Stephanie Pomboy: Has The Grand Game Just Changed?

0:00All right, and we should be live. Welcome to Thalphamoney. I'm Thalphamoney founder and your host, Adam Taggart. And we are very lucky to be joined today again by the macro maven herself, Stephanie Pomboi, for her monthly macro and market outlook. Hi. Hi. Hi. Here I am. I'm doing great. How are you doing? I am good. Let me just get rid of this conference banner all that I'm sure I'm going to bring it up again at the end of the discussion. I'm doing great. Things should come in fast and furious both in the the outside world and also in the Taggart inside world. So I look a little glirriined and here's still wet. Please forgive that. But first, Stephanie, let's start with the most important thing here, which is that your knee is recovering quite well. It seems. Oh, I thought you were going to ask the most important thing is will amina, but that's okay. That is me. I'm sure. Yeah, I'm

1:02getting there. You know, I have never broken anything before. So this is all new to me and it's frustrating to be mentally prepared to do everything I used to do, but have my body not quite be ready to be there. But I guess this is part of the recovery process. But everything's going great. Thank you for asking. All right. Well, and then now that you've shamed me, how is Will amina doing? And how I check it. She's doing great and she's snoring at my feet here. So if you hear those soothing sounds of bulldog, I apologize. I can't mute her. Now they're very soothing. I hope we hear them. All right, Stephanie. Look, as you know, I have to name these live streams before we've actually talked with one another. So hopefully this title will hit near the mark of what we're going to discuss today. The title is has the grand game just changed. And I pulled that out because there's a lot of things that have been going on that are that have the potential to be sort of game changers going forward. I've got a whole list of

2:07them and obviously probably have some of your own. But I'd love to get your reaction to some of these things. First off, we have a Fed that is really seemingly trying to become much more non-interventionary. Kevin Warsh is an e-referring this at his Jackson Hole speech. He is trying to restore the purity, the integrity of the market signal. All right. And as you know, for decades now, the Fed has been one of the chief culprits in placing its thumb on the scale by all the interventions it's done. And Warsh and I agree with him on this. He said, look, you know, we should be reacting to the market signal. The market shouldn't be reacting to us. The market is a much more efficient machine. And therefore, we really want to understand what that machine thinks. So I interviewed Dr. Art Laffer about a week ago who knows Kevin personally and has for a long time.

3:10And in his words, he thinks Kevin is going to be one of, if not the most meaningful Fed shares of his lifetime. And he shared online, shared on the video. So I'm sure he's not uncomfortable with me sharing it. But he's 86. You know, he's, yeah, I know. He's not a lot of Fed shares. And he's personally known them. I mean, if you know, back to Mjeszni and so obviously that's pretty high praise coming from him. He sees that Kevin's role, he thinks could be like measured in decades, like he thinks that he might be at the Fed for the next 25 years. You know, Warsh is still relatively young. Who knows? But you know, if that's the case where we've got somebody in there who really tries to restore the Fed to the resource of last resort versus the resource of first resort, it has been playing for the past couple of decades. And can, you know, potentially sort of sit in its hands as we go through run of the mill corrections and not jump in.

4:17That just could be a really different world. In fact, I think it's a world I'd like to live in. But I'm curious. Yeah. Agreed. I mean, basically, we're talking about eliminating the Fed put that has been put in place with Chairman Greenspan in 87 and has been steadily burnished. You know, Fed Chairman after Fed Chairman for the four decades since. And I think it's actually kind of an interesting parallel. We can get into this when we get into a broader market conversation as opposed to just talking about the Fed right now. But thinking about Kevin Warsh's tenure similar to that of Greenspan in terms of taking the reins at a time when he is clearly articulating a very hawkish position as Greenspan did in 1986 when he was appointed. And watching the long end of the yield curve edge higher and higher and higher while the stock market essentially is thumbing its nose at higher interest rates, which is exactly what happened from, you know,

5:22the end of 1986 all the way through the summer of 87 into the fall until finally, the stock market couldn't defy the pull of, you know, interest rates any further. But it's kind of an interesting parallel because both Fed Chairman were green came in, had these grand plans to be more hawkish. And in the case of Greenspan, obviously not only did he end up having to capitulate, but he then became the father of the Fed put. So it's kind of just an interesting context. And I think about it every day as I watch these 10-year yields here, but also globally move higher and higher. And equity investors, at least to listen to the financial media and all the pundits who get paraded forth there seem to be not terribly perturbed. I mean, they see it, you know, as something that's not super positive, but they don't view it as an existential threat to the economy or the stock market right now. Right. Yeah. Being the operative word is exactly. Okay. So I'm

6:28going to contrast Worsh with Besson in just a second, but let's do that through what's happening with yields. So we now have long-term treasury bond yields back up at heights where they haven't been for a long time. I should know this up top my head, but I don't. I don't know whether we're talking a decade, whether we're talking. I think it's 2000. You know, I have to double check, but I thought it was since before the global financial crisis. Okay. So basically the highest that's been in two decades. Yeah. Yeah. And I think the big question right now is just how high is it going to go? Right. And so we have we have been, it was funny when the fed started hiking rates in response to the crushing inflation that we saw back during COVID. There was a lot of discussion about, okay, well, look, the economy is a lot more indebted now than it was in Besson. It was in previous

