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

Starting point is 00:00:00 Is this a treasury market event or is it something bigger? It's a treasury market event and something bigger because the Fed hiked rates. Broader question is whether or not industry rates or even a tool at this point. Where are you viewing basically the relationship between the Fed and the Treasury right now? There's a Mexican standoff kind of problem and they don't know what to do. The end of the world is not that things break. The central bank has to come in and start buying bonds and has trouble explaining why. Wouldn't that mean they're just going into hard assets and getting out of any debt right away?

Starting point is 00:00:28 As Lynn would say, there's no stopping this. It can happen in this non-linear events where there's a bank holiday, a reset, and you have an extra zero on stuff for the next day. We're past the point in no return. 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 closed, but oil appears to be the dog that didn't bark. The 10 years gone from 4.4 to 4.8.

Starting point is 00:00:55 Besant has doubled bybacks at the long end of the curve. Warsh took the chair. Gold had a record in January before the. the war, but then it had his worst quarter since 2013, 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 U.S. thing. Is this a treasury market event, or is it something bigger? It's a treasury market

Starting point is 00:01:23 event and something bigger. Treasury is 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 conspicuably 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. And so, I think there is also another dynamic to what's happening in the West that I think is very insidious and underappreciated. It's almost like a snake eating its tail, which is hyperscalers, particularly in the U.S. are borrowing lots of money. As I heard this week on Wall Street, hyperscalers are the bond vigilantes.

Starting point is 00:02:25 Amazon, meta, et cetera, they're borrowing at five to six percent. And last week on the Duar Keshe 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 U.S. and the West can't afford much above 4.8% in the tenure. And the other problem, as we're starting to see with disappointing jobs numbers, a disappointing job openings number this week, the Joltz number. AI is the whole point of AI is that they are the hyperscalers are borrowing trillions competing with Bessent, raising Besson's cost of capital, which is then raising the West's cost of capital, with a goal of undermining Bessent in the entire Western white collar tax base.

Starting point is 00:03:15 Because unless AI removes a lot of jobs from corporate America, 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. Problem is that half of Besson's tax base comes from employment. So we're in this, I think, loop of rising rates, Bessent does something to fight it, intervenes in the end, blah, blah, dup sizes, buybacks. None of it's going to be enough.

Starting point is 00:03:48 Ultimately, they're going to have to do something very, very good. 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. 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?

Starting point is 00:04:15 Well, 10-year treasure or 10-year Chinese government bond yields are 1.5%, 1.4%. They are 300 basis points, 350 basis points below the United States. They're the lowest in the world. They used to be higher and they are than sort of everybody. And over the last 15 years or so, they're now the lowest in the world. And what are they doing? There's two things. Number one, obviously they have strict capital controls.

Starting point is 00:04:42 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, oh, their housing market has crashed. And so people are flocking into bonds and that's driving yields out. Yes.

Starting point is 00:05:05 And they leave out the other parts. Because normally China Hawks are saying how screwed the Chinese consumer is, how poor they are, et cetera, et cetera. 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

Starting point is 00:05:28 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 to Japanese type of way in terms of manufacturing all along the manufacturing process. to continuously improve. 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

Starting point is 00:06:16 that can be charged for one to two REMB for a 60 to 100 kilometer range, right? So that one REMB is 16 cents 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 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. 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.

Starting point is 00:07:07 And so when you look at two things, like, finally, I would point out, as someone pointed out to me, China's real rates are positive. at 1.4% on the 10 year. They're one of the only big countries in the world with a positive real rate. And so that's the reason why rates are that low. They are in wholesale deflation, both because they've been willing to take pain, right? The U.S. tenure go down and just let everything collapse. Well, even then it wouldn't work, but let housing collapse. Americans won't let housing collapse. Chinese let housing collapse 10 years ago. And now they're in a deflationary period with AI being applied in a different way than we are. We're applying AI in a very inflationary way for the moment, right?

Starting point is 00:07:52 Because we're building all this stuff and we simply don't have the capacity engineers, grid, et cetera, to do it. And so we're driving inflation here with all that. So that's why Chinese yields are as low as they are. Incredible. Lynn, there's a lot to unpack there. Where would you like to begin, my friend? A lot of topics.

