shadow banking and private credit it went nuclear essentially in 21 and 22 everyone in the space
convinced themselves they could generate high levels of return that were essentially risk-free
which whenever you hear that alarm bells should be ringing because there's no such thing in finance
how big and systemic can this become bubbles tend to take the same forms each and every time they're
given you know a different coat of paint a different facade nothing bad has happened therefore
nothing bad can happen, which means I take even more stupid risk. And it just gets bigger and
bigger and bigger to the point that the imbalance is inevitably going to reverse. And then the
question is what it means on the other side. That's the danger when it gets to forced selling
becomes distressed selling becomes fire selling. Everything just amplifies as the dominoes fall
one after another after another. How do people position themselves? Like what should you be
looking at as a way of sort of surviving this? I would buy a ton of...
Jeff Snyder welcome back to the show sir thanks Danny good to see you again it's been a while
it has been a while I always like talking to you because I mean I think you probably have one of
the best views into how the actual sort of financial system works in the plumbing and
you've been saying some scary stuff recently you've been saying that you think we're in a
financial crisis so do you think we are I think I've been more measured there are a lot of people
will say, hey, you know, we've heard from Jamie Dimon and Mohamed El-Aryan and others who say,
hey, I see a lot of 2008 similarities. And you're going to see what they're saying. The pattern is
the same because the pattern is human behavior, not necessarily the actual format. But I don't
know, you know, financial crisis, it's too early to call. We're dealing with different animals than
what we did back in 2008. However, there is a lot of evidence that suggests that the big portion of
the credit market did entertain a bubble and was in a bubble for quite some time, and that that
bubble has shifted. Whether or not it's a complete and utter bust and it leads to a financial crisis
is a matter that, you know, hasn't been settled just yet. But there are a number of telltale
signs that suggest that is a far greater possibility than maybe most people should be
comfortable with. And that seems to be the market position that seems to be, you know, everything
like you keep getting developments across the system that suggest there's a lot of trouble
brewing there. But it's still an open question about what it actually all means and where it
all boils down to. But what is it that you're specifically seeing that makes you think
potentially we could be? Like you say, is it in private credit? And what does that actually
look like? What are you seeing? Yes, shadow banking and private credit. People who may not
be familiar with the terms, shadow banks are simply, they're like banks, but they're not
They're not registered in regulated banks.
Essentially, investment funds.
And after the 2008 crisis, when the regulated banking system was essentially broken for good,
more and more throughout the 2010s, these non-bank shadow banks began to step in and fill that void
because there was a need to redistribute credit to especially smaller and middle-sized businesses,
the more riskier borrowers that the regulated banks were just staying away from
because their balance sheets were impaired.
And so you had these clean balance sheets among shadow banks who could go into some of these riskier areas and essentially relend.
They were getting their funding from the banks who were, you know, they looked at these shadow banks as less risky than lending directly.
So they get funding from the banks and just relend into these other parts of the economy that were started for credit.
That went nuclear essentially in 21 and 22, the aftermath of the pandemic.
The shadow banking just went absolutely crazy for a bunch of reasons.
largely because everybody thought initially anyway
it was going to lead to a permanent plateau of prosperity.
So why not take a bunch of risk
because it was going to lead to nothing
but positive results going forward.
So everyone in the space convinced themselves
they could generate high levels of return
that were essentially risk-free,
which whenever you hear that,
alarm bells should be ringing
because there's no such thing in finance.
There's no such thing as high rates of return with low risk.
It's high rates of return with what are perceived to be low risk
until they're not actually low risk.
So you had a hyper extension of private credit,
essentially shadow banking, whatever you want to call it.
The Fed calls it non-depository financial institutions.
But you had these investment funds that were out there
raising tons of money and relending it to the real economy,
believing that there was no downside to doing so,
which is the fatal conceit in every debt-fueled bubble
that we've ever seen in human history.
So lots of money went into the space.
A lot of it under really bad assumptions, which is all the ingredients, which are all the ingredients for a credit market bubble.
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.
You know, maybe Jay Powell wasn't correct.
The economy wasn't booming and solid this entire time.
And that there was more risk in some of these riskier parts of the credit markets than people had been anticipating.
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.
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.
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.
What we found out in these cockroaches is that nobody cared to do even the most minimum underwriting or due diligence.
That's what these cockroaches uncovered was stunning levels of fraud and just basic fraud.
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.
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.
I'm protected. But nobody ever checked the collateral.
Was it real? Was it what they thought it was?
And so in case after case after case, what became clear is that the collateral was either fraudulent, double posted.
And what it really suggests and what it really pointed to is that nobody did any homework.
The bubble behavior that went on for years was a lot worse than we thought it was.
And so the importance of the cockroaches is that one after another after another, it showed.
Nobody has any idea of what these credits actually look like, whether it's the actual credit providers, the shadow bankers themselves,
those who are providing the leverage and the funding through the banking sector,
or even the hedge fund investors or the institutional investors who seeded these shadow banks to begin with.
Nobody did any of the basic standards of due diligence and underwriting.
They just lent because everything seemed to be just fine.
And if everything seems to be just fine, then it's easy to buy into that fairytale fantasy of high returns with no risk.
I mean, no one doing any due diligence reminds me very much of 2008.
It sounds pretty similar.
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.
I don't know my history well enough to know exactly what caused the sort of Great Depression 1929 crash.
But like where would this fall?
How big and systemic can this become?
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.
as we're seeing a little bit now,
but also, you know, more damage to the real economy
and significant damage
because the real economy is not in really great shape
to begin with.
So it is a serious problem.
It's not an end of the world type of situation,
but it's enough that, you know,
create even more misery on top of old miseries
that still haven't been healed yet.
