Speaker 1: All right, Joseph, thanks for joining me today. Uh, the
Speaker 1: Fed guy. We certainly have a lot to talk about
Speaker 1: in the world of central bank policy. So I'm excited
Speaker 1: for this. Well, thanks so much for you invite me. Mark.
Speaker 1: I'm excited to be here. And also I see that
Speaker 1: you've published in a new book. Very excited to see
Speaker 1: that's well reviewed, and I I've ordered it and I
Speaker 1: can't wait to read it myself. Oh. Thanks, thank you.
Speaker 1: I appreciate that. Yeah, you saw it when I was
Speaker 1: just kind of thrown around the copies. Yeah, yeah, I
Speaker 1: saw it on Amazon now too, writing We're very well reviewed,
Speaker 1: five stars, so I can't wait. Yeah, thank you, So
Speaker 1: thanks for bringing that up. Shameless plug. He's talking about
Speaker 1: the book, The Uncommunist Manifesto. If you haven't got your copy,
Speaker 1: go to Amazon The Uncommunist Manifesto. It's a short read.
Speaker 1: It's about an hour read. Everybody should read it. In
Speaker 1: my opinion, communism seems like an old word, but it's
Speaker 1: just rebranded today. Um. Instead of abolition of private property,
Speaker 1: it's you'll own nothing to be happy exactly. So let's
Speaker 1: dive right in, Joseph, because I got a lot to cover, uh,
Speaker 1: and we'll see how much we can get through. Sometimes
Speaker 1: I get a little too ambusious here, but um, look
Speaker 1: the markets are crashing, real estates getting marked down, stocks
Speaker 1: are going down, currency wars are erupting all around the world.
Speaker 1: The Bank of England just broke again. Um, you know,
Speaker 1: I mean, stuff's going haywire. So I want to dig
Speaker 1: through all this. Um, but let's start with myth or fact.
Speaker 1: Last night on Twitter, you were and I were kind
Speaker 1: of engaged in this thing, and myth or fact does um,
Speaker 1: does the liquidity drying up caused the markets to crash?
Speaker 1: Now I know there's a lot of nuance here. Um.
Speaker 1: Jeff Snyder, I had him on a month two months ago,
Speaker 1: made month or two ago, and he said that, and
Speaker 1: I think, actually you were at the same event at
Speaker 1: George Gammons event where he was at and he says,
Speaker 1: the ft has no control. Uh, the euro dark your
Speaker 1: market so big. The reason why the markets crashes there's
Speaker 1: a dollar shortage. So is the shortage of dollars myth
Speaker 1: or fact? Yeah, so that's a really interesting question. So
Speaker 1: how do you measure a shortage of dollars? So I'll
Speaker 1: tell you how I look at this and now I
Speaker 1: address how I think some other people might be looking
Speaker 1: at this. So shortage of dollars, we usually think of
Speaker 1: that as someone wanting to borrow dollars but not able
Speaker 1: to access it. And the way this is measured is
Speaker 1: something called the f X swap basis, which is the
Speaker 1: premium that a foreigner has to pay when they borrow
Speaker 1: dollars in the market. So when we have major market disruptions,
Speaker 1: for example Lehman going down or what we saw during
Speaker 1: the March uh pandemic panic we saw the epics, swot
Speaker 1: basis widened significantly. What that means is that a lot
Speaker 1: of people who are trying to borrow dollars just can't
Speaker 1: get their dollars at market prices, and so they're having
Speaker 1: to borrow at extremely high premiums. That, in my view,
Speaker 1: is what a shortage looks like when you have money
Speaker 1: to pay and you just can't get it now. The
Speaker 1: way that you can't get it meaning, um, it's it
Speaker 1: costs more than you're able to pay for it. So
Speaker 1: there's a market price for dollars, and there's also how
Speaker 1: much extra premium you have to get you have to
Speaker 1: pay for to to get those dollars. So that's that's
Speaker 1: kind of helps measured. And the market price is usually
Speaker 1: set by the FED because the FED controls short term
Speaker 1: interest rates. So if you have to pay a whole
Speaker 1: lot more than the market rate that's roughly set by
Speaker 1: the FED. I think of that as there's a problem
Speaker 1: with the supply of dollars. There could be, as people say,
Speaker 1: a shortage. And the way that this is fixed is
Speaker 1: the FED steps in and there with a tool called
Speaker 1: the Ethics Swap Facility, where they're basically lending a limited
Speaker 1: dollars for in central banks, who then take those dollars
Speaker 1: and lend it to their own banks, who then take
Speaker 1: those dollars and lend it to let's say a corporation
Speaker 1: or something like that. And so when the FED opens
Speaker 1: up this ethics swap facility, uh, what we see is
Speaker 1: that immediately the premium to borrow dollars in the offshore
Speaker 1: markets disappears or it becomes very small. We see that
Speaker 1: consistently when the ethics facility opened up in UM during
Speaker 1: Lehman's collapse, in U during the Great Financial Crisis, and
Speaker 1: in March. And the thing is the f fex Soft
Speaker 1: Facility UM is actually still open. The FED never took
Speaker 1: it away, so it's operating on full force and there's
Speaker 1: very very little participation in it. And the reason being
Speaker 1: is that the premium premium costs to borrow dollars right
Speaker 1: now is you know, not particularly elevated. So that's me
Speaker 1: suggest that there's no shortage of dollars. Everyone who wants
Speaker 1: to borrow dollars at the market price can get dollars. Now.
Speaker 1: That's the price to borrow dollars now. I think a
Speaker 1: lot of people also point to the U S dollars strengthening,
Speaker 1: and we see what's happening right dollar to euro euros
Speaker 1: below parity. We see the Japanese currency basically imploding, and
Speaker 1: so that's making the dollar very strong. Now. I don't
Speaker 1: think of a strong appreciating dollar as a dollar shortage
Speaker 1: because there are actually very good fundamental reasons for that.
Speaker 1: The first, of course, is that the fits hiking rates aggressively.
Speaker 1: If um, if you're investing dollars in a money market fund,
Speaker 1: you're getting you know, three percent and maybe you'll get
Speaker 1: four percent soon. That's much higher than you can get
Speaker 1: in Japan or Europe. And also there's a lot of
Speaker 1: geo political factors that are encouraging investors to move their
Speaker 1: money from let's say, away from the war zone in
Speaker 1: Europe because Europe is in is in a war zone
Speaker 1: right now, to the US. So dollars appreciating because it's
Speaker 1: becoming more valuable. I think of it as you know,
Speaker 1: Let's say I have a house and I add a
Speaker 1: pool to it. The price of my house goes higher,
Speaker 1: not because it's a shortage, but because I've made it
Speaker 1: more valuable at higher rates. Make a currency more valuable. Um. Honestly,
Speaker 1: that's actually kind of part of the plan of what
Speaker 1: the Fed is trying to do. If you listen to
Speaker 1: trapa discuss his strategy to get inflation down, one of
Speaker 1: the pillars is to have a strong dollar. UM. So
Speaker 1: it's proceeding as he wishes it to be. Now. UM.
Speaker 1: You know, when I look back through through the long
Speaker 1: lens of history, UM, we can see times where we,
Speaker 1: you know, used barley for money, then we used metals,
Speaker 1: and then um in hundred Spain found a huge silver
Speaker 1: mine in U in Peru, and then that increased the
Speaker 1: liquidity of money supply in the world, which caused uh
Speaker 1: inflation and massive acceleration. And then the silver mine ran
Speaker 1: out and then things start contracting. And so we can
Speaker 1: kind of see throughout history. Every time you increase the
Speaker 1: money supply, you get booms and you get inflation, and
Speaker 1: then when the money supply starts running out, um, then
Speaker 1: you get contraction. Now the Fed has obviously said that,
Speaker 1: so they did. Uh, you know, there was a long
Speaker 1: list of que that was happening, right, So they're easing
Speaker 1: the money supply. Now they're going through tightening. And if
Speaker 1: I think about it, just um in super basic terms,
Speaker 1: and maybe that throws me off. But if I because
Speaker 1: we're in a debt based system, money is created through debt.
Speaker 1: So if I lower the cost of borrowing, more people borrow,
Speaker 1: more money is created than you were talking about that, right,
Speaker 1: the cost of the dollars to borrow. If I increase
Speaker 1: the interest rate, then less money is created, less people
Speaker 1: are borrowing. So doesn't that I guess it's it's not
Speaker 1: a shortage of dollars, but it's a shortage of ability
Speaker 1: to access the dollars because now the cost of those
Speaker 1: dollars is prohibitive to what I could spend on it. Well,
Speaker 1: that that's true, but there are other factors as well.
