Transcripts

 

Erik: Joining me now is Robert Kahn, managing director of Global Macro for Eurasia Group. Robert, last time that I had you on, we talked quite a bit about tariffs because that was the big news item of the day. Let's do a review since that last interview of how the news flow in geopolitics has evolved.

It seems like we don't hear quite as much about tariffs as we used to. Is it still as important as it used to be? And if not, what is?

Robert: Thanks for having me back on again. And you're right to say that tariffs were the central story of 2025, but maybe not fully in the way we had anticipated and talked about it several months ago.

It's still a source of important volatility. I always warn people when I talk to them tariffs will never be done with this administration. They will return they will reopen negotiations. Tariffs are a central element of their vision of rewiring global trade and investment in putting up a material wall around the US.

I think the average tariff rate now is right around 17% stated on the tariffs. It's a little lower when you take some exemptions into account in terms of what they actually collect, but, and that is a lot less than we thought it might be, say six months ago, but it is still the largest tariff shock.

This economy this country's had to deal with since the 1930s. And I would argue that it is still playing out in significant fashions. The US economy's been very resilient to these tariffs rates. But I think it's, there's disruption coming from them. And so to that extent, I would say tariffs are disruption deferred, not disruption avoided as firms now will be trying in the coming months to maybe more fully than before, pass through those tariffs to higher prices, to consumers.

Erik: Let's move on to the current geopolitical situation. It seems to me as we come into a midterm election year that the midterm elections probably are the big thing. Would you agree that's what market participants should be focusing on geopolitically? If not, what instead? And assuming that you do agree, what do you think the big items are in terms of midterm election outlook?

Robert: I think you're right to highlight the midterms, but if you ask me from my list of the, from the economic perspective, what should investors be worrying about? Let me give you a couple of things that I wanna highlight. And the first one really comes from the tariff conversation.

And so let me take, one step back on that, because to the extent tariffs were the story of 2025, I would argue that Clay is beginning to harden a bit around that tariff hole. Let me explain how that. We are seeing what's the formation of a three tier tariff structure, China with high tariffs around 30%, much lower than they were, but still at around 30%.

Most countries in the 10 to 15% range, and Mexico and Canada lower below 10% because of the legacy. But I do think that those rates are starting to settle and while, as I said before, I think that we will see tariffs continue to fluctuate. Exemptions continue to be negotiated. It'll still be a factor.

There's less room, to vary that there's less, gonna be less volatility in that space. And of course, we have a Supreme Court ruling pending, which could overturn the basis in which many of these tariffs were. Put in place necessitating a plan B. And so what I think we're starting to see it going into 2026 is an administration that while they will still use tariffs are moving, are pivoting towards a greater reliance on what economists call industrial policy.

It's deal making with companies and countries where the government is getting directly involved. In the investments the deals the strategies that companies. Take on whether that's taking a share of profits that Nvidia will generate from its China chip sales, or taking an equity stake in a company for permission to to invest or giving a tariff relief to a pharmaceutical company that agrees to sell drugs through a portal named after the president. All these are examples of direct intervention in markets in ways that we really haven't seen in the US economy before. And I think that's gonna be a big story in 2026. So that would be the first thing on my list. The rise of a greater industrial policy, greater market intervention.

By this government, which is interesting because you have a government that on terms of its commitment, wants to deregulate, wants to free up industry, but at the same time much more actively weighing in on the terms and conditions of deals. That ties into the midterms in the following sense.

As I look at the upcoming midterm elections, I think that you're gonna see the center of the debate focus on what political analyst call the affordability debate. I think what we're seeing from voters, and we saw this very much in recent off cycle elections in New York City, in Virginia and New Jersey and elsewhere, is that voters are very frustrated.

With the rising cost of living with the uncertainty around their economic prospects, jobs, wages, and the like. And to some extent, the president is being blamed for that. Presidents often are blamed when people feel insecure about their future economic. Prospects, and certainly that is the case here.

And the Democrats, I think, have probably been the first off the mark to highlight affordability as an issue they believe should serve them well in the midterm well, the President is fighting back and that means that these issues of affordability are going to be front and center heading to the midterm.

Of course, tariffs raise prices. That cuts the other way. It creates attention, I think, very much for the White House. In terms of that affordability. And so you're gonna see them cutting deals on tariffs lowering them, for example, on bananas and coffee. As I say, giving exemptions to firms if to, if they lower prices.

So affordability will affect and constrain that tariff structure but it will not fully offset it. Tariffs will still remain an important part of policy. So we're gonna see this tension playing out between the president trying to both accelerate his. Vision for the US economy, but at the same time trying to respond to these affordability concerns in going forward and trying to reclaim that narrative.

I think it's gonna be very hard for him. I think people's views are starting to get set in that regard. And so if you ask me how, I think right now the midterms are likely to play out I would put a very high probability. In fact, this Eurasia call is an 80% probability at the House of Representatives.

We'll move to the Democratic side of the ledger. In the midterms we put 30%, probably the Democrats could take the Senate. The path for that is much tougher given the seats that are up than the candidates in play there. But it's still possible in a wave election. But getting back to the house.

What we often see when a president's in his first two years has a both houses of Congress. There is a backlash. There isn't no usually a big swing in parties, and of course. We're starting with a very narrow Republican majority, even though I think we're our debate, our political debate is more polarized now.

Even though redistricting for a while we thought might tip the battleground a little bit in the Republican side, it now looks like that will be a minor factor. So as we look at it, it looks very likely that the Democrats will actually retake the house and that will of course, change very dramatically the political balance going into the last two years of the Trump term, it means even more so than now. The president would've to rely on executive orders and administration action rather than looking to Congress to support him with legislation.

Erik: I wanna focus on the first thing you said about midterms, which was the government policy intervention directly in deals and so forth.

I have a speculation, I can't prove this, but frankly, I think that President Trump is very focused for all of the reasons you just described on getting lower gasoline prices in the United States. So he can take credit for it and say, look I'm the president who's looking out for the little guy, and keeping those affordability issues under control.

I think he's probably already made some kind of secret deal with Saudi Arabia that we don't know about that has resulted in the Saudi increase in production. And I suspect that deal has an expiration date that comes before the midterm elections. And I think probably the reason that President Trump is so obsessed with.

Bringing peace to Ukraine. I'm sure part of that is, is legitimately what it is supposed to be on the surface, which is wanting to stop the killing and bringing peace to a wartorn region for the sake of humanitarian reasons and so forth. But frankly, I think to an equal, if not greater extent, he wants to solve that conflict so that he'll have justification to remove sanctions on Russia in order to get more Russian oil flowing in order to, again, keep consumer prices down and address that affordability crisis. What do you think of those ideas?

Robert: I think that you're that're spot on, and I'm almost entirely agree with you on that. I think there's a lot of good historical analysis that reminds us that gas pump prices are perhaps the most important single variable for how people feel about affordability, and particularly for those Americans.

And there's more of them than ever living paycheck to paycheck. What you pay at the pump. Matters tremendously, right? For how you feel. And I think the president has, as you say, put gas prices high on his list of how he has measured his success. At the same time, there are other factors some of which are being driven by his policies.

That also factor into what you pay for that gasoline and what you pay for. Energy more broadly, right? Gas prices can move differently than price of a barrel of oil. We know that electricity prices are facing a lot of upward pressure from this boom in data centers and related investment spending.

So it's a, it is a complicated story in that regard. I think you're right to say that this is a factor that has been animating the president and probably does come up in every conversation he has with Middle East leaders.

Erik: Now, another area that I think relates to affordability that the president has not been shy about intervening in, is determining the next Federal Reserve Chairman.

So we've had at first it, it seemed really clear that Kevin Hassett was the pick, and now maybe it's not so clear. What do you guys think about who the pick is, but maybe more importantly, how much does it matter? Because I think everybody's focused on who the next chair is gonna be to replace Jay Powell.

The chair is only one of a whole bunch of voting members. I don't think that there are a whole lot of other changes under consideration to who the other members are, although I think there, there would be a rotation. So what's the outlook in terms of the Fed? People who are likely to be in charge, and what is it gonna mean in terms of fed monetary policy going forward in this election year?

Robert: So those are great questions and pretty hard ones too. And I'll start with the one, the hardest one, which is who will the president pick to be the next chair? And the honest answer is, I don't know. That I don't know. And I don't think many people do know the president's mind. The sense is that he hasn't made a final decision yet.

Certainly we know that he can, kind of mole over these big decisions to the last possible minute, sometimes be influenced by the last person he talks to and not and probably keep counsel with a relatively small set of people. We do know, as you said that early on, he was making comments that suggested he was leaning towards Kevin Hassett.

Who he is known for a long time has a great deal of trust in and values as an advisor. Kevin is also very good at communicating the president's views. Which is something the president values, that sense of loyalty commitment to the president's vision. All of that made him, I think, probably an attractive candidate early on.

His background isn't in monetary policy. He's well known from his earlier days as a person focusing on tax policy. And he has played more of an advisory role in the administration than a driving of decision making. And but still all the signals were that the president might be leaning that way.

It does seem like as we get close to the finish line that those who support other candidates are making their case. And I think you've had this broad public debate now going on, and I do think there are legitimate arguments made that Kevin Hasset will struggle as chair.

To command a majority in favor of Trump's policies. In other words, he could advocate them, but as you said, when you go to that Federal Reserve open Market committee meeting, there are 12 voting members around. You need a majority of them. And you can't just as chair come in and say, I want this and expect to get it.

And indeed, the center of that committee right now really is not. In alignment with what the administration wants. And so I think Kevin Hassett might struggle quite a bit. I think one of the arguments made against him is that some of the other candidates in particular Kevin Wars, who is formerly on the board or even Chris Waller, who is currently on the board and is really a very strong macro economist.

Might be able to do better at coming in and building a consensus for different policies. Although those policies may not be entirely what the president would want. So the president seems to be trading off that sense of loyalty versus low rates versus maybe an effective and efficient chair.

In that sense. I think the leading candidates, and I might throw a reader into the mix as well. They are very different characters and might have different outcomes. And so I'm gonna say, I'm gonna give you my bottom line answer here and it's gonna be a bit the two handed answer on the one hand because these are different candidates and because the president himself has been forceful in pressing the Fed for policies and has the has by doing so. Raised concerns about Fed independence, that this will be a consequential choice, who he chooses may matter a lot. On the other hand, I'm gonna also argue to you that the person chosen might be quite weak in the early days. 'cause of that lack of consensus, we may see more descents than we have seen for some time.

We may see a board that is more sharply divided, and so from that perspective, it may take time before we really get that imprint. I do think we should be watching this very carefully and I am hoping that whoever is chosen does recognize the huge value. To the US economy of having a credible federal reserve that is independent from the administration, whichever, Democrat or Republican, and pursues a mandate of price stability with full employment.

Erik: I wanna go a little deeper on that last point because it seems to me that what we're seeing really is almost a certainty of the opposite outcome. In theory, the Fed has been independent from the federal government and makes its own decisions. I don't think anybody, who's intelligent really believes that completely. But at least there was an appearance of Fed independence. It seems to me that President Trump is pressing pretty darn hard for dictating what he feels fed policy should be, and really looking for a new Fed chair that will carry out the President's vision for lower policy rates.

And Jim Bianco told our listeners last week, be careful because real estate guys like President Trump. Always think lower policy rates are a good idea. Sometimes not. Realizing that lower policy rates don't always translate to lower borrowing rates further out at the end of the curve. If you create an inflation risk with by making a policy error with.

Too low of a policy rate, you're creating a risk that inflation fears will spark higher rates at the back end of the curve. I'm not sure if if the Fed's independence is really going to be possible with so much political influence. Am I reading too much into that?

Robert: You are not reading too much in it.

And Jim is spot on to use a spinal tap reference. I think you turn, on a scale of one to 10, let's turn it up to 11 and agreeing with that. I do think that the president's pressure campaign over the medium terms gonna, is counterproductive. It may generate slightly lower policy rates, but as you said it, the risk is a steepening of the curve.

Because of higher uncertainty, higher inflation risk and the like. And so there be, that idea that a lower federal funds rate means lower mortgage rates really is off the mark. There's a political aspect to this as well, because I think the president, hoping to spur the economy and making this kind of, I, I think mistaken analogy between the po policy rates and growth per se, in the near term just wanted lower interest rates for a long time.

I think as we head towards the midterm, and if I'm right, that affordability is gonna become a focal point. And if it is also true, as I suspect will be that firms will start passing through more of the tariffs to prices and the immigration crack down will create some labor market shortages, putting upward pressure on wages, and you add that all in, we're gonna be looking at an environment in a few months where inflationary concerns are the bigger concern for voters.

And I think the president may in that moment. See a trade off where actually having a fed that is more credible and diligent in fighting inflation actually serves him better. A fed that is seen as bowing to political pressure, cutting rates too much resulting in a much deeper yield curve and tighter financial conditions.

That's a real risk for him. And I think actually he may ru the day that he highlighted the interest rates. If we end up in that world.

Erik: Do you think there's a realistic chance that. He sees that and comes around to the point where it's President Trump, who's saying, wait a minute, let's not risk a dovish policy error.

We've got to focus on inflation, guys. Maybe we should be raising policy rates. I can't imagine those words coming off of,

Robert: I don't, I certainly don't expect that last sentence, that he would advocate higher rates. But I do think the first sentence saying, Hey, prices are too high.

We understand that it's not our fault, it's the Fed's fault. Could become an a more, a narrative we hear more of in 2026.

Erik: So in other words, president Trump might be publicly saying it's the Fed's fault, and those suckers at the Fed, they need to get policy rates down and they need to fight inflation harder at the same time.

Get to it boys.

Robert: Get to it, boys. Now, I do think that the, some the president's economic advisors do under, I think do understand the inconsistency, if I can say it that way. The tension in that argument. And they do understand that ultimately this administration is well served by a credible and strong fed that is balancing it.

Look, the Feds cut rates the last three meetings, right? Not as much clearly as the president would want, but they have bought some important insurance against the softening labor market. There are some measures, say they may have cut too much, but I think from their perspective and as an insurance policy in a period of high uncertainty and also some missing data it probably made a lot of sense and they can always, of course, pull some of that back if they overdo it.

So I, I do think we've seen a fed with the willingness to act. A fed that is attuned to labor market weakness, as well as inflationary risks, and frankly speaking in a lot of ways have gotten it right over the last year and a half in trying to thread this needle between, bringing down inflation and also, putting a floor under the labor market.

Now, I'm not giving them full credit for bringing down inflation. We've still running above the 2% mandate that Congress has given them. But I think they've acted pragmatically in that regard. And by and large, Powell, Chris Waller, importantly, who's given some very, insightful speeches and all of this, they have basically not been far off in their assessment of the economy.

Really in the last, say is a year and a half, two years, I do think in the pandemic, they misunderstood the inflation spike and were slow to react to it. But I think more recently they have shown a willingness to act.

Erik: Let's move on to the Russia, Ukraine conflict. I think the curve ball that's surprised me a little bit is it seems that as President Trump is pushing really hard to try to get a peace deal together, which I think is partly because he wants to take credit for the peace deal and also take credit for the resulting lower energy prices.

It seems like that's actually causing pretty significant tension between US and European Union policymakers and I'm questioning whether that's going to lead to a breakdown in the US relationship with the EU.

Robert: I think the US and European relationship has as strained it has been since World War II. I think it's unfortunate, but I very much, I think, consistent with. The President's vision of the world, his distrust of Europe, and his desire ultimately to get a peace agreement between Russia and Ukraine.

That would also come with a normalization of relations with Russia. All of that is, of great concern to European leaders, and as you say, the European, the Russia, Ukraine conflict has exacerbated those tensions. I think, the Europeans have been very focused on keeping the US involved with in in, in creating a path for peace.

Providing continuing support to Ukraine. And I think by and large, Europeans have been pretty constructive in that regard. But stepping back, where are we going is really the big question. Despite the flurry of talks over the last few weeks, it's hard to be optimistic that these current round of negotiations will lead to a, any kind of peace deal.

Putin has held Maximalist demands. Two sides are still very far apart, and it's hard to see the current deal being the basis for a peace agreement. Now that said could this be the start of a conversation that could. Over the next year or so, set the basis ultimately for a peace deal. One could be hopeful for that, but I think I would take as long as very significant differences remain on territory, on security guarantees.

And on the financing of Ukraine's reconstruction that this. The current talks will, are unlikely to lead to a breakthrough in that regard. The war, unfortunately, is likely to continue. You are prob you are continuing to see attacks including on energy structure from both sides, including from Ukraine.

And of course that's putting some upward pressure on oil prices leading into our earlier discussion.

Erik: It seems to me, if I just think about the tactics of politicians, which is usually to blame somebody else, when it doesn't go your way, it sets the stage for President Trump to say, okay, look, I negotiated the perfect deal.

Everybody loved it, except after the Europeans got to Zelensky, it got thrown out. I would've solved everything. We would've had peace, we would've had lower energy prices. And what if the punchline on that is? Okay. Europe, you're the ones who pushed Zelensky to not take the deal. This is your problem.

Now, the US is stepping out of this. We're not spending any more money on this. Europe. You want to insist that Ukraine has to keep up the fight for not losing its territory. You pay for it. We are out. Is that possible? And would it be a strategy for Trump to push the blame, at least in the perception of American voters onto, I solved the problem, it's their fault for not taking my deal,

Robert: it's their fault.

And so we'll break. We'll, we need to break relations. That's certainly the concern of Europe. That it leads to a fraying of the relationship between the US and Europe. First and foremost, the recently issued national security strategy was very critical of European leaders and European politics in ways that were shocking. I think

For those of us who grew up in the North Atlantic Treaty Alliance framework. And certainly that would be the concern. At the same time, the administration has hinted that there might be more sanctions on Russia if they reject a peace deal. So there's certainly gonna be a lot, continue to be a lot of jockeying by all sides to say, it's not our fault.

This didn't go through, we were being reasonable, they were being unreasonable. And that is certainly central to the politics of the moment. And you see this with President Zelensky offering a referendum on elements of the peace deal. In the context of a ceasefire, but at the same time being very inflexible on seeding land ahead of any ceasefire.

You're right to highlight that as an issue if we do go down this road of the president washing his hands of of Ukraine's future in, at least financially in the context of a failed deal. We will expect to see the full check moves to the Europeans in some sense, the cost of keeping Ukraine afloat of allowing them to continue to sustain the war effort pay salaries.

Make repairs to energy and the like. All of that will fall fully to the Europeans and we, that's our base case. That's why I think that by the end of the year you will see the Europeans strike a deal on using frozen Russian assets. To finance Ukraine. Obviously this will produce huge criticism and threats from the Russians.

They'll be very unhappy with it. The US itself doesn't want Europe to go ahead with that, but at the same time, absent US money, I think the pressures to draw on those frozen reserves will become, impossible to resist. So I actually expect to see a deal by the end of the year moving forward with that.

If it doesn't happen, probably some sort of borrowing arrangement with Europeans for Ukraine. But I think that what you're saying about the direction is Europe's gonna have to take more of the lead in terms of financing weaponry and the like. I think is very much should be the base case.

Erik: Now from time to time, president Trump has made threats and I perceive them as deal making threats as opposed to serious threats.

But he's actually threatened for the US to pull out of NATO completely. Representative Thomas Massey, who is not friendly with the president, has actually introduced a bill for that to have the United States withdraw from NATO. Is there any. Possible, actual outcome that could happen?

Or is this just politics?

Robert: I think it's probably always gonna be a tail risk there. The president is not inherently, instinctively a multilateralist. He doesn't have trust in these institutions, and he absolutely has a, seems a deeply held conviction that the US in a sense has gotten a raw deal from these type of large international security commitments, right? That we have paid more than we got out of it. I strongly disagree with that assessment. I think it has served as an a keystone for the peace since World War II that has produced huge. Benefits for the United States has allowed our rise as an economic and military and political power.

I feel like that's the right answer, is to say that we have benefited to an extraordinary degree from that, but that's not the president's view. So there's always a certain amount of risk for that. But I am hardened by the fact that the, that there is an element of that which maybe is simply leverage or.

Deal making that the president does listen to his advisors who do appreciate the value of the, as I would say, the value of having a fire department in play and that there is a deterrent effect from belonging to these institutions. Now, it does mean Ukraine, remember some time ago. Was pushing very hard to become a member of NATO.

And that's not going to happen. I think that's very much the result of this political debate. But I do think that there's real value in having the US engaged in these structures, even if the commitments that are being made by the US are weakened. Relative to has historically been the case.

Erik: We've actually seen a couple of European countries, not the central ones, making public statements saying, look, if some of these EU values continue, we've had enough of EU. Is that a trend that could grow likes?