There are a lot of similarities, like I said,
you know, bubbles tend to take the same forms
each and every time.
They're given, you know, a different coat of paint,
a different facade, you know,
different, you know, modern technology
and modern innovations.
but they're basically, it all comes down to the same types of behavior.
Everybody becomes convinced that nothing bad can happen.
In large part, it becomes confirmation bias
because you think this goes on year after year after year.
Nothing bad has happened, therefore nothing bad can happen,
which means I take even more stupid risk and do more stupid things,
do even less due diligence,
and everybody just prioritizes volume over everything else,
over common sense, and it just gets bigger and bigger and bigger
to the point that the imbalance is inevitably going to reverse.
And then the question is what it means on the other side.
So, yeah, not 2008, certainly not 1930s, but significant enough where if it starts in private credit, which seems to have already done,
that it could definitely spill over into other areas and create even more difficulties like leveraged loans and high yield corporate credit.
Financial markets, obviously, the stock market's not going to do well if we continue down this road.
in those financial markets like the stocks,
if they start to become shaky again,
if they start to really fall off,
that's gonna have macroeconomic feedbacks as well.
So it's significant enough without being,
you know, a nightmare type of scenario.
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Okay, so you have this framework
of the three stages of financial crisis.
Can you explain what each of those stages are
and where we are today?
To be clear, it's a conceptual framework
to give people kind of a sense of where things are.
It's not like a hard and fast,
stage one is exactly this,
and at this particular date, it shifts into stage two.
It's far more ambiguous than that.
And then there's often ebbs and flows,
nothing ever goes in a straight line.
We could go from stage one to stage two and not really notice it
because things kind of blend together.
together. But conceptually speaking, just to get your head around what this process could look like
so you can create a mental roadmap of what might be going on and kind of give yourself a sense of
where you think things are in terms of progression. That's the problem that we keep coming back to.
I know we'll talk about this a little bit more, but as we keep going through time, we get more
escalation, more escalation, more progression, more progression, never de-escalation, which suggests
we're moving further into these processes. But just briefly to put it together in a brief framework,
as we just talked about with the bubble, the bubble is easy to understand. Money just flows
into it. Nobody asks any question. Everything seems to be as good as a fairy tale. High returns,
low risk. Nothing can go wrong. So money only goes in the one direction. But eventually something
happens, and it's usually a combination of some things that take place, which causes people to
say, you know what? That's ridiculous. There's no such thing as high rates of returns or risk-free.
We need to start taking a closer look at what's really been happening. And as more people start
asking questions, they don't like the answers that they get. And suddenly, for the first time,
what I call stage one, is where money starts to flow out. Now, there's always money in and out,
but by and large, during the bubble period, money flows in overwhelmingly in that one direction.
In stage one, more than usual money starts to flow out because people are asking questions for
the very first time.
They're actually scrutinizing what's been taking place.
And they're not liking what they're seeing
because, of course, you're not going to like what they're seeing
because we just went through a bubble
with all sorts of stupid and garbage and everything else.
So for stage one, some money starts to go out.
However, that's really,
it doesn't lead to any further consequences
because as in stage one being a preliminary
early part of the process,
there are still people who are going to believe
in the fairy tale and the fantasy.
So there's still investors who are willing to put in money,
especially if they think they're getting a discount for it.
Plus you have the financial system, the regulated financial system, the banking sector,
which more likely than not is going to stand behind, in this case, shadow banks
as they start to experience some uncomfortable conditions with outflows.
So you've got some money that goes out, but you have ways to rebalance money
so that these shadow banks, for example, that are experiencing outflows
don't have to actually start selling assets,
which is what really determines a financial crisis.
When there's forced distress and even fire sales,
that's where things really get bad.
So in stage one, you've got people questioning the bubble
and all of the assumptions that went into it.
You've got enough people who are doing it
that you get some significant outflows.
But in stage one, they're relatively balanced
by bank emergency lines of credit
or new investors bringing money in.
And so largely, you can tell something is different,
but it doesn't really look all that bad.
And that's kind of where we went through
for like the last six months, lots of stage one.
We've seen confirmation for it.
Hedge fund investors have been redeeming,
have been withdrawing funds from a lot of these hedge funds
to the point that it's created issues for the hedge funds.
But we've also seen banks that have issued lines of credit
or have allowed these shadow banks
to draw on their lines of credit.
So they haven't had to really force sell anything
until recently.
So what happened last week
was one of the most well-known shadow bankers,
Blue Owl, admitted they just had to sell some assets.
And it wasn't voluntary.
It was a forced selling.
So that was the first instance of stage two behavior.
Now, it doesn't necessarily mean that we are in stage two.
It means that for the first time, we can confirm that something like stage two has taken place.
So stage two is where we go from stage one.
But the outflows either pick up or usually investors get more investors get cold feet.
So the outflows begin to pick up on that side.
And on the other side, there are fewer new investors willing to put money in because they're starting to ask their own questions.
And for the first time, when you get deeper into stage two,
the banking sector says, you know what?
Even though you have a preexisting line of credit with me,
I'm not gonna honor it.
I'm gonna cut that thing up and just cut my losses with you.
Because right now, all the losses are being borne
by the regular banking system.
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
Because if you have more money going out than you have money available to come in,
you have to sell your assets.
It's just basic maturity transformation.
We see this in every single crisis.
That's why this is a basic crisis template, not just private credit.
So you get the forced selling that tells you that things have progressed another step into stage two.
Can I just ask you a quick question on the stage two there?
Because when that happens, you said Blue Owl have started this essentially.
Is it the kind of thing that once someone spots this as a problem, it's like a domino effect?
Because once they start forced selling things, everyone else is then put in a position where they need to start selling the same assets.
