Transcription
Hello everybody, Luke Groman, FFTT. Hope you are well. Hope you had a great weekend and hope the week has started off well for you. Uh good Super Bowl. Uh that Seahawks defense is is very good one for the ages I I would think. So congrats to them.
I'm going to jump right in uh and the interest of brevity. So first question is from AB says, "Could you expand on the dollar yenyear US Treasury yield versus JGB 10-year chart that you posted last week? Is this a catchdown trade for dollar yen implications Swiss Frank to yen and carry trade and liquidity in general?"
The chart I I highlighted I thought it's the most one of the most important maybe the most important chart in macro right now. Uh it shows that the 10-year uh US Treasury yield minus 10ear JGB yield against uh dollar yen. Uh and what it shows is that despite 10-year JGB yields rising marketkedly relative to 10-year Treasury yields, the yen is still weakening against the dollar. And so there's in the last 6 months or so a significant alligator jaws have opened in that relationship that had been basically tied at the hip for 5 years prior. Um that's emerging market behavior in Japan. uh what it's telling us that markets are discounting uh that the rate or beginning to discount at least that the rate that triggers a debt spiral in Japan isn't that far north of here and the essentially that once rates hit there some sort of liquidity renewed uh yield curve control and 10ear JGBs whatever however they deal with it.
If in terms of the implications look if if you either hike hike rates and try to defend the yen, but then that risks more of a bond market problem or and and oh by the way, a bond market problem for Japan is quickly going to spread to the US and the world uh through the net international investment position. Recall that Japan owns a lot of foreign assets, a lot of them trillions in the United States that they will sell if they have to to defend their uh currency or bond market presumably at some point in that process. uh or they choose to cap yields like I just said again and resume capping yields and that would support the nominal value of the JGB market but it would weaken the yen meaningfully um and that would have implications for global liquidity.
U if you go back to the fall of 2012 uh under abnomics if I recall correctly I think that's what it was but the point is that the the Japanese injected a bunch of liquidity and you can kind of go chapter and verse through the S&P 500 regardless of sector and all the charts charts look exactly the same when Japanese did that. They go all go whoop whoop whoop, right? So whether it was industrial, whether it was metronic, whether it was it didn't matter. Healthcare, they all look the same. So that's probably what would happen for a while if the Japanese did that again. Uh and I would think things like gold and and and Bitcoin would actually do really well in that, at least until the dollar got too strong from the weaker yen to then turn around and create a problem elsewhere.
Um, you know implications for Swiss Frank yen I haven't really thought a whole lot about it relative to the Swiss Frank uh but gun to my head I would suggest it's probably positive for Swiss Frank over yen uh you know stronger stronger Swiss Frank weaker yen simply as a safety trade uh because you know as it relates to liquidity in general um it it is a very it's a it's a pretty big warning sign of some sort of disruption I think ultimately they'll get more liquidity but I think it's a warning sign of of significant disruption before then and that would probably all else equal be bad for liquidity good for Swiss Frank uh relative to yen and relative to to most things.
So uh next question from Rabib you sometimes speak of the performance of assets or asset classes in gold terms rather than dollar terms for what type of investor do you consider gold a suitable default holding/passive investment solution? Um what percentage of investors what type of investors I would think 100% of investors ought to be thinking about the world this way especially now um I would say u my fellow Americans I love you to death and you generally are the only ones who want to think about everything in terms of dollar terms that the dollar is the center of the world not uh in terms of evaluating returns and real returns rather than looking at gold as your metric for for real returns.
Uh, and it reminds me it reminds me a bit of of the Roman Catholic Church insisting that the Earth was the center of the solar system. Uh, and and persecuting anybody who said otherwise when of course the reality was the sun was the center of the solar system the whole time. The reason why I say it's so important, I think now is gold is nobody's liability. Uh, we all know that, but and it's a basically a 0% yielding bond of finite issuance, infinite face value, and infinite duration. And at a time where uh global sovereign debt is um in in a in a bubble and that bubble is bursting and that's part of the message of what I just talked about with the uh yawning gap um of of the yen weakening even though JGB yields are rising on a relative basis. That's telling you the sovereign debt issues are getting much more acute. Uh and and you're going to want to own gold because ultimately at least for part of the portfolio because ultimately um you know when you have a year like last year where gold's up whatever it is 50 60% or something and S&P's up you know 17 or 20 or 22% whatever it is that's the that's kind of the game. That's what we've been telling clients for a couple years is that you know I think stocks go up in dollar terms they go down in gold terms and we've seen that for a couple years now. And I think when you look at the setup on global sovereign debt like that's the only way out and I think it's likely to continue and I would say it's likely to continue with the type of gold volatility we've started to see over the last couple weeks. So this that's something to be mindful of but I think over the course of the rest of this cycle you know I think we're going to have a situation where over that cycle on higher val stocks will go up in dollars and down in gold terms. Uh and so I think I think it's an important metric. Gold as your as your true north star as the center of your investment solar system. I think that's appropriate for 100% of investors.
