"We're Past The Point Of No Return" | Luke Gromen and Lyn Alden

0:41 All right. Good morning, Luke and Lynn. Thank you so much for joining me today. I'm incredibly excited to have this conversation because the last one in April was phenomenal. And we've got so much to get into. So since then, the Strait of Hormuz has stayed close, but also appears to be the dog that didn't bark. The tenures gone from 4.4 to 4.8% is doubled. Buybacks at the long end of the curve, wars took the chair. Gold had a record in January before the war, but then it had its worst quarter since 2013.

1:03 All while central banks were buying record amounts. Bitcoin bottomed in the low 60s, and the Japanese yields are at levels not seen since the 1990s. So with all of that, Luke, starting with you. What is your general read on what's happening right now in the sovereign debt markets? Because it seems to me this isn't just a US thing. Is this a treasury market event or is it something bigger? It's a treasury market event and something bigger.

1:25 Treasuries. The center of all of it, as we're fond of being told, or as I'm fond of being told. So. This is a Western sovereign debt issue. There's one nation conspicuously or conspicuously absent in this bond route, which is China. And part of that is because China has taken pain. China has eaten bitterness. Right? They've let housing fall. They've taken they've been willing to take pain in the way the West has not.

1:58 And so I, I think there is also another dynamic to what's happening in the West. In the West side I think is very insidious and underappreciated. It's almost like a snake eating its tail, which is hyperscalers, particularly in the US, borrowing lots of money. As as I heard this week on Wall Street, hyperscalers are the bond vigilantes, and and meta etc. they they're borrowing at 5 to 6%.

2:29 And last week on the podcast, it was pointed out that they could easily borrow to 8% or more and still make their math work in the near term. And so that's what rates are going all else equal. The problem, of course, is the US and the West can't afford much above 4.8% of the ten year. And the other problem, as we're starting to see with disappointing jobs numbers at disappointing job openings number this week, the JOLTS number AI is the whole point of AI is that they are.

3:01 The hyperscalers are borrowing trillions, competing with Beasant, raising Besson's cost of capital, which is then raising the West's cost of capital with a goal of undermining best into the entire Western white collar tax base. Because unless AI removes a lot of jobs from corporate America, it's there's no investment case to it. Yes, those people will find their jobs eventually, but between here and there, productivity means a lot of people get fired. That's what that means in the short run.

3:32 Problem is that half of Besson's tax base comes from employment. So we're in this, I think, loop of rising rates. Besant does something to fight. It intervenes in the yen, blah, blah, double up sizes, buybacks. None of it's going to be enough. Ultimately, they're going to have to do something very, very as Lynn would say, there's no stopping this train. There's no stopping the snake eating its tail until they essentially cut off its head, which is full on yield curve control in some way, shape or form.

4:03 So I'll stop there Just quickly before Lynn jumps in there, I just want to unpack one little aspect of it. You mentioned that China was suspiciously not included there. What specifically in China are you seeing that's different. Well, the ten year Treasury or ten year Chinese government bond yields are 1.5%, 1.4%. They are 300 basis points, 350 United States. They're the lowest in the world. They used to be higher. And they are than sort of everybody.

4:31 And over the last 15 years or so, they're not the lowest in the world. And what are they doing? There's two things. Number one, obviously they have strict capital controls. So there are money's not coming in in any real way. Money's not going out in any real way. And. You've had a very deflationary environment. And in the West, everyone that is a China hawk points out to all their their housing market is crashed. And so people are flocking into bonds and that's driving yields out. Yes.

5:04 And they leave out the other parts because normally China hawks are saying how screwed the Chinese consumer is, how poor they are, etc., etc.. Where's the money coming from to bid bonds to that level, unless they have a lot of money. And that's the answer. Chinese consumers have massive amount of savings and they've been bidding bonds. That's the first point. The other point that again here too is left out by every China hawk because it doesn't fit the narrative is they have employed AI in a very different way than the West, which is it's almost like they are applying it in sort of the continuous improvement Japanese type of way in terms of manufacturing all along the manufacturing process to continuously improve.

5:50 And so a not insignificant portion of this. Again, what the China hawks call overproduction of Chinese goods is the massive productivity driver of AI being applied all along the manufacturing process throughout China. And so you get things like what a friend of mine just sent, which is an electric scooter that can be charged for 1 to 2 and B for a 60 to 100 kilometer range.

6:22 Right. So that A one rem and B is $0.16 to go 40 miles. And the scooter costs $500 fully loaded, and BYD cars 10,000 bucks that are probably better than anything we have here in the West. So the point here is, is that China is in wholesale deflation because of how they are. Not just it's not just the negative, oh, China's screwed because they let real estate collapse. It's also that they are applying AI.

6:55 They've decided to try to do a continuous improvement of manufacturing, which is very deflationary, as opposed to the Western model, which is, hey, let's create God in a box and then charge everybody to use it. And so when you look at two things, they finally I would point out is someone pointed out to me, China's real rates are positive at 1.4% on the ten year. They're one of the only big countries in the world with a positive real rate.

7:21 And so. That's the reason why rates are that low. They are in both because they've been willing to take pain. Right? US tenure go down. Just let everything collapse. Well even then it wouldn't work. But, let let housing collapse. Americans won't let housing collapse. Chinese let housing collapse ten years ago, and now they're in a deflationary period, with AI being applied in a different way than we are. It's we're applying AI in a very inflationary way for the moment.

