Transcripts
Erik: Joining me now is Mr. Eurodollar himself and Eurodollar.University founder Jeff Snider. Jeff prepared a slide deck to accompany this week's interview. You'll find the download link linked in your Research Roundup email. If you don't have a Research Roundup email, just go to our homepage. Macrovoices.com, look for the red button above Jeff's picture that says, looking for the downloads.
Jeff, it's great to get you back on the show. What I want to focus on today is everybody, who's anybody is now talking about the Mar-a-Lago Accords, the basic idea being President Trump doesn't want to continue the United States not being compensated for providing security services to most of the Western world. What's on the table for discussion is the idea that maybe instead of paying interest on our national debt, we would instead, at least to sovereign holders of treasury bonds, we'd provide military protection in lieu of interest payments. That's a radical, just fundamental change in monetary policy. So before we even dive into the details, and I know you've got a fantastic slide deck prepared for us with lots of details, let's start at the highest level of, you know, normally, the whole market freaks out if you get a 50 basis point instead of a 25 basis point change to policy rates, we're not talking about a little change in policy rates. We're talking about a proposed change of the overall monetary framework of the entire Western world. When's the last time anybody changed anything of this magnitude? Is it a good idea? And what are they trying to accomplish?
Jeff: Oh, there's so much there, Erik. I mean, I think you're exactly right in characterizing it that way. This is, like you said, this is not a 25 basis point rate reduction or a rate hike by the Federal Reserve. And in many ways, just to start out, I think this is fine. This is a sign of progress, because people are finally talking about, hey, we need to do something radical. And let's be honest here, this is a radical proposal. A lot of caveats here. We don't know exactly what's been talked about. We don't even know how serious that anyone's taking it, but it does seem to be something that is on the table for discussion at hand, from the rumors and everything has been circulating. It seems like there has been some discussions about it. So, this is something that's radical and something that is sorely needed. We've needed to replace the monetary system for what, ever since August of 2007, so we're going on 18 years now, and up until recently, nobody's bothered even mentioning it. So, the fact that they're at least thinking about, and I think one of the big positives here is the fact that they're connecting some dots and finally starting to understand that something big needs to be done. Because it's not just like everything's going to magically heal itself, or if the Fed comes out with a seventh version of QE, that'll somehow be the correct amount of QE. At some point, what needs to be done is something radical. So, I think that is absolutely the right way to think about it. And so the question isn't really that so much as, is what they're proposing likely to succeed, and more importantly, can they pull it off? I think those are the bigger questions. And in that way, there's still a lot of ground left to be covered, let's put it that way, it's sort of an introduction. So, like you said, I have a slide deck here. Some of the positives are that, look, first of all, the Trump administration and those surrounding the president have finally realized that the dollar going up in exchange value is not a good thing. So, most of what's been proposed on the Mar-a-Lago accord, or that's what everybody's calling it. And I'm a little disappointed, because I'm right down the road from Mar-a-Lago. I'm just down south Lago, I'm just down southern Boulevard, and nobody called me and asked me to participate.
Erik: Joining me now is 42 Macro founder, Darius Dale. For any new listeners who aren't familiar with Darius’ work, he's known for his absolutely fantastic charts and graphs and extremely long and detailed chart books, just so you know what to expect in the download that you'll find linked in your Research Roundup email, it will be a great big slide deck of, oh boy. What is it? 160 or so slides. You'll see that many of them are grayed out. That's necessarily out of respect for Darius’ paying subscribers. They don't want all of his information given away for free. So only the slides that we discuss in today's interview will be visible. Please forgive the fact that the rest have to be grayed out.
Darius, it's great to get you back on the show. Before we even dive into your famous slide deck, you mentioned off the air that you really enjoyed my interview last week with our mutual friend Jim Bianco from Bianco Research. Let's talk a little bit about what if Jim's right, and because President Trump is definitely an agent for change, and we're in a fourth turning, something you and I have discussed before, a time when the major rules of the game and the major institutions that define the game tend to get changed. What if President Trump actually were to bring about a whole new monetary regime where what changes is the way that the US finances its foreign debt is instead of paying interest, they start paying essentially protection services with the military to other governments. That would fundamentally change the balance of flows, all the things that we're used to, following tick reports and so forth. I think the analysis, does it get thrown out the window? Or how do you deal with the idea that something that big might happen, and how does it affect your process?
