1 00:00:00,000 --> 00:00:01,920 Michael, Al, welcome back to the show. 2 00:00:02,780 --> 00:00:04,140 Thanks, Moni. Very good to be here. 3 00:00:04,920 --> 00:00:09,760 It's great to have you. And for those of you who have not joined an episode of TFTC with Michael, 4 00:00:09,900 --> 00:00:15,580 he's the founder of Cross Border Capital, which is over 35 years of tracking global liquidity. 5 00:00:15,980 --> 00:00:22,180 Michael also authors the Substack Capital Wars, which I highly recommend you subscribe to. We're 6 00:00:22,180 --> 00:00:28,040 going to talk about his latest piece that he dropped yesterday. And he also built the GLI, 7 00:00:28,040 --> 00:00:31,940 the global liquidity index, which is the most widely cited liquidity measure in macro. 8 00:00:32,980 --> 00:00:39,480 And I think it's very fitting that we're recording today because it seems like the 9 00:00:39,480 --> 00:00:46,700 liquidity cycle may be crescendoing, topping out. And you wrote a newsletter and published it 10 00:00:46,700 --> 00:00:55,120 yesterday talking about what's next for Bitcoin, 30K or 90K. And so I think jumping into just a 11 00:00:55,120 --> 00:01:00,700 state of global liquidity in general, where we are, where we may be going, and then we can jump 12 00:01:00,700 --> 00:01:07,140 into how it may affect Bitcoin as well. Sure. Okay. Let me kick off. Essentially, 13 00:01:07,220 --> 00:01:11,740 what we're doing is we're tracking money flow through markets. And the idea here is a very 14 00:01:11,740 --> 00:01:16,680 straightforward one that money moves markets. In other words, if there's a lot of cash coming in, 15 00:01:17,040 --> 00:01:22,080 asset prices are likely to go up. And if money is leaving, asset prices are likely to come under 16 00:01:22,080 --> 00:01:27,580 pressure. And what we've seen, and you can probably see it on the graphic that we've put up, 17 00:01:27,860 --> 00:01:34,880 is that liquidity has very recently peaked and is starting to edge down. Now, I'm going to stress 18 00:01:34,880 --> 00:01:40,080 that this is a momentum measure, so it's a rate of change. The absolute level of liquidity is not 19 00:01:40,080 --> 00:01:45,680 falling yet. In actual fact, paradoxically, we're just creeping or inching up to highs, 20 00:01:45,860 --> 00:01:51,760 but the momentum has definitely slowed down. And at the margin, markets price off the margin. So 21 00:01:51,760 --> 00:01:57,200 this inflection could be quite serious. Now, you'll see as well that that cycle 22 00:01:57,200 --> 00:02:04,960 tends to oscillate with around a five to six-year frequency. We've had a pretty decent upswing, 23 00:02:04,960 --> 00:02:10,400 which has lasted over three years. So kind of by rights, we are likely to be going down, 24 00:02:10,760 --> 00:02:15,340 but maybe a similar kind of period. And that's clearly something to be concerned about, 25 00:02:15,560 --> 00:02:19,760 if that actually transpires. But we've had a decent bull market in many cases. 26 00:02:19,760 --> 00:02:28,080 You know, what we've been looking at or what one's been seeing over the last three years has been absolutely, you know, a blueprint for a normal market. 27 00:02:28,600 --> 00:02:32,580 Nothing is unusual. The only unusual thing has already been the tempo of the economy. 28 00:02:32,740 --> 00:02:35,860 But otherwise, asset performance has been absolutely on the nail. 29 00:02:38,340 --> 00:02:43,000 And so we just hit an all time high of global liquidity, correct? 188.8 trillion? 30 00:02:43,000 --> 00:02:52,020 Yeah. But the growth rate has been, I mean, it's been a tough, you know, this is the, you know, hauling yourself up to the peak is often the most difficult bit. 31 00:02:52,120 --> 00:02:56,860 I mean, you're obviously challenged with the altitude and everything else, lack of oxygen. 32 00:02:56,980 --> 00:02:58,060 We're beginning to roll over. 33 00:02:58,200 --> 00:03:04,700 I mean, that's the signal that you see here is just showing that the growth rate has already peaked and we're beginning to come down. 34 00:03:04,980 --> 00:03:08,240 And as I say, it's that marginal change, which is really important. 35 00:03:08,240 --> 00:03:15,200 And so we have these sort of countervailing forces in the liquidity market right now. 36 00:03:15,300 --> 00:03:20,800 Obviously, you've written it's been boosted by strong PBOC injections, firmer collateral, 37 00:03:21,160 --> 00:03:30,400 newest dollar weakness, but Bank of Japan, QT, and lack of liquidity, and ECB, Bank of 38 00:03:30,400 --> 00:03:32,880 England is probably driving us further down, correct? 39 00:03:33,660 --> 00:03:34,260 Yeah, absolutely. 40 00:03:34,260 --> 00:03:45,300 I mean, I think the thing to start thinking about here is why are you getting this inflection when you've got what seems to be actually some decent news? 41 00:03:45,740 --> 00:03:50,460 I mean, one is, as you rightly say, that Chinese are actually pumping money in to their markets. 42 00:03:51,180 --> 00:03:54,460 I mean, that's actually a normal thing ahead of the Lunar New Year. 43 00:03:54,820 --> 00:03:57,260 They normally make markets very liquid and they've done it again. 44 00:03:57,680 --> 00:04:03,440 But actually kind of beyond that, they really need to pump a lot more cash to get the Chinese economy moving again. 45 00:04:03,440 --> 00:04:32,020 And China is really in the doldrums in terms of growth. It's been adversely affected by huge debt load. And what's more, tariffs, or what were tariffs, probably still are tariffs in China's case, are impeding economic growth. So you've got a backdrop, which is actually not great for the Chinese economy, and they desperately need growth. Their model of society doesn't work if it's stagnating. And therefore, that explains why they're actually going for it and actually putting a lot of cash to work. 46 00:04:32,020 --> 00:04:44,160 Now, I think if you then say, what has the Fed been doing? I mean, hands up, the Fed has actually done a pretty decent job in the last three months because it was facing serious problems in the US repo markets. 47 00:04:44,980 --> 00:04:50,080 Repo rates, in other words, short-term interest rates were spiking above where the Fed wanted. 48 00:04:50,780 --> 00:04:52,240 There was a shortage of liquidity. 49 00:04:52,240 --> 00:04:58,240 The Fed came in with a new QE measure called reserve management purchases. 50 00:04:58,240 --> 00:05:04,600 and that has actually quelled the fire. It's put the fire out in the repo markets and actually repo 51 00:05:04,600 --> 00:05:09,880 spreads are kind of back down to normal levels. So that's helped. The problem is if you kind of 52 00:05:09,880 --> 00:05:15,780 look forward, it's not so much that the Fed could be tightening here. It's much more the fact that 53 00:05:15,780 --> 00:05:20,860 strong real economy is actually going to be absorbing cash. And the point that we make is 54 00:05:20,860 --> 00:05:26,680 that all money that's anywhere must be somewhere. And if it's going into the real economy, it's not 55 00:05:26,680 --> 00:05:30,900 there to drive asset prices, Bitcoin or whatever upwards. And that's really the problem. 56 00:05:32,400 --> 00:05:38,680 Yeah, you said it. I mean, you just reiterated, but that was the one line I highlighted 57 00:05:38,680 --> 00:05:44,480 from your newsletter from yesterday is note that all money that is anywhere must be somewhere. And 58 00:05:44,480 --> 00:05:49,540 if it's driving Main Street, it's not available for Wall Street. So in terms of driving Main 59 00:05:49,540 --> 00:05:56,300 Street, what type of flows or policies are overfocus on Main Street compared to Wall Street 60 00:05:56,300 --> 00:06:00,800 right now? Well, I think, I mean, you've got a number of features. I mean, one is the one big, 61 00:06:00,880 --> 00:06:05,060 beautiful bill. I mean, that's clearly coming out. You've got AI capex spend, which is clearly going 62 00:06:05,060 --> 00:06:12,120 to be significant. You know, you've got the effects of treasury policy, which has really 63 00:06:12,120 --> 00:06:17,860 been to issue a lot of debt at the very short end of the market. And that is being funded by the 64 00:06:17,860 --> 00:06:23,520 banking system because the banks like buying very short-dated US treasury bills and short-dated 65 00:06:23,520 --> 00:06:29,780 notes. And that's basically monetization. So in a way that money is being printed, not by the Fed 66 00:06:29,780 --> 00:06:35,280 here, but by the banking system to fuel economic growth, basically funding government spending. 67 00:06:35,820 --> 00:06:41,120 So the government sector and private sector CapEx are the main engines of economic activity. 68 00:06:41,680 --> 00:06:47,060 But if you kind of look through the last print, the Q4, which was clearly distorted by 69 00:06:47,060 --> 00:06:51,820 shutdowns and whatever else, the underlying tenor of the economy looks pretty decent. 