The Breakdown - The Bond Market Is the Truth Teller No One Listens To, Feat. George Goncalves

Episode Date: July 31, 2020

Today on the Brief: More bad news from jobless claims and the GDP The big tech hearing was a whole bunch of nothing; watch TikTok instead Robinhood dives into Kodak (but so do illegal insider traders) Our main conversation is with independent bond strategist George Goncalves. We discuss: How the bond market watches Federal Reserve meetings What, if anything, was new about this week’s FOMC meeting What it means that the bond market and equities market tell different stories Why the bond market has been telling a long-term story of slowing growth Whether institutional investors are actually moving away from government debt and into gold  Why Judy Shelton should have a place on the Federal Reserve Find our guest online: Twitter: @bondstrategist

I feel like the core bond markets, which is the government markets and the tips market, they're looking at all this information and they're saying that, you know, look, the Fed and the U.S. government, obviously valiant efforts. They did a massive campaign in March and April to try to stop the bleeding in the economy, but they perhaps maybe shot a lot of their ammo too quick. And now they've really, you know, limited the ability to actually arrest any sort of second wave, both in COVID, but also a second wave in the economy slowing down in a more proper recession. And I think that is lost upon most equity folks.

Welcome back to the breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by BitStamp and Crypto.com. The breakdown is produced and distributed by CoinDes. And now here's your host, NLW. What's going on, guys? It is Thursday, July. 30th, and today we are talking about the story that the bond market has been telling us that we are not paying attention to. To tell that story, I have guessed George Goncalves, but first,

the brief. First up on the brief today, it is the jobless claims and GDP story. So what happened? First, the GDP story. The U.S. economy contracted at a record rate last quarter. It fell at 32.9% annual rate and was 9.5% lower than the same quarter last year. This is the steepest drop in records dating back to 1947. Now, the thing that takes the sting out of this a little bit is that this was expected. This is the GDP story of a quarter where we saw mandated shutdowns of business, so of course there was a huge, huge dip. The less good part of the story is that rather than being full-on into a big V-shaped recovery, we're seeing dangerous signals in other areas as well, which gets us to the jobless claims numbers. Initial jobless claims were up a second week in a row.

They were up 12,000 claims to 1.43 million. I don't really need to make it clear that this is the opposite of the direction that we want these numbers to go. Even more disturbing, however, was that the continuing claims are way up. 867,000 total higher. continuing claims than last week, which is the biggest jump since early May. In total, there are more than 17 million continuing claims. One of the key go-forward questions of the economy is how we can coexist with the virus, and these initial jobless claims and the high continuous claims make it a scary question to ask. Next up, let's review the big tech hearings in Congress, and guess what? It was a whole big bunch of nothing, just like we thought it was going to be. The questioning of the four tech

CEOs, Amazon, Alphabet, Apple, and Facebook went pretty much exactly like you would expect with every congressperson using their five minutes to score political points and grab soundbites that they could use for their constituencies to help their re-election campaigns, et cetera, et cetera. What you should actually be watching in this big tech versus government space, because this is a narrative trend, this is a key theme to be watching, is, of course, TikTok. There has been a ton of TikTok news this week. First, the platform has come out hard against Facebook and Instagram saying that their copycat features are basically a tax disguised as patriotism. TikTok has opened its algorithm to try to basically counteract claims that it's just a tool of the

CCP, allowing people to visibly see how things are promoted or not. And finally, they've launched a $2 billion creator fund, so they are trying very aggressively to keep people on their platform versus having them go to a quote-unquote U.S. alternative. Secretary of State Mike Pompeo and Donald Trump keeps saying that they are interested in banning TikTok potentially, which will be a really seminal moment in the history of the internet should it happen. I also thought this tweet from Dovi-Wan was really interesting, where she wrote, TikTok is being approached by U.S. investors to be an independent company and valued at 50 billion amid current U.S.-China tension. If the founder of Bight Dance, which is a Chinese company is convinced to proceed, which likely won't happen, he will be considered as a non-patriotic

trader by many Chinese with harsh scrutiny. The battle to have sovereign control over massive internet traffic endpoints like TikTok will be even more fierce in the future. I joked that maybe this is what Bill Ackman's unicorn spat could spend its huge amount of dry powder on as getting TikTok to be shifted out of bite dance in China and into a U.S. shell. But I think that it is a fascinating question, and I think that the story of where this is going to play out more than anywhere else in the short term, at least, is in the context of TikTok. Another way of saying it is that I'm not sure that the U.S. versus tech alone narrative is going to really drum up the type of support it needs to get. Basically, it would take Republicans getting over their antitrust feelings to actually make a difference, and I don't see that happening. But a China-owned company, that has two political narratives that can be used as well at the same time.

Big Tech on the one hand and the U.S. versus China on the other. Lastly, and speaking of multiple narratives, let's talk about Robin Hood piling into Kodak. So it was just announced that Kodak is going to be the recipient of a $765 million loan from the government to retrofit its capacity to manufacture drugs. It is up 2,760% this week on the news, and a part of that is Robin Hood users. Seventy-9,000 of them added Kodak around the announcement, which made it 15 times more popular than the next stock. Now, the crazy thing is that as media focuses on the 79,000 Robin Hood users and the 2700% growth and all that,

what they're not noticing is that the day before the announcement, there was a 30x increase in volume the day before the announcement happened. As at Tesla charts, T.C. put it, a whole lot of people committed felonies on July 27th in Kodak stock. This is insane, guys. A 30x increase in volume around the Kodak stock which had been doing nothing. Absolutely nothing for a very long time. Because there was about to be an announcement that it was the recipient of this huge government grant, wild.