7:52 Right? Because we're building all this stuff and we simply don't have the capacity engineers grid, etc., to do it. And so we're, we're we're driving inflation here with all that. So that's that's why Chinese yields are as low as they are. There's a there's a lot to unpack there. Where would you like to begin, my friend? A lot of topics. I mean yeah, China's had kind of the opposite asset performance obviously. So that you know, they've had if you're an investor in Chinese real estate, you've had a really bad time for a long period time.

8:19 If you invested in Chinese stocks, you've had a really bad time. They've been constantly willing to sacrifice their mega caps and sacrifice the real estate market. They've been trying to internationalize their bond market by by keeping that, you know, pretty money good. Basically keeping both the value of their currency pretty stable in currency terms. And then also, you know, obviously the yields that Lucas went into, they've created that very deflationary environment. They're on opposite sides obviously from the US on a trade perspective.

8:45 So they're running absolutely massive trade surpluses with the rest of the world, while the US runs absolutely massive trade deficits to the rest of world, especially in goods. And we're on we're in very different sides. I mean, as I'm as I'm here in Egypt, I mean, over the past five years, Chinese cars have just taken over the road. And it's they've gone through the same pathway that, like other Asian manufacturers went through. So like when hands were fairly new, you know, as a major exporter, they were kind of known as low quality.

9:14 And then you fast forward a couple, you know, several years and then decades. Honda's are perfectly acceptable vehicles along with many other types of vehicles. And China is kind of going through that loop where five years ago it was like, you know, if you couldn't afford a like Honda's popular here, a lot of European manufacturers are popping here and you can afford one of those. You can get a Chinese one. It wasn't considered very good. But as of two, you know, two years ago, one year ago, I mean, they're increasingly going up the quality scale.

9:42 And so yeah, a lot of moving parts there for China. Obviously, a lot of talk about in the global bond market. I mean, one of the of course, the big things, at least for at least for markets with relatively open, you know, capital controls yields influence each other. So one really big markets going up. It kind of drags all the others up by comparison. Unless there's a really big reason to have a huge delta. And so if you add 50 basis points to American yields, it's not surprising that you get you get kind of similar results in Japanese markets.

10:13 These are all very interlinked and they feed off of each other. And I think one of the things I see on Twitter, I probably would push back on a some extent is of course, these things get sensationalized. And when we live through generational moments, they they are really big things happening, but they're usually happening slower than many people think, which is the other side of the nothing stops these trading thesis, which is that nothing stops the fiscal deficit, but also it doesn't blow up quite as quickly as, you know, many, many bears would think like it's not going to hyper inflate tomorrow or next week or next year.

10:45 It's a very long process that gets kind of punctuated by little mini crises here and there. And what's interesting is that, you know, when when the Treasury market broke in 2020, it literally broke. I mean, like literally off the run. Treasury just went illiquid. There was like this the market stopped working. And similar things almost happened in 2022 for for the UK they did happen. Was interesting is that we see all this intervention from Besson and yet you know move index was pretty mild.

11:18 Liquidity is still decent. It's just basically that that longer and yields were kind of pretty orderly grinding up. And they just didn't like the price of those, you know, they eventually put pressure on everything else. Anything that has tangentially discounted cash flow analysis to it, which includes the massive equity market, you know, obviously mortgage rates, we have a cost of living crisis. And it's partially because rates are so high, at least relative to prices. I mean, if you have mortgage rates where they are now, but you had a like a house price to income ratio, that was half of what it would be, then they'd be more affordable.

11:53 But the combination of high house to income ratio is plus fairly high mortgage rates gives you, you know, kind of social disaster for for young families. And so we have this kind of unusual intervention which, you know, the the long kind of road I think does end at yield curve control. You know this people have asked on podcast is this yield curve control. I mean it's like the softest possible version of it, any sort of QE or, or, you know, kind of shortening of the average duration Treasury debt.

12:24 These are kind of like softer forms of financial repression. And for me, I found that the only kind of strange thing is that they kind of did it prematurely, that there was no real crisis in the bond market. And so they kind of hopped in probably earlier than I would have expected. But here they are. And I think if anything's best in is kind of like doing the Streisand effect on the bond market, that I think more people wonder if there's a problem because he's focusing on it so much compared to just if he let yields go up to some extent, which then could pull capital from other things.

12:56 People, you know, if he feels good high enough, you could get selling pressure and gold for period of time to hop in and treasuries, you could get, you know, selling of the marginal assets to hop in there and buy, you know, if tenure goes up to 5 or 5.5%, you know, he wouldn't necessarily have to intervene per se. It depends on how quickly things move. So the way I kind of phrase it is that, I mean, the US can afford high interest rates in the near term.

13:20 You know, the longer term, obviously the higher rates they elevated things you get that long term spiral keeps kind of playing out. But it is interesting that they chose to intervene kind of as early as they did, I would say. I would add two to that. Lin made a good point, which is there's a bit of a dog that didn't bark in Besson's intervention, and I think the dog that didn't bark was historically. Yeah, you take the ten year up to 5 or 5 and a half, and pensions and insurance companies will buy it all.

13:54 They'll buy everything out there. And yet they didn't. And there's two reasons for that. Number one, the the deficit is now so big. I mean, it's in contrary to what he said, he was going to go shooting for three arrows. Right. Which is a 3% of GDP deficit by 2028. Fitch just said we're going to run a 7.4% deficit this year, 7.4% deficit next year. It's going in the wrong direction. So number one, the deficits are so big, it's arguable exactly what the rate is.

14:24 That would allow pensions and insurance companies to buy it all. But the bigger dog that has not barked that I is starting to kind of you know yep. Around the edges is there have been some people Nick Nemeth has done really good work on what's going on in private credit and the illiquidity of it. Couple other folks have done the same, and in particular, pointing to how deep the US insurance industry is in private credit in terms of a percentage of their assets and why this matters as it relates to the Treasury market is part of the charm of private credit, is they are having delinquency slash asset quality issues, but they don't have to take the marks because it's private credit.

