Transcription
Germany, Japan, and Korea are all historically big creditors from a sovereign perspective. And in particular, Japan, if they're borrowing money to do defense sty, they have turned sellers of bonds as well. So now they're selling, they're competing with Bessant to place bonds. Like everywhere you look, yield should be going up. And so to me, it's just all about when does something break at any of them because once it breaks at one, they're all going to have to do something. And that something's going to look a lot like yield curve control, although my suspicion is they'll never call it yield curve control until they have to.
Today's episode is brought to you by the Fundrise Income Fund. You'll hear more about the income fund later in the show. But for now, let's get into today's interview. Welcome to Other People's Money. I'm Maxi. I am joined today by Luke Roman, president and founder of Forest for the Trees. Luke, thank you so much for coming on the show.
>> Thanks for having me on, Max. Great to be here.
>> So, there is so much happening in markets and macro right now. We have yields at 20-year highs. I want to understand what is the driving force for this sell-off in the bond market.
>> Guess ultimately a supply and demand issue. Um and then the secularly inflationary um dynamics or or results of how the supply demand issue has been managed. Uh what do I mean by that is that uh we've seen the US in particular um shift issuance to the front end since uh Yelen late in '23. Bessent criticized it as soon as he got in Yelen's seat. He did the same thing except more um or at least as much uh but then it added accelerated the treasury buybacks uh that Yellen was doing which was also shifting to the front end on the margin. Uh and he accelerated that quite a bit versus what Yellen was doing. And if you take a step back, why is this happening? It's very straightforward. No one wants to talk about it, but it's it's very straightforward. It's right in front of everybody's face. We kept a hundred trillion dollars plus in the United States. Uh Europe had and and UK also have their offbalance sheet liabilities. They were all off balance sheet and they were always going to stay off balance sheet until uh people started getting old and any sixth grader with an actuarial table and a calculator could have seen that if 65 million boomers were going to be born, they were eventually going to hit retirement age and start collecting. And once they did, these offbalance sheet liabilities would start coming on balance sheet and being cash flow negative. People said, "Oh, you don't have to worry about it. It's not part of our debt to GDP until they turn 65 and start demanding a check." And now they are. And so that's happening all over the West.
Adding to the problem, they would have been bad enough on its own, but adding to the problem has been that the United States in particular has been engaged in forever wars for going on 30 years now. 25 years certainly. And so when you look at veterans benefits, which you know, right after the Vietnam War, right, expensive, messy war, veterans benefits as a percent of the defense budget got as high as 12% of of total defense spending because it's accounted for separately. Um, and then during the '80s, the '90s, fell back to 3, four, five, six. It's turned up sharply in 2010, and it hasn't stopped. It's now 27% of defense spending. And >> it's not like defense spending has gone down. It's not like >> defense spending hasn't gone down. This chart looks like this. And this again is an offbalance sheet liability that comes on. You want to go to war? Great. You got an awesome military, great. And you better reserve for what happens on the other side of a war if it lasts too long, which is you're going to be paying out a lot of benefits. We didn't. So now those are coming on balance sheet. Uh and to put some numbers around it, $400 billion of veterans benefits annually. Now, it's about 8% of tax receipts, which are near all-time highs, and it's growing at like two to 3x the rate of of of tax receipts because we we refuse to stop doing stupid wars and because our guys are getting older and because of the money we've printed to pay for the veterans or the the entitlements that are coming on balance sheet, etc., inflation's rising and so the cost of care is rising. So, you're getting like triple whammy there uh on the veterans benefits cost. And so, when you look at just the interest expense on the debt plus the entitlements, you're nearly 100% of receipts. You throw in veterans benefits, you're over 100% of receipts. And that drives a very simple dynamic, which is once you're over 100% of receipts with debt where it is, you can't raise taxes because it triggers a recession. You either print or you cut benefits. And when more you print, the more inflation goes up, the more inflation goes up. The more yields go up, the more yields go up, the less attractive or or or the more inflation goes up, the less attractive long-term bonds are, the more you have to shift to the front end. The more you shift to the front end, the more inflationary it is, the faster the faster the debt reprices when interest rates go up. This is the spiral the US, the UK, Japan, and and Europe are in. And being in this, it's a very recognizable spiral. We saw it after World War I in the UK, in Germany, in in France. Um, you know, the UK, the US paradoxically took care of it the way the Chinese are taking care of it now, which is stand aside and let stuff fall in price like housing. Uh, we had a huge, you know, huge depression for like 18 months in the early 1920s. Uh, Jim Grant did a great book on that. Anyway, this is why yields are going up around the world and there's no easy answer for it. Uh again, smart people are looking at the boomers and the boomer generation around the world going and in the West going, "All right, well, they're not going away." And you know, it's very obvious they have to keep inflating.
>> Well, it's interesting. We just had another ceasefire pause in the war as people consider the the cost of the war. And if you were being generous, you would say, you know, maybe we have some sense here in in keeping in trying to keep this the cost of this thing in check. But the alternative way to look at it is I can't remember a time what the idea of America not being able to afford waging a war that it is maybe a signpost um of that negative side of things that you're talking about that that we can't actually afford to wage this war.
>> In in short, yes. There's, you know, we can we can wage war on weekends and um as long as the 10-year Treasury yield is below 4.7%. Um, which tells you either it's not that serious a threat on one hand, right? Let's let's number one, it could mean it's not that serious a threat and Trump is going through the motions. So, you know, he he keeps his friends in Tel Aviv happy. Or it means we can't go to war anymore. And it has huge macro geopolitical implications in terms of what we hear so often, right? Ultimately, the US military backs the dollar. Hey, if you try to make things multipolar or sell oil outside the dollar, we're going to come and send the most powerful military in the history of the world and we're going to beat you over the head with it. And if the latter is even partially true, those those things aren't true anymore. And I I I think that's what's happening here. And it's still it's such early days in terms of the implications that I think markets are just waking up to the sort of the reality of. And oh, by the way, that then feeds back into inflation because look what's going on around the world. What are we hearing? Somehow they all got the same idea at the same time. I say that you know facitiously because I think they all sat down and said they're going to do it. Japan, Germany, Korea, UK, US all saying we're going to run basically defense stmmies, right? So in co we did we did consumer stmmies um where you you run deficits and you you send money to consumers to buy stuff. And these five are doing defense stemmies. They are borrowing money to rebuild their defense bases. And three of those guys, right, Germany, Japan, and Korea are all historically big creditors from a sovereign perspective. And in particular, Japan, to a lesser extent, Germany, big creditors of the United States. Well, if they're borrowing money to do defense sty, they have turned sellers of bonds as well. And so not only is it inflationary which reduces demand for incre you know attractiveness of long-term bonds at current yields sends yields higher, but it also turns Japan from bond buyer to bond seller. So now they're selling, they're competing with Bessant to place bonds, yields up. Like everywhere you look yield should be going up. And so to me, it's just all about when does something break at any of them because once one it breaks at one, they're all going to have to do something. And that something's going to look a lot like yield curve control, although my suspicion is they'll never call it yield curve control until they have to.
