The Breakdown - Treasury Secretary Bessent: "The Beatings Will Continue Until Morale Improves"

Episode Date: March 18, 2025

The market is finally digesting that there is no Trump put, and that Trump 2.0 is more concerned with remaking the global economic order than on making Wall Street happy -- at least for now. NLW talks about the implications for markets, bitcoin and beyond. Sponsored by: Ledger Ledger, the world leader in digital asset security, proudly sponsors The Breakdown podcast. Celebrating 10 years of protecting over 20% of the world’s crypto, Ledger ensures the security of your assets. For the best self-custody solution in the space, buy a LEDGER™ device and secure your crypto today. Buy now on Ledger.com. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, March 17th, and today we are once again trying to figure out what is going on in Trump's economy. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Well, friends, the stock market disintegration and the potential for a U.S. recession continue to be the biggest story in markets. Last week ended with the S&P 500 down a further 2.3%, the third straight week of major losses

for a combined 8% drawdown. There's only been four green days since the index set an all-time high on February 19th. This is now the worst drawdown since the summer of 2023, and the mood is getting distinctly sour on Wall Street. Peter Chair, the head of macro strategy at Academy Security, said, It is finally settling in that there is no Trump put and there is no way the economy can manage so many shocks effectively. Doge, firings, tariffs.

Administration figures have been active in the press throughout the drawdown, but, contrary to traditional political strategy in the U.S., there has been very little support for markets. While last weekend featured comments from the president and the Commerce Secretary, Treasury Secretary Scott Besson is now the singular voice for the administration, and his position is very clear. On Thursday, speaking with CNBC's Squawk Box, Besson said, we're focused on the real economy.

Can we create an environment where there are long-term gains in the market and long-term gains for the American people? I'm not concerned about a little bit of volatility over three weeks. He continued, The reason stocks are a safe and great investment is because you're looking over the long-term. If you start looking at micro-horizon, stocks become very risky. So we're focused over the medium and long-term. I can tell you that if we put proper policies in place,

it's going to lay the groundwork for both real income gains and job gains and continued asset gains. Besson expanded on this view during an appearance on Meet the Press on Sunday. He stated the administration is more focused on avoiding a future, more destructive financial crisis related to out-of-control government spending rather than anything in the short term. What I could guarantee, Besson said, is that we would have had a financial crisis. I've studied it, I've taught it, and if we had kept up at these spending levels, everything was unsustainable.

We are resetting and we are putting things on a sustainable path. Now, of course, the government can do a lot to smooth over a recession, but it requires or ramp up in government hiring and spending. Besson is making it clear that dealing with the pain of a recession is preferable to risking the surge of inflation that could come from intervention. And it seems that there is absolutely no appetite to intervene based solely on pain in the markets. Besson continued, I've been in the investment business for 35 years,

and I can tell you that corrections are healthy. They're normal. What's not healthy is straight up. You get these euphoric markets. That's how you get a financial crisis. It would have been much healthier if someone to put the brakes on in 0607. We wouldn't have had the problems in 08. making the position very clear Besson concluded,

I'm not worried about the markets. Over the long term, if we put good tax policy in place, deregulation and energy security, the markets will do great. I say that one week does not the market make. Now, in my time doing this show, we have never had a Treasury Secretary so active in the press. And it's especially unprecedented to hear that Treasury Secretary essentially cheering on a market downturn,

or at least saying, deal with it, rather than offering platitudes to Wall Street. Whatever your judgment on the policies are, at this point, their position is very clear. There is no Trump put, and the Treasury Secretary is going on TV every weekend to insist that he won't blink. Some are viewing standing aside and watching the market collapse as unquestionably the right decision. Adam Taggart, the host of thoughtful money, wrote, I can't underscore how correct Besson is, nor how important it is to allow corrections like Winter to happen. In recent decades, we've deformed our economic and financial systems,