Absolutely wild. It matters because there's two converging trends here. One is the aspect of narrative warfare and retail as a market force. But the second is reshoring and the push to have companies come home and manufacture in the U.S. I think this is going to be one of the dominant narratives over the next few years, and so it's interesting to see it impact markets right away. Speaking of market impact, today's main conversation is about bonds and what they tell us about the markets. My guest today is George Goncalves, and as you'll hear, he has been in and around markets for 20 or more years. He is focused on bond markets and has a huge breadth of experience to share in that light.

In our conversation, we talk about something that he said actually right before we started recording. He said the bond market has been the truth teller for decades, but no one wants to pay attention. This conversation is all about what the bond market is telling us that we're not paying attention to and why we should maybe look over and understand what those signals are trying to say. As with all long interviews, this is edited only very slightly, so let's dive in. All right. I am back with George Guncalves. George, thanks so much for hanging out today. It's great to be here. So, George, let's start for people who don't know and aren't familiar with you. Could you just share a little bit about your background and what you spend your time on? Sure. I'm going on over 20 years, bond market veteran, which means, you know, I've been a strategist, worked in the trading desks. I've been both on the sell side and buy side.

which, you know, in our world means, you know, asset management as well as, you know, the dealer, broker-dealer side of selling securities. Most recently, I was, you know, the chief rate strategist, and then later the head of the fixed-income strategy groups for the Americas at the Mora Securities of Japanese Investment Bank covered, you know, pretty much every single fixed-income asset class over the last 20-plus years from Munis to credit, primarily focused on, you know, U.S. rates, government markets, inflation. And now at this juncture, I'm solo on a freelance basis, primarily on Twitter under the handle at bond strategist, and really just enjoying my time, trying to get out some complex information to the broader world and trying to make sense

of the nonsense. So, I mean, that's a perfect segue. You know, you and I have been talking about doing this for a while, but we thought maybe we'd put it around the latest FOMC meeting, which obviously just they kind of did their wrap up yesterday. So let's kick off there. I mean, first of all, what does a bond strategist look for in the context of a Fed meeting? What are you watching? And then second, what was, if anything, notable, unexpected or interesting about the meeting this week? Yeah, I think we really helpful. I think your audience would appreciate what goes through our minds, you know, when folks are sitting on a trading desk or, you know, specifically like bond folks, you know, but I think this is probably true to any sort of researcher that's watching, you know, with the Fed

and trying to parse what the Fed is saying. And, of course, you know, the Fed Day is the key big one. I mean, I think, you know, just kind of breaking it down, I think your audience would appreciate how we go about it. I mean, there's, you know, really, you know, two or three big pieces of information that get relayed on Fed Day. And you first start off by taking a quick snapshot and mental look of like where markets are heading into the actual announcements and into the news news that comes out.

So, you know, everyone has their news wires pumping in. And that's true for both, you know, for us humans as well as the alga type systems that are looking for keywords. And everyone's looking at, you know, what's going to be relayed quickly as the headlines break. And then, you know, we, you know, we move quickly to. trying to compare and contrasting what was said in prior statements, you know, trying to triangulate, you know, what, you know, recent Fed speakers have said. Does that corroborate with what the general message of the statement is? You know, truth be told, yesterday, we really

get much in the statement. We got more in the press conference, which is the second piece of, which is really the most critical part. And that's where, you know, the chair Powell really can convey, you know, the message of what, you know, the committee, you know, is trying to relate to the markets into the world. And, you know, the press conference is much more dynamic. I think that, you know, we keep on on screen your favorite financial media news outlet. For me, it's Bloomberg. I have that in the background. I have this real-time script that's going through and reading every single word at the Fed. Chair Powell is saying because they actually provide a website that you can actually see the Q&A's real-time. And you can kind of scan through and get a feel for, you know,

like what he's saying. And then at the end of it, we go back and digest, like, what was new and, you know, is it material or not material? So that's, like, I think, in a nutshell, how, you know, a strategist or a research analyst on any sort of desk would go through and try to break down, you know, what the Fed is trying to convey. I mean, yesterday, you know, at first blush, it really didn't feel like much. I mean, they basically have said the same thing in prior statements. they're not looking to tighten any time soon, of course not. I mean, in fact, they're looking for ways to impart further easing. But there are, I think, a number of takeaways that I think are worth at least kind of putting out there.