Starting point is 00:08:10 I mean, yeah, China's had kind of the opposite asset performance, obviously. So, you know, they've had, if you're an investor in Chinese real estate, you've had a really bad time for a really long period time. we've been 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 keeping that pretty money good, basically keeping both the value of their currency pretty stable in currency terms.

Starting point is 00:08:37 And then also, you know, obviously the yields that Luke just went into. They've created that very deflationary environment. They're on opposite sides, obviously, from the U.S. on a trade perspective. So they're running absolutely massive trade. surpluses with the rest of the world, while the U.S. runs absolutely massive trade deficit to the rest of the world, especially in goods. And so we're on very different sides. I mean, as I'm here in Egypt, I mean, over the past five years, Chinese cars are just taken over the road. And it's, they've gone through the same pathway that like other Asian

Starting point is 00:09:07 manufacturers went through. So like when Hondas were fairly new, you know, as a major exporter, they were kind of known as low quality. And then you fast forward a couple, you know, several years and then decades, hondays are perfectly. accessible vehicles, along with many other types of vehicles. And China's kind of going through that loop where five years ago, it was like, you know, if you couldn't afford, like, Hyundai's popular here, a lot of European manufacturers are popular here. If you could afford one of those, you can get a Chinese one. It wasn't considered very good.

Starting point is 00:09:36 But as of two, you know, two years ago, one year ago, I mean, they're increasingly going up the quality scale. 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 thing is 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.

Starting point is 00:10:06 And so if you add, you know, 50 basis points to American yield, it's not surprising that you get, you get kind of similar results in Japanese markets. These are all very interlinked. and they feed off of each other. And I think one of the things I see on Twitter, I'd probably would push back on some extent is, of course, these things get sensationalized. And when we live through generational moments,

Starting point is 00:10:26 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 his training 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 hyperinflate tomorrow

Starting point is 00:10:43 or next week or next year. It's a very long process that gets kind of punctuated by a little mini-crisies here and there. And what's interesting is that, you know, when the Treasury market broke in 2020, it literally broke. I mean, like literally off-the-run Treasury just went in liquid. There was like, the market stopped working. And similar things almost happened in 2022.

Starting point is 00:11:07 For the UK, they did happen. What's interesting is that we see all this intervention for, from Besson, and yet, you know, move index was pretty mild. Liquidity is still decent. It's just basically that longer in 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 tendentially discounted cash flow analysis attached to it,

Starting point is 00:11:34 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 add a house price to income ratio that was half of what it would be, then they'd be more affordable, but the combination of high house to income ratios

Starting point is 00:11:56 plus fairly high mortgage rates gives you, you know, kind of social disaster for young families. And so we have this kind of unusual intervention, which, you know, the long kind of road, I think, does end at yield curve control. you know, this, people have asked on a podcast, is this yield curve control? I mean, it's like the softest possible version of it. You know, any sort of QE or, you know, kind of shortening of the average duration, treasury debt. 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, and I think if anything is best in it's kind of like doing the strife hand effect on the bond market, that I think more people want to feel as a problem because he's focusing on it so much

Starting point is 00:12:50 compared to just if he let yield to go up to some extent, which then could pull capital from other things. People, you know, if yields get high enough, you could get selling pressure in gold for a period of time to hop in in treasuries. You could get, you know, selling of the marginal assets to hop in there and buy, you know, if the tenure goes up to five or five and a half percent. 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 U.S. can afford high industry rates in the near term. You know, the longer term, obviously, the higher rates they elevated, things keep, you get that long-term spiral keeps kind of playing out.

Starting point is 00:13:29 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. Let him make 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 10 year up to five or five and a half and pensions and insurance companies will buy it all. They'll buy everything out there. And yet they didn't. And there's two reasons for that. Number one, the deficit's now so big. I mean, it's in contrary to what he said he was going to go shooting for three arrows, right, which was 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.