70 00:06:51,820 --> 00:06:58,540 And one would suspect that you're going to get a figure over the 12 months to end March, 71 00:06:58,860 --> 00:07:03,600 something of the order of about 4%, 4.5% maybe for your U.S. real GDP growth, which is actually 72 00:07:03,600 --> 00:07:09,640 a pretty decent clip. So that needs cash to be financed. Industry needs working capital. It needs 73 00:07:09,640 --> 00:07:15,220 money for the CapEx. On top, the Treasury is demanding more funding. And so money is being 74 00:07:15,220 --> 00:07:20,440 progressively drained out of financial markets. And if central banks are not at the margin issuing 75 00:07:20,440 --> 00:07:24,900 more liquidity, pumping it in, which I mean, the Fed is kind of flatlining at best now, 76 00:07:25,300 --> 00:07:30,200 you've got a problem in terms of the amount of liquidity available for financial assets. 77 00:07:30,560 --> 00:07:34,220 And that's really the point I'm making. I mean, it's, you know, the old paradox is that, 78 00:07:34,720 --> 00:07:38,120 I think, as you know, the veteran investor, Sandy Druckerman always says, 79 00:07:38,120 --> 00:07:43,280 the best time to invest in markets is when you've got a sluggish economy that central banks 80 00:07:43,280 --> 00:07:48,840 basically want to goose upwards. And that's really what we've had for much of the last three years. 81 00:07:48,840 --> 00:07:56,960 Now the economy is starting to gain traction. It's just desserts in terms of pulling liquidity out of financial markets. 82 00:07:58,160 --> 00:08:06,460 Yeah, the idea that the commercial banking system is really going to be the one driving flows outside of the Treasury. 83 00:08:07,460 --> 00:08:12,400 And the Fed is something I've actually been discussing with a colleague of mine on a show that we do every Monday morning. 84 00:08:12,400 --> 00:08:18,320 record after this but i think if you look at the nomination of kevin warsh many people 85 00:08:18,320 --> 00:08:25,820 took the headline of that and said oh we got a hawkish bed chair coming in here which uh was a 86 00:08:25,820 --> 00:08:31,140 surprise to many people he wants to lower interest rates but continue with qt doesn't want to expand 87 00:08:31,140 --> 00:08:37,980 the balance sheet too much but if you look at uh policy particular like particularly in the 88 00:08:37,980 --> 00:08:45,160 commercial banking industry with the SLR ratios and the ability for these banks to take on more 89 00:08:45,160 --> 00:08:52,740 treasuries to then lever up and lend into the economy. It looks like the implicit sort of policy 90 00:08:52,740 --> 00:08:56,920 is, hey, we don't want the Fed driving this. We want the banks really injecting this liquidity 91 00:08:56,920 --> 00:09:02,620 via credit creation. Yeah, I think that's absolutely right. I think the issue is that 92 00:09:02,620 --> 00:09:07,580 if the banking sector does it, it's more likely to go into the real economy. If the Fed does it, 93 00:09:07,580 --> 00:09:11,760 It's much more likely to go into financial markets, you know, evidence the last three years. 94 00:09:11,900 --> 00:09:14,500 So I think that, you know, there's logic in what they're doing. 95 00:09:14,500 --> 00:09:25,980 I think the problem with that is that we saw what happened at the tail end of 2025 when there was a withdrawal of Fed liquidity because of it. 96 00:09:26,060 --> 00:09:31,380 I mean, this is a wonkish comment, but because of this jump in the Treasury General account. 97 00:09:31,380 --> 00:09:42,600 And what that meant was that liquidity from the Fed kind of contracted by about 250 billion, but actually created havoc in the repo markets. 98 00:09:42,800 --> 00:09:47,980 So repo spreads blew out in a way that was uncomfortable for the Fed. 99 00:09:48,020 --> 00:09:54,920 And the Fed had to reinvent QE in the form of these RMP purchases, reserve management purchases. 100 00:09:55,220 --> 00:09:59,460 And that was really a way of solving the problem. 101 00:09:59,460 --> 00:10:05,160 Now, if Kevin Walsh is talking about not billions here, but trillions, dream on. 102 00:10:05,260 --> 00:10:07,960 There's no way that the system could accomplish that. 103 00:10:08,340 --> 00:10:11,320 Now, I accept the point that they want to do bank deregulation. 104 00:10:11,840 --> 00:10:16,640 But the real question at the end of the day is that are banks' balance sheets kind of 105 00:10:16,640 --> 00:10:21,840 big enough on their own without Fed support to basically backstop the markets? 106 00:10:22,220 --> 00:10:28,520 And if you get a situation where there's trouble in the Treasury market, we face a 107 00:10:28,520 --> 00:10:34,580 situation where dealer balance sheets have actually shrunk or they've halved since the GFC. 108 00:10:35,180 --> 00:10:39,440 Now, that's at a time when I think I'm correct in saying that the stock of federal debt since that 109 00:10:39,440 --> 00:10:44,640 time is up four or five times. So what you've got is a situation where the capacity to handle 110 00:10:44,640 --> 00:10:50,480 the private sector to be market maker and handle volatility in the treasury market is long, long 111 00:10:50,480 --> 00:10:55,800 gone. They need the Federal Reserve and they need a big Federal Reserve balance sheet. The problem 112 00:10:55,800 --> 00:11:01,860 that is being engineered here, or we're walking into a trap, I suppose, is that if you get a 113 00:11:01,860 --> 00:11:07,160 situation where the Fed has to intervene quickly and in size, they're going to have to keep coming 114 00:11:07,160 --> 00:11:12,020 back into the markets. And they put their credibility on the line each time, which I 115 00:11:12,020 --> 00:11:17,240 don't think is a particularly great recipe for robust policy. So I think the ability to shrink 116 00:11:17,240 --> 00:11:22,360 the balance sheet meaningfully is just not there, however high on the wish list it is. 117 00:11:22,360 --> 00:11:25,740 I saw some headlines 118 00:11:25,740 --> 00:11:28,140 I haven't really taken the time 119 00:11:28,140 --> 00:11:29,880 to dive into it but it seems like 120 00:11:29,880 --> 00:11:32,020 the repo market is beginning 121 00:11:32,020 --> 00:11:32,700 to 122 00:11:32,700 --> 00:11:36,000 lighten up again, people tapping it 123 00:11:36,000 --> 00:11:37,640 overnight I think there was 124 00:11:37,640 --> 00:11:39,780 something like 18 billion tapped 125 00:11:39,780 --> 00:11:41,880 in repo markets last week or 126 00:11:41,880 --> 00:11:43,080 one day last week 127 00:11:43,080 --> 00:11:45,160 it seems like 128 00:11:45,160 --> 00:11:47,860 there could be some liquidity 129 00:11:47,860 --> 00:11:49,940 it seems like liquidity crunch 130 00:11:49,940 --> 00:11:52,040 is on and that's actually a good 131 00:11:52,360 --> 00:11:56,600 segue into the bitcoin part of the conversation because it's one thing um i think it's a bit 132 00:11:56,600 --> 00:12:03,880 counterintuitive to many people out there uh and especially if you're looking at the price of bitcoin 133 00:12:03,880 --> 00:12:10,600 now almost 50 off its all-time high that it hit in late october early november last year 134 00:12:10,600 --> 00:12:17,720 if they're looking at gold silver equities markets and bitcoin seems to have detached and people are 135 00:12:17,720 --> 00:12:23,080 really picking on bitcoin right now saying look it's not not what you marketed it but marketed it 136 00:12:23,080 --> 00:12:29,080 to be it's not a store value asset but um that would push back that the properties of bitcoin 137 00:12:29,080 --> 00:12:34,820 the protocol and how it works make it such that if you understand how that works it is a good store 138 00:12:34,820 --> 00:12:40,660 value it has predictable um sort of consensus policies and you know there's only ever going 139 00:12:40,660 --> 00:12:47,140 to be 21 million but uh the counterintuitive use case of bitcoin is this liquidity profile that it 140 00:12:47,140 --> 00:12:54,120 has trades 24-7, 365 liquid markets, even though the market cap has come down significantly 141 00:12:54,120 --> 00:12:55,760 in recent months. 142 00:12:55,760 --> 00:13:03,440 But the ability to basically sell Bitcoin on a moment's notice, get cash right away, 143 00:13:03,560 --> 00:13:10,800 and then bolster margin in another part of your portfolio is actually a fundamental value 144 00:13:10,800 --> 00:13:14,160 prop that I don't think people really recognize yet. 145 00:13:14,160 --> 00:13:23,480 And the whole point of bringing this up is that I believe that Bitcoin acts as this liquidity alarm bell, maybe a leading indicator for liquidity tremors on the horizon. 146 00:13:23,800 --> 00:13:33,760 And I think what we've seen since late November, and especially cross-referencing it with the work that you do in the GLI, it seems like that may be the case. 147 00:13:35,120 --> 00:13:36,020 Yeah, I think absolutely. 148 00:13:36,020 --> 00:13:46,300 I mean, as a segue into what's happening in Bitcoin, I mean, you may want to look at this slide that I've just put up, which is what we think of as the asset allocation cycle. 149 00:13:46,500 --> 00:13:50,160 And, you know, the whole point right now is the watchword is rotation. 150 00:13:50,780 --> 00:13:52,820 You need to be rotating through the cycle. 151 00:13:52,960 --> 00:13:55,360 I mean, this is a dynamic asset allocation. 152 00:13:55,540 --> 00:13:56,460 It never stands still. 153 00:13:56,460 --> 00:14:08,180 And if you look at how the cycle evolves, eyeing back the previous cyclical diagram of liquidity, this is aligning that with asset allocation choice. 