Speaker 1: So if I if I raise an interest rate. You're
Speaker 1: exactly right, there's less of a demand for dollars. But
Speaker 1: what if I'm willing to pay the market price for interest,
Speaker 1: but I still can't get any dollars. That becomes more
Speaker 1: of an accessibility functioning problem of the market. Right. So
Speaker 1: you're saying it's a shortage. I'm not able to get
Speaker 1: them when I want them. I'm thinking even when you're
Speaker 1: paying market prices. I'm thinking a shortage of just there's
Speaker 1: not as much money in the system because less people
Speaker 1: are creating it through debt. So it's not that I
Speaker 1: can't get it, is that I can't get it at
Speaker 1: the price I need it, and so we just don't
Speaker 1: have the new creation amount of money has decreased well,
Speaker 1: because the FED is willing to lend infinite amounts of
Speaker 1: money at the market price. If you're willing to pay
Speaker 1: the market price, you can get all the dollars you need.
Speaker 1: The shortage, in my view how I look at it,
Speaker 1: occurs when even if you're willing to pay the market price,
Speaker 1: as said roughly by the FED, you can't get it.
Speaker 1: That's that's what Yeah. So um, you're definitely right, though,
Speaker 1: So the whole point of raising interest rates in acense
Speaker 1: is to decrease, uh, the credit creation and thus the
Speaker 1: supply of money. But there's something really interesting happening with
Speaker 1: the world now. You know, when we have a world
Speaker 1: where's largely based on private actors, this works because, for example,
Speaker 1: if the interest rate is higher and let's say I
Speaker 1: want to buy a house get a mortgage, I'm less
Speaker 1: likely this willing to do that because I'm sensitive to
Speaker 1: interest rates. So using interest rates as a tool to
Speaker 1: control inflation works when most of the economy is based
Speaker 1: on the private sector. But what if you have a
Speaker 1: world where most of the economy is actually the public sector.
Speaker 1: Now we all know that Congress is never going to
Speaker 1: go into a spending plan and say how we're going
Speaker 1: to pay for it? Interest rates too high? That's never
Speaker 1: a question. So interest rates don't matter to public spending.
Speaker 1: So if you have an economy that's becoming more dominated
Speaker 1: by the public sector, that tool of slowing down credit
Speaker 1: creation through interest rates becomes less effective. Mm hm. That's
Speaker 1: a that's a good point because they don't have the
Speaker 1: same constraints at the private sector exactly exactly. That's a
Speaker 1: kind but that's something that I think is becoming more
Speaker 1: obvious now when when the one hand, the FETE is
Speaker 1: trying to slow down the economy about raising rates. On
Speaker 1: the other hand, Joe Biden just announces he'll forgive you know,
Speaker 1: hundreds of billions of dollars in student loans. So they're
Speaker 1: pushing against each other in a way. Yeah. And now
Speaker 1: with the with the central banks needing to buy money
Speaker 1: to prop up their bonds, which we'll get to that
Speaker 1: in a little bit. Um, that's a really good topic.
Speaker 1: We'll talk about it. Yeah. So I but I want
Speaker 1: to stick on this, so increasing the money supply and
Speaker 1: decreasing the money supply. So you recently had this article
Speaker 1: that came out on barrens Um. We'll put a link
Speaker 1: to it down in the description below. And you were saying,
Speaker 1: how you know, for two years because of quantite of easing, Um,
Speaker 1: it doubled the central banks balance sheet to nine trillion
Speaker 1: UM of the nation's gross domestic product, which helped fuel
Speaker 1: significant gains. That's what you said, Um, and the que
Speaker 1: the easy the increase of the money supply, I put
Speaker 1: downward pressure on interest rates. So the converse of what
Speaker 1: you're saying, so, um, it pushed the borrowing costs down
Speaker 1: because there was so much liquidity, right, which increased liquid
Speaker 1: in the system. Um, so there's that, and now the
Speaker 1: opposite of that is happening. So now they're tightening, and
Speaker 1: so now they're reducing the security holdings by what nine
Speaker 1: five billion per months. It's the opposite of QWI, which
Speaker 1: would then put um upward pressure on interest rates and
Speaker 1: decreased liquid in the finance system, which which is what
Speaker 1: we're seeing exactly exactly right, and we see you see
Speaker 1: the effects kind of obviously right. QWI makes the stock
Speaker 1: market go higher. You reverse QWI, stock market seems to
Speaker 1: be going lower. So there's a lot of factors at play,
Speaker 1: but I think that's one of them. Um. One way
Speaker 1: I think that I look at the money supply since
Speaker 1: I think, uh, it seems like you focus on this
Speaker 1: as well, is that I would also note that when
Speaker 1: you're looking on at money supply, you could broaden your
Speaker 1: definition of money to include not just let's say M two,
Speaker 1: but you could also look at trudury securities. For example,
Speaker 1: if let's say I'm someone working at a company, Um,
Speaker 1: every week I get let's say a wire transfer from
Speaker 1: my company into my bank account, I'd say a thousand
Speaker 1: dollars If instead of receiving a hundred thousand dollars in
Speaker 1: my bank account, I got a hundred thousand a thousand
Speaker 1: in tugury securities instead, will that really make a difference
Speaker 1: to me? And I don't think so. I mean, in
Speaker 1: many ways, just like a hundred dollar bill is money,
Speaker 1: so a hundred dollars in trudury securities is also a
Speaker 1: form of money. So when you're when the FED is
Speaker 1: going out and doing QWI by buying trudury securities a
Speaker 1: lot of times, rather than say it's increasing the money supply,
Speaker 1: I find it useful to think that it's just changing
Speaker 1: the type of money people have. So, going back to
Speaker 1: the example that we just mentioned, instead of being paid
Speaker 1: maybe a thousand dollars in deposits in a bank, maybe
Speaker 1: I'm getting a sorry instead of being paid a thousand
Speaker 1: dollars and tredury securities, I'm getting a thousand dollars in
Speaker 1: a bank. The difference being that ted securities have a
Speaker 1: yield pay interest, but what I have in the bank doesn't.
Speaker 1: So when the FED is doing KIWI on a large basis,
Speaker 1: it's taking away risk free assets that offer interest to
Speaker 1: people and replacing them with um deposits at a bank
Speaker 1: or basically money that doesn't pay interest, and that forces
Speaker 1: a lot of people to go and look for more
Speaker 1: risk or higher interest returns. And that's what kind of
Speaker 1: forces the whole keywi risk on in my view. So
Speaker 1: one day I had a tudury paying let's say a
Speaker 1: two percent. Today I have a bank uptosit paying nothing.
Speaker 1: So maybe I go buy Apple bonds or Apple stock
Speaker 1: or something like that. Now QT does the opposite of that.
Speaker 1: Now interest rates go higher, there are more treasury securities
Speaker 1: for me to purchase, and so maybe instead of buying Apple,
Speaker 1: I go and I buy a two year treasury that's
Speaker 1: yielding four So that's that's out of how it works.
Speaker 1: In my view. You have this huge reshuffling of people
Speaker 1: going out of risk assets to just you know, parking
Speaker 1: it and uh and that showed security or the money
Speaker 1: market fund for for higher return. There's lesson need to
Speaker 1: take risk. The risk free rate right, yes, it's it's
Speaker 1: getting higher. It's going to be four percent by the
Speaker 1: end of the year. A lot of people are going
Speaker 1: to have to look at that and say should I
Speaker 1: that's the stock market where maybe I lose a lot
Speaker 1: of money. Or maybe I can just put this at
Speaker 1: the risk free rate and earn four percent with no
Speaker 1: risk at all. And even though the four percent is
Speaker 1: still um are still in negative real return exactly. At
Speaker 1: least it's at least it's known. At least it's known
Speaker 1: what my risk is as opposed to unknown. You know,
Speaker 1: could could the stock market dropping, you know, we don't
Speaker 1: know exactly exactly. So that's a big headwine two two
Speaker 1: risk assets and we see that already. Yeah, as you suggest. Yeah,
Speaker 1: now it sounds like so just kind of just to
Speaker 1: finish nail this point home on the on the shore
Speaker 1: stage of dollars. You you call that your definition of
Speaker 1: shortage of dollars when people want them but can't really
Speaker 1: get them. Um, I'm looking at it just a total
Speaker 1: amount of dollars being created going up or down. So
Speaker 1: when the total amount of dollars being created goes up,
Speaker 1: we have more liquidity. We see assets go up. When
Speaker 1: the total amount of dollars goes down, then we see
Speaker 1: us go down. Not that people can't get them, but
Speaker 1: there's just less of them because they're not as cheap
Speaker 1: as they were before. Right, Um, yeah, so there you
Speaker 1: have more alternatives when when you do QT you have
Speaker 1: higher interest rates, right, there's less than that for assets
Speaker 1: in general, when you have safer alternatives, like like we
Speaker 1: just talked about, well, and if I was going to
Speaker 1: borrow short at you know, zero point five percent and
Speaker 1: then go along at two or three percent, right, I
Speaker 1: may take those dollars because I can make that to
Speaker 1: three spread. But when those numbers change, I'm not gonna
Speaker 1: I'm not gonna borrow the dollars because now that deal
Speaker 1: is not available to me anymore. Right, Yes, the cost
Speaker 1: of carry goes higher, so there's going to be less leverage,
Speaker 1: less ring, and let's barring obviously decreased this amount of
Speaker 1: money in the system now, So if we keep moving
Speaker 1: on to that. You know, Chairman Pal he's been pretty
Speaker 1: strong with his wording. I think he got hammered a
Speaker 1: little bit a couple of months ago. He at the
Speaker 1: end of the meeting he got a little devish, and uh,
Speaker 1: they had to kind of backtrack that. In the last
Speaker 1: two meetings, he's been more harsh, more hawkish. I guess. Uh.