What about the the high real yields we have right now? Um, a lot of people have been saying, you know, just looking back over the last 10 years, real yields have never been higher. But if you look back even further, the idea of real yields at two, 3%, isn't that crazy? Do you think we're heading into a world where to to make these bonds attractive if the only way that that that we know is to keep printing to keep issuing debt? I mean, are we going to have to see sustainably higher real yields to make any all of this paper attractive?
>> It won't work. If that's the plan, like it's it's a disaster because high real yields when you have debt to GDP of 125% and it growing faster than your economy, right? United States is a highly financialized economy. High real yields are going to drive much slower US growth. Um, and the key driver to US growth for the last 12 to 18 months has been tech, has been AI, which is borrowing a ton of money now, and which is very sensitive to positive real yields. It needs negative real yields. So basically what that translate to anyone saying that hey we need high real yields to place that paper is we need to put a bullet in tech and we need to put a bullet in the American economy to place those bonds and once you say it like that you realize how nonsensical it becomes because if you do that the US will go into recession US goes into recessions deficits are going to rise nonlinearly. Um last four three recessions we've seen deficits rise 600 to,200 basis points of GDP. So GDP is what 31 trillion. So you're going to add two to3.6 trillion on top of a two trillion deficit in a world where you have positive real yields. And now what? Now you still have your entitlements coming on. They're going to come faster because in a recession, those numbers grow even faster. So, you're going to be looking at that that number I quoted before of of interest, gross interest plus entitlements plus veterans benefits. You know, it's maybe 104% 102% today. It's going to go to 130% 150%. And what's going to happen is the dollar is going to skyrocket as the US government crowds out all global dollar markets trying to place paper. And the treasury market dysfunctions, the stock market crashes in the US around the world, the economy. It's basically early days of co from the portion where treasury yields started going up instead of down until they step in and start buying treasuries under the opaces of of treasury market functioning in numbers that would make what they were buying under co look quaint by comparison. So it the two the the positive real yields people said hey sell gold on positive real yields. You know, all my friends in emerging markets they're like >> when your debt to GDP is 125% and your deficit's six and it's growing faster than your receipts and your positive real yields are going to slow your receipts the last thing you should be selling on positive real yields on real yields rising is gold. You should be buying gold hand over fist because you know how it's going to end. It's just a question of when. So that's just a mad repositioning and leverage.
>> So when you hear the new Fed chair talking about reducing the balance sheet, that's just got to sound farcical to you.
>> Yeah, I think I I think it's absolutely farcical and he is I think he's saying what he has to say and I think markets have a way of testing new Fed chair people and I think it would be a delicious irony if War who is so desperate he's he's been so vocal that he could have done Powell's job better than Powell did and look I'm not some you know I was a critic of Powell you know you sort of had a moment in time where you can inflate away the debt and he chickenened out. That was the brave thing to do. He should have done it, but he he couldn't do it. So, I've been no no like big supporter of Pal. I think he did fine. But to hear Worsh talk about how he could have done so much better is absolutely farical. And so, I think it's going to be a wonderful delicious irony to watch. He's if he tries to do this, he is going to he will end up having to grow the Fed's balance sheet bigger faster than Bernani and Powell ever did in all likelihood. And so it's just everybody wants to pretend like the debt isn't 125% of GDP and everyone wants to pretend like there aren't 65 million boomers that are you know somewhere between age 80 and age whatever they are 64 and they want to pretend that we haven't been at war for 25 years. Like if we you know it's it's like the old joke on you know the three scientists on a no scientist is being generous. Three people on a deserted island, right? A chemist, a physi a physicist, and a and an economist. And they're like, "Oh, we, you know, can washes up. We've got food. Great." You know, chemist is like, "Hey, we could use chemical reaction to open it." Great. The physicist like, "Hey, we can, you know, create a lever and open it." And the economist is like, "No, let's just assume a can opener." And so, like, Wars is like, "Let's just assume the federal debt isn't what it is. The entitlements aren't what they are. The veterans benefits aren't what they are and that we have a non-financialized economy that isn't highly sensitive to real rates. Like, what are you doing, dude? Just take your freaking medicine. Mark it down, move it on, and let's go. But otherwise, it's just going to be, you know, more of the same.
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It'll be interesting this this week to see what we get from the Fed. But I I mean just looking at the the price reaction to um to the the ceasefire announcement, you know, in the past with oil down like this, you would have expected bonds to really rally the the equity markets are now negative on the day that we're recording this. So we got a ceasefire and with the outside of the oil markets, we couldn't get the reaction. Uh I mean, what do you make of that? Um, and as well the AI trade unwind, as you said, it's highly tied to rates. How much of this do you think is where we are in the bond market affecting the equity market versus people starting to doubt uh that we're going to achieve, you know, artificial general intelligence?