Starting point is 00:14:16 It's going in the wrong direction. So number one, the deficits are so big. It's arguable exactly what the rate is that would allow pensions and insurance companies to buy it all. But the bigger dog that has not barked that is starting to kind of yip around the edges is there's, have been some people, Nick Namath has done really good work on what's going on in private credit and the illiquidity of it. A couple of other folks have done the same. And in particular, pointing to how deep the U.S. 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

Starting point is 00:15:02 of private credit is they are having delinquency slash assets. quality issues, but they don't have to take the marks because it's private credit, 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, 11 to Nick Nemeth's work is like 11 to 15, maybe 16% of total assets of the U.S. insurance industry, life insurance,

Starting point is 00:15:56 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 reaction to that would be exactly what Lynn said, which is Bessent having to react to the long end 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 4-8, 4-9, 6, 8,

Starting point is 00:16:54 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's 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. Now your life insurance is insolvent. Now what? Well, guess what they're going to sell to.

Starting point is 00:17:27 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 isn't barking. There's a Mexican standoff kind of problem

Starting point is 00:17:42 in the reflexivity, the interplay between private credit, insurance companies, trellong into the treasury market. And they don't know what to do. And there's no, like Ted Lynn's point. They're so far very soft versions of yield curve control. It's really much more like Operation Twist,

Starting point is 00:18:03 you know, done by the Treasury than the yield curve control per se. But it's the reason for doing it is the same reason they're they're eventually going to have to do yield curve control, which is, uh-oh, we don't like the price at the long end because we can't afford the price at the long end. And the price at the long end will trigger a Western debt death spiral. That's why they're doing it. And I, 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? Interesting. Lynn, I want to get your thoughts now.

Starting point is 00:18:36 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 U.S. housing market right now where 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. You can't port it in the U.S. I didn't know that. I didn't realize it was just a Canadian thing and you have to then refinance it like 6.6 or wherever the 30 years right now. So, Lynn, with regards to this idea of private credit, kind of keeping them in a standoff, your thoughts.

Starting point is 00:19:01 Yeah, I think there's a lot of merit to that. There's a challenge, of course, there's liquidity and solvency, which often get conflated in the media. 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, you know, private equity or private credit fund, X, Y, Z. And, you know, they have to say no to most redemptions.

Starting point is 00:19:25 And of course, that in sensationalized headlines will get conflated with solvency. But ironically, the way that that works is actually closer to full reserve banking, which is that they don't, you know, 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 illiquid loans, you know, longer duration of loans. With private credit, you know, your pensions, your insurance companies, your wealthy individuals, family offices, you're lending, and you're signing up front saying that there's no guarantee of liquidity. They'll try to do quarterly liquidity where they can, but they have to sell some of their

Starting point is 00:20:06 assets that they want to exceed that. And it's not, you know, it's not like a businesses like, you know, payroll. It's not a person's 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 absolutely does limit some of these funds. And of course, there's fractured-reserved 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 pull to

Starting point is 00:20:48 make that happen. Same thing with the central bank, obviously. Whereas insurance and pensions are fairly kind of honest balance sheets in a way. That basically if they want to buy something, they had to sell something else. They can't 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 dabble in, but they, you know, they're more limited than banks there.

Starting point is 00:21:16 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 treasury is kind of being issued, foreigners just aren't buying nearly enough, which means 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, now I'm a, you know, now I'm a dove now. So on the paper, he wants a smaller balance sheet.

Starting point is 00:21:49 foreigners are buying insurance companies. Obviously, they have the whole private credit issue. We just talked about banks are buying, but, you know, they're balanced. You 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.

Starting point is 00:22:15 There's no major liquidity stress. we've had what is so far been a pretty orderly degradation of the global bond market. I mean, it's like the move over many months, like the change in yields over many months has been significant.