Robert: Certainly is. If you, and as I said, there's a, there's recently this national security strategy came out.

It is a a vision statement, if you will from the US and while look, it's importantly a messaging document. It's a signal rather than a specific strategy that will now be implemented. It was very harsh towards the Europeans and very much along those lines, and even hinted at getting involved in European elections in the next couple years.

And on the side of right wing anti European integration candidates. So it's very much an element in the wind if you'll say it that way, it's kind of in the air and I think there are certainly elements of the president's team, and I think a lot of people point to Vice President Vance as one of them who strongly believe that the US should be less engaged internationally in that.

But, we saw his talk. It's a complicated story because. On the one hand, the president ran on an American first strategy that many people saw as saying, let's be less engaged internationally. Let's have less commitments, less wars, and the like. And we used to talk about this in the context of a G Zero world in which the US is stepping back from global leadership and there's no other country that steps forward.

And there's certainly an element bit of that. But at the same time, this is a president that can be very assertive, aggressive, even in, in getting involved in international conflicts in war, as we saw with Iran, la earlier this year in mediating conflicts all around the world. And now of course in Venezuela threatening that country in a way that could lead to significant conflict in.

The region. So we do see a president that, on the other hand is really, is still quite engaged. And the question of having in, in that environment, I would say even more than ever, having these international relationships like and engagements and having us having EU. That holds Europe together.

And having the US engaged with the EU constructively, I think serves the world and serves the US very well. As I say, that isn't the, there are many voices in the US administration don't feel that way and see a United, European Union as actually a threat, a challenge to the US, not a partner.

Erik: Let's move on to the other big potential challenge, which is China's relationship with the US.

Boy, we've got a country that we rely on for almost everything. All of our prescription medication, almost all of it gets manufactured in China. A lot of the midstream of manufacturing, we talk about we've got this big copper mine here. Copper smelting the aluminum smelting.

A lot of the process. A thing that needs to happen to make most commodities actually useful happens in China. So we've got this massive global dependency on China and a growing geopolitical tension. It seems to me that's a recipe for disaster.

Robert: I'm gonna be honest, this is one where I was a bit off.

I didn't get, I got it a little wrong in terms of the last time we talked, thinking back and because you're getting at this really interesting tension, as you say, between dependency and contesting contest, and I think through most of 2025 through most of 2025.

I was focused on the growing contest between the US and China and worried that we were in the process of seeing decoupling between the two countries that this, that the us that because both countries saw each other as chief rivals, we were gonna see growing trade frictions and a wall between the two countries.

We were gonna see growing competition on national security issues and like in ways that would be damaging, not just to the relationship between the two countries. But also would serve to fragment global trade and finance. Because the US China relationship is so central.

Now, all of that I think is still true. As a longer run driver, I do think these two countries will ultimately be in contests a across a wide range of issues. But your point about dependency has become more clear, I think, in coming months, and particularly on things like Rare Earth where the US has come to appreciate its dependence in the near term on China.

For the, not just the mining of it, but the refining of these materials. The Chinese, of course are, have faced a difficult economic situation themselves and probably feel this is the worst possible time for a major trade war. Both sides, I think, have come to appreciate the value of a period of stability and President Trump met with president Xi in Busan, South Korea now a little more than a month ago, and what came out of that was not a comprehensive deal, but certainly some sort of ceasefire, if you will, a putting down of arms.

On particularly trade and also on some security issues, and a framework was laid out in a sense for stepping back. The US in particular took down some of its tariffs. Ease some export controls, made commitments going forward. Chinese resumed shipments of soy, very important to US farmers, and also agreed on to provide easier export licenses for rare earth materials.

There were other elements as well. Now, implementation is gonna be a challenge. A lot can go wrong and there can always be a spy balloon somewhere that unsettles the relationship. But by and large, there was a commitment by both sides to step back. As I say, to put down their arms. I think this is pretty durable.

And so in that regard I think my outlook going into 2026 is a li is somewhat more constructive. Than I it was before. Now, part of that is indeed, it's a kind of bad news, is good news because from a US perspective, the dependence on these rare materials and is really profound in ways that I don't think everyone fully appreciated from defense material to high end technologies to everyday consumer products and it's not going away soon. You can't just decide we're gonna stand up that industry and be competitive in a year. This could be from all our clients we talked to from the experts in the area. This is a five to seven year deal. And so I'm not sure to the extent the US has decided that a pause makes sense.

At this point. I'm not sure that changes in six or nine months. And so as I look down the road, I think certainly for the course of 2026. The conflict between the US and China is gonna be less of a geopolitical driver of volatility than in 2025, and that I thought it was gonna be,

Erik: I couldn't agree with you more on the point that the coming war with Russia, that so many people fear a.

I don't think is a serious risk, and I say that for the simple reason that although it may not be in the headlines yet, there are plenty of people in the US military that are smart enough to recognize that the US could not possibly win. Any kind of kinetic conflict with China because they hold all the cards.

And I think it's very sad that's true, but it is true. There's a Australian entrepreneur called Craig Tindale, who recently wrote an excellent piece about this which is really starting to go viral after Robert Friedland the CEO of Ivanhoe Mines had retweeted it, and it's it's getting a lot of circulation.

We'll put that in this week's research roundup for the benefit of our listeners, but, I want to take the remaining time that we have and really focus on the hardest question, which is, boy, so many different subjects we've talked about in this interview. How do we assimilate all of this to your actual job title, which is not geopolitics, but your managing director of global macro.

What does this mean for markets and how do people position to consider all of these complex chess pieces that we're talking about?

Robert: I do think, I know this is gonna sound self-serving, but I'm pretty convinced that geopolitics is gonna remain a very important driver of market volatility. That was certainly a story in 2025, and I think that that continues to be the case. Some of that is the president. His ambitions of enacting major change, his own management style and some of the volatility and uncertainty.

And that word needs to be stressed, uncertainty that it creates, right? And that's a killer for making long-term irreversible investments. Whether in the US or elsewhere, and that will continue to play an important role. So I think geopolitics still matters, number one. I think that as I look at 2026, and we've touched a little bit about on some of this in terms of the affordability debate in the midterms, I think the, a critical question is one critical question is how this administration responds to disconnects.

I think the president does have a vision that he would be able to, restore a manufacturing future driven future for the us. I don't think his policies get us there, but what happens as that it disconnect between tariffs and the really, and industrial policies and all of this.

Don't generate the results he wants. What does he turn to? If affordability become re becomes an intensified concern for which the voters hold his administration return? What does he turn to? Does he adopt more unorthodox policies? Does he step back? These are gonna be critical questions, I think, in coming months, but as saying that, I don't wanna make it sound like this is just a question of this administration and this president.

I like to always say that President Trump is both symptom and cause of the current moment that we live in, right? That he he and ha came of political age. After a period in which, Americans I even, you can say this globally, but let's focus on America, where Americans were losing confidence in the market system and the free and the open market systems that we had produced and built up.

Since World War ii. Some of that I think was the disruptions, the dislocations from globalization and the discontent from those who were losing out, who felt their futures were not as strong. Some of it was the challenges from shocks, the global financial crisis, the pandemic and the like. Some of that I think is social media.

In the way in which it's changed our dialogues, but that mix of policies and developments and big trends, I think has created a sense of insecurity and a sense of conflict, intention, and the president, in a sense understood that and in a sense, rode that wave. Now I think he's been an accelerant to that process.

But, I think it raises the question of how much of this is President Trump, and how much of this, if you will, is Trumpism? How much of this is likely to persist even after his time as president? I think those are really interesting questions. I like to think that we are in some sense in a geopolitical recession.

What do I mean by that? It's not quite an economic recession, but there's this analogy of a sense in time which our politics are not helping us solve big problems. Are not bringing us together in ways, we've gotta find better ways to do that. So if you're asking me what does the outlook hold? On the one hand I see in a US economy that remains pretty resilient.

It's very dynamic in important ways, but yet I think is also leaving a lot on the table, if you will, by its current policy mix, sacrificing in terms of innovation and dynamism in ways that I think are gonna have some lasting consequences. So I think it's, can we find ways of coming together better and finding bipartisan and.

And, solutions to the challenges we're gonna face, I think this is a big question that we'll probably get answered over the next several years. But even beyond that,

Erik: With respect to some of the trends that we're seeing, price of gold is going crazy. We're not seeing any big upside in crude oil prices.

I think that's probably because of the president's efforts to intervene in the opposite direction. Are there any significant trends that are not already obvious that our listeners should know? About or think about in terms of investments?

Robert: I'm gonna make one comment. It's an economist comment, but I think it speaks to an investment strategy, which is and we, taking it back to our Fed conversation, the, what the Fed does down the road in terms of interest rate, cuts, depends a lot on what they see is what they call the neutral rate or what some economists call R star, which is the real interest rate that is right for the economy.

We've just been through a 20 year period. Where the sort of medium term interest rate that was right for the economy to be at full employment was coming down and for some time was very low. We called it the great moderation. We got very used to having very low interest rates and a low cost of capital.

It was a big source of growth for the US I would argue now that. The things we've been talking about today that include fragmentation, that include maybe some reversal of views on the US as an investment environment, which makes capital more costly. We won't have the giant pool of global savings to the same extent we did, we have had in the past.

All of that is demographics. These are all consistent with a higher R star. In other words, that interest rates fundamentally will have to be higher. In the medium term now than they have been in the past. Now, that is a controversial statement. Even within the Fed, there are people like John Williams, the New York Fed, who thinks that rates can go back down to where they were before the pandemic.

Others like Lori Logan at the Dallas Fed says no. Our stars could quite possibly be higher. In other words, the cost of capital will have to be higher. It has profound implications for the cost of housing. It has profound implications for investment more broadly. The verdict is out on all of that.

But if I had to say that our conversation today gives you some important reasons to be cautious in assuming that rates can come, go back down to where they were over the last couple of decades.

Erik: I can't thank you enough for a terrific interview. But before I let you go, I want to ask you about your boss, Ian Bremmer.

I know he has two super high priorities going into the beginning of the year. Of course, the first one is accepting our longstanding invitation to do a Macrovoices interview, but right behind that, he also publishes this annual top risks piece, which kind of tells people what to watch out for in the coming year, when does that come out, and who is it available to? And in general, for people who want to learn more about Eurasia Group or follow your work, how can they do so

Robert: Well thanks for bringing that up. I'll definitely tell Ian that he should follow up on this conversation we've had today. You're right, we put a tremendous amount of work into our top risks outlook. It's not really a risk, it's really our vision. So it's our base cases for how we think the world is going to go. But we do focus on developments that are not fully appreciated by investors by political leaders and the like, and that's why we call it top risks. It'll come out the beginning of the first week of January. So I think that's around the third. Last year was a weird one, to be honest. In some ways we maybe forget that, but, in the past many times, top risks would focus on far away wars or big geopolitical global trends.

Last year, most of the risks had to do with the US had to do with how the president, a new president's policies. Would change the world. So we talked about tariffs in immigration. We talked about norms and rule of law. We talked about deregulation and those kind of issues, and all of that remained front and center for investors.

We haven't decided yet, and I wouldn't wanna front run Ian on all of this, but I certainly think that as we look ahead and given, if you think about what we've just been talking about today. The US remains at the center there of these debates, good and bad. There will be some wins.

They won't all be problems. But I do think we're in a world where the US effort to, as I've said earlier to the us. Desire to rewire the rules for global trade and investment will continue and the implications of all that, what it means for us in terms of a country on our politics, on our constitutional rights and rule of law and the like. All of those issues will continue to be of central importance for all of us in 2026. And yeah, look, stay tuned for our top risk report at the beginning and I'm happy to talk about it. We put it on the website. We have a lot of public facing documents and even puppets.

Please tune in. It's Eurasiagroup.net

Erik: And again, folks, the website is eurasiagroup.net. Patrick Ceresna and I will be back as Macrovoices continues right here at Macrovoices.com

 

Erik: Joining me now is Bianco research founder Jim Bianco. Jim, what a perfect time. We're speaking Wednesday afternoon, just literally minutes after the Fed Press release. We've got a cut, which was expected, some bill purchases, which some people expected, and I think it's also important to talk about the divide.

This was not a unanimous decision of the Fed. What is in your mind, the signaling of a split fed on a decision like this that was widely anticipated? Let's cover all those things.

Jim: All right let's start with the cut. The Fed cut the funds rate by 25 basis points for a total of 175 basis points since they started cutting in September of 2024. They left the door open to the idea that, they might be done or pausing for a while. The dot chart, which was updated or dot plot, which was updated, only shows a median of one more rate cut for all of 2026. Of course, there's eight meetings.

One rate cut means seven of them. You're not gonna get a rate cut if that's indeed what they all wind up doing the other thing they announced. As you pointed out, they call it reserve market purchases, RMPs, don't call it QE. They're going to buy $40 billion of bills, maybe out to three year notes if necessary, but mainly bills a month going forward.

Now, what's that all about? The Fed has been doing quantitative tightening. They have reduced the size of their balance sheet, which also reduces bank reserves to the point now where the funding markets are not big enough for the underlying treasury market.

Remember, the funding markets, the repo market and everything else, what is their purpose to finance the 38, 39 trillion dollar treasury market? They're not big enough to do that. There's a tightness in that market, and those rates have been going up. So the Fed announced $40 billion of buying to try and add more reserves into the system, give banks more capacity to hand out more repo loans to meet the size of that market.

Now, the pushback I'll give you is stop there real quick before I talk about the vote. The question that everybody's been attacking has been, I think from the wrong side, they've been saying there's tightness in the repo market. So the fed's gotta do quantitative easing, refer market purchases.

They need to change the supplementary leverage ratio or maybe expand the standing repo facility or all these other things to accommodate the funding market to meet the needs of the treasury market. And I've said, but no one's turning it around and saying maybe the funding markets are giving a signal.

The treasury market's too big as opposed to the funding markets being too small, and that signal is Congress. You can't keep borrowing. You can't be keep borrowing at this level. You can't keep running $2 trillion deficits and keep with these massive budgets because if the Fed were to expand the funding markets, which is what they're doing, maybe they're sending a signal to Congress.

Go ahead, keep running these big deficits. Go ahead, expand your budget. Start new programs. And what's the concern there? I think that in the post COVID environment. After the supply shock of 21, that caused inflation to spike into 22. The next biggest driver of inflation is government spending. And if the repo market or the funding markets were too small saying you gotta back off in the government spending, and our answer is no.

We have to expand the repo markets so they continue the government spending, then we're gonna be worried about that. They're just encouraging or enabling more government, which enables higher inflation. Finally, as you pointed out the vote was nine to three. That's the first time since 2019 that we've seen three dissents.

And they were two-sided. Two dissenters Schmid of Kansas City, Goolsbee of Chicago dissented that they did not want to cut rates. And Stephen Miran wanted to cut rates 50 basis points. So we had a hawkish dissent and we had a dovish dissent. But going into this meeting, the expectations were for a bigger amount of dissent. I'll quote Nick Timiraos, the Wall Street Journal, Fed Watcher, yesterday's paper. He pointed out that if you listen to all of the Fed speak, since the last meeting on October 29th, there's 19 members of the Fed. 12 of them are current voters. They rotate the voters. 10 of them have come out with statements that they are uneasy about continuing to cut rates. And five of them were voters, but we only got two con dissents against cutting rates. And overall we got six soft dissents. Now what's a soft dissent? The Fed put out its dot chart again today and there was still a 25 dot plot in there, and six of those dot plots were for three and seven eights, which was the rate before the meeting. So six of the members put down as their dot that the fed should not be cutting rates, although 10 of them have given speeches suggesting it, and only two of them dissented. So a couple of these members that said that they didn't wanna cut rates actually relented and went along with it.

Now why is that important? Because in May we're gonna get a new Fed chairman. Kevin Hassett seems to be the leader in the clubhouse right now and that Fed Chairman is presumably gonna do the bidding of Donald Trump, who has made it very clear. He thinks that the funds rates should be a lot lower than where it currently is.

There's a number of Fed officials that are more concerned about inflation to continue to aggressively cut rates. In theory they could stand up and push back and say, yeah, but you're only one of 12 votes. New Fed chairman, who's the other six that are gonna vote with you to give you a majority because we're not in agreement here with you that we should be cutting rates, which is all fine and good, but if they wait until May to finally push back on that, they look, the Fed looks.

Highly partisan. 'cause you waited for Trump's guy and then you got a spine with all your dissents. But when we had Powell and before him yelling and before her Bernanke, you never dissented on any of that stuff. But now with Trump's guy, you're dissenting. And so they would've been better off, in my opinion, having a seven five vote Now to show, look, we're pushing back.

He had enough to get the cut through, but we're really of the opinion that we shouldn't be aggressive with these rate cuts in the future. Note to next Fed Chairman, but they didn't do that and I think that might come back to haunt them when we get that next Fed Chairman.

Erik: I'll come back to Kevin Hassett in a few minutes, but I wanna go back right now to some of the comments that you made a few minutes ago about how the market is responding to the government continuing to run all these deficits.

It sounds like you're saying, okay, early stages of bond vigilantes showing up in fighting armor might be, starting to show their faces. Is that what you meant? And I guess if the qualification I think is boy, for any sane thinking person, we've all felt for the last 20 years, like US government spending is outta control.

Surely the bond vigilantes are gonna show up and it's all gonna be, forced their hand. But that hasn't happened in the last 20 years. So what would be the changing factor that would cause Bond vigilantes to actually be able to change the or to force the hand of the government. And why hasn't that happened for the last 20 years?

Jim: I'd say for the last part of the question, the last 20 years, let's say pre COVID, no matter what we could do, we couldn't get inflation above 2% to any great degree except for brief moments here and there. So we were always in a very low inflationary environment. So the bond vigilantes really had nothing to be vigilant about.

In the post COVID environment, we are five years. We are approaching the fifth anniversary of the COVID shutdowns. Right now, I actually, excuse me, the sixth anniversary is coming in a few months in February of 2026, and the inflation rate is still 3% or higher, depending on which ones you look at. So they can't get inflation below three Now.

As opposed to above three. So the bond vigilantes, I think are, as you pointed out, putting on their armor and starting to push back. Now, I would argue again what I said before, 175 basis points of cuts and the 10 year notice, 55 basis points higher. On top of that, I would point out that gasoline prices in the last couple of days.

Have now broken below 3% as $3 as national average. That is the first time since the Russian invasion of Ukraine, that we have seen gasoline prices below $3. So that alone should have been very bullish for bonds. So you've got falling gasoline prices, you've got 175 basis points of cuts. And you've got the 10 year yield higher by 55 basis points.

While all that's happening, that sounds to me like a real pushback in terms of bond vigilantes, even though you might say, but Yeah, but it's still 4.15. It's not five, it's not six. Yeah. But they've ignored what should have been. Incredibly bullish stories for bond yields to fall and fall quite a bit, and they haven't.

So yeah, I think that the bond vigilantes are out there in force right now. And if we continue to push, Hey, we need more cuts. We need to be cutting by 50, the president. Criticize Jay Paul after the press conference saying that they should have cut 50 basis points today and not even be talking about being close to being done.

That the bond vigilantes are there. That, that we should probably be in the low threes right now, all things being equal, but we're 4.15, so there is an impact from none.

Erik: Let's stay on inflation before we come back to Kevin Hassett. Obviously we just got a 25 basis point cut, but more importantly, as you say, starting in May, president Trump has been super clear.

He wants a lot more cuts. He wants to see 1% cut, baby cut. Obviously the textbook fear is that really starts to unleash inflation. I suppose the counter argument to that would be while that. Does unleash inflation, it won't unleash any significant inflation before November's midterm elections.

And I think that's probably what's driving the president. So do we have a setup here for cut, baby? Cut. That sets up a big inflation response, which maybe doesn't actually kick in before those midterm elections, but. Boy, it seems to me like we could have a setup for inflation to start to run away in late 2026 into 2027.

Am I right to think that?

Jim: Yes. For the inflation statistics are officially classified as lagging indicators, so they will take some time to kick in and show the inflation bond markets are forward looking. They're not gonna wait for the inflation, they're going to anticipate the inflation.

So if you wind up. Cutting too aggressively, and the markets are worried about inflation, they'll react to it almost immediately. And that, could be the story of 2026 if we were to wind up getting a single-minded focus fed chairman who wants to aggressively cut interest rates. By the way, let me.

Talk about that inflation by diving off a little bit into the labor market. Why did the Fed cut rates, what is the Fed most concerned about? They're concerned about that jobs are falling that a year ago, a year and a half ago, the US economy was cranking out 150,000, 180,000 jobs. The beginning of the year we're still, churning out.