7:29cycles. Yeah. At what yield does the economy start to really buckle under? And back then when I was asking that question, people were saying like three, three now. Yeah. And obviously the economy right now is able to withstand, you know, five plus on the 30 year. I guess, so there's that question plus a lot of people have said, hey, look, you know, the past 40 years was, you know, a bond owner's market, right? You had nothing but declining yields and therefore prices were going up and it was just a wonderful time to make money in the bond market. A lot of people are saying that era has now ended. Interest rates are going to be on a secular rise going forward. Whether that's true or not, that's what the short term, you know, Gamefield is seeing right now, has been higher and higher rights. Two questions for you. One, are do you believe that we are in a

8:32secular new era for higher interest rates going forward? And two, do you have kind of a best guess as to how high it'd be too high for the economy to bear? Well, I'll answer the second question first, if I may. And that is I have been really sort of my view of the markets has really been shaped by one chart. And I think I've confessed this for years. And that is the long-term chart of Treasury yields. And just noting the financial crises that we've had over the last several decades and what you find is that we have had financial crises occur at successively lower and lower levels of interest rates, which is not surprising because we have been levering up more and more as interest rates come down. So your sensitivity to any increase in rates increases dramatically as you take on more leverage. So just going back to that chart as a

9:32frame of reference, I was one of those people you talked about earlier who was saying, you know, we can't handle the truth when it comes to higher rates. It rates will barely move higher and it will be lights out for marginal borrowers and the economy. And we have seen, you know, obviously, you and I have talked about it endlessly. This parade of corporate bankruptcies, which is the greatest wave of corporate bankruptcy since the global financial crisis. It's just that they haven't, you know, been high profile enough to capture the attention of the average investor out there. But there have been a lot of credit stresses and obviously you see it on the consumer side too. It's just it hasn't reached that point where it sort of devolved into a crisis yet. But I think you've got clear stress under, you know, behind the curtain that's building and we know what we've seen a lot of, you know, re marks for the private credit world where, you know, assets that actually

10:36have to trade are trading at huge air cuts to what they were marked to prior. So we know that all is not nearly as strong underneath the surface thanks to these higher rates and the massive amount of leverage in the corporate sector as well as the, you know, the public sector and the consumer. So I think that that's my answer to the first part is that I'm one of the people who would have thought we would have had a crisis by now. And I think when I go back and try to explain why it is that we've made it for basically three years or actually four, you know, they started raising rates in 22 without we had SVB. And again, we've had all these corporate bankruptcies, but we haven't had, you know, a cataclysmic financial meltdown. And when I try to conjure some explanation as to why we've managed to withstand a level of interest rate increase that I never anticipated we would, I keep coming back to the idea that the markets were so

11:39inured to the Fed put that the attitude starting in 2023, you know, after SVB, the Fed came in and immediately started to, you know, inject some juice into the system again. And so that furnished that Fed put again. And the investors basically, you know, starting and as they put together their forecast for what 2024 was going to be like, we're factoring in Fed rate cuts. And then in 2025, Fed rate cuts. And then in 2026, you know, so it's, it's just year after year, they say, okay, well, it didn't happen this year, but it's right around the corner. And so what they do is they do these extended pretend games just to get from today to the moment when they think that Fed is going to cut. And what's really important now, obviously, if you take Worsh at face value is that this notion that the Fed is going to cut anytime soon has just gone right out the window to hear him talk. As you said, you know, first off, the Fed isn't going to be interventionist. It's not going to

12:43run in with the fire hoses any time the market gets a little, you know, discombobulated. So that Fed put is going to start to become less of a factor. Problem is, you know, going to dog analogies like Pavlov, we spent the better part of four decades tutoring investors that the Fed would always be there. And I think that you untrain that behavior in four days or four weeks or whatever. It's going to take repeatedly getting bonked over the head with this hawkish message. You know, we're going to need to see the stock market, for example, down five or 10% in a handful of days or weeks and Worsh refused to have any kind of dovish commentary related to that. And we're going to have to do that over and over and over again to persuade investors that, hey, maybe this guy actually

13:43means business because I think right now part of the issue is you've got the administration kind of talking out of both sides of its mouth. You've got best of it on the one hand who couldn't be more interventionist. You know, first he does the Yen intervention than that fails. Then he comes forth with this treasury buyback announcement and that kind of the announcement flugged. We'll see what the actual execution does. But then at the same time he's getting up there talking about all these things he's going to do to intervene in the markets. Worsh is saying, I love the fact that the bond market is sending us a signal and we don't really need to tighten because effectively the bond market's doing it for us and this is how it should be. You know, this is how monetary policy is supposed to operate. So I can understand why there's so much uncertainty on the part of investors right now because you're getting two different messages and the theory and I'd be interested in what you gleaned from art laugh for on this because he's been long talking about a Fed Treasury Accord, Allah, what Voker did, you know, in the 80s and the idea was I thought

14:49that basically you would get the Treasury to go in and beat Congress down to get a little bit more fiscal restraint that would just naturally reduce pressure on the long end of the yield curve that would enable Worsh to actually make good on his promise to shrink the balance sheet. And then as those rates came down he could also start to cut the Fed funds rate. So I thought that was generally the hope and expectation but right now the markets are certainly not cooperating if that's the plan. Okay, I'm going to ask you in a little bit about has the put just been transition from the Fed to the Treasury? Yeah. But let me ask a couple of questions first. So I'm wondering if one of the reasons why we haven't seen the economy buckle as much as maybe we would have thought if asked a year or two ago, what do you think it's going to be like with it? 30 or at five point? Where is it right now? Like 5.3 or something like that?

