The Duran Podcast - Bond Market Warning: US Debt Crisis Is Just Starting w/ Ray Zucaro

Episode Date: September 2, 2026

Bond Market Warning: US Debt Crisis Is Just Starting w/ Ray Zucaro

All right, Alexander, we are here once again with Ray Zuccaro. Ray, welcome to the Duran. Great to have you on with us again. And before we get started, where can people follow your work? I post my monthly thoughts on TwitterX at Ray Zuccaro. I just put out my August thoughts. My firm's website is www.rvx-a-an.com. And we recently launched a new fund for the U-S. market in Europe with variety

capital out of the UK. Those links are in the description box down below and I will have them as a pin comment as well. Alexander Ray, let's talk about what's happening in the world. Indeed, and I think that this is a particularly important and good moment to be talking to Ray because lots of things are taking place in the world. And as I said just before the start of our program, unusually, unusual people, people who are not usually interested in events and movements and the financial markets are now starting to ask me questions about it. I mean, people I personally know. And the fact that they're doing that is usually a sign that important, well, I've always

felt that it's a sign that important things might be about to happen. But before we do that, since Ray, knows a very great deal about Venezuela, more than I think anyone else that I've spoken to, about the economics of Venezuela and the oil industry there. I was wondering, Ray, if you could take us through this extraordinary deal that has been done between the United States and the government in Venezuela. there's been an awful lot of very, very negative criticism. There was a ferociously critical cartoon about it in the Chinese media I saw

with the predatory United States seizing Venezuela's wealth. I mean, that is a widespread view. But maybe another question is how viable, how real is all of this? And is there anything for Venezuela in all of this? Okay. Thank you gentlemen for getting for having me on. Look, I think Trump summed it up perfectly. He was giving a speech on August 5th, and he said,

To the victors go to spoils, right? And I think that's something very interesting for countries like Russia, something like countries like Iran, potentially even China. To the victors go to spoils, right? So Trump is seeing this as an imperial conquest, right? and now they have to pay tribute. This deal, which, you know, a couple of those interesting aspects, a hundred-year concession.

And in my monthly piece, I wrote, that's one year longer than the United Kingdom negotiated with China after they're winning the second opium war, right? It's the longest concession in Venezuela's history by a factor of two, right? And at terms that, frankly, are, you know, are beneficial to the conqueror, right? I do think, to your question, Alexander, look, Delci Rodriguez is an interim president. She was in place because of the kidnapping senior Maduro.

So her term is she's actually exceeded what she is constitutionally mandated to take. So there's going to be questions about her constitutional nature of her and her entering into agreements. frankly, the concessions in this deal do not conform with the Venezuelan constitution as it's written today. So I do think long term it's going to be problematic, both domestically and Venezuela. And frankly, if you look at the terms, it kind of reminds me of the terms imposed upon Iran after the 1954 return of this shock. So I do think this is going to see plant seeds of problems in Venezuela going forward. both domestically and frankly in the US, I think there's going to be problems with this going forward. Can it work?

I mean, again, we've talked about this before. We did a program with you shortly after, you know, the seizure of Maduro. And you spoke about how some of the technical problems in the oil industry that people have been talking about could actually be resolved. there are technical solutions and that investment might manage to turn things round. Tell us about this. Yeah. So I recently did a historical podcast about Venezuela links in my monthly. So you look at the history of Venezuela and at its peak, it was roughly four million barrels. So I never said that Venezuela will solve the Middle Eastern lack of production coming through. Can I just quickly say that's absolutely what you said in our program.