Darius: Great question. And I just want to say thanks again for having me, always a real pleasure to be here, really, I did really enjoy Jim's presentation last week. I thought you guys asked and answered some really important questions, as it relates to where we are in this great time. I mean, as you and I talked about over the last few years, about how we are currently in a fourth turning and what that's likely to entail, from the respective of economic risks, monetary policy risks, fiscal policy risks, geopolitical risks, etc. And as it relates to some of the ideas that Jim floated with respect to changing the geopolitical world order, I think that's something that we need to have a serious conversation about. Because, as to your point, Erik, it could potentially have a significant influence over how the US Treasury market gets capitalized, and ultimately, how that impacts broader asset markets.
Erik, I know you're familiar with our investing, doing a fourth turning study a couple of years ago, in the summer of 2023, we performed a deep dive empirical study spanning dozens, if not hundreds, of time series to identify exactly what we should expect as investors throughout the duration of this fourth turning. We don't have time to explain the fourth turning, but for those who may be unfamiliar, so it's a time of great institutional and geopolitical change, and understanding that we're going to have a lot of great institutional geopolitical change, we need to have a thoughtful framework for how some of that change is likely to evolve. So, we broke down our investing to the fourth turning regime analysis into sort of four different categories. There's number one, fiscal policy risk, because to me, I think that's the most important dynamic that could change in this fourth turning is the size of the US government, how it ultimately gets capitalized, and who ultimately foots that bill. So if you look at slide 107 in this presentation, where we summarize our investing due to fourth turning regime analysis, specifically the fiscal policy section, what we know is that, historically, in fourth turnings, we typically see explosive growth in sovereign deficits, explosive growth in sovereign debt, the size of the government, and ultimately we see explosive growth in the cost to finance the government. And so, this is the baseline. This is what you should be expecting as an investor in a fourth turning. By the way, this has already happened since the fourth turning catalyzed itself back in 2008, and so I think we're just kind of on that path. When we jump to monetary policy risk on slide 120, where we summarize the key risk there, it's financial repression and monetary debasement, right? It's the central bank. It's the monetary authority using its balance sheet to step in as a lender of last resort to the explosive growth in sovereign debts and deficits with respect to economic risks we see on slide 30, where we summarize our analysis on the economic side. We know historically speaking, we've seen structural uptrends in nominal GDP inflation, wage growth and asset price inflation in fourth turnings. So, I know we're talking about a lot of change here, but historically, these fourth turning dynamics have seen faster rates of asset price inflation, primarily as a function of the monetary authority's response to fiscal dominance. And then finally, on slide 143, where we summarize the fourth turning geopolitical risks. The key risks in the fourth turning from a geopolitical standpoint, are a structural downtrend in income inequality from, albeit extremely high level. You typically see declining birth rates, increased trade protectionism and total war. And so, these are the kinds of risks that we see on the table here, as it relates to the balance of this fourth turning, which my former colleague and one of mentors, Neil Howe, believes is likely to persist into the late 2020s or early 2030s. And so going back to your discussion with Jim, Erik, there's a lot of stuff that's about to hit the tape over the next four to eight years, and I think it's very important for us as investors to have a framework to deal with this stuff.
Erik: Joining me now is Bianco Research founder, Jim. Bianco. Jim, it's great to get you back on the show. I want to talk about a topic that I know you've been spending a lot of time on in the last couple of weeks, which is, look, the Trump administration's making all kinds of bold moves, but the big elephant in the room is the national debt of $36 trillion. It's tempting to say they don't even have a plan for it. Actually, there is a plan forming. It involves people like Zoltan Pozsar, the very well respected economist who used to work for the Fed, then Credit Suisse. I think he's moved on to another firm now. Who are the players? Let's start with that. How are they seeing the problem? Do they have the President's support? Let's just start at that level, and then we'll dive into what are they going to do about it?
