The Wolf Of All Streets - Israel Under Attack | Global Financial Markets Risk Major Uncertainty | Macro Monday

Episode Date: October 9, 2023

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As the world braces for an escalation of the conflict between Israel and Hamas and the Palestinians, the last thing I really want to talk about or think about is what it means for my portfolio. But I'm cognizant of the fact that many of you are concerned, and at least we can present what has historically happened in times of war if there is an escalation. I have a very personal attachment to Israel. I spent quite a bit of time there. If you guys have been following my tweets, you'll know that I actually experienced one of the worst suicide bombings in history. Personally, I was about a block away and had been in the market five minutes before. So I do get a bit emotionally triggered by this conflict in particular,

even though I know it's not that vastly different from others. But what I'm not going to do is talk about SPF and his stupid trial or the impact of Frentech or what's going to happen to altcoins. What I am going to do is bring on adults, experts, who can give us context on what's happened in similar situations before to maybe piece together what's likely to happen in the future. Guys, it's Mac for Monday. As you know, I've got James, Mike, and Dave. Looking forward to hearing their perspective on this increasing conflict and what it might mean for markets. Let's go.

What's up, everybody? I'm Scott Melker, also known as the Wolf of All Streets. Before we get started, please subscribe to the channel and hit that like button. I'm just going to go ahead and bring on our guest today. We've got Mike, Dave, and James. Gentlemen, quite a morning. This is the first time that I admitted that I just didn't want to be here. I tweeted yesterday. I said, you know, I've got a lot going on.

Don't really feel like I'm the authority to be writing newsletters and telling you what's going to happen to Bitcoin and your altcoins because, frankly, I'm relatively indifferent to it. But that doesn't mean it's not important, right? And I think people need to be educated on what's happened in situations like this in the past. I mean, we do have quite a bit of context in situations like this. If this war escalates, we do know what happens. And we do know that investors generally are not prepared. We know that commodities generally

perform well. I have no idea if Bitcoin will perform well or not. But things like gold and commodities excel and things like cash, bonds and stocks do not. And there's obvious reasons that those things happen. Governments print more money. They issue more bonds to fund wars that obviously affects the value of their currency and such. But Mike, maybe we'll start with you. Obviously, you watch oil exceptionally closely. I think a lot of people's concern here is how this will affect the oil market, which of course could then massively affect inflation or what we have been watching. Yes. If I can share screen, first of all, my sympathies to everybody in harm's way and everybody with family and friends in harm's way. I want to start with the big picture, what happens with crude oil over time. And this goes back to

1970. I'm just taking WGI crude oil relative to its 40-month moving average. What we did back in last year was synonymous with a recession every single time since the big spike in 1973. Some of us remember that. I remember the big one in 79. That's when I was a gas jockey. The big one in 1980, I was in the trading pits. And almost every single time, these spikes lead to recessions. Now, this year, we've had a bounce, but it's also part of my big picture that we're probably doing. We're going to see more of what's happening in today's classic responses. Crude oil's up, not not a lot it put in a high about 95 just a few weeks ago it's trading 86 or 85 now um and we have the stock market down bond yields down a little bit

the ones that are trading in futures gold up as you mentioned i expect that to be more of a enduring pattern but crude oil to tilt itself back down and bitcoin is proving itself it's still a bit of a risk ask when things go down. But I want to tilt over to some of the things you should expect in crude oil. Here's a longer term chart going back to 1900. And it's been in a bear market since that peak in 2008. We've had this little bounce. And for good reason, any type of red mark means recession.

Crude oil goes down a lot. And again, we're on an economics call this morning. And when you see events like this, it triggers, it adds a catalyst to recession. Remember 9-11? Remember the Saddam Hussein's evasion of Kuwait? These things trigger, you need catalysts when you're already there. And when you get some fuel on the fire, that's what I think is happening today. So I want to just show you shorter term crude oil, what's happening.

That's the macro big picture. So here's for traders. In the white, that's managed money net positions in crude oil. It just started to roll over. That's hedge funds. I mean, they're not just crude oil, all petroleum. So crude oil, Brent, and the distillates, all the ones that are really active, just started to roll over at a peak similar to November of last year. We're having a little bounce today, but this is a clear sign that managed money net positions are starting to sell out a little bit. They're very extended and you need more of those to come in, but it's very rare for them to buy at certain levels like this, already way overextended long. And I'll tilt over to Bitcoin and go back to you. And this is what I could not get away from the screens this week. And obviously it was all over it. The key thing that happens in something like this is you hit stops and people sell stuff

that they can, not always what they want. Now, this is shorter term. The stock market's not down a lot. Half a percent's nothing. But it had that big bounce on Friday, which I thought was classic clear out the shorts for a recession. And it's been so many shorts. And I know them.

I see them there because they're just saying, OK, I'm either going to buy puts or two notes or hedge myself and I see it coming. So the key thing for Bitcoin, I like to point out is liquidity is still negative. Bottom line, it is negative as you look at Fed funds out a year. Now that's actually helped a little bit. This war has actually Fed fund futures have actually increased a little, I mean, yields have dropped a little, I mean, the Fed might lighten up. I don't think that's going to happen, but it's helped. But Bitcoin's tilting lower. And I like to say it's just stuck between the 50-week and the 100-week moving average. And with liquidity still negative and beta still positive and risk for recession, and what equity is doing in recessions, I think the 100-week

moving average tilting lower is still the more powerful force. And that's down about 29,000 now. Not saying it's magic, but just things above there, but you need to see divergent strength. And right now we're seeing normality in this kind of environment. Back to you. Yeah. Just really quickly sort of to add to that, to me, the story is more the 200 MA. We've got the 200 MA here on the weekly, which has provided resistance for three weeks. And we have the 200 here on the daily, which is one, two, three, four, five, six, is basically six candles have already tried and failed. So I think that this is a classic area of resistance. But obviously, I think we have bigger things in play than 200 day moving averages. Dave, I know you sort of shared the

