TFTC: A Bitcoin Podcast - #654: The Fed Has Painted Itself Into a Corner with Michael Howell

Episode Date: August 25, 2025

Marty sits down with Michael Howell to discuss the Fed's predicament at Jackson Hole, global liquidity cycles, the structural shift toward collateral-dependent lending, and how mounting debt refinancing pressures alongside AI capital expenditures are creating conditions that favor monetary inflation hedges like Bitcoin and gold. CrossBorder Capital on Twitter: https://x.com/crossbordercap STACK SATS hat: https://tftcmerch.io/ Our newsletter: https://www.tftc.io/bitcoin-brief/ TFTC Elite (Ad-free & Discord): https://www.tftc.io/#/portal/signup/ Discord: https://discord.gg/VJ2dABShBz Opportunity Cost Extension: https://www.opportunitycost.app/ Shoutout to our sponsors: Bitkey https://bit.ly/TFTCBitkey20 Unchained https://unchained.com/tftc/ Obscura https://obscura.net/ Join the TFTC Movement: Main YT Channel https://www.youtube.com/c/TFTC21/videos Clips YT Channel https://www.youtube.com/channel/UCUQcW3jxfQfEUS8kqR5pJtQ Website https://tftc.io/ Newsletter tftc.io/bitcoin-brief/ Twitter https://twitter.com/tftc21 Instagram https://www.instagram.com/tftc.io/ Nostr https://primal.net/tftc Follow Marty Bent: Twitter https://twitter.com/martybent Nostr https://primal.net/martybent Newsletter https://tftc.io/martys-bent/ Podcast https://www.tftc.io/tag/podcasts/

you've had a dynamic where money's become freer than free if you talk about a fed just gone nuts all all the central banks going nuts so it's all acting like safe haven i believe that in a world where central bankers are tripping over themselves to devalue their currency bitcoin wins in the world of fiat currencies bitcoin is the victor i mean that's part of the bull case for Bitcoin. If you're not paying attention, you probably should be. Michael Howell, thank you for joining me again. Big day. Yeah, big day today. Big day out in Jackson Hole. Everybody's waiting with a bated breath to see what Jerome Powell is going to say. I was watching. I couldn't sleep this morning. I woke up at three thirty a.m. and just

decided to get up and start working and have been watching CNBC. And it's been funny watching their commentary a lot of back and forth i think considering that this meeting's happening today we'll post this on monday and so i guess the pressure is on to sort of predict what jerome powell is going to do how would you describe his current predicament and what he may or may not do later today well i think it's it's clearly a difficult situation you know they uh they always say as an old irish joke that um well they say to travelers how do you get from here to dublin And the answer is, well, if I was going to Dublin, I wouldn't be starting from here. And I think that, you know, that's pretty much what I would describe the Fed situation is.

I mean, Jerome Powell is in a difficult situation given the sort of pushback or aggressive pushback he gets from the administration. I mean, that's for sure. But I think the other thing is that they kind of painted themselves in a corner a bit. I mean, on most counts, rates should be lower than they are. I think he finds it difficult now to probably admit that. So there is some resistance. But I think you can see within the FOMC, there is a growing willingness, I think, to cut interest rates. So I think given what's going on internationally with rates and maybe as well what's happened lately to the dollar, the rally, the weakening in the US economy, I think there's

grounds for rates to be cut. That's for sure. I think the more difficult question, which is you know, something I'm sure we're going to dig into is really what happens to the Fed balance sheet, the Fed operating system, you know, looking at longer term, because they've been promising us some information about the new operating procedures of the Fed for a long time now, and nothing's come out. So I kind of expect or maybe think that they're going to do something, announce something at Jackson Hole about the new operating procedures that they've been talking and thinking about for some time now. That may come out in an announcement. But I think the more fundamental question is, what happens to liquidity and really the size of the balance

sheet? And I think that's relevant, given the fact that if you look over the first six, seven months of the year, Fed liquidity, the amount of money that the Federal Reserve injects into money markets, actually was up $350 billion, even though the overall balance sheet itself, the broad balance sheet fell by about $250 billion. So you've got liquidity and the balance sheet going in opposite directions. And that's kind of because there are other ways of injecting liquidity into the system apart from the headline balance sheet number. And that's things like the treasury general account, the reverse repo program, et cetera. And they've been actually positively buzzing and actually adding money to markets, which is why risk assets have kind of

done so well over the last few months. The question is that if the Treasury is insisting on rebuilding that account, their account of the Fed, the Treasury general account, which was forcibly run down because of the debt ceiling, if that now is rebuilt in the second half of the year, then a lot of liquidity is going to come out of markets. Now, that's what investors are fearing. I don't think it's going to come to that because I just don't think they're in a position where they can do that. And that's why I say I think the Fed has kind of painted itself into a corner a bit here yeah in terms of choreographing or making the market aware of new operations can we dive into that in terms of what they may or may not change or what the market is

looking for them to change yeah i think that a lot of the market uh talk is really about whether they're going to change you know average inflation targeting to you know maybe change the nuance of that? Could they change the symmetry in that goal that could be done? For example, I think that's one of the things that is sort of high on the agenda as a change. There could be more technical things about how the operating procedures are changed. I mean, that may be necessary. But I would say one of the things that may come in, and this has been mooted in terms of what the Fed has wanted to do is maybe they're going to announce that they're going to be a bigger buyer of treasury bills in the market than they have been. Now, one of the things that was suggested

or has been suggested in speeches over recent months is that the makeup of the Federal Reserve's holdings of government debt, the SOMA account, the so-called SOMA account, is generally vested in longer duration treasuries. So things like 10-year notes, for example. And that's not really the sort of representative of the average mix of treasury debt out there in the market. As you know, there's been a lot of very, very short-term issuance operating, particularly under Yellen, but Scott Besson's continued that. And so the treasury is slated to issue a lot more bills. Now, on the one hand, that's playing to this whole argument about stablecoins being big buyers of treasuries in the future, and they like bills. Sure, I go along with that. But then the