80 to a hundred thousand jobs. Now it's churning out somewhere around 10 to 30,000 jobs. And I say that somewhere because we don't have the official statistics because of the government shutdown. They're still only current through September. We're looking at things like a DP, we're looking at things like challenge of Grand Christmas layoff announcements.

We're looking at some alternative data to that degree. So the Fed is worried that. The labor market is producing less and less jobs. Absolutely true, but they only give very short notification about what the Fed calls labor supply, which the market calls the breakeven rate. How many jobs does the US economy need to create?

The biggest driver in deciding that number is the population growth of the country. So if you go back to 23 and 22, when we were cranking out almost 200,000 jobs a month, the population of the country was booming. Why was it booming? Because of undocumented workers in illegal immigration, we were getting 3 million plus illegal immigrants into the country a year in 2023 that was making the population of the country swell by more than 1% today.

I'll go with the numbers that Trump used at his cabinet meeting last week, and he's repeated these numbers many times that the illegal immigration into the US in the last six months, he says, has been zero zero, not one person. He also says 2 million people have deported. 500,000 of them have been through ICE arrests, and 1.5 million have self deported. Now, he's not showing his work. We don't know if those numbers are accurate but conceptually they are accurate. We do know just from the watching the economy, the number of undocumented workers coming into the country is down a lot. The number of people deported being deported versus last year is up orders of magnitude.

Whether or not it's 2 million and zero or some number, near that we don't know. But, that brings up an issue that it's possible that the population growth in the United States is either zero or negative in the 250 years this country has existed. There's only been one other year that we've had negative population growth.

That was 1918, the Spanish flu, we got close in 2020. We got down to 10 basis points of growth. We didn't even have negative population growth during the Civil War when we. Killed 6% of the population of the country. 'cause the fertility rate, the average woman had about six kids. That's why we didn't have negative population growth, but we could be having it for the second time now, or something very close to zero if you don't have population growth.

Paul actually said this, if you don't have population growth, you don't need a lot of jobs. And we might be cranking out 20 or 30,000 jobs a month. We don't need many more than that. And if you are cranking out 20 or 30,000 jobs a month. Every other, or every third month might be a negative month, and then you have a 50,000 month to offset it there along the way.

If that's the case, and the Fed is cutting rates because they're worried about the labor market, they just cannot make that jump. Yeah, we, we're producing 180,000 jobs a month. Now we're producing 30, but we only need 30 or 20 or zero, and we're okay with 30. So don't worry about the labor market. They can't make that jump.

They're saying, what if we're wrong? What if the labor market keeps sinking? We gotta keep doing what Paul has referred to as risk management cuts, and they're not necessary. Then all that stimulus is just gonna go in the prices and push inflation even higher. So that's really the question about the labor market and about how inflation fits into this.

How bad is the labor market right now? And to answer that question, you have to ask the question, how many jobs do we need? Is it zero? Is the break even rate zero? Any positive number is okay. Again, over. A three or six month average. You can have negative numbers in there and some positive numbers in there as well too.

That is really the open question, and if we come to the answer that yes, it is somewhere near zero, yes, 30,000 is enough, all these rate cuts are just gonna go towards inflation, and we know everybody's angry about affordability and you're just gonna push inflation even more. That could become a real problem.

Erik: Help me if I'm misinterpreting the news flow here. 'cause what I think I've heard is a few weeks ago, president Trump announced, okay, look, it's the fix is in. It's a done deal. I've made my final decision who the new fed chair is going to be. I'm not going to announce it till after the end of the year, but.

It's a done deal. It's decided that's it. And then this week he started interviewing other guys for the job. Okay. Did he change his mind? What happened? I think almost everybody in the market assumed when he said that his decision had been made, that he was talking about Kevin Hassett. So I guess I should ask first, do you agree that's who he meant when he was saying that the Vix was in?

How come he seems to be backtracking on that? Is he, is it no longer a certainty that Kevin Hassett is the pick? What do you think?

Jim: Yes, I think Kevin Hassett was the pick. I think that there is some doubt if you wanna go with betting market numbers. Kevin Hassett was trading mid to high eighties after that announcement came out that, Trump has made his decision and now he's trading 69.

It's still above 50. He's still the favorite, but doubt is creeping in. Why is that doubt creeping in? As best I can tell is after it became known that Hassett was gonna be the guy, a lot of press reporting was corporate American Wall Street was pushing back about Hassett and they were unsure whether or not he should be the Fed chairman.

Not because of his resume. From a resume standpoint, Columbia professor of Economics has worked in the White House, has worked at the Fed. He has got a resume that makes him qualified to be the Fed Chairman. Question is, are we gonna get the Kevin Hassett of the resume or are we gonna get Kevin Hassett stooge of Donald Trump, whose job is to just cut interest rates and not even think about anything else?

Wall Street and Corporate America was worried we were gonna get. Kevin Hassett, stooge, and they were saying what we were, what I was trying to argue, before you cut too much, you're too aggressive. You might have a backlash in the bond market because you're not being sufficiently vigilant about inflation, and you could actually have higher rates.

So what I think happened was Hassett who's been out there almost every day, has been trying to assuage these concerns. About the idea that, he would he would overdo the rate cuts, and I think Trump doesn't like hearing that from him. Also, Trump likes the way that Scott Bessett, the Treasury Secretary, is a respected and calming voice in the market, and Hassett Wise, a very qualified, and he's a, competent person.

He's not getting that respect. From the marketplace right now. Seems like Trump is maybe having second thoughts and he is opening up the the selection process to interviews. But let's be clear. Question one is, what are you gonna do to get the funds rate to 1%? How are you gonna ignore anybody who gets in your way?

In order to get the funds rate to 1%, it's gonna be question two. So he's not looking for an objectively minded person. He's looking for somebody who wants to be single focused in lowering interest rates.

Erik: Let's talk about the prudence of the President's agenda because I can't believe he really cares that much about policy rates, which is what the Fed actually sets, I'm assuming.

The reason he cares about that is he's making the assumption that those policy rates translate, you, you lower the policy rate, it's going to translate. To lower rates further out on the curve. As you've described, it doesn't always work that way. I'm not sure if the president sees that, but boy, if you imagine the Democrat party saying, okay, we wanna do anything we can against President Trump, how many economists could we round up to express?

Publicly, the view that aggressively cutting policy rates doesn't necessarily result in lower interest rates on something like mortgages or car loans or things that voters care about. It seems to me like there's a pretty large contingent of economists that don't really like the president who would be ready to take that view.

And I think that frankly. The way I understand monetary policy, transmission is a lot of it has to do with the mood of the marketplace. So that kind of propaganda, if you will, could be very effective in maybe causing the back of the curve to respond opposite the way the president is assuming.

Am I reading too much into that?

Jim: No, you're reading exactly into that, that is the concern. And there will be enough people that will come out, me included, that would say, look, aggressively cutting rates is gonna backfire on you and produce higher long-term interest rates, because that's where mortgage rates are set and that's where corporate borrowing is set.

And those are the rates you wanna lower. Remember, Trump is already said that he. Thinks he should be fed chairman, but he acknowledged he can't be. He wants to appoint himself because he's a real estate guy. So that makes him, in his mind, an expert in interest rates and in fairness to Trump, every real estate guy I've ever met thinks that they're an expert in interest rates.

And they always have their expertise go in one direction. They're too high and they need to go lower. That's what every real estate guy thinks, because they think in terms of mortgages because that's the way that they're they've cut their teeth. So he's of that opinion right now that he needs to see interest rates come down.

And I still think that, he, that's why he believes. That the economy will boom. If we were to see the Fed continue to cut rates that eventually, long-term rates, mortgage rates, all of those borrowing cost rates will come down. And if there've been slow in coming down now. Trump's ready-made answer is too late.

That's what he calls Powell. You should have been cutting rates aggressively and earlier and we'd have a much lower tenure notes. We'd have much lower 30 year mortgages if we were to do that. Although I would argue no, it's more about. Worrying that you're overcut worrying that there's an inflation problem and that's what's holding it back.

And the only reason we're down at 4.15 is drill, baby drill seems to be working 'cause gasoline prices are down, but you still can't even get the funds rate. The 10 year rate below when you started cutting the funds rate at this point. So yeah, I think that's exactly what it is that.

The president is pushing really hard on it, and there's going to be some pushback if that's where they're gonna go in the future. That is, the new Fed chairman is gonna be single-minded, focused about being aggressive and cutting rates.

Erik: It seems to me that this is all a great big setup for the president to accidentally unleash.

I think there's a secular inflation in the making anyway, but it seems like, it takes a catalyst to really get an inflation to run away. Didn't you just kinda lay out the game plan for creating that catalyst?

Jim: Yes, and that is my concern about why I think interest rates could go higher from here because.

We're not talking about, being vigilant about inflation. Jay Powell said today that every member of the Fed expressed a concern that inflation is too high. I agree with him. Not one member of the Fed, according to Jay Powell has, is their base case. Any consideration to raising rates in the future doesn't mean we have to, but think about what I just said.

We're all worried about inflation, but we're not gonna do anything about it. We're, because doing something about it would mean raising rates. And so that is a, that is going to be a real concern. And as a matter of fact right before we, we started talking, Jay Powell said something at the presser too that was interesting.

He said that the inflation rate ex-tariffs is in the low twos now. There is no measure called inflation rate ex-tariffs. So obviously the Fed has invented one. They haven't shown their work as to where they come up with it, but I was looking at some of the breakdowns of the inflation numbers and I was looking at CPI services 'cause we're not tariffing services.

That's above three. CPI services. Less energy is above three and a half right now. I don't know. Yes, he's correct. CPI goods, which is largely a lot of tariff stuff is in there, is rising rapidly, and that does account for the majority of the rise of inflation over the last several months. But if you take that out of the equation.

Services are still above 3%. I don't know where he comes up with the low twos. Obviously he's got a measure that he came up with to come up with that, but I wish like the president would show his work about what the population growth of the US is. I wish that Jay Powell would show his work as to how he came up with that low twos number of, inflation ex-tariffs.

Erik: Let's talk a little more about inflation's, particularly secular inflations and how they work, because I could imagine, somebody from the Trump administration was listening to the two of us talking about this. They'd say, look, guys, come on, relax. We think that we can bring policy rates down that should bring long-term rates down in the unlikely event that Jim Bianco is right.

And what really happens is that pushes longer term rates up because of inflation fears. We can make an adjustment at that point, maybe we'd have to hike rates in order to bring longer term rates down, but we'll find that sweet spot and it's all gonna be fine. I don't think inflation works that way.

I think the way inflation works is once you start to see a runaway, not so much in inflation itself, but in inflation expectations. What happens is it changes consumer behavior. People start buying things now in order to buy them before the price goes up and all of the sudden you get a runaway situation that's out of control and can't be stopped.

It seems to me like we're playing. We're playing with fire here. We're playing with matches at a time that we don't understand that the forest is really dry and potentially at risk of once something gets burning, we can't stop it. Am I exaggerating to think that's a risk and what could go wrong here?

Jim: No, it's a real risk and it's happening right now, and I'll even, Jay Powell addressed this and I disagreed with him there. There's two broad measures of inflation expectations. One broad measure is market-based measures. You can look at the inflation swaps market. You can look at the treasury inflation protected securities market to back into what's called the inflation break even rate.

What is the market pricing in for inflation? So if you look at market levels of inflation there. Anchored to use the fed term. They're low in the low twos, they're not moving. They don't have a lot of volatility, and they would give the Fed and the administration comfort. See, the market-based measures of inflation are not a problem.

But if you look at the consumer-based measures, the surveys, the University of Michigan Survey of Inflation if you look at the political polls, the number one issue according to the political polls is. Affordability, the president's approval rating is falling because everybody's talking about affordability.

What they mean is the level of inflation. CPI is up 27% since April of 2020. And they would like to see some relief on these high prices in their example. Inflation for the public is unanchored, and they're very upset about it right now. Jay Powell dismissed it by saying that the inflation numbers are well-behaved in the surveys.

I'm like. We've only been talking about the University of Michigan being at 30 and 40 year highs in inflation expectation all year. And I'm sure he's found some other survey that says that, no, that's not the case. But the big ones that we look at are showing that's the case. That really comes down to what is more important than a bunch of bond traders aren't pricing in future inflation, or the public is tanking the president's approval rating and is spit and mad about affordability. I'm gonna go with the public being more important than a bunch of bond traders and that the public is the one that's going to lead towards unanchored inflation 'cause they want something to be done.

I'll say the last thing about this is how mad are they? They just voted a socialist in this New York City mayor. They almost voted a congressman who is a socialist in, in a very red district in Tennessee, and they voted a socialist in the night before we're recording as mayor of Miami. So they're now turning towards socialists that are saying, you want affordability?

I'll just cap the price. I'll just make it illegal for these prices to go up anymore. Does it make. Economic sense. No, but I just want relief. And if they're offering me relief, I'll take the relief is what we're getting right now. So yeah, it is a problem. And just because the tips desk at Goldman Sachs is not pricing it in.

Therefore doesn't mean it's a non-problem

Erik: Jim, I couldn't agree with you more. Let's shift gears now and talk about the consequences of all of this stuff in markets. If you and I agree that there's a very si significant risk that we're about to unleash a secular inflation the first thought is both precious metals in crypto.

Then I guess the next thought is let's talk about what happens in a big inflation to the stock market. I think a lot of people, remember the 1970s and think inflation up stocks. Down. I don't think it really works that way. I think it's inflation up stocks up at first a lot, and then stocks down only after the feedback loops kick in.

So let's get into what this is gonna mean for markets.

Jim: Yeah. So let's start with the precious metals markets. Obviously they're flying year to date. I'm just looking at my screen right now. Silver's up 110%. Gold is up 61%. Year to date. Silver traded over $61. The day we're recording at one point earlier in the day and gold is still at around 4,200.

They're not pure inflation plays, I don't think they are. What they are is they are. Uncertainty, bad things happening plays. That's why you buy gold. One bad thing obviously is inflation. Deflation could be another one. Political strife could be a third one. And the like. And so the fact that gold has been moving up quite a bit has been a signal to the marketplace.

It's worried, there's worried that there is a problem here and a lot of that's been coming outta Asia right now because you could actually argue that within Asia. The inflation problems and the worries are bigger. Japan has got a real inflation problem for the first time in 50 years. 50 years. Japan has a higher inflation rate than the United States.

You gotta go back to 1977 to find the last time that they actually that, that the, they had a higher inflation rate than us, as they do right now. China is an, I've been a very big bearer on China. I think that their economy is struggling. I think they've got a real estate problem. So that's been the big catalyst.

For gold, and the problem with China is if their economy is struggling, their answer is print, more accommodation, more government spending, and that would lead to inflation over in China. Now, the stock market, you're right, the stock market as we talk right now is just closed a few points short. Of an all time high.

The all time high, by the way, was set on October 29th, which was the last day that the fed cut rates. And so at this point I think we need to define the stock market two ways. There are the AI companies and then there's the non-AI companies. I use Michael Camp's at JP Morgan. They went through and they identified what they call 41 AI related companies.

It's the Mag seven. It's a couple of other companies along those lines. It's a few power companies that get primarily their business from supplying data centers with power, couple of capital equipment maker companies, 41 of them, those 41 companies. 47% of the S&P 500 market cap. The other 459 companies in the S&P are 53% of the S&P.

Now, what I just said is one theme is half the US stock market, when was the last time one theme was half or more of the US stock market. The argument is, and I've looked at the data too, you'd probably have to go back to the railroads of the late 19th century. To find the last time that we've seen a theme concentrated to that degree.

The AI companies have been 70% of the gain of the S&P 500 over the last few years. The other companies the have the other 4 59 companies have been only by about 30% of the gain. We restated the non-AI part of the stock market is up about 8%. Per annum over the last couple of years. Not a bad number, but we're all used to this 20% gain that the index has.

That's largely because of AI. So we've got a transformative technology coming in right now in the form of ai, and that has gotten the marketplace to get excited to push those stocks up. Beyond that, you've been getting rather middling kind of stock market returns, seven 8% type of returns in the market, and you're right in the initial stages of an inflation.

The earnings look good. Companies can raise prices and they can fatten their margins. But as the inflation goes on, that reverses because then something else happens. Their input costs go up, whether it's labor or raw material goods, especially if it's raw material goods from overseas that's being tariffed.

They go up and they're gonna start getting squeezed. That's why if you go back to the seventies example, if you go back to the late sixties, early seventies, people were openly saying. The best inflation hedge is stocks because they can raise prices and keep up with inflation, so own stocks. And then by the mid late seventies, that completely reversed and it completely went the other way because it was yes, but your input costs go up and your margins get squeezed, and it's really hard to make a profit.

And the stock market was a terrible performer. Until the early 1980s. And so that's where I think we are. We're in the early stages of the of the inflation boom. But even with that, the non-AI part of the stock market, which would be more interest sense inflation sensitive is really. Seven, 8% returns a year.

It's not the 15 to 20% that we've gotten used to with the overall index. That's because of AI

Erik: Jim, let's come back to what you said earlier about socialists being elected and so forth. It seems to me what's going on here is in decades gone by, younger generations didn't vote and therefore didn't have much say in things.

They were busy going to nightclubs and partying and having fun and, nobody voted. Therefore the opinions of. 20 somethings didn't really matter in terms of electoral outcomes. Seems like Generation Z is voting and they're voting for socialists and there doesn't seem to be any amount of, Hey guys have you looked at the history of this and do you understand the reasons that the United States has been more financially successful than socialist countries? The answer is they're not interested in hearing anything from old people. Okay, boomer, whatever you say, we don't think that your capitalist system is working for us.

We're gonna pick the opposite of it, whatever that means. And we don't really want to think anymore about it than that. At least that's the way I perceive it. It seems to me like that's, they're more than half of the people. They're growing in their numbers. They're going to continue to dominate majorities as long as we have a democracy seems to me we're gonna have more socialists, not just mayors, but congress people and eventually move toward a socialist system in the United States.

Am I wrong to think that's almost inevitable? And if it does, what's the long-term outlook for markets?

Jim: I think you're right, and I think you're right for the following reason, it hasn't been working for them. The widely quoted statistic that a lot of people have been saying is the average age of a first time home buyer's 40.

The reason it's 40 is you need to save for many years in order to buy a house. Prices, as I pointed out, are up 27%. They are finding it at very difficult in order to make ends meet when it comes to prices. Then on top of that, you've got the whole idea about what AI is gonna do to the labor market, the jobs market.

I'm graduating with a degree from a recognized university, in other words, I'm not getting a basket weaving degree, and from a university you've never heard of. I'm getting a degree from the University of Michigan in business or something like that. Good degree. Degree, good school and I'm not being able to find jobs.

And what I've been told is all the jobs I wanna be find I would like to get those entry level jobs are being replaced by a large language model. So they're feeling that prices are too expensive, opportunities are too few. And then here comes a guy like Mandami. We're going to have free buses. We're gonna, we're gonna have cheaper grocery stores.

We're gonna put a cap on the amount that your rent can go up, and the boomers are telling 'em that stuff doesn't work and they're saying, yeah, what you are doing isn't working for me now, so why should I listen to you? 'cause I'm not happy that I gotta save till I'm 40 to buy a house. I can't get a job because I'm being priced out of every job because of a large language model.

I can't afford anything at the store. Now, and you are telling me that if I vote for this guy, it's gonna be worse. It's pretty bad right now is what they're trying to say. And so I understand that. And you're right. Until we can tackle this affordability problem, until we could show them that capitalism is the way to go, look, I'm of the age that, I came into the workforce in the early eighties.

During the Reagan boom during, after the 82 bottom in the stock market, when the 25 year Ole's all wanted to wear yellow suspenders or yellow ties and suspenders and get a job on Wall Street and make a lot of money because there was opportunities there left and right. That is not the case today. So I understand where they're going.

You might refer to this as a fourth turning type of thing, and that you know that we are in that fourth turning, that winter that we're going to see with the pushback that we're getting. On one respect. I get it. I understand their frustration. I understand that, lecturing them about the evils of socialism and the virtues of capitalism, when they don't see it, is it really gonna help them?

Right now? And yeah, it might get worse until it gets better. Now the way it could get better is we start to attack this issue. Take housing. How do you fix the housing problem? More supply. The problem there is the president keeps yelling that the affordability thing is a con and it's a hoax, and it doesn't exist, and prices are coming down and things are becoming more affordable.

That's not the way to answer that question about affordability, that you're wrong. Everything's fine, is really what is what his answer is. So we're not gonna address it and we're gonna have a pushback. So I hope. We're going to start to address it. We need more homes built, being built. The number that I've seen that I believe is from 2009 to today, there's been about 21 million new households formed in the United States.