You always made it clear that Venezuela is not going to solve the problems, the problems created by the crisis in the Middle East. But if you want to continue. So, you know, when Maduro was kidnapped, production was roughly around 800,000 barrels today. I've seen in reports, again, I'm not on the ground. I've seen productions about 1.2 million barrels. Again, the Middle East was producing 20 million and we're between six and eight. So there's still a discrepancy, which, you know, when we talk about the bond, the yields,

I think that'll be more pertinent to that portion of the conversation. But so, yet with Cappex, Venezuela production can get higher, right? But it's a question of when. I also think Trump is not doing himself any favors with his truth social posts over the weekend that Venezuelans gifting the oil to the United States. If this were a rich country with Switzerland or Germany, Venezuela is a relatively poor country that just went through horrible earthquakes where upwards of 55,000 people are still missing. And at this point, I think we can presume those people are dead. So this is not a rich country. And to put themselves that

they're gifting us this oil is frankly, you know, just egregious in many ways. And also, I think there's also the pressure that the U.S. is putting on. So you look at the amount of revenues that Venezuela has generated roughly since Maduro's kidnapping, right? It's roughly almost $15 billion of revenue, of which only seven has gone back to the country. So what is the country doing? You're actually seeing them issue a lot in their local bond market. It's called the Bolivar is the local currency. And it's putting a lot of pressure on the FX. Why? Because the U.S. is choking them at a time where the society has been very damaged from this earthquake, that they need to rebuild. The U.S. is choking off their revenue

stream. So you wonder, why did Delsey Rodriguez make this kind of deal? Well, not only do you have 900 military troops that are there for humanitarian reasons in country, you're choking off the revenue, right? So is that a contract negotiated in good faith or, or, you know, the boot on top of the neck? Let's, let's move to the bond market issue. I think, I think you've, I think what you've just said about Venezuela really tells us everything we need to know. That last phrase tells us everything you need to know about this. But let's talk about the situation in the bond markets. People are becoming nervous about this. And are they justified in becoming nervous? And how does this connect with all the other things we've been talking about in previous programs, the situation

in the Persian Gulf, the wider problems in the energy system, all of this? I do think they're all interrelated. One of our first podcast we did together was Japan, right? And the stock of debt now Japanese yields on their 10-year bonds are 20-year highs, roughly 3%. But you're seeing it from a – it's a global phenomenon. Wow. Right now because, you know, every large G7 member is highly indebted in issuing more debt, right? And I think there's a very interesting aspect of what's going on in the bond markets today.

The bond market is segmented. So you have investment grade borrowers and you have high yield borrowers. And then obviously have the U.S. and the domestic markets. What you're seeing in the bond markets overall is a lot of issuance in the high grade market, the investment grade market. Why? Because of all these data centers. And so it's a question of supplying. demand, you have a lot more supply coming into a segment that is not used to that. Who usually

borrows in that investment grade? It's your higher rated governments and your higher rated companies. As you see so much issuance related to the data centers, it's pushing them out. So you're more supply, more supply. And how is it adjusting? You're seeing higher rates. So as the investment grade portion pushes rates higher, it causes higher borrowing rates for Japan, higher, higher borrowing rates for the U.S. You saw Google issues, and now they've started to have the tap local markets, Google issued in Australia at 7% interest rates, which for an investment grade issuers, is quite high, right?

And again, so that's the issue inside. And then you have the inflation issue. You know, Warsh at the Jackson Hole said, you know, inflation is running higher than target, consistently said higher than target. He never mentions the other aspect of the Fed's dual mandate about maximum employment. He just says rates are keep running higher. And then you saw this, I don't want to be too controversial, but a feeble attempt to manipulate yields in the treasury markets by using a few billion dollars to try to tamp down rates on a

trillion dollar market. That quickly failed as we saw the intervention in the end. Unless you address the underlying fundamental issues, this is putting a Band-Aid on the problem, right? So playing with the yield curve, intervening in the end, unless you address the underlying problems. And what are the underlying problems? The U.S. deficit is 6%. 40 trillion dollars in debt. And I had a discussion, I think it was one week or two weeks ago. And the person said to me, yeah, rates were higher in the past, right? And in 1981, U.S. Treasury yields were almost 14%. But my rebuttal is, yes, the stock of the debt to GDP at the time was,

