TFTC: A Bitcoin Podcast - Ten31 Timestamp: Mr. Warsh, I Don't Feel So Good

Starting point is 00:00:00 All right, take three. Monday morning, getting the cobwebs out. We're here to talk about meetings. Not our meetings. I mean, you were traveling last week. I had some meetings, but I think the president, some of the most prolific CEOs of American industry and high-level administration members took a trip to China last week to talk with the Chinese government, President Xi over there, about maybe working together on some things. i don't know what was going on over there was it a bunch of uh just a facade of nice cities masked with um sort of hey if you do this i'll do that smile i don't want to use the term but it was a facade of smiles to basically try to pull leverage and let you know like hey i know that

Starting point is 00:00:44 you know that we know that that uh we don't like what you're doing yeah you never well first of all you got the i think you got the order right of in terms of importance of my meetings and your meetings than the president's meetings which he as it relates to geopolitical import last week but yeah with these things you never you never really get the full story in the full picture from you know the the headlines i think we can safely assume there were many uh deals being cut or alluded to that then you know you add posture around uh on a public facing basis so we got some fairly frank taiwan discussion in a way that i think we haven't before you know that's the maybe the classic i know that you know that we know that etc kind of play that we've been dancing

Starting point is 00:01:26 around for you know 10 plus years and you know no real resolution resolution there got some suggestion that china may quote unquote open up more to the businesses of all these american ceos in the newsletter i i thought it was an interesting uh phrasing of the china will open wider which just really sounds like crocodile jaws which is maybe maybe not uh not so far off if you've kind of seen um american companies activities in china over the last 10 years and kind of how that's bled through to you know our relationship to to ip or in respect of that or lack thereof but in any case i think the upshot of it really was kind of holding pattern right like i don't know that there was a ton actually to be that was gained uh explicitly from from that meeting

Starting point is 00:02:11 you know we've got straightforward moves which we talk about in here every every week you know unclear again what the path is going to be beyond stalemate for that china allegedly will help lean on iran to move things forward but again the steps there are not particularly concrete so i think everyone kind of walked away in a bit of a shrug frankly yeah it was very unclear to me what was actually accomplished but uh the president and ceo jensen huang specifically said it's one of the the most prolific meetings of two states in civilizational history. So we'll see what comes of it. I think what was interesting as all this was going on, we'll flip to the slide deck you put together, I think maybe where the actual signal of last week was, was in bond markets

Starting point is 00:02:57 with yields screaming. As you point out here, we've got a chart from Zero Hedge with a 30-year auction high yield over five percent for the first time since august 2007 for the 30-year we have china's excuse me not china japan's yield curve blowing out uh the 10-year the 30-year here in the united states going up as well the 10-year guilt blowing out while all these these leaders between america and china were meeting to to discuss where we're going from a geopolitical perspective here at home in in many other bond markets across the world things seem to be deteriorating the the sovereign bond crisis seems to be really taking off and taking hold here as it seems to me i'm not a big ta guy but looking at the long-term charts on a lot of these these uh

Starting point is 00:03:45 yield curves it looks like they want to break out to the upside and higher for longer in terms of structural rates for for government bonds seems seems to be like a call that i i feel more comfortable making by the day here yeah definitely look that's the uh you know we can all be line drawers and line spoilers on our own capacity but some of these are not super hard to read i will say the the us tenure you don't you don't sit on here but uh you know broke the four and a half percent level which last week which seems to have been kind of a line in the sand for what are popularly called taco moments which i think are a little overstated but either way we haven't seen it get much above four and a half we did last week now kind of four four six as of this morning

Starting point is 00:04:27 but if you look on a longer term basis with that one it's from your ta perspective still hasn't like you know meaningfully broken out yet and that's really i think the the big rate to watch yeah here you go you know you look like on a you know five ten year basis like you know we're getting back to gfc levels but we've been kind of bobbing around in this range here for the last few years so we'll see if we're ready to fully break out there but i think the you know the headline last week that really like drove a lot of this was the the the hot inflation prints uh cpi and pbi both came in hotter than expected uh six percent even for on the producer index and even x food and energy which are you know generally thought of as more volatile often get pulled out to talk

Starting point is 00:05:07 about kind of the core metrics um you know well above expectations kind of uh increases uh increase the market's view that we the fed not only will not be able to maintain a rate cutting cycle but But in fact, we'll have to go back to hiking to control some of this. And that was really the story on the week and the debate on the week. Frankly, I was a little happy to finally not be focusing primarily on oil market logistics in the Strait of Hormuz. That's been kind of the meta for the last few months, basically every day. So getting back a little bit to just kind of these kind of basic macro and monetary policy questions was somewhat refreshing. But, you know, here you are with with Scotty B telling us that we'll see substantial disinflation in the near term.