Speaker 1: He says that you know, they'll stay at it until
Speaker 1: it is done right, So like, stay at what right?
Speaker 1: I guess, continue tightening and tell what until inflation comes down. Um.
Speaker 1: He doesn't seem to be concerned about the stock markets
Speaker 1: at all. Um really just focused on um inflation. It
Speaker 1: seems like, Um, you hear a lot of talk about
Speaker 1: you know, a pivot, a pivot, a pivot, a pivot.
Speaker 1: But again he doesn't care about the stock market. And
Speaker 1: and and ultimately, if you look at it, maybe the
Speaker 1: stock market hasn't even been hammered that bad as of now.
Speaker 1: But what we are seeing is the bond market, right,
Speaker 1: so there's a lot of volatility coming there. The vixus
Speaker 1: spiking credit default swaps. Is that where you think the
Speaker 1: focus is, like the liquidity in the bond market exactly,
Speaker 1: that's where I think the big risk is. So when
Speaker 1: you're doing so so I imagine many of the viewers
Speaker 1: here are familiar with how bitcoin trades. Right, So if
Speaker 1: you have, for example, in bitcoin, when you look at
Speaker 1: the market, if you have a whale come in and
Speaker 1: unload a whole bunch of bitcoin, prices are going to
Speaker 1: drop a lot. Right, that's a liquidity issue. Right, if
Speaker 1: you go and you sell a whole bunch of bitcoin,
Speaker 1: supplyingmand supplying exactly it's not just now. The trugury market
Speaker 1: is just like bitcoin in that sense, there's just supply
Speaker 1: and demand. You can you sell a lot of trudguries,
Speaker 1: you're going to get unstable prices, and that's exactly what's
Speaker 1: going on right now. So QT at a high level
Speaker 1: means that the public is going to the market is
Speaker 1: going to have to absorb a lot more trosury securities.
Speaker 1: Now how much more? A lot more um? This sierra
Speaker 1: looks like the total issuance that it's okay, So issuance
Speaker 1: including QT that the market will have to absorb is
Speaker 1: about one point five trillion. Now, before the pandemic, the
Speaker 1: market absorbing about five billion UM a year, So it's
Speaker 1: going to have to absorb one point five trillion this
Speaker 1: year and the next and going forward because of our deficit,
Speaker 1: it's going to be at least a trillion a year
Speaker 1: or forever. So that's a lot of supply into the market,
Speaker 1: and at the same time, the demand in the market
Speaker 1: it's not that strong. So during after the pandemic, the
Speaker 1: FED was basically the major buyer of troedery securities, and
Speaker 1: the FED is going away right now, so you're gonna
Speaker 1: have this huge supply and demand mismatch, which we kind
Speaker 1: of see manifesting in the troasury market. You see, sometimes
Speaker 1: the tenure goes up twenty point pony basis points a day.
Speaker 1: That's pretty unstable. And we've trended steadily higher over the
Speaker 1: past few months because we have to find these new
Speaker 1: marshal buyers to absorb all that supply. And I don't
Speaker 1: know who that is. Like you mentioned, inflation is high,
Speaker 1: and who wants to buy a tenure treasure security yet
Speaker 1: four percent? You can get the same thing and money
Speaker 1: market account. Yeah so, and that's what happened on the
Speaker 1: Bank of England as well, which I'm sure we'll get into. Yeah. So, um,
Speaker 1: if we if we stick with what you're saying, so
Speaker 1: just supplying demand, it's it's it's the most simple thing.
Speaker 1: You can take these super complex subjects and just break
Speaker 1: them down to just the equilibrium of supply and demand.
Speaker 1: And so back to just where we started with the
Speaker 1: money supply. When money is cheap, there's more demand for it, right,
Speaker 1: and so back to the supply of treasuries. Um, so,
Speaker 1: if the government is going to mean to need to
Speaker 1: issue more trade they already are you said, it's gone
Speaker 1: up from there, having absorbed five million owns up to
Speaker 1: one point five trillion yea probably billion to If we
Speaker 1: look at the FED, seems to be focused on crushing demand, right,
Speaker 1: that's what they've said. They believe that if they can
Speaker 1: crush the demand side, then people will spend less money
Speaker 1: and maybe they'll bring inflation down. Um. The problem to
Speaker 1: me seems that it's asset prices that are getting hammered. First. Um,
Speaker 1: if asset prices come down, then there's no cap gains,
Speaker 1: there's no iary distributions. We already have a huge balance problem, right,
Speaker 1: We're already running a deficit to the point that you're making.
Speaker 1: And so if we see asset prices come down, Um,
Speaker 1: then we don't see, like I said, the cap gains.
Speaker 1: We don't see that. We also see the reverse wealth
Speaker 1: effects of people spend less. So total tax receipts are
Speaker 1: just going to plummet. Most likely seventy percent of the
Speaker 1: taxes come from the top ten percent of earners, which
Speaker 1: most likely make the majority of their income from cap
Speaker 1: gains distributions and things like that. That's seventy access eats
Speaker 1: come from that. Uh, And so we could see a
Speaker 1: massive it. We could see this, uh this f five
Speaker 1: million to one point five trillion or even more. We
Speaker 1: can see this deficit grow by levels that maybe they're
Speaker 1: not even anticipating or do you think that's too apocalyptic?
Speaker 1: I think you're exactly right. That is the big picture.
Speaker 1: How are we going to pay for all these things?
Speaker 1: Or deficit? Is there's a forecast put out by the
Speaker 1: government based on law on the books. It's forecasts to
Speaker 1: basically be at least a trillion dollars a year forever.
Speaker 1: And that's just what it's on the books. Eventually, I'm
Speaker 1: sure they're going to give more free stuff. So, um,
Speaker 1: so that that that is the problem. It does seem apocalyptic,
Speaker 1: and um it seems like I think Stanley Drunken Miller
Speaker 1: recently made a similar point just just last week. I think.
Speaker 1: So it's a big problem. So the way that I
Speaker 1: look at it is that it's never a financing problem
Speaker 1: because if you are the US government, you have a
Speaker 1: printing press, you can always always pay for everything interest
Speaker 1: rate that everything, just print it, have the fit printed,
Speaker 1: and pay for it super super easy. Um, but that
Speaker 1: has consequences as well. The consequences are not that I
Speaker 1: can't make my interest rate payments. I always will be,
Speaker 1: but that if I print all this money, then I'll
Speaker 1: have inflation. So that is ultimately the constraint that the
Speaker 1: government has and we're seeing that right now. So in
Speaker 1: government just you know, created a couple of trillion dollars,
Speaker 1: gave it away and steamy checks and p P P
Speaker 1: loans and we had massive inflation. And not just us,
Speaker 1: but people all around the Western world did something similar,
Speaker 1: even worse, even worse. So, um, yeah, that that that
Speaker 1: is the problem that we face right now. We're going
Speaker 1: to have it seems like we're on a very big
Speaker 1: inflationary trajectory. We're going to be able to afford all
Speaker 1: these payments. It's just that it will be inflationary. And
Speaker 1: it's the only way to stop this would be to
Speaker 1: convince Congress to not spend so much. And now that's
Speaker 1: that's just not going to happen. Now, we're spending to
Speaker 1: reduce inflation the Inflation Reduction Act, Right, that's how it works, right, Yeah,
Speaker 1: if we spend all this money, we'll actually have it.
Speaker 1: I think it's I think it's pretty easy. You don't
Speaker 1: have to be the FED guy or a FED insider
Speaker 1: or economist. I mean, you could just ask the average
Speaker 1: person on the street, like do you think the government's
Speaker 1: going to spend less money or more money in the future? Right,
Speaker 1: And unfortunately, as these things continue to uh evolve, I
Speaker 1: mean we're already seeing it. Uh specifically, we're seeing it
Speaker 1: more in other countries. But you know, with u b
Speaker 1: I things like that assistance in California, they want to
Speaker 1: give tax rebates to help offset the rising cost of fuel.
Speaker 1: Obviously in the UK they have a big deal with
Speaker 1: that where they're trying to offset energy prices. And so
Speaker 1: it looks like more social spending is coming. Obviously there's
Speaker 1: this green transition that they're that they're pushing um and so, uh,
Speaker 1: it looks like spending is gonna go up. It looks
Speaker 1: like tax receipts are going to come down. And I
Speaker 1: think both of those are gonna happen at the same time. Now,
Speaker 1: you know, with inflation, maybe it kind of looks like
Speaker 1: GDPs going up inflation, but in real economic out but
Speaker 1: there's there's nothing there. And then at the same time,
Speaker 1: if that's not already bad enough, at the same time,
Speaker 1: we have because of the currency wars that are going on,
Speaker 1: So we're pushing inflation to these other countries. Now we're
Speaker 1: getting to these currency wars, and it looks like we're
Speaker 1: seeing Japan, we're seeing China. In order to shore up
Speaker 1: their currencies, they're dumping dollars to buy their currencies in
Speaker 1: the open market to keep them somewhat propped up, which
Speaker 1: is even more selling on the treasuries. Right, exactly, exactly.