15:14 As long as they don't sell and force a mark. And so I think one of the big dogs that doesn't bark around this move at the long end of the Treasury market and the rest of the world's sovereign bonds, is that they are a sign that private credit is worse than people understand, because if insurance companies could sell and it's I want to say to Nick Nemeth, work is like 11 to 15, maybe 16% of total assets of the US insurance industry.

15:54 Life insurance is if they could sell that without taking a catastrophic loss and therefore hit to capital to buy treasuries, they would rather own treasuries at 5% all day long than private credit. The fact that they're not doing that tells you that the problem in private credit is way worse than anybody thinks. And the and the the reaction to that would be exactly what Lynn said, which is best, and having to react to the long and faster than expected, because it would suggest that if credit quality in private credit is way worse than people are letting on, then there's basically no price at the long end that's going to pull pensions and insurance companies out to buy the long end, and you run the risk of 484968.

16:54 And if I was him, that would scare me to death, and I would do exactly what he's doing. And I think that's what he's facing is ultimately the center of it is private credit and the illiquidity of private credit to be able to get out of it without taking a catastrophic mark. And by the way, when I say catastrophic mark, what Nemeth work has pointed out is like they could sell, take the mark, but then all of a sudden, literally, it would chew up most of the life insurance industry's capital.

17:24 Now your life insurance is insolvent. Now what? Well, guess what they're going to sell to raise capital treasuries. They turn sellers of treasuries if they have. So there's this I think there is unspoken. It's unspoken. It's the dog that is embarking. There's a Mexican standoff kind of problem in the reflexivity, the interplay between private credit, insurance companies, long end of the Treasury market, and they don't know what to do.

17:54 And there's there's no hap like Ted Lynn's point there so far, very soft versions of yield curve control. It's much, really much more like Operation Twist, you know, done by the Treasury than than yield curve control per se. But it's the reason for doing it is the same reason you're there eventually going to have to do yield curve control, which is, oh, we don't like the price to long. And because we can't afford the price, the long and the price at the long end will trigger a Western debt death spiral.

18:21 That's why they're doing it. And that's it's this Mexican standoff around private credit insurance. And the long end that I think is super interesting in the context for why did Besson react so fast? Lynn, I want to get your thoughts on just as a quick aside, I don't know why, but it kind of reminds me even of things that I've heard regarding the US housing market right now were people that bought and got a mortgage in, like the 2021 era at these low interest rates, don't want to sell their house because they don't want to get a new mortgage.

18:48 They can't put it in the US. They didn't know that. I thought it was just a Canadian thing, and you'd have to then refinance it like 6.6 or whatever the 30 year is right now. So Lynn, with regards to this idea of private credit, kind of keeping them in a standoff, your thoughts? Yeah, I think there's a lot of merit to that. Yeah, there's there's a challenge. Of course there's there's liquidity and solvency, which often get conflated in the media.

19:08 And you can have two problems at the same time in different magnitudes. One thing that there's no doubt about is that there has been liquidity challenges. You'll see a headline like, you know, X billions want to withdraw from private equity or private credit fund XYZ. And they have to say no to most redemptions. And of course, that in sensationalized headlines will get conflated with solvency. But ironically, the way that that works is actually closer, closer to full reserve banking, which is that they don't, you know, when when you when you lend to a bank with demand deposits, you can supposedly pull your money out at any time, even though they're using it for some percentage of the liquid loans, longer duration loans with private credit, you know, your your pensions, your insurance companies, your wealth, individuals, family offices, you're lending and you're signing up up front saying that there's no guarantee of liquidity, that, you know, they'll try to do, you know, quarterly liquidity where they can, but they have to they have to sell some of their assets if they want to exceed that.

20:08 And it's not you know, it's not like a businesses like, you know, payroll. It's not a person checking account. It's these entities kind of savings. And so they, you know, they run into liquidity challenges that they try to withdraw too much too quickly. And of course, underneath that, especially on the margins, we do see solvency issues in some of these troubled areas. It's still unclear how big some of the solvency areas could be. And that actually does limit some of these funds.

20:35 And of course, there's there's fractional reserve balance sheets like banks that have a lot of flexibility based on what regulations allow them to do. I mean, if you want banks to buy more treasuries, there are mechanisms that they can they can pull to make that happen. Same thing with the central bank, obviously. Whereas insurance and pensions fairly kind of honest balance sheets in a way that basically if they if they want to buy something, they have to sell something else.

21:00 They can't just, just kind of lever indefinitely with insurance companies, you know, for example, you have a float, you invest the float. If you're a pension, you invest them when it comes in, you invest it, you know, they have a certain amount of leverage that they can that they can dabble in. But they, you know, they're more limited than banks. Their when you don't have foreigners buying treasuries on net. I mean, you know, you'll see the nominal number inch up over time mostly from foreign non-government entities buying but on a percentage of total treasuries kind of being issued.

21:29 Foreigners just aren't buying nearly enough. Which means more more of it has to be funded domestically. You have a central bank balance sheet Hawk ostensibly in charge of the fed. Now, who would prefer not to just blow out the fed balance sheet and say, no, you know, now I want to, you know, I'm a dove now. So, you know, on the on the paper, he wants a smaller balance sheet. Foreigners are buying insurance companies. Obviously they have the whole private credit issue we just talked about.