154 00:14:08,820 --> 00:14:16,040 And what it says is that if you're around the peak of the cycle, which we are now, commodity markets are really the thing that tends to run. 155 00:14:16,040 --> 00:14:19,040 And lo and behold, you've got very strong commodity markets. 156 00:14:19,040 --> 00:14:34,684 Gold evidence gold for example but equally copper a lot of other metals are moving up strongly as well Equities kind of precede that So in the upswing of the cycle you tend to find equities do probably by 157 00:14:34,684 --> 00:14:40,684 far and away the best asset class in a risk return perspective. And then as that cycle rolls over 158 00:14:40,684 --> 00:14:47,564 and starts to go down, cash tends to be the best asset in absolute terms, reaching the trough, 159 00:14:48,224 --> 00:14:51,744 Bonds then come into their own, long-duration government bonds. 160 00:14:51,824 --> 00:14:57,444 And then the cycle starts again with a risk-on move and back to equity. 161 00:14:57,584 --> 00:14:59,704 So you see that sort of movement through. 162 00:14:59,704 --> 00:15:04,104 And what we've seen through the cycle is absolutely that particular phenomenon. 163 00:15:04,724 --> 00:15:10,124 Now, the traffic-like diagram I'm going to show here, it was really the segue into what's 164 00:15:10,124 --> 00:15:10,704 happening in Bitcoin. 165 00:15:11,184 --> 00:15:17,084 And what this shows is, again, that asset allocation process with assets on the left 166 00:15:17,084 --> 00:15:22,344 and industry groups on the right. And what is divided into are four different regimes, 167 00:15:22,844 --> 00:15:27,704 rebound, calm, speculation, turbulence, which is generic descriptions of the phase of the 168 00:15:27,704 --> 00:15:33,224 liquidity cycle in each case. Traffic lights are traffic lights. So green is go, red is stop, 169 00:15:34,064 --> 00:15:39,504 amber is proceed with care. And you can see in the rebound and calm, the risk on phases, 170 00:15:40,064 --> 00:15:45,784 that you really want equities, full on equities. You want some credits early in the cycle rebound. 171 00:15:45,784 --> 00:15:51,084 You want commodities as the cycle matures. By the end of the cycle, you want to end up in 172 00:15:51,084 --> 00:15:57,424 long-duration government bonds. On industry groups, the upswing, the cyclical stage, 173 00:15:57,844 --> 00:16:04,084 is dominated by technology. And that's clearly the stage where Bitcoin as an asset does best 174 00:16:04,084 --> 00:16:10,204 in the upswing of the cycle. Financials do well about mid-cycle. And then at the top of the cycle, 175 00:16:10,284 --> 00:16:14,944 you want energy commodity stocks. And that's really what's running right now with a move 176 00:16:14,944 --> 00:16:20,144 beginning into defensive things like consumer staples are beginning to move all utilities. 177 00:16:20,844 --> 00:16:27,284 So that's how the asset allocation process works. Now, does that line up with Bitcoin? It does. And 178 00:16:27,284 --> 00:16:32,824 I'm going to shift on to a slide a little bit later on if I can get up there quickly, which is 179 00:16:32,824 --> 00:16:38,084 basically looking at the correlation between Bitcoin and liquidity. And the reason that that's 180 00:16:38,084 --> 00:16:44,444 an important point to watch, is that if we believe that liquidity is trending lower now, 181 00:16:44,764 --> 00:16:49,904 that's going to come at the cost of Bitcoin performance. Notwithstanding the long-term 182 00:16:49,904 --> 00:16:56,264 merits of Bitcoin, as you rightly point out, and I'm a strong believer in, I mean, I think Bitcoin 183 00:16:56,264 --> 00:17:01,044 has to form a part of everyone's portfolio for a lot of the reasons you cite. But this is 184 00:17:01,044 --> 00:17:07,664 evidencing the fact that the orange line, which is a basket of actually Bitcoin, Ethereum, and 185 00:17:07,664 --> 00:17:15,784 Solana with a 60-30-10 weighting. What that's showing is strong correlation between movements 186 00:17:15,784 --> 00:17:21,444 in liquidity. We look at six-week changes here. But we've advanced the liquidity data, 187 00:17:21,444 --> 00:17:29,464 the black line, forward by three months to show that basically Bitcoin et al. are very liquidity 188 00:17:29,464 --> 00:17:34,864 sensitive. They're the most liquidity sensitive assets on the planet. And they're a barometer or 189 00:17:34,864 --> 00:17:39,804 canary in the coal mine for tightening liquidity conditions. And that's basically the story right 190 00:17:39,804 --> 00:17:44,444 now. If you think liquidity is weakening significantly, and I think there's a real 191 00:17:44,444 --> 00:17:50,284 risk that that cycle is going to head downwards further, then you've got a risk that Bitcoin is 192 00:17:50,284 --> 00:17:56,764 going to fall more. And that's an unfortunate feature. It'd still be a long-term buyer, 193 00:17:57,224 --> 00:18:01,204 even at these levels. But I still think that you can pick it up cheaper. 194 00:18:01,204 --> 00:18:10,184 so i guess let's dive into the newsletter that you published yesterday and just giving people 195 00:18:10,184 --> 00:18:18,224 sort of a range of possibilities and the different cases for the liquidity crunch and the potential 196 00:18:18,224 --> 00:18:26,264 big rebound between 30k and 90k i guess just walk us through the sort of dynamics at play 197 00:18:26,264 --> 00:18:32,624 what would lead the price to move down even further? And in the outside chance that there 198 00:18:32,624 --> 00:18:37,144 is a correction to the upside, what would be the driver of an upside correction? 199 00:18:38,324 --> 00:18:43,664 Well, I think the first thing is what would cause a further drop. And a further drop would be 200 00:18:43,664 --> 00:18:50,384 basically the result of tightening liquidity conditions. And that could come from not 201 00:18:50,384 --> 00:18:56,104 necessarily from a fair tightening, although clearly that would be a factor, but more likely 202 00:18:56,104 --> 00:19:02,424 in this case, from a stronger real economy and by the increasing demands on the financial sector 203 00:19:02,424 --> 00:19:07,504 for funding from other areas. Now, we know you've got the AI spend, but you've got a big federal 204 00:19:07,504 --> 00:19:13,944 deficit to fund. And maybe after the Supreme Court's decision, there's an even bigger federal 205 00:19:13,944 --> 00:19:19,204 deficit to fund. We will see how that plays out. But generally, funding demands are going up. 206 00:19:19,664 --> 00:19:25,404 And that will come at the cost of risk assets. Investors will have to take money out of one area 207 00:19:25,404 --> 00:19:34,304 portfolio to basically fund another. So that would be the cause of problems. The 90,000 is 208 00:19:34,304 --> 00:19:40,724 a longer term aspiration, I think, that really rests on the idea that central banks ultimately 209 00:19:40,724 --> 00:19:47,544 will have to start printing money aggressively, both in one corner to fund government deficits, 210 00:19:47,644 --> 00:19:52,044 because I think that that's in many ways the only game left. You've got to monetize these deficits. 211 00:19:52,604 --> 00:20:04,664 There's no way that it could be afforded through typical means of debt issuance because of bond vigilantes around, or more particularly because of taxation, because we're on the wrong side of the Laffer curve. 212 00:20:04,664 --> 00:20:07,584 I mean, nobody really can sustain higher tax rates. 213 00:20:07,944 --> 00:20:10,224 So it's got to be a monetization in some form. 214 00:20:10,744 --> 00:20:14,444 And that, as you alluded to, is probably already happening now anyway. 215 00:20:14,444 --> 00:20:20,324 I mean, subtly through the mechanism of issuing lots of short-term debt, that's a backdoor way 216 00:20:20,324 --> 00:20:26,504 into banks basically monetizing. So I would say those are the two extremes. Now, what is more 217 00:20:26,504 --> 00:20:32,164 likely near term? I think what's more likely near term is further downside. And the reason for that 218 00:20:32,164 --> 00:20:39,844 is that you can already see signs in the bond markets that things are not going very well for 219 00:20:39,844 --> 00:20:46,244 maybe risk assets. I'm going to show you this chart, which kind of denies the claim that many 220 00:20:46,244 --> 00:20:51,964 people have been making over the last few months, that there is a monetary debasement going on, 221 00:20:52,084 --> 00:20:59,004 which is basically fueling the price of gold. And this is this chart. And if you take that in 222 00:20:59,004 --> 00:21:06,824 association with the previous one on Bitcoin et al, these two charts together basically say, 223 00:21:06,824 --> 00:21:11,384 debasement, what debasement? Because actually what they're both showing is liquidity conditions 224 00:21:11,384 --> 00:21:18,484 are actually starting to tighten. And I say that because this chart, although it's a bit of a sort 225 00:21:18,484 --> 00:21:25,084 of super nerd chart, but it's basically looking at bond term premia, which makes most people's 226 00:21:25,084 --> 00:21:31,244 glaze over, sometimes even mine. But what