15:52So they are around 5.2 I think. Yeah. Okay. And there's three things I can think of off the top of my head that maybe softening the blow. One is, you know, the massive amount of AI Catholics spending that's going on right now, right? That's just it's going directly into the economy to build these data centers and stuff. So that is directly stimulated to the economy. We have had a boom in manufacturing with all the reshoring efforts and government grants going into that space. So the heartland of the country really has had a quite a nice turnaround. It's still a turnaround that's in progress but a lot of manufacturing has re-emerged there. And then third, yes, higher interest rates place greater gravity on the economy, but they also act as a stimulus. I mean, at 5.2, 5.3 is going into the pockets of whoever owns those bonds. And there's a lot of older people out there that own a lot of bonds.

16:56So there are all three things that could be pushing this. Do you agree, disagree? Yeah, I absolutely agree on the AI thing I would add in the corporate profits boom related in large part to that, but I would also acknowledge that that's a relatively new story. When the Fed raised rates in 2022 and then we had SBB and then year after year after that, investors were looking for the Fed rate cuts. AI wasn't driving economic activity. You know, in 2023 and 2024, that's relatively. That's like the last 12, 18 months that we've really seen that become a huge story. And obviously, you know, 50% earnings growth related in large part to that has been a huge tail. When that's enabled investors, you know, if you're an equity investor, you can look at the fundamentals or liquidity. And one of them has to be operating in your favor, if we're in a recession and the fundamentals are dismal, at least the Fed could be providing liquidity

18:00and therefore that gives you a tailwind. And so right now, you have the situation where the sort of hawkish stance of the Fed and the higher rate environment is being offset by positive fundamentals, which frankly, I much prefer to see. I'd rather see a non-interventionist Fed. And it caught me that, you know, and markets that are driven by economic fundamentals rather than interventionist monetary policy. So for me, if this is in fact where we're going, it's a very positive long-term thing. But in the near term, it's going to be a real come-up in for investors who are just not prepared for the kind of trial support that they've actually been tacitly relying on for four decades. Yeah. Also, you know, it does beg the question, it raises the question, you know, what if something happens to these AI cat-x flows, right? I mean, we're still in the

19:07middle ground here where we don't really know what the return on investment is going to be for AI. And if it's less than is currently imagined and folks who are imagining quite a lot, you know, those flows might start turning off. And then that would definitely remove one of those pillars of stimulus that I mentioned. And there are some kind of eerie echoes, you know, I was thinking actually yesterday about in the summer 2007, we saw the commercial paper market begin to unravel. And that was really the sign that the bubble tied to the whole housing market was actually the financial side of it. You know, you know, you had the housing bubble bust in 2005, but it took a long time for that to actually revert very back onto the creditors' balance sheets. But the first place you saw at the flashpoint was really the asset-backed commercial paper market. And that's started to come in glue in 2007. And I was thinking about that because I'm thinking about, you know, the higher borrowing costs we're seeing for hyperscalers and the increase in credit default swaps.

20:12And so in the credit market, which is always the first to sniff out potential issues, there's clearly some anxiety around what you're talking about. Like, will the reality live up to the promise of AI? And is the circular financing and all of this, you know, malinvestment, you know, fear really well-founded? And it seems to be that the credit markets are saying, yeah, you know, we need to really demand a greater risk premium for this stuff. Whereas on the equity side, it's still fairly zippity-doodoo. Well, and it's interesting too. You know, this isn't a closed system. So with, you know, the hyperscalers increasingly funding their cat-backs with debt, you know, we have this dynamic where rates are going up on the treasuries for variety of reasons. But now they're also going up because there's just a lot more supply out there

21:13for credit purchases, right? I have to take credit for this because I was talking about forever, this crowding out of the public sector by all these private companies. And now I see it everywhere, everyone's having a crowding out. Okay, a little Johnny come lately. But one thing that's worth noticing is that you people fixate on credit spreads, and that's all they look at. And they'll say, well, junk spreads are narrowing. So everything must be fine. You bet junk borrowers are now borrowing at 7.4%. I mean, they were borrowing at four at the depths of the, you know, pandemic with zero money, uh, bananza. And that, that debt is rolling over at these rates that are now like, why is this? We've been talking about this for years, but in your opinion, is, are the chickens starting to come home to roost? You're seeing it again, you know, you see the bankruptcy, but you're also seeing ratings downgrades. And so I guess the question is, do we reach a point

22:16where the companies that are trying to roll their paper can't roll their paper because of the higher rates, but also the competition for capital, because if you're an investor right now, boy, you have plenty of options out there as to who to lend your money to, you know, the federal government needs a ton of money. I mean, this is need money, tumors need money. And then you've got this AI boom that's driving, uh, you know, corporate borrowing massively. Plus they're trying to roll 1.2 trillion dollars in debt from years ago. So, um, this is where you think you'd get to a point where some high profile company tries to roll their paper or tries to issue some new debt. And it really does not go well. And I think you're starting to see a little bit of that here and there, um, with some of these borrowers. Um, so, wait, stay tuned. But right now, you know, the, the, there's such a complacency