Starting point is 00:22:30 But it's kind of inch to 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 Japan and you're a really big

Starting point is 00:22:45 creditor nation, you know, they have these huge government pension funds that they used to invest more domestically in a little bit foreign. And now they have a huge swath of that as foreign assets. And 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 Japanese bond market gets disorderly, they can say, well, we're going to pull some of that foreign capital back. And we're, you know, we're talking very large amounts for them. And of course, the marginal dollar coming out doesn't affect market cap. It has a

Starting point is 00:23:18 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 U.S. is a debtor nation. You know, we are constantly relying on four, you know, we're sending out our money and 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. And so that is one of the, challenges. And, you know, it gets really awkward when, you know, the end of the world is not that things break. It's just that you have, like, the central bank has to come in and start buying bonds and has trouble explaining why. Like in 2019, that happened. It was a really fun time on social media

Starting point is 00:24:01 watching people work through that. The Bank of England in 2022 had to, like, 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. 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 market does get a liquid, I mean, they're not going to let it stay a liquid. So, you know, they would find themselves to be rocking a hard place with, of course,

Starting point is 00:24:36 the hard end of the spectrum be 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 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 Treasury General account to a certain extent without really a particular crisis to point to and just saying this is kind of what we're doing right now until the midterms.

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Starting point is 00:26:38 and there's a few things I want to add in there, but I do want to add a, 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 how low those yields were. My immediate thought was maybe it's just because of capital controls or something. But is there like a yuan, not yuan? 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? No, there's the yuan has got strict capital controls on it. So that's, you know, that's, yeah,

Starting point is 00:27:10 Yeah, the Japanese bond market is ultimately, like Lynn said, this plays into the U.S. Net International Investment position, which is, you know, foreigners own $65 trillion gross, $22, $23 trillion net and 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 U.S. dollar asset piggy bank, sell dollar assets by yen assets. And he even said that, Besson, to his credit. Yeah. that's that's exactly, yeah, that's exactly right. So Luke, 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

Starting point is 00:27:55 do it? Where are you viewing basically the relationship being the Fed and the Treasury right now and if he's actually going to bring up rates? I don't think he's going to raise rates. Really? No. Kevin Warsh is not a hawk. Kevin Warsh, you know, go back to his December 2018 op-ed that he wrote with Stan Drucken Miller. Fed tightening, not now. That's the name of it. And in it, they were begging, begging, 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, but you know, you were starting to see some slowdown in the economy. What do I think was, might have been.

Starting point is 00:28:43 happening. What I think was happening with that op-end was Druck and Miller was off-sides and worse. I believe at the time was he was close with Drac and Miller, but if not working with him. I don't know his career path intimately, but off-sides. And I think they were trying to get stand back on sides. And so that's really interesting to me this week, what did what did Besson say about Druck and Miller? And his op-ed last week to yesterday he came out and said, Dracen-Miller's off sides. And yeah, that's why he wrote that. This would be the site. I have a pretty good, pretty good account that Druckin Miller was off sides in the fourth quarter 18. And that led to the op-ed and that influenced Fed policy and away we go. And now here we have a second instance of it,

Starting point is 00:29:27 according to Besson. We'll see. Warsh isn't going to hike rates. He's not. He can't. And the reason I say that is U.S. true interest expense, which is gross interest plus entitlements, plus Veterans Affairs are 105% of U.S. 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 3. He hikes again. They're going to be 110 percent of receipts growing 10 while receipts are growing two. This is, this is, and by the way, 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 entitlements, $100 trillion plus in entitlements. That is three plus

Starting point is 00:30:31 trillion dollars a year when you look at Social Security, Medicare, Medicaid, and Veterans Affairs. those are in a hard currency. So we're spending 60% of receipts nearly on Medicare, Medicare, Social Security, and Veterans Affairs, which are all inflation adjusting. You know, we don't owe my parents, you know, we don't owe my dad a payment for Medicare. We owed them a knee.

Starting point is 00:31:01 We owed them diabetic medicine. All of that stuff is a hard currency. hip, sneeze, doctor's 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. And so to me, this is like the elephant in the room that no one wants to talk about in this hole, is he going to hike? Is he not going to hike? Bessent has a debt problem today.