Speaker 1: That's a special thing about the dollar. Everyone kind of
Speaker 1: has to manage their currency with respect to it because
Speaker 1: it is the world's reserve currency. And the way they
Speaker 1: do that is they keep a rainy day fund of
Speaker 1: dollars in case their own currency gets too weak. Then
Speaker 1: they use the rainy day hunt to basically show up
Speaker 1: their own their own currencies. So they would sell dollars
Speaker 1: and buy their own currency. And but they're really that
Speaker 1: rainy day fund, which is usually held in the form
Speaker 1: of treasuries. So those sell trujuries like you suggested, and
Speaker 1: that's even worse for the trojury market. Um, so you've
Speaker 1: got a lot of selling, but I'm not sure who
Speaker 1: the buyers are going to be, mm hmm, which just
Speaker 1: exaggerates the problem absolutely. So there is some tail risk
Speaker 1: here for it that you could have a very uncontrollable
Speaker 1: sell off in the trojury market. Um, but it's a
Speaker 1: tail RISKKET doesn't necessarily mean it will happen. It seems
Speaker 1: like the FED and you know better, you tell me,
Speaker 1: but it seems like the FED one and I think
Speaker 1: you and I have had this discussion before, where um,
Speaker 1: the FED doesn't want to surprise anybody, so they try
Speaker 1: to really broadcast far in advance what they're gonna do.
Speaker 1: They announced in November that they were gonna start raising rates.
Speaker 1: We didn't see them raise rates until January. Um. And
Speaker 1: so they tell us this that they're going to do
Speaker 1: these things, but it also seems like they get really
Speaker 1: dug into their position and feel like maybe they have
Speaker 1: to hold with this. So like Jerome Power was saying,
Speaker 1: we can't get inflation, we're not thinking about thinking about
Speaker 1: raising rates. Um. Then he said we're gonna let it
Speaker 1: run hot. Um and then we got it right, and
Speaker 1: then it was like, well, it's transitory, and it seems
Speaker 1: to be. You know, pretty much every pundent and economist
Speaker 1: out there says that they waited way too long. They
Speaker 1: should have started raising sooner, but maybe they were dug
Speaker 1: into that position of not thinking about thinking about they
Speaker 1: were't going to raise rates until I think it was,
Speaker 1: and so maybe they were dug in and finally said, okay, fine,
Speaker 1: we have to pivot. And what I'm afraid so one
Speaker 1: comment on that, But then too, if that's the case,
Speaker 1: if that, if there's some truth to that, then maybe
Speaker 1: I'm also worried that they're also dug in. They're gonna
Speaker 1: raise rates through the end of next year. Uh. And
Speaker 1: like even if these treasury starts spiking there's no bids whatever,
Speaker 1: are they dug into that? And uh, and they have
Speaker 1: to kind of hold the kind of keep that confidence
Speaker 1: and then they're not going to pivot when they need to.
Speaker 1: So I think the FED was definitely slow to raise rates,
Speaker 1: and exactly as you mentioned, they were probably to dug
Speaker 1: into their view that they would inflish will be transitory.
Speaker 1: And we see officials echoing that, um, you know, and
Speaker 1: that might have been political in some sense. So we
Speaker 1: saw the Trogary Secretary Janet yell And last year also
Speaker 1: say something similar and maybe those were the talking points. Um.
Speaker 1: But I want to be fair to them that it
Speaker 1: was a hard thing to do back then. It's it's
Speaker 1: hard to know how the colony would have involved. The
Speaker 1: clear policy here, I think was to keep buying mortgage
Speaker 1: backed securities housing, you know, more backed securities when the
Speaker 1: housing market was going up a year. That was clearly crazy.
Speaker 1: But whether not the race rates that that that was
Speaker 1: not the correct call. They should have raised rates earlier.
Speaker 1: But I think it's understandable if they if they are
Speaker 1: a little bit late on that, whether or not they're
Speaker 1: making another policy air that that, I don't know that
Speaker 1: it's going to be an error, but I'm pretty sure
Speaker 1: they're going to try to keep rates high um throughout
Speaker 1: next year. I think it's useful to think to understand
Speaker 1: how they're approaching this so um, a little bit of
Speaker 1: history is helpful. So in the seventies and eighties, uh,
Speaker 1: as we all know in the US, there was very
Speaker 1: high inflation, you know, over ten percent. And what the
Speaker 1: FED did back then in the seventies under Arthur Burns
Speaker 1: was they would hike rates, and then when inflation looked
Speaker 1: like he was getting under control, they would start cutting rates.
Speaker 1: And then what would happen and then the rates inflation
Speaker 1: will come growing back again, and then they would hike again.
Speaker 1: Inflash would come down, they'd cut again, and inflish and
Speaker 1: go back up. So that kind of stopped go thing
Speaker 1: that they did back then proved to be not very useful.
Speaker 1: So they are very keen to avoid that mistake. And
Speaker 1: Pauwell mentioned this specifically at his last pressor. So he
Speaker 1: doesn't want to remake the mistake of the seventies. So
Speaker 1: instead of just hiking rates and then cutting it at
Speaker 1: the first sign that inflation is coming down or maybe
Speaker 1: unemployment is taking up, he's going to hike it till
Speaker 1: let's say four and a half percent, and he's going
Speaker 1: to hold it there for the entire year. That's the
Speaker 1: game plan that he's trying to tell the market, and
Speaker 1: I don't know if he'll be able to carry it out,
Speaker 1: but that's what he's very resolute to to tell everyone.
Speaker 1: Some other something else that I think it's helpful to
Speaker 1: understand what Paul was doing. Well. To understand Paul is
Speaker 1: to think about what happened in December. In December, Powell
Speaker 1: was also resolute. He told the market that I'm going
Speaker 1: to be hiking rates in except that the Stockholm market crumbled,
Speaker 1: and I think maybe February or March they were indicating
Speaker 1: to the market that they weren't going to high grate
Speaker 1: it anymore. In fact, they were going to cut them
Speaker 1: in the coming months. So he did a complete one
Speaker 1: eight a pivot. And because he did that in many
Speaker 1: people in the markets don't believe that Paul was actually
Speaker 1: be able to carry out his plan to uh be
Speaker 1: vulker like. So that's why in the markets you see
Speaker 1: the market pricing and some probability of a bit next year,
Speaker 1: and that I think is what the market and to
Speaker 1: Fit are going to try to have to resolve in
Speaker 1: the coming months. Is the market right the Powell is
Speaker 1: a pivoter, he will eventually cave and then risk ass
Speaker 1: let's go to the moon. Or is Powell right that
Speaker 1: he is resolute, he is ah some spirit of vulcar
Speaker 1: and he is going to keep brids high throughout next year. Um,
Speaker 1: I guess we'll find out in the coming months. I
Speaker 1: think both of those things can be true. He can
Speaker 1: be resolute longer than most people think he will, and
Speaker 1: cause more damage and pain than most people expect. But eventually,
Speaker 1: as you've already kind of made the case, they'll never
Speaker 1: run out as long as they have the printer. So like, UM,
Speaker 1: I don't understand I don't believe any nation, any sovereign,
Speaker 1: would go with default when they have the ability to
Speaker 1: print money. You've already kind of makes so both of
Speaker 1: those can be true. It's the timing of when those
Speaker 1: things happen. Yeah, But but back to that just for
Speaker 1: a second. So Powell came in, you know, he was
Speaker 1: fired up. He was gonna make some change. He was
Speaker 1: gonna he was gonna normalize the system again, right, he
Speaker 1: started hiking rates and to your point that the market
Speaker 1: dropped and he was forced to pivot, and it seemed
Speaker 1: like he pivoted and again correct to me, but it
Speaker 1: seemed like and maybe even hinted to the fact that
Speaker 1: it was the stock market crashing that caused him to pivot,
Speaker 1: whereas this time it doesn't seem like he cares about
Speaker 1: the stock market crashing. Is as a matter of fact,
Speaker 1: he almost wants the stock market to crash because of
Speaker 1: crushing demand. You're exactly right. So the difference is that
Speaker 1: we have inflation, and inflation is very high. So back then,
Speaker 1: you know that the FEDS goal was full employment and
Speaker 1: price stability. Back then, inflation was low. That's okay, So
Speaker 1: what they were more concerned about was getting um the
Speaker 1: unemployment rates down, So it made sense. Well, you know,
Speaker 1: if I can cut rates and that will help unemployment
Speaker 1: and inflation is fine, why don't I just do that?