this is looking at is the risk premium that investors 227 00:21:31,244 --> 00:21:39,844 are forced to pay on holding government bonds. And this is showing how much premium they need 228 00:21:39,844 --> 00:21:44,724 or discount they're prepared to give for holding interest rate risk over the term of the bond. 229 00:21:45,224 --> 00:21:50,464 Now, just think of it as a straightforward risk premium for a bond. But that particular term 230 00:21:50,464 --> 00:21:56,344 premium, if there was a big debasement and bucket loads of liquidity in the system, that would be 231 00:21:56,344 --> 00:22:02,724 going up, not flatlining as it's doing here or even coming down. And what you can see is despite 232 00:22:02,724 --> 00:22:10,304 all the scorn thrown on the US dollar and the US Treasury market as sort of now fading safe assets, 233 00:22:10,404 --> 00:22:16,924 as many people like to say, look at that line, the bright red line. You can see that the Treasury 234 00:22:16,924 --> 00:22:23,904 term premium has flatlined almost for the last 15 months. I mean, it's been no change. That's 235 00:22:23,904 --> 00:22:29,784 been a robust performance. Now, what I would argue is if the bond market is so robust, 236 00:22:30,324 --> 00:22:34,304 it's certainly not detecting any monetary inflation right now. So the whole idea of the 237 00:22:34,304 --> 00:22:39,084 gold is being propelled by that reason is wrong. And I think that's an interesting point to ponder 238 00:22:39,084 --> 00:22:44,464 in the light of what's happening to Bitcoin in particular. So why is it that Bitcoin is going 239 00:22:44,464 --> 00:22:50,664 down? My view is because global liquidity is challenged. And why is the gold market going up? 240 00:22:50,664 --> 00:22:55,244 I think that's a very specific reason, which is all to do with China, which we can go on to later. 241 00:22:57,104 --> 00:22:58,484 Well, you can go into it later. 242 00:22:59,704 --> 00:23:00,804 Now you have me curious. 243 00:23:01,184 --> 00:23:02,544 Why is China driving that? 244 00:23:02,624 --> 00:23:03,924 I mean, there's the theories. 245 00:23:04,324 --> 00:23:17,944 I mean, the theory that makes the most sense to me is that we have this sort of multipolar geopolitical landscape accelerating at an ever quickening pace. 246 00:23:17,944 --> 00:23:25,204 and I think I mean post 2022 at the seizure of the Russian treasury assets it would make sense 247 00:23:25,204 --> 00:23:30,204 to me that Russia China and others got together and said hey we can't we can't depend on this 248 00:23:30,204 --> 00:23:37,124 dollar reserve system we need to diversify away uh to an alternative monetary standard and 249 00:23:37,124 --> 00:23:42,244 falling back to gold makes a lot of sense and if you look at all the gold that's been called on 250 00:23:42,244 --> 00:23:48,204 warrant at the Shanghai Exchange by the PBOC. It looks like they want to put that gold that 251 00:23:48,204 --> 00:23:53,444 they've accumulated to work in some sort of settlement network. Yeah, I agree with that 252 00:23:53,444 --> 00:23:58,964 money 100%. I think that's definitely going on. And I think that's a further argument really behind 253 00:23:58,964 --> 00:24:03,644 why gold is going up. But that's explaining why you're getting official purchases of gold, 254 00:24:03,984 --> 00:24:08,344 which I can come on to in terms of how the future monetary system look or what it looks like. 255 00:24:08,344 --> 00:24:18,744 But this particular chart that you see here is looking at People's Bank of China, that's PBOC, net liquidity injections into their monetary system. 256 00:24:19,084 --> 00:24:24,304 Now, this is shown daily, and I put a trend line through that, a 50-day rolling average through that. 257 00:24:24,644 --> 00:24:30,184 But you can see the upward trend, and this is the year-on-year change in their liquidity injections. 258 00:24:30,184 --> 00:24:33,504 So they're basically accelerating their liquidity inflows. 259 00:24:33,504 --> 00:24:35,644 Now, why are they doing that? 260 00:24:35,644 --> 00:24:41,724 that's because of debt, because there's huge debt in the Chinese system they need to get out of. 261 00:24:41,724 --> 00:24:50,084 And basically, that liquidity increase is trying to devalue internally the value of debt. So they're 262 00:24:50,084 --> 00:24:55,984 actually, if you like, destroying their paper money. And that is encouraging purchases of gold, 263 00:24:56,424 --> 00:25:01,484 in particular by the private sector, notwithstanding what the official level is doing as well. 264 00:25:01,484 --> 00:25:27,164 So if you look at this chart, this is the yuan gold price. In other words, the price of gold in yuan. And China is driving that process. It's the Shanghai Exchange, which is the marginal price of gold, no longer COMEX or London. And I think that they've been targeting gold at different levels for different periods. And, you know, we're now getting gold over 35,000 yuan or renminbi an ounce. 265 00:25:27,164 --> 00:25:35,164 And I think it's going higher because I think they're going to have to put the same amount of liquidity back in their system this year that they put in last year, another trillion dollars. 266 00:25:35,504 --> 00:25:44,584 Now, if you look at this chart, this is the one that many people cite as to why the gold market is experiencing this great debasement. 267 00:25:45,084 --> 00:25:53,024 And what it shows is the decoupling between the gold price, which is in orange here, and real interest rates as shown inverted. 268 00:25:53,164 --> 00:25:56,204 So this is real dollar interest rates shown upside down. 269 00:25:56,204 --> 00:26:03,424 And there's a break around 2023 where the gold market shoots up for interest rates kind of flatline. 270 00:26:03,604 --> 00:26:08,744 So people say, look, something else is going on here. This is central banks basically debasing money. 271 00:26:09,144 --> 00:26:16,604 Well, actually, it's China. And this is the gold price again against Chinese PBOC liquidity injections. 272 00:26:16,884 --> 00:26:23,104 That's a pretty decent correlation. And that's showing that what you've got here is a driver that's coming primarily from China. 273 00:26:23,104 --> 00:26:51,564 Now, that's what's behind private sector gold purchases. And it's going to get worse because if I show you this chart, this is what China really has to do. And what this is explaining is the plight that China is facing, which is a plight of having too much debt that needs refinancing. And they don't have the liquidity in the system at the moment to refinance that. So they've got to injure more liquidity. 274 00:26:51,564 --> 00:26:57,764 And the two lines on the chart are measuring debt liquidity ratios. Now, the reason for looking at 275 00:26:57,764 --> 00:27:04,284 this is that although many other people cite alternative measures like debt GDP, our view is 276 00:27:04,284 --> 00:27:10,764 that debt liquidity is a crucial statistic because debt has to be refinanced. And financial markets 277 00:27:10,764 --> 00:27:16,764 are dominated today by refinancing transactions. It's not about raising new capital. It's all about 278 00:27:16,764 --> 00:27:20,984 rolling over existing debts. And if you've got debt that's issued in the world economy, 279 00:27:21,444 --> 00:27:27,804 which is, what, $350 trillion, and circa the amount of debt outstanding, and you've got an 280 00:27:27,804 --> 00:27:33,424 average maturity of five years, that means you've got to refinance about $70 trillion a year on 281 00:27:33,424 --> 00:27:40,064 average. And that's a huge ask. So basically, in China's case, the debt liquidity ratio, 282 00:27:40,484 --> 00:27:45,244 the orange line is high, and that has to come down, and they're printing money. Japan did the 283 00:27:45,244 --> 00:27:50,784 same thing. Japan is the red line. Look at what happened after the Japanese bubble burst in 1990. 284 00:27:51,304 --> 00:27:58,664 The debt liquidity ratio went up significantly. And Abenomics was forced to basically address 285 00:27:58,664 --> 00:28:04,544 that problem. And it did that through reform. And it did that through the Bank of Japan buying 286 00:28:04,544 --> 00:28:09,524 huge amounts of Japanese government bonds, trashing the currency. The yen has collapsed. 287 00:28:10,024 --> 00:28:14,384 But Japan is digging its way out of its problems. And Japan now actually looks a pretty decent 288 00:28:14,384 --> 00:28:19,444 investment. China is doing the same thing 10, 15 years later. It's printing a lot of liquidity, 289 00:28:19,624 --> 00:28:24,544 and they're going to have to do as much this year as they did last year or more to get out of the 290 00:28:24,544 --> 00:28:30,584 problems. And that's where you've got this monetization going on. That's the microchism 291 00:28:30,584 --> 00:28:37,484 of why gold is going up, why Bitcoin isn't. Now, that's your, if you like, thesis about 292 00:28:37,484 --> 00:28:43,244 why you could get a lower Bitcoin price in the near term, but the gold market could paradoxically 293 00:28:43,244 --> 00:28:45,204 hold up against this backdrop. 