I mean, for one, if we think about the growth outlook, I mean, everyone's been pretty bold up, at least in the risk market side. A lot of folks have been bulled up, but the bond market hasn't been as much. I know we're going to touch on that later. But, you know, the Fed mentioned a number of times, I think over six times that the rate of change is slowing on economic data. You know, rate of change is the most important thing in everything that we look at. So when the Fed is like saying it over and over again that the rate of change is slowing, you've got to take notice. And I think that the market is starting to figure that out and will figure that out over the course of August. That was really important discussions around fiscal and that really, you know, the baton has to get passed to fiscal.

side. Meanwhile, we're heading into an election, which might make that more acrimonious. And they're discussing the framework. And they mentioned a number of things around, hey, we don't think we're doing QE, but by the way, they're buying 120 billion per month of mortgages and treasuries. They view that more as still market functioning, which tells you a lot and for a lot of different reasons. And they mentioned that the swap lines, you know, are going to be extended to March 31st, which is actually very interesting because the day before they had extended the credit programs, which they had painstakingly spent so much time putting in place until the end of the year. So interesting that they're putting the dollar funding mechanisms over year-end all

way through March 31st, which, you know, that's a signal in and of itself. BitStamp is the original global cryptocurrency exchange. Since 2011, BitStamp has been the preferred exchange for serious traders and investors. Trusted by over 4 million customers, including top financial institutions. BitStamp is built on professional grade trading technology. Their platform is powered by a NASDAQ matching engine, and their APIs are recognized as the best in the industry. Download the BitStamp app from the App Store or Google Play, or visit bitstamp.net slash pro to learn more and start trading today.

That's bitstamp.net slash pro. What's going on, guys? I'm excited to share that one of this month's breakdown sponsor. sponsors is crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more? With crypto.com's MCO Visa card, you can get up to 10% back on things like food and grocery

shopping. When you buy gift cards with the crypto.com app, you can get up to 20% back. Download the crypto.com app today and enjoy these offers until the end of September. Kind of coming back to these different signals that you're pulling out from yesterday, I almost feel like there's sort of like a two-part process for anyone who's trying to analyze this. One is, you know, what is your interpretation as the analyst of what's being said? But then second is almost kind of triangulating what the market interprets it as. So it's kind of like these two layers of analysis is, you know, what you thought the Fed was saying and then how the market was receiving it and whether it was different. So I guess you're kind of sharing that in general and a high level, people's interpretation was that there wasn't a lot new.

I mean, is that the case or is there more nuanced than that? I think it's increasingly becoming more evident that it's more nuanced than that, that they're looking at high frequency data and they're noticing that there is a slowdown happening and that what we saw in coming out in May June, it really was just a bounce back from the lockdown. And that was to be expected. And I think that now, you know, getting nervous that, you know, we're entering into this kind of no man's land between now in October, really November, where it's going to be hard to really, you know, up the ante. I mean, of course, the Fed has some tools. We could discuss what those are. But I feel like it's a subtle signal that they're getting nervous that the fiscal fiscal side has to get their act together and provide relief. And will it be enough?

And I think they're worried about that. Yeah, I think this is really interesting. You know, it's been fascinated over the last two weeks in particular as the kind of May and June data has rolled in that there's this kind of psychic fracturing and schizophrenia in the narrative machine. On the one hand, there are all these things that look better. But on the other hand, the data that's more kind of contemporary, right, that's more in the moment, things like jobless claims, you know, and a variety of other credit card purchases and things like that are telling the same story that the virus numbers are telling. which is that, you know, holding aside any mandated shutdowns, people are recalibrating for a kind of an indeterminate environment, right? Yeah, no, I think, look, lockdowns that are forced is one thing. But I think that there's also a shift in consumer behavior.

You see in the consumer confidence numbers as well, you know, if people get nervous about, you know, stepping outside and conducting their daily livelihoods, you know, it's just going to, you know, it has a knock on effect. And I think we're in, look, it could be noise because we're obviously in summer and people are re-changing the way they vacation and how to deal with, you know, being more landlocked and not being able to travel around the world as much that might actually create a boost in some areas of the country. But I think that, you know, we're in this weird state where we don't know if the trajectory that we saw coming out is going to be that robust. I mean, I'm skeptical of that. And that's because I read the tea leaves of how the bomb market is digesting it all along. And so I think that, you know, that narrative is going to get tested. And then the question is, like, how deep does it go? And what snaps people out of like, oh, maybe it isn't that bad?

Like, so I think that's why August, it could be typically a snooze fest, but it can, you know, there could be, you know, outliers that come out of nowhere that completely derail, you know, the current narrative. So this is really interesting. And this is a key part of why I wanted to have you come share your perspective. You just mentioned this idea of reading the tea leaves that the bond market is telling us. And one of the sort of narratives or notions that I've seen repeated, you know, kind of frequently on Fin Twitter, on crypto Twitter, is the idea that the bond market has been telling us a different story or potentially multiple different stories than the equities market. And obviously, we live in a paradigm where the equities markets are sort of the golden god when it comes to the, you know, the media narrative about the markets. So I guess two-part question.

One, has the bond market been telling us a different story than the equity's markets? And to the extent that it has, what is the story that the bond market is telling us? Yeah. So I would say, yes, the bond market has been telling us a different story. But maybe before I explain why that's the case, let me give you the counter arguments, which you end up seeing a lot on Finn Twitter and those that are kind of more bond bearish, they're like, well, bonds don't give us any signal, any signal effects any longer because the Fed is buying so much, so why should we look at them? And I think that's like a convenient narrative that, you know, many of the naysayers want to use to say, well, don't look at bonds.

