I mean, Bitcoin goes way up

1033
01:00:59,218 --> 01:01:04,097
and then it goes down by what 80 90 and then goes way back up again um so i mean i don't think people

1034
01:01:04,097 --> 01:01:09,498
would be shocked if it gets down to around 80 down from its high which would be what um 30 000

1035
01:01:09,498 --> 01:01:14,977
something like that i mean 30 000 you gotta be thinking about buying a ton of it yeah i mean if

1036
01:01:14,977 --> 01:01:20,317
we get there i will be selling everything i've got to buy more um but you and me both i'll provide

1037
01:01:20,317 --> 01:01:25,797
some leverage we see if i can find some leverage someplace just to close out i know you you're kind

1038
01:01:25,797 --> 01:01:30,457
of tight on time. But and this is quite a big question to close out with. Going into the midterms

1039
01:01:30,457 --> 01:01:34,258
end of this year, Trump is going to want the economy running as hot as possible. Do you think

1040
01:01:34,258 --> 01:01:37,817
he's got a chance of getting there? Do you think this could be a really strong year in the markets?

1041
01:01:38,817 --> 01:01:42,857
No, see, it's always the what people want versus what they can actually deliver. Same thing with

1042
01:01:42,857 --> 01:01:47,817
the problem of the Fed. One of the biggest things I try to get people to get out of is the mindset

1043
01:01:47,817 --> 01:01:52,337
that governments can achieve whatever they set their mind to, because we see examples of this

1044
01:01:52,337 --> 01:01:58,918
not happening everywhere. The recovery after 2008 never happened, didn't happen. China is a perfect

1045
01:01:58,918 --> 01:02:04,218
example. The Chinese have been stimulating their economy for years and it only gets worse and worse

1046
01:02:04,218 --> 01:02:08,718
and worse. Governments don't have unlimited capacity to achieve the goals that they set out.

1047
01:02:09,078 --> 01:02:14,677
In fact, they have very limited capacity, far more limited than you think, which is one reason why,

1048
01:02:15,078 --> 01:02:19,758
again, go back to the marketplace. The marketplace has not budged. There is nothing in the marketplace

1049
01:02:19,758 --> 01:02:24,898
right now that suggests, and believe me, market participants know the Republicans and the Trump

1050
01:02:24,898 --> 01:02:30,198
administration want the economy on the right track before we get long before we get to November.

1051
01:02:30,738 --> 01:02:36,857
This talk about a boom in 2026 is not priced anywhere in the market. And if it was, we would

1052
01:02:36,857 --> 01:02:42,137
have the reverse calculation of what I just went through. If there was any if there was a plausible

1053
01:02:42,137 --> 01:02:47,297
path to the Trump administration simulating the economy this year, what we would see is the yield

1054
01:02:47,297 --> 01:02:52,177
curve steepening out in the other direction. So short term rates would be stuck at 350. The Fed

1055
01:02:52,177 --> 01:02:55,258
wouldn't need to cut rates anymore, right? Because it would be responding to a strong economy,

1056
01:02:55,258 --> 01:02:59,258
which means that the long end of the yield curve would had to be at least 200 basis points above

1057
01:02:59,258 --> 01:03:04,398
the short end, which gets you the 10 year around five and a half, if not 6% or higher.

1058
01:03:04,998 --> 01:03:09,758
It's not moving in that direction. And if this was a realistic possibility in the near term,

1059
01:03:09,758 --> 01:03:13,498
you better believe the marketplace would be already moving in that direction.

1060
01:03:13,938 --> 01:03:19,438
So what the market is saying is, yes, we realize that Trump would love the economy to be red hot running into November.

1061
01:03:19,758 --> 01:03:22,418
We just don't see any way for that to take place.

1062
01:03:22,877 --> 01:03:25,117
The conditions, labor market is too sour.

1063
01:03:26,498 --> 01:03:28,558
People, I want to point this out.

1064
01:03:28,677 --> 01:03:31,677
I don't know even how to put this in the right word.

1065
01:03:31,877 --> 01:03:34,097
We had zero job growth last year.

1066
01:03:34,097 --> 01:03:36,258
I don't know why people don't know that more.

1067
01:03:36,578 --> 01:03:43,078
We had no jobs grow, no jobs in the entire U.S. economy, an economy with 160 million people working.