>> I don't know that they're doubting we we'll achieve AGI. What I think has come into play is China, right? This this reminds me so much of um so much else I've seen as it relates to China. Uh which is, you know, oh don't worry, they're never going to catch us. H they're closer, but they're still never going to catch us. Oh yeah, they have a competitive offering, but it's just cheaper. It's not as good. Oh god, it's cheaper and it's better. And by the time you get to that last one, it's over. You've lost. And I think that's what we're in the early days of seeing with this AI, which is again 2000.com bubble it burst. Who cares? It was mostly equity issuance, right? The equities go to zero. You know, sorry, thanks for playing. If you believed in, you know, the sock puppet, you lost. Okay, great. That's markets. The second they started borrowing money and mass to finance this and then using these vendor financing arrangements, etc., and then and then it got looped into a national defense imperative. I think that's what we're watching is the fact that like people say, well, there's a big debate. Is Japan better or excuse me, is China better? Is is China not better? I don't know. I don't have the c credentials to know and evaluate which AI model is better. I read smart people who who I think are do have the credentials and they kind of go both ways with different qu here's what I know 30 years in markets. The fact that we are discussing is China competitive or not is all that matters because it means it's close enough for government work and in sectors that are as richly valued as this. I mean we are valued in faking La La Land on P, you know, multiples of revenues, you know, PE to the ones that even have earnings. Uh, and they've borrowed a bunch of money. It was all borrowed on the come all of it. It wasn't like they had the cash flows to pay this stuff. And so if you have a forget about a down round, if you just have a slower round of refinancing things like OpenAI equity, etc. The whole thing starts to come unwound and that has capital flow implications. That has growth implications. And to your point that that that the long bonds in the United States 10 and 30-year Treasury sold off over the last two weeks or the last month as the AI trade was questioned over the last three weeks. It's a really troubling signal. Now, you could say, well, we went back to war and oil went up and that's why fair point, but I think you raised a great point, which is oil's down today. What's a tenure? I I saw it earlier down two basis points.
>> I mean, it's not the rally you would expect for oil down five bucks on a pause of the war.
>> No. No. And so, yeah, I think it's super important. You know, we had we had charts in a report for clients last week which highlighted I saw that non or excuse me, labor force participation rate in the United States is tanking. It's back it's not only is it tanking, but it's back to COVID lows. And I'm like, all right, well, let's just see what this looks like. I took it back to 2000 and I compared it to 10ear Treasury yields. And it's like the same chart. Lower labor force participation, lower tenure. Makes sense. Deflationary 30-year it's even tighter. Well, let's look at, you know, 10-year term premiums, right? So, what's the market the rate the market's demanding to buy US longer term paper against that and it's a pretty correlated until 2022 '23 and all of a sudden long-term yields and term premiums have taken off as as labor force participation rate is turned down. And in the last 6 to 12 months, all three of those have taken off like scalded cats as labor force participation rate has tanked. That is emerging market with a debt and fiscal crisis price action. There is no world where a declining labor force participation rate should be driving sharply higher yields. There should be no world there. None. And yet it's happening. And so why I think it goes right back to that discussion of hey we can pretend right you can you can you can ignore reality but you can't ignore the consequences of ignoring reality and wars and all the others are ignoring that to GDP is 125%. Japan's a seller Germany's a seller. Korea is a seller. UK is a seller. UK has been our second biggest creditor by the way. So they're going to build up their military. Chances are they're going to finance their own bond instead of ours. Um and then you've got debt as well. Like I said debt where it is. And you've got these offbalance sheet liabilities coming on balance sheet at rates that are two three x of what receipts are growing, what GDP is growing. It is a it's the same it's the same problem Vimar Germany had after after World War I. I mean I don't think that's where we're going for a lot of different reasons, but directionally it's the exact same problem.
Now, you talked about the the changing nature of the stimulus that we're going through right now compared to CO where it was sort of direct to consumers. I mean, do you do you view there there being a potential that all of this AI spending has become such a big driver of the GDP growth of the of the US economy at this point that um it it is in many ways the stimulus and it will be backstopped.
>> Yeah, I do. And to me, the only question is is how big a draw down do you need to justify some sort of Treasury uh or Fed backs stop bailout guarantee of the AI thing? Um I heard credible rumblings the subject was broached six to nine months ago already.
>> Oh, really? That that they've already discussed what happens if this whole thing unwinds.
>> In specific cases. Okay. And would it be just like the public bonds like the the big bond issuance that we hear about from the major companies or they how far down uh how far down do you think they would go?
>> What was the Fed buying in CO? Weren't they buying junk bonds? Weren't they weren't they buying corporate they were buying corporate bonds, right?
>> I I don't know if they ever bought the corporate bonds. I know they said they would. They they just opened the door that that's a possibility that they would do that, but they never actually stepped in and did it. If they did it at all. Yeah, if they did it at all, it was small. But that was enough, right? So.
>> I think look at the imp look at the imperative of how this is being described, right? We can't afford to lose this. This is the new cold war. China can't win blah blah blah blah blah. And then look at the reality of the math and you just to me it is it's elemental. They're going to have to buy back stop bond like they'll just take over Nvidia, right? Nvidia's on the tape today guaranteeing, you know, $250 billion of uh I think it's o open AAI. I think it's open AAI some sort of data center here in Ohio actually. And interestingly, Nvidia's down on the day I last I saw. Right. So, it's Nvidia is starting to trade down on guaranteeing other people's bonds. That's another signpost, right? Um that shouldn't be happening. And ultimately I think Treasury or Fed will take over for for Nvidia is guaranteeing these things. They'll take over for Soft Bank, take over for and just backs stop the whole thing. And it's, you know, may not even be that expensive per se, but I think that's what's going to happen. And it'll be a really Look, I think stocks go up on that. I think bonds go down on that. I think dollar goes down on that. I think inflation goes up on that. Um, I think gold goes up on that. I think Bitcoin goes up on that. Uh I think industrials go up a ton on that. So to me it's just so crystal clear that's where this is going. But I again it's Wars is going to lose all credibility after it happens and so will Bessant, right? Because Bessant will be running the frigin Chinese economic model he's been complaining about for the last 15 years of his career. And that's fine. Like this that's where this was always going to go. But just don't pee on my back and tell me it's raining. Just tell me the truth.
>> Yeah. I mean, they're taking stakes in companies like Intel. It seems there's Chinese characteristics for for sure. Um, but I want to talk a little bit more about the the short term. We had quite the whipssaw in expectations in in rates this year from everybody saying we're going to get cuts to now people are starting to price in in hikes. The the there was a period in time when people were pricing in cuts and the long end was selling off. Now we're getting we're having inflation concerns and the long end is selling off and and so I I wonder like is there a world where without intervention in the bond market where you see um where you see the long end stabilizing?