Federal Reserve should be matching, if you like, in its SOMA account, the average mix of debt in the market. And the moment they're not, their SOMA account is too heavily weighted to longer duration debt. So what they may do is reduce the average by buying a lot of bills. Now, that would certainly help the fund take pressure off funding, and it will enable the market to get more liquidity. In order to do that, they'd have to sort of change the rules a bit on what they're talking about in terms of roll-off of debt. So they could say they're going to continue rolling off existing treasury notes. But then they add an addendum to say, OK, we're alongside going to build up our holdings of bills?

So they could do something like that. Nothing's certain, but I would be looking for some subtlety, simply because if you look at the math here, if they do rebuild the TGA, we're talking about taking $300 billion to $400 billion out of money markets. And I don't think that's a good idea, to be perfectly honest. I think you'll see a lot of tensions in markets if that transpires. Yeah, it's... It's fascinating in many regards, both on the Fed side and the Treasury side, because Scott Besant, very publicly, when he was coming into the administration at the beginning of the year, was lambasting Yellen for hammering the front end of the yield curve.

And I think he's implicitly had to walk that back and just action speak louder than words. They're still hammering it. And I think even explicitly over the course of the summer, he has admitted that they will still keep issuing bills on the short end. And then to your point about the Fed's painted itself in the corner, it seems like Jerome's in this position where he doesn't want to seem like he's letting politics influence his decisions. But to your point, if you look at all the ways in which they can inject liquidity, they're sort of out of arrows in the quiver. I believe reverse repo last I checked is around $22 billion, down from $2 trillion a few years ago. Yeah, it's right down. And there's not much more they can do, to be truthful. So what you're looking at, I mean, sort of ironically, is you're shifting really from a regime of Fed QE, or

whether it's a hidden QE, but the Fed has been the mainstay of liquidity coming into markets. And you're shifting to a situation where the treasury is more and more responsible for, if you like, liquidity easing. It's taken on the mantle now, whether that is, you know, vested in the treasury because of the gyrations in the treasury general account, whether it's as well or probably more particularly because of just the changes in the average duration of issuance. And this is an important point because, you know, very generally, I mean, we can think of liquidity as being an asset divided by its average duration and think of duration as sort of the maturity of the debt. So if you're issuing lots of debt at very short maturity, that quotient, that ratio between the asset size or the debt size and its average maturity is going to increase quite dramatically because on average, you're replacing a 10-year note, say, with a three-month bill. so the liquidity available to the private sector is going to go up enormously now that kind of makes a difference as well um for a whole lot of reasons i mean one is that we live in a world now where collateral uh collateralized lending is absolutely critical you know latest estimates

from the world bank who have dug very deep into this worldwide tell us that something like a close to 80 percent of all lending worldwide now is collaterally based i mean that's an astonishingly high figure. But that's the reality. This is how the world has changed since the global financial crisis. Collateral is really critical to the system. And so what you've got to have in terms of future liquidity growth, in other words, future lending growth, is a stable collateral base. You can't afford to have the bond markets going awry. Now, with that regard, you can help that situation really in two regards. One is you can start to issue a lot of very short-term paper, in other its bills. Now, I know, you know, we accept the fact that this is not sort of great long-term

planning from the treasurer's perspective. And Stanley Druckenmiller has, you know, been on record as saying over the years, look, these are the numbers that you'd expect to see, or this is the policy you'd expect to come out of Argentina. And we can't really say that about, use Argentina as the benchmark anymore, but you know what I mean. It's a Latin American type, you know, funding process to fund at the short end. But, you know, hey, the US is now doing that. But one of the advantages, if there is an advantage in doing that, is you actually don't absorb liquidity from the market. You actually create more liquidity because you're showing a very short-term bill.

And what's more, you help to contain volatility in the collateral markets. Now, that's absolutely critical, and that shouldn't be lost sight of. One of the things that we've seen over the last few months, which is a wonkish point, but it's still really important here, is that if you depend on collateral for liquidity and credit growth, what you need is stability in these markets. In other words, you want very low volatility. And there is a statistic out there that I look at very keenly, which is called the MOVE Index, which is a measure of the volatility across the treasury yield curve. So it's bond the volatility. And if you look at that index, it's plunged dramatically over the course of the

last few months. Now, that could be purely coincidental. It could be by accident. I think it's being engineered lower. I think the Treasury and the Fed realize that they've got to get volatility down. If they get volatility down, that's liquidity enhancing. It's good for financial markets. And what's more, it keeps hedge funds in the game of buying treasuries. Because one of the things you will recall, Marty, is that foreign buyers have kind of slowed down. They haven't reversed, but they've certainly slowed down their buying of US debt. Traditional buyers of debt in the US are not really there in size because the yield curve is still quite flat. So there's not really the uplift on buying long-term debt and funding it in the short-term markets.