2009 to 2025. There's been 18 million new homes built. So we have a deficit of about 3 million homes plus. Probably another 2 million existing homes have been condemned and torn down because they were just old and not out in disrepair. So we might have a deficit of about 5 million homes. We need to loosen up, say zoning laws, building laws, land use laws in order to let contractors and let builders and developers build more homes.

Problem is the the boomers that own the homes don't wanna hear that because that sounds like more supply, more competition. My house might fall in price. So yeah, we've got real issues we gotta work through. If Neil Howell was here, I think he would probably say, yeah, and that's exactly why we have fourth turnings and maybe we're getting very close to one right now.

Erik: Isn't it true then? The fourth turning usually breaks down and replaces all of the biggest trusted institutions and so forth. Seems like we are indeed. Very definitely in the late stages of a fourth turning. 'cause they last for about 25 years. The expectation would be sometime in the early 2030s, we start the first turning with newly constructed systems that the younger generation is in charge of designing.

And, it would be the millennials are in charge and Gen Z is doing all the work in order to usher in new systems to replace what we have today. I don't know. It's, it feels to me like. The the feelings of Generation Z are completely understandable, but I think about, I don't think they really understand the consequences of socialism.

What do you do? You could try to reach out to them and communicate with them, respecting their views, trying to engage them in a respectful debate about the benefits of different economic models and maybe why socialism isn't the solution. Thing is Jim. The last guy who tried that was Charlie Kirk, and it didn't really end well for him.

Jim: I agree. What you have to do is instead of lecturing them about the evils of socialism, do what I saw when I was 23, 24 years old, in 1983, 1984, and that was. The opportunities that capitalism was presenting, that you can get these jobs that could give you decent careers and get you moving along to being able to afford nice houses and nice things, and do the things in life that you wanna do.

Show them the opportunities. Instead, we tell 'em, socialism bad. Save till 40. And don't complain about the prices at the store. I'm sorry. That's just the way it is. That's not a solution for them, so they're gonna need to have something more than that. So hopefully we'll get to that point. You are right in the first turning, maybe with large language models and AI being the transformative technology I am a big believer that technology is a net creator of jobs

I've seen the studies that say 50 million jobs will be displaced by AI of 160 million in the United States. So roughly a third, maybe about 30%. Okay. I think that might be right, but I also think that AI might create 70 million new jobs and those new jobs it's gonna create. Are currently in industries that don't exist. And so maybe we could get to the point where we turn to the millennials and the Gen Zs and say, those 70 million jobs in those industries that don't exist, go create those.

Go create those industries, go do that, and you will make, and that's the wave that your generation will ride. In order to become more financially secure and not wait for the boomers to do it, or the boomers won't do it or the Gen Xers to do it. 'cause the Gen Xers are now starting to approach 60 years old anyway, and the older ones are at least.

And so that hopefully could be where they're gonna go with this in the first turn. And I actually think they will. And I think that, like I said, at the end of the day, technology is a net creator of jobs. The problem is. I can identify the job that's gonna go away, the job that it's gonna create doesn't exist.

So it's always a concept that it's out there and but they usually are. And those jobs, go make those jobs reality. And so hopefully they will do that.

Erik: Jim, I can't thank you enough for a terrific interview. As usual, before I let you go, let's talk a little bit about what you do at Bianco Research.

You are not actually running an ETF. You manage an index, which WisdomTree follows with an ETF. So people who want to invest around your views and your strategy have a way of doing so. Tell us more about it.

Jim: Yeah, so I do manage, I'm a fixed income guy, by, by, by training and by practice. And so we do manage the Bianco Research Total Return Index.

You can find out about it at BiancoAdvisors.com, we set the parameters on the index and WisdomTree as an ET TF that tracks our index. I've used the example, think of me like the head of the S&P 500 Index Committee and SPY tracks my index. That's the setup that we've got. WTBN is the ticker symbol for the wisdom Tree Bianco fund, and my day job still exists is that is as being the researcher of Bianco research. You could find out more and more about us at the words Bianco research, either BiancoResearch.com is our website, Bianco Research on Twitter, Bianco research on YouTube. Either Jim Bianco or Bianco Research on LinkedIn.

And so you could follow me on any of the socials. I try to stay active on the socials as well too, or check us out on our website.

Erik: Patrick Ceresna and I will be back as Macrovoices continues right here at Macrovoices.com

Erik Townsend 

Joining me now is Marko papik, geo macro, chief strategist for BCA research, very well known for his geopolitical and political commentary regarding markets, Marco, let's dive right in, because there's so much to talk about this week. I think Venezuela is probably the first thing on everybody's mind. You know, normally, if you're going to start an air war, the first thing you do is declare a no fly zone through a very well defined military and political protocol. President Trump did it a little bit differently. He did it on truth social instead. What should we make of that? Is that an official no fly zone, or is that just the president kind of expressing himself? What was that?

Marko 

I have no idea, to be honest with you, but we have to take President Trump's tweets, socials, whatever we're supposed to call them nowadays. We do have to take them very seriously. You know, I mean, he's he's declared trade wars, he is declared peace treaties. He has declared new geographical names. So I think that we have to take his warning that you shouldn't fly any airplanes over Venezuelan airspace very, very carefully.

Erik Townsend 

Well, certainly that is being respected. If you look at flight aware, you can see that all the airplanes stopped going into Venezuelan airspace because they don't want to get shot down. What's coming next? Because if this had been through the the normal Pentagon channels, I would say, Okay, if they're declaring a no fly zone, it means they're about to start in an air war. But you know, if I look at President Trump's track record, he tends to like to go into negotiations with big, tough talk, and then negotiate some different settlement. So how should we interpret this? Is it a prelude to an air war, or is it maybe just President Trump setting the stage for a negotiation?

Marko 

I mean, I think you've nailed it. I agree 100% with you. I think that President Trump has very defined Seven Steps to maximum pressure, as I've articulated it and called it for my clients, my frameworks worked really, really well. For example, I never really got bearish this year, not on April 2, not on April 10. He was talking very tough about tariffs. He likes to punch people in the mouth, in the face. He triples down on it just when you think he's about to start negotiating, and then he starts negotiating when you least expect it. So I do think this is a prelude to negotiations. Maduro, according to just press reports. I mean, I'm not sharing with you anything that is not public knowledge, but Maduro is very clearly offering quite a bit to President Trump, and I think that President Trump being the negotiator he is. He understands that he has a lot of leverage in this particular situation, and so he's just, you know, asking for more, as I think, is the objectively correct thing to do. Now, I can't tell you what happens over the next, let's say, 30 days, but I can tell you what does not happen beyond that, there will not be a ground incursion into Venezuela. You can be assured of that there will not be a war between the United States of America and Venezuela. And the reason for that is that President Trump is very clear that Afghanistan and Iraq were tragedies, a waste of resources, and probably the dumbest foreign policy move in American history. And so I don't see him repeating something that he clearly abhors in Venezuela. But will he turn Venezuela into a parking lot if he doesn't get what he wants from Maduro? I think, you know, I think it's 5050, I could happen, and that's something that the United States of America can easily do, particularly in this part of the world. Venezuela has no ability to defend itself. The US will basically conduct the suppression of enemy air defense operations within a week, and then after that, it will be able to bomb whatever it wants in Venezuela for as many months as it wants. So, yeah, I mean, Maduro is definitely on the clock here and has to offer a better a better deal to President Trump.

Erik Townsend 

Now, Venezuela has more oil reserves than anyone. So, you know, I could see this going one way, which is, if there's going to be this military conflict like you've described, it could potentially put, you know, a real upward pressure on oil prices is people get afraid about supply, but boy, if President Trump made some kind of deal for us oil companies to really develop Venezuela because a lot of its resources have not been efficiently utilized, that could be a long term very bearish signal for oil prices, because it could mean that we're about to, you know, go and redevelop a bunch of untapped resources. What do you do in a case like this? You know, which way do you bet, if at all, in markets?

Marko 

So you never really asked me, Why is President Trump doing this? But you're answering it right, and I agree with you. This is the answer. But why? Me. Why now? Why on December 2, 2025 why? Why the urgency? You know, is it ahead of the midterms? I don't know. I mean, it seems to me like it will be politically more convenient to do something like this after the midterms, when all the risk of getting flack in Congress is President Trump is getting right now for some of the you know, dubiously legal military operations, like who authorized this? For what reason? How is Venezuela threatening the United States of America? These are all risks. So why is he taking these risks right now? And I think the answer to this is quite oil bullish. So there is no world in which America replaces Maduro and oil starts flowing within the next 12 months. That is a fantasy. And if somebody sold that fantasy to President Trump, who is not exactly, you know, knowledgeable of how energy works, well that that somebody is obviously trying to get something accomplished here. But there's no world in which America like defeats Maduro, whatever that means, and suddenly oil starts flowing. So I don't really see a bearish outcome for oil prices, at least not in the next 18 months. You're right. Venezuela has a lot of reserves, but you got to understand, this has been a country run by communists. For the last 25 years, they've destroyed the productive capacity of pdvesa and of their engineering and servicing. No amount of American service companies are just going to show up and turn on some magical pipeline that's that's not just not how the world works. So then again, what's the urgency? And I think that the answer to that question may be the meeting between the Crown Prince of Saudi Arabia and Mohammed bin Salman two weeks ago in Washington, DC, with President Trump. Saudi Arabia has been a very good partner for President Trump and the US administration. They've kept OPEC production very high. Oil prices have been very low throughout this year, even with all the geopolitical stuff going on in the Middle East. And it's clear that Mohammed bin Salman has said to President Trump, look, I know what's your number one political issue? It's CPI. It's inflation. I'll help you with that. But Saudi Arabia has its own domestic political logic. I mean, it's trying to nationalize nation. Build, rebuild the whole country. Move it away from oil revenues. Build industry. Build new parts of the country. And for that, you need oil revenues. Saudi Arabia cannot just do America's bidding forever. At some point they're going to need Brent crude prices to be higher than $60 not like in 100 but let's say 7075, I suspect that Mohammed bin Salman came to the United States of America two weeks ago and very politely told President Trump, like, look, I gave you 12 months. You told me CPI is important to you. Inflation is a big deal. I gave you that. I can't keep doing this forever. I know midterms are coming up in November, but I need some of that oil revenue too, and I suspect that that's where the urgency comes from. The US needs to find another source of crude, because they know that the OPEC production policy is going to change in 26 there's going to be less supply on the market in 26 and so that's where I think the urgency of this comes from. And I think that there's nothing but upside to oil prices in that case, because it means OPEC production is going to have to be cut. Saudi Arabia probably told the US that. And on the other hand, this notion that the US can replace Maduro, and voila, there's like, 17 million barrels of day production. I think that's going to be very disappointing, because that country is a mess. It's been driven into a Third World status, and it's gonna take years to get production up.

Erik Townsend 

Okay, I feel like I'm missing something, because I agree very strongly with you that if President Trump made some incredible deal with Venezuela, and it's gonna be really, really bearish for oil prices, it's bearish royal prices five to 10 years out after they develop a bunch of new productive resources that do not exist anymore in Venezuela, there is no switch to turn back on. So if the issue here is MBS came to the White House and said, Look, Mr. President, I've given you as much room as I can give you. I can't extend it all the way to the November midterms. Expect oil prices to come back up. It seems to me it would be foolish to think that Venezuela has any part to play in solving that problem. Are you saying that President Trump just doesn't get it?

Marko 

No, I think he gets it, you know. But what are you going to do? You can't just sit on your hands. You got to at least show that you have a plan, right? And I mean, part of the plan is drill, baby drill, deregulation of American resources. Hopefully that picks up. The problem, of course, is that Saudi, Saudi price control has been so successful that nobody wants to drill. Baby, drill, President Trump can deregulate a. As much as he can. You know, he can encourage me and you to put an oil rig in our backyard, but we're not going to do it with oil at 60. So there is like a paradox for President Trump, he's almost too successful. Over the last 12 months, Saudi Arabia brought oil prices down significantly. That's been great, but that has also discouraged production, both in the US and everywhere else. That's the paradox of this, you know. And so he can't, he can't look like he's not doing anything. And at least, you know, the, let's say the three to five year plan. Let's give a little bit more benefit to maybe the White House in five to 10 years. But at least he can say, hey, look, yeah, all prices are back at 7075, maybe even $80 but we got a new guy in Venezuela, and don't worry about it. In three years, we'll fix it.

Erik Townsend 

It seems to me, just thinking about the way politics work, President Trump really needs to get gasoline prices in the United States as low as he can get them through the November midterms, because that's his best strategy to lock in a, you know, the Republicans continuing to control the Congress and so forth. Is there a conversation he can have with MBs to say, Look, you guys want to get away from oil revenue, you know, let's make a nuclear deal, which it seems like they are going to sign a section 123, agreement. Is there some deal that he can offer to Saudi Arabia to entice MBs to keep oil prices low and make them even lower through November.

Marko 

Yeah, I think so. So I don't think all is lost. I think you know, Crown Prince Mohammed bin Salman either told President Trump that the production quotas are going to go down, or he made a deal, such as, what you were in for. I don't think you know it's a foregone conclusion that Saudi Arabia is going to demand 70 to $80 prices tomorrow. But, I mean, I just wrapped up an analysis in Saudi Arabia, literally, today. And I can tell you from just looking at the charts, the Saudis are starting to really run out of fiscal room, and they need to start issuing debt quite aggressively in order to finance a lot of their very ambitious and impressive priorities. And so I don't know the timing exactly. I think that Saudi Arabia can easily hold out until the midterms. Give President Trump what he needs until then, but I don't think they're going to be happy that it's going to take another 11 months, you know, and if that was the conclusion of the meeting, then for sure, Saudi Arabia got something else in return. Marco.

Erik Townsend 

How much value do you think the section 123 agreement, which means the US basically opening up its intellectual property, sharing around nuclear energy technology with Saudi Arabia, and allowing Saudi Arabia to leverage US nuclear engineering capabilities. How valuable is that to the kingdom? How much you know, would they be willing to do in order to get that? Because it seems like that's the thing that's on the table.

Marko 

Yeah, for sure. I mean, I think it's extremely, extremely valuable, but that's not going to solve Saudi Arabia's, you know, not problems, but it's not going to solve for their ambition. At the end of the day, Saudi Arabia doesn't need, like, an alternative source of energy. What Saudi Arabia really needs is revenues from oil. It needs them in order to do fixed asset investment inside of Saudi Arabia. And while President Trump did allow them to share intellectual property on nuclear he did also ask Saudi Arabia to invest money in the United States of America as well. And so that's just a lot of outlays that Saudi Arabia is on the hook for they have to rebuild their entire economy. And by the way, I think a lot of the commentary about Saudi vision 2030, is very, very critical. I actually think that 85% of it is pretty good, yeah. 15% of it is kind of like, you know, big hero projects like Ronaldo playing soccer in the desert, you know, things like that, there's there's some of that, but I would say the vast majority of Saudi industrialization and modernization plan is very smart, is just extremely expensive and on top of their own domestic agenda, you've got President Trump saying, Hey, I also need you to invest hundreds of billions of dollars back in the Us so that I don't impose tariffs on you. So nuclear program, nuclear, IP, nuclear, cool technology is not going to solve those problems. Saudis need money, and they sell oil for a living, and so I think the time is running out. At some point they're going to have to tell the US, look, we gave you 12 months, we gave you 18 months. We gave you 24 months. Whatever you know that ends up being but now we need higher oil prices. And look, at the end of the day, that's not that bad. It's not that negative for the US economy. I think actually, current level of oil prices are negative for the US in the long term. And I think they're negative because what the Saudis are doing on. One hand, they're complying with President Trump's directive and demand. On the other hand, they're also doing something that's good for them. They're keeping oil prices low, which destroys production outside of the Middle East, in the US, in the Canadian tar sands, you know, off the coast of Nigeria, off the coast of Latin America, these prices are just too low for that production to come back up. And so that will benefit the Saudis, because a lot of companies are going to go out of business. People are going to go bankrupt. Wildcatters in Texas, you're going to have to find a new job, you know, maybe not go back to wildcatting like the longer these prices at these levels sustain themselves, the more we're going to destroy permanent productive capacity. So I think the I think what President Trump needs to focus on, if he has to focus on, if he wants to focus on affordability and inflation, he needs to prepare himself for a world where oil prices are at 80 and reduce costs of other parts of the US economy through supply side reforms. That's the only way, because it can't just be energy that keeps inflation in check. There's got to be other things as well.

Erik Townsend 

Let's bring the Russia Ukraine conflict and the potential of a peace agreement. Seems like President Trump is pushing really, hard for some kind of peace agreement in the Russia, Ukraine conflict. Could it be that the strategy there is to, you know, resolve that to both take a victory lap on on having accomplished peace, but then also to relax sanctions on Russia in order to bring more of that oil back into the market.

Marko 

So, yeah, I think that it's all of that again, I we're in violent agreement today with each other, you know. So there's really, I think you've articulated very well. There's really two components of this. First and foremost, this is the largest land war in Europe, actually, on the Eurasian continent, really, since the Second World War. So absolutely, there's just a sort of a notch in your belt foreign policy accomplishment, if President Trump can get Russia and Ukraine to sign some sort of a peace, even a ceasefire, quite frankly, will be extraordinary. There didn't seem to be at all, absolutely, any attempt by the Biden administration to wind down this conflict. And so I do think that there's a element here where President Trump just wants to get it done. Because, you know, for the gram, as Drake would say. The other reason, though, is that I think that he, he does genuinely think that there can be an oil price, an energy cost, sort of benefit. I think that there will be, at least in the short term. You know, when you think about Russia, Russia is actually exporting pretty much as much oil as it was before the war, but it's the diesel part that's the big issue. There's a there's sanctions on diesel and and Russian diesel could flood the market, which should move all the other products down as well. So I do think there's potentially, let's say, 5% decline in oil prices if the deal just ends tomorrow. I just think that it's difficult to drive them further down. I think we're as low as we're going to get. Maybe Brent gets down to 55 maybe WTI is at 50. I don't think we get lower than that. And in fact, I think the third reason that President Trump may be thinking that he can end this deal, and why it's a good reason, and you can see this from some of the verbiage that's coming out. For example, the 28 point plan that was proposed by by the American administration with Russian input. There were, there were points in that 28 point plan that seemed to suggest that the US and Russia will collaborate. And I think that there might be thinking in the White House that Russia can be flipped so that it's not as allied to China. You know what some people call the reverse Nixon. You know, Nixon, of course, flipped China away from the Soviet Union and allied US and China together. I think that there might be some attempt to potentially start that process as well.

Erik Townsend 

Let's bring us China relations into the conversation. Then, what should we make of the growing tension there. There's also this potential conflict that, just in the last few days, happening around Taiwan, in the South China Sea, between various different naval vessels from different countries. Give us the rundown on what's happening and how we should interpret it, how it relates to markets.

Marko 

Well, I think that Japan, China tensions could get ugly in 2026 you have the new prime minister, takaishi in Japan. She is a populist and sort of like more nationalist leaning. But you know, her mentor was Shinzo Abe who, of course, in 2012 kind of had this big, big reawakening of Japan. And towards national security concerns. But the other issue also is that unlike Abe, and unlike previous prime ministers, her ruling party, the LDP, is no longer aligned with the pacifists who used to form a majority on behalf of the LDP, she's actually allied with this with this other party, the innovation party, which is a lot more aggressive on foreign policy. Now, they still don't have a majority, but you know, the bottom line here is that this is as aggressive and nationalist, and, you know, foreign policy focused of a Japanese premier as maybe ever, even more so than Shinzo based. So I think that, you know, she's not going to fall to Chinese pressure very quickly. On the other hand, I have to tell you, as someone who's observed China, Japan foreign policy and China US foreign policy for as long as I've had a career, Chinese response so far is pretty muted. It's interesting to me that it's muted. China has a detente with the US. President Trump keeps calling President Xi his dear friend. He's about to go to China in first or second quarter of next year. And so, you know, if I was running China, I would be a lot more aggressive right now towards Japan, just to test the Alliance, you know, can I, can I peel the US off of East Asia? Can I get them to back off? Can I isolate Japan and and China's not really doing that. Um, quite frankly, like the economic, you know, pressure on Japan thus far has been laughable. Um, now that could very well change, and so I would watch that very carefully over the next 30 days, but China seems to actually be more willing to put this to bed than Japan does, and that reflects that Japanese domestic political dynamic. But I think that the biggest story here, aside from the Japan, Japan China tensions, is really US China detente, you know, one of the views I had, you know, even 2418 months ago, was that President Trump is really the only person on the planet that can make a trade deal with China. He's the guy that flew off in the plane. He's the only one that can land that plane. He is just like Richard Nixon, you know, the famous statement, only Nixon can go to China. Similarly, really only Trump can make a deal. And I think that with his focus on inflation, affordability the midterm elections, I think the big surprise in 2026 may actually be further unilateral, one sided reduction in Chinese tariffs, President Trump may really be left in 2026 with no way to stimulate the US economy other than to reduce the tariffs that he's imposed himself, provided that the Supreme Court, of course, keeps them in place. So I think that could be a big surprise for investors, that the relationship between China and the US actually progressively keeps getting better for the rest of President Trump's

Erik Townsend 

term Marco, before we move on to US politics, let's just assimilate all of these different geopolitical situations, because there's so many of them going on. When you net this all together, what does it mean for markets and investors?