31% and as a percentage of GDP was 2%. Right. So now we're running at 120, 130 debt to GDP. And so while the cost per unit is lower, the stock is much higher. And what does that mean? As the proportion of GDP servicing that debt is now over 3.2, 3.4%. So it's sucking all the oxygen out of the budget is what I'm saying. So you're seeing that constant pressure, right? And inflation, look at, did you know, did you know wheat prices? Wheat prices are up 38% year to date, right? Diesel prices, gasoline, petrol, right? You're seeing this constant pressure of, and I think a lot of it has to do with what's happened with the Middle East, right? Before that rates were coming down. You were seeing retail prices of petrol and diesel coming down. That has been the real catalyst that's, you know,

of broken it, you can't put the toothpaste back in the bottle. And until that issue is interested, rates keep pushing higher and higher and higher, and it's building more and more pressure. And would you agree, from what you've just said, that these small interventions, they probably convey more to the markets a sense of the Treasury not having a tools and a stomach to deal with these underlying problems that you have just identified, then of the Treasury actually having any real control of the situation. Just as when you talk about inflation in this way, and this is, this is to some extent,

this is a supply crisis driven inflation. Again, this is, I would have guessed, particularly difficult. central banks for the Federal Reserve Board to find a way of resolving or dealing with. I mean, first those points and then there's some other things I wanted to just say. But I mean, the point is that the authorities don't look well-organized at the moment to address these problems. Yeah, I think there's been a little bit of uncertainty. of the role that the Treasury in the U.S.

and the Federal Reserve is playing, right? You're seeing the Treasury active in the markets, whereas traditionally that had been a role for the Fed, right? And the problem is, to your point, Alexander, is they're doing small little band-aids, right? You have to come in, if you're really going to manipulate, I'm sorry, if you're really going to adjust the size of the curve or the angle of the curve or the rates,

you have to come in with a bazooka, right? You don't come in with a little pea-shooter, right? And it's these small interventions, which, what does that send to the message? The government, the Treasury, is scared because they're losing rates. But they're not, they don't have the, they're not addressing it from a fiscal point of view, and they're not addressing it from a tool point of view. So they're kind of half, you know, they're not doing, they're not addressing it the way they should. And to your point about central banks, one of the reasons that the rates really,

after the Jackson Hole comments and how hawkish Warsh was, is the market is interpreting that he's going to raise rates because he kept, you know, inflation's too high, inflation's too high, inflation's too high. So the market's repricing that the rates are going to go up. I'm not a economist, right? I'm a portfolio manager. And what do I see? What is that concern for me is at a time where you're seeing higher prices causing demand

destruction, you're going to raise rates even for. further. So what is that going to do? Slow down the mortgage market even more, right? Credit cards are going to get more expensive. Your car breaks down. You have to buy a new car. Everything is going to get, so you're going to exacerbate that recessionary like problem. I mean, is there going to be recession tomorrow? No. But you're building more and more pressure between the demand destruction and the slowing the slowing down effect by having interest rates rise. So a year out, you know, past the midterms, maybe that's what they're focused on. It's going to be a very problem. problematic environmental, economic environment.

What do higher interest rates do to the federal government's repayment of debt? That's a great question. And again, it goes back to the stock of debt, right? So as interest rates rise, the stock of debt becomes more costly, right? The Treasury has been issuing, has been wary to issue longer dated bonds because of the cost. So the term structure, not to get a very technical, so most of their debt is relatively short term, right? The Fed controls the short end of the curve. So the Fed will raise rates at the short end.

So the stock of debt is going to become 25 basis points more expensive, right? Which 25 basis points doesn't sound like a lot, but when we're talking trillions and trillions and trillions of dollars of debt, it adds up. Right. So raising rates will actually cost to the government's cost to service. that debt to go up. And if they do issue longer in the curb, that cost will also be more, will also go up. I'd like to go back to what you were saying about the effect of the AI boom and the data center boom. Now, if I've understood it correctly, what you're basically saying is that investment flows are being absorbed into this boom.