That's the danger when it gets to forced selling becomes distressed selling becomes
fire selling. So there's a progression within progressions. And that's why, you know,
it's a simple example just to understand conceptually what's going on. But yeah,
that's really what happens when you progress from stage one to stage two and eventually stage three.
It's really just that once the selling starts, it creates these knock on effects.
So what Blue Owl was forced to sell and their price, they made sure that everybody knew the
price was very close to par. It was actually a bit less. There was a bit of a discount there.
But then this week, we got confirmation of another fund called New Mountain that actually had to also
sell assets at around 94 cents on the dollar. Now, it's not exactly an apples to apples comparison,
but it is conceptually what you just said, Danny, which is one person sells and the next sell,
the price goes down and the price goes down. And as more selling is forced to take place,
the price goes lower and lower and lower. It causes more selling because everybody sees the
lower prices and they think, oh, crap, I better get out while I still can. And so you have more
sales, fewer buyers because there's less money in the space. Prices go lower and lower and lower,
and it triggers that cascading effect that leads to eventually, if it goes too far, that's where
you get to stage three, where it's everybody panicking. So that's stage two is where you
start to see the forced sales because money flowing out is flowing out more than money is
coming in replacing it. And then stage three is where these distressed sales create more price
effects than the system can manage. And it leads to not just selling in the area we're talking about,
in this case, private credit. It leads to market prices that fall farther and farther. And then
they spill over into other market segments and other potential markets, which leads to lower and
lower prices. And that's when you start to get the big consequences where, in this case, it won't be,
you know, we're not going to see another Lehman Brothers fail, but we could see some of these
private credit funds go belly up. That's that's absolutely something that could happen. And we
really don't know what that would mean as far as the functioning of the system. But that's more
stage three. So you get the sales, you get more outflows, you get the banks that are pulling back.
There's less liquidity across the entire system, across the entire marketplace. Prices go down
and then you get to stage three where it's just everything just amplifies as the dominoes fall
one after another after another.
And how long does this,
I imagine this can take a matter of hours
or a matter of weeks or months or years.
Because if you watch Margin Call,
it reminds me of that
where they start the morning
selling their stuff for like 95 cent on the dollar.
And by the afternoon,
they're selling it for like 65 cents on the dollar.
That obviously happened in like a day in 2008.
But like, do you expect this to be a much more-
Yeah, that's the worst part of stage three.
That's toward the end.
You expect this to be much more drawn out?
They're always drawn out.
See, the problem is people have this conception that a crash happens overnight.
Like one day everything's fine and the next day everybody's panicking.
That's not what happens.
Crashes, even the most violent crashes like 2008 were several years in the making.
Yes, several years.
Same thing with the 1930s.
The Great Depression did not happen overnight.
The stock market crashed in October 1929.
It actually peaked in September 29.
The actual depression didn't happen until 1930, 1931,
after you got a couple waves of bank failures.
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.
We're overreacting to what is just basically a small thing.
So like I said, stage one, a lot of investors see, OK, there's some irregularity over there.
That allows me a buying opportunity.
I can put my money in and get stuff really cheap.
So there's always this back and forth.
There's never this clear, decisive signal that says we are moving in this direction.
And so that back and forth leads to it takes up a whole lot of time as this process plays out.
But ultimately, what matters is not the length of time.
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.
It's a difference between a credit crisis and a liquidity crisis.
A credit crisis is something like we saw in the 1980s and 1990s with the SNL crisis.
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.
It didn't lead to massive market chaos because it never really became a full-blown liquidity crisis.
That's the difference between the SNL crisis in the 80s and 90s and 2008.
2008 started out as a credit crisis in the same way.
You had overextended lending for a lot of stupid reasons.
A lot of stupid things took place.
A lot of leverage that had been added onto it.
So you had a credit crisis.
There were losses that need to be taken by the system.
But they were so big and so large and so misunderstood that it led to liquidity, the markets breaking down.
It led to the entire monetary system breaking down.
It led to the banking system breaking down.
So it led to much further consequences, which is a credit crisis became a full-blown monetary crisis.
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.
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.
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.
Can you explain that to me? Because I'm not sure I fully understand.
Like, why would a credit crisis not become a liquidity crisis?
Like, what are the different things there?
Yeah, because in a credit crisis, what it really means is that there are hidden losses in lending, right?
You lent to people that you probably shouldn't have.
Those loans are worthless.
Everybody has to take their losses.
They're widespread.
But it doesn't necessarily lead to all the stuff we just talked about.
You can have a credit crisis that never goes past stage one.
So the credit crisis is there's lots of losses to be taken by this person, this person, and that person.
But it doesn't lead to distressed sales because maybe it's not that big of a deal.
Some of these funds that take losses are not sharp enough that it leads to a complete draining of their liquidity facilities.
They're never forced into selling assets at distressed prices, which is really what gets into the crisis.
So there are lots of losses.
In some cases, firms go out of business, banks go out of business.
But it doesn't lead to systemic problems further down the road because it doesn't create the downside across markets.
It doesn't lead to the real depression in prices.
The sort of domino effect that you talked about when, you know, a lot of forced selling,
distressed sales lead to further distressed sales.
The link in the chain is broken by something that proves to be more resilient.
Therefore, just as a bunch of credit losses that need to be taken by the system, the system
takes those losses usually over a prolonged period of time, but it never really goes past
stage one or maybe early stage two.
So is the idea there that it doesn't snowball into sort of public markets?
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.
Is that the right way of thinking about it?
Yeah.
So you can think about it like in the example of the S&L crisis.
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.
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.
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.
And relatively is doing a lot of work, a lot of the work here.
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.
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?
Oh, it's really, really impossible to tell.
What I would say is that it's a non-trivial risk at this point.