>> Yeah, I think we're past I think we're past, you know, we've crossed the Rubicon on that front. Um, and the bond vigilantes were for a long time kneecapped by derivatives. Um, and the private the private vigilantes, but the but the vigilantes now are, you know, Kevin Worsh is a vigilante, right? He's talking about selling bonds out of the long end. Um, the the global sovereigns are are, you know, foreign central banks are vigilantes. They're not buying this stuff. They haven't bought this stuff for 12 years uh on a net basis. Central bank holdings of of of bonds are are down slightly over 12 years as the debt has risen like I want to say about like $18 trillion over that time. Um maybe it's just 12 trillion. I know what's six trillion between friends, right? Um the uh so I think we're past the Rubicon on that front. Now what could I do to get the long end down? I could get it down for a little bit for you, right? If if you like, hey, S&P down 40, S&P down 20 in two days, three days, I could get the long end bid for you for three, four, five days, maybe even a week, and then it's going to turn around and it's going to start selling off with the S&P. We saw that in CO. We saw it in Liberation Day. We saw it on the war. We keep seeing it. People don't want to believe it, right? It's like it's like if you're watching the movie Jaws and it's like oh girl washes up, she's cut in half. That's just a motorboat engine. And then like the little boy gets chomped up and then the other the fisherman gets chomped up and like you're seeing the teeth and you're seeing the bite mark. Then you see the shark and you're and and and yet you go I'm still going to go swimming. I don't know what's eating people. There's, you know, there's something out there. The issue is there's too much supply. There's not enough demand at the rates that we can afford and everybody knows it. It's a because it's a pretty straightforward math problem. And so like I can get you rates down for a week or maybe even 10 days if we crash S&P like if we have a black another black Monday like '87 event. I could get it down for you. The other way I can get it down for you is Kevin Worsh prints money and buys it and caps it. That'll get it down for you. Uh, and I guess the last way is, you know, Bessant going to, you know, Worsh and saying, "Hey, revalue, you know, revalue gold and and or or Bessant letting gold really run and then revaluing it and then telling Bess or Worsh, excuse me, to create a TGA uh, deposit and Bessant buying back his own bonds." Then I could then I could get it down for you. And if you did that, by the way, you get that the GDP down. Now, sort of these traditional metrics that for the last 30 40 years all worked, right? Hey, if we have equities down 10%. That's going to create demand for bonds. It will not create demand for bonds until you delever the you have to devalue debt to GDP from 125 to at least 80 and probably more like 60 to 70%. Which means you either got to whack the heck out of the dollar um particularly against gold or you have to do yield curve control. That's it. Like those are the ways out. And you know they want they don't want they don't want to do that because then they're going to you know they're going to be the John Laws who have to buy back all their bonds at like printing money.
>> That's how this is going.
>> Which one do you think is is more realistic? I you you do have to give Worsh a little credit that he has at least come in saying that he wants to change the way that that the central bank thinks. The idea of revaluing gold in the past, you know, monetary policy policy regimes of the past few decades seems kind of outlandish. I mean, do you think that they would that that Worsh would revalue gold or do you think he's going to be more traditional and just do, you know, financial repression?
>> I think he's gonna be much more traditional. I think I agree that it's outlandish that they would do gold at least until they absolutely had to do it. Um I just want I'm trying to find here on my screen something that Wars said recently because everyone's talking right. So uh last week he told Congress that uh the Federal Reserve is not in the bailout business um especially not for the biggest debtor of all the US Treasury. Sorry, that was Gregory IP at the Wall Street Journal. He did though append an escape clause. This is a direct quote last week from Kevin Worsh. Quote, "In periods of crisis like the 2020 pandemic and the 2008 crisis, central banks by design need to step into markets to create a fair price." End quote.
>> Okay. So, we'll get fair prices. Fair for who?
>> Yes, we'll get fair prices.
>> Yeah. So, he he's basically like he's full of crap to be blunt. Like he's he's he's going when push comes to shove. Yeah. He's going to play tough for a little bit. He's going to play harder to get right. He ain't going to sleep with the markets on the first date. He's going to wait till date three when he has a crisis and, you know, then he's then he's going to be sleeping with them, you know, giving them whatever they want because he's he doesn't have a choice. His alternative is the Treasury market dysfunctions again because it's a supply demand problem. If he wants to change that, he's got to devalue the debt.
Well, let's talk about where some of that demand is going. You said it's going to just other bond markets just because there is so much issuance, but also central bank buying of gold has has reacelerated. There was a brief blip in March when I think people were were selling gold, you know, to to get dollars to buy to buy oil as as the price of oil went up. Um, you know, emerging markets in particular. Um, but since then buying of gold has resumed. Uh, we have stabilized a bit in the gold selloff. I mean, do you think that now with the crisis maybe behind us again, do you think we are going to start to see the the gold buying pick back up and a resumption of the rally?
>> I don't know if the crisis is behind us or not. I think that remains to be seen. Um, but I do think the gold buying will just resume because I think there's a moment in time where people sell gold to get uh to get oil, right? Basically to finance reserves and they sold treasuries right alongside that as well. You can see that in the data. Um but the longer a war goes on the less you want to own bonds and the more you want to own the more you want to own gold. And also what this war has demonstrated which is the Americans not only can't go to war on anything other than a weekend or and and as long as the 10-year Treasury yield is below 4.7%. But even under those conditions, they can only go to war for a couple months and then they run out of defensive missiles and need China to restock them and they can't make their own rare earths yet. And in with those set of circumstances, what do you want to own the bonds of that country or do you want to own gold? Especially knowing that, you know, they're busy sanctioning everybody over everything. Um still um, you know, is there if I was any random country having been threatened by Trump, Greenland, France, Spain, England, Germany, Korea, they pulled the missiles from me, right? So you know they love me so much and then when the when the crap hit the fan they pulled all my defensive missiles and came to Israel. What would you own? I would own you own gold. And so I think that's what we're seeing. So I think and then oh by the way the Chinese who were supposed to be the worst herd of all of this right there were some in some circles this was a a 5D chess move to choke off the Chinese what have the Chinese done you know they bought like 80 tons then the next month and when the price fell then they bought like 100 tons then then price stopped falling then they bought 110 tons then they bought 140 tons this most recent month in June they bought 173 tons they're literally buying like 70% 60 no it's closer to 70% % of of global gold mine production on a monthly basis when they're supposed to be collapsing because they don't have any oil and this and that and the other. So like that narrative is being demonstrabably proven false. But I think they're also going, "Oh, you're going to knock gold down. Awesome. Wave it in. Wave it in." because and so I think really from here on out, you know, I think gold buying is going to continue because you want to own the bonds of someone who can't afford to go to war over 4.6 4.7%. Why? Because they're telling you if we have actually have a real war, they're going to print they're going to print those bonds into in like oblivion to buy them all. Just buy gold.