From EY besides precious metals, what is one sector or region that you that is your highest conviction over medium or long-term horizon and why? Uh US electrical infrastructure equities. Um the types of companies that you would find in the PAVE PAVE and grid ETFs. Uh I have no relationship with either of those issuers. Um, I've got so I've got no no no no skin in that game in terms of uh reason to recommend other than looking at the companies that are in them. Those are the types of companies I think are set to do well in coming years. Why? Because we're resuring. It's happening. And I think it's likely to continue to happen. And you know when China has built electric grid bigger than the entire US electrical grid in just the last four years, we got a lot of catching up to do. The American electrical grid is basically flat in terms of capacity versus 20 years ago. Think about that. That's incredible. That suggests there's a lot of open field running for years to come in my opinion.
Uh from Alex, when yield curve control? Um in my opinion, explicit yield curve control will be the absolute last option only done as sort of the Alamo break glass emergency. more likely I think we're going to continue to see de facto yield curve control that we are years into seeing which is keep shifting issuance to the front end when you need to keep doing treasury buybacks where you swap in longerterm bonds for shorter term bonds um maybe get some stable coins in there maybe you change the bank SLR rules so that you exempt treasuries again for some of them uh you get the Fed to do reserve management purchases RMPPS which is not QE it's only bills it's not QE.
Um eventually if gold's allowed to rise enough and I think it I think it will be if it does rise enough you can revalue that and as we've talked about adnauseium and buy down a debt to GDP and ultimately as long as the dollar weakens in an orderly manner that's ultimately good paradoxically for longerterm bonds as well that should help treasury demand. you can see that relationship you know up to a point gets too crazy on the downside that's a problem but ultimately higher gold helps that. again it's not an immediate tactical thing but if you think about it the more gold back the US Treasury market is the more people are going to be willing to accept a lower coupon perfect example I've said in multiple interviews look at $30,000 gold I'll sell every ounce of gold I got just about and buy 3.5% 10ear treasuries why? Because the price of the dollar will be appropriately reflected uh in terms of the price of gold relative to in what my estimation is the amount of debasement that's likely to occur. $30,000 gold, great. Yeah, I'll I'll lend money to the US government at 3 and a half%. That's a very implied gold back treasury market at that point. Perfect. $5,000 gold, not that interested yet. Not at three and a half. And the government can't afford to pay me five, let alone 6 7 8 9 10%. So, that's why I continue to think, you know, gold over long-term treasuries until the dollar is appropriately priced relative to gold.
Let's see uh from Jay, what are some triggers? What are some of the triggers that will make you consider slash enter Bitcoin? Again, price time or nuclear printing or signs that nuclear printing is coming. Um, let's see. price. You know, right now, Bitcoin consensus, in my opinion, is still not discounting what we were talking about earlier with the Japanese bond market and potential risks and and contagion around that that could create a whoosh down for assets globally, leading with Bitcoin. And I think that's part of why Bitcoin has sold off already. It's warning what's coming for other risk assets uh for at least a moment in time um here in the first half. Uh I don't think that uh Bitcoin consensus is considering AI deflationary risks as much as they should be uh into the issue of too much debt which again is ultimately really good for Bitcoin after nuclear printing.
But look right now there's no signs of nuclear printing for the things I'm looking for for a sign that nuclear printing is imminent rather than inevitable. I'll be looking for the move treasury volatility index nearing 120 130. It's it's you know it's it's still near the lows. credit spreads still near the lows, equity volatility still near recent lows. Uh and so sort of the traditional risk metrics that policy makers are watching for, they're all fine. And so um you know, Bitcoin's actually issuing a warning that all of those metrics are going to go higher at some point here, probably in the not too distant future. But, you know, until you see those metrics warning, I don't I don't you're in my opinion, you're not likely to see policy makers uh moving to, you know, quote unquote nuclear printing. And in the meantime, the monthly technicals on on Bitcoin suggest the very least there's still, you know, there's still a lot of wood to chop in terms of best case it kind of chops along here for a while. It doesn't seem to be when you look at the technicals, a lot of urgency to turn around and bid Bitcoin from wherever 70 to 150 in a big hurry. Uh, you know, as we sit here today. So that's how I'm thinking about at the moment. Subject to change without notice. So caveat emptor.