sentiment of not wanting to get up and get here today. Yeah. I mean, look, there are so many bad takes this weekend and several of them with mutual friends of ours on their shows that it's just ridiculous. I mean, look, the reason why the macro picture is being influenced is because of the reasons behind what happened. And if you want to ignore it, it's okay. There are lots of people who want to ignore it. Lots of people, you know, typically the people who line up and say, oh, well, you know, there's oppression and there's this and everything is justified are the ones who aren't actually understanding what's happening. This is Iran. Let's just call it what it is. Four days before this attack, the supreme leader of Iran went in a public address and threatened every single country in the region for normalizing relations with Israel, period. You know, sometimes, you know, Occam's razor, the simplest solution is usually right. People need to understand what's going on. Now, this matters for the economy. So let's just

start with the simple. It is Iran. And why does it matter that it's Iran? Well, there's two reasons. First, what does normalizing relationship mean? Normalizing relations does not mean we're going to be friends and sing Kumbaya. I mean, we have normal relationships with China. We have normal relationships with Putin. We have normal relations with many countries that we are at odds with. Frankly, that's normal. What normal relationship means is it means the Saudis were set to recognize Israel's right to exist. Now, those are words that are very hard for people to hear in the Twitterverse, but that is literally what was at stake. So the Saudis being brokered a deal, and there have been lots of people been talking about it on the background side,

were close, just like the Abraham Accords, where four other states in the region normalized relations. Once again, it doesn't mean they're going to be best friends. It means they recognize Israel's right to exist. Hamas, Iran, Hezbollah do not believe Israel has a right to exist. Iran, their chief leader, stood up and said Israel should not have a right to exist. They are, and I quote, a cancer that needs to be eradicated. That was four days before the attack, funded by Iranian money. Now, why does this matter for the economy? It matters for the economy because Iranian oil is relevant to the crude oil price. And the reason crude oil is up 4% today is because it would be political suicide for this particular administration to not ratchet up sanctions against Iranian oil. because it would take a lot for the Democrats to

lose the backing of pro-Israel forces and politics, but that would do it. That might be the one thing that could happen. And so there is a lot of stress here. This is interesting. And if you look back at that, and we all know, I've talked about stagflation in the 70s, and we all know that the 70s stagflation started with Middle East tensions after, you know, the 73 war, which barbled up. And yeah, it took a while, but between boycotts, I mean, you know, the boycotts that happened in the various oil price shocks of the 70s, that's what was ultimately the catalyst for the 70s style stagflation. And we've talked about this on this show, and James has talked about it, and I've talked about it, and Mike's talked about it, that stagflation is not an improbable outcome to a world where we can't afford to allow our government debt to get into a bigger cycle. But the truth of the matter is that this

could provide a handy excuse for the Fed. And people are going to have to think about that. The Fed could basically say, and if I were Powell after the events of last week before the attack, I would be getting thinking, you know, I want to walk out the door. I mean, here he is. And, you know, what also happened last week also happened last week is Elizabeth Warren directly criticized his interest rate rises at the same time as she and the administration were protesting with workers and stopping his ability to go after inflation expectations. Now we have potential oil price shocks that will ripple through the economy, which he can easily use as a blame. Remember the Putin price hikes narrative? Right? Well, it becomes very convenient to start blaming geopolitics for inflation and to tell the Fed to back off.

Now, will that happen? I know Mike doesn't think it will happen. I actually do. I think that there's too much political here. If this escalates into a war with Iran, and it's hard to imagine how Israel, which went from bickering internally, massive political infighting to complete solidarity, how they're not going to go after Hezbollah to raise it to the ground. Not Hezbollah. Well, they might go after Hezbollah too. But Hamas, for Not Hezbollah. Well, they might go after Hezbollah too. But Hamas for sure. I can't see how that they don't. Honestly, can you imagine what would have happened if 9-11,

if we knew if someone took credit for 9-11, what would we have done? Well, we know what we have done. We would have raised them to the ground. And in fact, we committed trillion. We literally attacked an entire country. We attacked an entire country that wasn't even 100% responsible for it. So, you know, people who get holier than thou say, oh, well, I can't believe they're going to.

It's like, are you kidding me? What would happen? Just imagine what would happen in this country. Now imagine, you know, why it will happen. So, yeah, there is a very real risk of escalation here. And oil prices are going to be, you know, there's issues. I mean, we haven't talked about it forever. But the other thing to remember about oil prices and Middle East instability is what happens if the Straits of Hormuz ends up in play militarily. See James Nodding.

See, as old people, we remember the Gulf War. We remember this. Things like that doesn't take a lot. Now, it's not there geographically, but it's not all that far either. So people need to be aware. So your intro was actually extremely prescient. You have a situation where if oil prices from external shocks go through the roof, what do policymakers do? My bet is they ease up to allow investment in supply and they justify it that way. I don't think- I think it's important here that we then, to your point, we have to make the differentiation between what the situation is and what the situation could be, right? Because there's no guarantee of escalation. And I think Mike's base case is correct if nothing vastly changes, right? And I'm going to let James go, and then

I do want to go back to Mike to say, hey, if this escalates into a full-blown regional conflict, does that change the base case? But James, there's a lot to unpack here, obviously. I sort of saw you nodding your head. I guess we should just be clear when we're talking, if we are talking about, hey, this is what's happening today. And if we end up with a ground war with Iran, maybe we have a very different situation, right? Yeah. I mean, look, it's very difficult, as all of you guys know, and anybody who's managed money before knows, it's very difficult in these moments to keep your emotions in check and to look at your portfolios objectively and what's going on in the market objectively,

it's extremely difficult. I mean, I didn't sleep well all weekend and we all have friends and family who are affected by these things. And so it's not an easy time. But there's a lot of noise, you know, you know, you come out last week, we have out of the blue, we have the White House sending out an emergency alert nationwide as a test, which kind of puts people on edge thinking, are they expecting an attack in our cities? Like what's going on? So you just put that over there and then you've got this strange jobs number that comes out, you know, that looks really strong. It's got revised back really strong. But then you look at the actual data in it and, you know, there's conflicting data in there. The wages are not going up. There's multiple job holders are going up. It's like it doesn't it doesn't point to a very strong economy. And 75,000 government jobs.