Speaker 1: Now today it's completely different. Inflation is very high and
Speaker 1: unemployment is very low, so we're gonna have to get
Speaker 1: inflation down. So inflation is basically the Fed's primary mandate
Speaker 1: for the moment. And how do you get inflation down? Well,
Speaker 1: the way that I think about it is inflation comes
Speaker 1: down when people can no longer afford higher prices. How
Speaker 1: do they no longer afford higher prices when they have
Speaker 1: less money? Okay, So there's a couple of ways you
Speaker 1: can get people to be poor, so to speak. The
Speaker 1: one is to make asset prices go lower, like you mentioned,
Speaker 1: making the stock market go lower. That means people have
Speaker 1: less money in their stock account to go spend and
Speaker 1: buy stuff if they can't afford higher prices, and inflation
Speaker 1: will come down. Now, the other part, which is what
Speaker 1: I think the FED is emphasizing more now, is if
Speaker 1: you have lower wages, if you have more wages, then
Speaker 1: you can't afford stuff less, So so wage gains. According
Speaker 1: to the FED data, it's growing about about six seven
Speaker 1: annual rate. Now, if you're in if you're salaries going
Speaker 1: up six seven percent a year, obviously you can afford
Speaker 1: a six seven percent inflation. So in order to get
Speaker 1: inflation backed down towards two pc, you're gonna need wage
Speaker 1: gains of about you know, two or three and the
Speaker 1: only way to get that is to have higher unemployment.
Speaker 1: So that's what they're trying to do right now, basically
Speaker 1: raise the unemployment. It's not a pretty thing to say,
Speaker 1: but that that is very much the goal, and it's
Speaker 1: a hard goal to Actually, the labor market is very
Speaker 1: strong and it seems to be have a shortage of workers,
Speaker 1: so the Fed is going to have to keep interest
Speaker 1: rates high until they see the labor market crack. Yeah,
Speaker 1: so supply and demand. If there's more open jobs, people
Speaker 1: who have to work for lower. If there's no if
Speaker 1: there's no available workers, they're going to have to pay
Speaker 1: them higher. It's um it's now um I. I tweeted
Speaker 1: out something similar to that in the past, where it's like, hey,
Speaker 1: hopefully the people understand the Fed is actively trying to
Speaker 1: bring their pay down, like that's against the what the
Speaker 1: will of the people want. Wages have not kept up
Speaker 1: with inflation over the last thirty four of the years. UM,
Speaker 1: inflation is raging at whatever you know, whatever you want
Speaker 1: to believe eight or nine percent of the CPI tells
Speaker 1: us or more likely. UM. And of course wages aren't
Speaker 1: keeping up with that. And to your point, they need
Speaker 1: to bring wages down. That's a problem. The fact that
Speaker 1: you're getting paid more is a problem for the FED,
Speaker 1: and they want to bring that down, which is Uh.
Speaker 1: I think if most people understand that, and they're not
Speaker 1: going to be happy with that. But but you're absolutely right.
Speaker 1: And then the fact of bringing asset prices down the
Speaker 1: wealth effect. So, UM, I may not be retiring for
Speaker 1: twenty or thirty years, I don't plan on selling my
Speaker 1: house for twenty or thirty years if ever. UM. But
Speaker 1: the fact that I see the value of my home
Speaker 1: and my retirement accounts come down, I just feel more poor.
Speaker 1: I'm gonna not take vacations, I'm not gonna go out
Speaker 1: to dinner as much, etcetera. Um. But I want to
Speaker 1: jump back to the unemployment part for a minute. So, uh,
Speaker 1: the official unemployment number is low, more historically low. If
Speaker 1: you dig into that data, it doesn't look that good
Speaker 1: to me because let's say, for one, UM, the amount
Speaker 1: of hours has come down, so people are working less hours. Obviously,
Speaker 1: the job force participation rate is very low, so that's
Speaker 1: historically low. Um, the amount of hours people are working,
Speaker 1: the amount of two to three jobs that people are working. Uh. There,
Speaker 1: the rate that they're getting paid has come down, which
Speaker 1: they want that um. And then UM, they had this
Speaker 1: big adjustment in the employment data based off of jobs
Speaker 1: created and destroyed from last year's data, which was this
Speaker 1: crazy anomaly, so they added I forget now three thousand
Speaker 1: jobs or whatever they added, So the data actually doesn't
Speaker 1: look good to me. Um. Obviously they have hundreds or
Speaker 1: thousands of PhDs and analysts looking through this data. I
Speaker 1: mean I'm just some guy on YouTube here. UM, so
Speaker 1: they have to see that, right. But UM, do they
Speaker 1: just want to run with that headline number because that
Speaker 1: gives them the cover to run or do they see
Speaker 1: this and they go, well, actually, we're going to use
Speaker 1: this number, but we see that it's actually not that
Speaker 1: good beneath and so our long term planning is taking
Speaker 1: that into consideration. I think they actually do believe the number.
Speaker 1: So so these people who work at the FED, their
Speaker 1: establishment types there. They're from the system. They spent the
Speaker 1: entire life in the system, so they have confidence in
Speaker 1: the things that the system produces. Inflation numbers, unemployment numbers.
Speaker 1: You know, to doubt those is to doubt themselves. They're
Speaker 1: part of systems. So I don't I don't think that
Speaker 1: UM they view that as suspect. Okay, well, and I
Speaker 1: think that that. So there's that, there's that, But there's
Speaker 1: also another aspect as well. The way the FED UM
Speaker 1: gets information. It's not just numbers, but it's also a
Speaker 1: lot of discussions that they have with other people. So
Speaker 1: if you are if you are at the FED, you
Speaker 1: have connections throughout the business community. So FED officials will
Speaker 1: talk to ceo s, talk to managers, talk to everyone really,
Speaker 1: and they'll have this formal surveys but also in formal conversations,
Speaker 1: and they want to try to get to get a
Speaker 1: sense of what's happening on the street. And what they
Speaker 1: hear is that all they're having trouble hiring people. So
Speaker 1: when they have that qualitative information that seems to confirm
Speaker 1: what they see in the data, then I don't think
Speaker 1: they have any reason to doubt it. Yeah, that's that's
Speaker 1: that's that's good to know. UM. Now let's jump to
Speaker 1: the topic we've been pushing, pushing, pushing, So let's talk
Speaker 1: about the Bank of England. So the Bank of England
Speaker 1: broke UM. George Soros famously broke the Bank of England before. UM.
Speaker 1: Now they broke again. Basically, Uh, they couldn't cover the
Speaker 1: pensions and they've had to panic and just go all
Speaker 1: in on the poker table, right, all in unlimited frame
Speaker 1: frame that up for us a little bit. So at
Speaker 1: a very high level, it's just supply and demand. You said,
Speaker 1: it's best framework, much better than any big econometric model.
Speaker 1: It's just makes everything back to basics. So what's the
Speaker 1: supply Okay, So two things are happening in the past
Speaker 1: couple of weeks. One Bank of England is gauging a QT,
Speaker 1: but not just simple QUTI like the FED where they'll
Speaker 1: let something let's say the FED holds the shared Security
Speaker 1: gets repaid and just let's that money disappear. The UK,
Speaker 1: the Bank of England wanted to actually sell their portfolio,
Speaker 1: so that's increasing supply into the market. You're actually selling. UM.
Speaker 1: The second thing on the supply side is that they
Speaker 1: have this very aggressive fiscal budget. So I think we've
Speaker 1: read in the news that uh, the UK government wants
Speaker 1: to put a ceiling on power on electricity prices. Well,
Speaker 1: that money has to come from somewhere, right, so they're
Speaker 1: going to have to borrow more. And at the same
Speaker 1: time they're cutting taxes, so they got to borrow even more.
Speaker 1: So the supply of sovereign debt, which is called a
Speaker 1: guilt UK sovereign UK. I think it's a two billion
Speaker 1: dollar swing. So it's like a fifty billion dollar tax
Speaker 1: hit by cutting and then it's a hundred fifty billion
Speaker 1: increase in spending to cover the energy bills. That that
Speaker 1: sounds like not a lot too to us, to people
Speaker 1: in the US, but the UK is a smaller country,
Speaker 1: so that that's a huge amount for them. Um. And
Speaker 1: that's enormous amount of supply. Okay, So everyone sees that
Speaker 1: ship there's a lot of supply coming online. Better get
Speaker 1: out of the way, and so the prices plummet and
Speaker 1: that means yields go up significantly. Now, the thing is
Speaker 1: a lot of people who own those uh guilts. They
Speaker 1: owned them, uh perhaps on a levered basis, or or
Speaker 1: at least they have let's say levered instruments that are
Speaker 1: tied to the interest rates, so they basically got a
Speaker 1: huge margin call. Now it's like any other speculator. You
Speaker 1: buy something on leverage or you have leverage exposure to
Speaker 1: something that's something you know price changes a lot, then
Speaker 1: you could be in trouble. If you look at the
Speaker 1: interest rates in the UK, well those interest rates they
Speaker 1: shot up a lot rapidly, so they were margin calls.
Speaker 1: What happens when you have a margin call, you get
Speaker 1: equid dated by your broker. Okay, so a lot of
Speaker 1: these investors got liquidated. That means the price goes even lower.