So they're really dependent on the hedge funds who are doing something very technical called a basis trade, which means shorting futures and buying cash bonds. Now, that's at the margin, the big buyers of treasuries. And what those hedge funds really require is low volatility in the market. So I think there's an awful lot of volatility targeting going on. One would have to say a dangerous policy, because it can go wrong at a moment's notice. You can suddenly lose control of volatility. Volatility can spike. But it does show that there's, I think, behind the scenes, a lot of awareness that liquidity is a critical factor in markets right now. Yeah. And your newsletter from yesterday, diving further into this point, I'm going to make

a question and then actually two questions. First, just describing the world collateral multiplier like reducing the volatility um of the yields like gives people more confidence and certainty that the bonds the other the bonds connected to those yields are are good collateral liquid collateral and then the second um the second question i have is are you essentially describing yield curve control without saying it explicitly yeah i think it is i mean it's a it's a form of yield curve control i mean there's there's no question about that uh i mean that basically i mean all these operations are trying to uh you know manipulate uh investors into certain parts of the curve and they they don't want long you know long duration yields in other words 10

year 20 yields to back up very much uh and then ideally like uh investors to be in the front end and uh even more what they'd like is jpal to cut interest rates because if they start cutting rates at the short end of the market, the cost of bill finance is going to go right down. And that's going to save the Treasury a lot of money in terms of interest payments. So I think absolutely, this is what they want. And if they can rational or create shortages of longer term debt at the long end of the market, in other words, they're going to starve the pension funds and insurance companies and longer duration government bonds, then those yields will be down as well so i think there's there's definitely uh you know yield curve control yeah and i mean

that's the big question in my mind once you go down this path is it complete japanification of the yield curve and if you look over japan right now they're 30 and 40 year are breaking away those yields and is this they're trying to be as implicit as possible but as you're describing It's pretty clear this is what they want. Like, is this a point of no return in terms of driving demand on the longer end of the yield curve from foreign buyers? Yeah, I think one's got to put this in context. I mean, we're talking here about the U.S. We're not talking about a Latin American economy, and it would take an awful long time for the U.S. to sort of spoil its reputation here.

The U.S. dollar is still the principal safe asset in the world. U.S. Treasurers are still the main, they're pristine collateral. It would take a lot to dent that. And despite the sort of the media, which have been jumping on this ridiculous bandwagon to say it's the end of the dollar or it's the end of the treasury market or whatever, you know, as the dollar had a little bit of a wobble earlier on this year. I mean, that clearly is not the case. But, you know, reputation, I mean, the shine can come off reputations. I mean, it will take time. But I think that, you know, you're absolutely right to say, look, we're we're embarking on a journey here, and we're treading down a path, and that path is not

a very attractive one, because it could end up rather like Japan. Japan is now struggling to contain yields at the long end of the market, because they've basically been, you know, been undertaking this yield curve control or manipulation for so long. And you can only squeeze a balloon, you know, so much until it bursts. And that's the problem that they're getting into. Now, I think the US is some years away from that, but I think you've got to be alert to these dangers. And if you look at the pressures on the US treasury market right now, I mean, paradoxically, they're not really coming from domestic largesse right now. They're actually coming internationally from pressure on Japanese yields and German yields. So US yields at the

long end of the market are actually being pulled up by those factors right now. That's not to say that there couldn't be a domestic problem upcoming in the next two or three years, which would actually push yields up. So I think the danger that we've got here, as you rightly point out, is we're sort of moving down a path which is not a very attractive one from the perspective of long-term interest rates. And this is the dilemma that everybody faces. The US may well be the cleanest shirt in the laundry, but hey, it's in the laundry. A lot the country is in a worse shape, we acknowledge, but it's not really a, you know, to keep saying that we're the cleanest shirt and everyone else is in a worse situation is not really great

salvation here. The problem is debt, and we've got to get off this debt problem. And it's not easy. So freaks, this rip of TFTC was brought to you by our good friends at BitKey. BitKey makes Bitcoin easy to use and hard to lose. It is a hardware wallet that natively embeds into a two or three multi-sig. You have one key on the hardware wallet, one key on your mobile device, and Block stores a key in the cloud for you. This is an incredible hardware device for your friends and family, or maybe yourself who have Bitcoin on exchanges and have for a long time, but haven't taken a step to self-custody because they're worried about the complications of setting up a private public key pair, securing that seed phrase, setting up a pin, setting up a passphrase.

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presentation explaining why this bull run might be only just beginning and what forces could push it to the next level. Read the first ever mid-cycle report from Adamant Research at unchained.com slash tftc. That's unchained.com slash tftc. And also, if you're using Unchained, you can use the code tftc for 50 off any of their services go check it out that's like i was describing to you before we hit record i wrote a newsletter this morning basically just wanted to flag to people i know everybody's focused on what's happening in jackson hole right now but if you look over at the margin and leverage in the system nominally it's at all-time highs and in real terms it's right below all-time highs hit in 2021 and then you consider recent industrial inflation prints

with ppi being relatively elevated you look at the trump administration and the fact that they are obviously looking at this artificial intelligence boom as a national security risk and they want to do everything they can to make sure they win the race against china to get the predominant ai models in u.s shores or operated by u.s companies and then you look at what's happening jackson hole likelihood of rates coming down being higher than it has been in some time and i'm just wondering with leverage where it is with markets at all-time highs like what does this look like moving forward if they lower rates go full qe um with all these other external factors playing in, particularly with AI and the amount of investment that's going to be

needed to build out the energy infrastructure to make it possible in the first place. Yeah, I think these are all great points. I mean, it puts Jackson Hole kind of into perspective because there are bigger things out there that we've got to be alert to. There's a slide that I've given you, you can put up on the screen, which is looking at the global liquidity cycle. And that kind of puts in or frames the issue that we face. Now, this is looking at the world. The index shown is a black line, which is our index of the momentum of liquidity through world financial markets. So this is the amount of money. This is not M2 or M1 or any of the monetary aggregates. This is money which is flowing through financial markets, which is really driving financial asset prices.