Exactly. So it's, it's a lot of noise there. You've got the, the, the outlook of, first of all, you've got the worst bond route, apparently in the history of bonds in the last three years. And so, you know, it's, you've got the 10year that's in price discovery mode. It's literally trying to figure out where it's going to settle in for the right yield for the sheer amount of debt that is coming into the markets from the U.S. Treasury. We hit $33 trillion somewhere in the second or third week of of September and then just a couple of weeks later we're up another 500 billion dollars of of debt I mean we we added a half a trillion dollars of debt in just just over two weeks I mean this is just insanity and so people are not like when when when you look at the bond yields it, there's so much noise around it, but it all points to the same thing, which very few people are talking about.

Mike has acknowledged it, but there are very few people in mainstream media that are talking about the fact that investors are worried not about whether bonds fail, whether the fail to, whether the US defaults on them. They're worried about the sheer amount that is coming into the market and they want to be compensated for that, period. And so that's another issue. And so then you look at oil and one of the factors that everybody's been looking at is, OK, if we're going to come into recession, oil's got to sell off. So this the conflicting data that's coming in and the expectations of recession kind of eases off that oil price. And now we have a conflict in them that's growing clearly in the Middle East. That's going to be a problem i mean this this dates back to mike and dave uh you guys remember it's got you're a little bit too young

uh to remember this but i remember sitting in in my mom's car in 1974 1975 waiting for gas you know we had because we had an odd numbered license plate we're waiting for another i was only a few years old i still remember this It was so traumatic just sitting there for hours and not knowing whether you'd have enough gas to go to the places you need to go. That is a fundamental issue for people who are just trying to live their lives. And so this is a major, major problem. And ironically, I wrote about the Strategic Petroleum Reserve in my newsletter this week, and I didn't know that this is before there was even a conflict. And I pointed back to the fact that this all started with the original oil crisis, which was when the United States was accused with sympathizing with Israel, the Israelis, and we got cut off, OPEC cut off production and oil spiked and we couldn't get any. They just shut off the spigot. And so that's the original oil conflict, the original conflict in the Middle East and oil crisis. And here we are again.

I mean, if you think that this is not heading toward escalation, of course it is. Whether or not we get there, we don't know. But that's the direction we're heading right now. And so traders are taking risk off the table. I expect equities to go down. I expect Bitcoin to go down because it is still considered a risk asset for the traders. And like you said, Scott, they're looking for liquidity. Or maybe Mike said this over the weekend, Bitcoin trades.

I mean, you can get liquidity. And when you have a war that escalates on a Saturday and there's no market open, I mean, bonds aren't even open today because it's Columbus Day. Futures are. So, I'm sorry. The futures are. Correct. Yeah. But the cash market's not even open. So, you know, the moves in the market are kind of expected.

I think they're a little bit less dramatic than I expected, but there's optimism. And in my mind, there's optimism in the market because, you know, gold is not up quite as much as I expect it to be. The futures are not down quite as much as I expect them to be, the equity futures. But there's just so much noise that we need to unpack and navigate through. Cooler heads will prevail. James, an important point that I tweeted about yesterday that I just want people to know, and probably something you've talked about or thought about in the past. If you look historically, just interesting because you brought up gold. When there used to be wars in medieval times or previously, the war ended when the gold ran out.

Right? Yes. And I made the point and had some horrible comments coming back. I said nothing about Bitcoin. I said nothing about this war being about money. I simply pointed out that fiat and money printing allow for modern warfare to happen in the way it does. Perpetually. You can print more money. You can fund the war machine. It allows it. I'm not saying that a thousand-year-old conflict in the Middle East has anything to do with money.

I'm just saying that these wars used to end when the money ran out, and now the money can't run out. Yeah, and so that's a good point. And, you know, my wife was saying to us, she's like, well, we have 33, over $33 trillion of debt. How are we, if we get involved, how are we going to fund that? Well, it's simple. You just print more money. I mean, it's like, we're literally going to print money. And Mike, before you go to that end, by the way, how are we going to fund that? It should be noted that I don't really get into politics, but we have no speaker of the house, which means that the United States currently cannot pass more funding to support Israel at the moment. Just so you know how utterly broken this

is, whether they should or should not is up to you as the audience to decide, but they cannot right now without a speaker of the house. Mike, go ahead. So I like how you said that. Let's go. I want to show you some pictures. James and Dave added some lot of cool stuff. So let's first show you how the world's changed. What I show you in white used to be in excess of a deficit of US and Canada liquid fuel, crude oil, liquid fuel. We used to have a deficit of production versus consumption. I mean, this is a period of here. Our peak consumption was in 2005, but this white line is all that matters to Crotelle.