Jim: Yeah, so there is a plan. And it starts with, I think, Stephen Miran. He was in the Treasury Department under Steve Mnuchin right at the end of Trump 1.0 and he moved on to Wall Street, worked for Hudson Bay Capital, and now he's been appointed the Council of Economic Advisors Chairman for Trump 2.0 in November. He wrote a piece about global trade, and he wrote a piece about dealing with all of these issues, the fingerprints all over that report were Zoltan Pozsar’s fingerprints, as you’ve pointed out, he's moved on to his own and used to be at the Fed and formerly a Credit Suisse. Both of these guys have the ear of Scott Bessent, and Scott Bessent has been giving policy type speeches going back a year now that sound very similar to what they're saying, and some of what Trump has been talking about, he’s also very consistent with all of this. So that's the players and so now the question is, okay, what is it that they're talking about? It's a three-pronged process. Number one is about tariffs. Now, that's the thing that is eating up all the oxygen in the room, is that Trump is tariff man. Tariffs have two potential meanings. Number one is, they're used as leverage or a club to get something. The great example of that is what recently happened with Mexico and with Canada. You know, I'm going to put tariffs of 25% on all your products, unless you put 10,000 troops on the border or appointed borders are in Canada and do something about the flow of fentanyl and illegal immigrants. So that's the club part of it, I need you to do something else, because we, in Trump's thinking, have an unfair relationship, and so therefore I'm going to use this club to try and balance it out. The other one is to put tariffs on for the sake of raising revenue. And famously, Trump has said it's the most beautiful word in the dictionary, and that he wants to start an external revenue service, an ERS to collect tariffs, as opposed to the Internal Revenue Service, which collects income taxes. So, tariffs is the first one, and it gets all of the oxygen, and everybody knows about that. The second one is fairly new, and that's the sovereign wealth fund that they came up with. Now officially, Trump, last week, signed an executive order to establish United States sovereign wealth fund. Scott Bessent was asked, how's it going to work? He said, we're going to monetize the assets of the United States. No one quite knew what that meant, but it was in the report what that could possibly mean. The US has a lot of assets that are not being fully appreciated. The big one that has been pointed to is gold. Between Fort Knox and the basement of the New York Fed, US owns about 8 tons of gold. It is valued at $42. Price of gold the day we're recording, went over $2,900. For you to take that 8 tons of gold and revalue it for $42 to $2,900, that's about $800 or $900 billion of assets. Okay, there's $800 or $900 billion of assets for the sovereign wealth fund.
Bitcoin, a lot of people in the Bitcoin community are getting excited that there's going to be a Bitcoin reserve, or Bitcoin is going to go into the sovereign wealth fund, or the government's going to buy Bitcoin. Let's be careful, because these terminologies all mean different things. Now, if they want to put Bitcoin in the sovereign wealth fund, that's really easy. Over the many years, the Justice Department has had fraud investigations that has led to them owning 207,000 Bitcoin, or about $12 billion worth of Bitcoin. They haven't been able to really figure out who the owners of these are, because they've acquired them through fraud investigations, and you know, if you're on the blockchain, and you don't know who the owner is, so they could take that thumb drive, hand it to the sovereign wealth fund. There's another $12 billion worth of assets. Now, let me stick on that for a quick second. That's just a transfer. There's no actual buying a Bitcoin that's going on there. What about a Bitcoin reserve? What a reserve means is that you're backing the US dollar, which is a pure fiat currency, by something like gold reserves, or in this case, Bitcoin reserves. We don't back the dollar by any reserves. We back the dollar by the full faith and credit of the United States government, which is, some people said, is really the United States military, that if we were to start to back it by something, the idea that the Federal Reserve or the Treasury Department would buy Bitcoin and say that every dollar in your pocket has some percentage ownership of Bitcoin could make it extraordinarily volatile because the price of Bitcoin gyrates around, so would the value of that dollar in your pocket, and the US Treasury of the Federal Reserve has no ability to control the price of that Bitcoin. It's not a good idea for them to go that route. Could the sovereign wealth fund buy it, or could the Treasury buy it as a naked speculation on the price? Look, Michael Saylor says it's going to go to 13 million. Tom Lee says it's in 20 years. And Tom Lee says, it’s going to 250,000 this year. Why don't they just buy it as a naked speculation, betting on that? Okay, but the problem there is they would have to borrow billions of dollars in the treasury market to do it, at a time when interest rates are up and people are complaining about mortgages costing more because of the higher interest rates, you're going to increase the supply of 10Y notes or 5Y notes, so you could buy a speculative asset on the idea that maybe it'll 2x or 10x or something, and then be able to pay off that debt and turn a profit for the government? One, I don't think that's the purpose of what government is, is to speculate. That's the private sectors job, is to speculate on the price of assets, not the government's job to speculate on those assets. So, I don't think that that's a good idea. So ultimately, I think that the sovereign wealth fund will have some Bitcoin. It already exists, they'll just be handed the thumb drive, and it will be and it'll go into there.