Starting point is 00:05:52 And what we're seeing right now is the result primarily of a supply shock. And we can look through that. It's, you know, it's transitory, as some others have said in the past, which you can kind of see down there what we might be thinking of. And therefore, you know, once once that passes, we'll have this big productivity boom. And, you know, we were already kind of seeing that before seeing core inflation come down. So therefore, you know, we're going to have room. And, you know, I think if you flip to the next slide, you can kind of see like he's he's really the Secretary Bestin is really kind of echoing what Warsh has said, you know, on his on his press campaign, his his the whatever you want to call it, his his pageantry to ultimately qualify for Fed chair, the Fed chair role throughout the last year. Warsh has been parroting this line that, you know, we're going to have AI will enable this massive productivity boom that will create disinflationary pressure and give the Fed room to not hike rates, but in fact, to lower them kind of in stride with that productivity boom. And I think there are a few data points that make this somewhat compelling as a narrative, right? And I think there are arguments that you can get into that we can discuss here that this environment fundamentally doesn't look anything like the environment of 2021, which is the last time we heard that inflation was transitory.

Starting point is 00:07:10 And if you look to the next slide, both the Cisco chart on the last page and the next slide, I think, are potentially hinting at that, right? That there is meaningful, real reacceleration of certain sectors in the fundamental real economy. You know, this is not, you know, a U.S. that has, you know, like five or six years ago, fully just offshored all of its industry and is kind of at the mercy of international supply chains, has no real kind of, you know, economic vibrancy to it other than, you know, SaaS. And, you know, maybe we are moving into a position where the real economy actually is meaningfully accelerating on, you know, some of these trends. I think it's funny that, you know, to go back and look at that Cisco chart, you know, we talked about Intel a couple weeks ago and how they basically have the same chart, right? You see back into the late 90s, massive blow off top, and it takes them like 25 years to finally reclaim that level. Greenspan was saying a lot of the same stuff at the last time Cisco was mooning here, right? And so it didn't it didn't fully work out then. But, you know, you could certainly make an argument that, you know, the world was not ready for the world. The stock market was dramatically pulling forward the tech gains that would come from the Internet boom. And maybe we're not pulling forward in such a crazy way. The gains that will come from AI like this is all very TBD.

Starting point is 00:08:31 But I think to end this long rant, the point that I think we should draw from this is I just have to fade the market view or the market fear that with Warsh coming to the table, even though he will not control the Fed, with everything going on in AI, with rates getting into very uncomfortable spots already, with the geostrategic issues that we've talked about ad infinitum for the last few months that the U.S. is facing, whether all of this is true or not is kind of irrelevant. Like this is the story that I think they're going with. And I think you could see it actually play out in economic reality or maybe not. But I find it extremely difficult to believe that we're going to look at a few inflation prints, even like very hot inflation prints and say, you know what, because of the Phillips curve, we really just have to hike rates, guys. like we're just going to have to seed hegemony to china we're just going to have to lose the ai race all these trillions of dollars of you know hyperscale hyperscale capex that we've uh committed to and believe we're coming you know what sorry that's just not gonna be able to happen and stock market may tank you know 20 30 but that's the price to pay to bring down inflation a little bit like i gotta say i'm just radically fading that so i'll stop there but to pull it all together like i i think the market reaction this this week uh was very myopic i think i completely

Starting point is 00:09:46 agree with you and that's i think that's the one thing that we're going to figure out i know you don't want to talk about it because we talked about it ad infinitum but i think the negative externalities of the straight in terms of helium supplies specialty gases chemicals motor oil i mean you have i mean this was the meme going around the end of last week over the weekend it's going to be the 40 supply reduction in motor oil for u.s suppliers uh by middle summer of this year obviously sulfur production's down which is bad for fertilizers beginning to see that this could be a double whammy here in the united states with some drought looks like we got el nino coming too and so you have uh sort of mother nature forces hitting hitting the supply side as

Starting point is 00:10:27 well and i think not only is the ai race existential and i don't think they're going to stop this train from the i think inflation is going to be i think secondary to concerns that that exist in the ai race and the physical economy they're going to have to try to support all these sectors to to make sure that we can supply back to market prices be damned and i think i completely agree with you there yeah and yeah to be really clear like i agree with you on all that like i think we should prepare for you know some period of uh much hotter more entrenched uh experienced price inflation right in terms of in goods for all the reasons that you listed but But I just think it was we talked about on the show before, you know, with the the math of U.S. debt where it is in the game doesn't work without stock prices going up.