ballooning our debt, and greatly injuring the purchasing power of our currency, in a foolish delusion we can keep recession perpetually at bay. We've only exacerbated the pain of the inevitable. Whatever your political persuasion, having a Treasury secretary like Besson, who is courageous enough to be honest and adult with us about this issue is a gift. We've needed such leadership for decades. Brent Donnelly of Spectrum markets commented, the put is lower. They are front-loading the bad stuff and will try to deliver good stuff or pray for rebound in sentiment, economy, and stock market by midterms. This view is even starting to show up in Wall Street notes, with Jared Woodward, the head of global research at Bank of America writing,

the global handoff from big government to the free market may prove slippery, but it seems necessary given large deficits in bloated debt burdens. Economic growth has been enabled by unsustainable government support and protectionist policies. It may take time for private sector job growth to accelerate, for government workers to resettle, for broad-based corporate profits to rise, and for global trade to find a new equilibrium. In our view, the likely productivity gains from a market-based economic reboot are greater than the risks, and the risks from the unsustainable status quo of a debt-financed, tepid, and narrow economic growth are severe. Still, though, part of the the issue with this rhetoric out of the Trump administration is that the path forward isn't particularly

clear. Last week, Commerce Secretary Howard Lutnik said that recession would be, quote, worth it in order to put tariff policies into place. But to the extent that tariffs are being sold as an end goal, rather than the means to achieve a specific outcome, that could be a challenge. And that also might be why Letnik is now discussing things like the America membership fee in order to eliminate the income tax on people making $150,000 or less. So at this point, people are definitely not sure about what's happening. CNN polling release last week showed that 56% of voters disapprove of Trump's handling of the economy higher than at any point during his first term. When it comes to tariffs specifically, 61% of people disapprove. Economist Noah Smith, who holds a fairly influential position on the moderate left,

wrote last week, there is no utopia waiting on the other side of Trump's economy. It's just pain now in exchange for more pain later. And from a marketing hat, this may be the real issue with the current direction of this administration. Just saying there's going to be a golden age might not be enough. You might have to articulate exactly how we get from here to there. And while some on Wall Street are beginning to agree with Trump's view of the world, institutional investors appear more willing to back the policy and research notes than in the markets. The last two weeks have seen the largest ever reduction in hedge fund positioning since data collection began in the late 2000s.

This means the current de-risking is greater than the 2022 bear market, the COVID crash, and the 2018 liquidity crisis. Over the weekend, the Wall Street Journal reported that one of the world's largest hedge funds, Millennium Management is under a huge amount of pressure. The firm lost 1.3% in February, its worst month in over six years. Losses are reported at 1.4% so far this month. And while this doesn't seem like a huge drawdown, especially for us insane people over here, modern risk management techniques could compound market volatility. Trading firms like Millennium, Citadel, and 0.72 are comprised of tightly managed independent trading teams or pods. At Millennium, the Wall

Street General reports, when a pod is down 5%, the amount of money they have to invest is cut in half. If it hits 7.5%, the trades are unwound and the team has shown the door. This homogeneity among big stock players adds a level of systemic risk. The Wall Street Journal writes, what was designed to be a safety valve can add to selling pressure when different investment teams at the same firm or competing firms hold similar stocks that they are simultaneously trying to get rid of. The big question will be where the buying pressure comes from to put a floor under the stock market. Last Tuesday, Morgan Stanley held a seminar led by David Tepper of Appaloosa Management and other top hedge fund managers. The discussion of how Trump's policies would impact markets in the global economy had very little consensus.

No one was sure which policies Trump would stick with or initiate in the near future. With Tepper asking, does anyone know? Hello, friends, I am thrilled to share that Ledger is once again partnering and sponsoring with the breakdown. Many of you know, but for those of you who don't, Ledger is the most secure hardware wallet for your crypto and logins. It's trusted by 7 million users and secures 20% of the world's digital assets. What's more, Ledger is a lot more than wallets. Over the recent years, they've built a comprehensive ecosystem of products and services, all of which are designed to make digital ownership more secure and accessible.