294 00:28:45,204 --> 00:28:58,148 But the other question you ask is what then drives Bitcoin in the future in the long term towards 90 or even beyond And I be optimistic to say it going to be a long way beyond that Now the reason for that 295 00:28:58,568 --> 00:29:03,028 if you want me to go on, is to basically look at what's happening in terms of debt 296 00:29:03,028 --> 00:29:07,788 in the world economy, which I can come to in this chart. Should I proceed on this? 297 00:29:08,928 --> 00:29:13,748 Yes, sir. So if you think about what the financial system is, 298 00:29:14,228 --> 00:29:20,028 This is looking at the debt liquidity cycle. And this is saying, look, financial markets are all 299 00:29:20,028 --> 00:29:25,848 about refinancing existing debts. We've got way too much debt in the world economy. Everybody will 300 00:29:25,848 --> 00:29:30,488 acknowledge that. But the thing that is shied away from is the fact that debt needs to be 301 00:29:30,488 --> 00:29:35,388 refinanced or rolled over because it has term. In other words, it's issued for five years or three 302 00:29:35,388 --> 00:29:40,628 years or seven years or whatever. But it will come back and needs refinancing. So you need liquidity 303 00:29:40,628 --> 00:29:45,528 for that. So basically, what you've got here is this nexus at the middle of the financial system 304 00:29:45,528 --> 00:29:52,728 between debt and liquidity. And the paradox is that debt needs liquidity to be refinanced to 305 00:29:52,728 --> 00:29:58,068 something like 70 to 80% of all transactions in financial markets now, primary transactions, 306 00:29:58,068 --> 00:30:04,928 are about debt refinancing. But the paradox is that liquidity also needs debt as collateral, 307 00:30:04,928 --> 00:30:12,348 because something like 77%, according to the World Bank, of all global lending is now collateral 308 00:30:12,348 --> 00:30:19,488 backed. So you've got this paradox. And what it really means is that new credit relies on old debt 309 00:30:19,488 --> 00:30:25,108 as collateral. So you get this sort of vicious or virtuous circle. It's virtuous until it's vicious. 310 00:30:25,668 --> 00:30:31,728 And it can go wrong from either way. Either you get credit spreads blowing out and term premia 311 00:30:31,728 --> 00:30:38,468 changing, as the right-hand side says, or you get problems in the move index, bond volatility, 312 00:30:38,948 --> 00:30:44,848 or SOFA spreads as of last year begin to blow out. Now, the ratio between debt and liquidity 313 00:30:44,848 --> 00:30:50,988 is an equilibrium relationship. And that's what it's looked like over time. So this is for the 314 00:30:50,988 --> 00:30:58,588 advanced economies. We just saw the chart for Japan and for China. And this is what the world 315 00:30:58,588 --> 00:31:04,268 has looked like. Now, this is dominated by the US and by Europe, obviously. But basically, 316 00:31:04,268 --> 00:31:10,508 what you can see in this chart is an equilibrium level of about 200%. And then either side of that, 317 00:31:10,608 --> 00:31:16,808 you get fluctuations, where you either see financial crises at the top, or you get asset 318 00:31:16,808 --> 00:31:21,568 bubbles at the bottom. When there's too much liquidity, the ratio is low, you get an asset 319 00:31:21,568 --> 00:31:28,088 bubble. When the ratio is too high, you get a financial crisis. Now, you can see where we've 320 00:31:28,088 --> 00:31:34,088 come from, we've come from this period that we've labeled here the everything bubble. And that was a 321 00:31:34,088 --> 00:31:40,268 very curious period, unusual period for sure, because it was one where the GFC and the COVID 322 00:31:40,268 --> 00:31:47,868 emergency elicited huge liquidity injections by central banks, all the QE exercises, et cetera, 323 00:31:47,988 --> 00:31:54,568 worldwide were engaged. You saw interest rates being slashed to zero or even below that, which 324 00:31:54,568 --> 00:32:00,868 encouraged more debt, ironically, and it also encouraged the terming out of debt. And now what 325 00:32:00,868 --> 00:32:06,188 you've got is that terming out of debt is coming back into markets, that liquidity is beginning to 326 00:32:06,188 --> 00:32:12,588 be drained into the real economy because of a stronger pickup in real activity. And so that 327 00:32:12,588 --> 00:32:19,548 orange line is starting to go up quite significantly. And as it starts to cross that threshold of 328 00:32:19,548 --> 00:32:26,508 sort of harmony, you then get into the risk of increasing turmoil as you get into that gray area 329 00:32:26,508 --> 00:32:33,128 that we've projected through to 2030. Now, just to spell out what that means in debt refinancing 330 00:32:33,128 --> 00:32:38,788 terms, this is the debt maturity wall for the advanced economies, according to our estimates. 331 00:32:39,408 --> 00:32:45,308 So this is what you see. And this is basically the amount of debt that's coming back into the 332 00:32:45,308 --> 00:32:51,408 system to be refinanced every year. Now, if that doesn't look dramatic, then that which looks at 333 00:32:51,408 --> 00:32:58,568 the changes every year is more dramatic. And you can see the change dramatically from the early 334 00:32:58,568 --> 00:33:04,908 2020s through to the late 2020s when the debt maturity more comes back. And that's the risk 335 00:33:04,908 --> 00:33:09,548 that markets are running. Now, if you get a financial crisis, what is going to happen? 336 00:33:09,548 --> 00:33:15,908 And like every other financial crisis, the only way you resolve it is by throwing more liquidity at the system. 337 00:33:15,908 --> 00:33:25,948 And because of the fragility of our financial system, because of all this debt, central banks have got no choice but to do QE time and time again. 338 00:33:26,188 --> 00:33:29,948 And so you want an asset that is likely to hedge monetary inflation. 339 00:33:30,128 --> 00:33:32,568 That's gold and Bitcoin and other crypto. 340 00:33:32,568 --> 00:33:39,628 Yeah, these maturity walls are a bit daunting to look at. 341 00:33:39,628 --> 00:33:53,888 And that's, I mean, having been doing this for decades now, has there ever been a similar situation where you have a debt maturity wall looking like this with interest rates? 342 00:33:54,188 --> 00:34:05,068 I mean, they're back at historical norms, but relative to where they were post-GFC and especially post-COVID stimulus. 343 00:34:05,428 --> 00:34:06,348 That's one thing I worry about. 344 00:34:06,348 --> 00:34:14,208 It's just the – you look at the 10-year, the 30-year, where they are and you think of the magnitude of debt that needs to be rolled over. 345 00:34:14,928 --> 00:34:20,868 Is this unique in the history of your tracking of these metrics? 346 00:34:21,468 --> 00:34:23,308 Yes, quite similar, Marty. 347 00:34:23,308 --> 00:34:24,868 It is for two reasons. 348 00:34:25,048 --> 00:34:29,268 I mean one is that we haven't seen this explosion in debt before. 349 00:34:29,268 --> 00:34:33,948 I mean, if you look at, take the US, take US federal debt as this one example. 350 00:34:34,548 --> 00:34:42,188 You've had a situation where US federal debt has increased, I think I'm correct in saying 12 fold since year 2000. 351 00:34:42,748 --> 00:34:49,228 I mean, this year, not 12%, 12 times, even since the GFC, I think is up four or five times. 352 00:34:49,988 --> 00:34:52,788 And that's not, you know, the US is not unique here. 353 00:34:53,208 --> 00:34:54,428 Debt everywhere has gone up. 354 00:34:54,428 --> 00:34:59,128 So we haven't seen this amount of debt in the system that needs refinancing before. 355 00:34:59,268 --> 00:35:03,388 is point number one. Point number two is that if you come back to the interest rate question, 356 00:35:03,828 --> 00:35:09,728 during COVID, what happened was that interest rates were slashed to near zero in cases. 357 00:35:10,288 --> 00:35:15,268 Some countries actually went negative. And that was a very unusual situation. 358 00:35:15,808 --> 00:35:21,368 Now, years ago, when I worked at Salomon Brothers, the book that we used as a sort of 359 00:35:21,368 --> 00:35:25,828 Bible of interest rates was a book called The History of Interest Rates by Sidney Homer. 360 00:35:25,828 --> 00:35:31,348 And that book detailed, I think it's 4,000 or 5,000 years of interest rate history. 361 00:35:31,808 --> 00:35:35,168 Nowhere in those pages do you ever get any reference to zero interest rates. 362 00:35:35,348 --> 00:35:36,228 It's never happened before. 363 00:35:36,688 --> 00:35:42,168 So this turning out of debt and encouragement of debt by policymakers at the time of COVID 364 00:35:42,168 --> 00:35:43,988 was really unusual. 365 00:35:44,248 --> 00:35:47,608 And it's caused that skew of debt refinancing. 366 00:35:48,208 --> 00:35:52,888 So you've got a cyclical pickup on top of what is anyway a fast rising trend. 367 00:35:52,968 --> 00:35:55,668 So short answer is no, it's never happened before. 368 00:35:55,828 --> 00:35:56,828 Yeah. 369 00:35:56,828 --> 00:35:58,828 Interesting times. 370 00:35:58,828 --> 00:36:03,588 You mentioned the relative strength in the real economy here in the US. 371 00:36:03,588 --> 00:36:08,828 Did last week's GDP print coming in 50% below expectations? 