They're really, you know, useless at this point. You have to just kind of focus on, you know, risk markets. And that's really a reflection of the economy. I mean, again, being trained and having worked, you know, over two decades in the bond market and understanding what it's been telling us, not just for the last 20 years, but quite frankly, the last 40, if not the last 200 years, and I'm going to go really way back. We've been in a structural declining rate environment outside of the inflation scare that we saw in the 1970s and briefly in the 1930s. But if you really go back and you think about how far have real rates have been declining, they've been declining for multiple centuries. And that's really a

function of productivity changes. The printing press was one of the big, you know, one of the kind of innovations out there. Of course, we know we all kind of bow down at the altar of tech and think that, you know, we're living in this day and age of amazement. And it's true, we are, but we've come a long way where, you know, real growth or the real kind of ability for economies as large as they've become, at some point they start to slow down. And we've been slowing down for decades because we just can't keep growing at the same pace as we were. I mean, it's going to either eat up all the resources in the world. I mean, there's so many other, you know, side topics that we can go into. But, you know, real rates are basically telling us that

growth is not going to be that robust going forward. And it has been the case like that, you know, give or take a few moments in time where real rates spike up higher. They've been basically heading lower and just not believing this narrative that, you know, sustainable recovery is in the making. So what are the implications of this? I mean, I guess like, well, one, One, how would people behave differently if they were listening in this way? Or is that such a counterfactual that it's hard to say? It's hard to say. I mean, I think, look, the other piece that it's also thrown out there, I think, you know, for selfish reason, is like, oh, you should not have bonds in your portfolio.

And, like, it's tricky, right? I mean, obviously, you don't want to be buying negative yielding assets and slowly chipping away at your capital. I mean, I get that. And that's probably specifically true for the retail investor and for the private investor that may have other alternatives, especially outside of the realm of government bonds. But there is a large segment of the investor base that has to be involved in the bond market for fiduciary reasons and for legal reasons, like pensions and banks and so forth. And so they're always going to be involved. And they might drive, you know, bond prices to unrealistic levels.

and that's a topic in and of itself. But, I mean, if you kind of still go back and circle back to, you know, wire bonds telling us a different story than equities, largely I think, you know, there's this view that, you know, what else can the Fed do if we do see, you know, a bankruptcy, you know, wave, if insolvencies were to pick up again, if we actually see a natural side of a recession, you know, the acute lockdown shut, down impact and creating like a very short-lived kind of depression, it's easy to dismiss that

and say, oh, look, that was just because of the pandemic. It's going to all come back. It's going to be fine. It ignores the reality that, you know, we were already fragile heading into this environment and that credit markets and the ability to service debt, you know, were pretty stretched. And so I feel like, you know, the core bond markets, which is the government markets and the tips market, they're looking at all this information. and they're saying that, you know, look, the Fed and the U.S. government, obviously valiant efforts.

They did a massive campaign in March and April to try to stop the bleeding in the economy, but they perhaps maybe shot a lot of their ammo too quick. And now they've really, you know, limited the ability to actually, you know, arrest any sort of second wave, both in COVID, but also a second wave in the economy slowing down in a more proper recession. And I think that is long. lost upon, I think, most equity folks. I mean, they're just viewing like, look, liquidity is great, money's coming into the system, everything's guaranteed to go up.

Everything's based on price, right? So if you wake up one day and you realize that you can't service those debts or you can't maintain those equity valuations, they'll just be a reset. Those companies will either still exist or not, and we'll just have different price levels, but the world will keep going as it always does. So this actually brings up a really interesting question, which is, is, you know, obviously we've had this major, major kind of world shifting event that has created a new context for everything in COVID-19. But, you know, late last year, like called Q4 2019 and coming

into this year, what were you looking at, you know, I guess what was the story that bond markets were telling then, and how much has that been changed versus reaffirmed by what we've seen subsequently and COVID-19? I think what, look, and I've been watching this, and I've been I'm a money markets follower and really like to look at the plumbing to see what it's telling us. And really since all throughout 2019, culminating with the repo scare that we had in September, which led to the Fed's not QE of really ramping up the balance sheet initially. And then what happened through March, I think we're all part of the same story that there's only so much balance sheet in the world, unless you actually start to expand it on the public sector side,

either through governments or through central banks, printing money and just expanding the ability to service all these assets. So, I mean, I think, you know, it was at the end of the day, signaling that we're a very late cycle that you could only issue so much debt and expect things not to either start to break down in that kind of environment. I mean, when you have things priced to perfection like we did, and now we're trying to reflate these assets, you know, more broadly in the S&P or wherever, it's hard to maintain those valuations unless you have real honest earnings growth and you're really able to service

debts forever. And that's why we're seeing a big rise in zombie companies that only can survive if rates are at zero. And so I think, you know, the Fed, you have to give them some credit. They tried to raise rates. They didn't get too far. They tried to reduce liquidity in the system, and they had to unwind QT. And then it really just created this window between the summer of last year, really through the beginning of this year, that there was just not enough capacity on the private sector side to handle all this debt. And it led to these weird gyrations that we saw in middle of March, of middle of March, and they have to step in.

And that's why the Fed keeps calling it market functioning, that they're buying $120 billion of assets for market functioning. They're just clearing up and making space so the system can actually keep operating. So this, I mean, this brings up a really interesting question about how much agency the Fed actually has with these decisions. And I guess to what extent the agency or lack thereof is a vector of just market functioning or political will. So, I mean, I guess that's my question is, you know, we kind of look at each of these meetings, you know, with a microscope and examine the decisions. But on a slightly higher level, how much actual room to make a broadband of decisions does the Fed have? That's a great question.