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what they have available to you. So thanks, once again, to Ledger for sponsoring the show. But what's happening in Bitcoin land? Well, certainly stock market drawdowns and recession fears are making it very difficult to push forward with the more aggressive parts of the Trump administration's Bitcoin policy. So far, we've only seen the White House commit to holding on to the nation's Bitcoin. But outright buying is the stated. goal. According to a recent report from DeCripped, White House advisor Bo Hines confirmed this view at a roundtable event last Tuesday, stating the White House's intent on acquiring as much Bitcoin as it can. White House officials confirmed the statement but added that acquisitions would be made in a, quote,

budget-neutral way that doesn't cost the taxpayers a dime. The government buying crypto would be a big ask during a period of strong growth, but during a downturn, it's going to be extraordinarily difficult. Recent polling from data for progress show that a majority of U.S. voters oppose the purchase of Bitcoin for a strategic reserve, only thanks. 34% are in support of the policy, and just 29% of Democrats believe purchasing Bitcoin would be a good idea. Among Republicans, the opinion is evenly split, suggesting that even Trump's base have serious reservations about the policy. Now, data for progress is a progressive polling operation, but the results are pretty stark. Outright Bitcoin purchases seem likely to have an uphill

battle in the opinion polls. The polling also looked at a range of different government spending priorities. Social Security, Medicare, education, and infrastructure all had majority support for increased federal spending. NASA funding and AIR&D had far less support, with fewer than a quarter of voters calling for more spending in these areas. Crypto and blockchain development was by far the least popular spending priority, with just 10% in support of more spending. Now, given how little this administration seems to be responding to polls in the short term, maybe that just doesn't matter at all. Still, some Democrats are beginning to lean into the Bitcoin Reserve as a wedge issue. Last Thursday, Gerald Connolly insisted that the Treasury should halt the plans to develop a BSR. He wrote that Trump has

quote, glaring conflicts of interest, and complain that the policy did not, quote, seek congressional authorization. Connolly wrote, the creation of a strategic cryptocurrency reserve is poised to enrich the president and his closest allies at the expense of the American taxpayer. Connolly is the ranking member of the House Committee on Oversight and Government Reform, and so this may be a good preview of how Democrats will frame the BSR moving forward. In short, even if the administration can find a budget-neutral way to buy more Bitcoin, they'll still have to contend with the backlash that comes with it. And yet, while Trump's Bitcoin policy might not have a lot of favor among voters, enthusiasm on Wall Street is still going strong

despite a month-long drawdown. Last week, Goldman Sachs mentioned crypto in their annual letter to shareholders for the first time ever. They wrote, The growth of electronic trading and the introduction of new products and technologies, including trading and distributed ledger technologies, such as cryptocurrencies and AI technologies, has increased competition. The firm specifically mentioned a lack of crypto products as a competitive disadvantage for them. Crypto was also a key focus at a high-profile event for the derivatives industry in Boca Raton last week. Catherine Clay, the head of derivatives at CBOE, said, Crypto is back.

We definitely have seen the re-emergence of the crypto theme back at Boca after a few years of it being pretty much absent. Don Wilson, the CEO of trading firm DRW, commented, there was a previous year where there was a lot of hype around crypto. But this year, there is a recognition that using blockchain is actually going to be an important part of how we move to 24-7 trading. Terry Duffy, the CEO of the CME, is planning to plow ahead with crypto markets this year, stating, we listed Bitcoin, then we listed Ether,

now we just announced we're going to list Solana. I want to see crypto become more mainstream. And indeed, Solana Futures went live over the weekend. And even as crypto adoption in the Tradfai world continues to grow, we're also seeing crypto-native institutional products catch on. BlackRock's Biddle Fund now has reached $1 billion in assets under management. The product is an on-chain money market fund holding short-term treasuries accessible by holding an Ethereum token. The fund is largely used by crypto trading firms that want to sit in cash while earning safe on-chain yield. The fund is around a year old and only accessible to institutional investors, making the billion-dollar milestone a significant achievement. The entire market for tokenized