Starting point is 00:31:28 Acutely, number one, his interest and interest like obligations are 105% of his receipt and they're going to X's receipts today. And if Warsh hikes, they're going to run faster and his receipts are going to fall. That's going to blow out. 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 percent debt the GDP, in a context where his long-end domestic, you know, foreign buyers aren't buying enough, the foreign buyers that are there are hedge funds,

Starting point is 00:32:04 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, haven't bought a treasury net at any duration, but certainly not at the long end in 12 years going on 13 years. 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.

Starting point is 00:32:30 There's no price of 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 Warsh and Bessent getting on the plane to go to Asheville together, they weren't talking about the freaking Yankees. Right. We have it on record, right? What did Bessent say to Pulte?

Starting point is 00:32:55 I will punch you in your effing face. You want to step outside? I'll punch you in your face. I hear credible rumblings that Bessent took a swing at Elon Musk. under Doge. I think, hey, this is what we used to call the sales desk, a hey, mother,

Starting point is 00:33:13 or conversation. Hey, mother, you aren't going to raise rates in September. 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 they, you know,

Starting point is 00:33:27 they look pretty. Everyone looked good. Oh, I got all of it. Lynn, I want to get your response. If you agree, where you disagree,

Starting point is 00:33:34 and I was just want to quickly highlight, like even as a Bitcoiner who wants none of this monetary policy or things going on. I do find percent just incredibly entertaining. I just think he's a wonderful character in this weird drama that we're all going through. So, Lind, your thoughts,

Starting point is 00:33:45 please. Yeah, I agree with that one. So, yeah, in general, so my kind of view and research has been,

Starting point is 00:33:52 my base case is for zero to one hikes, basically that you'd forget the one, it'd be kind of symbolic to say he did it. And so, yeah, I kind of don't really take a stand on what's going to happen, 25 basis points. But in general,

Starting point is 00:34:06 The issue is that when you get to this far in fiscal dominance, rate hikes don't solve the problem. Everybody has their mental model of the 70s when we had lending-driven inflation. So it was fractures of banking primarily responsible for the money supply growth. You had baby boomers entering the home buying years, having their peak credit formation. You had pretty low debt to GDP, public debt to GDP. So if you've raised industry, it's like Volker did really high. You do a couple things. One is you bankrupt like Latin America.

Starting point is 00:34:36 So you reduce their oil consumption, at least more for the U.S. 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 Lus at all those inflexible spending,

Starting point is 00:35:06 you don't you don't change like congress doesn't make decisions because you know interstates are 5% instead of 4% and then in addition when you have over 100% of debt to GDP and you raise industry rates you blow at 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 accounts for example it's like they get 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 industry rates or even a tool at this point. I think that's the uncomfortable question for Wall Street and for the government as a whole.

Starting point is 00:35:45 So what's that line like below my line? Is that, was that the Chimot line? Yeah. So I've been basically any, yeah, 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 would crack spreads look like, you know, three months from now or six months from now? I briefly mentioned oil in the beginning. Oil never went up to $150 or $200 a barrel like people feared.

Starting point is 00:36:10 But we do have record high crack spreads because the bottleneck currently. Diesel is $185. Exactly. So 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 oil itself is over 100 just because the gap between what oil costs and what the actual refined product costs is, you know, higher than average. It'd be even worse, of course, if oil itself then blew out. But, you know, putting that aside for a second, you know, like what is on the top my mind, you know, some months from now, it's okay, what's happening with fiscal deficit? That's still

Starting point is 00:36:48 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? What are, you know, 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 in engineering terms, you'll put like a barrier around it and say like, here's the tolerance that we don't really have to devote too much attention to. And for me, like 25 basis point questions, it's 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, 7% of GDP deficits is a much bigger topic than if he's going to toggle, you know, industry rates because we're just so far down the line. in fiscal dominance, that it almost doesn't matter. And the broader question, though, I think

Starting point is 00:37:39 it's, and this is, you know, perhaps why Besson is acting so early here before any signs of trouble, is that there is this kind of dawning realization in Wall Street about fiscal dominance. You know, back, I mean, Luke and I were talking about this for many years. It used to be fringe. And, you know, over time, like, my context on Wall Street are kind of increasingly saying, I mean, this is understood. 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, periphery become more like acknowledged. And part of what holds this together is perception and sentiment, the idea that that, you know, okay, we have a problem right now, but it's temporary.