And that, in effect, is one of the reasons why in effect treasuries, the federal government has to compete with the fact that all the money is going into the investment room. Now, can you take us through this? Because there's a narrative out there. And maybe you can talk to this, that to the extent that we're getting growth in the economy at all, it is a product. of this stock market boom that we are seeing based around AI and data centers and all of that. But if that is so, then it is apparent, and again, I mean, I'm not anticipating what you're saying. But if that is so, then it is creating distortions and instabilities in other parts of the system. So can you take us through this and comment on this a little bit further?

Excuse me. You said it exactly right. What you're seeing is these investment-grade hyperscalers are crowding out. What does that mean? They're, again, sucking all the oxygen out of that investment-grade portion, pushing yields higher. So government, again, rates are being pushed higher because for creditors to lend money, to these investment grade issuers, they're issuing so much that they're requiring a higher cost of capital. And that's pushing the cost of capital for all investment grade issuers. And frankly, it's even pulling the high yield market up as well. So you're seeing that.

The perception was that if you look at, you know, what is the, how is the U.S. going to address the stock of debt, right? You know, you have GDP and debt, right? There's only two components to that equation. So the idea is, okay, we're going to try and grow the GDP to address the debt, the GDP issue, right? The law of large numbers makes growing a GDP the size of the U.S. very challenging. AI, the data centers, has been the area where many perceive that as the panacea of what is going to drive the economy going forward. If you actually look at the underlying number, you look at construction and manufacturing hotels and leisure, the underlying components outside of data centers, outside of AI,

are very weak, right? And the other mandate of the Fed is maximum employment. So the unemployment rate looks artificially low, but you've seen a lot of people exit the job market, right? You look at labor participation outside of COVID, you're seeing rates, the lowest participation rate since 1976. So the idea is that how are we going to grow the U.S. economy? It's data centers. So they're pushing so much government emphasis. I don't know how many Trump truth socials. If you're not on board the data centers, you're going to be backwards, all his different comments is, that's the area where the economy seems to be growing. And it's a very narrow, you look at the S&P earnings, and it's a very narrow portion of it. But that's what every, that's what, you know, whether it be

equity, you know, equity prices reaching new highs, it's all driven by this one narrow sector of the overall economy. And that's the sector that many believe will, you know, drive the economy and give us that growth to address the debt to GDP issue. How do you deal with all this debt? Can I just give an example, which is Italy? I mean, there was a time when it looked as if Italy was beyond salvation. And then you can be very critical of Georgia Maloney and we are often on this program. But she does seem to have been relatively successful in holding back further debt issuance. I mean, Italy now runs a primary budget surplus, so I understand. And this has resulted in a fall in Italian yields, yields on Italian

bonds. So, you know, she does seem to have got a grip on the situation, at least to some extent. can't say how long this is going to continue for, but at least you can see that something can be done. Firstly, am I right about that? And can this happen in the United States? Because one of the things that I find about the United States is that it has a very, very complex budgetary system where everything seems to be structured towards increasing spending from Congress, from the government from all sorts of other parts of the decision-making process. Because what it seems to me that you're saying to me is that what the United States really needs to do is to get on top of its deficits and of its debt issuance. So can they achieve something of what Maloney has

achieved or appears to have achieved in Italy? Let me answer the bigger question first. How do How does the U.S., or frankly, any economy really address the stock of debt? And I think it's the elephant in the room. I think ultimately you're going to see weaker currencies, right? You know, historically, let's say before the EU and the ascension of the common currency, Italy had, you know, issued a lot and the current, the lira was weak and devalued out, right? That's the historical mechanism for adjusting to the stock of debt. I think over the long term, you're going to see weaker U.S. dollars.

versus other stores of value. In my monthly, I talk about different stores of value. And I've had a lot of debates about whether the dollar will be replaced and why does it have the role that it does? Because it has all the bells and whistles and derivatives and swaps and credit default swaps. From a transactional point of view, it is by far the most robust market. But from a store of value versus gold versus silver and whatever, even if you want to look at Bitcoin, It has not acted as a store of value. Why?