21:56 Banks are buying, but you know, their balance sheets don't have endless capacity unless you do, you know, some degree of kind of supplemental leverage ratio reductions further that they're already done and things like that. And so I do think that they're getting squeezed now, you know, I don't know how acute it is because again, there's no there's no move index issue. There's no major liquidity stress. We've had what is so far been a pretty orderly degradation of the global bond market.

22:23 I mean, it's like it's like the the move over many months, like the change in yields over many months has been significant. But it's it's kind of insta long. And so it is interesting that they're kind of jumping in so quickly. And of course some countries have other levers they can pull, like if you're a Japan and you're a really big creditor nation, you know, they they have these huge government pension funds that they used to invest more domestically in a little bit foreign.

22:54 And now they have a huge swath of that as foreign assets. And they're one of their nuclear options is they can say, okay, we're pulling some of that capital back, like if the yen gets disorderly, if the if the Japanese bond market gets disorderly, they can say, well, we're going to pull some of that foreign capital back. And, you know, we're talking very large amounts for them. And of course the marginal dollar coming out doesn't affect market cap.

23:17 It has a disproportionate effect on market capitalization. So they can pull money out so they can into Japan. And that can be a really big factor. Whereas the US is a debtor nation we are constantly relying on for you know, we're sending out our money in trade deficits, then the rest of the world is buying our assets with those trade deficits. So we don't have this like gigantic pot of money that we can just, just pull in.

23:40 And so that is one of the challenges. And, you know, it gets really awkward when, you know, the the end of the world is not that things break. It's just that that you have like the central bank has to come in and start buying bonds and has trouble explaining why, that that happened is really fun time on social media, watching people work through that. The Bank of England in 2022 had literally they had a speech on balance sheet reduction that they had to cancel due to the guilt crisis and then temporarily increase their balance sheet instead.

24:16 Now, to their credit, they eventually were able to reduce it for a period of time. But it's just the optics of having to do that were awful. And if you have a so-called kind of balance sheet hawk in charge, that if the if the market does get a liquid, I mean, they're not going to let it stay a liquid. So, you know, they they would find themselves in a rock and a hard place with, of course, the heart, you know, the heart of the spectrum.

24:37 Being able to control and kind of the middle of the spectrum would just be the balance sheet increasing despite inflation still above target and then saying it's, oh, it's only for technical reasons or, you know, it's x, y, z. And of course the softer ones. What we have now, which is, you know, this, this basically Treasury operation twist, which is that, you know, they're willing to buy back longer duration securities by issuing T-bills and or drawing down the traditional account a certain extent without really a particular crisis to point to.

25:06 And just saying this is kind of what we're doing right now until the midterms.

26:37 Luke, I want to get your response to that. And there's a few things I want to add in there. But I do want to add I want to ask a bit of a weird question because it hit my mind, and I'm sure there's a good reason why it doesn't necessarily exist. I was not following the Japanese bond market at all, so I wasn't aware of how low those yields were. My immediate thought was maybe it's just because of capital controls or something, but is there like a you a yuan not yuan?

26:57 Yeah, yuan carry trade. Because I was thinking if you have lower rates in China, would that actually pull demand away from the Japanese debt? Know there's the yuan has got a strict capital controls on it. Okay. Yeah. know that's. Yeah. The Japanese bond market is ultimately like Len said this this plays into the US net international vessel position, which is, you know, foreigners own $65 trillion gross, 20 to $23 trillion net in dollar assets. And so ultimately, if Japan has a problem and Besson doesn't fix the problem, then Japan will start pulling their money out of the US dollar asset piggy bank, sell dollar assets by yen assets or by N.

27:38 Yep. his credit. And that's that's exactly. Yeah, that's exactly right. Continue with that too. I'm curious then what you think Warsh is going to do coming up here. Because last time I looked at CME futures, it looks like we're getting a rate hike in about two weeks time here. Do you think he's going to do it. Where do you where are you viewing basically the relationship between the fed and the Treasury right now. And if he's actually going to bring up rates.

28:03 I don't think he's going to raise rates. Really. No Kevin Warsh is is not a hawk Kevin Warsh. You know go back to his December 2018 op ed that he wrote with Stan Druckenmiller fed tightening. Not now that's the name of it. And in it they were begging Bay Ying in all caps begging for the fed not to hike rates anymore because bank stocks were 15% off the highs. And even though employment hadn't fallen, which is a lagging indicator, as they acknowledge in it.

28:34 But, you know, you were starting to see some slowdown in the economy. What what do I think was might have been happening? What I think was happening with that op ed was Druckenmiller was offsides and was, I believe at the time was he was close with Druckenmiller. But if not working with him, I don't know his career path intimately, but in offsides and I think they were trying to get stand back on sides. And so it's really interesting to me this week.

29:04 What did what what did Besant say about Druckenmiller I didn't catch that one. to yesterday? He came out and said Druckenmiller offsides. And yeah, that's why he wrote that this would be the I, I had pretty good pretty good account that Druckenmiller was offsides in the fourth quarter 18. And that led to the op ed and that influenced fed policy in a way. We go and now here we have second instance of it. According to best we'll see.

29:30 Worse isn't going to hike rates. He's not he can't. And the reason I say that is us true interest expense, which is gross interest plus entitlements plus Veterans affairs and 105% of US receipts through fiscal third quarter of 2026. And they are growing 7.5%, while receipts are growing 4%. He hikes rates. True interest expense is going to be 107% of receipts growing 8 to 9 while receipts grow three.