Marko 

Well, I think that what it means is that geopolitics is not necessarily going to be a major driver. I mean, first and foremost, I think that oil, oil had a terrible year in 2025 I think that it could have a better year next year. So that's, you know, we already discussed the dynamic here. Saudi Arabian domestic priorities, I think are going to take preference in 26 over American domestic priorities. Saudi Arabia can't keep doing America's bidding forever. The second issue is that right now, if you look at European defense companies, they're sniffing out effectively, the end of the war in Ukraine. In fact, aerospace and defense equities, German Aerospace and Defense equities, have broken through their 200 day moving average, they're just falling off a cliff. I think this is an overstated reaction, just because the war ends in Russia and and Ukraine between those two doesn't mean that Europe is going to stop rearming. In fact, Europe has many reasons to rearm. First and foremost, President Putin said today that if if Europeans won a war, he'll give it to them. So it's not like Putin is going anywhere. But the other issue is that for Europeans, a lot of this rearmament is just a fiscal stimulus, you know, and they're not going to abandon that. It's a it's a sweet reason to keep stimulating domestic economy. So I would be looking for an opportunity next year to buy back into those sold off aerospace and defense equities. And then the final issue is, your China, Chinese equities are the best performing equities in 2025 equities in 2025 it's not s p5 100, it's not Europe, it's not Japan, it's not emerging markets, it is China. And so what I would say is that if there is a genuine detente between China and the US, I think that Chinese equities could have even more upside. Remember, even though they went up 40% this year. It's from a very low base. Pretty much none of my clients in the institutional space, like sovereign wealth funds, pension funds, own any Chinese assets. And if they do, it's like 2% of their portfolio. You know, you have many American pension funds that, for various state legislative reasons, are not allowed, like legally, to own public market equities in China. So what I would say is that there is a potential significant flow return to China as many of those institutional allocators, you know, go from two to 4% allocation. And by the way, even 4% is pretty low. This is the second largest economy in the world, 20% of global GDP, and most institutional investors are only 2% invested. So what does all of this mean? If oil goes up, if European defense and industry does well, and if Chinese equities do well, we're really setting up for yet another year where the rest of the world outperforms US equities and US assets, which is what the story of 2025 really was. So that's where I think a lot of these things are headed

Erik Townsend 

now, you told me off the air before we got started, that you think US politics are actually going to play a much bigger role than geopolitics in 2026 markets. Let's start with why you think that, and then dive in and give us the overview of what's going on and what your outlook is for US politics.

Marko 

Well, I think that the midterm election is, of course, important. Now, if I was President Trump's advisor, if you know, if I was in the White House, I would tell him, Look, President Trump, you're going to lose the midterms. You know, like, I don't need any polling to tell you that. That's just as close to science that political science gets presidents lose midterm elections. You know, that's unless there's a major terrorist attack in the US, you're going to lose the midterm election. Now, while I will be absolutely objectively correct with that statement, I don't get a sense that President Trump is not the kind of guy that likes advisors that tell him the reality, you know. So I think he's going to try not to lose the midterm elections. So how do you do that? Well, you cannot have a slowdown in the US economy. And I see a lot of forecasts out there by economists saying, like, look, the labor market is slowing down. The consumers are unhappy. The consumer sentiment is terrible. And so we're going to start seeing a retrenchment in consumption, which is 70% of GDP. And you cannot just have the AI capex boom hold the whole economy together. That's just, you know, they can't keep happening. There has to be participation by the largest component of the US GDP, which is the consumer. So how do you stimulate in 2026 Well, the gut reaction by most analysts is, well, okay, President Trump will do more fiscal stimulus. I don't think he can do that. The bond market already rioted. From September of 24 to February of 25 bond yields went up 100 basis points as the Fed was cutting rates. Why? Because President Trump won the election and he campaigned on very, very profligate fiscal spending. The bond market reacted poorly. The Republicans in the House revolted, and what we got was one big beautiful bill, which, in my reading, is not stimulative at all, especially if you combine the one big beautiful bill with the tariffs, which are really just a consumption tax. When you look at all of that together, the US is not really running stimulative fiscal policy. And I don't think that President Trump will have any leeway to get anything through Congress either, because the bond market will prevent him from doing that. Yields will go higher. And the second reason is, you're already here. You know, Senator Thune, the Majority Leader in the Senate, already saying, kind of like, no, no, we should be paying down debt. We shouldn't be just giving $2,000 checks to American consumers. So I think that fiscal policy is done.

So how do you stimulate that? What do you do? Monetary policy,

Marko 

that's the only path for the US to reflate the economy 26 and in particular, to incentivize the consumers which spent the last 15 years de leveraging. So if you look at, for example, household debt to disposable income, we're back in 1990s levels. If you look at household net worth calculations, if you look at home equity, a lot of this is higher if mortgage rates and borrowing rates so long term rates come down over the next 12 months, I think that you can reflate this cycle, and I think you can extend it significantly, particularly the housing market. Now this was just an idea I had six months ago. We know since September, the administration has been talking about this. You've had Secretary Pulte talk about assumable and portable mortgages. You've heard talk of 50 100 year mortgages. They're clearly focused on this. And you've heard both Treasury Secretary Scott best and President Trump both note that they want to declare a housing emergency. You've got President Trump being criticized for affordability. Well, that's not. Because toaster ovens have gone up in prices. You know, it's not really because of tariffs. The reason affordability is poor is because the kind of goods and services that make you member of a middle class are extremely expensive. And that's not an iPhone, it's not a TV, it's not a tradable good that you import from China and slap a tariff on it. It's actually tertiary education for your kids. It's the roof over your head, it's a health care and it's daycare. Those are the things that are very expensive. Those are the things that mom Donnie and Trump agreed together in the White House. And so what I expect President Trump to do is focus on the affordability of homes and bring down borrowing rates and basically reflect a housing cycle. I think that's the biggest story in 2026 and I think that the reason he's going to have to do that is just he doesn't have any other options, fiscal policy, fiscal lever. We've used them up. Joe Biden used him up the Trump Pelosi administration, as I like to call the 2020 post pandemic stimulus. They used them up. And President Trump, in 2017 with that pro cyclical fiscal stimulus, he used it up as well. So it's now up to the Fed and monetary policy.

Erik Townsend 

I'd like to ask you to comment on the I guess I'll call it a war of two narratives. Our friend Eric Peters, over at one river asset management, has expressed a view very similar to some of what you just described, which is, look, President Trump is going to try, whether it's possible or not. He's going to do everything he possibly can to win the midterm elections. Therefore, he's going to goose the markets. He's going to do everything he can to stimulate the economy. This has to be good for Wall Street. But if you listen to Scott besson's actual statements, he's been very outspoken in saying Wall Street's gotten too much of a free ride. It's Main Street's term. Our policies are going to focus on Main Street now, obviously that's what voters want to hear. So that's what he's going to say. Does it mean that the things they're going to do are not really going to help Wall Street and that markets are going to be disappointed, or is it really the case that in order to satisfy Main Street, it's still going to be very bullish for financial markets?

Marko 

Well, we finally have something we disagree with, which I'm happy. It's a great question. It's a great question, and I concede that you're correct, that that is what Scott Besson was saying in January of 25 in February of 25 in March of 25 and April of 25 but since April of 2025 I haven't heard Scott actually say that. You know, he used the term detox. We're going to detox the economy from Joe Biden's socialist policies. That was, like, one of the verbatim quotes. There was a lot of that, you know, your point, Main Street, over Wall Street and so on. But they've actually stopped using that terminology, and I suspect they stopped using that terminology because they are starting to realize a very important truth, the stock market is the real economy. You know, it's the top two deciles of American income distribution that are doing all the consumption. If the stock market slows down, they're going to stop consuming. And so, you know, President Trump and Scott Besant, not really for any fault of their own. I mean, I think this is just where we are as a country. They just happen to be in charge right now. But you know, the reality is that if the stock market slows down, they're going to have to eat a recession. They don't seem to be willing to do that. Now, I do think that Scott Besson may have been willing to do that in January, February, March and April of 2025 The problem was that at the time, the bond market didn't react the way I think he thought it would yield stayed stubbornly high. You know, we hit 4.8 I think it was in January, and then 4.6 after those April tariffs. And so if you had a recession with yields that high, like it's game over, right? Like it's like emerging market, like, you know, balance of payment crisis, it's, it's game over. And so I think they correctly focused on, you know, rationalizing the tariff policy, you know, and and, and guiding the Paul the economy to where we are now. But, yeah, I don't, I don't see any more chest beating from them. And I think that they are going to focus on mainstream, as you say, but in doing so, because they no longer have fiscal room to maneuver, they're going to have to use monetary policy. And if you cut rates for consumers, you're going to be cutting them for everyone else, including the AI capex, tech bros, including Wall Street, including hedge funds, you're effectively going to steepen the yield curve. The Fed is going to cut rates aggressively after May, in particular, and I don't see how that's also not very good for Wall Street. So they're going to end up creating, I think, an even bigger bubble. And at the end of the day, it's probably going to be somebody else's problem to clean up after this administration is gone, which is convenient, you know, politically

Erik Townsend 

Well, I'm sorry to this. Point you Marco, but we're actually still in violent agreement. I tried to express both sides of that argument, but I agree with you that I think what's going to happen is President Trump is going to do absolutely anything that he can to win the midterm elections. No policy action is too reckless, and no longer term consequence, such as inflating a bubble, is going to slow that down. He has to win the midterm elections. And I think in his own mental model, that's something he has to do no matter what. And the fact that guys like you say it's impossible is not even going to hit his radar. I think we do agree very much on that. Let's talk about which you know, if that's your view, and I think we share that view. Which markets benefit the most, which markets don't benefit? Where's the longs and the shorts on this story?

Marko 

Well, I'm going to tell you a funny anecdote to answer this question, because I had this hilarious interview a couple of months ago with a journalist. I want name from a newspaper. I want name, but basically I got a call very angry journalist on the other line, and the line of questioning was basically President Trump in 2026 will replace Jay Powell with a chocolate Labrador. The independence of the central bank will be eroded, and that's bad for the stock market, to which I answered, independent central banks are not good for the stock market, they're bad for the stock market. Independent central banks are not good for the bond market. They're bad for the bond market. Allow me to explain Turkish and Argentinian stocks. What have they done? Over the last 25 years? They've outperformed the S, p5, 100 in local currency terms. But let's leave that aside for a second. What causes a recession? What causes a bubble to pop? It's the independent central bank being that prudent adult in the room shaking their little finger at us, saying, You've been naughty. We need to raise rates. What causes bond yields to go up? It's the central bank shaking its finger at policymakers, saying, You've been fiscally irresponsible. Here come the bond vigilantes. Fix your fiscal house, or else we won't support the bond market, right? Well, anyone who wants to short stocks in 26 because President Trump is going to put his Fed chair like is basically going against history. Erosion of independent central banking is amazing for equities. It's YOLO time, baby, but there is always a price to pay. There's no free lunch. So what is the escape valve here? It's a US dollar. And so I don't, I don't want to give you a negative s p5 100 forecast for 2026, you know, what do I think the s p5 100 target is for next year? Who cares? It's up. But the question is, what should you do with your money? Should you put it in that asset that's priced in the dollar, or should you find some other asset that's maybe priced in the Euro or renminbi? Because if the US dollar has another year where it falls 10% as it did this year, Eight 10% it staged a little bit of a mini rally at the end. But my view is that I think that's unsustainable. I think that in 26 the obvious trade is not to short duration, expecting some sort of a bond carnage, because President Trump is responsible, or to, you know, short stocks because, you know, somehow independent central banking is important for equities. No, no. I think the way to play domestic politics in the US is to effectively try to play with dollar weakness, and I think that calls for more exposure to non US assets. That's, that's fundamentally what I would say. Now, this isn't a debasement of dollar thesis. You know, this isn't some sort of complete loss of independence of the central bank. I see a lot of slander being thrown at Kevin Hassett, which is unfair. This was a man who was chief economic advisor to Mitt Romney to Senator McCain. You know, it's it's not like he's completely clueless as to how monetary policy works. And I don't think that President Trump is really doing anything that extraordinary. That extraordinary. He's just going to allow American monetary policy to be more dovish than it should be, like, Oh no, that's literally what every President has done over the past, I don't know how long, and so I don't think that's that crazy. I just think it's going to happen, and it's going to happen for these political reasons. Political reasons. We articulate it together, and I think that's going to be negative for the dollar. And I think the best way to play it is to just find something that's not priced in the dollar. And you know, what's funny about this is we're in the middle of this AI super cycle. AI is apparently the greatest thing since, like. Is bread. But when I was in Zurich, in Munich, like, a month ago, two months ago, you know, everyone's super bearish on Europe. Everybody, every German I met, is like, we live in a museum. This is terrible. America is so much better. But with their second breath, they complained that they made no money in the s, p5, 100 in the midst of an AI bull market that's supposedly geographically domiciled in the US. And so what's the bigger, bigger macro story? Then? Is it AI, or is it the fact that if you're domiciled in Europe and denominated in Swiss franc or the euro, you made no money in s, p5 100. You actually lost money in 2025 because you owned America. That's how important these currency moves are. And so that would be my case for why 2026 is going to look a lot like 2025 at least in terms of relative global equity, you know, performance. And for anyone listening to this, you know, a lot of obviously listeners are probably based in the US all I would say to you is like, yeah, my I'm not bearish on S p5 100. Hell no. It's just that you might want to take some of the money you made in the s p5 100 over the last 15 years and just expose yourself, diversify to just things that are not priced in dollar and yes, many of your listeners probably already are in gold and Bitcoin as a form of diversification. I think that's a little bit too like World War Three ish, if there is no recession, there's no need to be in safe haven assets. Own some European equities, own some Chinese equities. Own some Japanese equities, just diversify, and I think you'll be okay.

Erik Townsend 

Let's come back to Kevin Hassett. Just in the few minutes that we've been recording on Tuesday afternoon, Bloomberg has been reporting that, apparently, President Trump has made an announcement that he's going to announce who the new Fed chair that he's already chosen is early next year, so it sounds like he's intentionally signaling that it's going to be a secret until after the first of the year. Do you think Kevin Hassett is the shoe in is that who he's picked, if not who else is on the table? And what will the consequences be when that is announced and we have a new Fed chair next? I think it's May that we that Jay Powell's term is over.

Marko 

So I've always thought that it's, has it, you know, he has the credentials. He has a long I mean, he's, he was, I think, a professor at Columbia of economics, and then he went into sort of Think Tank world, more of the center right American Enterprise Institute and so on. As I said. I mean, he's been the economic advisor to the political campaign of every Republican president before Donald Trump, since Bush Jr. So I've seen a lot of sort of Kevin Hassett slander out there, and I don't know the man. I mean, it's not like I'm pro Hassett. But my point is, the slander has been kind of ridiculous. You know that he is just a a Trump guy. That's just not true. The man has been in 25 years, an advisor to every single Republican president. So now you could argue that the monetary policy of every single Republican president was maybe bad, you know, like, we don't know. But my point is that he's very experienced, and I think that he's clearly President Trump's choice. I don't think that he is a chocolate Labrador. And I think this is very important. Will bond markets riot? Because it's Kevin Hassett, maybe initially, because too many people, too many bond investors, like read The New Yorker or New York Times. But the reality is that he's going to go in front of the Senate, he's going to answer the questions as a guy who has a PhD from UPenn, and you know, he's either going to get confirmed or not, but that's going to depend on those answers, and those answers in order to be confirmed are going to make the bond market realize, oh, oh yeah, right. He's just going to probably be more dovish than he should be, but not on some like emerging market level, just on the level that we've seen before. I mean, why do we have the housing crisis, for God's sakes in 2007 we're all pretending, by the way, as if somehow the Fed has been a paragon of central bank independence. I mean, there's a reason we had a housing bubble in the United States of America. The Fed kept interest rates too low after September 11, and after the tech bubble blew up for 2002 to 2005 similarly, we did a ton of QE after the GFC that didn't really do anything. And then after the 2020 pandemic, Jay Powell kept interest rates too low because he thought that inflation was transitory. Really, really, in 2021 you've got the Mexican central bank raising interest rates like crazy, but the Fed is not why. You know, maybe President Trump should authorize a bunch of H, 1b, visas for Mexican economists, because, apparently the ones. In the Fed don't realize that $5 trillion worth of fiscal stimulus is going to cause inflation to not be transitory. My point is simply this, just in the last 25 years, I just articulated three examples of where yes, monetary policy in the US was way too dovish. If President Trump is the fourth iteration of this, it doesn't mean America's become Turkey. It means America is in America, and we're going to have another bubble. So, you know, act accordingly.

Erik Townsend 

Marco, let's assume that Kevin Hassett is President Trump's pick for Fed chair. I definitely agree with you on that. But boy, if I try to connect the dots here, it seems like all the spin I'm hearing is Democrats are probably trying to pre position. Okay, let's tell everybody that Hassett is Trump's boy. He's not independent, he's not suitable. We got to keep him out of the Fed. Now, the Democrats don't have control of the Senate, so how much resistance can they present? Can they can they prevent has it from being appointed, or are they just going to make a bunch of noise about it before that ultimately, is the outcome?

Marko 

I think for sure, for some reason that I'm not quite that, I don't really understand, has it has attracted the ire of the Democratic Party and sort of just liberal intelligentsia. What's ironic about that is that that may succeed in the Senate. You know, a few conservative Republican senators could end up voting against him. They may be swayed by this sort of risk that he is going to do President Trump's bidding, but I just think that means the next guy or girl gets confirmed and is probably going to do the same thing, which is not really do President Trump's bidding, like verbatim, we're not going to go to 0% interest rates, but is American monetary policy? Is the Fed funds rate going to be, like, 50 basis points lower than it should be? Yeah, and that's gonna happen whether it's Hassett or anyone else as the Fed chair, you know. So I both think that, yes, you're right, the Democratic Party and you know, sort of liberal media will paint has it as some sort of, you know, Donald Trump, chocolate Labrador. But I think it's kind of silly, because whoever else replaces him is not going to be their favorite pick either. You're just going to have another Fed chair that will run monetary policy slightly more dovish. And again, I just want to reiterate this has happened three times just in the last 25 years that I can articulate just like this. You know, just kind of BS ing with you back and forth on a podcast without even showing any any charts. I don't think we're in a world where the US becomes turkey or Brazil. We're just in a world where we're going to have monetary policy that stimulates the economy because we're out of fiscal bullets. Man, it is what it is.

Erik Townsend 

Well, Marco, I can't thank you enough, as always, for a terrific interview. But for the benefit of some of our listeners who do want to see those charts, tell us a little bit about what you do at BCA research. What is the geo macro function that you have basically created there all about and how can they find out more about it and follow

Marko 

your work? Yeah, thank you. Thank you for double clicking on Geo macro. I'm trying to make it catch fire. Basically, my premise as a strategist is that in 2025 and beyond, you can't really be a macro investor unless you incorporate politics and geopolitics into your framework, you know. So it's not a nice to have. It's not the icing on the cake. It's in the batter, if you just focus on macroeconomics, or if you just focus on momentum or valuations or bottom up analysis, is just not enough, you know. And so that's what geo macro is. It's it's a blend of politics, geo politics and macro economics, where, basically I don't differentiate between these frameworks. I use all of them. And so at BCA research, I run that strategy. My job is really to call the five big asset classes, as I like to call them, the s, p5, 100, the dollar, the 10 year yield, gold and energy oil. I think if you get three out of those five right, you can get everything else right in your global asset allocation. So that's kind of what I do, and they let me do it. And I'm very, very grateful to BCI research for giving me the platform to put my voodoo to the test, you know? And it's worked really well for the last two years. I've been extremely bullish last two years, particularly this year. My S, p5, 100. Target was 6950 we're not going to reach it, probably by the end of the year, but we're going to be close. And I think one of the reasons that I've been right is that sometimes, yes, macroeconomics looks bad, but policymakers are what we really need to forecast. It's that second order effect that we need to really think about. It's not just the first order. It's not just. What's linearly extrapolated mathematically from data. It's how do policymakers react to it? And without that, I don't know how you can really be a macro investor. Well, I look

Erik Townsend 

forward to having you back in 2026 for an update. Patrick seresna and I will be back as macro voices continues right here at macrovoices.com.