Because the U.S. has taken advantage of the deep dollar markets, and you've seen debt go from 30% in 1981 to 130 today. So they've really taken advantage of that. But that only works for so long, right? So I think, again, this is my view, is I think you're going to see a weaker dollar, and they're trying to also go back to the growth. So how do you address those two?

So you shrink the debt by having a weaker dollar and you grow the growth by focusing on where you see growth to get those metrics back in line. And, you know, in countries like Italy, I think, are, they don't have the financial flexibility as the U.S. given, you know, the Brussels Central Bank. So some of their tools, a term that Alex uses a lot, the tools, they don't have as many tools to address some of the fiscal issues. And one of my concerns for Europe as a whole is, you know, you have competing ideologies and histories and economic models competing against each other. You know, what you've described is actually not so different from the kind of Italian economic policy that I used to remember. So you had actually pretty high inflation, I mean, systemically high inflation. you had a perennially weak leader and at the same time you had relatively good growth. I mean, it sounds a strange thing to say, but that was how they managed things.

And for a while, for a long time, actually, it worked quite well. And then, of course, what happened was the euro came and Italy joined the euro. And they couldn't pursue that policy anymore. And inflation came down. And of course, there was no lira anymore, but the euro was quite strong. And the result was a prolonged period of stagnant economic, well, no, basically very little growth in the economy indeed. And a very, very difficult period of adjustment, which is, by the way, in my opinion, far from ended. So, what you're describing, I mean, to me, that sounds a little bit like the U.S. future, which is a weaker currency, higher domestic inflation.

I mean, inflation is a way of reducing debt itself. Also, I understand. Anyway, any thoughts on that? And I would actually expand upon what you were saying a little bit more because when Italy lost the ability of using the lira to address it, what are you seeing? now with the U.S., right? When UAE talked about needing a swap line, right, the U.S. stepped in because they threatened to go outside the dollar system, right? Why did we intervene in the Japanese yen to make sure that they don't sell down their treasury reserves? So the analogy I made in my monthly news writer, it reminds me of Hotel California. And I know Alex loves the music references. You can check in, but you can't check out. Right. So what is the U.S. empire doing is making sure that those subjects can leave the dollar system, whether it be, you know,

UAE leaving OPEC, and now there's been rumors of Venezuela leaving OPEC, you have to stay in the dollar system. Japan, you can't sell your treasures. You have to stay in the dollar system. So we're making sure our subjects, as we potentially devalue the dollar, our subjects can't leave and have to share the burden of the U.S. evaluation. I mean, there would be another way of describing that to some extent, which is an expropriation of savings, or is that too strong? The vassals being basically obliged to put their money in what is a devaluing currency.

I mean, that does suggest a degree of expropriation. And it was we have Donald Trump now saying, you know, if they, you know, at the end of the day, you know, if people don't do as we tell them, well, we've got the U.S. military there as well. I mean, it does seem, to me at least, it does have something slightly of a protection racket quality about it. Just as that. Or am I overstating things? Not to keep harping back, but what I expanded upon in my write-up is why the use of dollars, again, because it's a deeper market and all the derivatives. But also, it had been a historically store of wealth. And I think, you know, again, to use the expression, you can't put

the toothpaste back in the bottle. Once the, the powers that be expropriated Afghanistan's central bank assets and ultimately use them for different funds and now the Russian central bank assets, the two pillars of why use of currencies, the depth and the derivatives and the store of wealth. And you're chipping away at that second aspect, right? You can't leave the dollar system. You know, going to take your central bank assets, it does have a mobioso like racket sound to it. Again, just a portfolio manager of not an economist. Yeah, no, no, no, of course not. I understand that.