So you think gold purchases are going to continue to accelerate from China. Do you let's say this this crisis does continue? I mean obviously they stabilize the price. They stopped importing oil. They sold a lot from their reserves. We don't really know how big those reserves are. Do you think that that's a lever that they can continue to pull? Um and how long do you think it can go?
>> I do think it's a lever they can continue to pull. Um, number one, if I read recre the other day, they're the biggest refiner in the world, right? So, and they can buy it in or they can buy it in yuan and dollars. And so, now you can sort of play with, you know, you buy it in yuan, you can sell it in dollars, you can there's a lot of things you can do with a refinery and the ability to buy feed stock in two currencies. Uh, so that gives them optionality. Uh what have we been hearing for the past year plus? What are they flooding the world with? Solar panels and electric cars. Like you can see what's happening. They're um according to at least one source uh in the first half of '26 they reduced oil demand by 1.4 million barrels a day by shifting to EVs. Uh they have the grid to be able to do that because they spent the prior 20 years investing in grid and instead of in in you know fighting wars in Iraq and Afghanistan. Um, and so I think they have an ability, you know, their their reserves are not their reserves are not infinite, their SPR. And when Trump got elected, I hear they uh businesses ramped up cash holdings to like six months of cash because they figured a trade war was coming. Trade war came, Bessant got it and said, "Uh, we've got all the leverage." And two months later, he folded like a cheap suit as did Trump. Then they spent 2025 really ramping up SPR and probably longer, right? SPR holdings. War comes, they run it down. My guess is they were probably ramping up purchases with oil down in the 60s and 70s uh a few weeks ago. Restore, you know, then we've certainly seen we've heard that um, you know, in terms of some public on the LG side, um ramp up of that. And so they seem to be doing a pretty good job of managing these. And again, does it mean they can go forever? No. Does it mean they're they're uh omnipotent? No. But they don't have to be they don't have to be faster than the bear. They just have to be fat, you know, faster than the than the pudgy camper that's over there in Washington and in Europe and in in the UK. You know, those fat campers over there, the barrels will run down faster. It's just a pain contest. And like they won the pain contest in April, right, of April of '25, liberation day. We're going to put it to them. By May, CEOs of several of the biggest retailers in the US, they went to the White House and said, "There's going to be empty shelves in three to six months if you don't stop it." Round one of the paying contest goes to China. Okay, let's go. Round two. We're going to cut China off. Venezuela, Iran, bond market goes to 466. It folds like a cheap suit. You know, 10ear yield goes to 466. So, you know, I've been very surpris I was very surprised by what China did to be honest. Um, had they not, I would have been right because they did what they did, I was wrong about the disruption the oil oil interruptions, etc. we're going to cause. So, um I think they're going to continue to have flexibility around that because they've shown a willingness to be flexible and a willingness to react, right? They don't wait for, you know, they just go, "Look, it's Trump. Oil's a 65. Do we think he's going to suddenly start being rational? Nope. Buy oil." You know, oil's at 95, 10 years at 47. Do we think he's actually going to blow up his own market? No. He's Trump. He's inherently self-interested. Sell oil, sell, you know, you know, whatever. I I I think that's what they're going to keep doing.
>> And it is interesting because China had this huge property bubble. Their market has gone nowhere for a number of years. They've been willing to suffer through this period of down prices from from their biggest asset classes. And I'm sure it's been hard for those people, but they haven't they haven't folded on it. They've they've said, "This is what we need to do to get things back to normal, and they're doing it." And here we can't take it for a week, two weeks of of market pain before we fold. I mean, you talked about the CEOs coming to say, you know, the shelves are going to be empty. To me, it feels so much simpler than that. It just feels like it's it's market prices. It's purely market prices and they just can't we can't take the pain here. Um
>> I would I would yeah I would take it one more which is the equity market is the economy. They actually have a real economy. We don't and they're related. So it's a little bit of a a flip statement. But she came out in I think 2018 and said homes are for living in not for speculating. And when you look at when he gave that speech and what happened to home prices after it was a distinct policy choice. We are going to deflate housing. And then you can also see loans picking up into different industrial pro you know basically making stuff to make sure that China 2025 which they had laid out in 2015 would happen. And so they redirected capital out of housing into goods increasing goods supply which is you know we're seeing that in competition in cars right it's hit corporate profit margins there etc. It comes down to a view of where they want their country to be in 10 or 15 years, right? So, do we want, you know, America, we cater to the boomers, right? Home prices have to stay high, equity prices have to stay high. Realistically, if either of those fall, the fiscal situation, which is already teetering, completely implodes. The Chinese because they didn't do the dumb wars and because they don't have the social uh programming that we do, right? You know, people say, "Well, their debt to GDP is higher." Well, yeah. Do you include entitlements? Because if you do, it's not. Um, and because they don't have the social safety net that we have, and they didn't do the dumb wars that we did for 25 years, they have more leeway to take some of that pain and take the longer run view of where do we want to be in 2030? Because what's going to start to happen if we just let home prices run and run and run where people can't afford houses is you're going to start to have political instability. If you have I mean there's uh uh Peter Turchin did a book on it um tur r c h i n um I can't think of the name of it right now but he he looks he he created a scientific field called cleodnamics which looks at um uh basically it's it's wealth inequality and elite overprouction leads to political instability and so people say hey it's great the US market's up and houses are up And so it's all fine, right? Like like think about what Trump what what was her name? The blonde, right? She's getting asked about Epstein and she's like the Dow's at 50,000, right? That tells you internally that's the only thing they're talking about. This is our talking point of 50. That's great. But political instability is already happening. Trump's here because of political instability. Charlie Kirk got shot. That's a symptom of political instability. The CEO of United Healthcare getting assassinated on the streets of Manhattan. These things didn't happen in America when I was growing up. You know, I have I have I have a a friend of mine who has the contract for the medical examiner's office in two uh major uh or two two major second tier cities of the United States. Okay. So, anybody who dies of murder, suicide, drug overdose, suspicious circumstances, accident, they get them. And it's a monopoly. They said, "We are seeing we are busier now than they were at the depths of COVID when people were drinking, shooting, and and overdosing them themselves to death." So, you've got this sort of political stability dynamic that I think the Chinese are considering because they don't have the financing role that they have to address that we do quarter to quarter to quarter to quarter in the in the election cycle, you know, every every 6 to 12 months. And so it's smarter. Like how do you stop political instability? Well, the first way you do it is you don't make houses go up and up and up so no one can afford a place to live. Like that's a pretty good smart way. Like if I wanted to create a revolution, I would jack up food prices. I would jack up housing prices. I would jack up healthcare prices. I would jack up education. And what are the Chinese are giving away education. Their home prices have crashed. Equity prices are down, right? So, you know, it could be a sign of weakness of the Chinese. Maybe they're afraid of of a revolution. I don't know. But I can tell you the US, right? What do we
Have in New York? We have an avowed Marxist running this city of New York, and people are like, "This is fine. The Dow's at 50,000."