Starting point is 00:11:20 Right. The game doesn't work without GDP going up to shore up tax receipts. and you know the game doesn't work if we're getting to levels of you know uh whether on the short end or the long end right regardless of where you're funding five percent six percent seven percent kind of blended uh interest to roll the the existing debt burden like all of that all of those things falling apart like makes the game stop and i just i think what you're saying if you think the fed's gonna have to hike aggressively is that the u.s is going to effectively just give up hegemony and allow like a sovereign debt spiral to happen right and well i think that's the the interesting dilemma we find ourselves because if you remember what was it september of 24

Starting point is 00:12:01 when pal lowered rates for the first time and you have the 10 year and 30 year move inversely to that like is that does that become the norm moving forward right does the treasury yields disconnect from the federal funds rate and if so what are the repercussions there yeah i mean i think the question then is like how creative do they want to get on the long end right because there was a time when there was a time when we didn't have to deal with that for like a long period and we've had you called it a bunch of different things different versions of qe operation twist you know any number of other facilities but the the in principle like the fed has control over that it's just a question of how aggressive they want to be out in in the open market and you know

Starting point is 00:12:44 Warsh has talked about being, you know, more dovish on the front end and more hawkish on the balance sheet. So lowering rates, but also kind of reducing Fed balance sheet. And, you know, I think it's a fair base case that that's a lot like Besson, you know, scolding Yellen for funding too much on the front end and then coming in and doing exactly the same thing because he has to for the entirety of his tenure so far. And I think if you flip down one, you know, you'll see like, or yeah, two here. This is a really interesting headline related to this point. And this is not this is not the Fed, it's the Treasury. But if we're thinking of a world where the Fed and Treasury are working much more in tandem and hand in hand, and now you've got two

Starting point is 00:13:19 Druckenmiller protégés at both the Fed and the Treasury who know each other very well. If we're thinking in that world, I think this is also something, this is the kind of thing you want to keep your eye on of the Treasury potentially beginning to take on a lending repo role for Treasury collateral. So the Treasury repo market, as we've talked about on the show before, a key piece of overall financial system plumbing. And we've seen, you know, tightness in that market in the past, which causes all sorts of issues. And most notably, September 2019, you know, the market basically broke and the Fed had to step in. And we've seen the Fed do different things in the past, including reserve management purchases started late last year,

Starting point is 00:13:57 as a means of kind of keeping this market smoothly functioning. And, you know, now you're seeing this this headline that the Treasury Borrowing Advisory Committee floats this idea that the Treasury could start using its excess cash, however you want to define that, part of the Treasury general account, its cash balances effectively to lend into that market. So effectively, and that would be, you know, when cash is in the TGA, that's thought of as pulling cash out of the private sector, and it's kind of a negative liquidity impulse. And so getting it back out would be a positive liquidity impulse. But it's interesting because it turns them into a lender against their own debt so the treasury repo market is fundamentally based on collateral

Starting point is 00:14:37 what the collateral is um treasury bonds or notes different um bonds across uh the duration curve but in any case the issuer of that debt is the treasury and now it's coming in potentially and lending against the the collateral of its own debt to keep that market running smoothly right so it's getting into very like you know ouroboros like snaking its tail kind of uh kind of territory and I don't think this by itself is like the solution that allows us to run infinite deficits and you know this is not directly comparable to the Fed monetizing the debt you know in the ways that it's done in the past or you know growing its balance sheet by several trillion dollars overnight like it did in COVID but I put this on here because a I didn't see it discussed a ton

Starting point is 00:15:18 and I think it's really interesting and I've not seen like anything like it before but be like this is the kind of thing I'm talking about where there are a lot more like you know dirty tricks and rabbits up the hat that i think can be pulled out between the fed and the treasury to kind of keep the game going for longer than people think that will have like inflationary impacts like that has very um you know unevenly distributed impacts across society so it's not me saying like that's a good thing for society um and for the u.s and most people in the u.s but this is the kind of thing that i think we should watch for right just like more and more like weird exotic creative ways that have not been used before to kind of keep this game you know keep this game running and i

Starting point is 00:15:57 think you know last thing is just like you don't have to it's the classic comment that you don't have to be faster than the bear you have to be faster than the slowest guy running from the bear and i think like that's the strategy right now you know the u.s doesn't have to be fully sound and everything that's doing but it has to be more sound and more sustainable than all of the rivals that it's you know trying to continue to subjugate and you know the all the rivals in this great game that is trying to beat i mean it sounds a lot like the japanification of u.s markets like And it's funny, as we're discussing this, as I think the end state of the Japanification of any bond market is being reached there, where it seems like they've completely lost control. And you have former, I think the former head of JP Morgan in Japan coming out and basically telling Japanese citizens to prepare for hyperinflation.