30:06 He hikes again. They're going to be ten 110% of receipts growing ten while receipts are growing two this is this is. And by the way every everyone on Wall Street says we don't have a debt problem because we owe our debt in our own currency, but we don't. We have a entitlements $100 trillion plus in entitlements. That is three plus trillion dollars a year. When you look at Social Security, Medicare, Medicaid and Veterans Affairs, those are in a hard currency.

30:41 So we're spending 60, 60% of receipts nearly in on, in on Medicare, Medicaid, Social Security and Veterans Affairs, which are all inflation adjusting. You know, we don't owe my parents, you know, we know my dad a payment for Medicare. We owed them a knee. We owed them diabetic medicine. All of that stuff is a hard currency, hip sneeze, doctors time. It's all a hard currency. The more we print, the more the price of those things go up as we're all seeing.

31:13 And so to me, this is like the elephant in the room that no one wants to talk about. And this hole, is he going to hike? Is he not going to hike? Beasant has a debt problem today acutely. Number one, his interest and interest like obligations are 105% of his receipts. And they're going to access receipts today. And if worst hikes, they're going to run faster. And as receipts are going to fall that's going to blow out.

31:42 That in turn is going to reverberate into dollar up, long term rates up, which is then going to reverberate back into his interest, like obligations rising even faster than his receipts. Now, in a context of 120%, that the GDP, in a context where his long end domestic foreign buyers aren't buying enough, the foreign buyers that are there are hedge funds, and they will only buy as long as volatility is low. And the foreign central banks, who are very patient, haven't bought a treasury at the long end from him and bought a Treasury net at any duration, but certainly not at the long end in 12 years going on 13 years.

32:20 And so his sort of last remaining patient buyers, the domestic industry for life insurance and pensions, they're jammed up in private credit because the fed hiked rates. There's there's no price a long term treasuries where they can take the mark of sell down private credit. And so he's got a non-linearity facing him at the long end. And so when I see the picture of worship and Beasant getting on the plane to go to weren't talking about the freaking Yankees.

32:48 Right. We have it on record, right? What did what did say to. Pulte? I will punch you in your effing face. You want to step outside? I'll punch you in your face. Are your credibly credible rumblings that that took a swing at Elon Musk under Doge? I think, hey, this is what we used to call the sales desk a hey mother conversation. Hey, mother, you aren't going to raise rates in September.

33:19 You aren't going to raise rates, ever. That's what I think was set on that plane together. And then they got off and they fixed their hair and I got of it. Lynn I want to get your response if you agree. Were you disagree. And I also just want to highlight like even as a beginner who wants none of this monetary policy or things going on, I do find it just incredibly entertaining. I just think he's a wonderful character in this weird drama that we're all going through.

33:43 So lend your your thoughts, please. Yeah, I agree with that one. So yeah, in general. So my my kind of view and research has been my base case is for 0 to 1 hikes basically that if we get the one would be like kind of symbolic to say he did it. And so I kind of don't really take a stand on what's going to happen 25 basis points. But in general, the issue is that when you get to this far in fiscal dominance, rate hikes don't solve the problem.

34:13 Everybody has their mental model of the 70s when we had lending driven inflation. So it was fractions of banking primarily responsible for the money supply growth. You had baby boomers entering the home buying year having their peak credit formation. You had pretty low debt to GDP, public debt to GDP. So if you raise interest rates like Volcker did, really high, you do a couple of things. One is you you bankrupt like Latin America. So you reduce their oral consumption at least more. For the US.

34:38 It's kind of the brutal real politic of it. But then domestically, you do slow down lending at a much bigger rate than you blow out the fiscal deficit. When you have debt to GDP that low and you have lending that high. So you're actually tackling the core issues. In the modern times, it's not that bank lending is super high. It's pretty benign. Instead, it's that physical driven inflation and raising interest rates. When you have like, like loose get all those inflexible spending, you don't you don't change like Congress doesn't make decisions because, you know, industries are 5% instead of 4%.

35:13 And then in addition, when you have over 100% of GDP and you raise interest rates, you blow it. Interest expense, which ironically for some entities is spendable money that you're actually stimulating some, some entities. So on the receiving side of that, you know, it's baby boomers that have money market account, for example. It's like they they get a raise if you raise interest rates. So I think they're aware of that. So basically the broader question is whether or not initiates are even a tool at this point.

35:40 I think that's that's the uncomfortable question for, for Wall Street and and for the government as a whole. So what's that line like below my line? Is that was that the Below my level. When we talk about 25 or 50 basis points, it's like we're not in monetary dominance. We're in fiscal dominance. I think a much bigger question is what a crack spreads look like. You know, three, three months from now or six months from now.

36:04 We talk briefly. You mentioned oil in the beginning. You know, all never went up to 150 or $200 a barrel like people feared. But we do have record high crack at diesels they're now right diesel the 185. basically, you know, we have the bottleneck ended up being in refineries at the moment. And so gasoline and especially diesel are priced as though all itself is over 100. Just because the gap between what all costs and what the actual refining product costs is, is higher than average.

36:37 It'd be even worse, of course, if all is self than blew out. But you know, putting that aside for a second, you know, like what is on the top of my mind, you know, some months from now, it's okay. What's happening with with fiscal deficit, that's still going to be big. It's always going to be big. Nothing stops that train. What happens with Iran? What happens with oil? What happens with refined products? What do those spreads look like?

36:57 What are the what's going on there? That's a bigger question to me than 25 or 50 basis points from the fed. And so it's kind of like, like an engineering terms. You'll put like a bear around it and say, like, here's a tolerance that we don't really have to devote too much attention to. And for me like 25 basis point questions, it taking up so much air time. And it's just it almost doesn't matter because the numbers are outside of that band. You know, GDP deficits is a much bigger topic than if he's going to toggle, you know, interest rates, because we're just so far down the line of fiscal dominance that it almost doesn't matter.