Look, I think at this juncture, there is an element of national security. I think, you know, you've had Luke Grumman on your podcast, and he's been on this for way ahead of most people. people. And there isn't, you know, at the end of the day, the Fed is still part of the U.S. and in U.S. is going to do everything in its powers to make sure that we have a properly functioning banking system. And if you were to, you know, ask any sort of leaders down in D.C., like, what's the most important things, you know, for keeping your country safe? You have to have a viable banking system and you have to have a great military, which, you know, they're defending both of those by keeping the treasury market well functioning.

Do you think then, I mean, I guess it's, I mean, it gets back to this question of whether they can actually shift things. You know, for, I guess, what then becomes, is there a way to unwind this or is this, you know, how does this play out, I guess is the question that I'm kind of grasping at here. You know, it's an interesting thing. Yeah. No. In the here and now in the real time, we'd like to try to like forecast the future and really get a sense of like how can this really all play out. And anyone that comes on your show or anyone, quite frankly, has no clue because, I mean, there's some scenarios that are more feasible than others. I mean, I think what we're trying to play towards is the scenario that, like, we had during World War II. And you had a very close relationship between the Treasury and the Fed. And we got debt to GDP numbers that were basically roughly where we are now. And life continued.

And we got to the other side. and you had to make some changes on how banks operated. But obviously the world is now much more complex than the 1940s, 50s banking system. And it really actually kind of brings us to the juncture of what, I mean, I think a lot of your audience focuses on, which is the role of alternative kind of assets, alternative means of exchange like crypto. And I think it's starting to really open up that. discussion, you're hearing central banks around the world think about having their own central bank digital currencies. I think you have to create an environment where things cannot be fixed

instantaneously, right? So you try to stop the bleeding and then you want to slow down the process as long as possible so that you can figure out what is the exit strategy. And it might very well mean that the exit strategy requires a rethinking of how the Fed operates relative to commercial bank and dealers. And, you know, it's, I mean, I think I've heard some call, like, you know, the Fed now the market maker of last resort. Technically, they're supposed to be the lender of last resort. They're not supposed to be making markets. And so I think they're doing all that to try to buy time to figure out what is going to be the new world once we get out of this. And this might mean a three or five or ten year plan. And it probably also brings into into this discussion,

the role of the dollar and everything else. So I feel like it's such large topics to tackle that you cannot just do it on the fly. And so I think they're trying to set us up for this new world without they themselves knowing all of the answers. Yeah. I mean, I think that's a good perspective. And I certainly agree that trying to actually know the future is a tough, tough request. But let's actually shift then. You kind of segue to the dollar.

And I think there's been an interesting conversation happening over the last couple weeks as gold and silver have kind of cruised up. And as the dollar, or at least the DXY, has taken a bit of a nose dive. And so, you know, anytime you have chart one going going one way and chart two going the other way, there's an easy, easy narrative correlation there. And certainly it kind of filtered over into the Bitcoin environment where we had a big, big jump up from, you know, the 9,000 that we've been hovering at for just about. ever, up to over 11,000 on Monday, which has been sustained this week. I guess, you know, one of the conversations around that has been, well, there's, I guess, two parts that I'd love your take on. The first is whether this dollar move is actually the kind of root cause of this shift up

in these other kind of, you know, alternatives. But then the second piece, which, you know, is obviously directly related to kind of the bond strategist work. is there's been a narrative. I mean, you saw it in Bloomberg just the other day of institutions looking around at gold and saying, maybe they can do some of the job that treasuries had been doing because we're moving into kind of a negative real interest rate world. So I guess that, you know, two kind of very different paths to take us down.

You can pick whichever one you want to start with. But one is, you know, what's your take on this conversation about institutions looking away from government debt and into gold? And then two is more kind of broad-based, you know, what we're seeing with the dollar and and maybe, you know, to the extent that the bond market has kind of a perspective on that, that'd be interesting too. Yeah, no. So, I'll start with the gold one part. So I think that that one's got people's attention, especially what's been happening with a big melt-up.

And it's really the other side of what I was describing earlier, a pretty big move into negative of real rates, which it becomes like a kind of key tenant for, you know, gold affidionados. And, you know, just, you know, for the record, I mean, I do think gold is a store of value. And I actually, you know, do think that it merits being in one's portfolio in some shape or another. But what I'm, I get nervous about, like, towards the end and of big moves like this is, like, for those that actively trade or for those that, you know, try to, you know, you can be, you know, you can either be an investor or a trader, right? I mean, or you could be both if you can actually manage that well. But sometimes when you get towards these emotional points where you make all time highs and you start to kind of, you know, drink your own Kool-Aid that you think that this thing's going to keep ripping to the upside and

you hear the, you know, the gold bulls just stay on one side and not really try to hear the other side of the story, that to me starts to become like a red flag that we're maybe getting close to the end of the rally. I mean, it might still have, you know, many, many more years of upside, but in the here and now, it's quite possible that we're at a point of exhaustion. I don't know. I mean, technicals kind of suggest that we're starting to get there. Maybe there's more upside. I'm not trying to make a call here specifically, but for gold to kind of make that quantum leap to becoming a pure substitute to high quality collateral assets like treasuries or even mortgages, or within the banking system, you need to have a huge re-rating of