So, I mean, greater than nothing, but certainly not, you know, potentially a base case.
Though I will say the markets have been pricing something like this for years now.
and as we continue to go along,
everything seems to move in the same direction
as what markets have been telling us
to expect the entire time.
So that's not exactly a positive scenario to begin with.
And what I mean by that is markets have been saying
over the long run, interest rates were gonna go down.
They were gonna go down by a lot
and they were gonna stay there for a very long time.
And so for the last several years,
I've been sitting here telling other people to sit here
and think about how do we get from there?
Or how do we get there?
How do we get from where we were,
say in 2022 and 2023, where central banks were hiking rates and everybody thought interest rates
are going to go into the double digits, to the market telling them, no, interest rates are going
to go down. They're going to go down by a lot and stay there for a very long time. And as we
continue to progress, you see weakness in the economy. We see job losses take place last year.
That's the macro side of it. And on the financial side of it, we've got a private credit bubble that
is certainly going bust. That would fit into a range of scenarios that lead us to interest rates
going down and staying there for a very long time.
So if it does get to stage three,
that would certainly fit the forecast
that the markets have been sending for several years now,
several years during the entire period
when this stupidity was building up
in the private credit space.
So that's why I say the potential for a stage three
is probably higher than we would like it to be
because it fits within the scenarios
that we've been looking for for years.
That still doesn't mean it's a done deal,
it's gonna take place
or that the results of it will be catastrophic.
it just means that there will be significant enough
disruption, disorder, and deflation
that it does lead to a situation
where we have, you know, the economy's down,
more job losses, unemployment's rising on the macro side,
there's financial volatility, there's losses to be taken,
there's going to be, you know, disruption,
certainly in the stock market,
if it goes that direction.
All that kind of stuff that you associate with it,
that would fit into the overall framework
that we're looking at.
So the chances are high enough to be paying attention.
Yeah, I mean, that's probably the best way
to put it because, you know, when you put a number on something, you got the numbers change.
The probabilities change all the time as we get more and more information.
So, I mean, that's I think that's probably the best description I've ever heard anybody
say.
It's enough to pay close attention to it.
Hey, I'll take that.
When you say the markets have been pricing in like low rates for a long time, even during
sort of the fastest rate hike in history, they've been pricing this in.
Is that right?
And where have they been pricing that in?
forward markets, interest rate swaps, the yield curve.
The euro dollar futures curve, the old euro dollar futures curve,
the far superior euro dollar futures curve,
inverted back in December of 2021.
So that was the market saying whatever the Fed's going to do in the short run,
interest rates are likely to go lower after a certain period of time.
So never since then.
The curves have been completely upended.
So you had inversion in the yield curve,
the treasury market yield curve, March of 2022.
And it had been inverted and heavily inverted.
and historically inverted from March of 2022 on and off in the initial stage,
but all the way until September of 2024.
So the market was saying, eventually, once the Fed gets its inflation hysteria out of its system,
rates are going to go down and they're going to go down by a lot and stay there.
So from the very beginning, from the very beginning of 2021,
the markets have said, over time, this is what we should expect.
Not interest rates going into the future, going into double digits, soaring into the skyward.
It's not the 1970s.
There's no lingering inflation.
We should expect things to go the other way.
And I mean, to me, that seemed to make sense
because the economy tailed off right in 2022.
It didn't fall into a recognizable recession,
but it was every bit the recession.
We've seen the job market weaken along the way
in the macroeconomy, not just in the US,
but across the entire world.
And that makes sense too.
You think about what happened in 2021 and 2022
while all this financial irregularity
and stupidity was going on,
the entire world of the vast majority of it
was impoverished.
You had prices that soared ahead and incomes that didn't come close to making up the difference.
So in other words, everybody fell further behind almost at once.
It was like this one big slap in the face.
How is that ever going to work out any other way in the future?
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.
It just got worse and worse and worse over time.
but it did so in a way that wasn't recognizable to most people
and what they think of and when they hear the term recession.
But the macroeconomic-based case has always been from 2021 onward
that we would end up in this situation for that reason,
because you can't impoverish the vast majority of the world
and expect it all just to work out fine and dandy.
So when you say that rate cuts are basically baked in the cake at this point,
like Kevin Walsh is obviously almost likely coming in as Fed chair in May, I think.
What do you think the difference he will make there will be?
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.
Thanks for anticipating my answer.
I really appreciate it.
No, it won't matter.
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.
What the markets are saying is that conditions develop to the point where the Fed has no choice.
like 2008. Before 2008, the Fed had no intentions of lowering interest rates. In fact, when they
look at inversion and euro dollar futures in 2007, they said, what the hell is the market pricing?
We don't see anything bad taking place. We're not going to cut rates. We just raised them. We just
stopped raising rates. Why would we cut rates? So it's not, it's what the market is saying is
regardless who's at the Fed, conditions are going to be such that they have no choice but to respond
in the way that we think they're going to respond,
which is if we have a credit crisis
that leads to higher unemployment,
it doesn't matter what anybody at the Fed says today,
they're going to lower rates
and they're going to lower rates by a lot.
It's not the Fed's choice.
It's the conditions around the Fed
that the market says the Fed will have to respond to,
which is why lower interest rates,
contrary to popular perception,
lower interest rates are not stimulus.
It is officials reacting
to what's taking place in reality.
So that's why interest rates go down during recessions rather than interest rates go down and stop the recession from happening.
They're responding to the recession that's developing or the financial crisis, whatever comes along with it.
So that's what the market is saying.
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.
They're going to bring rates down, not all at once, as we've seen.
I mean, this is a drawn-out cycle.
It's one of the most drawn-out rate-cutting cycles that we've seen.
But over time, eventually, they get there.