37:37 And the broader question, though, I think it's and this is, you know, perhaps why is acting so early here before any signs of trouble is that there is this kind of dawning realization of Wall Street about fiscal dominance, you know, back, I mean, Luke. Luke and I were talking about this for for many years. It used to be fringe. And over time, like my my contacts on Wall Street are kind of increasingly saying, I mean, this is understood.

38:04 And you'll have like big research firms, big, big pension funds, big investment banks putting out reports about this. And so things that were kind of on the, on the periphery become more like acknowledged. And part of what holds this together is perception and sentiment. The idea that that okay, we have a problem right now, but it's temporary. It's okay once this thing resolves, you know, once the fed regains credibility, then long end yields will go down.

38:32 There's this kind of like credibility loop that people kind of like cope. It's like as long as, you know, as long as, you know, we figure out the temporary things that we can get the things back on track. And there's like a pretty kind of, like loose perception that if you get a past certain critical point, you know, if you've got people that manage to trillion dollars that suddenly see the things like that I do like in terms of if they if they suddenly wake up and agree with me one day, whether I'm right or wrong, if they just agree that I'm that the way I'm doing it, then nothing stops is deficit and they're in charge of $1 trillion balance sheet.

39:07 I mean, then you got a problem, right? And so they don't really want that cascade to happen. They want to keep the idea that that there's always some kind of plausible reason why we can get this back under control, that AI is going to be so productive. Then we're going to have a big deflationary sink and absorb all of this. Or, you know, stablecoins are going to actually come in and save the day, for example. And the best ones, of course, always have a grain of truth to them, right?

39:35 That you don't you don't point to, you know, what aliens are going to do. You point out to something that actually like intelligent people can say, okay, we have a list of things here that if they go right enough, then you know, things are fine and we can get yields down. And none of this has to kind of slowly spiral out of control. And I think that's what what best is trying to to manage right now.

39:56 Interesting. Yeah. I want to get your take on the idea of like, because I'm thinking about if everybody they should if everybody agreed with you to I'm pretty sure. Wouldn't that mean they're just going into hard assets and getting out of any debt right away? Well it raises an interesting question and I think it's something that people think they have more time than they do on this. And I'm not saying it's next week or two years.

40:17 I mean, it could be, I don't know, it could be five years, ten years. But Jim Rickards wrote, I can't remember which of his books it was, but he opened it up with a scene of a meeting that he sat in, and I believe it was during the great financial crisis, or maybe shortly thereafter. But the point of it was this Treasury's got a direct line into Blackrock, per the consigliere of one of the top execs at Blackrock, according to Jim Rickards.

40:47 And Rickards goes on to say that in a crisis, Treasury can pick up the phone, make one call and lock down 5 trillion of capital now, which is Blackrock. That's it. No sales and the rest of the market would follow. so to me there's this view of like well I don't have to worry about it yet. I'll worry about it when I worry about it. And when I look at it and go lay out everything we've laid out, I lay out we're already beyond.

41:15 We're past the point of no return. They have a Weimar gold reparations problem. I'm not saying we're going to go Weimar, not say we're going to hyper inflate, but I, I am saying the United States has a Weimar gold reparations. They owe more money than they are taking into receipts in a hard currency that inflation adjusts today. It's only a matter of time to Lenz point until people running trillion dollar balance sheets get that, and when they do, they're going to go to hit the cell button.

41:44 And it's not going to work like it didn't work like the by button stopped working at Comex at silver in 1980 with the hunt brothers. And then whatever your allocation is to everything bonds, stocks, gold, bitcoin that's going to be your allocation. You're not going to be able to move. And then they're going to close things down for two weeks three weeks. And when they reopen you will own what you own at the new allocation.

42:16 And I have two dear friends that emigrated here from Ukraine, American citizens. Now they've told me how this goes, which is we remember 19, I believe it was 1998. We had enough money in the bank to buy five cars. We were wealthy. My dad was a doctor. They closed the bank on a Friday. They reopened it two weeks later. And the money we had in the bank, we got it all back and it bought us a month's worth of groceries.

42:39 When people that are running trillion dollar balance sheets internalize enough that they realize that there's no stopping this train, and that we're already past the point of no return, barring a productivity miracle. And so that might be your trigger of like, oh, if AI starts to break, then, oh, then the whole thing might that could get really fast. And you go, there isn't going to be a shift, an orderly shift, or even a one month shift of trillion dollar balance sheets in the golden Bitcoin.

43:11 They'll shut the markets and then they'll reopen them two weeks later and Bitcoin will be where it is. Gold will be where it is. Stocks will probably reopen gap higher treasuries will have lost immense amounts of value relative to those assets and life will go on. This has happened over and over and over and over and over everywhere in the world, basically, except America. And so Americans who are listen, I'm an American, I love America. We're the most ethnocentric, hubristic people in the world because it's never happened to us.

43:47 We're sure it won't happen. And yet. Look, I don't know when it's going to happen, but the math is telling you it's going to happen. Could it be next week? Sure. Could it be ten years? Sure. Could it be 20 years? Sure. But that's how it's going to go. They will just. They'll just lock it down. And it was when I read that book again, I think it was in an 8 or 9. Maybe it was 11.

44:09 Rickards book, he flat out says a Blackrock exec, one of the top execs was told by Treasury they had the they had the program in place 20 years ago, nearly. If we need to, we can pick up the phone and we can stop you from selling everything we can stop. They will just run, you know, think about what Lynn said before about private credit. We want 3 billion. You can't have it. They'll do it to everything.