There are mixed feelings here. Uh, depending upon, uh, who you're talking to. It's going to get worse. It's going to get worse because you've got a lead over production, and you've got record wealth inequality. Wealth inequality in America is higher now than it was in the Gilded Age. It's going to keep getting worse.
Yeah. It's interesting. The Chinese as well. You know, I was invested in some of their, uh, consumer lending names. They're just seeing incredible loan growth, and, and the Chinese, by and large, um, it's not a debtor society, and it, it's people paid back their loans at incredible rates. Um, and but the Chinese cracked down on it. They said, "We don't, we don't want to have so much of a, a credit, consumer credit-driven economy because it creates these, these negative feedback loops when, when the tide goes out." And they just, they stepped in and, and they, they shut down on, uh, a lot of the loan growth and a lot of the, the stuff that made, that made the whole thing work.
Yeah. And the CCP doesn't like competition, right? Because at the end of the day, if you're making loans to the people, you're in control of the people, not the CCP. They don't like that.
Yeah. Well, here the market seems to be, seems to be in control. So, we've talked about gold, we've talked about bonds. What about the dollar? I mean, you said you think they're going to have to, to whack the dollar, get it down, um, to, to help fix some of these problems. I mean, how is that going to happen with, uh, with yields just continuing to rise and rise and rise? What are they going to have to do to get the dollar down?
Yeah. And with oil where it is, right? Like you had a moment you could do it, and then you did this dumb war, and now you can't. You can't, you can't, you can't devalue the dollar with oil at 85. Come on. You're right. You know, very, very clearly over the last three, four years, as long as oil's between 60 and 80, the Treasury market's fine. Once it hits 85, it starts a dysfunction. Yields go up. You've got to get it down. So, if you're, you know, for Bessent, who came out in early '25 said, "Judge us by the tenure." Well, how you doing, buddy? You're not doing good. The three arrows are all in the toilet, and the 10-year's at 4.7. Nice job. Heck of a job, Brownie. Right.
Um, so how are they going to do that? They're in a bit of a pickle, right? I think the way you do it is ultimately you let a momentary risk-off. Um, the challenge is, is that's like, you know, that's like trying to, you know, just have a small explosion by lighting a gasoline-soaked rag in a nitroglycerin plant. Like, we just want a small explosion. So, we're just going to, it's tricky. Uh, I think you need political cover. So, you're going to need risk-off for a moment, and then you can, you know, but paradoxically, it's going to send the dollar higher. That creates a debt feedback loop that's going to send yields higher. You're going to get a moment where yields go down, and then they're going to go up at the long end on that, just like they have repeatedly because, again, your biggest marginal, 40% of the notes and bonds net issuance since 2022 has been bought by Cayman Islands hedge funds since 2022. That's Fed white paper last October. What do, what do Cayman Islands hedge funds do? You know, number one, they manage to a monthly mandate. So, anytime volatility goes up anywhere, they, they go, they degross their entire book. What do they sell? They sell Treasuries because they're the ones that, you know, a lot of them are doing the bigger ones, certainly, you're doing this hedge fund relative basis trade. That's who's buying all these Treasuries. And that's why, in the short run, why Treasury yields, long, long yields go up on risk-off. Now, you know, you've got very fickle creditors. So, how do they get it down? I think you're going to need a risk-off, and then you're going to need something that looks a lot like what we saw post-COVID, which is, you know, de facto yield curve control, you know, and, and with, with fiscal stimulus, and, and that'll do it.
Is that a dip you would be a buyer of? I mean, we, we talked about how reactive both the elected government and, uh, and our central bankers have been to any sort of instability in prices. I mean, you look at comparing to 2008, how much faster during COVID they got the dollar swap lines out. They talked about backstopping the credit markets. Now, you know, we've got the president, if we get oil above a certain point, the war is off. Uh, you know, we're, we're incredibly reactive. And, and any dip, whether it was Liberation Day or the Iran war or COVID, I mean, the, the greatest dip-buying opportunity that many of us have ever seen, is the next dip going to be one that you want to buy?
I think all the dips are ones you want to buy in dollar terms. Um, look, equities are still down 30% from 2022 in gold terms, and they're down 40% from 2000 in gold terms. And I think that is, you know, as long as China is China, I think that's the new regime, right? Where even if we want to beat down gold and sort of make a statement about the dollar, what are the Chinese doing? They're just showing up and waving it in every month more and more. And we can't, we can't afford to have a force majeure issue in London or in New York in, in physical gold. And so ultimately, the Chinese are driving the boat on gold. The Chinese are watching all this and going, there's a disaster. Like, we did this, like in the, in the, in the King Dynasty, like 400 years ago. We know how this goes. You know, it's, it's like the Back to the Future. I've seen this one. Those are the Chinese right now. I've seen this one. I know how this goes. So, they're gonna keep buying gold because there is no mystery how this is gonna go. And probably silver too, by the way. Uh, and so dips should absolutely be bought in dollar terms. And, but in gold terms, I think, I think the next five years, I think we're going to look back in five years, and I think the S&P is going to be up big in gold, in dollar terms. I think it's going to be down in gold terms.
What do you have for your price target for, for gold over the next year?