its importance in the banking system. And that only happens not by people forcing up the price. That really happens by decree. And it really requires all the world powers to kind of sit in a room and rethink its role. And it really kind of rethink, you know, again, back to the dollar, which I know we can discuss later, and rethink like what is like the common denominator for all transactions globally, what is the value of what we care about. And we might have that discussion in the years ahead. I just don't think we're going to have that in the middle of a pandemic slash tensions between U.S. and China. So I feel like the dollar still will maintain its position in the world. And gold is a great alternative. But it cannot, it's just not big enough to

substitute what the bond market does for just the kind of the plumbing of what we built. If we decide to change that plumbing, then yeah, gold can have a huge, huge role in that place as as other alternative assets. So I think that's a really good distinction, right? There's the gold conversation in the context of what room this particular asset has to grow, you know, as some people maybe want to allocate a little bit more or less to it, even including new buyers, versus this structural role that bonds play in the global market and the global plumbing, which is a, you know, it's not necessarily dependent on or even related

to any sort of short-term price action. Yeah, and look, I know people who want to poo-poo, and trust me, I'm not a huge fan of QE, and I think we've overdone it in many different ways. But Japan's been doing it for 20-plus years, and that they still have JGBs, even though they're not really yielding much, they're still the backbone of their banking system. And so this is not just true for the U.S. banking system. It's for the global banking systems within each country's jurisdictions, you know, bonds are basically the foundation of, what makes up our banking system. So if you want to change that, it really requires a whole host of alterations

that I don't think we're ready to make yet. So I actually do want to come back to that in a little bit in the context of the Judy Shelton nomination. But first, you know, kind of continuing this thread and looking at the dollar. So Jeff Snyder obviously is super skeptical of these conversations around, you know, the dollar is losing its weight and all sorts of stuff.

And mostly that for him comes down to a belief that the Fed simply doesn't have the capacity and power that we ascribe it to flood the market, quote unquote, with dollars, right? He calls it a floodbeth. And he recently wrote about this in the context of this specific sort of gold treasuries and dollar conversation. And he pointed to the fact that the DXY is, you know, so weighted towards Europe and the yen when actually, in his estimation, the yen going up is sort of part of a larger dollar strength story. So it's actually kind of just a hard measure anyways. But part of what he referenced was the bond market sort of not corroborating the DXY story. So I guess I just wanted to get your take on the dollar in what we've

seen recently. Yeah, I know. I mean, look, I have a tremendous respect for Jeff as well. Never met him, never met him, never spoke with him, but it seems like a nice guy and well-intentioned. And, you know, I feel like he's a little bit frustrated like me and that people want to, you know, force a narrative on how Fed actually conducts operations and what it means for the actual currency. And although we kind of generically say they're printing dollars, they're really just creating reserves in the system, and it's really the inability of those reserves to escape the system, which is why we don't have rampant inflation. And that's why, you know, I'm sure that's why he calls it the flood myth.

But, you know, the Fed wants us to believe, you know, and wants us to, to, to think that they're doing that. It's more like a game of confidence that they're trying to gin up and push up inflation expectations because the alternative is kind of a debt bust from deflation aspect. And so they know what they're playing with, but they can't really necessarily create the dollars that the really the world really needs. Another great person, which I'm sure you probably have seen, like Richard Werner, you know, Scientific Econ on Twitter, you know, he's done tremendous work over the years too. And then the entities that actually create money are the banking system. So you need a viable commercial banking system. And this is true for both the domestic banks

as well as global banks to create dollars. I mean, I think people, some people don't know and realize that there's a lot of dollars that are created outside of the Fed's domain in the global banking system, which are just unaccounted for. We just don't know how much it is. I mean, we see BIS estimates of like there's a massive dollar shortages. In other words, meaning that, you know, entities, outside the U.S. have borrowed a lot of dollars and eventually they have to pay back those dollars. But, you know, we don't know, you know, it's 12 or 16 trillion, whatever the number may be. These are big numbers, but it's really just the, the grease in the system to keep global trade operational and working around the clock. So that's why the dollar is so paramount.

I mean, I think, you know, when you look at that, when you understand the plumbing that way, But then you try to look at the price action of the currency itself. Sometimes you have to almost separate them and really think of them in separate ways. I mean, yes, the dollar value that you're seeing relative to other currencies or on a broad basket like the Dixie, which I rather look at is the trade weighted dollar. Yes, the dollar has been going down in theory and value. But that's on a relative basis. And to Jeff's point, I think it's a very good one.

When the yen is rallying, you know, as we would say, In Japan, you know, it's Yokunai. I mean, that's not good. I mean, you don't want the yen to rally. That's usually a sign that, you know, people are looking for hard assets and safety, which is akin to what the dollar does anyway. So I'm worried that, you know, if you look at the trade weighted dollar, which is much more of a cleaner way of looking at it that doesn't have the overweight of the euro in the

end, you're not seeing this big pickup because I think investors are realizing that the global growth story is still to be determined if it's actually going to come back in the same manner. And we still have the possibility of wave two's coming in from COVID, which will probably most likely hit less developed countries much more so than developed countries if it were to pick up in the fall, that if emerging market currencies are not rallying and therefore it's not like a risk on in FX space, then this dollar kind of weakness could be a head fake. I think it's a really interesting lens to look at this with. And maybe just to kind of, I want to actually get your lens on a couple of other things, right? Because they're the sort of high profile economic issues or I guess in some ways geopolitical issues as well and how they show up in kind of market reaction. So, you know, one of the things you mentioned in terms of the Fed's current or what we saw from the Fed yesterday is these sort of smoke signal. that, listen, you know, the fiscal needs to pick up.