and what we tried to show there is that there is a a rhythm a pretty standard rhythm of about five to six years in that cycle and the sine wave that we've drawn on top of that was actually drawn up 25 years ago in year 2000 and we haven't changed it thereafter it was done by Fourier analysis for those that are mathematically inclined but it's been sort of continued on at the same frequency which is that 65 months uh you know tempo and what you've seen over the course of the last uh you know cycle movement is we've been absolutely on track so the cycle bottomed in october of 22 and it's been moving up the volatility you've seen is actually largely a china phenomenon and you know i can try and show uh you know what um uh what that looks like if you uh if you take

a look, hopefully that slide has changed, to the advanced economies stripping out China. And you get a much, much cleaner line. Now, we can drill into what's going on in China if you like. But I think the big issue here is the cycle is basically beginning to swing, to turn or get towards the peak. And that's clearly a critical factor. Now, if you put that in, as I've shown in this third slide, this is looking at where we are against the normal cycle. Now, this is not set in stone. So we've got to be careful. And we're just playing the averages here. But the averages are important to watch as a benchmark. And that dotted line is the average cycle since 1970, the average liquidity cycle. And our view is that liquidity drives markets. And so you've

got to be aware, alert to this. And the red line is the current cycle. Now, we're not turning down yet. That's not the point. Maybe we've got a little way to go before we reach the peak. But you can kind of see that, put in context, this is the situation that we're trying to grapple with. Now, I put in the earlier slide, which was the world one, so adding back China, a projection. and that projection is showing that we are reaching a peak you know maybe in six months nine months time and then we kind of go down and the question is why do we go down and that's an important thing to address so let me try and address the reason why we think things may be going down now one of the arguments is to look at this slide which is comparing the current cycle

shown in orange here, with the cycling back in the 1980s. Now, a lot of your viewers probably won't remember the 80s or whatever. But that's when I started in financial markets. And I remember the 87 crash all too well. I was at Salomon Brothers at the time and witnessed it sort of front on. And basically, what you saw was a very similar move to what we're seeing right now. you had uh a plaza record in 85 which was an attempt to get the dollar down and just think back to the word accord uh mar-a-lago accord whenever politicians or policymakers talk of accords they're talking about uh sizable exchange rate adjustments and we've had that uh that allowed uh foreign central banks back in 85 and again now to ease policy and that was a factor

which drove global liquidity up. It launched a recovery in the world economy, rising commodity prices. We're sort of getting that now. It began to push yields in bond markets higher. We're getting that now. And it was ended basically in late 1987 by the Germans saying that they were concerned about inflation, and they were thinking about and planning to raise interest rates. the crash stopped them doing that but that was their intention and because of the plaza record and louvre chords there was set uh if you like trading bans between currencies and between interest rates so if the germans moved the u.s would have to move and treasury secretary baker at the time was actually much more inclined to want rates lower uh a little bit like you know

that the the treasury and the administration are talking to the fed now get rates down That's what Baker was doing at the time. And in the event, things went awry. Investors got spooked. They realized the liquidity cycle was about to end. You can see the dramatic move down in that red line at the time. And that's really what happened. That caused the crash. now the orange line is moving up in that direction so your concerns about you know bubbles and and you know high p's are very well said because this is what we expect at this stage of the cycle we're going to be there yet we haven't had the trigger but we're getting we're clearly getting late in the cycle and those are things to think about so let's sort of you know try and articulate why you could be getting this cycle ending sign. What I want to do is just to move on, if I can, in this presentation to another slide. I'm just going to go through these bits and get to

the bit I want to start with, which is just here. And that's saying that this is what we've got to think about in terms of understanding risk in financial markets. And this is looking at the ratio between debt, shown here for all advanced economies, and the amount of liquidity they've got. So in other words, the ratio of debt to liquidity. Now, why is this so critical? The reason it's so critical is that debt has to be refinanced. It always has a maturity. So if you issue five-year debt, in five years' time, you've got to refinance that debt or pay it back. The spoiler alert is that debt's never paid back. It's only ever refinanced. So what you get is a need to refinance periodically. And what this chart is basically

showing is that ratio between debt and liquidity. If you get lots of debt relative to liquidity, you're going to struggle to do the refinancing. It's much more of a problem. And what I've shown is that when you get above that threshold of about two times of that ratio, that dotted line, you get financial crises, which we've annotated there. And almost every financial crisis, if you look back, has been a debt refinancing crisis in some way. And that's important to understand. Now, if you look at the other side of that threshold, when you're very low, there's lots of liquidity. Liquidity becomes abundant. And its vent is financial assets. It creates asset bubbles. Now, if you look at the last 5 to 10 years,