I think it probably gets back and probably through all-time highs. Um, I mean, that's actually a pretty big rally from here. So, I don't know. I don't like to be that aggressive. So, let's, let's say this goes back to 5,000, and, you know, eventually, um, because I, I also think part of it too, like the other thing about the Chinese is a very gradualism, right? They're not, they don't do big splashy things like the Americans do, right? It's very subtle, right? We drop bombs and wipe out, you know, the family, the ruling family of Iran. Chinese are much more subtle than that. Um, and they've done the same thing as it relates to gold. Um, you know, they were on the ropes a bit in the third quarter '23, and what happened? Like, they changed the rules a bit, and spreads in Shanghai blew out. Gold premiums blew out. Now, we wrote a report at the time for clients. They're using gold to defend the yuan. And we were right. That's exactly what happened. It's basically, okay, the yuan's under pressure. We're just going to empty London and New York gold vaults until the pressures removed. And it was, and it was, and they did, and it was.
So, uh, by, I, I bring that up by way of saying I don't think like they're going to be, you know, a lot of gold people like, oh, they're going to make it 10,000 tomorrow. Probably not. That's not their style. But their style is, it'll be 5,000 in a year, and it'll be 6,500 in two years, three years. It'll be 8,000 in four years, and it'll be 10,000 in five years, you know, and the S&P will have gone up from 7,000 to 11,000 or something. And yeah, S&P up in dollar terms, down in gold terms. Um, because that's the one thing, the other thing that, that, that a lot of sort of the, the China hawks like, oh, property's gone nowhere, stocks gone nowhere. Tell me how gold's done in China because that's, that's one of their biggest savings. It's also a huge capital base for the bank, banking system. How's gold done? Oh, well, that's gone, that's up 4x in the last six years. And oh, by the way, the same people looking for a collapse in the yuan against the dollar have completely missed a collapse in the yuan against gold, which is what's happening. And it, it, it's literally the way the system's designed for the yuan to fall against gold over time. So, um, because that's how they're internationalizing the yuan. They've said that repeatedly for 10 years, 11 years, 12 years. So, uh, that's how I, that's how I think about equities. It's, it's dollar terms, gold terms. Uh, I think ultimately good for Bitcoin too, but not yet.
Yeah, we haven't talked much about Bitcoin. What's, what's happening there? Uh, I, I think there's obviously a huge, uh, five-year comp problem. I think that that's, you know, something with Bitcoin. Obviously, you have the, the store of wealth, the people who want to get a hard asset outside of the dollar system, but at the same time, it's a highly, still a highly speculative asset. And you've got all of these other speculative assets right now that people are making money on. You're seeing, uh, streamers who used to cover memecoins are covering AI stocks. How much of the, of the slowness in Bitcoin do you attribute to there's another flashy shiny thing in the room right now for speculators to go and, and tell their friends about?
I think that's a big part of it. I think you've got, you know, that, that, that thing, you know, flashy, flashy competition syndrome. You've got a civil war going on in Bitcoin of sorts, right, between the, the BIP versus non-BIP. And like, I'm a Bitcoin guy. I like it. I've owned it. I don't have time to figure out what's what. I don't like, just tell me when you stop, like beating the heck out of each other and, and what, what we're doing. Um, you've got some increasing, still, you know, credible concerns about, um, when quantum becomes an issue potentially for a part of the base of Bitcoin out there. And to me, the other, you know, you've also got the four-year cycle issue, which suggests we have more downside from here given historical precedent. Um, you know, through the maybe the fourth quarter, early fourth quarter this year. And then you've, for me, the biggest hang-up for me still is it still trades like a tech stock. Days when NASDAQ's up, it's up. When NASDAQ's down, it's down. Except for this year, it's underperformed the NASDAQ massively for the first half of this year. And then it has actually outperformed the NASDAQ a bit in the last two, three weeks, um, because it's already been down, knocked down. Now, I don't, I'm very nervous about anything tech-related. I don't like the setup there at all. And so basically, for me to kind of, you know, I, I owned a lot of Bitcoin. It was a huge part of my net liquid, net worth. I sold most of it, almost all of it, um, last year. Um, 96,000, 23, 24 ounces of gold. We're still sitting here, 14, 15 ounces of gold, 65,000. Um, I'm, I'm not buying it back with what I see the risks on tech because I just, you know, yes, Bitcoin's already sold off, but if we really get a risk-off that we need for Wor, that I think we need for Wor to have the political cover to cut rates aggressively, weaken the dollar, all these things, and this newly emergent competitive setup from China. Um, look, if we have a two, three-month stretch where the NASDAQ really gets hammered, I don't want to own Bitcoin on that. And I'll be, I'll be happy to be wrong if that's the case. Look, if Bitcoin goes up in that, I'm going to be dead wrong. But I just have not seen anything in the last several years to suggest that if the NASDAQ really gets way laid for a month or two or three months, that na, that that that Bitcoin is going to somehow, you know, scream to now when they start backstopping NASDAQ or when it gets NASDAQ gets bad enough that they're, it's becoming apparent they're going to have to backstop it. That is where I want to be adding back to Bitcoin. And I might be being too cute by half, but I think that's where this whole thing's going. That's, that's how I see it playing out. And then I want to own, I want to lo, I want to be loaded up Bitcoin to the gunnels and, you know, then I'll take my chances. I just think the price is going to be lower than where it is today.
You think that Bitcoin is going to be the play over gold?
Yeah, I would, I mean, history would suggest that. Yeah.
We have a Fed meeting coming up, as you said, the first, uh, the first date with the market. Wor came out and, and he said, "You're not getting any." And, uh, everybody interpreted it as as quite hawkish. Um, but he's also said that he doesn't want to be giving a lot of guidance. I mean, what do you think the chances are that he kind of, uh, whipsaws the market around and goes back the other way just to sort of teach us all a lesson about taking his words, um, too seriously? I mean, do you think that we're, we're set up here with, with everybody expecting hikes into the end of the year for Wor to kind of wiggle around a little bit and, and, and make the market unwind all of that pricing?
I have no edge here, so take everything I, I'm about to say on it with, with a, with a block of salt. The fiscal situation suggests he can't hike rates this year. Full stop. The oil market suggests he should hike rates. Full stop. The tech market suggests he should be cutting rates aggressively. Full stop. If he cuts rates or re-hikes rates, long-end yields are probably going higher either way. Which is only going to then. So, if I'm him, I never would have taken this job, you know, unless they're like depositing $100 million in a Swiss bank account or something for him to be the bad guy, right? Or something like that. But even then, I don't know that I would do it because my reputation is worth more to me than a hundred million dollars. So, anyway, I don't know what he's going to do. But I feel pretty strongly that every move he makes, there's going to be something wrong with it. Like, he's got options, but they're just all unpleasant. Raise rates. You 25 basis points might be enough to kick the legs out from under what's going on in AI. I mean, look what we're watching, like you said earlier today. Okay. Well, don't do anything then. Okay. Well, now oil picks back up, you know, and inflation picks back up.