treasuries is around $4.2 billion, so BlackRock has about a quarter of the burgeoning market. With regulatory changes expected soon, BlackRock's tokenization partner Securitize is beginning to look at other forms of tokenized funds and use cases for real-world assets. They launched the first Oracle for Biddle last week, allowing the fund to become integrated into DeFi systems, and they're also pursuing the tokenization of private investment funds from firms including Apollo, Hamilton Lane, and KKR. Now, with plenty of narratives pointing in each direction, analysts' opinions about what happens next are diverging. Plenty believe we've now seen the bottom of this drawdown, or are at least getting close. Economist Timothy Peterson is looking at

seasonality and feels pretty good about the current situation. He wrote, Bitcoin is trading near the low end of its historical seasonal range. Nearly all of Bitcoin's annual performance occurs in two months, April and October. It's entirely possible Bitcoin could reach a new all-time high before June. One of Peterson's Bitcoin models involves tracking median price action across the average of the past 10 years. Currently, Bitcoin is 25% below the average price action for March, which is an extremely weak month on average. This would match up to known weak points in market liquidity for Tradfai as firms straightened up their books for the end of the quarter. Peterson's model called for $126,000 by June. Meanwhile, others are suggesting that this is

just about enough pain to complete one of Bitcoin's characteristic bull market pullbacks. Bitcoin saw a low of $76,000 last Tuesday, which would be exactly 30% off the February all-time high. Derivatives markets are also starting to point in the right direction as well. After dipping into the bearish territory last week, Bitcoin futures are again trading at a healthy premium. Traders are currently paying a 5% annualized premium to own Bitcoin contracts settled in two months time. This suggests that there's plenty willing to bet on a Bitcoin recovery in the short term. Meanwhile, global liquidity is ticking up after a rough patch at the end of last year. Analysts Quintin-François wrote, money supply rose 3.9% year-over-year, fastest pace in 30 months. Global liquidity is going up,

so will Bitcoin. Analysts are pointing at a 7% increase in Chinese M2 year-on-year, and a 500 billion euro fiscal package in Germany as key drivers. Bitcoin does show a very strong correlation to global liquidity on a three-month lag, so to some, this is a sign that will be out of the woods soon. To keep it balanced with some bearish analysis, however, Marcus Thelian of 10x research sees the risk of another long and boring summer consolidation. Thelian said there is, quote, little evidence to support a strong price recovery in the near term. He sees it very possible we'll see a repeat of the 2024 price action,

which saw Bitcoin drifting down for half a year. Thielen's analysis leans heavily on technicals, but also he gave a fundamental reason for this view, adding, this aligns with our view that most ETF flows came from arbitrage-driven hedge funds. Given the persistently low funding rates, there's little incentive or willingness to deploy additional capital despite the recent price correction. And regardless of where we head next, it's clearly been a very rough patch. Crypto-Quant data measuring Bitcoin demand hit a year-to-date low last Thursday. Their metric attempts to measure 30-day demand in Bitcoin terms hitting negative 142,000 Bitcoin

at the lows. This figure has been positive since September, peaking in December before drifting down. It transitioned into the negative in the final week of February just as the drawdown accelerated. This is the most negative that demand has been across the entire bull run, narrowly outpacing the drawdowns from last summer. Again, the metric doesn't tell us much about what comes next, but it does confirm that we're getting to the point where most corrections bottom out. That is, unless they start getting worse.

And so, friends, alas, we are once again in the no-one-nows-any-hinterland. We're all in this together and we're just going to have to ride it through. And of course, you can count on the show being here as you valiantly suffered through it. For now, however, that's going to do it for today's breakdown. Appreciate you listening as always. And until next time, be safe and take care of each other. Peace.