And they get there because they don't have a choice.
I don't know if I've ever asked you this question,
because I know you don't like the Fed.
But do you think we should get rid of the Fed?
It's not that I don't like the Fed.
It's the, well, I mean, there's lots of questions about the Fed.
The Fed isn't what people think it is.
And the Fed isn't what the Fed advertises itself to be.
That's what I really have a problem with.
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
They say monetary policy,
but that's really interest rate policy.
It's not monetary policy.
They are not targeting a money supply.
They're not doing anything with money supply.
So they've given this impression
that they're a monetary institution when they're not,
which is my biggest beef with the Fed,
is they are pretending to be what they are absolutely not.
So can we get rid of the Fed?
That part of it, yes.
Now, that doesn't mean that some parts of the Fed are salvageable.
For example, I use the Fed all the time in terms of information.
It is one of the few sources of information into these dark spots
that we otherwise would not have because of the Eurodollar system
and its opaque nature offshore,
hidden in the footnotes of bank balance sheets,
and a lot of stuff doesn't even show up on bank balance sheets,
or shadow bank balance sheets in these days.
So the Fed does have some use.
It uses its power of subpoena and regulatory authority,
macroprudential power to force some kind of transparency,
not nearly enough.
But the idea that the Fed controls the economy
and the monetary system
and then can generate predictable positive outcomes
by moving the federal funds rate around,
that's total horse crap.
So it's just a statistics and PR agency at this point.
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.
What they're saying is if we raise rates, we have no idea when the effect of raising rates will take place.
At some point, the outcome that we were anticipating by raising rates will take place and then we'll take credit for it.
In other words, it could take three years. I mean, think about it this way.
the Fed as you mentioned already most aggressive quickest rate hiking campaign in its history yet
here we are three four years later still talking about inflation risk why is that the case long
and variable legs they anticipated the outcome and they're waiting for that outcome to show up so
they can take credit for it it's essentially turning correlation into causation which is what
the Fed has been doing basically its entire history but more so since the euro dollar development in
the 60s and 70s. So whenever the Fed does something, most people don't pay attention to what it is they
do. And if it correlates with the outcome the Fed is, you know, they've taught you to believe in,
you think the Fed is responsible for it. But like I said, you know, if that was the case,
we would never have recessions because the Fed lowers interest rates heading into a recession.
We get the recession anyway, which leaves the Fed to say, well, it would have been worse if we
hadn't lowered rates. That's the other way they get around this. Long and variable lags or jobs
saved like in 2008. Well, it would have been 1930s if we hadn't acted with QE. So that's my problem
with the Fed. It's giving people the wrong impression about what it is and what it actually
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What do you think about the sort of eroding independence of the Fed
with Trump pressuring Powell and then bringing Walsh in
and presumably Walsh is going to do,
I'm sure they've had long conversations
and he'll do whatever Trump really wants there.
It's just another extension of the mythology.
The idea that the Fed is this all-important institution,
which by the way is absolutely central to its policies.
Its policies are expectations policies,
which means you have to believe in it.
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.
If you believe you can fly, then you can fly.
That's what their policies really are.
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.
which is, again, horse crap
because that's not how the world actually works.
But in order for that to work,
everybody has to believe the Fed
is this all-powerful institution.
So everything the Fed has done
and how it has evolved since the 1990s in particular,
and there's a reason why the 1990s
had started down this road,
it has to maintain this aura,
which is why we have these press conferences
with Jay Powell standing up in front of the podium
with that bank of flags, really impressive,
and all the most major mainstream media asking them questions.
It's a ritual.
It is a religious ritual so that the Fed maintains this aura of power and capability, right?
And so the idea of the Fed's independence falls under that entire paradigm
because if the Fed's independence is threatened,
that somehow threatens the mythology that has been built up around the Fed.
when the marketplace, the marketplace where all of this would make it, if the Fed's independence
mattered one bit, like the treasury market would have said, oh, crap, this is a big deal.
We've heard about the Trump administration threatening the Fed's independence since last
year. And we went through the same thing in 2019. People forget we went through the same stuff in
2019. The market does not care one bit because the market knows the difference here, the difference
between mythology and reality.
If the Fed's independence is threatened,
no one really cares because it won't make a difference
where it actually matters.
But you say it's horse crap,
but like markets, real markets do move
when Powell says stuff.
So you think that's just enough people
believing the mythology essentially
and trading on that mythology rather than actual reality?
Yeah, in the short run, absolutely.
Huh, interesting.
You can line up, look at,
you can run any correlation you want
between Fed policies and market movements.
They don't last beyond the short run.
Even QE, everybody thinks QE money printing
led to the stock market going up.
There is zero correlation,
zero correlation between the Fed's balance sheet
and the stock market.
See, I've heard you talk about this before,
so I know your sort of reasoning there,
but for anyone that's not,
that might be a bit of a shocking statement.
Do you want to explain why you think that?
It's not why I think that.
It's what the numbers say.
But there is this short run impact.
And by the way, it's not just the stock market.
The bond market fell for it, too.
If you look at bond market history back to the early QE days, even Eurodollar futures fell for it, which is embarrassing.
When the Fed first announced QE back in December of 2008, what happened?
The opposite of what was supposed to happen, right?
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.
That's not what happened.
The very first QE, bond yields went up, and they went up by quite a lot.
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.
So if this stuff works and you believe QE works,
you're going to want to buy a ton of stocks.
Same thing happened in QE2.
Bond yields went up rather than down,
and stock prices certainly went up in August of 2010
when Ben Bernanke announced QE2.
So there is a short-run relationship
with perceptions of what the Fed could do,
especially if these policies are new and untested,
even though they had been tested in Japan.
The idea was the U.S. execution
would be different than the Japanese execution.