we've labeled that the everything bubble. Why is that? It's there because you've got excessive liquidity relative to debt for two reasons. I mean, one is that every episode of crises or tension in the world economy, be it COVID or be it the GFC, policymakers come in and just throw liquidity at the system. They need to stabilize it. They don't want the risk of a credit crisis, a serious one. So they throw in lots of liquidity. And then the other thing they did, particularly around the time of COVID, was to put interest rates down to near zero levels. Well, that just encouraged everyone to term out their debt. And people were basically terming debt out in 2020, 21, 22 at very low interest rates. But they were terming it out five years

later, let's say, in 26, 27, 28. And that is now likely to come back onto the horizon. Now, you'll see that in this chart, which is showing the change in the average debt roll And look at that bunching around the end of the decade. There's a lot of debt to refinance. That could be household debt, syndicated loan debt. That's debt of high-yield bonds. There's government debt. Everything's sort of coming up into that concentrated period. And the reason this is so unusual is that, you know, when I was at Salomon Brothers in the 80s and early 90s, the Bible that everyone looked at and read was a book called The History of Interest Rates by Sidney Homer. And that book, which is sort of the Bible of interest rates, goes back, I think, 4,000 years. Nowhere in that book is there any mention of zero interest rates. So in 4,000 years, we haven't had it, but we did have it in COVID, even negative rates, in fact, as you recall. And that's why it's so unusual. And that's why we're kind of recovering from this mess, because basically that incentivized everybody to take on more debt and turn out their existing stuff. And this is the problem that we're creating. So what you're getting is this debt roll. The other thing that I'm going to say, which kind of hooks into your point, your very good

point about AI, is that a lot of the liquidity that we've had in the system over the last five years or so has come through the big tech firms in the US who have generated vast cash flows. They haven't invested in them particularly. They've basically kept them in treasury. They've been out there in the money market seeing if fueling liquidity. But now the tech spend is eye-wateringly large. I mean, from the latest figures I saw, the tech companies are spending a billion dollars

a day on new capex in AI or whatever. So you're talking about over a two-year period, probably as much as $2 trillion, sorry, as a trillion dollars of new capital spend. And that is clearly money that is coming out of financial markets. You know, money that's anywhere must be, you know, somewhere. and the fact is, if it's in the real economy, it's not in financial markets. And that's the reality. So you get to this slide that I've just put up here. And that's saying this is the problem that everyone's got to start thinking about. This is the debt liquidity cycle. At the heart of the

system is this collateral stability requirement, which is saying that the US treasury market is absolutely key here. We've got to have a stable treasury market. That's why you've got the Fed and the Treasury geared up, I think, to maintaining volatility, a low volatility. And the way that you can understand that is to look at that left-hand wing, which is how debt is converted into liquidity, because basically, you need high-quality debt to create liquidity. And what it's saying is that the repo collateral markets are absolutely central here. And you've going to look at things like the move index or the uh or sofa spreads and here are sort of just two examples this is looking at uh sofa spread so this is saying you know is there a shortage of

good quality collateral in the system or a lack of liquidity and this is showing when you get spikes now there's been a lot of a lot of spikes or a lot of activity uh in the last 12 months so you can see that if this is looking at the pulse of a patient in a hospital, you can see that they're getting pretty excited here. And they're moving up towards a coronary or whatever it may be. But this is the thing. Federal Reserve is onto this, and they're trying to keep these rates down as best they can by changing bank reserves. And that's why I think that it's going to be really, really tough to rebuild the TGA in the next six months without there being a serious problem. so i trust the fed is up to this is onto this and so that's why i think there needs to be you know

some fundamental changes in their operating procedures and here's the move index just to show what's been going on and you know um i've been arguing this point about move volatility coming back into this range and there being a target and i was accused i think in one of the financial newspapers maybe it was the ft a few days ago sort of launching a conspiracy theory I don't think it's a conspiracy theory. It's just a fact. I mean, it makes absolutely every sense in the world for the Treasury and the Fed to target volatility because hedge funds are key buyers and the collateral markets are

critical. So why not? So that's the story. And that's the risks that people face, I think. But we're not over yet. The fat lady has a son. No, I'm sorry for interrupting, but it's just very interesting having you walk through that's making some headlines and uh thoughts i've had become much clearer you mentioned stablecoins

earlier obviously the expedience with which the genius act got passed here the united states makes a lot of sense in retrospect considering they're looking for buyers of the of the bills but then on top of that as it relates to bitcoin and stablecoin specifically i think another change that's been made this year that many people still aren't paying enough attention to is the sort of the elimination of sab 121 which had some very strict and reserve requirements for any bank that was going to hold bitcoin or other altcoins and they changed that to sab 122 and so now banks can take bitcoin as collateral if they want and going back to your point of um the the system is very collateral dependent it seems like they're trying to open

up as many gates as possible to stuff new types of collateral into the system. Yeah, I think that's right. I mean, I think the thing is that stablecoin are a great mechanism to buy treasuries, to buy bills in particular, to help fund the treasury. But it basically creates a sort of, if you like, from the treasury's point of view, a kind of virtual circle. And the reason for that is that if you think back to sort of monetary economics, what happens is if a credit provider basically buys a government debt, any government debt,

they monetize the government debt. So it's effectively printing money. And the fact is that if you're issuing lots of bills or short dated debt, that's really attractive to credit providers. And this is what the banks essentially hoover up. So what you can see in the data right now is that the growth of looking at the growth of bank balance sheets, it's being driven a lot by purchases of government debt. This is monetization. So, you know, what we're doing is we're embarking down the route of monetary inflation. I mean, these are the fears that everyone's got. And that monetary inflation is ultimately going to come through in terms of devaluing people's wealth or just increasing the cost of living. And so what you need is