Starting point is 00:38:25 It's like, okay, once this is a rant thing resolves, you know, once the Fed regains credibility, then long end yields or go down. there's this kind of like credibility loop that people kind of, it's like cope. It's like as long as, you know, as long as, you know, we figure out the temporary things, we can get the, the things back on track. And there was like a pretty kind of, like, loose perception that if, if you get a past certain critical point, you know, if you got people that manage a trillion dollars that suddenly see the things like that I do, like in terms of, if they, if they suddenly wake up and

Starting point is 00:38:57 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, that nothing stops his deficit, and they're in charge of a trillion dollar balance sheet, I mean, then you've got a problem, right? And so they don't really want that cascade to happen. They want to keep the idea 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 that we're going to have a big deflationary sink and absorb all this. Or, you know, stable coins are going to miraculously come in and save the day, for example. And the best ones, of course,

Starting point is 00:39:33 always have a grain of truth to them, right? That 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.

Starting point is 00:39:47 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 Beston's trying to manage right now. Interesting. Ligie, 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?

Starting point is 00:40:08 Well, it's raised as 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. I mean, it could be. I don't know. It could be five years, 10 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 consigliary of one of the top execs at BlackRock, according to Jim Rickards. And Rickards goes on to say that in a crisis, Treasury can pick up the phone, make one call and lock down $5 trillion a capital now, which is BlackRock. That's it.

Starting point is 00:40:58 No sales. and the rest of the market would follow. And 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 it and go, lay out everything we've laid out, I lay out, we're already beyond, we're past the point of no return. They have a Vimar gold reparations problem. I'm not saying we're going to go Vimar.

Starting point is 00:41:21 I'm not saying we're going to hyperinflate. But I am saying the United States has a Vimar gold reparations. They owe more money than they are taking in a receipts. in a hard currency that inflation adjusts today. It's only a matter of time to Lynn's point until people running trillion dollar balance sheets get that. And when they do, they're going to go to hit the sell button and it's not going to work. Like it didn't work. Like the buy button stopped working at Comex at Silver in 1980 with the Hunt Brothers.

Starting point is 00:41:54 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. And I have two dear friends that emigrated here from Ukraine. They're American citizens now. They've told me how this goes, which is, we remember 19, I believe it was 1998.

Starting point is 00:42:26 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. When people that are running trillion dollar balance sheets internalize enough that they realize that there's no stopping this train and that were already past the point of no return, barring a productivity miracle. And so that might be your trigger of like, oh, if AI starts.

Starting point is 00:42:56 to break, then, oh, then the whole thing, 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 into gold and Bitcoin. 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, you 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.

Starting point is 00:43:37 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. We're sure it won't happen. And yet, look, I don't know when it's going to happen. the math is telling you it's going to happen. Could it be next week? Sure. Could it be 10 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 08 or 09, maybe it was 11, Rickards book. He flat out says a Black Rock 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.

Starting point is 00:44:25 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. 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 of the other side of it and debt the GDP will be 20%. Down from 120%.

Starting point is 00:44:47 It'll be, you know. And, you know, the money that used to buy five cars will buy months of groceries. Have a good day. And when I asked my Ukrainian friends, how did people that own gold and silver do? Obviously, it's pre-Bitcoin. How'd they do? He said, oh, they were fine. Nothing changed for them.

Starting point is 00:45:03 That's how it's going to go. Unfortunately, like we're past the point in no return. My custody set up today looks nothing like it did five years ago because Bitcoin security is a process. We should always be looking for opportunities to improve. So whether you're getting your coins off the exchange and taking self-custy for the first time or you're setting up a brand new multi-vender multi-sig to secure your family for generations, Jade Plus is a tool you should absolutely have on hand.

