Transcription
So, the deal between Iran and the United States has allegedly been agreed to and will supposedly be signed on Friday of this week. Now, there's still a lot of details that could make the deal go south, but if it goes through, it means the next phase of the master plan can finally begin.
The US and Iran have reached a framework to end the fighting. A signing is set for this Friday. What needs to be worked out before then, what they're actually agreeing to, in what timeline, and what's left to be worked out is a very big question.
Now, regardless of what happens on Friday, the next phase of the economy will start on Wednesday because on June 17th, Kevin Walsh will chair his first Federal Reserve meeting. And I think it's going to be one of the most important meetings that we've had in a long time because what he says in it is going to determine what's going to happen to our interest rates, our stock market, and arguably the whole economy.
So, let me explain what I think is going to happen. Starting with something called the CME Fed Watch tool, which takes a look at interest rate probabilities. Now, it's showing us roughly a 97.4% chance that there will be no changes to something called the federal fund rate, aka we're not changing anything to interest rates. And I think the stock markets have already fully priced in this reality, right? This is not news for the market. Okay. Okay.
So then why is this meeting so important? Well, it's important because what Kevin Walsh says on Wednesday is going to matter more than what he does. And to understand why, I want to show you something. So gold just closed below what's called the 200-day moving average 3 days in a row. That is the longest streak since October 2023. Now, the last time that happened, the bond market almost broke. The Treasury Secretary panicked and injected liquidity by buying bonds, and as a result of that, the price of gold went on to triple over the next 2 years. Now, I'm not saying that gold is about to triple, but I am saying that the last time this happened, what followed was a significant multi-year rally across gold stocks and risk assets. So, I think something big is happening. And Wednesday is when we get to find out which direction the market's going to go.
So, in today's video, I'm going to show you what the plan is from Kevin Walsh to make everything about the US economy look really good and how I think he plans to solve the debt problem. And then I'm going to tell you exactly what to watch out for on Wednesday because there's two possible outcomes. So, with that said, let's get into it.
Hi, my name is Andre Jick. Hope you're doing well. Come for the finance and stay for the super cycle. Okay, so Kevin Walsh was nominated as Fed chair by Trump, and from day one, there was a very clear vision of what Kevin was supposed to do. Trump wanted him to lower interest rates because Trump wants the economy to grow and to make him more money.
"Did Kevin Marsh commit to you that he will push to cut interest rates if he is confirmed?"
"So, but we talk about it and I've been following him and I don't want to ask him that question. I think it's inappropriate. Probably, probably would be allowed, but I want to keep it nice and pure."
But Jerome Powell did not want to lower interest rates because the US has a huge debt problem. So the plan was to solve for these problems without triggering a crisis. And here is how it's going to work with Kevin Worsh. This is a beautiful theory from Luke Growman at FFTT.
Step one, Kevin Walsh lowers interest rates. Remember though, the Fed only controls the short-term interest rate for bonds like the two-year treasuries. That makes borrowing cheaper in the short end. It loosens the economy and it gives Trump the growth story that he wants heading into the midterms. That's very important.
Step two, at the same time, the Fed starts shrinking its balance sheet. This chart right here, meaning the Fed will stop holding as many bonds. Now, normally when the Fed sells bonds, that pushes long-term interest rates up, which normally is bad, but that's actually intentional here because it creates what's called a steeper yield curve. A steeper yield curve means banks can borrow money cheaply in the short term and they can make more money in the long end, right? That's free money for the banks. That is the spread that they have relied on to make money. Now, in order for this to happen though, short-term rates have to be lower and long-term rates have to be higher. Okay.
Step three, arguably the most important part, is to deregulate the banks. Specifically, the plan is to remove the capital requirements that limit how many Treasury bonds banks are allowed to hold. That regulation, by the way, is called the supplemental leverage ratio or SLR in nerdspeak. It's a post-2008 financial crisis rule that required banks to hold a certain amount of money as a buffer against their total assets, including treasury bonds. So imagine, for example, a bank has 100 spots for all their investments. The SLR is basically a rule that says you can only have a certain number in treasury bonds. Even though treasuries are considered the safest asset in the world, it's basically the same as cash. They still take up those spots. So the banks have hit a wall. They want to buy more treasuries, but the regulation says, "Sorry, it's full."