23:17around any potential risk coming from the, the credit market side that, uh, it's going to take a while to penetrate that, I would think. Okay. Um, all right, I want to get over to, you know, this potential new era of increasing intervention on behalf of the Treasury. Um, you know, Scott Thesson has recently, uh, you know, intervened with his version of operating operation twist to try to bring down these higher yields on the long end, which really hasn't been working. And he also intervened in the, the yen market, um, with, with Japan, um, which I'm sure Worsh has got to feel a little bit like, dude, I, you, you put me in the seat. I'm sure we hit, you know, they had lots of conversations about this new role of the Fed and being less intervention, it, interventionary. I'm sure Worsh is doing a little bit of like, hey, I'm trying to execute the playbook we talked about, and you're going to have the direction. Yeah. Real quick, I just want to read this, um, this

24:17post on X that I was reading right before we hopped on step. Um, and I believe this is the type of future you would like to see, um, that this is going back to the past, okay? The 1921 depression was one of the sharpest economic contractions in American history and the federal government led it burn itself out. Unemployment hit roughly 12% industrial production collapsed. Prices fell hard and fast. And within 18 months, the economy roared back without a stimulus package, a bailout, or a federal jobs program. Uh, the federal reserve created only eight years earlier in 1983, hidden inflated the money supply aggressively to fund World War I, the inevitable correction arrived in 1920. Prices had doubled during the war years and the credit bubble, the Fed had deflate. Um, pain was unavoidable. Um, President Harding did something no modern politician with Darrytem. He cut federal spending from 6.3 billion in 1920 to 3.2 billion by 1922. He slashed

25:21tax rates. He let wages and prices fall without propping them up artificially. Treasury Secretary Andrew Mellon simply allowed the market to liquidate that investments and reallocate capital toward productive uses. So he's basically saying we've had time in history where people were, let's say courageous enough, smart enough to say, look, the best clearing mechanism here is the market. Yeah. Let's not get in its way. In fact, let's try to take some things out, um, that we, that you know, that that that we've done in the past that has influenced the market like raising taxes and stuff like that. Like, just get them down. It's going to be painful. We'll take our looks, but it will truly be transitory. You know, the market will clear and then investment will start flowing back in when people start seeing good values. Um, I'd love you to be a reaction that in general, but I'm guessing that's what you would love to see here going forward. Oh, absolutely. I would like to see, you know, I'm sort of an Austrian, uh, in my

26:23economic bias. I'd like to see the economy do its own thing, complete free markets without this constant intervention by the Fed or the Treasury, which I think quite frankly is why we're in the situation we're in today. Where do I place the odds of that happening? Um, you know, I'd say very low, however, um, you know, Donald Trump, this is his second term. So he really has nothing to lose in terms of letting the economy actually go through some torturous cleansing of excesses. Um, because history, you know, with the benefit of time, will indicate that decision, but it will be brutal in the near term. So the question is, is he willing to have his legacy for the next five years be miserable and be the most hated president or whatever to then lived on in history as having done the right thing and actually set the economy back on a sound, uh,

27:28a fundamental foundation? Um, so we'll see. One thing I know for sure is there's zero chance of anything like that happening between now and November 3rd. Yeah. Because we've got to get, you know, that that's obviously, I think all of these policy moves we're seeing from the Venezuela oil, you know, 65, when is it 65 billion, billion barrels or? Yeah, I've got that on my list here. Okay. I can't change your cell. Yeah. From that to importing beef to, uh, Besson's treasury, buyback and outsmancer, you know, I think all of these things are desperate attempts to kind of get an upper hand in this affordability argument between now and November 3rd and they'll just do whatever it takes. Um, what happens after that, I think, remains to be seen. And there is, you know, you could make the case that like I was just saying that if they want to go down in history and really create a lasting legacy, they have an opportunity to do it by actually ending this era of massively interventionist policy. It's just kind of ironic

28:33to see all these crazy frantic interventions in the lead up to that kind of a shift. So, you know, it would be quite a, a traumatic change. Um, but yeah, I'm hopeful. I mean, uh, we'll see if Worsh is really the, the hawk that he purports to be. But I thought his, you know, I actually wrote the cover note for my report last week. I said, you know, you had Scott Bassett with a very interventionist policy and Kevin Worsh with a free market policy treatise. And the question is going to be how do those two play out over the next several months? Because they do appear to be at odds, but as you were saying, you know, it's hard to believe that they haven't been in discussions together and have some kind of game plan, a joint game plan for where they're headed. Well, I asked, uh, I asked Dr. Waffer about this because he, you know,

29:39he's been an advisor to presidents forever on both sides of the aisle. And, uh, I don't know if he knows Scott Bassett personally, but I'm sure he's one degree of separation from that. And he knows Kevin very well. And he was like, he almost laughed it off. He was just like, um, no, it's not trauma. It's not a battle between the fed and the treasury. He said, they're just serving different masters. Right? You know, Worsh has to obviously report the banking system and then has whatever mandate he thinks he has, you know, to be independent and all that type of stuff. And he's like, best in the day, works for Trump. And, you know, Trump at times is just going to tell Besson, get this done and Besson just has to say, yes, sir. Right? So that just might be the case here is what I was thinking. Okay, so, um, do you think, and maybe it's too early to tell, but do you think that the chief and herbiner going forward from here is going to be the treasury