The third part of this program is the most controversial in the least discussed. And Miran just laid it out in his paper in November about global trade. And that is the 80 years since post WWII, security arrangement that the US has with the rest of the world. The US Navy has patrolled the high seas, has allowed for free trade around the world for, like I said, nearly a century, hasn't charged anybody for it. There's no bill that goes to any country. But what they've asked is that you align yourself with us, the West, the democracy, free thinking people, and not with the Soviets and the communists from prior to 1990 and maybe today, the Russia, China, Iran, North Korea axis, and we'll give you this security arrangement. Well, Trump has been railing against the security arrangement. On January 23, he gave a video speech to the price crowd in Davos, and what he said in that speech was, he said, we're basically done being the patsy, that he is going to demand that the NATO countries now spend 5% of their GDP on defense, and presumably some of that will flow back to defense contractors in the United States. But I don't think he's done there, because what Miran said in his paper is, you owe us so much for the last 80 years that what we want to do is a debt swap. Those NATO countries have trillions of dollars of debt. You're going to swap it for 100 year or perpetual zero coupon non-marketable Treasury security. So, you're going to swap $10 billion worth of treasuries for a $10 billion coupon century bond, won't mature for 100 years. Won't get any interest on it. Why would any country do that? Because if you don't, we'll have to revalue the security arrangement. Maybe the US Navy won't protect your ships. Maybe Article 5 of NATO is triggered. You could send your troops and your money to the front line, United States won't be there to back it up. You got to start paying for it. And Trump has been very clear about paying for it. Well, these countries have ten billion of treasuries now, they got ten billion this non-marketable thing. Doesn't that put them at a worse financial position? The Federal Reserve comes in. They can offer a lending facility, you give me a billion dollars par amount of those bonds, I will give you a loan, a repo loan for a billion dollars. If you need liquidity, it will be at par. There will be no unrealized or realized loss. It will be available anytime. Will the Federal Reserve go for it? That's why Trump has been bashing, one of the reasons why he's been bashing Jay Powell and the name Kevin Warsh keeps popping up, that could be the next Fed chairman. And he's very open to this kind of idea. So, it's kind of a cram down on them. And look, in every restructuring deal, there's a cram down somebody when you were structured to debt, somebody's got to lose. Trump's argument is, for the last 80 years, that loser has been the guy in Peoria. We've gone into the global trade organizations. We've hollowed out his industries because we sent them overseas. We've worsened his standard of living. Now, people are saying, no, the fix is we have to raise the retirement age to 75 or 80 so that we could get rid of the unfunded liability of Social Security. And Trump's argument is, no, that guy, Peoria, always loses those people that have had the free security ride for 80 years, it's time that they pay for it. And if they don't, if the French say something like, you know what, we'll just pay protection money to Putin to leave us alone, rather than pay you. Then Trump's got tariffs, and he'll come back and he'll punish them with tariffs.
Let me conclude this explanation of where Trump is. Most people, I listen to your podcast a lot, and people that are on your podcast, and there's a widespread agreement that the debt situation is unsustainable. I agree with that. Jay Powell has even said, in December, he gave a speech and he said, it's unsustainable. We got to do something about it. Let me restate that it's a crisis. We have to do something about the debt situation in a crisis, and in a crisis, we expect bold and brash thinking. This is bold and brash thinking. Oh, but this is not what we want. And if I could dare say, oh, I know what we want. We want go to that faceless guy that you never interact with and you don't know in Peoria and screw him. Just don't screw me or my friends. But that's not the thinking that Trump has witnessed. What he even talked about last week with his new tax deal, that he wants to permanently make the temporary Trump 1.0 tax cuts permanent. He also talked about getting rid of carried interest and resume and getting rid of the exemption for sports teams. So, Trump is a very populist kind of guy. He's not necessarily, “I want to make sure that all the billionaires are taken care of.” He's also, you know, he's been a builder, and he understands these guys, and he wants to take care of them too. So I think what's been not appreciated is this broader, bolder thinking. People like Miran and Zoltan Pozsar and Scott Bessent, and you're starting to see the beginnings of this program in some of the language and some of the policies that Trump has been promoting, like the sovereign wealth fund.