Shows how great of a country we live in. It's happening that we have a problem of exports right now. Right now we have an excess of 6 million barrels a day and we use Iran. Iran's been able to add a million barrels a day. US and Canada together, which includes ethanol and biofuels, we have 6 million barrels a day we have to export

because we don't use that. That's how the world's changed from kids like us who grew up during the, you know, I'm remembering the 73, 74 crisis and the 79 wars and things. This is what's really changed. And this is why I point out what's also, it's negative for crude oil prices. It's wonderful for the U.S. It's bad for Europe, bad for China, but the US is a shining star in this. And that's where the dollar is no problem. Yet, we're still restricting liquidity. I just want to show over a few other things. This is also a paradigm shift. What I show you in orange is total consumption of unleaded gas in this country. It's plunging. I mean, it peaked before the pandemic. I mean, absolutely plunging. I mean,

I drive an electric car. It's awesome. But it's not just because of that. It's work from home. But this is total miles driven or going up. That's a paradigm shift in what's happening in the US. It's technology taking over and making OPEC redundant and things like that. So also, one thing I want to show you in terms of inflation and deflation, I still think we're heading towards severe deflation. Now, if oil spikes, great, maybe it goes 100. But what's that going to do for the economy? The best number one pressure for inflation deflation is economic growth or contraction. And we're heading towards that. So I show you in white, that's just the Bloomberg Command Index.

Every time it spikes from new highs, what I overlay was PPI collapses. And we're still, we've had a little bounce this year. It's still heading lower. It's starting to tip down for a good reason. The things we said, crude oil, dollar strength. There's not, it's unstoppable. And there's also a key thing that's, I'm going to just two more and I'm good. It's key thing that's current bodies in motion is we have negative money supply. The number one thing in all markets is liquidity and money supply.

It's negative. And why? Biggest pump ever still dumping. And we have a federal funds rate well above negative money supply. It's negative. And why? Biggest pump ever is still dumping. And we have the Fed funds rate well above negative money supply, around 4%. So that's what's happening right now is that we're going to change that. Again, this is just another little deflationary thing. We've had this big pump. And the number one thing for deflation, I think, is when the stock market comes back to parity with GDP. I mean, it's the highest. It was the highest ever before the Fed started tidying.

That's what I show you there. And CPI is just starting to roll over. You start taking wealth out of people's hands. It's severe deflation. I'll end with this. Now, this is just going through a little bit of history here. This is the crude oil chart. I mean, those of us remember this is the big spike in 1973.

What happened when that happened? Since then, crude oil has been a dog. It's been the worst performing commodity. I can compare that to all the other ones. It put in many lows here. I remember 79 was when I was pumping gas and we had lines. We had double the price. The war in the Gulf, that put in a peak around 40 that lasted for 13 years or so. The low after that was around 10. And this peak we took in 08 is still heading lower, unless we can have some kind of crisis that's just going to make it worse. So that's the key thing where the US is a shining star. That's why the world has changed. And that's in agriculture

too. That's just showing you the facts of how the world's changed since we were kids, and we had to live through those big oil spikes. So isn't the implication there if the US is the shining star that you believe that the dollar will continue to show strength through this? That's kind of the part of the lose-lose. Absolutely. So the dollar right now at 5.1% of the tune out is almost two times, three times what you get in the top three next countries, China, Japan, and Germany. I mean, that's unstoppable force.

So why would you touch Bitcoin or gold when you can say, oh, US government's going to give me 10% in two years? For mean, that's unstoppable force. Why would you touch Bitcoin or gold when you can say, oh, US government's going to give me 10% in two years? For now, that's the case. But if the war escalates, we would expect to see a ton of war bonds and yields to absolutely crash. So that goes back to what we have now and what we will have. It's the other way around. When you have wars, you go to safety. And that means US treasuries across the board. I mean, I've seen it. I've held the positions. I've had them. And you have to have severe inflation, yet wars in this case are meaning deflation because, remember, it's isolated. Even if Iran gets involved, you need something really severe and crude oil, which also means the U.S. is still the shining star. We have

the biggest energy producer on the planet and next exporter. That's how it's changed. And you've seen a little bit on the screens now. So never underestimate these kinds of things. You go for treasuries, you go for the dollar. And remember, there's a big world out there with a lot of money that is learning that, okay, do we want to be on the side of China and this might be somewhat related in Russia or do we have the protection of the US

and the ability for us to speak freely here? I mean, this is nothing but bullish for the dollar, nothing but strong demand pull for treasuries and bearish for risk assets. I just want to say, we haven't even talked about it. And Dave, I want you to unpack some of that next, but we've talked about this chart a lot, how we get the yield curve inversion, then we get a Fed pivot, then we get a market decrease, crash, correction, whatever you want to call it. Nobody seems to be talking about the fact that in less than six weeks, we've gone from sub 1% yield curve inversion to only 288.

And it actually is un-inverting. I don't know if that's a word, but un-inverting rapidly. So we could actually be seeing an end to this historic period of yield curve inversion. Yeah, and look at what happens. Go back to that chart and look what happens when we un-invert. Yeah, we pivot and then the market crashes. Black is the market, guys. So blue is the yield curve inversion. The red is Fed Funds. So you can see the pivot. So there's sharp elbows down when they pivot. They have not here. And then every single time you get a massive and sustained. So you get the big drop. But what my clubs talk about, you don't make a new high for a very long time after that. So and they pivot and then the market crashes. It's clockwork. It's happened every single time in modern day. That's how recession, that's the lead up to the recessions. Yeah. The Fed pivots when stuff is really bad.

That's the gist, right? And so people who are- Yeah, but look, I mean, yeah. With unicorns and puppies and fairy dust, it just doesn't happen. Because they're trying to quell demand with an instrument that is a blunt instrument to raise interest rates basically across the board. But like I said earlier in the show, look, the market's doing the job for them. And the treasury, dumping so many treasuries on the market, it's just doing the job for them because the rate curve has adjusted upward dramatically in the last six weeks. Yeah. Go ahead, Dave. I mean, yeah. I mean, it's hard to unpack here, dude. Yeah. I mean, let's work backwards. Look, we all know that I think the Fed has been trying and behind the scenes to manage yield curve control, which is why we were inverted in the

first place. I think that more people have paid attention to it recently. I think the fact that it's un-inverting is rather fascinating because it's really, really bad for the US government deficits if long rates normalize. I mean, I keep pointing this out, but a normal yield curve with the current short rates would mean somewhere around 6% to 7% on the 10-year to the 30-year, which, by the way, no one in the world has anything approaching normal. So there's no reason to... When I say normal, I mean historically normal. It seems unlikely. But at the end of the day, at that point, there's literally no budget left for whoever the new speaker is to even do anything with. I mean, effectively, you're already talking about we have the largest peacetime deficit

in history going right now. Very important. So now what happens if we are in the future? Yeah, we're already at $1.5 to $2 trillion deficit. Right. And that's with if long rates do go up, that gets significantly worse because, as we pointed out, the biggest difference now in the 70s is 30 percent to 100. Well, a lot more than 130 percent with unfunded liabilities. But, you know, a deficit that's four or five times higher means that your interest expenses is just astronomically larger.