But either way, there is a short-run impact
where people think maybe this stuff could work.
I don't really know what it is. I don't know what it does. But hey, possibly it could work.
The Fed is doing something big. Everybody's talking about how big it is.
So maybe I'm going to buy some stocks and sell some treasuries because it could work out that way.
But it never lasts that long because in reality, that's not how the world really works.
That's certainly not how the monetary system works. It doesn't work on Peter Pan belief.
It works on actual money and monetary circulation more than anything else.
So there are short run periods and people only remember the short run periods.
They only remember the times when the Fed announces QE and the stock market soars.
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.
So over time, there is zero correlation.
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.
But during like COVID, when the Fed did print a bunch of money, forgive the, I know you maybe
don't agree with that framework, but you know what I'm saying.
That's what everybody says.
I mean, yeah.
But no one would say that the economy was in a good place while the world was locked
down, like the real economy, but stock markets did soar.
So is that not correlation?
But was that the Fed or was that something else?
Was that just simple correlation?
So I would argue that it wasn't the Fed at all.
What else would it be?
The federal government.
It was the federal government reopening the economy or at least creating a pathway to reopen the economy.
That led to further second and third order effects, including the price illusion, which was really the price shock.
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.
So in 2020, it was slow at first and it really got going at the end of 2020 into early 2021.
That wasn't the Fed printing money.
that was the federal government reversing its policies
or at least creating a pathway
to plausibly reverse its policies
and people reacting ahead of that.
Okay.
One of the other questions I have around the Fed is,
like, they've obviously got the dual mandate,
one of which being jobs.
How are they going to manage...
There's actually three.
Okay.
Well, we explained that in the answer too.
But how are they going to manage that
with AI seemingly starting to take jobs?
I don't know if you saw,
but Block announced yesterday
that they're getting rid of nearly half of their employees.
Which is not AI, though.
Well, I mean, there's obviously a lot of people
that say they hired way too quick in like 2020, 2021,
and they had a lot of like a way too big headcount.
That's what Jack Dorsey said.
That's what he said himself.
He said, hey, look, we fell for the illusion too.
We did what Amazon and everybody else did.
We hired way more people than we needed.
Now they're just blaming AI for the layoffs
when it was really just being wrong about the economy.
But I think given enough, like given a few years,
I think AI will start replacing real jobs.
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.
Jack has been at the forefront with this vibe coding revolution.
What do the Fed do if AI does start replacing a large number of white collar jobs?
Nothing. The Fed can't do anything. The Fed can't meet its mandates.
They have to pretend to do something, though.
They have to pretend. That's really the issue.
And so, again, the mandates are full employment, stable prices.
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.
That's not a thing, too.
Just to digress a little bit here.
I'm going to rant a little here.
People don't realize the Federal Reserve was a joke for the vast majority of its history.
That's not me saying it.
That's the mainstream media, the marketplace, the banking sector, everybody, politicians.
After the 1930s, the debacle in the 1930s, the Fed was relegated to the back bench.
It was underneath the Treasury's thumb.
And even when it so-called got independence in 1951, nobody looked at the Fed to do anything.
It was basically left to try to manage Treasury auctions.
That's what the Fed did from early 1950s to the 1970s.
And then the Fed sat there unable to explain where the great inflation came from, let alone stop it.
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.
And it wasn't because of anything the Fed did. It was because of the great moderation that showed up.
And the Fed couldn't even explain why the great moderation showed up.
But the point I'm making is this idea of the Fed being an all-powerful technocratic institution is a modern invention.
It is something that was created largely out of the inability for people to explain where the great moderation came from.
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.
We started targeting the federal funds rate.
Maybe that's where the great moderation came from.
So this ocean of prosperity in the 1990s was our doing through moving the federal funds rate around.
If you stop and think about it, you think about how ridiculous that sounds.
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.
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.
So what we're really seeing is the Fed return to type here.
It's just going, people are realizing slowly that the Fed is still the same joke that it was.
It's just that it hasn't completely fallen into, it hasn't been completely accepted that way just yet,
because there is still a lot of people who depend upon either having Jay Powell the god or Jay Powell the villain,
which is very useful to a lot of people, right?
Why does the politicians keep the Fed around?
Because when times are good, the president can point at the Fed chief and say, I appointed that guy.
He made the economy great. I'm a genius.
And when the economy's bad, what can he do?
like Trump. That Jay Powell's an idiot. He's dumb. He's stupid. He's incompetent, right?
The Fed is nothing more than a political lightning rod. So to bring this back to your question,
sorry about that. With artificial intelligence, the Fed would, if we get higher levels of
unemployment, I think they would be more measured in their rate. They would still
bias toward lower rates, but they would be more measured because what they would say is, look,
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
what the Fed has said is why they never refer to the third mandate.
And it is required by Congress.
It is in the law, the amended Federal Reserve Act.
The reason they don't bring up a third mandate is because they say,
if we take care of the first two, by default, the third one takes care of itself, right?
If we have maximum employment and stable prices, then we will have stable interest rates.
So we focus on the first two.
Therefore, we don't have to worry about the third.
When everything that we've seen during this period shows that that's not the case.
We don't have stable prices.
We don't have full employment.
And interest rates, they are certainly not stable.
And even when, even 2010s, you could characterize the interest rates as stable.
They're supposed to be stable at moderate levels.
That's the word that is used in the statute.
They sure as hell weren't stable at moderate levels during the 2010s.
They were entirely too low because low rates aren't stimulus.
They're a reflection of conditions.
So the Fed fails on every one of its mandates.
AI is not going to help suddenly help them.
It's just going to add to their challenge.
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.