You know, we can't do everything and fiscal needs to come back in. So right now, obviously, there's huge disagreement between the left and the right around what the next round of fiscal, you know, stimulus engagement, whatever you want to call it, is going to consist of. But you're talking about trillions of dollars, right? The low offer is a trillion dollars. How does that potentially impact the bond market? What does the bond market make of those conversations?

What are they expecting? So the basic rule of thumb that I've kind of always gone back to over the years, you know, and I've used the supply argument myself to try to understand, like, you know, there's competition in the sense that if you produce more bonds in theory, you know, based on, you know, kind of textbook economics, you would expect those bond prices to go down to try to entice investors to come in, yields would go up. And that's true most of, you know, most of the time, but only really, works when you have a properly functioning economy that's in a growth phase. So if you're in an

environment like we are now, where it's uncertain, like, what is the path for the U.S. economy? And you're just seeing the fiscal side just replacing the drop off an aggregate demand from the private sector. It shouldn't, I mean, it could over time, and it will. I mean, I think if we get our arms around this, we will have higher rates in the future. And that would be something applauded by the Fed and everyone else to kind of as a vindication that we're seeing normality come back in. But in the very, very near term, like the second stimulus package, which probably won't be as big as the first one, and might end up being more deflationary in nature and expose

this kind of weakness and the delays around the bankruptcy wave as well as insolvency wave. It's still out there, both at the consumer level and at the small business level. And so if, if like the fiscal support is not big enough, yeah, the bottom market in theory is going to have to underwrite all this new paper that's going to hit the market. But there's going to be willing actors stepping up to buy that because at least they know what they're buying versus buying some credits which may go bankrupt in two or three weeks. Interesting.

Super interesting. Similar question, I guess, around the U.S. and China. You know, this is, again, we're so used to see. how news and news cycles play out in equities markets. But when we see heightened tension, like last week in particular, there was a lot of rhetorical bluster going back and forth and even some real action in the consulate closures or the dueling consulate closures. What do bond markets make of either the U.S. China specifically or just sort of that

type of geopolitical event? Well, I think you kind of were mentioning earlier about how, like, you know, we've seen, large institutions slowly shifting away from treasuries or at least contemplating them as an alternative because rates are low and gold is a zero cash flow asset, but at least you kind of know what you're dealing with. I mean, foreign central banks, this is no secret. This has been going on for over a half a decade, if not longer, have been slowly peeling back and investing some of their excess dollars into gold, right? And so, you know, when you think about what's, these have been long-term trends where this, there's like a de facto kind of thinking that people think, oh,

foreigners own our debt. Well, not really, not as much as they used to. Now they're like in the low 30s percent of our national debt. And the majority now is being held by domestic investors and or the Fed, right? So, you know, in, you know, 10 or 15 years ago, if we were having this sort of, you know, more, more acrimonious tension between, you know, world superpowers and one is indebted to the other, you would think that there would be some sort of premium started to get priced into the bond market that, hey, what if there's some sort of retaliation? At this juncture, I mean, I think, and this is me just being a little bit tongue in cheek, if you go and look at how much the Fed bought in the couple weeks of March, like, I mean, they bought almost like two trillion dollars

worth of treasures. They can basically buy out any sort of retaliatory response that would have ever I hopefully never gets to that point. But if any central bank wanted to really test the bond market, I think the Fed has basically signaled that they will step in and take down the other side. And it will be, yes, very volatile for a couple of weeks. And that might be an issue. But I think that there's a subtle message out there that, you know, don't mess with our bond market because we can take it down and bring it back home.

And I think so like that's the way I look at just very high level. And this is, you know, I don't want to sound like a conspiracy theory. But I think like when people, always like, oh, what if foreigners sold all their debt? I was like, well, then someone else has to buy it. It's either going to be domestic investors or in the interim, probably the Fed will have to step up in a big way. And they kind of shown a glimpse of that back in March. So it's really interesting, actually. And I think the reason, so I don't think it actually sounds, or maybe it would have 10 years ago sounded kind of conspiracy theory. But I think that there's a

growing appreciation of the centrality of the U.S.-led financial system in its power in the world order. And there's this old narrative, obviously, it's not a narrative, it's kind of a truism of the dollar being backed by, you know, guns. And in a lot of ways, it feels like almost the reverse is true that the real power in the system is and has for a long time been financial. And, I mean, certainly any time that there are hearings in Congress or the Senate around the role of digital currencies, particularly, you know, non-sovereign, non-state currencies like Bitcoin, that is the key question is, does this undermine the sort of sovereignty and centrality of the U.S. dollar is the World Reserve System?

So in a lot of ways, I actually, I don't think it's, I think the fact that you're picking up on signals that the Fed may be trying to, in some way, maybe even subconsciously, signaling that they have the capacity to absorb any amount of that type of pressure in sort of economic warfare is probably right on. No, thanks. Yeah. Look, I mean, I think, look, there is obviously, A lot of different messages we could take away from these things.

And I think your point is, and that's why, as I said earlier, I think central banks would like to figure out a way of introducing or their own kind of digital currencies. And at the same time, given how far along the currencies that are already in place, like crypto and so forth, I mean, like a Bitcoin within the crypto space, it's going to be hard to shut those things off. So I feel like it's just a matter of finding, again, back to what I said earlier. earlier, you can't just make these decisions overnight and you don't want to do it in a rush moment like we are now.