Starting point is 00:16:47 And we'll see how it plays out here and what timeline it plays out here. like you said you have to be the fastest man running or just faster than the slowest man running from the bear what does the timeline look like here does japan's end state being laid bare for everybody else and a signal to the market that pulls forward some of the negative consequences of a policy like that because people say oh if you do this this is what happens and it's a very interesting time uh in sovereign debt markets right now yeah no doubt on the uh on the bear point if you flip down to the next next page this is just i thought worth updating on as a as you think about kind of the the game of chicken that we're in uh we talked about this last week how

Starting point is 00:17:29 much the independent refiners who are primarily uh the primary consumers of iranian oil are doing you know you've seen now a headline over the past week of major supply cuts um you've seen you know one person out of the industry saying without cutting output the losses are unbearable it's big pressure on um china's oil industry and i think you know just the latest kind of data point pointing to this running away from being faster than the slowest guy running from the bear like who who ultimately has to blink first is it you know a net energy importer that's you know meaningfully squeezed by the hormuz situation or is it you know if you think back to that first slide of uh you know a country with over 100 debt to gdp that's running up on 100 of receipts being

Starting point is 00:18:13 consumed by non-discretionary payouts you know is it uh their sovereign debt um getting to a point where it's unaffordable and then having to kind of pull out from the situation and default back to some level of normalcy so you know just something to track here again in the in the race versus energy kind of war that we're seeing between the us and china you know both are uh suffering quite a bit i think on these different metrics yeah and last but not least i mean we've be talking about it but i think this is probably the most high signal headlines come out of the straight and in a couple months here which is the fact that iran i mean the headline says maybe turning the straighter hermes into a bitcoin-based insurance market local reports say but i mean we

Starting point is 00:18:53 did some pretty heavy research over the weekend to confirm this is true it seems to be true that you have a state sanctioned i think they're calling it uh hormones safe safe which is basically an insurance product while you're crossing that the irgc is demanding payment in bitcoin and i think this is an interesting headline they don't talk about it um in the the snippet that we have up on the screen now but i think it's well known in our space that tether worked in conjunction with ofac and and the law enforcement entities connected to ofac to freeze 344 million dollars worth of of tether that was deemed to be held by our irgc friendlies or the irgc itself and a few weeks later it looks like they're turning to bitcoin specifically i would imagine because of the

Starting point is 00:19:46 censorship resistant properties and the inability of olfac to tap the ceo bitcoin on the shoulder and have them freeze uh utxos in particular wallet so i think this is the most bullish i mean depends on how you read this but as a bitcoiner looking at this non-emotionally just looking at it as as the sort of value prop of a permissionless uh permissionless uh settlement network being validated in the wild i think this is the biggest geopolitical related bitcoin headline in many years maybe since el salvador leaned into it uh back in 2020 2021. yeah i totally um the you know we'll see how it develops it may or may not be true but you know this this isn't from bloomberg the screenshot but no less than bloomberg has reported on this as as you know credible

Starting point is 00:20:39 and allegedly comes out of uh iranian state media and starting to get airplay on you know outlets that you would consider to be you know very uh very credible and very plugged in we'll see how it develops but i i you know this is not even the first time we've kind of heard about something like this and we talked about it maybe a month ago you know kind of a version of this you know the rgc taking tolls in bitcoin and potentially a variety of other things like as you mentioned stable coins so i i feel like there's a lot there's a lot more smoke here and um i think there may well be kind of a fire particularly since as you said like it intuitively makes a ton of sense it's what i think bitcoiners have long theorized would you know one

Starting point is 00:21:16 path for bitcoin adoption has been you know adversarial sovereigns that don't necessarily need to or or want to or not able to trust each other but we've always said bitcoin is money for enemies and this would be certainly quite a validation of of that thesis and especially if it turns out to be uh you know a bitcoin only kind of um market to the even to the extent that it gains like a little traction i don't necessarily expect this to kind of be the long run uh the long run equilibrium for you know flows and straightforward moves but to the extent it gains it exists at all and any payments are taken and it is bitcoin only i think that says a lot that validates the thesis that we've been hammering on for years especially relative to everything

Starting point is 00:21:58 else that we just talked about right like with the the need to manage creatively the massive sovereign debt burden that's out there in the us and elsewhere kind of coming up on potentially the the end game of at least this phase of um monetary history and kind of writing writing new chapters with creative people at the helm like warship who have a particular agenda they want to get through with all that going on and sovereigns starting to discover and take seriously this particular value proposition like i don't know it might make sense to get some just in case it catches on right it may be catching on maybe catching on john it just may be 17 years in uh bitcoin may be finally catching on and with that we'll see you guys next week

Starting point is 00:22:44 Thank you.

TFTC: A Bitcoin Podcast - Ten31 Timestamp: Mr. Warsh, I Don't Feel So Good

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.