 

Erik: Joining me now is ECRI co-founder Lakshman Achuthan. Lak It's great to get you back on the show. For most of our listeners are familiar with your work, those who are not should just put Lak name into the search box at Macrovoices.com we go fully into the long-term business cycle and cycles analysis work that Lak's firm.

Economic Cycles Research Institute focuses on in some of those past interviews. I wanna dive into the current situation, though, Lak, because you are Mr. Cycles. You think about the world in cycles. I love your work, but hang on, you told me something off the air about how you guys have this idea of an economic regime change.

It seems to me. Although the cycle's work is very important, and I get it. I respect it, but I think president Trump and Secretary Bessent are intending policy changes that are really literally on the scale of re-architecting the global financial system. Now, I'm not saying that they're going to achieve all of those goals, but.

That's what they seem to be out to do. And it seems to me that potentially puts a real speed bump in reading cycles that are normally based on just, the normal ebb and flow of economics. How should we think about cycles analysis in a world where President Trump and secretary Bessent really are intending changes that are pretty much unprecedented?

Lakshman: That escalated quickly. That was a big question, but I It's great to be back with you. I I I think that's really at the heart. Your question just cuts right to the chase. It's at the heart of decision making in a world where, the rules are changing and and so you have to do a lot, you have to have an interesting framework, I would say.

And I'm very grateful for the cycle framework because it has a tried and true history of navigating what I would call a regime change. You're talking about re-architecting the global economy. I agree. It, it seems like there's some version of that. It's hard to say literally what, but there's some, something's going on.

And cycle work does. Extend back farther than people may realize to the early part of the last century. And there have been a lot of regime change actually changes of kind of the economic lay of the land over that timeframe. I'll rattle off a few, a little trip down memory lane.

You have the panic of 1907 which It was the creation of the Fed. So that's a, it's changing some of the rules of the game, right? You have as World War I ends, you have the end of globalization. And income tax, reduces the reliance on tariffs. That's a huge shift in the way global trade was going on.

In the first half of the thirties, you have Smoot Hawley Tariff Act, the Depression, the end of the Gold standards, the New Deal. There's a lot of huge things going on. More recently. And you could tell I'm a cycle guy when I say this is recent. But you have the Nixon shock in the seventies.

There you have some tariffs. You have the end of the gold dollar link, the Bretton Woods set up and stagflation shows up. That's a new thing relatively new in this century. You've got the housing bubble the financial crisis, the huge bailouts with QE. And then post COVID, you've got that unprecedented is a word that gets used a lot, but unprecedented, massive fiscal stimulus, extreme QE, and all the supply chain stuff that happened.

So these regime changes. Have occurred the cycles continue to happen, right? And if and this is important to remind everyone what we're doing with cycle work is watching for the inflection point, is the cycle going to turn and go the other way? So if we have one job at ECRI, that's our job.

Is it gonna turn and go the other way? The rules can change. The magnitude of the swings can get larger and smaller as the structure of the economy changes over all these decades. But this inflection point monitoring and kind of risk of question actually is pretty darn stable. And all those times I just listed, the cycle indicators didn't break down.

They kept getting the direction correct and more importantly the timing of the direction. And now I'm talking about growth. I'm not talking about markets, but the timing of the direction they were able to get very well. So in the current environment, the reason this is a problem, and this is embedded in your or original question, the reason this is a problem is 'cause when the rules change.

Models break down and nine outta 10 people listening, whether they're explicitly doing it or implicitly taking it in when they take in information, are relying on models. Where there's an estimation of some sort of relationship that has occurred in the recent past, the last five or 10 years, and it's optimized for the next whatever year or something, and you say, oh, 'cause those are the rules that last several years.

It's gonna happen that way in the immediate future during regime change. That's absolutely untrue. However, these cycle indicators continue to get the direction right? So it's in that context that we come into 2025 and you have as you said, this re-architecting perhaps going on of the global economy, and how do the indicators work?

Quite frankly, they work the way they always do. They got the direction right.

Erik: Let's go ahead and talk about how the cycles interpret the last six months or so. Let the amount of time that we've seen these significant policy actions from Secretary Bessent and President Trump starting to affect markets.

How do the cycles interpret those, that period of time when those events occurred, and what do they tell us about what comes next?

Lakshman: I'm gonna refer to a couple of charts that are available that I'll make available that you can make available. Back in basically liberation days, right? It's in April or so. And we had ended 2024 all set up for, there's a slowdown. We're having a slowdown in growth. There's no hard landing. And inflation, while it's still sticky, is gonna stay in check. And in, in April, our indicators were still signaling a slowdown ahead, but there was no recession.

And before Liberation Day that was our view. There was no nothing in our world, nothing too radical. Then you have liberation Day, you have all of the. Headlines and quite a bit of angst about a hard landing or a recession. That was the mood. It, people may or may not remember this, but that's what it was.

So in July, after there's you have a little bit time after after all that news came out. Our forward-looking indicators on growth had turned back up points to growth, firmin not stalling. And that was even as our forward-looking, separate forward-looking indicators on inflation were showing inflation pressures still fading.

And at the time we called it a setup for a Goldilocks space. And everybody else was still talking about a hard landing, but we just, it didn't show up in the cyclical forward looking directional data and. That's just what, we are very agnostic actually on, on, on most things except what our indicators say.

When the indicators are pointing one way or another. We trust them because of the real time performance and then we try to figure out why afterwards. Now August, by August of this year very interesting because the resilience was giving way to even firmer growth. Our cyclical signals and broader investment data started to really line up and we got into a more, what we would call a balanced brightening.

And it's an unusual situation. I think the last time was quarter, a century ago where you have a cycle. A set of cycle data, which we're tracking moving to the upside directionally at the same time that you've got some sort of structural thing happening. As you say, there was all this re-architecting happening, but there's a separate, the separate issue is the all the tangible and intangible investment drivers.

That surround the ai activity. And so with those pushing to the upside at the same time that the cycle's pushing to the upside doesn't happen like that all the time. And so that's notable, that's happening. We saw that in the summer. In September again, our update is the expansion is totally intact.

Inflation is contained. That's pretty darn unusual. And that brings us to now where it continues to be constructive. There's. There's this I think it's now a little bit more in the headlines. This K shaped stuff, we've been talking about it for, until I'm blue in the face.

But basically the, you have the, a smaller group of consumers at the upper end of the K that are responsible for the bulk of consumption. The top 10% are just spending freely. And they're helped by rising wealth and strong balance sheets. And at the same time, the median household is under a lot of strain.

They, they have slower earnings growth, a lot of credits, stress and. With the job market not adding jobs, right? It's not losing jobs, so it's not adding jobs. There's more stress. And so you get this, what we've called the kind of plutonomy pattern, a narrow consumption base that props up the overall numbers.

But there's definitely some fragility underneath. And that. Is why things I think are very confusing for people at the moment. And it also explains in a way where one aspect of why inflation can is having trouble like getting a grip of getting some traction here. I'm talking broad inflation not goods, inflation.

And that's because the bottom end of the K just can't stand it. They can't handle higher prices and so it's very difficult for it to start to to run. And our forward looking inflation indicators are saying that continues to be the case for now. So right now we're in a Goldilocks phase.

I know that's getting a little tired to say growth firming inflation contain no hard landing, no stagflation. Now eventually that's gonna, the balance will tip. And that's what the leading indicators are designed to do is to give us a heads up on that.

Erik: That's fantastic Lak because that there's so much to unpack there.

I really want to dive into it. I tend to think in macro narratives in my head and I, I really respect the data-driven work that you and others do, that's what I respect technically, but my brain thinks in narration and what I think you just said. Tell me if I got it wrong, is right now we've got an economy that's dependent on rich people being in the mood to spend money like it's going outta style 'cause some of them are new at being rich and they're still celebrating that. But all it takes is one big catalyst, like some of the people the that are in the majority who can't afford to go out to dinner watching that conspicuous consumption, getting pissed off and throwing a Molotov cocktail at just the wrong moment that hits a big news story and all of a sudden there's a mood shift and rich people don't wanna show off and go spend money like it's going outta style and everything collapses very quickly because of that one little butterfly flapping its wings at the wrong moment. Trickle down effect.

Am I reading way too much into that? Because it sounds like there's some real risk there.

Lakshman: Here. Here's where our cycle stuff would line up with that story. As I intimated the k-shaped consumption, it's not a new feature. This feature, it, I feel like I've been saying it for decades.

And maybe it's been there forever. I'm not that old. But his, I know that we're not the first ones to struggle with what's going on with the economy and what I do know. Is like relative change, right? And it feels like that gap between the upper end of the K and the lower end of the K has just taken a, good step bigger.

And that would feed into the narrative you just said, right? It's what's the straw that's gonna break the camel's back kind of thing.

Erik: What do your long-term cycles tell us about past times in history when wealth inequality was growing exponentially, which is what seems to be happening here.

Lakshman: Here's what happens, right? It's quite interesting. Imbalance is built. And they're always different, right? If you're a student of these cycles and histories, there's some debt crisis, there's some other boom like the dotcom boom, or there's the housing stuff.

There's weird little ex like imbalances that build, and that in and of itself doesn't tell you when things are going to end, right? We're looking for the inflection point in my world, right? We're looking for the inflection point. So we track the leading indicators, not the coincident ones we're trying to look a little further ahead and when they begin to turn and go down, I don't know exactly what the match is going to be.

That lights the fire, but that's when. The conditions are ripe for something to move the other way, and that's where you generate the cycle. It's the combination of the extreme. In this case, we're identifying tension between the two legs of the K or the two arms of the k and. At some point, something is gonna give, I, I don't know what it is, but I watch the long, what I'm doing every day as much as I can is watch these long leading indicators and I'm trying to see if there's any sign of a growth rate cycle, downturn and reason this is on my mind.

I can't help but remember the dotcom boom. And, roughly speaking, NASDAQ went to 5,000, then it peaked, and then it crashed and fell 50% and took, all the related things around it with it. And there was a whole narrative around tech that it was going to do all of these things.

And it, it's not that. It was untrue, but it was just overdone, right? It got overdone and perhaps that's happening here. I don't know. But what I do know is that in 2000, the year 2000, the long leading indicator index had started to turn down and it was starting to point to growth slowing, which then takes the shine off of the priced for perfection stories.

Erik: But you're saying you're not seeing that now? You're not seeing the topping

Lakshman: today? When I'm talking with you right now, I don't see it. It doesn't mean I'm not aware that it could happen. I'm aware it can happen, but I'm just reporting object is it as I'm trying to be, I'm trying to get rid of my feelings.

And say, I know that booms end in busts because I've read books, right? And I know that the long leading index is just one thing. I don't know. There may be other things that could crack the situation. But the one thing that I know something about is accelerating and decelerating growth.

And I know that decelerating growth would take the shine off of the price for perfection stories. That underpin a lot of what is being said about, you know how people have stories around why, this time is different and right. And you see everybody, I think everybody who's been around for a little while looks at the market and says, whoa, that's pretty high.

And wonders, what might. Topple the apple cart today. I'm saying in the snapshot of what the long leading indicator is saying is it's not growth yet.

Erik: It seems if you look at the market in terms of where all of the upside has been, it would be the risk of an unwind of the AI trade specifically.

And I think there are extreme parallels to the dotcom bust in the sense that they got the call right, that the internet was gonna be a really big deal. They got that exactly right. It's just that. They went and bought a whole bunch of stuff. They didn't understand what it was because it sounded like it was internet related, and that got us into a bust situation that was quickly contagious, even to the cool stuff that really was relevant.

Is there a setup for that to happen again here with AI where Yeah, AI is a really big deal, but it doesn't mean we can't have a bust because it's a big deal.

Lakshman: I, I would say it's virtually certain, right? Because the nature of it is you, as we said earlier, you're priced for perfection, but the misallocation of resources, right?

Because you don't know which one is the right one. So everybody's throwing money at everything and some of them are no good or, maybe I, what is it? I'm not gonna get this right, but I'm sure your listeners know this that in the dotcom boom, they were building certain infrastructure, including lines and capacity for data moving around that just was way beyond anything that could be used.

And it has to be repurposed at some point. It's almost like building, there, there's a whole thing where people built all the malls and stuff like that, and then you don't go to the mall anymore. You buy stuff online, so you gotta repurpose the mall. Here we're building a great deal of dataset or capacity and other things.

I don't know exactly how this works, but if there's some technology change that may not be needed, right? So that's misallocated capital. That's, you gotta be careful what you wish for. Many of us know or understand that these free market economies that we are, we like to think we're in, we're mostly in, for the most part.

Every once in a while they get a kind of crony capitalism, but in these free market oriented economies. If you don't allocate your capital properly, you get, you end up paying for it at some point, and so the boom can turn into a bust. And that's probably gonna happen here, but there's a huge fear of missing out.

If it happens in a month and you pulled out, you're a genius. If it, if you pull out now and it happens in a year, you're an idiot. And so that fear of missing out keeps everybody here. I wanna swing back 'cause you're making me think back to the regime change stuff. Also, if you'll bear with me in the early seventies Nixon the Nixon shock, right?

This is a bit of a regime change. He has a, an America first policy. And unilateral action. In the international trade stage, you get 10% PAC tariffs. You have the inability to exchange dollars for gold to taking off the gold standard. The upshot of that for everybody looking at it in the moment.

Whoa, this is a really big deal. Which it is. And maybe this is gonna bring us a lot of inflation. What's gonna go on now? There was a whole concern around that. And ultimately they were right. I think in retrospect, people look and they say, oh yeah, seventies had a lot of inflation. It must have been related to that Nixon shock.

And it probably was right. Smarter people than I have made that argument. But what's interesting from a decision making point of view, either for your business or for your portfolio is that after he did this and made the announcement the economy did great and inflation was not a problem.

It was more than a year later that the wheel started to come off. I don't think people really appreciate that. The indicators got the direction right in on both counts. We had been coming out of the 69 70 recession, so the indicators were pointing towards growth and we didn't have an inflation problem at the moment, even though these things were happening.

And it's not that it didn't show up right because they, these were big rule changes. And you have the oil embargo begin also, but the the timing of when it shows up is really critical. And, there might be some rhyming of that now.

Erik: I really want to go deeper on this one, Lak, because, and I'm gonna ask you to hold me to account here 'cause you are a historian and a cycles analyst.

I am not. And if I've got the history wrong, please set me straight. But I think about the Nixon shock and the secular inflation of the 1970s with a different narrative, which is. I think that all the signs of a secular inflation were there in the mid to late 1960s. I think that the first, from what I've read about secular inflations, and please correct this part if I have it wrong, it's very common that the market is misled because for the first few years of a secular inflation, the feedback loops that make inflation bad for the stock market haven't kicked in yet.

So what happens is in the early years of the inflation, it feels like just. Really explosive economic growth, and everything is wonderful, everybody's happy. But it turns out that it's really just the beginning of an inflation. I think that's what happened. It started in the late sixties, and by the time the Nixon shock occurred, as you said you can get to essentially what we think of in markets is a buy the rumor, sell the news event where the Nixon shock happened.

A lot of people knew that it was going to be inevitable. They were fading. It. That got unwound. It wasn't another year, just like after the bust in the dotcom market. It wasn't until another year before the trade really started to kick in that, the internet is an important thing and that the inflation was very real.

And then you had the stock market bust of the 1970s. It feels to me like we're still in the late 1960s. The Nixon shock hasn't even happened yet. Have I got that all wrong, or what do you think about that view?

Lakshman: So on the secular side I'm like you in the sense of, I, I hear the stories, I try to put them together.

And it's very difficult because the secular stuff or structural stuff very hard to forecast the inflection point extremely hard. You can see it if you're lucky and you're really good in the rear view mirror. Five years after it happened, it's hard to do the to know that stuff.

So that's why it's tricky. I think you need to be a astute, I, in one man's opinion is that history is important, right? And I like to read it. They're great stories. And you learn that, people. Did interesting things and thought, interesting things but you're also reading someone's account of something.

You don't literally know what was happening in the mood in the moment. Like I think you and I and everybody listening know the mood today outside our window. But then you start to re-remember it very quickly and as a decision maker. You're taking in all of this, you have this huge amount of data flow, and nowadays we have more than ever right, of this data flow coming over our washing over our screens and our ears or whatever, and we're trying to figure out is there a structural change? What is the structural change?

What's it doing? And quite frankly, it's very, it's almost impossible, but I think the cyclical stuff, you can start to hang your hat on that. That is reliable information. Even now with the government data, on hold for a bit we have reliable cyclical inputs. And they're saying that regardless of our understanding of history and of.

The game changes or the rule changes that we think are going on at the moment, growth is not collapsing here and inflation writ large is not running away. The caveat there, how I can reconcile that with the stories that we've been telling about Nixon or the secular changes that, that started in the sixties.

Is that the forward look on the cycle indicators is a couple of quarters, two or three quarters. So it's not saying any of those views are wrong, it's saying not yet.

Erik: Lak. I love that setup because I'll tell you the narrative that's, I think. Driving. This is energy. And if you use that analogy to the internet, they were building a whole bunch of infrastructure.

They weren't thinking about things like social media and, so forth would be the big trends that would be where the money would actually be made in the internet. I think what people are missing now about the AI trade is, yes, it is every bit as as important to the future of history as everybody thinks it might be, but.

It's not gonna happen the way everybody thinks or imagines it's gonna happen because there won't be enough energy in order to fuel it. The exponential growth of AI will require a increase in the amount of energy that we consume that simply. Isn't immediately serviceable. It could be long-term with the right nuclear energy strategy, but that takes 10 or 15 years to build out.

There's a really big energy crunch I think that will drive an inflation. So again, I'm thinking in narratives, how does that view align with your cycles work? What do you see in the cycles? That, and by all means, if you contra, if your cycles contradict, tell me

Lakshman: No. Right now the future inflation gauge is not running away.

Okay? And most of the future inflation gauges around the world are pretty benign. We cover, all the major economies, including the major, emerging economies. Actually in China, you want a little inflation, right? Because they've been flirting with deflation. I'm talking very broadly, not in a commodity or energy inflation.

There are a couple spots where there's a little, UK and Japan had a little inflation stuff, but not, but basically not an issue right here. Does that mean anything that you said was wrong? No, I agree with you. My, I we work with large industrial companies and those who are in the energy production area.

Like the traditional, Hey, I may, I need to have a generator kind of thing. They've sold things for the next five, 10 years already. Because of what you're saying with the demand. What's quite interesting, and I don't know how to fully figure this out, I is just market prices.

I, I was listening to a pitch, this is your basic straight up. Wall Street Bank pitch on how to reallocate your assets, right? And so everything's, all the assets are up year to date across the board. Bonds, equities, whatever, gold stocks except oil, right? Oil's down oh 10%. When I had this report, which is a, in September, end of September.

So that's interesting. Right now, how do I intersect all of that with inflation and cycles and it comes into our work. Now I'm going from structural to cyclical. Looking at the next couple of quarters, it comes into our work in two ways. Industrial materials, prices sensitive ones including oil.

Let's say, let's start there. At the bottom of this very closely linked to global industrial growth cycles. Global industrial growth has been in fits and starts. It was like slowing a little bit and bottomed out and yeah, now it's moving up. Okay, so there's a, there may be a disconnect there on the demand side between a relatively weak oil prices and where the global industrial cycle is headed over the next couple of quarters.

That says nothing about supply. I'm not, I don't have an insight on the supply side. So that's the other side of this equation. And then you switch to the inflation side. What's going on with inflation cycles? So I'm switching from global industrial growth cycles to a completely different cycle.

Inflation cycles in the United States in particular, and sensitive industrial materials, prices, which is much broader than oil. Okay. There's energy, there's metals, there's textiles. There's there's other kind of miscellaneous materials, building materials, these other things, and they actually are starting to move up as a group.

Some of your longtime listeners may remember the JOC index. The Journal of Commerce Industrial Materials Price Index. That it's actually an ECRI index that we started in the eighties to track sensitive industrial materials. Prices. It's very different than like the Bloomberg one or Goldman Sachs one or whatever.

'cause those tend to be energy heavy. And ours are ore tradable. Our index is specifically designed for inflection points and growth, and I have to tell you that the breadth of that is starting to move to the upside. So it would be unusual, very unusual for oil prices to not eventually participate in that.