Speaker 1: That means even more people need to get liquidated. So
Speaker 1: you had this fire run like, fire cell like dynamic,
Speaker 1: similar to what you see in any financial crisis. So
Speaker 1: what happens now I have a whole bunch of people
Speaker 1: who are getting liquidated and a lot of people losing money.
Speaker 1: We have looks like a fire cell going on. The
Speaker 1: Bank of England then steps in and offers to be
Speaker 1: basically the buyer of last resort, similar to what the
Speaker 1: FED did and during the pandemic. It goes in and
Speaker 1: it's like we're going to buy as many of these
Speaker 1: guilts as we need to do, as we need to buy,
Speaker 1: and once the Bank of England steps in and it's
Speaker 1: ruling to buy as much as needed, and the Bank
Speaker 1: of England has unlimited, uh, unlimited amount of money than
Speaker 1: the market stabilized. And we can see this not just
Speaker 1: what happening in the guilt market, but in the treasury
Speaker 1: market as well. When the Bank of England stepped in
Speaker 1: those long dated UK guilts, they based the yields just
Speaker 1: kind of plummeted enormously, like the biggest drop in the
Speaker 1: history of guilts, and that pulled all the other sovereign
Speaker 1: bond yields in the world down as well. So you
Speaker 1: saw the treasury yields I think go down thirty basis points. So, um,
Speaker 1: it had a global effect of calming the sovereign debt market.
Speaker 1: And is that because um they're like, well, shoot, if
Speaker 1: the Bank of England decided to bail out their market,
Speaker 1: then everybody else will as well. So that was kind
Speaker 1: of like that reassurance. I think that that's definitely some
Speaker 1: aspect to it. If you have, uh, if you have
Speaker 1: one sovereign So the global bal market is tightly connected
Speaker 1: because it's all credit risk free. So that means that
Speaker 1: so if I'm an investor, now i can get let's
Speaker 1: say three percent in the UK or four percent in
Speaker 1: the US, and after hedging currency, I'm gonna go with
Speaker 1: whatever is higher because they're both credit risk free, and
Speaker 1: so that that's fine. So they're all connected together. If
Speaker 1: we see the UK guilts come down, then mechanically everything
Speaker 1: has to be priced with some um, you know, some
Speaker 1: relative value value relative to to the guilts. So that side,
Speaker 1: and also of course having a central bank come out
Speaker 1: and being being willing to do quei or put money
Speaker 1: that always makes the market happy. So and that does
Speaker 1: increase the probability that maybe the FED or someone else
Speaker 1: will be doing the same thing in case something became
Speaker 1: too disorderly. And you know, if you look at the commentary,
Speaker 1: a lot of people are looking at this and as
Speaker 1: a potential pivot point, which it definitely is not, but
Speaker 1: the market is always hopeful for things like that. Yeah. So, um,
Speaker 1: now they've pledged I think they pledge unlimited qui to
Speaker 1: support the bonds up until October, just for like this period.
Speaker 1: So then we'll wait and see, right if if they've
Speaker 1: restored enough trust and then they can stabilize the yields
Speaker 1: and more people want to buy them, they can bring
Speaker 1: buyers back in, then maybe they stop. But if no
Speaker 1: buyers come back in and the yields starts spiking again,
Speaker 1: they're gonna have to probably jump back in again, exactly exactly.
Speaker 1: And that's the problem just not with not just the UK,
Speaker 1: but all the governments in the Western world. Um, they've
Speaker 1: borrowed so much that the amount of debt is so
Speaker 1: huge that the market can function anymore. You know, the
Speaker 1: supply is just enormous. So in the past the problem
Speaker 1: was hidden because you had people being the central banks
Speaker 1: buying it, FED buying it, Bank of England buying it,
Speaker 1: ECB buying it UM. So you don't really know what
Speaker 1: the real appetite is for for sovereign debt. And apparently
Speaker 1: it's not a long at least at these prices. Yeah,
Speaker 1: we can see that for sure. Now you said, you
Speaker 1: said the word credit risk free, and we we mentioned
Speaker 1: that earlier at risk free returns and so credit risk free.
Speaker 1: So government bonds specifically, sovereign bonds specifically UM probably Tier
Speaker 1: one nation sovereign bonds are considered risk free. I don't
Speaker 1: know if you would consider, you know, the all Salvador
Speaker 1: bond or the Turkish bond risk free necessarily right, and
Speaker 1: and and and well, before you answer that, they're considered
Speaker 1: risk free because to the point that we're both agreeing,
Speaker 1: um um no nation would default on their bonds when
Speaker 1: they can print the money, and so they're considered risk
Speaker 1: free because they're always going to be able to pay that.
Speaker 1: That's exactly right. If you have a printer, you can
Speaker 1: always have the ability to repay your debt, but you
Speaker 1: could voluntarily default. And that's the reason why that the
Speaker 1: US actually does not have a triple A. Reading from
Speaker 1: the SMP, the SMP saw that the US, during we
Speaker 1: have a you know, periodic death ceiling episodes where one
Speaker 1: party doesn't want to raise the death sailing. Uh. The SMP,
Speaker 1: SMP Senator Poorts, the reading agencies saw that the US
Speaker 1: maybe would voluntarily default during a death ceiling episode, and
Speaker 1: because of that they cannot be triple A. But they
Speaker 1: have the capacity because they have the printer, but sometimes
Speaker 1: may they may not have the political willingness as you suggested. Well,
Speaker 1: and then they run into limitations, and so it's the
Speaker 1: proverbial rock and a hard place. They can print as
Speaker 1: much as they want, just like Zimbabwe. But then you
Speaker 1: have runaway inflation. If you don't print your default. If
Speaker 1: you do print, you you have inflation. And so which
Speaker 1: one is worse? Right? Which one do you have the
Speaker 1: political will to deal with? Are you okay seeing everybody's
Speaker 1: pensions wiped out and everybody broke on the street or
Speaker 1: would you rather people just pay a little bit more
Speaker 1: money for the things they buy? Yeah? Yeah, yeah, So
Speaker 1: it's a political it's always it's an inflation in my view,
Speaker 1: is always political. So how do you create an inflation?
Speaker 1: Just give everyone a million dollars everyone. If you everyone
Speaker 1: has a million dollars on their bank account, you have
Speaker 1: a lot of inflation. How do you create deflation? Let's say,
Speaker 1: race taxes to ninety percent, take everyone's money away, hiken
Speaker 1: interest rate scent, make the soft market go to zero.
Speaker 1: So it's inflation is ultimately in my view of a
Speaker 1: political choice. Now I would imagine other pension funds are
Speaker 1: doing the same thing that they were doing in the UK.
Speaker 1: And as we see, so I guess there's three three.
Speaker 1: I guess maybe the top three cent t banks in
Speaker 1: the world, the FED, the b o E, and the
Speaker 1: b o J when looking at you know, currency, you know,
Speaker 1: liquidity around the world, or amount of payments or whatever.
Speaker 1: I would imagine all three of them are probably doing
Speaker 1: the same thing. Uh, the b o J and the
Speaker 1: BOE coming under massive pressure in their markets. And so
Speaker 1: could we see a similar situation arise in the b
Speaker 1: in in Japan. In Japan, so or they don't want
Speaker 1: in the pension situation like we do. You're you're you're
Speaker 1: flattering the Bank of England to the hundred years ago
Speaker 1: during the British Empire and now it's the e CPS
Speaker 1: is the second large in the bank thing? Um yeah,
Speaker 1: b O E, b O E. You' right? I think
Speaker 1: is the fifth right, Yeah, they used to be important.
Speaker 1: They probably wish they still were. Um. So the Japan
Speaker 1: is different because the chap Japan is doing something called
Speaker 1: you would curve control, which is basically fixing the price
Speaker 1: of their sovereign debt. So because the price is fixed,
Speaker 1: they cannot the pensions are fine, they can't have any
Speaker 1: suffer the same problem. But in Europe they definitely can,
Speaker 1: and I think that's the next point of weakness. So
Speaker 1: so Robin Brooks on on Twitter has a very very
Speaker 1: good graph of who has been buying Spanish and Italian
Speaker 1: sovereign debt over the past few years. It's the CV.
Speaker 1: The CB has been buying it all. Now, if the
Speaker 1: ECB steps back, you can have the exact same thing happen,
Speaker 1: where the yields shoot up very high, and that that
Speaker 1: creates losses for the people who are invested in those
Speaker 1: and the people who invest in Spanish and Italian debt
Speaker 1: that the bank's pension funds and so forth. So you
Speaker 1: could have something similar happen, which is which is which
Speaker 1: is concerning, but likely could also be fixed. The ECB
Speaker 1: will just go and buy more and that will be
Speaker 1: negative for the Euro. So that's probably the next weakness
Speaker 1: weak point as as we see QT unfolded globally. Now
Speaker 1: we've set up a big problem that seems the only
Speaker 1: beginning worse. Governments are going to spend more money um
Speaker 1: than they have deficits. Tax receipts might go down, deficits
Speaker 1: will probably go up. They'll have to continue to print
Speaker 1: more money UM. At some point this kind of comes
Speaker 1: to a head. We're starting to see some big crack
Speaker 1: showing up, obviously in Japan and now in in Europe
Speaker 1: has bigger cracks that we haven't really talked about Europe.