dedicated monetary inflation hedges. And that means gold, it means Bitcoin, etc. And I think the whole, I mean, Bitcoin, in my view, is definitely the future. And I think that the US officially has to endorse that pretty quickly before somebody else does. And I think that if the US wants to maintain control of the global financial system and the dollar, it makes every sense to get on board with Bitcoin pretty quickly. Because what would happen if China did, for example um i think that would be it would be important to get that uh you know to get that staking quickly completely agree and i'm just looking for a tweet that sort of validates exactly what you just said luke roman has been paying attention to the sort of squabbling between the

u.s and china specifically and he tweeted out i'm not sure if you caught this headline this week but It seems like China wants to get a digital yuan stablecoin out there. And Luke just posited earlier this morning. So what happens when China launches 0% yielding yuan stablecoins backed by finite gold to compete with 0% yielding USD stablecoins backed by infinite T-bills? Will the reaction of the USD stablecoin proponents mirror the seven-minute abs guy from something about Mary? And I think he's alluding to, are they going to have to back it with Bitcoin? Yeah, very sensible. I mean, he's had some great calls in the past, yeah.

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that if you look at the frequency of that cycle, it pretty much is in line with the average maturity of debt in the world economy. So the cycle fluctuates with a five to six year frequency. And that's pretty much the average maturity of debt out there, about five to six years. so that would kind of make sense so it's a debt refinancing cycle yeah and that was just i had a hunch that was going to be your answer and if that is the case like do we have to rethink is there the potential to rethink how we're issuing debt to rethink duration does it make sense or is this just the way what it would basically say that you know if we're if we're changing the tenor the average tenor of debt out there we're going to change the average tenor of

cycles so you're going to get shorter cycles if uh if we're doing more uh you know more debt issuance and that you can you can see the logic in that how that would work is if the treasury is always issuing you know three months six month bills uh they're always going to have a big problem every three to six months when you effectively get a role or if that if that debt is bunched and you get a role yeah and then now my mind's wandering too like does this like the reintroduction of patient capital like long term like did like you mentioned it earlier too like this transition to hard assets is this how it happens you just have a sort of not even asymptotic but you just have a accelerating sort of market turnover because you're getting shorter

and shorter on the curve as you as refinance the debt that at some point the system needs to transition to something else. Yeah, I think that makes sense. You know, I also think that, you know, an interesting thought experiment is just to say, well, you know, what would happen in the world if there were only two assets that you could invest in? You could only invest in short-dated government debt, or you could invest in Bitcoin. You know, what would happen?

And you could see under that situation that, you know, you would get Bitcoin moving with the financial sector 100%. And whenever there was expansions of liquidity, investors would basically take on more risk and put more money into Bitcoin. And so you can see Bitcoin being highly, highly pro-cyclical with the liquidity cycle. Now, the reason I cite that is that a lot of people look at macroeconomic fundamentals. In other words, what's happening in the real economy to judge what's happening in the equity markets. Right now, what you've got is a situation which is a great paradox, is that it doesn't seem to be any cycle in the real economy. The economic data is kind of blowing two or three different ways.

No one really knows, are we in a boom or a bust or whatever it may be. But if you look at the markets, they're performing just as if it's a very, very normal cycle. And I'll demonstrate that because I think it's an interesting point to ponder. And let me just try and show you what I mean by that. And this means sort of coming back to, in fact, this diagram. So if you think about the cycle here, so let's put that into a framework and think about the asset allocation cycle, which I'm about to show here. So this is showing that schematic cycle.

So what you have on the left-hand side is what asset classes tend to do well as the liquidity cycle is evolving. And on the right-hand side, we basically describe the phases of the liquidity cycle as we understand them. Now, what this broadly says is that in the upswing of the cycle, you want equities. This is traditional asset classes. And Bitcoin is a risk-on asset. So it generally does well when you're in the upswing. And in theory, it should do not so well if you're in the downswing.

We haven't a lot of evidence of a downswing of late, but we'll see. commodities around the top, then cash on the way down, bonds at the trough. And this is how that translates into different asset classes and different industry groups. Now, bear in mind what I just said about the fact that there's no business cycle, or it's really difficult to perceive a business cycle right now because the data is blowing in so many different directions. No one really knows. Is it recession? Is it recovery? Who knows? But if you look at the cycle of market cycle, it's absolutely normal. So if you're in the rebound stage of the liquidity cycle, so think of assets on the left and industry group sectors of the S&P, let's say, on the right

hand side. If you're in the rebound area, which is the early phase of the cycle, so that was basically 2023 or thereabouts, maybe to mid-24, then you were looking at equities doing well, credits doing well. Commodities, not so well. Bond duration, forget it, bad. As you move towards calm, you want equities. You want to start to migrate your credits more into commodities and stay away from bond duration. And then you can see how that cycle migrates from left to right. And then if you look at industry groups, then you say, well, in rebound, what I want is cyclicals, but I really want tech, that's the strong outperformer. Then you get to calm, tech still does quite well, but you start to get financials coming through and energy, where you look at the yield curve

steepening as you'd expect now. Commodity stocks are beginning to get a bid. Financials around the world, look at European banks have been on fire. JPM's up quite a lot in the US already, stalled a bit lately, but it's had a good performer over the last 12 months. Regional banks are doing pretty well again. So you're looking at financials, energy, commodities doing well. So this seems to be a really, really normal cycle when it comes to market movements and liquidity. But you can't pick that up from real economy right now. Yeah, there seems to be a very stark disconnection from financial markets and the real economy, at least here in the United States. And you have the Silicon Valley crowd really beating the drum about this AI wave being a boon to productivity.