And I think probably base case for me would be it will.
what happens to all the people that are unemployed and do you think we see some kind of UBI
and if we do do you see that as actual stimulus because it's real money going to real people in
the economy rather than just creation of bank reserves again is if you think about it ceteris
paribus taking the last part first it looks like stimulus but it's actually not because you have to
account for the conditions that led to it in the first place so we're redistributing money through
UBI, assuming that's what happens, but it's intended to offset a hole that was created
from the loss of jobs. So would it actually be stimulus? Well, in a centrist-paribus world where
you're starting from scratch, yeah, it looks like stimulus, but it's actually, would UBI be an
effective replacement and alternative for lost incomes, lost earned incomes through productive
jobs? And looking at it that way, which is the proper way to look at it, it's not stimulus,
It's actually, it just nets out of zero.
You can argue it's better than zero, right?
It's better than the alternative.
It's potentially better than the alternative.
I don't think the long-run consequences would be better than the alternative.
But in the short run, you could say it's better than having people have no jobs and no incomes.
But it's certainly not stimulus because it's not offsetting what real earned income does for an economy,
which is most consumers are more likely to spend more freely.
businesses too when uh they're when when um incomes are generated through natural organic
and economic processes then when they're redistributed through some predetermined
bureaucratically arbitrarily determined number which was what ubi would be by by the federal
government or any government for that matter so ubi would not be an effective offset to lost jobs
so the question is whether or not we have lost jobs i'm probably a little bit more optimistic
than you about that.
I don't think AI eliminates jobs.
I mean, yes, it will definitely eliminate some jobs,
but I don't think that's what,
we're not looking at a catastrophic loss of employment.
I look at it as AI being a potential,
you know, human-robot partnership
where it makes human workers so much more productive.
In that case, it doesn't eliminate workers,
it eliminates hours worked.
So I can see us going, for example,
from a five-day workweek to a four-day workweek
with some people actually having a three-day workweek
because AI will make human workers so much more productive
that just like when we went to a five-day work week in the 1920s,
businesses will first start out using that as a recruiting tool.
Look, come work for me.
I'll pay you really well.
Plus, you only need to work four days a week.
And eventually, that filters for the rest of the economy
as that level of productivity really does take place in the real economy,
which I think it will,
although I think it'll take a lot longer than people are anticipating right now.
It might be 10 years from now rather than next year or the year after.
But I think long run, yes, there will be some jobs that are eliminated because that's the natural economic process.
But by and large, we're not looking at mass dystopian levels of unemployment.
We're looking at a positive future where we all have to work.
We don't have to work as much.
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.
Well, that's a way more optimistic outlook.
I like that. And that's what deflationary technology should always have been.
Like it should be us at an office less and being more creative more.
Yeah, you do more. You get more out of less, right?
That's what free market economics and capitalism is supposed to do.
You have a set of finite parameters and you learn how to use your techniques and processes better
so that you get more out of what you're doing for putting less in.
So just to go back to the potential that we're entering or in a financial crisis, how do people position themselves?
Like what should you be looking at as a way of sort of surviving this?
Well, I mean, the easy answer is just safety and liquidity.
So, I mean, duration and treasury markets, because, well, not necessarily long duration, but some level of duration.
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,
but the market sees the probabilities rise to a certain point, what you're going to see is short-term interest rates,
medium-term interest rates are going to go down a hell of a lot more than long-term interest rates.
So the yield curve will steepen out substantially, but do so from the front end.
So like the two-year, for example.
The two-year right now is a little bit under 3.4%,
setting a new multi-year low,
which is another signal leaning in the direction of that type of steepening.
If that's correct, the 10-year is sitting at 4%.
If we assume the 10-year doesn't go, it's actually a little bit low 4%.
But if it doesn't go any lower,
the yield curve wants to be about 200 basis points steep, upward sloping.
It had been inverted for a long time, as we discussed before.
It is uninverting.
It hasn't gone through the entire un-inversion process.
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.
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,
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.
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.
I mean, there's no really price speculation in bills.
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.
So a curve steepening, bull steepening type of trade would work really well here, assuming that it continues to go in this direction, though.
So like I said, we've been looking at this for years.
And as we continue to go through year after year after year, we see more evidence of that taking place, not less evidence.
So it's a relatively easy thing to do.
But that's, I mean, tragedy market's easy.
You want to take a little bit more risk.
You could buy gold or something like that.
I would buy a ton of Bitcoin.
If Bitcoin gets down around, you know, 50,000 or less, if the market overshoots on the downside,
I'm going to pack up the truck for Bitcoin or something like silver.
because those are the things that you're going to want to own
in a period of instability, gross instability
in a whole lot of different ways,
including the economy and the marketplace.
So yes, there's a lot of caveats and a lot of ifs
and a lot of probabilities,
but as those probabilities start to pile up
and it looks like more concretely,
that's where we're going,
that's where you really want to be.
All the traditional tools that safe haven
to get you through unstable periods.
That's cool to hear you talk about Bitcoin in that way
because you've always been sort of a little skeptical of Bitcoin.
Is it just the fact that it's pulled down so much from its highs
that you're interested at this point?
Or have your sort of opinions changed on it slightly?
No, my problem with Bitcoin, it's not really a problem.
It's understanding what it is and where it's going.
Not price, but actual function.
Bitcoin is not replacing the US dollar.
Bitcoin is competing with gold as a safe haven portfolio asset.
That's why it behaves a lot like the Nasdaq.
It's competing with the stock market or gold.
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.
There's a lot of upside potential from Bitcoin.
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.
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.
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.
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.
And there's nothing wrong with that.
We can use a digital form of portfolio asset,
especially one that has limited supply
and limited availability.
There's nothing wrong with that whatsoever.
It's not a competition for the dollar.
That's really where I have the argument.