1068
01:03:43,078 --> 01:03:48,977
We had zero job growth in 2025. And somehow that's not going to have a negative impact on 2026.

1069
01:03:49,797 --> 01:03:56,117
So the point is, the market is saying, look, we've been in this rut for years. It only gets worse.

1070
01:03:56,177 --> 01:03:59,998
It only seems to move in one direction. It doesn't matter what the government wants to do.

1071
01:04:00,157 --> 01:04:08,797
It's the conditions that we have. And then, unfortunately, they progress too far to the wrong direction that we're kind of stuck in this direction, kind of stuck in moving this way.

1072
01:04:08,797 --> 01:04:11,977
Plus, you throw a private credit mess on top.

1073
01:04:12,357 --> 01:04:18,457
And let's not forget, maybe the stock market pops because the AI bubble is no longer supporting that narrative.

1074
01:04:19,018 --> 01:04:23,317
I mean, there's a number of financial risks that are out there on top of the macroeconomic weakness.

1075
01:04:24,137 --> 01:04:30,157
It's a very small possibility that the Trump administration is able to deliver what it wants to deliver.

1076
01:04:30,938 --> 01:04:32,698
I think that's what the markets are all saying.

1077
01:04:33,518 --> 01:04:35,317
It's going to be an interesting 2026.

1078
01:04:35,738 --> 01:04:37,157
Jeff, I always love speaking to you.

1079
01:04:37,157 --> 01:04:42,097
Every time I feel like I'm getting a grasp of what's going on in the economy, I speak to you and realize I need to start again.

1080
01:04:42,797 --> 01:04:44,238
But thank you for coming on the show.

1081
01:04:44,317 --> 01:04:45,198
Really appreciate it.

1082
01:04:46,097 --> 01:04:46,637
Always, Dan.

1083
01:04:46,698 --> 01:04:50,597
I always love talking with you and catching up and revisiting.

1084
01:04:51,198 --> 01:04:51,377
Yeah.

1085
01:04:51,438 --> 01:04:54,418
So tell everyone where they can go to find out more about your work in case they want to check it out.

1086
01:04:55,698 --> 01:04:55,837
Yeah.

1087
01:04:55,857 --> 01:04:57,377
Just look for Eurodollar University.

1088
01:04:57,518 --> 01:04:58,558
I've got a YouTube channel.

1089
01:04:58,718 --> 01:05:04,817
I've got subscription services where if you really want to get deep into the weeds about what all these signals are, what they mean, what they're doing,

1090
01:05:04,817 --> 01:05:05,998
which I mean

1091
01:05:05,998 --> 01:05:08,238
recent events suggest

1092
01:05:08,238 --> 01:05:09,317
that you need to do that

1093
01:05:09,317 --> 01:05:10,337
more now than ever

1094
01:05:10,337 --> 01:05:11,498
to really stay abreast

1095
01:05:11,498 --> 01:05:12,438
of what's taking place

1096
01:05:12,438 --> 01:05:13,518
and what's really happening

1097
01:05:13,518 --> 01:05:14,198
and what it means

1098
01:05:14,198 --> 01:05:16,438
what it potentially leads to

1099
01:05:16,438 --> 01:05:17,018
down the road

1100
01:05:17,018 --> 01:05:17,817
like I said

1101
01:05:17,817 --> 01:05:18,797
the subscription services

1102
01:05:18,797 --> 01:05:20,357
you can find at Eurodollar University

1103
01:05:20,357 --> 01:05:22,297
the website is eurodollar.university

1104
01:05:22,297 --> 01:05:24,498
or just search for Eurodollar University

1105
01:05:24,498 --> 01:05:25,637
Awesome

1106
01:05:25,637 --> 01:05:26,538
Thank you Jeff

1107
01:05:26,538 --> 01:05:27,177
appreciate this

1108
01:05:27,177 --> 01:05:28,377
and hopefully I'll speak to you again

1109
01:05:28,377 --> 01:05:29,518
in a few months

1110
01:05:29,518 --> 01:05:30,938
Yeah soon

1111
01:05:30,938 --> 01:05:32,777
Yeah thank you

1112
01:05:34,817 --> 01:05:35,317
you