And that's why we're seeing profit margins increase without any new hiring at a bunch of the mag seven companies, particularly Meta, Google, Microsoft. And I think that's what's making me cautiously, just cautious generally, I don't even want to say cautiously optimistic. Is that real or is it a bunch of people with very high incentive to beat that drum, trying to will it into existence? And I think that's something even within the Trump administration, I think David Sachs and others that are more tech forward within the administration are saying, hey, we have this window of opportunity to really take advantage of this, this step change, improvement and productivity across the economy. And I think that's – a lot of people are – we're just in this extremely uncertain period of time due to where we are from a debt situation, where the liquidity is, and then on top of that, you have this compounding external factor of this new technology. RAOUL PAL Yeah. Yeah, I guess, Marty, what I'm saying in a way is to look, if the financial markets have got no strong connection with the real economy, what you're getting is potentially a threat, because you're getting, as I said, a trillion dollars coming out of the markets

over the next, well, this year and next year, because of tech investment spending. And that's a little cash yeah there's a lot to chew on here because it's uh having only been observing financial markets uh very closely since the great financial crisis like i've seen a couple of these cycles and to my point earlier it does seem like things are accelerating and the uh the cycles are are shortening i mean oh wait um to i guess you can go to the european credit crisis in the early 2010s then obviously covid 2020 banking crisis of 23 and now here we are today it seems like we're in a precarious situation yet again trying to think through this of where it ends and so in terms of bitcoin that's something i wrote in the newsletter this morning too like if more and more

people are observing these cycles compressing and getting more extreme in terms of the response to any downturn in terms as it relates to money printing and debt issuance i wonder bitcoin being 16 years old like does the muscle memory um get to a point where if there is another downturn that people wake up and say all right it's obvious that something's wrong in the traditional financial system with these boom and bust cycles this alternative here in Bitcoin. It's completely separate from that in many regards. Historically, it's been a risk-on asset. Do you see it potentially transitioning to risk-off? I think it's a very interesting point. I think the thing is that, look,

the plain fact is that you've got a trend and you've got a cycle to contend with. And I think there is a liquidity cycle which essentially is driving the ups and downs short term in Bitcoin makes a lot of sense because it's a very liquidity sensitive asset because it responds to monetary inflation. And that's what we've got through the cycle. But we've got a trend, an exponential trend, which is basically debt-driven, which means that over the long term, just because of interest rate compounding, not least the fact that you've got a positive primary deficit as well, adding to that debt burden, but the interest payments and the primary deficit mean that debt is growing exponentially, liquidity has to keep pace with that. So, I mean, what people are not really understanding, as far as I can see, is that what has really changed post-COVID, in particular, is that the debt burden is just growing at a much, much faster pace. And it's really difficult, particularly with aging demographics and the need for defense spending, et cetera, to actually to rein that in in any way, shape or form. So what you've got to do is you've effectively got to monetize that or at least keep pace with liquidity.

And therefore, you've got to have monetary inflation hedges in your portfolio. That's why Bitcoin makes so much sense in the long term. And what I would say on top of that is it's a strategic asset. So that kind of lends its way to your point about being, is it going to be accepted more as a safe investment? Yes, I think it will be for sure. Because outside of the domain of central banks and governments, absolutely. but you've got to think about the growth of Bitcoin in terms of both the intensive margin

and the extensive margin. And in terms of the intensive margin, let's call that the liquidity cycle. And let's call the extensive margin the fact that you've got more and more and more people who are going to embrace this asset over time. And that's what's going to give it a lot of its trend growth. So I think if you look at it through those two lenses, you can put it into context more easily yeah that's a fascinating time to be alive it's uh i've said this many times the last few months it's equally unnerving and exhilarating because of everything going on uh the land uncharted ground yeah really is um in the last uh the last topic you mentioned it in the beginning i meant to follow up or forgot but i think it is um it is something that could

be worthwhile you you alluded to china's sort of influence on the liquidity cycle um not necessarily throwing a wrench but obviously having an impact in a certain way what is china doing that's let me let me just shift on to what's going on in china and i'll um i'll lead to that um okay let me just swing out here this is through the bond markets to where we are dollar china So in terms of China, this is looking at the Chinese bond market. Every bond market tells a story. And what you've got here in the Chinese bond market, yellow line or orange line is looking at 10-year yields. And the black line is the term premium or risk premium on Chinese bonds. The fact that the black line is going down and it's pulling down the orange line is saying that

you've got a big rush for safety in China. Investors are basically going for safe assets. Now, that black line, which had been going down, is stabilizing. And that stabilization is a good thing because it's basically telling us that we've probably reached a floor in yields. And what you're seeing now is probably a switch of assets among Chinese investors into more risk assets. So the Shanghai index has begun to pick up quite noticeably. Now, the reason that that is going on is that, if I can shift to my next slide, this is what China needs to do. So this is the debt liquidity ratio in China. And what I said is that if you look at different countries, they need stability in their debt liquidity ratio.