Speaker 1: But but the ECB has got their problems with the
Speaker 1: pigs nations down below in Portugal, it ill degree Spain. Obviously,
Speaker 1: the whole Russia situation. We're seeing it the first crack
Speaker 1: really with the Bank of England. But it's like that
Speaker 1: first crack they'll start coming. Um. I want to I
Speaker 1: want to kind of talk about this in game maybe
Speaker 1: you know, hypothetical situations. But before we do, UM, let's
Speaker 1: jump to another topic, which is um central bank digital currencies.
Speaker 1: So obviously China rush their central bank digital currency through.
Speaker 1: They unveiled it at the Olympics that they had there,
Speaker 1: and in China, the under President Biden through executive order,
Speaker 1: they've been rushing this CBDC through the FED now released
Speaker 1: as FED now thing. It looks like this central bank
Speaker 1: digital currency is rushing through. What are your thoughts on that?
Speaker 1: What are you hearing on that? So? I think a
Speaker 1: CBDC is not not there's really no use case for
Speaker 1: the US. So CBDC if you look at who's really
Speaker 1: young hole about the CBDCs in the world, it's like
Speaker 1: you mentioned, it's China it's these totalitarian states because a
Speaker 1: CBDC is ultimately a surveillance too. It's a way to
Speaker 1: control people if the government can see whatever you own,
Speaker 1: and maybe they can lock your account, maybe they can
Speaker 1: make sure that you just do what you're told. So
Speaker 1: it's it's what totalitarian states really like now here in
Speaker 1: the US, whether or not we have a CBDC is
Speaker 1: ultimately a political choice, and you hear different things depending
Speaker 1: on who you speak with. Um Powell actually seems to
Speaker 1: be slow walking the CBDC UH reject at the FED.
Speaker 1: He says that, you know, we need to do more
Speaker 1: research on this, and we need regulations and so forth,
Speaker 1: and we need Congress to pass UH legislation showing that
Speaker 1: there's a clear intent. So I think that the FED.
Speaker 1: So Paul Paul wasn't the only FED official who who
Speaker 1: seems to be not too warm about the CBDC here.
Speaker 1: Another one would be um uh. It's former governor quarrels
Speaker 1: very clear that we don't need to CEBDC here, and
Speaker 1: they're all right, why why, there's really no use case
Speaker 1: in the US. It seems to be more of a
Speaker 1: potentially dangerous political tool. So at the moment, the people
Speaker 1: in charge of the FED don't seem to want to
Speaker 1: go down that path. I think there are voices in
Speaker 1: the FAT that are influential who would be happy to
Speaker 1: see a CBDC, for example, the Brainer who is also
Speaker 1: a member of the World Economic Form as as you
Speaker 1: guys know, you know the countries that are under the
Speaker 1: influence of the word economic Forum like CBDCs, like the Eurozone,
Speaker 1: like Canada. So far, and it's a it's it's I
Speaker 1: think it's very much a So I can't see a
Speaker 1: real economic use case for it. So I think if
Speaker 1: it more as a political tool to have better control
Speaker 1: over a country's citizens, well what about as an economic tool.
Speaker 1: So the problem in the pandemic was they sent all
Speaker 1: the stemmy out and they were hoping to stimulate the markets,
Speaker 1: but then people sat on the money, they didn't stimulate
Speaker 1: the markets, or they put into robin hood as opposed
Speaker 1: to buying goods and services, and so, um, if if
Speaker 1: they have a CBDC, which we started seeing that language
Speaker 1: come out in some of these STEMI bills that came
Speaker 1: out in UM, maybe it's a tool where they could
Speaker 1: inject liquidity directly into the market and they could affect
Speaker 1: that you know how fast people spend it to make
Speaker 1: sure it does get spin and even into the right places.
Speaker 1: So it could be an economic tool. But I mean
Speaker 1: that's obviously control, but control for economic purposes, Yes, it's control,
Speaker 1: and it can be exercised in positive ways or in
Speaker 1: negative ways, and the exact in way. We could say that, hey,
Speaker 1: you're protesting where you shouldn't be, or maybe you voted
Speaker 1: for the wrong person. You know what, maybe you shouldn't
Speaker 1: be spending any money at all. So it's it's an
Speaker 1: extra tool. And like any tool, it depends on how
Speaker 1: much confidence you have in the people who make the
Speaker 1: rules and well people who actually wild that tool. And
Speaker 1: it can definitely be used for very positive purposes, um
Speaker 1: like getting money directly to people, but under the wrong hands,
Speaker 1: it could also be used to silence, dissent, or punish
Speaker 1: your enemies. So ultimately it depends on how much confidence
Speaker 1: you have in the system. Now in the US, we
Speaker 1: have a tradition where we don't have confidence in the system.
Speaker 1: That's why we want the system to be as weak
Speaker 1: as small as possible, because we know that if you
Speaker 1: give people, regular people a lot of power, they are
Speaker 1: tempted to use that for their own benefit. So that's
Speaker 1: uh so again that that seems to be what history pretends.
Speaker 1: So in your guess, in your in your guess, you
Speaker 1: would think that maybe if I'm if I'm reading you right, um,
Speaker 1: that maybe we might see it in other nations first,
Speaker 1: and maybe the US might be one of the last
Speaker 1: to adopt it because they don't have a big economic need.
Speaker 1: It's more of a political tool, and the people would
Speaker 1: probably kind of push back with the checks and balances
Speaker 1: that we have exactly. I think that's right. Completely depends
Speaker 1: on politics. This is completely a political choice. The politics
Speaker 1: the political leadership we have now at the FED does
Speaker 1: not appear to be uh think that the CBDC is
Speaker 1: very important. If maybe have a different FED chair, we
Speaker 1: got to get a different outcome. So at the moment,
Speaker 1: it seems like the US will be probably one of
Speaker 1: the uh not definitely not the first country to have
Speaker 1: something like this. Okay, so now let's uh, let's let's
Speaker 1: let's take the situation that we have and let's just
Speaker 1: hypothetically kind of game plan this out. So, um, it
Speaker 1: seems like you know, we're I think you know, you
Speaker 1: have the you know, whatever the Peter shifts or whatever
Speaker 1: that I've been calling for this system and the Mike
Speaker 1: Maloney has been calling for Denver, you know, ten twenty years,
Speaker 1: and I think they're they're right, I mean factually, like
Speaker 1: this doesn't work over the long term, but like how
Speaker 1: long can it go for? Like we don't know? Right,
Speaker 1: they seem to have more tools up their sleep than
Speaker 1: most people had had thought. But we're starting to see
Speaker 1: serious cracks with the Bank of England and to your point,
Speaker 1: they're not one of the top banks, they're one of
Speaker 1: the smaller ones. But Bank of Japan has their big problems.
Speaker 1: The e c B has got massive problems the dollar.
Speaker 1: The FED has opened up swap lines with these central
Speaker 1: banks to basically bring them on their back and provide
Speaker 1: this liquidity to them. And so kind of Brent Johnson's
Speaker 1: dollar milkshake theory. Maybe the dollar just continues to rise, rise,
Speaker 1: rise stronger as it continues to build these out. But
Speaker 1: eventually the same constraints are going to hit everybody at
Speaker 1: different times. Which is one, do we continue to just
Speaker 1: print this money and rage inflation or do we let
Speaker 1: the whole system crash? I mean, it doesn't keep going
Speaker 1: for a while as right now we're seeing the Lebanons
Speaker 1: and the and the Turkeys go down, but eventually we
Speaker 1: see the Bank of England and the Japan's go down,
Speaker 1: and then the ECB and then finally the dollars the
Speaker 1: last one standing. But then they're still stuck with the
Speaker 1: same constraints. Is that kind of how you see this
Speaker 1: playing out over a period of time. So I think
Speaker 1: that you know currency and so this is ultimately so
Speaker 1: a question of confidence. So what we see right now,
Speaker 1: what's happening is that globally, people who have the most
Speaker 1: confidence in the US. And if you have problems in
Speaker 1: the euro Zone, if you just look at you know,
Speaker 1: the euro is appreciating a lot. That means a lot
Speaker 1: of people are moving money from um Europe to here.
Speaker 1: And similar in Japan and similar to many other countries.
Speaker 1: It's it's you go to where you feel it's the safest,
Speaker 1: and the US here we have positive interest rates, we
Speaker 1: are secure, food, secure, energy, secure, there's no war and
Speaker 1: in your nearby so um, if there's unrest in the world,
Speaker 1: the US is going to be the ultimate beneficiary. I
Speaker 1: think we see this now, I expect this to continue.
Speaker 1: So now continue strengthening of a dollar. That that sounds
Speaker 1: reasonable to me. Um. But as we've been discussing, the
Speaker 1: US is not has probably has its problems as well.