372 00:36:08,828 --> 00:36:15,188 Does that change your analysis of what's going on in the real economy, or do you think that 373 00:36:15,188 --> 00:36:19,268 was simply because of the government shutdown and you didn't have the treasury pumping? 374 00:36:19,268 --> 00:36:21,268 Well, I think it was the shutdown. 375 00:36:21,268 --> 00:36:23,608 This is a way of looking at that. 376 00:36:23,608 --> 00:36:28,268 This is measuring the world business cycle, not just the US business cycle here in Orange. 377 00:36:28,788 --> 00:36:35,588 So the Orange line is basically all the major surveys, the ISM, Tancan in Japan, the EFO 378 00:36:35,588 --> 00:36:40,568 in Germany, the CBI in Britain, aggregated by economic size. 379 00:36:41,028 --> 00:36:48,008 The black line is the index that I think Stanley Druckenmiller calls the internals of the 380 00:36:48,008 --> 00:36:52,328 market, which is basically, in his view, a much better guide than economists to what's 381 00:36:52,328 --> 00:36:52,848 going on. 382 00:36:52,848 --> 00:37:12,308 And this is looking at the performance of cyclical stocks relative to defensive stocks within the MSCI. But you can equally take the S&P 500 as a similar benchmark. So this is just looking at what cyclical stocks are doing. So they're basically on a roll at the moment. So that's suggesting that you've got a pretty decent economy coming through. 383 00:37:12,828 --> 00:37:13,968 Now, what does that mean? 384 00:37:14,108 --> 00:37:19,048 I venture again to this point that all money that's anywhere must be somewhere. 385 00:37:19,688 --> 00:37:24,728 And this is a track of global liquidity in orange against the black line, which is the 386 00:37:24,728 --> 00:37:25,628 world business cycle. 387 00:37:26,028 --> 00:37:31,108 So you can see there, I mean, we've moved them a tad to line them up exactly, but they're 388 00:37:31,108 --> 00:37:31,968 more or less in sync. 389 00:37:32,388 --> 00:37:37,028 And what that's saying is that strong economies don't always have strong financial markets, 390 00:37:37,988 --> 00:37:41,628 particularly if central banks are not doing that much, which they're not anymore. 391 00:37:41,628 --> 00:37:49,808 And actually, you've even got some central banks, such as the Bank of Japan or the Reserve Bank of Australia, that are actually hiking interest rates and tightening right now. 392 00:37:50,208 --> 00:37:54,728 So what this is saying is that as the real economy goes up, the black line accelerates. 393 00:37:54,928 --> 00:38:02,448 So the amount of liquidity in financial markets drops because of these increasing needs for funding and working capital demands and whatever else. 394 00:38:02,788 --> 00:38:04,608 So all money that's anywhere must be somewhere. 395 00:38:05,088 --> 00:38:08,988 So if it's not, you know, if it's on the black line, it's not on the orange line. 396 00:38:09,188 --> 00:38:11,488 And that's the risk that we're running. 397 00:38:11,628 --> 00:38:20,288 I love sitting down and speaking with you because I think you're very unemotional about this. 398 00:38:20,288 --> 00:38:27,108 You zoom out and just look at the numbers and the cycles and where we are within these cycles. 399 00:38:27,488 --> 00:38:39,608 And I think it's just fascinating reading your newsletter and then juxtaposing it to the headlines and what seems like, I mean, we're in a midterm election year here in the United States. 400 00:38:39,608 --> 00:38:46,548 the economy is the number one focus of the Trump administration. 401 00:38:47,388 --> 00:38:55,088 I think beyond the economy, the state of asset prices for boomers specifically who are looking 402 00:38:55,088 --> 00:38:55,588 to retire. 403 00:38:55,828 --> 00:39:01,948 I mean, voting sentiment in November will be driven heavily by how the economy is doing 404 00:39:01,948 --> 00:39:04,628 and how people's portfolios are doing. 405 00:39:04,628 --> 00:39:09,468 It seems like there could be a storm on the horizon for the Trump administration or the 406 00:39:09,468 --> 00:39:15,248 Republican Party if they want to keep the House and the Senate in midterms if this liquidity 407 00:39:15,248 --> 00:39:16,368 cycle turns over. 408 00:39:17,288 --> 00:39:26,248 And it seems like Scott Bessent, Donald Trump, and his administration are sort of maniacally 409 00:39:26,248 --> 00:39:30,748 focused on making sure that the economy and financial assets are humming heading into 410 00:39:30,748 --> 00:39:31,128 November. 411 00:39:31,128 --> 00:39:33,908 But it looks like they may be running into a buzzsaw. 412 00:39:34,948 --> 00:39:38,288 Yeah, I think the Wall Street may have an issue. 413 00:39:38,288 --> 00:39:49,488 I mean, what I would say is that if you look at what the Fed is doing right now, it's a monetary policy consistent at best with a range bound market. 414 00:39:50,008 --> 00:39:55,488 It's not a monetary policy that's capable, I think, in my view, of actually pushing the market a lot higher. 415 00:39:56,148 --> 00:40:04,628 Now, the chart that I've just put up is trying to understand the balance of policy between the Fed and the Treasury in terms of liquidity injections. 416 00:40:04,628 --> 00:40:19,288 And what this is basically trying to evaluate is the strength of stimulus that comes either from the Fed directly, which is the red area there, which is straightforward balance sheet expansion, traditional QE by the Fed. 417 00:40:19,288 --> 00:40:28,648 The orange bit is the part that I sort of tongue-in-cheek called not QEQE, which was the sort of Sula Tabla stuff the Fed did. 418 00:40:28,788 --> 00:40:47,428 It wasn't fessing up to QE, but it was doing it behind the scenes, things like changes in the Treasury General account, things like bank term funding programs, things like this latest RMP, things like changes in reverse repo facilities. 419 00:40:47,428 --> 00:40:52,748 all these sort of factors that were not headline QE but added liquidity is the orange bit. And then 420 00:40:52,748 --> 00:41:00,428 the black part is what the Treasury does through changing the tenor of bill issuance. And very 421 00:41:00,428 --> 00:41:06,428 briefly, I mean, that's a sort of wonkish point. But broadly, if you're issuing a 10-year bond, 422 00:41:06,808 --> 00:41:12,648 you take up more balance sheet capacity risk terms than if you issued a bill. So in other words, 423 00:41:12,648 --> 00:41:18,568 a bond is a lot, a long-dose bond is a lot less liquid than a short-term treasury. So if they're 424 00:41:18,568 --> 00:41:25,008 shifting towards the treasury bill end of the issuance calendar or spectrum, then they're 425 00:41:25,008 --> 00:41:30,528 actually delivering more liquidity of the market. So the black area is what I've called treasury QE, 426 00:41:30,788 --> 00:41:36,228 which is what the treasury is doing by changing the average tenor of debt held by the private 427 00:41:36,228 --> 00:41:41,808 sector. So that's a liquidity stimulus equivalent. And if you look at what's happening, you look at 428 00:41:41,808 --> 00:41:47,168 2026, I mean, there's a cycle for sure. And that cycle is picked up in the little window at the top, 429 00:41:47,168 --> 00:41:54,948 which is showing changes in the ISM index in black with a six-month lag. And that's showing 430 00:41:54,948 --> 00:42:00,848 that you should be getting a much stronger ISM through this year. You're tracing out that orange 431 00:42:00,848 --> 00:42:07,948 line. But you'll see, if you look at the bigger chart, through 2026, the black area, the treasury 432 00:42:07,948 --> 00:42:14,568 stimulus, by far and away dominates what the Fed is doing. And this is the whole idea that I think 433 00:42:14,568 --> 00:42:20,808 is endorsed both by Besson and by Walsh, that you're shifting the hose from the Fed, where it's 434 00:42:20,808 --> 00:42:27,848 undirected and soaks everything, to the Treasury, where Treasury spending is much, much more directed 435 00:42:27,848 --> 00:42:31,928 on areas they want, whether it's defense procurement, where it's critical minerals, 436 00:42:32,328 --> 00:42:37,508 whatever it may be. Yeah, it's interesting taking this in the context to 437 00:42:37,508 --> 00:43:06,988 I'm not sure if you caught up, but last year, Richard Werner's sort of press tour, particularly his conversation with Tucker Carlson about what actually drives the real economy and his whole idea that that credit creation from banks lending to businesses is the type of sort of monetary expansion you would want to see because it actually gets that money into the real economy versus just Fed, QE, which just pumps financial assets specifically. 438 00:43:06,988 --> 00:43:28,712 And it seems like the MAGA Trump administration is trying to affect that again via the Treasury going back to the SLR ratio changes and their focus on resting control of monetary policy from the Fed and creating this unified policy between 439 00:43:28,712 --> 00:43:30,492 the Fed and the Treasury. 440 00:43:30,492 --> 00:43:37,812 So it seems like we're meandering into new territory in terms of what used to be an implicit 441 00:43:37,812 --> 00:43:42,872 independence of the Fed and the Treasury. And now there seem to be throwing away any implied 442 00:43:42,872 --> 00:43:47,892 separation to saying, no, hey, we're going to try and make it so the Fed and the Treasury 443 00:43:47,892 --> 00:43:49,292 are moving in lockstep. 