Starting point is 00:45:27 Open source both hardware and firmware and you can verify it using genuine check when it arrives. Then pair it with the Blockstream app or any number of software wallets, including Sparrow, which I often use. So get yours today. Go to store.com.com code BTC sessions or scan the QR code to get 10% off of your Jade. Lynn, I want to get your response before I shift to Golden Bitcoin. Yeah, I mean, there's two main ways it can happen. It can happen in these nonlinear events where there's a, there's like a bank holiday, a reset, and just, you know, like you have an extra zero and stuff the next day. And there's kind of the slow spiral type, which is, I mean, you know, where I am official inflated is 15%.

Starting point is 00:46:05 And it's just like, it's a normal Wednesday. It's just like, that's, that's how it goes. You have to save it 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 after you pass initial shock, people adapt. That's how things go. And so you can have this, that's where it comes down to trying to predict policy decisions,

Starting point is 00:46:36 which is that kind of the natural state of things, they can keep doing small things. You know, if the bond market goes to liquid, they can buy $100 billion of bonds 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. 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 your credibility degrades. Then you get that, you know, there's $1,000 balance sheets saying maybe we have to do something different. And part of it is that you have real politic in play,

Starting point is 00:47:16 which is that, you know, the people in charge of Japan's, you know, gigantic pension fund, one of their considerations is relationship with the U.S. So one is, it's not just like a strict personal investment portfolio optimization. That's part of it. But then it's also, you know, to what extent we want to risk our relationship with, you know, one of the largest economies in the world and a longstanding friend. And all the benefits to come from that and that sometimes drawbacks to come from that. and if things get bad enough, then that calculus changes.

Starting point is 00:47:49 And that's how you get kind of more rapid changes. And the Fed asks to say, oh, instead of buying $100 billion, we have to buy a trillion. Kind of like what happened in COVID, where they have to come out with like a comical amount of purchases to fix the problem. So yeah, you can get these kind of more gradual ones. You can get these abrupt ones. 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.

Starting point is 00:48:13 I mean, that's why I've been a lot. longstanding 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. 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, you know, people say, well, that'd be a Dumer perspective. Well, again, I mean, I'm right now in a place with a 15% inflation. It's things that sound like Dumerism are just a normal Wednesday in other countries.

Starting point is 00:48:53 And to lose point, like people in certain countries, if you own gold or Bitcoin, you're just like, yeah, that was crazy. Glad I had, you know, it's not Mad Max. It's just, it's just, yeah. And so there's different levels of Dumerism, 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

Starting point is 00:49:17 and it's not always about worrying it's just about owning scarce things you know trying to avoid scarce things that are temporary in a bubble because even a good thing can get overpriced from time to time if everybody likes at the same time and you try to go about your day

Starting point is 00:49:33 and then you worry about other things at some extent like what jurisdiction you're in where do you live, where do you work for wealth of 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 go about your day and just realize that, you know, the world, people get through crazy events.

Starting point is 00:49:57 I mean, there are certain horrible, horrible events that can happen, but anything short of the worst stuff. I mean, people are adapt. And, you know, the last five, ten, even 40 years are not necessarily the map for the next five, 10, 40 years, looks like. And 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

Starting point is 00:50:26 physical constraints is when the illusion begins to break, right? Yeah. When this 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's sell groceries at a loss to the country.

Starting point is 00:50:47 People need to pay attention. Why is he doing that? This is when you see things like that. When you see him come out and sound like Elizabeth Warren and Mamdani about, hey, you evil refiners, I like you, but you're overcharging people.

Starting point is 00:51:05 Well, then stop supplying the Ukrainians with friggin' targeting directions and missiles to hit Russian refinery, right? Like Bessens 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 pee on my back and tell me it's raining.

Starting point is 00:51:30 But when you see these inconsistencies in the physical world, these are warnings. And it doesn't mean again, it doesn't mean it's happening. tomorrow or next week or even the next year. But the longer they go on, even the dumbest American will go, even most maga, I'm not saying people maga are dumb, but I'm just saying the most rabid, when you're when you were rabid and dogmatic, you're indistinguishable from being dumb. When you were the most rabid dogmatic Trump supporter going, you know, like some of you've seen some of these interviews with beef ranchers.