So the U.S. government can't really afford, none of the major Western governments except for Germany can really afford for long rates to be at levels where they're at and God forbid go to what historically a normal yield curve would look like. So if you think the Fed isn't going to be called upon to do something about that, you're not paying attention. I mean, remember, and I'm going to keep saying this because of all the events we've had, it's been overshadowed. When the most powerful person in financial services, in the administration is openly critical of the Federal Reserve, it is a big deal. Now that that happens in a case where now, if things do start escalating,

in any shape or form, that gives the Federal Reserve an out. I mean, look, I just tend to think as a student of human nature, that that's highly likely that that that Mike's chart where he talks about M2, I think M2 will reverse. I think I thought it would not reverse to be to be blunt. I didn't think it would reverse until toward the end of the first quarter, second quarter, when the presidential election starts moving. That was my base case. But now we have to wonder about what will happen. I think that we'll be on this show, probably have several more shows to talk about it before it actually happens. So we could speculate idly, but it is worth understanding and positioning. I think that

what Mike said about oil is great. I want to take out the flag and start marching, yay, USA, USA. The problem is, is there's a very big difference in the constitution of USA oil exports and Saudi oil exports. Light sweet crude is dramatically easier to use for refined products than the sludge that gets produced out of shale and oil sands. That's not to say you can't do it, but it's dramatically more expensive, and substitution costs are very large. So there is a reason why Biden went to the Saudis and has been working behind the scenes to overcome his ridiculous positioning vis-a-vis the Saudi government early in the pandemic due to his political statements.

There's a reason that Blinken has been working at this. And that, weirdly, the fact that the U.S. has been making progress with the Saudis is probably the trigger for this particular attack. But the reason is that light, sweet crude out of Saudi Arabia is dramatically cheaper for creation of certain distillates, most notably gasoline. It's interesting, Dave, though, I'll let you finish, but it does feel like the Saudis have actually become more contentious and less fearful of a diminishing relationship with the United States over the past few years. Well, it's because they've gotten chummier with China. Right. And we, you know, noticing that, I mean, look, all of this

is real politics. And, you know, there are many I mean, look, all of this is real politics. And, you know, there are many, many, many moving parts. And we are, this is not a geopolitical show. But, you know, we could dive in and understand what's going on. I mean, look, you know, we have lots of things going on in the world. But you might, you may notice that, you know, that's why I started with the notion of what does normalizing relations mean? I mean, we haven't talked in the Bitcoin space, but what country provides the vast majority of security software using crypto? It isn't even clear. Not by that, but not in close.

Sure. Not in close. So people, you know, you can say what you want. I mean, the crypto industry, you know, obviously we're very small relative to everything else. Yeah, Dave, say that again, because I bet that I bet there's a lot of people on that are watching the show that don't understand that because it's not talked about regularly. So we talk about the fact in crypto and in crypto that, you know, how small our industry is and what the base primitives are. The by far country with the highest concentration of security software, whether it's Fireblocks for wallets or many other smaller companies that a lot of people haven't heard of, are

the dominant providers of security software in the world. And it isn't even close. There's not, I don't know who second place was maybe with Ukraine at some point was probably second. So now you have, and I'm not saying this was coordinated. I'm not saying this is irrelevant. I'm just saying it's an interesting fact. If people believe the next world war will be fought in cyber, the U S is not stupid. The one country you don't want to be destroyed is the one that provides the literally one of the world leaders in cybersecurity software. You don't want in crypto wallets and a lot of that else in crypto. They're not an investor in crypto. I mean, you know, it's interesting, but they have an incredibly vibrant tech sector.

And who have they been working with and who has been, you know, Dubai, right? You know, and the UAE. And all of this gets into play if people are forced to choose sides, which is exactly why Iran did what they did. I mean, it's like very rarely do you have actions as unprecedented as we all thought they were, that from a political point of view, you understand the motivations as easily as this one. And I keep saying that. Everyone keeps saying, oh, it's the Palestinians. Bullshit. It's not. Hamas is not the same thing as the Palestinian Authority. And the fact of the matter is that there is no one in the world that's going to condone, or if they do, they're people who, I virtually would never cut somebody off. I think you should

be able to talk about things, but someone who condones targeting women and children, parading women through the streets, God knows what's happening to them, where they've been taken, putting kids in cages and not at the border in detention camps. I mean, literally putting them in cages on trucks. I mean, no one's condoning these sorts of actions if they're civilized. But the fact of the matter is that's what's gone on here. And understand what's under attack and understand why. As I said, you know, I quoted this week, a weekend, I tried not to tweet because I knew I would rage tweet if I did. But I did say one thing. I said Maya Angelou was right. When someone tells you what they are, believe them the first time. When the Supreme Leader of Iran stands up and says, four days before this attack,

Israel is a cancer that needs to be eradicated, believe them. That's what they want to do. And the reason they, and they specifically in that speech specifically threatened Saudi Arabia and everybody who might normalize relations with Israel. Once again, normalizing doesn't mean cooperate. It means I agree that you should exist, that you have a right to exist. And unfortunately, in the political dialogue that's gone on, people don't understand that that is the core. The core is everyone says there's a thousand year old conflict. Okay, great. You know, there are conflicts and we can go through it and it's complicated. It's very hard to resolve. But the core is, is there a right to a Jewish state to exist, period? And if you say yes, then you can have normal relations and things could potentially get better. You can have a two state solution. Lots of things could happen. But if you don't say yes, you stay in this situation. And the world was literally tilting

towards saying yes, and Iran couldn't have that. I keep saying why that matters. Go ahead, James. Go ahead, Mike. Go ahead, Mike. I just want to tilt back the markets a little bit. And we can share a screen on this. And the key thing I've been looking for is for the market to start showing, Fed fund futures to start showing, at least some point, the Fed's not going to be tightening more. And that's what's happening this morning. This is live markets. Fed fund futures right now are 533.