44:36 And you know they can't do it to everything forever. But they'll do it to everything for two weeks, and then we'll get out the other side of it. And that the GDP will be 20%, down from 120%. It'll be, you know, and you know, the money that you used to buy five cars will buy a month of groceries. Have a good day. And when I asked my Ukrainian friends, how did people that own gold and silver do?

44:58 Obviously this is pre bitcoin. How'd they do? He said oh they were fine. Nothing changed for them. That's how it's going to go. Unfortunately like we're past the point of no return.

45:43 Then I want to get your response before I shifted. Golden Bitcoin. Yeah, I mean there's there's two main ways it can happen. It can happen in these non-linear events where there's a, there's like a bank holiday, a reset and just, you know, like you have an extra zero on stuff And there's kind of the, the slow spiral type, which is, I mean, you know, where I am official inflation is 15%. And it's just like it's a normal Wednesday.

46:08 It's just like that's that's how it goes. You have to save in things that are not cash. And it's just the economy is. I mean, that would sound shocking to an American or a Canadian or, you know, people in Europe or Japan, but but after you pass initial shock, people adapt. That's how things go. And so you can have this, that, that's where it comes down to trying to predict policy decisions, which is that kind of the natural state of things.

46:39 They can keep doing small things, you know, if the if the bond market goes a liquid, they can buy $100 billion of bonds and, and say it's a technical reason and just kind of finagle stuff for a period of time and go get it back on track for a period of time and just kind of keep it going. And you have this. But then month after month, FOMC meeting, after FMC meeting, you have to explain why you're buying bonds with above target inflation, which gets old after a period of time and you your credibility degrades.

47:09 Then you get that you know there's trend dollar balance sheet saying maybe we have to do something different. And part of it is that you have real politic in play, which is that, you know, the the people in charge of Japan's, you know, gigantic pension fund. One of their considerations is relationship with the US. So one is it's not just like a strict personal optimization, that's part of it. Then it's also, you know, to what extent we want to risk our relationship with the, you know, one of the largest economies in the world and a long standing friend and all the benefits that come from that and sometimes the drawbacks that come from that.

47:45 And, you know, if things get bad enough, then that calculus changes. And that's how you get kind of more rapid changes. And the fed has to say, oh, instead of buying 100 billion, we have to buy a trillion. Kind of like what happened in Covid. We have to come out with a comical amount of purchases to to fix the problem. So yeah, you can get these kind of more gradual ones. You can get these abrupt ones.

48:04 My, my default is always to look out for the gradual ones. You know, the nonlinear ones are hard to predict. Like Luke said, you want to be positioned ahead of time. I mean, that's why I've I've been a long standing fan of, you know, some at least some percentage of self custodial assets, you know, have, you know, real estate's not mobile, but you know, your real estate and you have portable things like gold and bitcoin and so forth, and you have assets.

48:29 And then of course, you have your stocks. You have other things like that that are more like account based. But there is a value in bearer assets. And you don't have to be a, you know, people say, well, that that'd be a Duma perspective. Well, again, I mean, you know, right now in a place where the 15% inflation, it's things that sound like Dumouriez are just a normal Wednesday in other countries. And to lose point like people in certain countries, if you own gold or bitcoin and you're just like, yeah, that was crazy.

49:02 Yeah. It's Thursday. Yeah. And and so there's different levels of duma ism, right? It's just like you own scarce assets, you position with this stuff in mind, and then you kind of do your best to go about your day. And, and it's not always about worrying. It's just about owning scarce things, you know, trying to avoid scarce things that are temporarily in a bubble because even a good thing can get over priced from time to time.

49:28 If everybody likes at the same time and you and you try to go about your day and then you worry about other things some extent, like what jurisdiction you're in, you know, where do you live? Where do you work for other people? Like what citizenships or, you know, where can you live if things get weird? And so you kind of go up the ladder of things, you can control position and then try to try to go about your day and just realize that, you know, the world, people get through crazy events.

49:57 I mean, you know, there's there's certain horrible, horrible events that can happen, but anything short of the worst stuff, I mean, people are adapt. And, you know, just the last five, ten, even 40 years are not necessarily the map for what the next five, ten, 40 years looks like. Well I think too you want to look when you're looking for sort of crazy stuff is they can kick the can where they as long as they need to when they start running into physical constraints is when the illusion begins to break.

50:30 Right? When when the spell begins to break. So when you have President Trump come out and say, I'm going to sell 300,000 pounds of beef at a loss, he's the president who's MAGA running Mamdani sell groceries at a loss to the People need to pay attention. Why is he doing that? is when you see things like that, when you see him come out and sound like Elizabeth Warren and about, hey, you evil refiners, I like you, but you're overcharging people.

51:05 Well, then stop supplying the Ukrainians with frigging targeting directions and missiles to hit Russian refinery. Right? Like Besson's up there today, saying the refined products are up because the Ukrainians are hitting Russian refineries, and it's causing a global supply shock. You're supplying the weapons, you're supplying the targeting. Like, don't like don't Pete on my back and tell me it's raining. But when you see these inconsistencies in the physical world, these are warnings.

51:37 And it doesn't mean, again, doesn't mean it's happening tomorrow or next week or even next year. But the longer they go on, even the dumbest American will go even the most MAGA mind. I'm not saying people might go dumb, but I'm just saying the most rabid. When you're when you are rabid and dogmatic, you're indistinguishable from being done. When you were the most rabid, dogmatic Trump supporter going, you know, like some of you seen some of these interviews with beef ranchers, they're we I love this guy.