Now, when COVID hit in 2020, for example, the Fed temporarily exempted treasuries from the SLR calculation for about a year, and then exactly what Luke Groman predicted happened. Banks instantly piled their money into treasuries and the bond market started to function very smoothly. But then when the exemption ended and expired in March 2021, banks had to lower their treasury holdings, and the bond markets did not like that.
So Kevin Worsh's plan is essentially to make that COVID exemption permanent or at least to significantly loosen the SLR so banks can hold way more treasuries without it counting against their capital requirements. I know it's confusing, but what all of this means in a nutshell is that once those limits come off, banks pile into treasuries with huge amounts of leverage. They will borrow money cheaply. They'll buy bonds. They will pocket the spread. And by doing that, the banks absorb all the Treasury bonds the Fed will sell. The Fed shrinks its balance sheet, and the commercial banks expand. The net effect on the bond market is going to be almost identical to the Fed just buying the bonds itself. So it's basically quantitative easing, aka money printing. It's just laundered through the commercial banking system instead of the Fed's balance sheet.
Now, why would they want to do that? Why they'd want to do that is that if and when someone says, "Hey, look, the Federal Reserve's printing money again. Isn't that inflationary?" The Fed can say, "Actually, we're not. Look, we're reducing our balance sheet." They have a cover story. On the other side, though, by removing the lending constraints on the banks, they can now do both. They can buy treasuries and lend money to Main Street, a lot more money to all of us, right? So, Kevin Walsh can get on TV and say, "Look, I'm doing productive deregulation. The banks are helping small businesses and it's not helping Wall Street, it's helping Main Street." And there is an element of truth to that, but at the end of the day, it's a Rube Goldberg machine for money printing.
But then you layer AI on top of all of this. Kevin Worsh wrote in the Wall Street Journal once that AI would be what's called a massive disinflationary force, meaning people will become more productive at their job because of AI. And so therefore, the price of stuff will come down, just like the tech boom of the 1990s. So the story becomes, we're cutting rates, we're deregulating the banks to fuel growth, and we have AI driving down inflation. We can grow our way out of the debt problem without anyone feeling any inflationary pain. That was, and I think still is, Kevin Worsh's master plan. That is why the stock market was pricing in rate cuts just a few months ago. But then something happened.
All right, before I get into that, one of the reasons I'm able to put these videos together is because I'm constantly in meetings. I'm on calls. I talk to analysts. And so I'm always trying to gather as much data as possible, which makes it really hard to keep track of, which is also why I'm so excited to partner with today's sponsor, Plaud. Plaud is the world's most advanced AI notetaker. Here's how it works. Plaud's Note Pro is something that you clip to the back of your phone magnetically, and it captures everything in a room up to 5 meters away. It has 50 hours of battery life. It filters background noise. It identifies who said what, and their AI generates structured summaries and action items after every meeting. Now, the part I use most is something called Ask Plaud, which is basically a ChatGPT that has context on every conversation you've ever had. The note pin here on my wrist is also the smaller version of that. You can wear it like a lapel pin or on your wrist. And it's helpful for everyday conversations, calls, and casual capture. It uses the same AI brain, but just a different form factor for when you're not in a boardroom. And what sold me on using both of these devices instead of my phone is because my phone battery drains, I get interrupted by notifications, and I can't search for a recording later. And Plaud solves all three. It also uses enterprise privacy standards like SOC2, HIPAA, GDPR, which basically means what's in your meetings will stay there. They also have a 30-day free return on both. And these are products I genuinely use and I love. And the link is in the description down below with my discount code. I think this is the best use of AI I've ever found. So, with that said, let's get back to it.
On April 1st, Trump announced military actions against Iran. And almost right away, the Strait of Hormuz, which we all learned was one of the most important shipping lanes in the world, which controls 20% of the world's oil, that got shut down. Oil prices went up. And when oil goes up, inflation goes up. And when inflation goes up, interest rates tend to go up to slow it down.
Now, here is why that is so catastrophic for Kevin Walsh's plan. Remember, the whole thing depends on short-term interest rates going down. Because if you can lower the short end, which the Fed can do, you can steepen this curve. Take a look at this chart, for example. The green curve on the left. That's what Kevin Walsh needs, where short-term rates are low and long-term rates are high. A big gap between the two. And the bigger the gap, the more banks make money because they borrow cheaply on the left-hand side and they lend expensively to us for our mortgages on the right-hand side. And that spread is how banks make money. The bigger that gap, the more they profit, the more treasuries they buy, the more the whole machine works.