If you go out into the future, see these negatives? The market's starting to price. And, okay, maybe they will start easing. It doesn't mean they will. That's the liquidity coming back. And that's what's happening a little bit with this crisis but i need to point out what's happening globally and let's talk about that to gdp higher debt gdp in a modernized country like us is very negative for yields just a fact i've been dealing with for 40 years in the bond market and when you have people tell you the opposite it's almost always an opportunity to buy

bonds yes i've been wrong. But here's the facts. This is just showing the world bond yields. U.S. Treasury 10-year notes, it's 4.8. You go down to Japan, it's 0.8. In China, it's 0.26. Let's look at U.S. debt to GDP. It's actually declined versus the peak.

It's 122%. But there's a complete direct correlation in debt to GDP going up and yields going down, which is I show in your bond yields. And every single time we get into a recession, don't underestimate what the Fed in this country can do. They buy bonds. They can make that 30-year yield go where they want, if they want. People used to say they don't control it, but they have when they can. So last significant recession we had, yields on the 30-year bond went close to 2%.

The other one recently, they plunged to new lows. We get towards recession, that's the number one force. Debt-to-GDP is not going to matter. It's going to go up. But when people tell you it's making yields go higher, they've been wrong for decades. You get short-term spurts. Let's look over at Japan. Japan's debt-to-GDP is more than double what U.S., 250%.

In China, JP Morgan's latest said it was 280% of that GDP. Yet I showed you lower yields because they're contracting somewhat deflationary economies right now. And they're not the world's reserve currency. So I look over that, and I think the bottom line for this deflationary zero, I think, when people say you're not supposed to expect yields to go up because debt's going up, they've been wrong for decades. They'll probably be wrong, except in third world countries. This is the number one thing that's going to make yields go down is this normalization.

This is the US stock market versus GDP going back to 70s. It's well above where it was at the peak. Remember when we had that peak in 2000, how bond yields collapsed in that recession? Same thing again in 2008, bond yields collapsed in recession. We're more the base for deflation. It's the highest in almost 90 years, that base. Mike, we can't ignore the fact that the largest owner of Japanese debt is the Bank of Japan. They own over 50% of their own debt. So who's the buyer? They're the buyer.

Exactly. That's my point. They're the ones who are buying and controlling the yields. That's my point. They just control the yields relentlessly. If that happens in this country, the U.S. Treasury, the Fed will just buy the bonds. Buy. They will monetize every single bond that they need to keep the market going.

But also the deflationary forces of the safest securities on the planet are overwhelming you don't get that in jgbs and what you're getting that's right that's i i 100 agree we we we do sit in a in a kind of a privileged position here in the united states where yeah it we have a flight to safety even though you know we're just the word what what is the uh expression with the cleanest shirt in the dirty laundry? Right. I mean, and that's just reality. We do have that that advantage. But this is a key thing. I'm glad you pointed out just back to you, Davis.

This spike we've had recently in the debt. It's never happened without a recession yet. It's happening before recession. That to me gets my great reset. It's just going to be that much worse. It's making the Fed tighten more. And all these jobs are, I just saw this fiscal stimulus to get reelected is just going to trickle to a pretty severe recession. Yeah, I agree. I mean, the point I was going to make, Mike, is that you and I disagree on exactly one aspect of what you just said. Most of it I agree with. And that is, you said, use the word deflationary. Inflation is a monetary phenomena. I am a Milton

Friedman acolyte. I'm not going to lie about that. That's fine. We have two types of inflation, one we consider good, one we consider bad. And when you're talking about inflation, you're only talking about the one we consider bad, which is the CPI, which has all sorts of substitution effects, etc. So you would argue we were deflationary or very low inflationary environment for a very long time. And I would say that's true because we're able to import our way into things. But if you look at the cost of college tuition, medical care, etc., where we couldn't import and there no substitution effects. And medical care, which does have technology that should have lowered its cost, we've seen massive, I mean, literally massive inflation. And so when you start talking about deflation, it makes me, the monitor is part of me shudder, the Bitcoin are in me shudder.

Because what does Japan, what's going on in japan it's not deflation it's called manipulation that is the most manipulated market on the planet has been for for decades as you say i mean the japanese government literally owns 50 of their own debt they and more and and will continue to do that and what james is talking about is the necessity of doing that now if that happens here you're right you're absolutely right What happened in both of those two lines where bond yields collapsed called QE. And I'll go back to, I love the original YouTube video, the cartoon character talking about the Ben Bernanke talking about what is QE. But at the end of the day, that is what you're basically saying is, if things get bad, the Fed will do QE and it won't be stealth QE like the four.