So we've had that conversation on the podcast before
and your issue is around like the inelasticity of Bitcoin.
I'll just link that in the show
rather than getting to that again,
because we've covered that in pretty good depth, I think.
So one of the things that I like
in terms of the framing of how Bitcoin performs
in the short term, how the price moves,
is Luke Groman's theory that it's like
the last functioning smoke alarm for liquidity.
Obviously, Bitcoin rolled over at the end of last year.
Do you think that is global liquidity drying up
or like the smoke alarm that it's about to dry up?
Yeah, I think it's both a liquidity signal
as well as a risk-taking signal.
It's sort of the marginal,
it's at the margins of people's perceptions
of whether or not they want to take risk
or whether or not want to remove risk.
That's part of the institutionalization of Bitcoin
through Wall Street and funds and everything else.
That's what it kind of becomes,
is sort of the easiest thing to sell in a downturn,
in this downturn anyway, assuming that's what we have.
Portfolio manager, hey, Bitcoin had a tremendous year last year.
It's really easy to get out of it.
Plus, as it becomes, price goes down,
portfolio managers don't want to own it
because their clients will fire them for owning it.
So it becomes the marginal risk setter.
It tells you something about the perception
across the financial markets to take additional risk
or to take additional risk off the table.
So for me, yeah, that's one of the things that really stuck out
is that Bitcoin had, it really is, you know, it hit the high in October,
but it started to roll over in July.
When we see a lot of stuff roll over in July, private credit in particular,
you look at the BDC prices in the stock market,
you look at leveraged loan prices, for example,
there is a pretty solid correlation, at least a rough correlation,
between Bitcoin as a risk gauge
and what we've seen in, for example,
the reversal of the private credit bubble.
So that's how I would look at Bitcoin.
And like I said, if Bitcoin goes lower for whatever reason,
just because it happens to be the easiest thing to sell,
that just presents a tremendous buying opportunity.
Yeah, I mean, down here in the 60s,
I think it's already good value.
It may go to the 50s, who knows, but...
You know how this goes, Dan?
I mean, markets always overshoot.
And Bitcoin's history, right?
I mean, Bitcoin goes way up
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
would be shocked if it gets down to around 80 down from its high which would be what um 30 000
something like that i mean 30 000 you gotta be thinking about buying a ton of it yeah i mean if
we get there i will be selling everything i've got to buy more um but you and me both i'll provide
some leverage we see if i can find some leverage someplace just to close out i know you you're kind
of tight on time. But and this is quite a big question to close out with. Going into the midterms
end of this year, Trump is going to want the economy running as hot as possible. Do you think
he's got a chance of getting there? Do you think this could be a really strong year in the markets?
No, see, it's always the what people want versus what they can actually deliver. Same thing with
the problem of the Fed. One of the biggest things I try to get people to get out of is the mindset
that governments can achieve whatever they set their mind to, because we see examples of this
not happening everywhere. The recovery after 2008 never happened, didn't happen. China is a perfect
example. The Chinese have been stimulating their economy for years and it only gets worse and worse
and worse. Governments don't have unlimited capacity to achieve the goals that they set out.
In fact, they have very limited capacity, far more limited than you think, which is one reason why,
again, go back to the marketplace. The marketplace has not budged. There is nothing in the marketplace
right now that suggests, and believe me, market participants know the Republicans and the Trump
administration want the economy on the right track before we get long before we get to November.
This talk about a boom in 2026 is not priced anywhere in the market. And if it was, we would
have the reverse calculation of what I just went through. If there was any if there was a plausible
path to the Trump administration simulating the economy this year, what we would see is the yield
curve steepening out in the other direction. So short term rates would be stuck at 350. The Fed
wouldn't need to cut rates anymore, right? Because it would be responding to a strong economy,
which means that the long end of the yield curve would had to be at least 200 basis points above
the short end, which gets you the 10 year around five and a half, if not 6% or higher.
It's not moving in that direction. And if this was a realistic possibility in the near term,
you better believe the marketplace would be already moving in that direction.
So what the market is saying is, yes, we realize that Trump would love the economy to be red hot running into November.
We just don't see any way for that to take place.
The conditions, labor market is too sour.
People, I want to point this out.
I don't know even how to put this in the right word.
We had zero job growth last year.
I don't know why people don't know that more.
We had no jobs grow, no jobs in the entire U.S. economy, an economy with 160 million people working.
We had zero job growth in 2025. And somehow that's not going to have a negative impact on 2026.
So the point is, the market is saying, look, we've been in this rut for years. It only gets worse.
It only seems to move in one direction. It doesn't matter what the government wants to do.
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.
Plus, you throw a private credit mess on top.
And let's not forget, maybe the stock market pops because the AI bubble is no longer supporting that narrative.
I mean, there's a number of financial risks that are out there on top of the macroeconomic weakness.
It's a very small possibility that the Trump administration is able to deliver what it wants to deliver.
I think that's what the markets are all saying.
It's going to be an interesting 2026.
Jeff, I always love speaking to you.
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.
But thank you for coming on the show.
Really appreciate it.
Always, Dan.
I always love talking with you and catching up and revisiting.
Yeah.
So tell everyone where they can go to find out more about your work in case they want to check it out.
Yeah.
Just look for Eurodollar University.
I've got a YouTube channel.
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,
which I mean
recent events suggest
that you need to do that
more now than ever
to really stay abreast
of what's taking place
and what's really happening
and what it means
what it potentially leads to
down the road
like I said
the subscription services
you can find at Eurodollar University
the website is eurodollar.university
or just search for Eurodollar University
Awesome
Thank you Jeff
appreciate this
and hopefully I'll speak to you again
in a few months
Yeah soon
Yeah thank you
you