But I do think that we're trying to reinvent real time over the coming years, the role of the Fed vis-a-vis the commercial banking system vis-a-vis alternative assets and how they all kind of interplay with each other. And hopefully it doesn't require some sort of economic warfare to trigger that. Yeah, totally. So, I mean, let's one kind of example of this or something. that people have highlighted as potential shift in tone is there's been quite a dustup over the nomination of Judy Shelton. And I think, you know, there's kind of two very different reasons for that.

One is policies, right, and pass comments around either a return to the gold standard or just a sort of disinclination towards the need for central banks in general. The second is kind of a little bit different. It's politics, right? And a worry that she doesn't seem to care much for the the separation of powers, right, between the Fed and the Treasury. What do you make of that? What do you, what have you seen kind of the reaction to that nomination be like? And, you know, is it something that's even worth paying attention to? Look, I think what you're picking up, picking up on is important to highlight.

I do think that, you know, as with everything in life, people are fearful of the unknown or something that's different. I mean, not just kind of pulling the party line. And I actually read a lot of her papers and subscribe to some of her basic tenants on hard money. And I do think that she would be a really welcome voice at the Fed. That's my own personal view. And I think that people down in D.C. that don't really have a full understanding of how the system really works and just see something new means potentially bad, therefore, let's challenge it. I think, you know, there's, it could be those kind of people are probably what you need to have in

place if what I described all along through this podcast that we're trying to rethink, you know, a very complex system within the dollar banking system fed globally. How do we do this? It's good to have, you know, fresh linking like someone like Judy Shelton. So before we started recording, you said something really profound that I'd love for you to just, you know, kind of put a capstone on maybe as we sort of round out this conversation. You said the bond market has been the truth teller for decades, but no one wants to pay attention. And it sounded from what we've spoken about before that this has to do with sort of the larger global growth story. But maybe you can just kind of sum up your thoughts on this and perhaps kind of shoot us forward about how we should start to listen or pay attention.

Yeah. So thanks for picking up on that too. I mean, I do think that it's one of the areas that has always been viewed as more as an arcane area of the financial market. but in fact, actually the biggest piece of the puzzle and really the glue that keeps it all together and the foundation, as I described. And so I think that, you know, through conversations like this and just in general, there's been a growing appreciation of trying to understand like how the plumbing works. And you kind of come back to this common denominator, which is the bond market and what it's telling us. And so, I mean, I do think that, you know, those that are really in touch can see, the miles away, maybe see it a little bit too early and that influences decisions and so forth.

But I do think that what the bond market is at this juncture, you know, signaling that we're not out of the woods yet and that, you know, there is, you know, larger forces at play that, you know, really could be tied back to you into national security. And I think that we need to really be aware of those messages when we start to think about, you know, our daily livelihoods and what we do with our, you know, our financial assets as well as, you know, conduct our lives in general. So I think that, you know, there's, it's going to continue to grow in importance. The problem I have, you know, to kind of sum it up at the end, it took this long. And now yields really barely offer nothing, very little to investors. and now they're being forced in to buy at the most uneconomic levels. That's really the tragedy in this whole situation that, you know, if folks really had picked up and realized that, hey, when rates were at 3%, 2%, 4%, they were much more attractive,

but they were being told, don't buy it because equity dividend yields are much higher. Therefore, why would you even touch bonds? Meanwhile, they end up becoming a really, you know, stability factor in your portfolio. I mean, there's a larger question about whether an economy that is based on, you know, sort of easy credit and perpetual growth can redesign itself for resiliency without totally cratering. And that I think plays out on both individual and sort of larger macro levels. 100%. Well, George, it's been an awesome conversation.

I know the listeners have really appreciated kind of getting this insight into the bond market and just the perspective that that helps bring to so many of these other's issues. For people who want to follow you, where can they find you, your writing, your work, Yeah, I mean, the best place at this point is just on Twitter at Bond Strategist. I also do some freelance work with a number of outlets, one called Macrohive.com, which is really trying to create a virtual strategy world for the everyday person as well as an institutional investor to get information on these complex macro topics. But for now, my main area would be just on Twitter at Bond Strategist. Awesome. Well, we will definitely have you back to talk more about all this stuff. And again, I really appreciate you spending the time today. Great to be on. Thanks for having me.

When reflecting on this conversation, I keep coming back to this idea of a long-term structural shift to a lower growth environment and what that means. We've created an economy that is absolutely dependent on this sort of ever-growing growth model. And it hurts us in so many ways. It hurts us in terms of our results. It hurts us in terms of our capacity to deal with change, but at the same time it is enormously enriching and has led to an incredible amount of wealth being created. How we reconcile this larger secular shift to a lower growth environment and to the need and perhaps the desire of consumers to have more resiliency and less consumption in their lives with the fundamental way that our economy is organized is, I believe, one of the key questions for the next 20, 30, 40 years. Of course, on the way to that 20, 30, 40 years, there are going to be a lot of very important

issues that happen. So I hope that this conversation has given you an interesting insight into how a bond strategist thinks about these different parts of the market, about what we heard from the Fed this week, and so much more. So thanks as always for listening, guys. And until tomorrow, be safe and take care of each other. Peace.