Outright, blatant, brazen QE where they dump, you know, 10 trillion dollars on the market without even blinking. And at the end of the day, I agree with you. That's in fact my base case is QE. So I agree. I think you're right. I mean, what is the trigger? Generally, it's political pain. What is the threshold for political pain these days? And that's really a question. Now,

I don't know the answer to that, but I do know that you and I more or less agree up and down the line, except that I believe that we have no spine in politics and that the Fed will be politically influenced. And exactly your point is exactly my point, which is when things get tough, the Fed gets easy. And I've said it before. I said it two weeks ago, I think, on the show. I said, look, it's possible that they're going to leave interest rates where they are to say they're doing what they're doing with this hand. And back here, they're going to start QE, the control long end of the curve. I've been saying- I mean, aren't they doing that fiscally anyways? We talk about it every week, but isn't what the Fed's doing sort of irrelevant when we're adding a trillion, two trillion a month to the debt

and just endlessly printing bonds instead of printing money? Isn't it total deception to pretend that we legitimately have tightening at the moment when the Treasury is doing literally the opposite of the Fed? Well, it's tightening in some areas. Okay, so this is a really important point. So when you have Fed funds at a certain level and everything's keyed off of there and keyed off of the 10-year Treasury, the problem is you have smaller businesses and smaller public companies that don't have access to the programs we're talking about.

They aren't getting the handouts and they don't have, you know, a trillion dollars of reverse repo money. You know, they don't have access to the capital. And at some point, one of those and a number of those will get into enough trouble. And we're seeing corporate bankruptcies starting to really pick up here. And they're at, they're, they're, they're rising at a level that we haven't seen since the great financial crisis. And so the issue is that we will have some sort of domino effect where enough of these or one that is large enough breaks. This is the something breaks scenario. Something breaks that's large enough or

important enough that it topples something over that through contagion, that creates a massive waterfall. And that's a waterfall event. And that's what we're talking about when the, when, when we talk about the fed raising rates, they really, that's why every single time that when Mike brought up that chart and, and you see the recession occur after that, the yield curve becomes, you know, re you know, un, un inverts, that's because the fed has to go too far and break something. They literally have to push us into recession to fix the problems. And so the, you know, the manipulation, the fiscal, the monetary problems. And so I agree with you on the surface. Yeah, we've got all this

stuff going on in the background and Dave is right. I mean, we've got the PTFP program going on and that's going to expire when they're going to re-up it. They're not going to make these guys, you know, purchase back these bonds and put them back on their books at 60% of value. That's not going to happen, you know? So it's going to continue and you're going to have the backdoor liquidity going on for large institutions while you've got a number of smaller companies that are struggling. And it's just a question of when now. And that, by the way, that large versus small is the other major pillar of the stagflation thesis, because the engine of growth in the economy worldwide and certainly United States has always been small business. Large business is not the engine of growth in the economy worldwide and certainly the United States has always been small business. Large business is not the engine of growth. And so if you politically take a series of policies which are designed to favor large over small, which by the way is true when you increase regulation like this or this administration is doing, it is true when you do everything that

James was just talking about, it is absolutely going to create lower rebound growth and make it much harder to get back to where you want to get to. And this fact is not lost on people. So it is a really interesting scenario. It's sad in a way, but look, politics has always said, the truth is, is we're here trying to tell people what to do. The one point I will make about the crypto markets that to get back to markets, I think watch the Ethereum Bitcoin ratio. Because it's looking Ethereum is looking pretty sickly and we're you know, and if you look at that, why is that? I think that's actually logical in a world where Bitcoin might be linked link in my opinion, over the next year or two from risk assets. Ethereum is clearly

a risk asset because it's basically a technology. It's not a stock because it's not a corporation or board of directors. But at the end of the day, that ratio rolling over is kind of a big problem. It's an internal flight to safety in that market. So that is the first, you know, that, that it did happen in 19 during crypto winter. But the fact is, if we break through those levels, lows from 2019 on Ethereum Bitcoin, that is indicative of, of that de-linking. Now people in the crypto sphere don't want to hear it because they don't want to say

that my thesis of Bitcoin is a flight to safety. I know it starts sounding like a Bitcoin maxi at this, but I'm not. I'm just saying that Bitcoin should be less cyclical. It isn't because it trades like an option. And Mike and I spar over that. And I suspect that he's going to be buying me a steak dinner, not because I think Bitcoin is going up a great line, but because I think that when we get out of, it won't go as far down as he thinks it will go when risk assets sell off. You know, it does go up in a straight line though,

because you guys brought it before. This is M2, by the way. I just want you guys to see M2 Monetary Supply since 1959, if you want to see about money printing. And this huge dip that we're talking about over the last couple of years, there it is. There it is. Looking at knowledge splendor,or guys and dave you think this is right and you're saying that basically this is going to happen right yep that's exactly right that might that might not even be uh steep enough yeah i i that is exactly what i think is going to happen

and and that's really the difference but but But I want to clear almost everything Mike said, I agree with is just that they don't. So, but here's, here's one thing about these kind of bets. I would love to lose. I mean, a steak dinner between us is nothing. It'd be fun. Honestly, I would love to lose that one. If we can look back from this and say, okay, we're okay. Or we can look back from this. Well, that we can look back from this and say, Hey, the equity market went down in Bitcoin. Didn't I'd be like, that's awesome, because it just would not follow all the rules of high volatility, best performing assets in the world and hitting stops. It just wouldn't follow. But it'd be wonderful at some point. It will. I think we have to get through that next bridge first.

The first bridge is what I showed you is, you know, this normal correction. Let's share my screen a little bit. Dave mentioned, I think James did too, you mentioned small caps. This is a Russell 2000 small cap index. It's picking down at new laws. To me, this is what I would call a bear flag. I mean, in a recession, it made the biggest pump ever in terms of monetary supply. It's going down and it's got all the trends have been up for 10 years. It's just got to start breaking supports and get back to it. This is a weekly chart, maybe back to its 200-week moving average. It's just normal reversion in the most extended economic period of zero interest rates ever, and we have bankruptcies increasing. It's just what stops it. And I look over at the macro big picture in terms of, we talked about a little bit of deflation.