From NC avid subscriber here. Thank you very much for your business and kind words. In your recent report you point out that the US has been exporting a great deal of gold and also that the US may well need to revalue its gold to address debt. First point undermines the second. So US is forced exporter of gold. Uh I'm not sure it does undermine uh the second. the the second point undermine the first. Uh I think it's what we might be watching is the US essentially de facto settling a portion of its trade deficit in gold and letting that trade deficit bid gold up so that the gold price increase will be much more sustainable than just say Scott Bessant bidding gold higher where he's got to become the whole market if he bids it too high. The US trade deficit is so big that if you're settling portions of it in gold, de facto, or encouraging the Chinese to do that for you, other trade partners to do that for you, uh, look, people say there's no other market big enough to absorb the, you know, the deficits. Yeah, there is. Gold is. It's just a function of price. You get gold's price up enough, gold is going to run the deficits in this new system as we see it, rather than the US running the deficits. The Chinese sure as heck don't want to run it. The Europeans don't want to and can't anyway. Ditto the Brits. did are the Japanese. So gold, if gold runs the deficits, as appears to be happening to replace the US running the deficits, that ain't going to happen at $5,000 gold. It's going to need $10,000 gold, $15,000 gold, $20,000 gold. And so if your deficits have bid it there, now all of a sudden you go, "Oh, great. Now we can revalue official gold to that number. It's an accounting entry. Boom. We've created money using that number. Now we can buy down the long end of the curve. gives a lot of optionality to Secretary Bessant. So that's how we're seeing it. Um, you know, that essentially trade settlement revalues gold high enough and then US just goes with it to uh recapitalize its balance sheet.
From aa is the Chinese government's direction to its banks to cut treasuries exposure an indication of significant economic stress and that it is trying to orient all liquidity to its domestic economy seems to be a sign of a deeply troubled domestic Chinese economy. U you know I'm not so sure it is. Um, desperate countries sell gold. They don't buy gold. The Chinese are buying a lot of gold still. Uh, I think it's a sign, you know, to be clear, there's some property issues there still. And uh I think what they're doing with Treasury is probably a sign either it's part of a deal with the US maybe um to divorce uh strengthen the yuan, weaken the dollar um or preparation for sort of that inevitability uh which I think is has to be being discussed in these trade deals. We want a weaker yuan or a weaker dollar against the yuan. if they agree to it, they would be sort of foolish not to start stepping back as they start implementing that and and obviously the yuan was was meaningfully stronger against the dollar contra contra to most expectations uh last year. So uh and then the final one for today uh from Rick thoughts on David Hunter's view more melting up until a global bust with TLT being the only safe place to park money. TLT of course being the long-term Treasury bond ETF.
Uh unless said meltup allows a massive revaluation of gold higher which is then revalued to significantly buy down US debt to GDP aka a massive devaluation of US debt to GDP by via a massive devaluation of the dollar against gold then any global bust if debt to GD if we have a global bust where debt to GDP is and deficit is and foreign holdings of US assets at negative or excuse me 27 7 trillion. and while foreigners are have borrowed $90 trillion in in non-financial debt according to the BIS in the latest numbers any bust in that world would drive US receipts well below just the interest and the entitlement payments almost immediately almost immediately and that then would almost immediately force the US into a print or default and when I mean default I mean oops we can't pay entitlements or oops we can't pay interest on the bonds default or we print the difference. We print the vig. And in my opinion, there is zero chance they are going to default nominally on treasuries or entitlements. Just politically, you can't do it. And so ultimately, I I think that rules out any sort of global bust where TLT outperforms all for more than like a cup of coffee. And when I mean a cup of coffee, I think Liberation Day last year is a pretty good indicator, right? 10-year Treasury Yield. I know it's not TLT, but long-term bonds in the US were bid and for what, seven trading days, eight trading days after uh liberation day, which was a pretty big riskoff, US Treasury market started breaking, started dysfunctioning. You could see it in the move volatility index. Intraday was highest it had been since like, you know, the crash of 87 and Leman, etc. So unless they're willing to stand aside and let be forced into a printer default choice on and treasuries entitlements, which ain't going to happen in my opinion, they've repeatedly shown they won't. they'll inject the liquidity or in the global, you know, meltup in theory that that Hunter sees ahead of time, if there's some sort of revaluation, recolateralization of the balance sheet, then you could then, you know, but that then gets back to my point, a $30,000 gold, I'll be happy to sell gold by three and a half year treasuries all day long, but not a 5,000 and certainly not at $2,000, $3,000 goal. Ain't going to happen. So, um, with that, I'm going to finish up for the night. As always, thank you for joining me. If you like these updates, check out fftt-lc.com. More information about tree rings, uh, our 10 most interesting things. Brief synopsis about each of those things and why they caught our attention, if they uh, were changing the way we're thinking about the world or reaffirming the way a way we were previously thinking about the world. But, uh, lots of great feedback on it. At any rate, everybody have a great rest of your week and look forward to chatting with you soon. Take care everyone.