Starting point is 00:52:05 They're like, I love this guy. And like, what is he doing? This is not only hurting my living, but it's non-economic. He's literally following Mamdani's economic policies. These are the clues of, you know, these are the cracks in the facade of, you know, because the paper world, they can, you know, oil is a perfect example. Part of the reason why crack spreads are so high is because they've been manipulating oil. They have been.

Starting point is 00:52:32 There have been a number of different ways they've done it, right? You running down the SPR is a way of manipulating oil. 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, a, uh, uh, uh, uh, gbaf or, or whatever point. And he said, you know, we know which futures Jane Street was selling, you know, at your behest, Scott Besson, why don't you do something about that, you know, so I've heard other things are like that type of thing, right? So they are doing what they

Starting point is 00:53:07 can in the market they can do, but they can't do as much in the refined products. It's a physical issue. You can short refined products, not nearly as deep 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 friggin gasoline. And I can't put, I can't, I got three boys that are over six feet tall. They don't eat paper beef, as it turns out. They eat actual beef. And so it's that physical. 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.

Starting point is 00:53:52 And it's a straw that breaks 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. We're bouncing up a little bit here. Are we back in Bitcoin? Yeah, 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.

Starting point is 00:54:17 It was way too big. And so, yeah, I still own, you know, call it mid-single digits of liquid net worth and Bitcoin. I've been add back a little bit cautiously. Simply because I, you know, it has bounced back a bit, but I still think. that this non-linearity we talked about as it relates to bonds, right? You know, to Lynn's point about things going in, you know, sort of gradual, I think we're dangerously close to a, you know, 10 year at, you know, 4-8, 4-9, 5, 5, 5 and a half, 6, 7, 7 and a half, and then they really got to do something. And again, I've said it before.

Starting point is 00:55:08 I think it's very possible. I'm way too cute. I also think if we get a two, three week period, one month period where the tenure goes from four, eight to seven, I think I'm going to be able to buy back everything I sold more cheaper than where we've seen a 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 conviction is increasing. to get that air pocket because, again, of the debt, where we are with the fiscal situation

Starting point is 00:55:44 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. And then this non-linearity of private credit insurance, long-end foreigners, right? I mean, you know, 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 Bessent for capital. So that's, I, that's, I, that's, I, that's, I, That's where I'm at on Bitcoin. So love it 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

Starting point is 00:56:23 sometime in the next two to three months. And I think there's a high risk of it. There's an above normal risk of it, right? So 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.

Starting point is 00:56:41 The conditions are here for the 10 year to go from 4-8 to 7 like that. And I think if I'm right, then I think Bitcoin's going to trade much lower than most Bitcoin Bulls thinking for a moment. And for those that don't care about that volatility, I totally get it. But I would be aggressively buying on that downside. 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 wait that, wait that possibility somewhat differently.

Starting point is 00:57:12 And I just, I don't really trade around that possibility. I think my, to the extent that I am aware of that possibility, I just have cash, like that I, I maintain something like a non-zero degree of liquidity. I don't like cash. You know, 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, you know, 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. I'll happily take profits there when they get kind of silly priced.

Starting point is 00:57:45 I don't really sell cold storage Bitcoin or physical gold and things like that. And so I do think that the Bitcoin chart is looking a lot better now. So putting aside something like an air pocket, I mean, I think it's putting in a bottom. I try not to say what is a pico bottom versus what's happening there. I agree with a checkmate, which is, you know, just as ask yourself if you're in the bottom desal or not really. Like are you in his fast money out? Is that all in AI or you know what kind of what do 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,

Starting point is 00:58:22 which is very overbought. And my view was it's not in a bubble. It just, it just went from undervalue to like somewhat more in the ballpark or reasonable very quickly. And so that, that takes a period of time for the markets to digest that. And I think it's, it's a period of time. the correction's been healthy. So I'm still a long-term bull on both Bitcoin and gold. And I think they're both looking better here than they were a few months ago, I would say. Beautiful. Lynn, where can everybody go to follow you?

Starting point is 00:58:51 Lin-Aulton.com. Thanks for having me. And Luke, where can everybody go to find your stuff? FFTT-L-L-C.com. 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.

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

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