Lose even more.
Yeah. What are you going to do? Like, and it, it ultimately, you know, the fix is simple. It's just not politically easy. It's, it's, you know, those entitlements have to go away, and there's no way you can make them go away. Okay? So, if the entitlements won't go away, then the war's got to go away, and the defense department's got to go away, but it's got to go away without a recession. We can't do that. And, okay, well, then the last options, you've got to cut rates when you shouldn't be cutting rates and buy a bunch of bonds when you shouldn't be buying those bonds. Devalue the heck, you know, yield curve control, devalue the heck out of the currency. Those are your options.
Um, and, you know, so to, so to your point, right? This is the first, you know, this is the first date. Last month was the first date. Here's the second date. I think he still plays hard to get, but I think he plays hard to get in an easy-to-get way, right? Where there's some mystery, like, hey, just stay with me, you know, it's going to be, just give me a little time, it's going to be, it's I'm going to be canceled by me too, luckily by the, uh, unfortunately by the end of this conversation, apparently, but, um, luckily it's not a couple years ago. At any rate, um, I think he's, he's trying to ride two horses with one ass for another, another couple, another, you know, till the next meeting. I don't even know when that is. I should, but I don't. But it's probably what, six weeks, eight weeks?
Oh yeah, six to eight weeks. Almost.
September, something like that. Um, but it's great, right? It's like the old Rush song. If you know, if you don't even if you don't make a choice, you still made a choice.
Yes.
Perfect line for Powell. He's going to have to flop a card one way or another. He flops a card on Wednesday.
Yep.
And he's got three, you know, it's not like this is like, you know, these aren't important constituents, right? Is oil and inflation, the Treasury market, and, and, and AI, which is this like the key driver to economic growth over the last two years, right? So, you're like, one of them is going to be unhappy, at least, and maybe two, and, you know, that'll set us up for the third date, which could be a real doozy.
I want to close with a question about about sequencing and what you're watching and how you think this is all going to unfold. What is the area that's going to start this? Is it the AI trade unwinding? Is it losing the bond market? Is it more conflict, the, the forever war, um, in the Middle East? What, what is it that you think people should be paying most attention to to sort of see the path forward that you're talking about unfold?
I don't know. And that's what scares me. That's why I'm sitting, you know, personally, my liquid net worth, nearly 60% in cash, T-bills, and, and gold bullion, because I don't know. Um, I've got like a bunch of, you know, flies flying around looking for a windshield. So, what's the windshield? Is it the Japanese bond market? I don't know. Is it supply chains now that we're sort of reclosing Hormuz? I don't know. Is it the UK bond market? I don't know. Is it the German bond market? I don't know. Is it the US bond market? I don't know. Is it this war? I don't know. Is it, you know, the fact that Russia's been helping target US assets and, and can continue to do so, and we're out of Patriot missiles, and something untoward goes boom? I don't know. Is it Ukraine and Iran getting into it now, and all of a sudden, you know, I don't know. There are so, like, and again, I wouldn't care, I wouldn't care, it's too strong. I would care a lot less about any of these things if we were trading at 2002 PE multiples or, or, or le and levels of sentiment. If we were trading at 2008, you know, if we were trading at 1980, right? We're at like a 42k Schiller PE, like it's, it's La La Land. That's why, you know, even though I would expect gold to sell off as if any or all of these things go boom in the short run, I think gold actually would go still go down because you're still a financialized instrument. I look at all these things and like, it's just so crystal clear. I want to have the gold position there because we know in two years, dollar, you know, stocks higher in dollar terms, lower in gold terms, like gold is now the reference point to sort of everything in my view, as a result of all the, the untenability of all these issues, the untenability of wars. Like he's got to make a choice, and they all suck. There's no good choice, right? Like, you know, do you want to shoot yourself in the head, in the heart, or in the nuts? Pick. Like, uh, nine. No, no, no. You have to shoot one. Pick. That's where he is.
So, between stocks, the dollar, and the bond market, which one do you think is a bigger bubble right now?
The biggest bubble, I guess, is still the bond market on a real basis, right? It's to, to, to, because to own long-term bonds, you have to believe that your own government is going to defund itself, defund the defense department, defund the most polit, powerful political constituencies, and crash the stock market, which would crash the bond market if they tried it, by the way, just to preserve the real value of the bond market. Like, there is zero chance that's going to happen. And so to me, the only question on the bond market is like, what is the yield that they ultimately EYCC at? That's like, that's the most interesting thing to me about the bond market. The rest of it, like, I, if you want to own bonds, buy gold. And I think that's eventually that's where the market's going to go. Like, you, you, if you want to own duration, own gold. Because gold is just a 0% yielding bond of infinite duration, finite issuance, and infinite face value. Why would you own a 10-year Treasury, which is, you know, 4.6% yielding, infinite supply, finite face value, finite yield? And, and I think as more, you know, central banks have gotten that. They got that 12 years ago. US banks are like, no. Chinese banks are like, yeah, wave it in. Chinese people, wave it in. Yeah, I get it, we get it. Most of the emerging, most of the, you know, the global south, like, we get it, wave it in. You know, the western, western, and it's not just a US problem, it's, it's the Germans, it's the UK. There are these sort of, they're all on the same page like, oh no, these bonds, these are, you, these are value. I'm reading about the South Sea bubble right now. It's like I'm reading this book, I'm 100 pages into a 220-page book, and I must have laughed out loud, like literally 15 times already because it's just like, oh my god, this is all just happening again.
Yes, I've seen this one.
I've seen this one. Yes.
Yes, exactly. Exactly.
Yes, indeed. Well, Luke, we will leave it right there. People can find your writing for your clients that you talked about today at forestforthetrees. That's fft-lc.com as well. You're on X, you're on YouTube, whatever your favorite social media platform, they can follow you there. Luke, thank you so much for joining us.
Thanks for having me on, Max. It was a great conversation. I appreciate it.
Hope you enjoyed today's interview. Remember to check out the Fundrise Income Fund. Click the link in the description to learn more about the strategy and assets. Until next time.