If you've got a very high debt liquidity ratio, you've got refinancing problems in your debt markets, and you face debt deflation effectively. That's what China's got. That's what the bond market has been telling us. So they've got to get their debt liquidity ratio down. You do that in one of two ways. You default your debt. No financial system can afford to default debt because debt is collateral.

So you can't do that. You've got to increase liquidity. And so they've got to start printing money, and that's broadly what they've been doing. this probably this chart is a better one to show it this is looking at the amount of money going through chinese money markets and you can see the increases and decreases in that basically what they've done is they've had two or three goes of actually injecting large amounts of liquidity into their markets i've shown a year-on-year change because there is huge seasonality in chinese money markets to a very large extent because china is still very much an agricultural

economy or has large agricultural elements. And so there's a lot of seasonality in terms of the money flows in the markets. But you've still got that issue. So I've looked at it cleanly here in year-on-year changes. Why was 2024 so depressed? Because what was happening was the Chinese were trying to shadow a strong dollar, and they couldn't do it. And what they've done really since the beginning of 2025 is to throw the towel in, helped by the fact that the dollar took a little bit of a respite. So they put a lot of liquidity into markets. That is important. We need to see them keeping that up. The last four weeks have been a little bit mixed. So it's difficult to know the direction. But I was very encouraged at the beginning of the year. I'm

still moderately optimistic. But the Chinese market has been a strong outperformer this year. And it may end up being one of the strongest markets for the year as a whole. This is just looking at the evidence of what they're doing. But I want to show this chart and the next one as a conclusion. This orange line is really what you've got to try and monitor. This is the yuan gold price. The black line is the yuan US dollar cross rate. Now, everyone in the market seems to be focused on the black line. And they like the stability that you see. They're around 7.1, 7.2, 7.3 renminbi per US dollar. That's fine, OK? But behind the scenes, you've missed a lot of what's been happening in the gold market. And the Chinese gold price has absolutely

skyrocketed. Now, gold everywhere, I know, has gone up. But the key point here is that I think this is a deliberate move because it reflects the monetization that's going on in the Chinese economy. And China is the world's biggest producer of gold. They obviously are accumulating gold internationally by anyone that wants to, any government that's selling, the Chinese are normally buying it. So they're accumulating gold. As a Chinese citizen, you can hold as much gold as you want, but you can't export it. So it's a natural hedge for people in terms of that economy. and the Shanghai gold market is really the leader now worldwide. It's the marginal pricer. So if you want to know what's going to happen to the gold price, in my view, what you need to do is to

understand the dynamics in the Chinese monetary system, the fact that monetizing and devaluing their real assets against, sorry, devaluing paper money against real assets. And a real asset here is gold. So they want to get paper money debts down. They print lots of money to do that. And And what you see that evidenced through is a rising yuan gold price. Now, our view last year was that that had to get to a minimum of 24,000 yuan to make any dent or scratch in the debt problems that China has. It's got there. They've held it there lately.

But I think it's going to have another jump up. So I'm very optimistic of gold. And if I'm optimistic of gold, I've got to be optimistic of Bitcoin. So that's the backdrop. But whereas the Federal Reserve has its major leverage on the financial systems worldwide and on financial assets, China's People's Bank has its major leverage really on the real economy because the Chinese economy is so controlled by the PBOC. And secondly, it's got a big economic footprint worldwide and regionally.

And this chart, the next one, shows movements in Chinese liquidity against world commodity prices. The orange line is Chinese liquidity. We've extrapolated that. It's shown as an index of liquidity impulses. So that's showing data from 2004 onwards. The orange line is just showing there's potentially another big inflow coming. I mean, that's partly guesswork or projection, but that's what I think is going on.

And the black line solid is all commodity prices of the CRB index, and the dotted black line is X energy. So just to show there's no bias with oil prices, but that shows the picture. So what it says is, if you're going to get a lot of Chinese liquidity expansion, you're going to get commodity markets up, but you're going to get the gold price up. But that's quite consistent because gold typically moves about six to nine months before commodity markets do. And that's what we're expecting yeah i imagine terrorists are really accelerating this and throwing gas on this fire as well because yeah because the chinese economy is suffering really badly um you know from the tariff hikes yeah and then and that's the other the way i understand it like

the the capital flows historically up until recently as we with trippin's dilemma hollowed out our manufacturing base export it to the rest of the world buy their goods and then they take the cash that we buy those goods with and pump it back into our financial markets and that there's some disruption in that flow right out to um yeah again equally unnerving and exhilarating uh if you like to nerd out about this stuff and michael i can't thank you enough for spending an hour on friday uh early evening to uh to walk through this with me this is a great question marty thank you the pleasure is all mine sir this is um incredibly illuminating and high signal content so thank you for putting it together um anybody's listening to this who's not subscribed uh to

cross border to michael's sub stack go uh go subscribe it's incredible and it's called capital wars yeah capital wars you guys did a collaboration with the bitcoin layer um team earlier this week crew that was really good i really like the bitcoin color in that one yeah yeah that was a good qa awesome well i'll let you enjoy your friday night hopefully we can do this again maybe we'll uh maybe we'll meet at the peak of the cycle at some point in the next six to nine months yeah let's hope it's a way off but anyway yeah look look forward to the next engagement party thank you all right have a good one peace and love freaks okay if you've made it this far i want to thank you for listening and ask you for a couple things can you subscribe on the platform

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