Yes, there's different types of deflation. We just go back 100 years of CPI. That's what I have here in CPI. The biggest ever dip in bottom in CPI was the 30s. When did that bottom? When FDR confiscated gold. So that's a great way to bottom markets and deflation. We're going there.

I don't know what's going to happen, but that's the trend we're going because this is the last time in history on the way up the stock market got this expensive, which it did here, versus GDP. It's the number one measure of inflation, risk assets, and just speculation on the planet. It's a US stock market versus GDP. It's a Warren Buffett model. And so I think CPI is going to do simpler. I i mean the last significant low was like minus two percent during the financial crisis it's it's coming from a higher plateau it's heading down and you see what the russell index is we're having bankruptcies the fed's still tightening this is a bear market i think what stops it needs you basically you usually need um a significant lag to fed easing economic growth uh and demand pull recovery we're not even starting that we haven't even started the easing economic growth and demand pull recovery. We're not even starting that. We haven't even started the easing. We're still tightening. We're still showing the tightening. Maybe we're taking

away. That's just the part of my looking at is this probably has to go down for a normal recession. Yeah. And we've got some indicators. We've got a lot of Fed speakers on the docket this week. I mean, there's like seven of them talking. I've never seen. So I read the Bloomberg really quick update of what's coming this week. And I talk about it in my newsletter. I've never seen anything like it this week. It's incredible. Like there's seven that are going to be speaking this week that I could count that I saw were announced. And I'm sure more will just have, you know, this is the list from Bloomberg of key events in global markets this week, by the way. It's usually five things.

What's it going to take for them to pivot? Because they're all saying the same thing, mostly Hawker. What's it going to take for them to pivot? Like we most say, something's got to break. Something's got to break. I mean, but we've got PPI. These are things that the Fed looks at, right? You've got the PPI coming on Wednesday, and you've got the minutes from the last meeting coming Wednesday.

You've got jobless claims coming Thursday, and the've got the minutes from the last meeting coming Wednesday, you've got jobless claims coming Thursday and the CPI coming back to back. That's interesting. You know, if you had some sort of, if those two numbers show dramatic changes, that would, that would, you know, I think that would push them. That would give them enough firepower to pivot. Are they going to show dramatic changes? I don't think so. Not with the way oil spiked this last month or the last eight weeks. I don't think that that's going to happen. But again, lagging indicators, lagging indicators.

At some point, we'll have already gone too far. I think we've already gone too far. and we're just waiting for the evidence. I mean, I was having some conversations this past week at conferences in New York with some, some macro guys, and basically they think the CPI is going to come in at the top of the range or over the range. I think that, which is interesting because I think the consensus is it's going to be on the high end so the question is what happens with that and i i will find it uh you know it's i'm not trying to talk about short-term markets i mean we've got so many cross currents here but you know end of the day there's lots of reason to believe that that we

have a rough few weeks uh and having a no government and having this happen on a day when the bond markets close is really, really fascinating. But would it be any surprise with crude oil up over 10% in the month that we're measuring? I mean, energy is the largest factor in- Yeah. Well, crude oil trickles into a lot more. That's the other thing about energy that people always forget. They always forget this. They go, well, we'll look at the CPI, ex-food, and energy. That doesn't matter because the oil prices go as an input cost into a lot of other things that are part of the core CPI. The other big thing that's happening is with, with labor strikes ticking up as much as they are, how much are wages, uh, you know, what, what's going on

with wages in smaller companies where you don't hear about strikes, you just hear about what's going, you know, you know, those, those effects. Yeah. There's that we know of they're over, there are about almost a half a million people that have striked since the summer that we know of. And they're all looking for, for wage increases of somewhere in the neighborhood of eight to 10% or more or more classic, classic end of cycle stuff. Exactly. Right.

That is, that's where Mike and I started agreeing violently. Oh, that is fun. I like violent agreement, but, and save some of this good stuff for next week. Honestly, I hope deeply that we don't have to talk about an escalating war a week from now.

Right. So hopefully we can go back to the normal topics of Macro Monday. I loved your point, Dave, about the crypto industry in Israel that people are so unaware of. A lot of people we've had on the show, a lot of my friends are in the industry there. You guys may remember Nimrod the hobby's been on the show a bunch of times. Absolutely one of the funniest, most personable human beings ever. One of the first people I called, we've spent a lot of time together in person. I said, how are you holding up? And he said, well, my son's a commando. My brother's a commando. My brother's son is a commando. All three of them are in the same unit on the front line right now. And I get a text every 24 to 48 hours letting me know that maybe they're okay. And just to put it in perspective, these are the people that have...

I know it doesn't matter. Every human life is equally valuable, but we would all be disingenuous to pretend that it doesn't hit home when it's someone you know or somewhere you've been. It just feels different, obviously. And so I just want you guys to be aware that this massively does impact people you've seen here in this industry and that all of us know on a very, very personal level. I also want to just say thank you to the three of you. I know we do this every week and we show up. Like I said at the beginning, I really didn't want to show up. I feel much better than I did, to be quite honest. I think it's important to talk through it, talk it out, to have intellectual agreements and disagreements in times like these and others, right? Other than sitting around and stewing in my own thoughts about what's likely to

come. It's great to be able to talk through it with the three of you gentlemen. So thanks once again, everybody. Please follow all three of these awesome guests on Twitter. And we'll, I guess, see on Crypto Town Hall, which by the way, today, guys, Crypto Town Hall on Twitter is not being hosted for Mario's account. He's basically been 24-7, if you guys haven't seen, covering what's happening there. I mean, truly incredible. But we're going to be moving to the Crypto Town Hall account, which we've been intending to do for a very long time to host that.

I'm sure the numbers will be down without people seeing Mario there there but i think it's important that we make that change and differentiate those things all right guys i will see you over there on twitter spaces thank you dave james bye guys