Now look at the red curve on the right. That's what the Iran war gave us instead, where short rates went up because of the war because all wars throughout history are inflationary. So the gap has almost disappeared. You can see it in the real data at the bottom. It shows that as of this week, the spread between the 2-year and the 10-year Treasury interest rates is about 4/10ths of a percent. Now, for context, in a healthy economy, that spread should usually be between 1 to 1.5%. The Iran war cut it by more than half. When that happens, the banks stop buying treasuries because they're like, "Well, we're risking our money for 30 years to make almost nothing. Let's not do that, right?" So, the whole plan breaks. And it breaks specifically because when investors don't know what's about to happen to the world, or if they don't know there's going to be a World War II, that's when investors are like, "Pay me more money, right? Give me a higher interest rate to buy your bonds." That's why the curve is flattening. That is the issue for the Fed.
So, now Kevin Walsh walks into his first Fed meeting on Wednesday inheriting the situation. So, what does he do? Kevin Walsh is stuck, and that's because there's really only two paths forward.
Path one, he signals that looser policy is coming, meaning he subtly hints that interest rates will go down later this year. Maybe he says the Fed will step in to support the bond market if things get worse. If he says that, the markets will read that as liquidity incoming, aka money printer will be turned on. And historically, when that happens, gold goes up, stocks go up, right? Bitcoin goes up, risk assets in general all go up, right? This is the path that gets everything moving again. And let's Kevin Walsh's plan sort of get back on track. But only if the Iran situation resolves soon. Because without that, all we have is higher and higher gas prices, aka higher inflation. And that makes it really hard for him to say he's going to lower rates.
But there's a second path, though, where he acts what economists call hawkish, right? He says inflation is still a concern, guys. Right? The economy might be strong. We just saw a jobs report that showed 172,000 new jobs, which is almost double what the expectation was. And in a normal world, a strong jobs report means a strong economy, which is good news. But right now, the market is interpreting it as the opposite. It's bad news. It's bad news because a strong economy with high inflation means rates have to stay high or go higher. You can't have a strong economy and then start to lower rates. It's like adding gasoline to the fire. You want to have a balance. So, if Kevin Walsh stays hawkish, aka rates stay the same, and that's how he talks about it, expect stocks to follow gold and Bitcoin most likely lower.
Now, here's what makes this meeting sort of interesting. Remember, 97.4% of the market already expects no change to the rates on Wednesday. So, the rate decision itself is not the news. I think we already know what he's going to do, which is nothing. The news is what Kevin Walsh signals subtly or not subtly about the future. Every word of his press conference on Wednesday is going to be looked at by every trader on Wall Street. They're going to be hyper-analytical about every word. And I think the market's reaction in the after-hours is going to tell us a lot more than anything than what he actually says.
Now, for now, just understand that's most likely what Kevin Walsh's plan will be. And that for now, it's also on pause, right? In order for it to come back to life, one thing has to happen first. It's that Iran deal that Trump keeps talking about. The Iran deal is the economic plan. And the reason why is because the US Treasury, run by Scott Bessant, has to sell or refinance $8 trillion worth of bonds in the next 12 months. It is a huge amount of money, and they have to find buyers for all of it. Into a market where interest rates are going up because of the Iran war, into a market where foreign central banks are not reliable buyers of our treasuries anymore because they've been replacing US treasuries with gold, and into a market where the main buyers right now are highly leveraged hedge funds, which could be forced to sell at any moment and collapse.
And while all of that is going on, there's another ticking time bomb that's even more important. The US Strategic Petroleum Reserve. It's the emergency oil stockpile, and it runs out, allegedly, in less than 80 days. Right now, releasing oil from that reserve is what's been keeping our gas prices from going so much higher. It's been the absorbing shock of this Hormuz being closed, right? But once it runs out, there is nothing left to cushion the prices. So oil prices will go up. Inflation goes up. And so investors are like, "Okay, pay me more money." Short-term rates go up. And bond investors are like, "Well, if inflation's going at 4.2%, I want more than that to lend you my money. Otherwise, why would I?" So their master plan does not work without an Iran deal.
So when you hear Trump say that he's working on this deal, what he's actually saying is, "We need to reopen the Strait of Hormuz right away before the SPR runs out, before oil goes up, before the bond market breaks, before Kevin Walsh can't cut rates anymore, before the whole plan to QE but not really QE dies." The Iran deal is the most important part of this puzzle. Scott Bessant knows this, but he's not telling us this, which is why, and this is just an opinion, he goes on TV and says, "Iran is losing the war." Because here in the US, we are fighting a war of optics. As long as the optics look good and people believe everything is good and a deal will be reached soon and that we're winning, our markets will stay calm.