Absolutely. What, going back to my earlier question, there is the alternative route, which is that the United States gets on top of its debt issuance and fiscal policies. And that might, that based on what you're saying, would start to rectify this credibility, rectify the issue. I mean, that would be the more rational, the more orderly approach. And I think we can both agree that there is ample room to do this. I mean, you could get on top of the budget deficit issues without crashing the economy,

as would happen in some places. What chance is there of that? I mean, obviously this is a political question, ultimately not an economic. one. But, I mean, inevitably, if you're a fund manager, if you are a political comment, if you're a commentator, do the kind of commentary we have to look at these political things. Is there any chance of that proximate chance, in your opinion of that happening? At least, well, I'd say any chance. Is it likely? Look, the word, I think, is entitlement in the US, where you can't, once you put in spending,

It's very hard to take back. I was quite optimistic at the beginning of Trump 2 with the whole Doge and Elon Musk and looking for government inefficiency and fraud. And that quietly died away on the vine, right? You look at the stock of debt that Trump has put on, whether Trump 1 or Trump 2. And there's just no political appetite to address that, right? And until you get that credibility, I don't see how it's going to be addressed, right? Again, the U.S. is well now into the political season, and you're not going to see spending cuts. If anything, you see more pork and bridges to nowhere and increase spending at this time.

So I do worry that we're getting to a runaway freight train type of scenario where spending, spending, and you're having this, again, a lot of it spends back to the Middle East, a lot of cost pressures. So you have a lot of different aspects that are pressuring the economy. in different ways and in different portions, but are all pressuring. I'm not seeing that golden goose, I don't know if it's AI. I just worry that that's such a narrow portion of the market that the other aspects of the market, the labor participation, let's just say AI does great, but then you have, you know, no one working and no one's spending on it. What good does it do?

So I'm a little bit pessimistic here and now because I'm not seeing political appetite. I'm not seeing financial markets really, you know, pressuring to the point where they actually address the issue. So I hate to be a Debbie Downer here, but I'm not often at this point. Okay. Last question for me. Is there a risk of stagflation? In other words, that we have this situation of higher inflation continue, but it's never quite so bad that it does actually cause a real reduction in debt. And at the same time, this can be prolonged for quite a long time, as I very well remember, from the 1970s. We were caught in a stagflation situation for a, well, basically, I mean, it felt like a decade. I mean, is that a real risk, or are we going to see

something an even bigger shock, you know, a major recession? or even higher inflation than that, which would be shocks. Stagflation is something you can live through, by the way. I've lived through it. It's not agreeable. It is very demoralizing and impoverishing. But how strong a possibility of that is the... Look, if it walks like a duck and talks like a duck and acts like a duck, it's a duck.

And to me, it feels like the U.S. is in a very... is stagflationary environment. So you look at the numbers of, you know, there is growth, but in a very limited sector, right? That sector doesn't touch the base of the pyramid, right? You've seen such a concentration of wealth in that 1%. Yes, that 1% potentially is doing well, but the base is not. So to me, it feels like we're in a very stagflationary environment, right? Again, maybe the economists and the government statistics will tell you otherwise, but it certainly

feels like that. And again, from political disappointment to rising cost pressures, again, wheat 38%, you know, literally the bed bread basket, right? The main component of the bread basket. So it just feels very problematic here. Zer Rezikara, on that note, I'm rather, rather concerning note, but nonetheless, important that we know these things. Can I say thank you very much for this. Exceptional program. Exceptional program. All together.

Thank you, Ray. Before you go, where can people follow your work, once again? I published the monthly thoughts at Ray Zuccaro on TwitterX, RVX-A-M.com, and Variety Capitals are Lewis Fenture. Those links in the description box down below and as a pin the comment. Thank you, Ray. Thank you, gentlemen. Thank you.