30:43instead of the fed? Well, in the near term for sure, but the problem is, and this is what I wrote about for my clients this week is this idea, you know, when Besson came out, first with the yet intervention, obviously a spectacular failure, um, and one that he should have known full well going into it was going to fail. You know, this is the guy who was at George Shorra's his right arm, uh, when they went up against the bank of England and, you know, a central bank can only push its currency in one direction indefinitely. And that's lower, you know, printing money can get your currency to go as low as you want. Right. He can't make your currency go up indefinitely. You can do these little tweaks around the edges, but ultimately the fundamentals will always win out. Um, and that's what George Shorra's proved to the bank of England. So I, I thought it was kind of a, uh, a little bit of a reckless gambit on, and a desperate gambit on

31:44Scott Besson's part to get Japan to stop liquidating treasuries. Um, so then when he came in with the buyback announcement, which, you know, going from two billion to four billion, it may not sound like a whole lot. I'm sure on a production basis, it could be meaningful. Um, but when the markets didn't really seem to view that as having a whole lot of, um, he dropped a little bomb about the TGA and using the Treasury General Account to fund these buybacks and, you know, made the, calm, the observation that that's almost a trillion dollars worth of firepower that he would have at the ready to buy back treasuries. And I'm just gobsmacked at how many people ran with that and said, yeah, well, we don't want to get in front of that. He's got a trillion dollars to hold down the long end of the yield curve. So, you know, he can get a lot of time. Well, I don't know what world they're in because we're running a two trillion dollar deficit. Where do they think that Treasury has some secret trillion dollar slush fund that they can access with which to buy down

32:49the long end of the yield curve? They don't. This is a checking account. Not money is all been pledged and then some. It's just that right now, do the vagaries of the calendar. There's a trillion dollar sitting in there that hasn't yet gone out. So he can in that interim tap some of that money. But ultimately, he's going to have to replenish that. That money just doesn't drop from the sky. So he doesn't have a trillion dollars. It's all nonsense. So I think he did that to kind of scare. This is my new theory on it just as short term. You know, I'm viewing everything through the lens of whatever it takes before the midterms. So that's kind of my operating framework now. I was still going to do it. He's just using that to scare off the bondage. Like don't get in front of me. I'm going to zort you with my supposed one trillion. Right. And if you look at, and I've been highlighting this for a while, if, you know, I've been bearish on rates saying yields were going to keep going higher. But the one caveat I've talked about is that you have this massive

33:51speck short position in the long end of the yield curve. And if they got a sense that either they're going to be some kind of fantasy, you know, fiscal discipline or that, you know, best it was going to immediately stop be showing any long dated paper or whatever. You could have the catalyst for a massive short covering rally. And it would be sizable because we've never seen short positions really this large. So I think that was it. He's saying, here, I have a gun and it's loaded with a trillion dollars worth of TGA money that I can use to scare you guys off. So get out of that, you know, short, you're short positions. And obviously that would send bond prices higher and yields lower. Right. And if he can just in the short term, in the short term, that's the key is it wouldn't be sustainable because nothing would fundamentally have changed because he doesn't have that money. And he's going to have to replenish it. And off there is no fiscal discipline and yachty foreign central banks are still diversifying and all the all of that stuff. But if he can do it and flesh them out in the next month, then interest rates

34:58come down, mortgage rates come down. And it might be enough for the average Joe who's headed into the polls for the voting booth for the midterms to say, hey, look, you know, suddenly mortgage rates down a hundred basis points. This whole affordability thing is starting to look pretty good for me. So I think that's that's the gambit. But just to go off on a tangent a little bit, what I proposed is that if Scott Vessent really wants to have a trillion dollars to put forth sustainably toward holding down the long end, he could do that tomorrow. And all he has to do is revalue the gold reserve from $42 an ounce to where it is today. And that reserve would go literally from 10 billion to one trillion overnight. So he could do he has that potential kitty there. So that's just something to kind of keep in mind. I know it's like a radical idea, but we could end up that could become more of a mainstream conversation. Okay. Can I ask you this? Why do we do that? Why do we still

36:03I don't know. Rolled on the books at such an antiquated amount. It's a really good question. I wish I had an answer. I have no idea. But when you know, Vessent, everyone remembers when he was first appointed, he made that oblique comment about monetizing the asset side of the balance sheet. And a lot of us gold bulls immediately started doing this. You know, okay, what's the number that it'd be? You know, so who knows? It's probably in the realm of conversation somewhere. But you know, I'm not proposing that that's going to happen anytime soon. But I think it will become more of a a discussion point. If the the bottom market continues to do what it's doing here right now. Okay, Kevin here in the live chat just mentioned the next question I was going to go to. And let me see if I can share my screen here. That's like Kevin Worsh, is it? Yeah, not Kevin Worsh. Unless he's going into here. All right, so yeah, I think this is right.