One that that, that means that one driver of many. The inflation cycle could start to get a little traction in the coming quarters.

Erik: Lock everything that you're saying very much stands as confirmation of one of my core views, which is I think we are at the beginning of a secular inflation, and I think the bad for the stock market, part of that secular inflation is not happening yet.

It sounds like your data confirms is not likely imminent. It's probably a good year or two off before we get into the kind of inflation cycle that that really starts to affect markets. And there's a lot of good reason to think that this equity market, what everybody thinks of as a very bubbilicious maybe it's about to stall out and roll over.

Stock market probably actually has legs to run quite a bit higher before. Eventually I think there will be some serious. Headwinds, but it sounds like it's not time yet. Does that jive with what you're saying?

Lakshman: Yeah, I'd say not yet. I agree. I agree with you. Not yet. I'm, this is an off color joke, but it's, I'm an older guy.

It's the guy who jumps off the Empire State Building. He's and as he's going, passing each floor on the way down, he says, so far so good. It can be fine for a while. And and booms and busts are like that. They're fascinating times. If. You have some awareness as to what's going on and probably some humility on knowing that you're not gonna get it exactly right.

Erik: I wanna turn this conversation upside down now because I think that this secular inflation discussion we're having is gonna be really important. You see this from two sides. One is your cycle work, but you also advise a lot. Of people to the extent that you can talk generally without breaching any confidentiality agreements.

What are your clients asking you about inflation? How are they seeing it? Is any, are other people worried about this? What is your interaction with your client network telling you about this?

Lakshman: What I think the, our, our clients have spent some time thinking about cycles. And once you get into it you're a little more familiar moving between cycles and growth and cycles and inflation.

And it's the latter cycle, the cycle in inflation. I think that is. Interesting to the clients and to me, quite frankly because I think it, it's confusing to, to the general public and therefore has all kinds of risks and opportunities around it. The inflation cycle right now as we've been talking about, is not a problem.

The us cyclical outlook on inflation overall, it's not running away, and that's hard to believe. Because of the things that you see and hear around you, and when you get into it. And we talked about this a little bit at the beginning of the call there are pieces that are moving up and it's related to the headlines.

The tariffs and such are pushing core goods inflation out of deflation where they were in 24 and into inflation, where they are now, and they're running around, they're approaching 2%. And so that's a big change, right? They went from minus 2% to plus 2% on core goods. At the same time. Shelter and services less shelter are all trending down.

And so that's why the overall inflation while sticky is not running up yet. And part of that relates to the bulk of people who, when the median households and who are in the lower end of the K, who can't afford higher prices. And so discretionary. Spending items they can't get a lot of price inflation there for that large cohort of people.

All of this matters because there is this combination of inflation and growth give you interest rates. And interest rates, then price the rest of your portfolio. I'm oversimplifying, it's critical component. And where does this then relate to the interest rate, to the yield curve?

Regardless of whatever the headlines are there's not going to be a strong inflation reason for a hawkish FED. So that's one piece of information. On the other side the continued stickiness and all of the structural and secular concerns, may have the long end hanging out, also sticky.

And so that's the setup for the yield curve going forward. There, there's probably some room on the short end. Certainly not for raising rates, but for being more dovish. And then the other end's sticky for now. And you've got, as I described earlier on a cyclical basis, a Goldilocks kind of outlook, firming growth with overall inflation, not running away.

So you see how the inflation cycle informs so much, and I think the inflation cycle is the most confusing part for most people to figure out.

Erik: Lak. I can't thank you enough for a terrific interview. But before we close, I want to ask the question on a lot of our listeners' mind particularly our institutional audience, which is what if they want to sign up for your service in order not to be left out in the cold and to know when there is a change in what your cycles are telling us is coming next, or when one of those inflection points is upon us.

Lakshman: Look, if you wanna work with us, it's pretty simple. Just call just give us a call. We're old school. Just call Melinda at our office and you can find us at Businesscycle.com. We're here in New York and we do have some people who are extremely good on, on, on social media and stuff.

So we have a YouTube channel, and that's Economic Research Institute. And we have a LinkedIn where there's, there's a newsletter and things like that, and that's Economic Cycle Research Institute. Again. So if you just type in the whole name on one of those social channels, you'll get right up to date stuff on what we're doing publicly.

If you wanna work with us, give us a call or send us an email and we'll take care of you. We're nice people and we enjoy talking.

Erik: Patrick Ceresna and I will be back as Macrovoices continues right here at Macrovoices.com

 

 

 

Erik: Joining me now is Michael Howell, CEO, of Global Liquidity Indices. And boy, what a perfect time to get Michael on the show. Michael prepared a slide deck to accompany, today's interview, which I strongly encourage you to download as we'll be discussing those slides throughout the interview. There are also two research notes, which are very much worth reading.

One of them is called a Giant Hissing Sound, and it's exactly about this drying up of global liquidity that's occurring in markets. Michael published that long before the market events of the last week or so. So he's definitely got some prescience in terms of what was going on in this market. The second download is called The New Currency Wars and the Gold Bitcoin Axis, America's Digital Collateral versus Chinese Gold.

Both of these papers are very much worth the read. Just for our listeners benefit, we are recording this interview. Early on Tuesday morning. So Michael and I are aware of the market carnage, which brought us to the first sell off to a closing print below the 50 day moving average on S&P E mini futures since the 21st of February in 2025.

The last time this happened, it was 1200 points down from there before it bottomed. Michael. Is that about what's gonna happen next, or is this one gonna be shallower?

Michael: Oh, hi Eric. It certainly could be. I think the concern is that we've we've been in a bit of a bubble and liquidity is basically being pulled from markets and, liquidity has been a major driver of asset prices really well, as long as I can remember, in fact.

But certainly since the the low point in. Late 2022 markets have catapulted upwards by more liquidity. And it looks as if this is coming to an end, or certainly at least for the short term, if not one into 26.

Erik: Now I wanna compare this. I agree with you completely that boy, liquidity is everything to markets.

It does seem like the technical indications are giving us a signal we haven't seen since February. That was pretty nasty in February. This could be big. The other side of that though, is our good friend Eric Peters over at One River Asset Management has a note out saying, look. President Trump has never had more at stake than he has right now.

If the Democrats take control of the Congress in the midterm elections in 2026, we're gonna go back to Lawfare, probably another impeachment. Who knows what could happen. On the other hand, if he can get through this and somehow make sure that Republicans win in 2026, then the rest of his presidency, and he can't run again, so this is the end of his presidency.

It sets him up for the legacy that he wants to have. So what Eric Peters is saying is, boy, there's never been a stronger incentive for Trump to pull out all the stops and do absolutely any policy action that it takes to turn this around. So I guess the question in my mind is, okay, are there any policy actions that can turn a drying up of global liquidity around?

And I agree with you, it's not just US, it's global. Liquidity that seems to be drying up. Is there some trick up Secretary Bessent and President Trump's sleeve that could reverse all of this?

Michael: I think there's a lot of things out there. And I'm absolutely sure that their focus very much on the midterms, so I'd be surprised if they do nothing from here.

But the question is do they really try and goose Wall Street or do they put more stimulus into Main Street? And I think everything that we're hearing out of. Treasury Secretary Bessent is that we're basically moving towards an environment where it's quite likely that Main Street is gonna get the thrust of any policy impetus.

Now, I think you can see that in some ways by listening to some of the Trump appointees on the FOMC notably Steer Miran. And what he's saying is that sort of very curious combination of. Let's cut interest rates, but also let's shrink the Fed Balance sheet. Now that's a head scratching point because it's difficult to do that, but at the end of the day, what they're really saying, I think, is that lower interest rates will likely help Main Street.

But a smaller balance sheet is gonna take some of the impetus or some of the liquidity away from Wall Street and that may be is what they're thinking of doing. And it's really in this sort of camp that I describe as, a shift from Fed QE towards treasury, QE.

And that I think is really the direction of policy. The problem is it's very difficult to. Sort of fine tune that withdrawal of liquidity from Wall Street without causing the market some tensions. And I think we're seeing the early signs of that now in the repo markets. We haven't seen these kind of tensions in repo really, since 2019, and the script is looking very similar.

So you're seeing a run of of excitement or wider spreads in repo and then suddenly as in 2019, you get an unexpected blowout and that could be happening again. So we've just gotta be really careful about monitoring some of these some of these issues.

Erik: Michael, let's tie this conversation into your slide deck. Walk us through what's going on and what we can expect next.

Michael: Okay let's let's start on slide 11, which is a little way in, but it gives you the sort of essence of what I've just been talking about, which is looking at at the global liquidity cycle.

Now, what this chart is identifying is the momentum of liquidity through the world economy. Now, I think we've gotta be, clear about. A couple of things. One is what is global liquidity? And the way that we define it is it's the flow of funds through world financial markets. Now is that money supply?

The answer is not, it's not probably an easier way to understand what we are doing is to say that this aggregate is really financial money, but it pretty much begins where conventional M2 measures of money supply end. So it's really looking at that sort of fringe. Of, of funds, which are, in repo markets flowing through shadow banks, Etc.

These kind of more esoteric areas. But it's that which tends to drive a lot of the leverage in the financial system. And it's very cyclical as the diagram says. So the black line there is the momentum. It's shown as an index, but it's basically the underlying growth rate of liquidity. And what we've overlaid on top of that is a sine wave that you can see as a red dotted line.

Now that sine wave was actually put in place 25 years ago, back in the year 2000. It was estimated for those that are mathematically inclined by fourier analysis, and it's basically been extrapolated thereafter. What is what you get. It's a 65 month cycle. Interestingly by coincidence the foundation for the Study of Cycles, which is an institute that looks very closely, as the name suggests, that cycles took the data away and did their own independent analysis much more rigorously, I'm sure, than we did. And they came back with exactly the same conclusion that it's a 65 month cycle.

So there's independence sort of corroboration here. And the other question is, why is it 65 months? And our best rationale is that this is a debt refinancing cycle. As we've noted before, capital markets are not as the textbook suggests mechanisms for raising new money for new investment projects.

They're much more systems for debt refinancing. And we've got so much debt. Something like 70 to 80% of all transactions in financial markets are about debt refi now. So this is debt refinancing cycle and the average maturity of Debt out there in the world economy is around about five and a half years, which is exactly the 65 month cycle.

So that's probably what it is. And you can see from the cycle that we last bottomed in late 22. In fact, it was October of 22. The cycle has been moving up, pretty pretty nicely in almost in a straight line ever since. But it's just beginning to inflect and it's inflecting. It's pretty much round where that ine wave is suggesting late 2025, early 2026.

And that's why we're concerned because we're seeing this downward momentum. And that's coinciding with where the cycle would norm, the rhythm would normally start to turn down. So that's our concern. And if you go to the next slide that basically just encapsulates that in by looking at the current cycle and comparing it with the average.

Cycle over the period since 1970. The average cycle is that black dotted line. The zero is showing the, of the middle of the chart is the low point, the months before and after that low point are shown at the bottom counting to the left and to the right. And the red line is the current cycle. So it looks as if we're pretty much at the end of a, what is a normal cycle.

Now there is tolerance either side of that average and the tolerance it's been on average about eight months. You've got a window there of some flexibility, but it looks as if we're getting pretty late. That's the story. And then, if you want the implications, then take a look at the following slide 13, which is just a schematic diagram that looks at the asset allocation cycle and tries to overlay the liquidity cycle, which is shown on the left. Onto the asset allocation cycle, which is shown on the right, and it basically infers that if you're in the upswing, in the phases that we describe as rebound or calm, you are likely to have strong performance from equities around the peak of the cycle.

You tend to find commodities. Picking up strongly in the downswings you wanna be moving back to cash is the asset that gives you the better absolute returns. And then around the trough of the cycle, you want longer duration government debt. And then the cycle starts again. You go from risk of back to risk on, and that's effectively how the how the cycle tends to work.

Where are we now? We're basically around the peak in the US market. We reckon Wall Street's in what we call a speculative phase in terms of liquidity. Let's be clear. Other markets are nearer the peak, maybe Europe emerging Asia, and much more in the sort of the very late calm phase.

But you got the idea. We're late in this cycle.

Erik: I wanna make sure that I'm not reading too much into this. 'cause as I go back to page 11, this looks pretty ominous. It says that basically we're probably hitting a peak or pretty darn close to it, and it's two or three years of down before up starts again.

And we're seeing that confirmed. I would say certainly the signal that we've seen in the last two days in the market is the first time since February that we've had a closing print on the S&P below the 50 day moving average. And I saw an. Note from our friend Ola Hanson over at Saxo Bank saying commodities are really starting to take off.

That jives with what you're showing on page 13, that's what happens after the equity cycle has already peaked. Really seems like there's a lot of corroborating evidence that all says equities are done here. Am I reading too much into that?

Michael: May maybe, it's never quite as binary as that, as you know right , but I mean, I think the the fact is that we're likely to see much more of a headwind for stocks if this is the correct judgment, that liquidity is turning down.

You can see this whole picture in a, maybe a, an easier way through traffic lights, which we show on slide 15. And the point about that chart is that it basically shows to the left. Asset allocation in which asset classes you should be picking in different phases of the cycle. And then the industry groups that tend to perform are on the right hand side.

Now what that traffic light system says, and by the way, that this is, not something which adapts to each cycle, it's something that we I'm not gonna say set in stone, but it more or less is we've used this for decades, but it basically shows where you would normally expect to see returns from.

Different asset classes, different industry groups. Now what it says is that if you're in the rebound stage where you know you want to be, just think about the traffic light, the orange light says proceed with caution. So that's saying that you wanna, overall in your asset location be prudent, but probably.

Moving forward green lights are clearly goes, so you want to be in equities and credits at that stage. Commodities, it's too early and bonds not really any interest. Then you go to calm and you start to see equities picking up more strongly and you're getting the first sniff of action from.

Commodities credits. You wanna be, maybe a little bit more cautious, spreads have already narrowed a lot at that stage. Speculation, equities proceed with caution commodities, full green. That's where I think we are now. By the time you get to turbulence, you wanna be out of out of equities.

You maybe wanna be sticking a toe back in the credit area because spreads may be more attractive and bond duration gets the green light. And you think about industry groups on the right hand side very straightforward. You wanna be in cyclicals in that upswing phase during rebound and calm.

You wanna be defensive otherwise, in the downswing phases. Technology always leads, so it does. Really well in rebound and calm. You tend to find financials really picking up strongly around the mid-cycle calm stage. And then typically energy commodities do well later in the cycle. Now, I would say, despite the fact that we've had virtually no business cycle to speak of since the end of COVID.

Economists have generally flatlined maybe for a host of reasons, one being the the sort of strength of fiscal spend. What you've seen is a very normal liquidity cycle and you've seen a very normal asset allocation cycle. This has been almost operating like clockwork technology.

Were clearly leaders financials have had a stellar 12, 15 months across, worldwide. Commodity markets are, have been on fire mining stocks have been basically, thrilling us this year. So it looks extremely normal from an asset allocation and liquidity cycle standpoint. The puzzling element is clearly about reading the economy because that's pointing all different ways.

Erik: And I would suggest also that the obvious other elephant in the room has been an expectation or a desire among market participants to believe that this market weakness surely must have been all about the US government shutdown. With the government reopening. We must be almost at the bottom and it's all gonna take off again.

It seems like you've got the good explanation for why. Maybe that's not true, but I think we should touch on that topic. Is there any any validity to the idea that maybe what we're seeing here is just to sell the news reaction to the government reopening and we're about to see a recovery?

Michael: It could be, I think that, one has to be realistic here. And the fact is that, within the Fed Balance sheet, there's an element that we we've termed fed liquidity which is something we wrote about when we published a book, five or six years ago, called Capital Wars, which went into dissect it a lot of Fed operations.

And we came to the conclusion that it's not the overall balance sheet. That's really the important element. It's really understanding. Parts of the balance sheet, those components that actually create liquidity for the markets. And if you look at that that particular aggregate that that calculation fed liquidity it's been under, under pressure over the last few months.

Really from a combination of reasons. One of those is being the end of the debt ceiling. Treasury general account, which had been paired down during the period when the, where the federal government couldn't issue debt. It's been rebuilt. That sucked money out of markets. And then lately the government shut down, has further sucked more money out because there hasn't been the, there's been limit limitations on spending.

So you've got the Treasury general account, which is it sounds slightly wonkish, but it's an element of the balance sheet where effectively the Treasury build up its bank account at the Fed, but that is taking money outta markets. It's not circulating liquidity, and that has been, now it's over a trillion dollars and that will clearly come down as the government restarts.

There's no question. So money will come back. The question is that the Fed has taken out. Over that, maybe the last six months since the summer about 500 billion. So half a trillion dollars out of markets it could put back with a government restart, maybe 150. So we're still gonna be sure, and that is being played out in bank reserves where bank reserves are now well below the 3 trillion threshold in the us and that's clearly causing problems in the repo markets.

I think what might be helpful is to try and understand why this is a problem and maybe what is coming down the track in terms of understanding this sort of whole debt liquidity nexus, which is really driving global financial markets as we see it. And there's a slide a little bit further on in the presentation on slide 21.

Which looks at a sort of schematic representation of the, the world financial system, if you like, post GFC. Now, what that slide identifies, it's as I say, a schematic diagram, right at the heart of that diagram is a debt. Liquidity Nexus, and what it basically says is that you've got this paradox in the world economy where, as I've maybe emphasized, we're in a refinancing world where capital markets are already focused almost entirely now on.

On refinancing existing debts. If you take out a debt, unlike an equity security, you've gotta think about rolling that debt. Spoiler alert, debt is never repaid. It's only just rolled over. You've gotta, you've gotta roll that debt on average FI in five years time. And that causes a great burden for financial markets.

So if you think of a very simple math here, if you've got $350 billion of, sorry, trillion dollars, I beg your pardon. Trillion dollars of debt in the world economy with an average term of five years, you are asking capital markets to roll over 70 trillion. Of debt every year. This is a huge amount and it's only getting bigger.

Now if you look at how this system works, you've got at the heart of the system, this debt liquidity nexus. The paradox in the system is that debt needs liquidity for a rollover, but liquidity needs debt as collateral. It needs all existing debts as collateral. Now, that's the paradox. Something like, as you can see from the chart, 77%, very precise figure, but that comes from the World Bank, 77% all lending worldwide now is collateral based.

So it doesn't mean to say your, home mortgage or real estate has got a, is collateralized. It's not just that. It's saying that a lot of financial lending. It's actually collateralized using US treasuries or German bonds. Think of the hedge fund basis trade that is underpinning the US treasury market.

A lot of that is, or the bulk of that is collateralized on treasuries. So this is really a very important element. And the point about this diagram is that what you need is an equilibrium there, and that equilibrium is a balance between the amount of debt and the amount of liquidity. If you have deficient liquidity, you're gonna get a financial crisis.

If you have too much liquidity, you get an asset bubble. Now, if you take a look at the following slide 22, that gives the history of that particular ratio. What that shows is the debt liquidity ratio over time. Now, I've often puzzled, been puzzled by the idea of why do economists look at debt to GDP, and I've never really understood the logic for that.

Maybe it's because it's an easy calculation to make. And so many things in economics what is most easily measured seems to take on the greatest importance, whether it's relevant or not. And I think that's the same with debt/ GDP, this is looking at something which is practical, which is saying, let's look at debt liquidity.

You need liquidity to roll debt. And if you look at that series, it's it's basically a stationary series that mean reverts. And it seems like there's a level of. About 200%, otherwise, two times debt to liquidity where you get an equilibrium. Now, if you stray above that equilibrium, if you go way above the two, you'll see there that you get spikes which have annotated, which happen to be global financial crises, and that's when you get refinancing tensions in the system because there's too much debt, insufficient liquidity, you can't roll the debt.

And so financial markets get into gesture. If you look at the opposite of that, if you go down the page and you look at the low periods of the debt liquidity ratio, when there's abundant liquidity in the system, you get asset bubbles. The vent of that excess liquidity is asset prices. And you can see where we've just been coming from, something called the everything bubble.

Now that is an astonishing displacement downwards of that ratio, and it's clearly been propelling markets ever higher, and you can see that it's now coming to an end as that. As that line picks up, now we can go down two rabbit holes here. One is to is to look at. The history of asset bubbles, which I think was the second slide in the deck, which is just something I snipped from Twitter which was a chart on asset prices in bubbles since 19, the mid 1970s.

And I just. As best I could overlaid on that, our global liquidity cycle, just to show that almost every bubble coincides with a prior period of excessive liquidity, pretty much as this slide 22 confirms. But the question is, why did we go down so far in that ratio? Why was there so much liquidity relative to debt?