444 00:43:50,212 --> 00:43:53,152 Yeah, makes sense. I think that's exactly what's going on. Yeah. 445 00:43:54,432 --> 00:44:01,512 Yeah. What, I mean, moving away from a US focus towards Europe and Japan specifically, 446 00:44:01,512 --> 00:44:08,832 I mean, two different beasts. It seems like Europe is not doing well economically. I think 447 00:44:08,832 --> 00:44:14,552 they've taken the posturing of the Trump administration to heart saying, hey, we're not 448 00:44:14,552 --> 00:44:20,232 going to put the bill for NATO in your defense anymore if we don't believe that you're, if we're 449 00:44:20,232 --> 00:44:26,292 getting back a commensurate amount of value that we're putting in to this agreement. And it seems 450 00:44:26,292 --> 00:44:33,412 like European governments are scrambling to re-architect how they defend themselves and 451 00:44:33,412 --> 00:44:42,332 how they operate their economies. And then over in Japan, it seems like they are trying to defend 452 00:44:42,332 --> 00:44:49,652 or not defend their yield curve as much as they were in the past. Like you said, their policy 453 00:44:49,652 --> 00:45:00,052 right now is QT. It seems like they have a pretty drastic domestic focus right now. 454 00:45:00,052 --> 00:45:08,692 And it seems like they recognize that enabling this global carry trade has not worked out 455 00:45:08,692 --> 00:45:15,572 particularly well for them. And they're trying to re-architect what they're doing as well. So it 456 00:45:15,572 --> 00:45:21,152 seems like there's a lot of shifting sort of policies across the world, not only here in the 457 00:45:21,152 --> 00:45:27,012 United States. Yeah, I think absolutely. I mean, I think if you want to turn to Japan, 458 00:45:28,252 --> 00:45:32,112 I mean, one thing to say is this is looking, I mean, again, this is sort of getting into the 459 00:45:32,112 --> 00:45:36,972 weeds of the fixed income markets, but it's an important point, I think, to make. And that is, 460 00:45:37,072 --> 00:45:42,372 if you look at the, this is the components, the two components of the 10-year Japanese government 461 00:45:42,372 --> 00:45:49,372 bond, JGB. And the one to really watch is the orange one, which is, again, looking at the term 462 00:45:49,372 --> 00:45:54,972 premium. Now, the term premium has clearly shot up from those sort of low levels that we're looking 463 00:45:54,972 --> 00:45:59,532 at back around October of last year. But actually, they've started to come down meaningfully since 464 00:45:59,532 --> 00:46:04,292 the election. And it looks as if the whole question about, you know, concerns over Japanese 465 00:46:04,292 --> 00:46:10,072 bonds are disappearing fast. And I think that that's quite, that's well deserved. And, you know, 466 00:46:10,072 --> 00:46:15,892 My view has always been that we're going to make Japan great again before we see MAGA. 467 00:46:16,332 --> 00:46:17,872 I think that's been the deliberate policy. 468 00:46:17,972 --> 00:46:22,792 If you need a bulwark against China's expansion, you've got to basically enliven the Japanese 469 00:46:22,792 --> 00:46:24,192 economy and make it more robust. 470 00:46:24,712 --> 00:46:28,892 So I think that Japan is definitely a very good area to invest in. 471 00:46:28,892 --> 00:46:32,492 I think it's going to see some pretty solid long-term gains out of Japan. 472 00:46:32,492 --> 00:46:43,492 Now, if you come to this chart, which is coming back to maybe one of your questions about the yen carry trade, the yen carry trade has clearly spooked a lot of investors. 473 00:46:43,492 --> 00:46:49,492 I mean, it's sort of the big bogeyman out there. But I think that its impact is much exaggerated. 474 00:46:49,492 --> 00:46:56,492 This chart is looking at capital outflows from Asia. And by definition, those capital outflows tend to go into the US dollar. 475 00:46:56,492 --> 00:47:02,092 into the US dollar. There's nowhere else really for them to go. And if you look at the left-hand 476 00:47:02,092 --> 00:47:09,372 side of that chart, by the way, the black line is all Asia and the orange is China, the red is Japan. 477 00:47:09,372 --> 00:47:16,972 And if you go back to the early part of the chart, 85 through 1919, whatever, probably through to 478 00:47:16,972 --> 00:47:24,172 actually the early 2000s, that chart was dominated by Japanese capital outflows. I mean, that's really 479 00:47:24,172 --> 00:47:30,152 the yen carry trade in its fullness. If you look at the more recent periods, particularly since 480 00:47:30,152 --> 00:47:35,732 2015, the capital outflows have been absolutely dominated by China. And so it's China we're going 481 00:47:35,732 --> 00:47:41,432 to focus on rather than Japan, in my view, in terms of impact on the dollar and financial markets. 482 00:47:42,072 --> 00:47:48,992 And China, as we know, is running a huge trade surplus. It's got a lot of capital inflow that 483 00:47:48,992 --> 00:47:52,652 it's got to try and deploy. And the question is, what does it do with that? Now, I think, 484 00:47:52,652 --> 00:47:59,712 Marty, you quite rightly said that it doesn't want to lean too heavily on the dollar because that's where it's been forced to lean too much before. 485 00:48:00,172 --> 00:48:06,972 And it's trying to diversify into other areas, gold being one of those areas and probably commodities on top. 486 00:48:07,592 --> 00:48:16,092 And I think what that tells me is you're getting the world monetary system kind of dividing into two very distinct spheres. 487 00:48:16,572 --> 00:48:18,632 I'm not going to say unconnected. 488 00:48:18,632 --> 00:48:20,652 I mean, there may be bridges between them. 489 00:48:21,032 --> 00:48:25,872 But broadly, you've got a Chinese system, which is being backed increasingly by gold 490 00:48:25,872 --> 00:48:29,152 and maybe other precious metals or commodities. 491 00:48:29,512 --> 00:48:30,812 But that's what they're doing. 492 00:48:30,812 --> 00:48:35,312 Because remember, China doesn't have a big international bond market that they can lean 493 00:48:35,312 --> 00:48:35,872 back on. 494 00:48:36,372 --> 00:48:38,792 No one trusts Chinese government bonds internationally. 495 00:48:38,912 --> 00:48:40,092 They've always got that as a benchmark. 496 00:48:40,612 --> 00:48:43,532 So they need to use a benchmark everyone's familiar with. 497 00:48:43,952 --> 00:48:47,332 And gold is probably the most obvious backstop for the Chinese system. 498 00:48:47,852 --> 00:48:51,552 And then you've got on the other extreme, you've got the US, which does have the Treasury market, 499 00:48:51,552 --> 00:48:57,332 but it needs to broaden that appeal. And so stablecoins are the way forward. And so I think 500 00:48:57,332 --> 00:49:02,972 what you've got is effectively two monetary systems running in parallel, the commodity-based one for 501 00:49:02,972 --> 00:49:09,632 China and a digitally-based one for the US. And that's how I think they're going to evolve. So 502 00:49:09,632 --> 00:49:15,412 the growth of stablecoin and then by association, other digital currencies are really going to be 503 00:49:15,412 --> 00:49:19,432 foremost in terms of understanding the international monetary system in the future. 504 00:49:19,992 --> 00:49:26,212 Yeah. And I forgot to mention it earlier, but as it pertains to China driving the gold price and 505 00:49:26,212 --> 00:49:32,732 Bitcoin suffering over the last six months as gold has skyrocketed, I think another key point 506 00:49:32,732 --> 00:49:38,172 to add there is that yet again, China has come out and announced that they're banning the use of 507 00:49:38,172 --> 00:49:45,112 cryptocurrencies. And there was a report, I believe in late November, earlier December of 508 00:49:45,112 --> 00:49:51,612 the CCP stepping into one of the provinces and shutting down a large mining operation. 509 00:49:52,472 --> 00:49:57,792 And many were speculating represented something like 10% of global hash rate on the Bitcoin 510 00:49:57,792 --> 00:50:04,852 network. And so- This is very significant. I mean, the Chinese issued a notice called Notice 42 511 00:50:04,852 --> 00:50:11,712 about two or three weeks ago, which basically doubled down on control over crypto, I mean, 512 00:50:11,752 --> 00:50:17,412 specifically US crypto. And my point last year was, one of my points last year was, 513 00:50:17,752 --> 00:50:22,052 they've actually stablecoin are a huge, huge threat to the integrity of the Chinese monetary 514 00:50:22,052 --> 00:50:26,752 system. And what they've now done is they've basically outlawed all sorts of crypto, 515 00:50:27,492 --> 00:50:33,432 any form of digital currency to legal within China. And they are basically putting up a defensive, 516 00:50:33,432 --> 00:50:38,852 great financial wall, if you like, or great firewall of China to try and protect the economy 517 00:50:38,852 --> 00:50:46,192 against this threat. And I think it's a real threat. So China realizes that. But what is true 518 00:50:46,192 --> 00:50:51,572 for China is true for many, many other countries. And so other countries are going to feel the heat 519 00:50:51,572 --> 00:50:58,072 of US competition on stablecoin. Now, I think the way the international monetary system is evolving 520 00:50:58,072 --> 00:51:02,652 is an interesting one to ponder. And I'm not going to say that I've completely understood it. 521 00:51:02,652 --> 00:51:15,972 But I would say if you go back to a very sort of basic monetary system where one used precious metals or banks or whatever, in that example, the money you chose determined the payment system. 