37:15All right, can you see this? Yes. Okay. So, Japan's bond yields have been just going off to the races. And I think, you know, my glass is on here, but I think they're up near 3% this point time, 2.8% or something, I think. So this has potentially really big implications again, the whole topic of this title of this live stream is game changers. Could these rising yields get to the point where the carry trade really starts to break down because there's just not enough of an arbitrageable difference between Japanese debt and US treasury debt? Well, I think the answer depends on the dollar yen relationship because that's been the offset. You know, they've been raising rates for a while. And initially the concern was when the B.O.J. abandoned the yield current control that you would

38:19abandon all of this, this carry trade that's been in place for years and years and who knows how many trillions of dollars are tied up in it. But the weakness of the yen became the vow. You know, that came the opportunity. And that's why I thought again that Besson's intervention was a little bit of a high risk gambit because on the one hand, he's trying to get them to stop selling treasuries, but he risks unwinding the carry trade if all those speculators felt like he was serious about continually, you know, if the US and the big or the Ministry of Finance got in there and were on a regular basis intervening and basically had like a yen foot, you know, we're going to hold the floor here. Then that could have, you know, meaningful implications for financial markets all over the globe because the the yen carry trade was just, you know, sourcing money to put positions

39:22on all over, you know, from emerging markets to Europe to, you know, AI, hyper scalers and all of this here. So everything would get tied up in that if he did pull the rug out from under it. So I think, you know, it's kind of a global answer, but rates in Japan obviously are skyrocketing and there's negative implications for their debt and deficits just like we're seeing here as well with soaring interest expense, but as really to the carry trade, I think it all depends on whether they can stem the decline in the yen. And again, you know, it's really hard when a currency is fundamentally moving, you know, it's moving lower for fundamental reasons, yeah. You know, then it's a very hard job to try and fight that. And again, you know, I go back to Soros versus the Bank of England. He just made that wager like you cannot fight the fundamentals indefinitely. You

40:22can try and you can spend a lot of money. And the thing with the central bank is that the money they spend is quantifiable, you know, yeah, that's why Soros was able to hold the line is, you know, he would get beaten up, but he would be able to quantify. Well, they only have this much ammunition so all I have to do is suck it up for another, however many, you know, iterations of this. All right, so he touched it a little bit on this earlier, but just real quick stuff. How seismic would it be if at all, I think it would be somewhat at least, if the carry trade did go away. Gosh, I mean, I have no window into how you would quantify that really. Just that it's been around for so many years and it had been the chief source of financing for a lot of lever positions. But I wonder if it really became less and less of a factor as we got into our own 0% money spectacular

41:28here. So it may not, you know, I think it would be impactful, but it may not be the systemic rug pull that it would have been, let's say pre-COVID, for example. And I don't know the answer to this. Maybe you better insets an idea, but let me just, let me just pull up one more picture here. Let's do it. And you were talking earlier about how much more leverage the system is now than it was in Eras past. So here's just the federal debt, right? And there's also private debt on top of this. But I just want folks to remember, back during the dot-com bubble, the federal debt was a quaint, you know, less than 6 trillion. And going into the great financial crisis, it was under 10 trillion, right? It had doubled. That's a big deal. It doubled in about 10 years. But it was less than 10 trillion. Now, obviously, it is more than quadrupled since then.

42:37This has got the, this doesn't have the latest 40 trillion number on it. But yeah, going from under 10 to 40 plus trillion is more than a congrupling. So you talked about how a lot of levered bets are made off the carry trade. I mean, the world is just so much more levered now. So potentially could that make the carry trade ending even more significant because all those levered positions, you know, if those flip over, the guys holding onto that leverage, all of a sudden, they're really vulnerable. Yeah, oh, absolutely. But I think it's also just a point, you know, whether it's a position via the yen as the source of borrowing or dollars or whatever, just the pure leveraging of financial assets globally is a huge vulnerability, especially in an environment where you're seeing global bond markets re-rate in pretty aggressive fashion.

43:38And by the way, this isn't the whole picture, but margin debt is at its highest level level right now. Yeah. Yeah. So that's a sign of that extreme leverage. Yeah, absolutely. And then, you know, just getting sort of granular people who are dismissive of these concern about leverage and the impact of higher rates on it will point to things like, you know, 50% earnings growth, and therefore, US corporations can easily manage any increase in debt service because they're making so much money. But again, you've got to think about this as the halves versus the have not because the balance sheet positions of the top 10 companies is decidedly different than it is for the 490 other companies. And that's just in the S&P. I mean, if you broaden the lens out to all US companies, it's much less inspiring. But even in the bag 7, we're now seeing companies go

44:40free cash flow negative. So this myth about corporate balance sheet strength, hopefully, has been shattered. But if not, it will be as these higher rates really begin to bite into earnings at some point be a higher interest expense. And then for the marginal guys, maybe to the point that they just can't continue as a going enterprise. So that's why you've seen a lot of these corporate bankruptcies is presumably they were highly levered and their debts were rolling at substantially higher rates and they just couldn't make it happen. All right. So, it's now forget about 12 minutes left. I want to try to squeeze one more main topic in there before we start wrapping things up. So you mentioned briefly earlier the deal, the agreement that has just been struck between US and Venezuela for a very substantial amount

45:42of Venezuela's oil reserves. And Trump is out there doing what Trump does best, which is pounding his chest and saying, this is the best deal in history. And I've just doubled America's oil reserves and all that stuff. And let me just say there's parts of this deal that I'm not going to address here in this conversation, folks, because we'll just be talking about it all day then, which is the morality of this is a lot of people have been saying, what are you talking about? We forced regime change on this country by kidnapping and removing Maduro. And this agreement is a gun to the head agreement. This isn't, we don't know if this is the will of the Venezuelan people or not, right? But generally as the deal is being pitched is it's great for everybody, right? This is, these are oil deposits that the Venezuelans themselves have had a tough time tapping,