Speaker 1: Ultimately we will not be able to keep printing and
Speaker 1: spending forever um. But there's a sequence to this. First,
Speaker 1: the weaker countries, the periphery, UM, they have their problems.
Speaker 1: They fall, money comes to the US concentrates, but eventually
Speaker 1: you'll have the money is going to have to go
Speaker 1: somewhere else as well, because the US has its own problem.
Speaker 1: So what what it could happen is that it can
Speaker 1: just go into things like real estate um or you know, commodities,
Speaker 1: things like that, things that cannot be printed um. Because
Speaker 1: if the question is ultimately that the people who manage
Speaker 1: our currency system, the government, is not doing a good job,
Speaker 1: then you want to go to items or things where
Speaker 1: the government cannot mismanage, and that those are more tangible
Speaker 1: things like real estate and you know gold, maybe even
Speaker 1: that maybe crypto as well. Yeah. Yeah. Bloomberg Intelligence put
Speaker 1: out a piece of work that they said that they
Speaker 1: think they could see bitcoin transition from a risk onto
Speaker 1: a risk off asset by end of two So that
Speaker 1: could be interesting. Um. You know, I've often said that
Speaker 1: that Wall Street trades bitcoin like a risk on asset,
Speaker 1: but it's not a risk on asset, and so um,
Speaker 1: there's like this mismatching perception of reality. So it's trading
Speaker 1: like a risk on asset, particularly because of Wall Street, UH,
Speaker 1: you know, has taken such a big chunk in it
Speaker 1: and the market small. But we're seeing in about four
Speaker 1: billion people in the world living under totalitarian regimes with
Speaker 1: triple digit or double digit inflation. Um, they're using bitcoin
Speaker 1: to get out of UH, confiscation, high levels of inflation. UM.
Speaker 1: I covered it yesterday on the radio. Sub Saharan Africa
Speaker 1: is the is the largest place of adoption happening. If
Speaker 1: you look at transactions under a thousand dollars, like eight
Speaker 1: percent of a we're happening there and so you go
Speaker 1: where the pain is the highest. And so at some
Speaker 1: point that reality flip flops, right, UM, So it'll be
Speaker 1: interesting to see how that happens. UM. So that sequence
Speaker 1: that you talk about weaker countries falling first, UM, money
Speaker 1: moving to the stronger ones to the us D. Than
Speaker 1: eventually though the USD is gonna have the same problem,
Speaker 1: and then people will find other outlets for that um
Speaker 1: and so whether that's the real estate, which has been
Speaker 1: a traditional one, or stocks, gold, bitcoin, etcetera. Timing So, uh,
Speaker 1: you have the Harry dance out there, you know, and
Speaker 1: plenty of other people Jeremy Grantham, Um, you know we're
Speaker 1: in a textbook bearer market bounce, we have a fift
Speaker 1: drop in front of us, um, etcetera. But then there's
Speaker 1: other people that say, no, the market structures holding up.
Speaker 1: The FEDS kind of has things going. Money is coming
Speaker 1: to us because the markets are worse, and maybe we'll
Speaker 1: just kind of continue and muddle kind of along. Um,
Speaker 1: which camp do you find yourself in? Obviously without a
Speaker 1: first of ball, Yeah, I I don't really so don't
Speaker 1: think we have a crash in mind? So and I'll
Speaker 1: tell you why. So, just like the framework that we
Speaker 1: were discussing, the periphery falls first and money goes to
Speaker 1: the center. We see the UK falling, right, So they
Speaker 1: come out with this okay, so their bond market goes
Speaker 1: crazy and their and their currency depreciates. That means a
Speaker 1: lot of people are taking money out. They don't have confidence, well,
Speaker 1: they don't like the outlook in the UK, or maybe
Speaker 1: they find the US more attractive, and they're putting money here. Now,
Speaker 1: I was actually just having this conversation with a foreign
Speaker 1: based investor. Suppose you are a UK based investor and
Speaker 1: you invest in the Nazzack. Okay, you're today, you would
Speaker 1: have lost a lot of money, right the NAZAC went down. However,
Speaker 1: when you look at it pound terms, you're not really
Speaker 1: down that much. Maybe you're even flat because even though
Speaker 1: the NAZAC is going down. Uh, you you invested in
Speaker 1: dollars and um, so in local currency. As a dollar appreciates,
Speaker 1: you're earning that in pounds and the same thing. In Japan,
Speaker 1: for example, you can see the Japanese currency basically went
Speaker 1: from a hundred to add hundred forty, right, almost appreciation.
Speaker 1: So if you're a Japanese investor and you invest in
Speaker 1: the US stocks, sure the stock market went down, but
Speaker 1: the dollar appreciate a lot, so in end terms, your
Speaker 1: account looks more or less the same. Now, this is
Speaker 1: going to happen to a lot of foreign investors, so
Speaker 1: they're going to want to put money in the US
Speaker 1: because even if the U s stock market goes down
Speaker 1: more um, they're going to earn money from the fics
Speaker 1: appreciation and all it's going to go up, so they're
Speaker 1: not really going to They're going to be buffered from
Speaker 1: the losses in the stock market. That kind of puts
Speaker 1: support in the US. So much foreign money going in
Speaker 1: and just buying US assets. If that's the case, I
Speaker 1: think it's it's hard to have a crash. Um you
Speaker 1: just have a lot of forere money pouring in and
Speaker 1: making money off the currency, the dollar appreciation. It's a
Speaker 1: good point. It's a good point. We talked about money
Speaker 1: going money, money increasing, and money decreasing and the booms
Speaker 1: and US and so well, maybe the FED is decreasing
Speaker 1: the money supply now we were also increasing because we're
Speaker 1: attracting all this international capital at the same time, it's
Speaker 1: kind of instaying and then supply and demand. Are we
Speaker 1: going to have more capital coming in and then the
Speaker 1: rate that the FED is decreasing it by um It's
Speaker 1: it's a it's a similar thing as I was just
Speaker 1: talking about with bitcoin taking adoption in you know sub Sarain,
Speaker 1: Africa or Lebanon, where you have to break into the
Speaker 1: bank to even just get your own they're literally robbing
Speaker 1: banks to get their own money out and so, um,
Speaker 1: you're like, well, shoot, I guess I'll just take bitcoin.
Speaker 1: I mean, it's down six, but that's better than losing
Speaker 1: all of it. Um kind of a thing. But to
Speaker 1: the yeah, lose, I'm sure the bitcoin is like if
Speaker 1: you in local currency terms, they're not losing anything because
Speaker 1: they're probably gaining. Yeah. Yeah, um yeah, that's a that's
Speaker 1: a really good point. Um man. I think that's good.
Speaker 1: I think we've covered a lot of ground. I appreciate
Speaker 1: you giving us that last bit of insight. You don't
Speaker 1: think there's a crash, and you told us why, So
Speaker 1: I appreciate that. Um. And you've been a wealth of knowledge.
Speaker 1: I appreciate that. Um. So. I know you're pretty active
Speaker 1: on Twitter at fed Guy twelve. We're gonna make sure
Speaker 1: we link down that below. You also have a website
Speaker 1: fed guy dot com. Yea, um, anything else that you
Speaker 1: want to attention to. I know many, very many of
Speaker 1: their audiences are interested in monetary policy and the financial system.
Speaker 1: I also have this book it's called Central Banking one
Speaker 1: on one. It teaches you about how the FED works,
Speaker 1: what the international dollar system is like, and um, a
Speaker 1: lot of a lot of the mechanics of the financial system.
Speaker 1: So if you guys are interested, check it out. It's
Speaker 1: on Amazon. It's very well reviewed of Oh yeah, you
Speaker 1: have four ratings there. Yeah, it's almost five stars. So
Speaker 1: I think it's something that would be helpful to your
Speaker 1: audience if they're interested in the financial system. Yeah. I
Speaker 1: love that you have the money printer on top and
Speaker 1: you use the word you use the word money printing,
Speaker 1: which we all use. It's obviously we all know that's
Speaker 1: not how it works, but but but that's the common language.
Speaker 1: I'm gonna make sure we link to that Amazon uh
Speaker 1: description down below, and I'm gonna buy it as soon
Speaker 1: as we get off of this call as well. Leave
Speaker 1: your review on that. With that, Joseph, I guess the
Speaker 1: go ahead and ended. Yeah, thanks so much for inviting me.
Speaker 1: It's a pleasure. Mark, thanks Jovins. All right, that's a rap.
Speaker 1: Thanks for listening. Hopefully you got as much good information
Speaker 1: about this conversation as I did. It's always great to
Speaker 1: get a different viewpoint and more specifically somebody who has
Speaker 1: intricate knowledge of the inner workings of the financial system
Speaker 1: and specifically the Federal Reserve, the Central Bank, and so
Speaker 1: it was a great conversation. Hopefully enjoyed it. Check out
Speaker 1: the links in the description, follow him by his book,
Speaker 1: follow him on Twitter. And that's what I got to
Speaker 1: your success. I'm out.