52:08 And like, what is he doing? This is not only he's hurting my living, but it's not economic. He's literally following them. Downey's economic policies, these are the clues of, you know, these are the cracks in the facade you know, because the paper world, they can, you know, is a perfect example. Part of the reason why crack spreads are so high is because they've been to manipulating oil. They have been there have been a number of different ways they've done it.

52:34 Right. You're running down the SPR is a way of manipulating. Well, yes, that's what it's there for. Okay, fine. I also hear credible rumblings. There have been, you know, and actually this was alluded to by the Iranians multiple times, including last week, you know, last week, whatever his name. Or whatever point, you know, we know which futures Jane Street was selling, you know, at your behest. Scott Best, why don't you do something about that? You know, so I've heard other things like that type of thing.

53:05 Right. So they are doing what they can in the market. They can do, but they they can't do as much in the refined products. It's a physical issue. You can short refined products. It's not nearly as deep as as crude oil, but in the end of the day it's a supply demand thing, right? I can't fill my wife's truck up with paper frigging gasoline. And I can't put I can't. I got three boys that are over six feet tall.

53:29 They don't eat paper beef. As it turns out, they actually eat actual beef. And so it's that physical world. When you start to get the inconsistencies with the narrative, where you don't know which lie is the one that brings down the whole thing. You just know that one of them will, and it's a straw that broke the camel's back kind of a thing. Luke. All right. I know we sold around 95. We're talking about positioning ahead of the crisis.

54:01 We're bouncing up a little bit here. Are we back in Bitcoin. I never sold all of it. I just sold from being what I thought was, you know, for a 51 year old man who thought it was, the price is going to drop a lot. It was way too big. And so, yeah, I still own, you know, call it mid-single digits in of liquid net worth and bitcoin. I've been adding back a little bit cautiously. Simply because I, you know, I it has bounced back a bit, but I still think that this non-linearity we talked about as it relates to bonds.

54:42 Right. You know, to Lynn's point about things going in, in, in, you know, sort of gradual, I think we're dangerously close to a, you know, ten year at five, you know, for eight, four, nine, five, five and a half, six, seven, seven and a half. And then they really got to do something. And again, I've said it before, I think I'm, you know, it's very possible I'm way too cute.

55:12 I also think if we get A23 week period, one month period where the ten year goes from for 8 to 7. I think I'm going to be able to buy back everything I sold more, cheaper than where we've seen it trade this cycle, and I would be aggressively buying on that because we know what the you know, and if I'm wrong or I'm going to be wrong because I my, my conviction is increasing, we're going to get that air pocket because again of the, the debt where we are with the fiscal situation today in terms of the interest like obligations relative to receipts, where we're seeing supply chains globally, inflation is only going up from here.

55:52 And then this non-linearity of private credit insurance, long end foreigners, right? I mean, the Saudis come out this week. They're borrowing $8 billion like they were supposed to be investing $400 billion here. Now they are competing with peasant for capital. So that's I that's where I'm at on Bitcoin. So love it as a as a neutral digital reserve asset for the people still own some might be being too cute. But I think we're going to have a momentary bond market rupture sometime in the next 2 to 3 months.

56:25 And I think there's a high risk of it. There's an above normal risk of it. Right. So I would I wouldn't say there's a tornado coming. I would say I'm looking at the conditions and going, it's not a tornado watch, it's a tornado warning. It's not a bond market watch. It's a bond market warning. The conditions are here for the ten year to go from four, 8 to 7 like that. And I think if I if I'm right, then I think Bitcoin is going to trade much lower than most Bitcoin bulls.

56:50 Think for a moment. And for those that don't care about that volatility that's I totally get it. But I would be aggressively buying on that downside. That's that's where my head is at the moment. Beauty Lynn your fastest elevator pitch on where Bitcoin is right now. Yeah I think that's certainly a possibility. I think I just, I just I wait to wait that possibility somewhat differently. And I just, I don't really trader on that possibility. I think my to the extent that I am aware of that possibility, I just have cash like that.

57:19 I maintain some like a nonzero degree of liquidity. I don't like cash. You know, my, my, my preference would be to have just enough for the checking accounts. But I, you know, I always have kind of more cash than I need for nonlinear kind of deflationary shocks like that or like air pockets. I don't really try to trade around it when I want to trim out of Bitcoin. I usually sell a treasury company at three times.

57:41 Nav you know, I'll I'll happily take profits there when they when they get kind of silly priced. I don't really sell cold storage bitcoin or you know physical gold and things like that. And so I do think that the bitcoin charts looking a lot better now. So putting aside something like an air pocket I mean I think it's I think it's putting in a bottom. I try not to say what is what is a pico bottom versus, you know, what's happening there.

58:05 I agree with checkmate, which is, you know, just ask yourself if you're in the bottom decile or not. Really. Like, are you in? Is fast money out? Is that all in AI or you know, what kind of what are the metrics look like? I've been very comfortable with that. I think, you know, for a period of time, even gold got ahead of itself. I mean, the RSI was was just very overbought. And my view was it's not in a bubble.

58:27 It just it just went from undervalued to like somewhat more in the ballpark of reasonable very quickly. And so that that takes a period of time for the market to digest that. And I think the correction has been healthy. So I've studied long term bull on on both Bitcoin and gold. And I think they're both looking better here than they were a few months ago I would say. Where can I go to follow you. Thanks for having me.

58:53 And Luke we're going to go to find your stuff. If you enjoyed this episode, Luke and Lynn like subscribe. All that fun stuff. It really does help us out and check out the previous episode with Michael Sullivan.