But I think privately, Scott Bessant understands exactly what game Iran is actually playing. Iran knows they don't need to defeat the US military. They can't, and they don't have to. They just need to keep the Strait of Hormuz closed long enough for the US bond market to break. What that breakage looks like, by the way, is bond prices crash, interest rates explode higher, and all of a sudden the US government's paying so much more in interest that it can barely function. We'll have our private credit markets potentially break. We might see more banks breaking, and we'll see our overvalued stock market potentially break. There's a lot of bad things that'll happen, and this includes the crypto market, too. So, it would be all-around bad for everyone. That is the war Iran is actually fighting. And they're kind of winning it. Not because their military is so strong. It's because they've got the US by the, uh, interest rates, if you will.
And China, by the way, is adding more fuel to the fire. Because at the same time as the OpenAI IPO, China's like, "Check this out, guys. Not to rain on your IPOs, but look at the US markets, right? They're IPOing into trillion-dollar companies. So, we're just going to spend like, one-tenth of that to recreate your same tech." That hurts our markets because it puts in question our valuations. It puts in question our reckless spending. And it highlights how strong China's spending power is relative to the dollar on a par level. Remember when China announced a deep sea? It crashed the US market by hundreds of billions of dollars. That's the game China's playing. It's very subtle, but it does not help the US when they do that. The timing of their spending announcement with all these IPOs, that is very intentional and I think very strategic.
So, here's what to watch out for on Wednesday. First, pay attention to Kevin Walsh's language around inflation. If he says the word "transitory" or anything like it, that means he's suggesting that inflation from the Iran war is temporary and it'll go away on its own. And that would be what's called a dovish signal, right? The markets will like that and they'll most likely go up. If he sounds concerned about inflation being persistent, then that's hawkish. Markets will not like that. They will most likely go down.
Second thing to look out for is watch whether he mentions the bond market specifically. If he says "stress in the Treasury market" or hints that the Fed has tools to support the bond market, that's him signaling to us that the money printer is warming up. QE will happen if it needs to happen. If he says that or some version of that, then gold and Bitcoin will go up almost right away.
The third thing to watch out for is the dollar. If the dollar weakens as measured by what's called the Dixie index after this press conference, that's actually a good sign for risk assets. It means markets are pricing in future liquidity, aka money printing. If the dollar strengthens, though, and this Dixie index goes up, it means the opposite. Tighter conditions, higher rates for longer, and more pain ahead.
These are some of the signs I'm looking for. And as far as what I'm doing, I'm not making any investment decisions yet, but I'm looking very close at gold and silver. The amazing Northstar charts, by the way, on gold and silver show that we are in a pullback and we're not in a low-risk entry point yet. Silver especially has come a long way off its highs, and I'm still watching and I'm still being patient and I'm waiting for either a cleaner technical setup or a clear signal from Wednesday that the direction has changed.
The super cycle for real assets is still very young. There's this amazing chart from Azure Capital that shows we're only 6 years into what historically runs for 14 to 22 years. By the way, a super cycle is where money rotates from one place to another in a very big way. For roughly 15 to 20 years, financial assets dominate, stocks and bonds outperform, and money flows into paper assets. But then the pendulum swings the other way, and for the next 15 to 20 years, real assets dominate, which are things like commodities, right? Gold, silver, Bitcoin, oil, hard assets outperform. The last commodity super cycle was between 1997 and 2011, driven by globalization and China. Before that, it was 1963 to 1980, driven by the breakdown of Bretton Woods and the oil shocks. The current one started around 2020. It's being driven by de-globalization, record debt, fiscal deficits, and the expansion of the money supply. All of which are structurally inflationary. That means stock markets can still and will probably go up relative to the dollar. However, hard assets and commodities will go up relative to the stock market. So, stay patient, stay informed.
Now, if you're interested in seeing how I'm personally preparing and how I'm investing, those videos live in the premium member section. You'll also get access to my main videos earlier, and you'll get access to extra videos. If that's valuable, the link is down below. It allows me to make more videos like this one and take on fewer sponsors. But, thank you so much for watching this video, and thank you for being a member. I hope you have a wonderful rest of your day. Smash the like button. Subscribe if you haven't already. I'd love to see you back here next time. Take care.