46:46for the past close to 30 years under socialist rule there. There's been just massive underinvestment in the oil infrastructure after it was nationalized and it's pretty to crap it anyways. But I think a lot of the deposits that America is taking over here, I think might be ones that haven't even been tapped yet by Venezuela. So, Venezuelaans are looking at this saying, man, we're going to be spending the next couple of decades, hopefully rebuilding the infrastructure that's now outdated and we're going to tap those fields. We don't know when we're ever going to get to this other stuff. And so if the US comes in and is able to extract that and then sell it and give us a share of the profits, that's just great to us. And it's at least, it's a long lease, but it's 100-year lease and presumably, at the end of 100 years, if things aren't going great, they can just say, hey, you know what, we're not going to renew the lease and we're just going to keep all the rest for ourselves. And then obviously Trump is saying, hey, look, it's a substantial

47:46amount of new oil for us. The US is a country that has the most heavy crude refineries by far versus any other nation. And so we can basically use this stuff, we can sell it, we can mix it with our light-sweet crude and that actually helps us a lot in improving our refinery process to be able to get all the full range of the stillits. So that's up. So I guess my first question is, how much of, if this plays out the way that the people who are pitching us to it are promising, how big of a game changer do you think this is? Well, I mean, it's a game changer for us long-term. I think here again, the timing of the announcement is all related to trying to persuade people that oil prices are going to be coming down meaningfully at some point. And then if you can persuade them that they're going to be coming down meaningfully at some point, maybe you limit the degree to which they're going up in the near-term,

48:48you know, it helps dampen the increase in oil prices that's being driven by the situation in a ramp. So this is kind of a way to cushion the blow of that. Obviously, as you mentioned in your excellent you know synopsis of this whole thing, it's going to be a long time before any of that oil is actually being used refined and then actually used as an end product in a way that actually implement, you know, impacts the average person's life here in the United States. I totally get that. And I've just been asking questions around this announcement. I've gotten a huge ton of blowback because I think people miss the part where I say, you know, this could be a big deal assuming that it plays out the way that all parties are hoping for right now. But here's a comment from Jackalay. Venezuela is a nothing burger. It won't be relevant for five to ten years.

49:52I a thousand percent agree. Right. That's just how oil extraction works. You got to pay a bunch of money and put a bunch of, you know, infrastructure in first and then it takes a, you know, a while before the oil flows start coming. So I totally grant from that and I'll grant them the ten years. Right. Like we won't really see much that's going to start impacting the price of oil for a decade. Okay. But then there's as long as the least stands. Right. Then there's 90 years of excess profits and excess inventory like that should be a huge long-term bananza. And I do think if it goes out this way, it could really help suppress the price of gasoline for decades after the initial decade that we do our investments. Right. No, I would agree with that. I think that the next few years, however, it's irrelevant. Well, it's not irrelevant because as I said, you know, the degree to which people expect there to be massive supply down the road will help limit just how much higher

50:55prices necessarily go in the near term. I think it's a cushion in some degree. And it's helpful as a cushion not only going into the midterms with the Iran situation going on, but also once Iran wraps up and, you know, I think I mentioned this to you in the last conversation. I don't think oil prices drop like a stone. I know Trump is telling everyone as soon as we're done and so did best at yesterday. Oil prices are going to go down and everything's going to be fine. But the entire world now has to rebuild all its oil reserves that were depleted in trying to protect their their populations from the increase in prices. So there's a massive rebuilding. And then you'd have to assume that the AI bubble goes bust if you're going to have a bearish call on energy because that's another source of demand that would seem to be steady state, if not accelerating. So I think there are reasons why this helps long-term to dismiss it as sort

51:58of like saying if Trump, I mean, this would be a wild, but if Trump actually were able to get Greenland that suddenly having access to all those rear minerals wouldn't mean anything to us. It wouldn't be, you know, long-term. It doesn't make a difference. To me, to dismiss the Venezuela thing is sort of akin to dismissing that, you know, you're basically saying we're going to get the US access to all of these strategic reserves that are incredibly valuable and will become increasingly valuable as we move into this sort of AI-driven future. I'd be reluctant to poo poo it, but in the near term I'm an energy bill. I think prices are going to stay where they are in a minimum if not move higher, you know, not explosively, but just continue to edge higher based on demands both of the economic and cyclical demands, but also the replenishing of global resources. The SPR is globally. Yeah. No, I totally agree. And again, I think

53:00I don't think many people are expecting Venezuela to be a positive... Yeah, I'm moving the needle thing for years and I'm right with them, right? I do think it could really move the needle beyond that. Again, if everything goes as the way they're saying and you know, the next regime just doesn't come in and re-nationalize everything and all that stuff. I'm quite sure there's been a lot of provisions in the agreement and also some backroom, you know, discussions that say, hey, if you go, if you try to re-nationalize this, you're going to feel the full weight of the American military or whatever, but let me bring in two other things. But can I just get a quick thing in this? The one thing that it could do that could be beneficial immediately is that between Iran and Venezuela, we have now greatly compromised China's access to its main oil. So it could be more, you know, we're thinking about this in terms of analyzing the price of oil, but maybe we need to think bigger about analyzing it from the standpoint of Trump's trade