And now why are we going up? And that's really the second rabbit hole. Now, if you think about why we went down, it was simply because we reached the situation after the GFC and after COVID where policymakers just plowed liquidity back into the system to try and write put us back on the rails and write the system after those significant crashes or collapses.

Liquidity was the solution. It's now become the problem and the other thing is that interest rates were slashed to zero. If you've got worries about debt, why do you want to incentivize people to take on even more debt by getting interest rates to zero? That seems to be a completely crazy policy doing that, but it also encourages a lot of borrowers to term out their debt later to later in the decade.

So if you. Look at the next slide and I'll stop after that. But if you look at the next slide 23, that shows the the, for the advanced economies, what's called the debt maturity wall. And this is our calculations, but it basically shows the incremental increase each year in the amount of debt that needs refinancing

You can see this is for, as I said, the advanced economies. You can see the bite out of the chart in the COVID years 21, 22, 23. And why was you, why did you see that bite? Because low interest rates encourage borrowers, governments, corporates, households to refinance their debt, term it out, in other words, push it back to the late 2020s.

And that is now coming back full steam into capital markets and it needs liquidity. To be refinanced, so that's why the ratio's going up and that looks fairly threatening for the next few years. Liquidity is desperately needed and that's not what policy makers seem to be wanting to do.

Erik: This slide 23 really speaks to me, Michael, because we've discussed this narrative for the last 10 years about, boy, we're gonna run into this problem.

Interest rates going back up, it's gonna be hard to refinance US government debt. It comes at a time when geopolitical relations are such that many countries are questioning their commitment to US treasuries as their primary reserve asset. That's a great narrative. But boy, you look at slide 23 and what it says to me is.

Was a good narrative, but we didn't really have a big problem until about 2024, and it gets worse in 2025 and wow, for the next five years, who the heck is gonna buy all of that US Treasury paper at a time when even before we had this maturity wall hitting us in the face, it was already getting difficult to continue to rationalize that sale of US Treasury paper because of geopolitical developments.

Am I reading too much into this, or is this a really scary slide here?

Michael: I think Eric, you're not rooting enough into it. I think the reality is, remember this is refinancing existing debt. This is not talking about the new debt that's coming down the track as well. So you've got on top of this for the us another 2 trillion every year of of new debt.

So I think this could, we're burying ourselves under paper here. This is the problem, and so you need more liquidity, and this is why the monetary debasement trade is so popular because the only way governments can get themselves out of this is to basically start printing money.

Now you can see the tensions, which are forcing governments into a corner. On the next slide, which is looking at the repo markets, which is very topical right now. Now the issue that we raised is that if you start to see problems between the amount of debt needing to be refinanced and liquidity, you're gonna start to see tensions in the repo markets, which are the main refinancing arena.

Certainly post the GFC. And what slide 24 shows is the spread between. Repo rates, which are a market based rate and fed funds, which is clearly the administered rate by the Federal Reserve. The targeted rate, and you can see how that spread is evolving over time over the last three or four years.

Now, it's not so much the extent of the divergence that's really important here. It's the frequency and what you're seeing is more and more evidence that the repo markets are struggling under the way to refinancing demands and the lack of liquidity. And normally you'd expect to see is that chart initially shows a negative spread because SOFR rates which is the main repo rate.

A collateralized whereas fed funds is not, so you'd expect actually SOFR to trade a tad below fed funds. And actually what you're seeing here is it's trading well above. And, paradoxically, the Fed's recent interest rate cut has been virtually wiped out now by the markets in terms of the rise in SOFR.

So it's the Fed has lost control. The interest rate setting mechanism. Now, at the moment, this is purely an inconvenience for the Fed, but it could turn into a bigger problem down the track. And one of the things to see is to look at a couple of slides on which I think is slide 27, which is looking at bank reserves in the US which is really the counterpart to liquidity in money markets.

Bank reserves are shown as the orange line in terms of their deviations from what we do. Deemed to be adequate levels of reserves or minimum levels of reserves, and the numbers of failed trades that you're getting in among primary dealers in these markets. Now, primary dealer trade fails are shown in black inverted.

So when that black line falls. Lower, it's actually indicating a big spike upwards in failed trades. And what you can see is that as bank reserves dip so you are seeing this this process of increasing trade fails. Now that's only gonna lend to volatility in. Financial markets and certainly in the bond markets.

And that's really a concern. And if you wanna understand how we got there, just take a look at the two prior slides, 25 and 26 25 is looking at the aggregate we described as fed liquidity, which is basically the liquidity components of the Fed Balance sheet. And this, comprises both their QE policies.

The QT policies and what we've slightly tongue in cheek labeled not QE, which is this ULA tabla or backdoor liquidity injections that can come, through running down the reverse repo account through the bank term funding program, whatever. You look at slide 25, which is the fed liquidity growth, and you can see basically where we are right now, which is this big draw

In in the growth in liquidity. So actually fed liquidity is falling in absolute terms, and that's because of these factors such as the end of the debt of the debt ceiling, the government shutdown, Etc. There's some recovery for sure, but it looks like a fairly recovery. And even to get there, we've assumed that we go back to a QE.

I've used the, heretic. I've used the word QE, the dreaded word. We go back to a QE of maybe 250 billion next year. But there's still not enough to already lift, fed liquidity growth. And you can see the impact of that if you go to the next slide, 26, which is the counterpart. So think about fed liquidity, initiates the liquidity impulse.

It goes into money markets and it ultimately appears as bank reserves excess or whatever levels of bank reserves. And you can see here are Estimates of bank reserves. So we've taken, we've calculated estimate or we've estimated bank reserves by looking at when you get tensions in repo markets. And that gives us a plot for minimum levels of reserves and we show actual reserves against that.

And the. Prior chart or I looked, we looked at earlier. Slide 27 is the one that shows that displacement relative to failed trades. So you can see where we are now. The Fed has basically let us bank reserves fall below what we think is the critical measure of about 3.3 trillion, and that is why you're getting the tensions in markets right now.

And I'll end this bit on just looking at one further slide, which is slide 29, which is comparing fed liquidity in absolute terms with the S&P. And the S&P has been lagged by six months to show it has it follows on, not directly one for one, but, I've always looking at that chart and, spotting the fact the federal liquidity was dipping as sharply as it is.

I'd be fairly worried about the health of Wall Street. If you get my point.

Erik: Michael, let's move on to page 30.

Michael: Yeah, let's let's focus on that, Eric. What it's looking at is a slide that basically disaggregates the various sources of stimulus that are coming into US financial markets in liquidity terms and what the chart is looking at.

There are three divisions there two, which concern the Fed which is the orange and red areas. The red is conventional QE, balance sheet expansion by simply buying treasuries. The orange bid is what we've as I said, called slightly Italian sheet, not QE, which is really the backdoor liquidity stimulus, which comes from things like the bank term funding program, the rundown of the of the reverse repo account, Etc.

Other sources of liquidity, and that's really what you would call fed QE. And that's been something that clearly has lifted Wall Street. It's benefited wealth owners in the US. But it's something that treasury, secretary Bessent, roiled against, and more particularly recently new FOMC appointee Stephen Miran.

And what they're talking about is actually focusing much more on what I've labeled treasury, QE, which is the black area now that basically is concern something that Miran wrote about we've also focused on, which is looking at changing the issuance calendar in the US towards. Bill finance or very short term debt finance of the government.

And because that changes the structure of debt in the system, although this sounds wonkish, it actually is equivalent to a liquidity injection. In other words, if you're, if you are issuing a lot of treasury bills, the question to ask is who buys those bills? And it tends to be banks and banks by government debt.

Technically it is monetization of the deficit now. The little window in that chart is basically overlaying on the liquidity stimulus the the growth rate or the cycle of the US economy. And you can see that the two line up pretty well with a lead time of about nine months. So it should be that the real economy gets traction in 26.

Contrary to what a lot of people are talking now about recession, I think it's gonna be the opposite. You get stronger growth. Now, this is not just a US phenomenon of this monetization of debt, it's also a global phenomenon. And if you look at slide 32, this is looking at the scale of monetization of fiscal deficits and government debt by banking systems worldwide.

And the point is that this shift from longer dated debt issuance towards shorter debt issuance is. A subtle way of governments getting banks to finance them through printing money because banks love the short-term paper and that's exactly what they're doing. So if you look at that slide 32, that's worrying for Monetarists because what it's likely to be telling us is that more traditional M2 money supply growth.

Could be actually accelerating into next year and you Yeah, I'll back up. The envelope calculations would suggest that us M2 conventional money supply could be growing at something like, seven 8% in 2026, which is clearly incompatible with a Fed. 2% inflation target. So this is the longer term problem that the system faces.

Now, that's one reason why you want real assets as a protection against this debasement, but there's another reason, which is basically China. And if we look at what China is doing, take a look at slide 38, which is. Jump forward, but it basically looks at the debt to liquidity ratio of China and it compares that with Japan, which is the black line on that chart.

Now, as I tried to argue, debt liquidity ratios are the equilibrium in the system, and what you need to do is to get out of a away from a high debt liquidity ratio and to pair that down to more average levels. And you can see Japan has successfully done that. And despite the fact that Japan's debt to GDP is sky high, its debt to liquidity has been brought down significantly because of Abenomics and because of the bank of Japan buying lots of JGBs Japanese government bonds monetizing debt causing the Yen to weaken significantly. And by the way, it's still weakening despite the a lot of brave words about how the yen is so undervalued. It's responding to this monetary inflation by devaluing. China is good doing the same thing now it is being forced into a devaluation of its currency.

It wants to print money. This has been, I think, accelerated by the stable coin phenomenon in the us It's threatened. Monetary system is threatened greatly by this, and you can see on the following slide. 39. The scale of the impulse that the PBOC has just added to markets in 2025. They've been sitting on their hands of quite a long time.

They're running a tighter policy to try and protect the Yuan against the US dollar. And my view is that's doing two things. One is. But that big liquidity impulse is driving the gold market up, which is what Slide 40 says. And I think we've gotta start thinking about how China is controlling gold now.

And that is another sort of ultimate segue into the future monetary system. And then finally, on slide 41, what you see there is the is a track of Chinese liquidity, which is taking a longer term view. Using our indexes of the Chinese liquidity impulse against commodity prices. And you can see there that in the black lines are the with or without energy, the impact of Chinese liquidity on commodity prices.

And the fact is that China has a big economic footprint globally and in the Asian region. And if the Chinese economic engine gets going again. It's gonna suck in commodities and that's gonna drive prices up. So I think we're absolutely at the stage where commodity markets do well.

Erik: Okay. You've said that a couple of times now that commodity markets should do well, and we're maybe getting to the point where equity markets have, are reaching a peak.

What does that mean for the commodity stocks, the mining stocks? Are they likely to continue to do well along with the com underlying commodities, or are they going to be affected by the pressure on equities?

Michael: Argue this in a number of ways, Eric. One is that if you look at these many of these mining stocks on traditional valuation grounds, or, even compared with their history, they look cheap.

So I think there's no question about that there, there's compelling value in them. But the thing is that a mining stock has two moving parts. The E and the P and the E is gonna move up strongly as commodity prices rise. Assuming, let's say that oil remains. Or lags because one of the things that tends to affect mining stocks is the cost of extraction, and that tends to be energy related.

Looking at the commodity price to oil ratio is clearly a decent heads up for that, for the, for those profit margins. But assuming that is going upwards, then you're gonna get further. Earnings expansion for these stocks. But the question is the PE and the PE, sadly is also a sort of a function of general levels of Wall Street.

So if markets sell off, it's gonna be very difficult for mining stocks to gain dramatically. They may well outperform because they've got stronger earnings, but it's it's a difficult judgment. So I think that you are on safer ground looking at the underlying commodities. In this at this time.

But, I'm, personally, I'm still favoring mining stock because I think that they've got decent value behind them.

Erik: I want to just assimilate this entire slide deck before we move on to go a little bit deeper into this question of stable coins and re-architecting the monetary order, which you've got an excellent paper again, linked in the research roundup email for our listeners to download and read.

Let's just take this all into to perspective, Michael. If you had showed me this slide deck three weeks ago when the S&P was testing all new, all time highs at 69 50 or whatever it got up to, I would've said, boy, this is a really compelling argument that says we're nearing the end of a cycle. The big question now is, okay, when's it gonna crack?

Gosh, Michael, just in the last 24 hours as we're recording early on Tuesday morning before the European open, we've seen the S&P break down to its first close below the 50 day moving average for since February. And the last time it happened, it was 1200 points down from there. Did it just crack?

And if so, it seems like maybe this is a pretty big deal and a pretty big signal.

Michael: Yeah, it could be. I think the thing is that if you look at investor sentiment measures so this is what retail investors are doing. There doesn't seem to be a huge overextension in markets.

So this is not about, let's say excessive valuation concerns. This is much more about the flow of liquidity, and you can see the breakdown on the flow of liquidity. But looking at the repo market in the US that's a. Fairly decent heads up. It's only a US metric, but it's certainly important.

And the repo markets certainly are are not behaving very well, and they're not behaving very well simply because the Federal Reserve has pulled the rug away to some extent. And what I would go back to again, is the, is the comments that Stephen Miran has made recently about saying, okay, what we want is the balance sheet down and we want interest rates down.

And that says to me that they wanna direct the hose away from the Fed. And soaking asset markets with actually directing the hose more precisely into the real economy and trying to get Main Street driven forward. And that means, defense procurement. It means critical minerals, it means taking strategic stakes, Etc.

And it comes back to this general idea that we've been talking about for some years. This is a capital war, not a trade war. A trade war is a veneer on top. It's really a capital war. This is a struggle for. If you like, dominance of the world economy in terms of currency and capital and America wants to win.

Erik: From page 23, we know we're facing this massive refinancing wall that comes at a time when the relationship between the US and China is under extreme pressure. All indications are that China is buying gold hand over fist apparently, to replace their prior dependence on US treasury paper as their primary reserve asset.

You wrote an excellent paper, which is linked in the research roundup email. It's called The New Currency Wars and the Gold Bitcoin Axis, America's Digital Collateral versus Chinese Gold. In the time we have remaining, give us a quick rundown of what this paper is about.

Michael: Let me also flag Brent Johnson because he's done very similar work.

He probably makes the case more eloquent than me, but he's been a great advocate over the years of the MILKSHAKE theory, which you're familiar with, and I think a very good way of understanding the milkshake, theories to look at. Slide 35, which basically showing the big inflows into the US dollar, and this is something which has clearly occurred almost uniquely since the GFC.

There has been a redirection of money flows into us assets in the US dollar for a whole host of reasons, but clearly it's been a fact and that has prop higher over the years and Brent has very clearly called the milkshake theory. I think what we've got now is a milkshake theory with two straws, and not just this sort of dollar straw, but we've also got a stable coin straw. And I think that explains an awful lot about the reaction of what of China in recent weeks to to the, to these developments and why it's putting a lot of liquidity into its markets right now.

It wants to repair its financial system quickly, and it also explains why China is buying a lot of gold. Now what I think you are getting is you are getting a financial system worldwide that is cleaving. Its two parts, one part which is being backed by gold, which is China. And China is clearly accumulating gold.

It's a big gold producer of now the world's biggest, but it's also buying on the open market. And, some market experts, as you'd be familiar with, are actually suggesting that China has actually managed to accumulate something like 5,000 tons of gold officially. Way above what the slated amount is.

The data shows. So they're doing this surreptitiously, but they're doing it by stealth, but they're still doing it, and that gives 'em the ability to back their currency by gold. Now, it's important to say that this is not a return to a gold standard. Fundamentally no, it's not. Because they still need fiat, because they need fiat money to basically fund the government in the same way that America does.

But America is not backing its system with gold. It's using a stable coin, and it's basically wrapping treasuries within a stable coin wrapper. So what you're getting is essentially digital collateral in the US versus gold. Or tangible collateral in China. And what America is implicitly saying is trust our technology.

And what China is saying is trust our gold. And that's how the two systems are basically working out now. Stablecoin is a big threat to China. And just to understand that, just think of the squeals that are coming out of Europe now about the unfairness of US stablecoin and, a a prominent member of the ECB.

Said only yesterday. Look, this is unfair competition because if the US starts issuing stable coin to European residents, we are gonna lose. Europe is gonna lose control of the monetary system. Let's just reap that for China too. 'cause China's got a much, much bigger problem.

And the way that I envision it is to say, look, if you are a Chinese exporter you are facing sort of the choice between the devil and the deep blue sea at the moment. You can put your money, your dollar earnings. Into a Western banking system and you can risk sequestration rather like the Russians faced after the invasion of Ukraine, or you can put it back in the domestic banking system and risk sequestration by the Chinese authorities, by the PRC if you do a Jack Ma full foul of the authorities.

So it's very, it's a straightforward decision I would suggest to start putting your money into stable coin. It's easy to open a stable coin account easier than opening a bank account. And what's more, there's some degree of anonymity in holding them. So the Chinese must be really scared by this, and that's why I think they've been triggered into stabilizing their financial system, trying to buy a lot of gold, issuing lots of liquidity to the debt problems because we're facing this capital wall.

So it's really a question of trust. Gold versus trust our technology, it's in America's interest. I would suggest maybe controversially to say, actually we want to destabilize the gold price because a much higher gold price will benefit China. And it's in China's interest to attack US technology through cyber warfare and maybe quantum computing to say we wanna un undermine the fabric of of US society, which is very technology dependent.

So you've got these two. Entities at war using very different weaponry.

Erik: In the interest of time, I'm going to have to refer our listeners to your excellent paper for more context on this. But I have one final question before we close, which is, how do I make sense of what this means for the gold market from here?

Because on one hand I could see the argument that, hey, China is gonna continue buying gold hand over fist. It's gonna drive the price higher. You gotta stay long gold. We're maybe at a, a. Bit of a low point here. It seems like a good buying opportunity. Go baby, go on gold. But then I could see the other side of this, which is President Trump is very much engaged aggressively in negotiations with China.

He has, as far as I can see, a very strong incentive. And there's no doubt in my mind that Scott Bessent understands all this stuff and is coaching him on what it all means. To say, look, China, we gotta cut a deal here somehow, where you guys back off on the gold buying and go back to US treasuries and we'll make it good for you by wrapping them in stable coins and we'll make a promise to you that we're not gonna do to you what we did to Russia.

How do I balance those two ideas? What do you think the outlook is for gold here?

Michael: I think you've gotta play the trends, Eric. I think that's for sure. Both commodities gold and Bitcoin are volatile. We know that. If you take the longer term view, my view, my.

Perspective is, it's not a question of gold or Bitcoin, it's a question of gold and Bitcoin. You need both of those assets for the reasons I've just explained. And I think if you look at the longer term perspective, just consider the growth in federal debt US federal debt since year 2000. Compared with now is up 10 times.

That's an eye watering figure. The S&P has managed to gain less than five times over that same time period, but goal is up 12 times. So goal is more than outpaced the increase in federal debt. So if you start to extrapolate into the future you are looking, even taking. Congressional budget office data that the debt GDP ratio of public debt to GDP for the US is gonna test 250%.

So more than doubling from where we are now by 2050. That would suggest that if you just use that same timeline and assume that the real value, the gold value of federal debt stays where we are now, not an outperformance by goal. The gold price should be 10,000 by the mid 10,000 an ounce by the middle 20.

Thirties and it should be $25,000 an ounce by 2050. Now that'd be higher. We live to see that, I'm sure. The fact is the trend is there and you've gotta play the trends and people need essentially hedges against this monetary inflation. And my point has been that we're in a monetary inflation world, not a financial repression world.

There's a subtle but a really important difference.

Erik: Michael, I can't thank you enough for a terrific interview. I really want to encourage our listeners to download all three of the attachments in the research roundup email. That's the slide deck, which we didn't have a chance to get to every page in.

I recommend that everyone peruse the pages we missed 'cause there's a lot of great content there, but particularly the two papers that you shared with us, both are excellent and I highly recommend them for people who want to go further than that and find out more about what services are on offer at Global Liquidity Indices, how do they follow your work? How do they contact you and what services are on offer there?

Michael: Okay, Eric. The easiest way is to look at Substack. We have a substack called Capital Wars, where we provide both data and narrative, and we publish about three.

Three times a week on average. For that we've we've transitioned from a company called Cross-Border Capital, which I founded. We've now focused a lot on global liquidity indexes, but the old website, crossbordercapital.com still exists and works, and that's where our institutional research offering is still provided.

Those are the two main conduits I would suggest. And there's a Twitter account @crossbordercap. For the occasional tweet,

Erik: Patrick Ceresna and I will be back as Macrovoices continues right here at Macrovoices.com