522 00:51:16,352 --> 00:51:19,112 But in the modern world, it's kind of the other way around. 523 00:51:19,492 --> 00:51:24,432 The paradox is that it's the payment system which is almost determining the form of money. 524 00:51:24,432 --> 00:51:33,972 And so if the US gets the architecture of crypto payments correct and established, that will almost underscore the role of the dollar in the world economy. 525 00:51:33,972 --> 00:51:41,812 Yeah, it's wild times. And particularly if you look at this sort of domestic swabbling 526 00:51:41,812 --> 00:51:50,932 on Capitol Hill right now with this Clarity Act bill, which is essentially a fight right now between 527 00:51:50,932 --> 00:51:57,172 the big banks and crypto upstarts, for lack of a better term, like Coinbase, who want to share 528 00:51:57,972 --> 00:52:03,172 the yield that is generated from holding short-term treasuries in reserves for the stable coins with 529 00:52:03,172 --> 00:52:08,532 with customers than you have Scott Bessett and Trump basically saying, hey, gentlemen, 530 00:52:08,692 --> 00:52:12,172 get to the table, get this figured out because we need to get this policy out there to begin 531 00:52:12,172 --> 00:52:15,012 sort of building this architecture that you just described. 532 00:52:15,792 --> 00:52:18,092 Yeah, I think absolutely right. It's absolutely essential. 533 00:52:18,772 --> 00:52:25,692 Yeah. And that's like, when you take this into consideration too, that's if China 534 00:52:25,692 --> 00:52:32,992 specifically is going pro-gold, anti-Bitcoin and other cryptos, I would like to believe 535 00:52:32,992 --> 00:52:35,832 that the United States should view that as an incredible opportunity. 536 00:52:35,972 --> 00:52:39,692 Obviously, they've highlighted stable coins as a big point of focus, 537 00:52:39,692 --> 00:52:42,832 and they want to lean into that as much as possible. 538 00:52:43,792 --> 00:52:45,652 And maybe this is my bias showing, 539 00:52:45,732 --> 00:52:51,632 but I would hope that they recognize the sort of geopolitical gravity of China, 540 00:52:51,992 --> 00:52:56,052 basically betting it all on gold and the opportunity that exists with Bitcoin, 541 00:52:56,172 --> 00:53:00,492 specifically where you have this very similar asset 542 00:53:00,492 --> 00:53:07,572 that is form-fitted for the digital age, where that could be an incredible counter to China 543 00:53:07,572 --> 00:53:12,592 leading into the gold, is the US actually following up with something like a strategic 544 00:53:12,592 --> 00:53:20,272 Bitcoin reserve and basically signaling to American citizens via de minimis tax exemptions, 545 00:53:20,372 --> 00:53:25,552 maybe capital gain tax exemptions that we should be building around Bitcoin, as well 546 00:53:25,552 --> 00:53:26,772 as a stablecoin infrastructure. 547 00:53:27,972 --> 00:53:28,392 Yeah, I agree. 548 00:53:28,752 --> 00:53:29,012 I agree. 549 00:53:29,312 --> 00:53:29,652 Absolutely. 550 00:53:30,492 --> 00:53:35,472 Awesome. Well, this has been incredible. Thank you for your work. Is there anything we haven't 551 00:53:35,472 --> 00:53:38,872 covered today that is on your radar that you think people should be paying attention to? 552 00:53:39,872 --> 00:53:44,792 I think the one thing that I would say to round it off in terms of putting this together, 553 00:53:44,952 --> 00:53:50,252 and it may come back to the bond markets and judging what's happening to fixed income, 554 00:53:50,732 --> 00:53:57,812 is to basically think of maybe two charts. And this may be a step too far into the weeds of 555 00:53:57,812 --> 00:54:03,892 bond market analysis. But this chart is an interesting one, because it basically 556 00:54:03,892 --> 00:54:10,832 shows us that we can talk glibly about trends and the optimism about the long term. But 557 00:54:10,832 --> 00:54:16,092 it's the cycle that often skewers people and bites them in places they don't like. 558 00:54:16,512 --> 00:54:21,252 And this is looking at the global liquidity cycle again in orange. But it's also showing 559 00:54:21,252 --> 00:54:27,512 in black the changes in term premium worldwide. Now, term premium, as we went into, 560 00:54:27,512 --> 00:54:33,472 the risk premia that investors demand to hold bonds over their term. So it's effectively, 561 00:54:34,072 --> 00:54:42,992 if you like, the price of safe assets inverted. So if you basically see a very high term premia, 562 00:54:43,372 --> 00:54:48,372 that's saying there's no demand for safe assets. Whereas if the black line in this case is low or 563 00:54:48,372 --> 00:54:52,812 falling, you're looking at increasing demand for safe assets in the system. In other words, 564 00:54:52,812 --> 00:54:58,772 risk, people are starting to price risk more aggressively. Now, these two charts, liquidity and 565 00:54:58,772 --> 00:55:02,772 the term premium, are completely unconnected in the sense that they're very, very different 566 00:55:02,772 --> 00:55:08,992 variables. One's a flow of liquidity and the other is a rate coming from the term structure. 567 00:55:09,432 --> 00:55:14,432 But they do correlate pretty closely, as one might infer from what I've just said. So if you're 568 00:55:14,432 --> 00:55:19,212 looking at declining liquidity, you're saying that systemic risks in the system must be rising by 569 00:55:19,212 --> 00:55:24,412 definition, because there's less liquidity around. If there's more odds of default, therefore, 570 00:55:24,492 --> 00:55:28,772 investors are going to be less risk seeking, and they're going to start to shift towards 571 00:55:28,772 --> 00:55:34,152 safe assets. And that's what the chart seems to be telling us. So there's a consistent story in 572 00:55:34,152 --> 00:55:38,992 the bond markets that seems to be coming through. And that kind of reinforces the idea that bond 573 00:55:38,992 --> 00:55:44,552 prices have been remarkably stable. Now, if you put that into what that really means for the 574 00:55:44,552 --> 00:55:50,252 average investor. This is showing the yield curve, which is the way that you kind of evaluate the 575 00:55:50,252 --> 00:55:55,512 bond market. So this is looking at the spread across the term structure. People normally look 576 00:55:55,512 --> 00:56:00,852 at 10, too, but I've looked at the average across all rates here. So this is just a simple average 577 00:56:00,852 --> 00:56:06,772 of the term structure slope. And the orange line is US liquidity. Now, what that says is that if 578 00:56:06,772 --> 00:56:14,312 this thesis, this whole stuff I've been talking about is correct, what you'd expect to see looking 579 00:56:14,312 --> 00:56:20,252 at that chart and eyeballing it is the US term structure. In other words, the yield curve should 580 00:56:20,252 --> 00:56:25,552 flatten by about mid-year. And that would be a pretty good signal, I think, of a risk-off 581 00:56:25,552 --> 00:56:31,512 positioning move. And that's what the liquidity data is kind of telling us. So if you want to 582 00:56:31,512 --> 00:56:36,052 monitor what's going on, I mean, the two best things to monitor outside of Bitcoin, which is 583 00:56:36,052 --> 00:56:41,052 clearly, I think, a barometer of liquidity generally, is to look at the yield curve slope 584 00:56:41,052 --> 00:56:47,712 And to look at things like the repo spreads in the short-term money markets, that's another sign of things going awry. 585 00:56:48,172 --> 00:56:50,992 So if you want some risk control, I'd monitor those. 586 00:56:51,452 --> 00:56:57,952 But my long-term view is that everybody needs to have gold and Bitcoin in their portfolios in some form. 587 00:56:58,772 --> 00:57:10,992 Yeah. And just to make sure I'm correct in believing this, the trough of this cycle of liquidity is drying up would be in some point next year. 588 00:57:11,052 --> 00:57:16,492 correct? I think that's great, Monty. Yeah. That's my best guess. Awesome. Well, Michael, 589 00:57:17,132 --> 00:57:22,372 thank you for the work that you do. Thank you for taking some time on this Monday afternoon, 590 00:57:22,492 --> 00:57:28,992 your time to discuss all this. I think it's incredibly fascinating, very high signal. And 591 00:57:28,992 --> 00:57:33,772 again, I really appreciate your ability to zoom out and look at everything on emotionally and 592 00:57:33,772 --> 00:57:36,512 just look at the data. I think it's very important to be able to do that. 593 00:57:37,272 --> 00:57:39,232 Well, it's great, Mike. Always a pleasure. Thank you. 594 00:57:39,232 --> 00:57:39,932 All right. 595 00:57:39,992 --> 00:57:40,612 That's all we got today. 596 00:57:41,212 --> 00:57:41,832 Peace and love, freaks.