54:02negotiations with China, not, you know, trade, but also national security, all of the geopolitical issues related to trying to basically put a stranglehold on China. So this, you know, we're maybe too myopic in thinking about this strictly as an oil deal, because it may be just as much if not more so, a China deal. I completely think it is. I mean, a huge part of us going into Venezuela was to slam the door on China, which is trying to, you know, get more and more involved there. And I think very much the same thing with Iran, too. I think you can't look at Iran without looking at through the lens of the overall geopolitical game, which is essentially US versus China. So let me bring two things in here real quick. One is, you know, right now where the pressure between US and Canada has been, you know, ratchet it up, right? But I think all of

55:02this is a way, somewhat one man's opinion. I think all of this is a way, these 50% tariffs, right? It is a way to try to just force whatever final agreement is going to get struck to get struck, right? Both sides don't want these tariffs to last for very long or ridiculously high. And so let's presume for a moment that, yeah, okay, we find a way to come to an agreement that everyone's willing to feel somewhat decent about. And then Canadian oil starts flowing more so than it has over the past couple of years, right? Then all of a sudden, the US is really kind of, let's say in control, but has a lot of influence over Canada's oil and then as well as oil. And then if you add to that, and again, I'm making a lot of assumptions, folks, I'm not calling this as long as it happened. But if Iran capitulates, that's going to, you know, there are going to be concessions that come along with that, again, probably affecting its trade with China, right? So,

56:05first off, I have a hard time believing that the US, even if only two out of those three things happen, citizen's position is the gas station to the world. The role that the Gulf used to play. I think America, potentially, and maybe even likely, has rested that from there. And so going forward, the world is going to be increasingly dependent upon America for dependable oil supply. And admits all the other things that America is trying to do to reinforce its power in the rest of the world, you know, really being the main guy in town on oil. That's a massive lever. And I know a lot of people are going to say, oh my god, you know, Iran's not going to capitulate. But if you look at what's going on since we really ratcheted up the economic side of things, and basically decided, you know, we're just going to, we're just going to really tighten the screws in them through the blockade. Apparently, you know, things are going from bad to worse there

57:07inside Iran. And, you know, things continue that way. The regime is at some point going to have to buckle. It's going to buckle because there's a populist uprising. It's going to buckle because other members of the Iranian military start bolting. There's just a lot of reasons that if that pressure is able to be maintained, and who knows if it can be. But I think if the status quote or momentum continues, it's in the US's favor there. And again, I don't know, I've got no crystal ball as to what's going to happen. But I do know if the Iran capitulates. And we make nice with Canada and this Venezuelan puts out, you know, that's a game changer again, not for the next couple of years. But for the next couple of decades, high probability. Yeah. The one big if the Eden put in there, and I think it's the biggest if of all, is if the present administration or something similar to it prevails. Because if this Democrat socialist

58:12movement of the the Democrat party continues to gain momentum. And we'll see what happens at the midterms, but we're looking at 2028. All of this could come to a very swift end. Probably highly likely. Yeah. I was like president AOC or Moldami. Yeah. I'll be very likely. Yeah. I mean fossil fuels are not something they're going to embrace. Drill, baby, drill will not be part of their platform. And certainly not accessing oil reserves in Iran, Venezuela, and you know, cause, well, they will cause you have to Canada. But that's about the only thing they would do. So that's that would be my big if. And I hate to keep bringing it back to politics in the midterms. But ultimately, a lot of these policies are contingent on that. You know, this, it's very binary either we're going to continue on this plan or we're going to go 180 degrees the other direction. Yeah. And that's oftentimes what happens with countries, right? As the pendulum swings one

59:14direction, then it swings the next direction. And America has really been stuck in that of late, where, you know, the first four years of the new administration is just tearing down what the previous one did. Right. I mean, it really, what, what side you fall on almost doesn't matter. It's just sort of like you're continuously stuck in this, this pendulum of chaos and really not a lot of stuff gets moved forward. Right. So, yeah. Very clear. That is the multi-trial you know, your question. Here's that. And you know, at this point, we're just going to see how the midterms term work out and see what sentiments like from there. Okay. Well, Steph, we're here at the end of the hour. I've got a bunch of other questions for you. But we're just going to say until next time. So real quick, for folks that would like to follow you and your work in between now and your next appearance on Thalphamoney, where should they go? They should go to macro-mayvans-cleral-macromavans.com. And you can read sample research and find out how to sign up and all that jazz. Or follow me on

1:00:20Twitter at S. Palm Boy. Or here once a month. And then also for your conference, I'm so honored to be able to join you for that with my partner in crime. Mr. Williams, Grant David, Vincent Williams. Williams name? Yes. I have to bond with him on that. I'm a for name. Are you really? Yeah. And it is just folks never do that to your children. Why is it? Let's hear it. My true first name is Andrew. Okay. So it's Andrew Adam Parker Tiger. Andrew Adam Parker. Oh, okay. Yeah. So Andrew Adam Parker Tiger. That's true. Yeah. So it's just a place to stay with PSA and all that stuff. Right? Every time I go through PSA, I have to explain. I've got two first names and I'd go by this one. But the one you're seeing on my passport is the so it's a nightmare. Don't ever do that to your children. Okay. Yes. So Stephanie is going to be one of the featured presenters on the faculty.

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1:03:31as well as that little bell icon right next to it. Steph, thanks so much. I'll let you go and take Willough Meena out for a walk now that your knee is wonderfully functional. But thanks so much for taking the time to do this again. Always a pleasure. Thank you Adam. All right, and everybody else. Thanks so much for watching.