Erik: Joining me now is Tribeca Investment Partners fund manager, Guy Keller. Guy, it's great to get you back in the show. I can't believe it's been, wow, almost five years. I want to start with a chart that I know you're familiar with. Listeners, you'll find it in this week's uranium section of the postgame chart deck. That is Ocean Wall’s chart comparing the price appreciation of yellow cake uranium versus UF6 versus enriched uranium products. Guy, what this shows us is that the bull market in uranium that you and I, and a lot of other people predicted is on. It's on in spades. It's a raging bull market in enriched uranium nuclear reactor fuel, which is up 506% in the last three years. The price of it more than doubled in calendar year 2024 alone. The thing is, we can't invest in enriched uranium. We can only invest in the uranium feed stock that it's made from that's down on the year in 2024, despite the fact that I think there's an argument to be made that 2024 might just be the biggest bowl year ever in terms of news flow for the nuclear industry. Guy, what's going on? How is this possible?
Guy: Yeah, thanks, Erik, and great to be back on your show again. Been very excited about this. It is a head scratcher, and I think it comes down to just simple capacity. The end user for uranium and nuclear utilities, most of them are not just nuclear. They live in companies that are also producing electricity from a number of other sources. The nuclear fuel buyer is also the same team, or sometimes individual, that is responsible for refueling and maintenance and a whole bunch of other things. And so, I just think it's just, they just lack the capacity to look across the whole fuel cycle. You've seen some very, obviously, changes from the US government, with the Russian import ban of enriched product, and then the Russian retaliation in restricting exports of enriched product to the US. There's lots of back and forth as to further sanctions from Europe and other parts of the world on enriched product from Russia. And as you know, and your listeners know, a large part of the enriched uranium that's required to make nuclear fuel rods comes from Russia. It's one part of the nuclear fuel cycle. And so, I think, because you've had all of that uncertainty, and you've had, especially US utilities having to scramble to ensure that they can replace that Russian material. They've kind of just been forced to ignore the uranium upstream side of the equation, because the EUP, the enrich uranium product, is much more near term for them. We used to take sort of two years from mine mouth to reactor core for the yellow cake to move through the fuel cycle with the Russian sanctions, that can now be closer to three years. So, the uranium required for tomorrow's enriched uranium product is three years away. So, as I said, I think it's just that they've been forced to focus further downstream to solve a near term problem, and assuming that they'll eventually have to come back to the uranium, and I think they will. I mean, last year was surprising in how little uranium was contracted, given that the term price of uranium appreciated throughout the year and held at that $82, $83 level, despite the volatility and in the much less traded spot price.
Erik: Joining me now is Commodity Context founder, Rory Johnston. Rory, it's great to get you back on the show. Let's start with the big picture for oil markets, inventory fundamentals, where do we stand?
Rory: Thanks for having me, Erik. I'm so happy to be back. Entering into 2025, we're in a really interesting point in this market, because 2024 itself was kind of a funny year after really everything between 2020, even 2019 through to 2022, 2023, we had just absolutely outrageous levels of volatility. We had every possible kind of tail risk you could imagine hitting the oil market, kind of back and forth, back and forth from literally, COVID, turning the industry upside down. Russia invading Ukraine, Houthis blockading the Red Sea. You had Israel and Iran, all of this stuff happening, but at the same time, then 2024 really just slowed down. You had the prices traded in their tightest range since before COVID, we had the overall supply and demand growth even slowed each of those years. You were accelerating coming out of that COVID slump. And then in 2024, it really just kind of ground to a halt. We saw really slow, both supply and demand growth. Now, I think that entering this year with this really low inventory position, particularly on crude oil, we're beginning to see demand re-accelerate a bit faster than we're seeing supply accelerate. So, I see this as a bullish factor heading into the year, and it's supported by the fact that the futures curve remains relatively backwardated, even after this latest pullback. So, I think the market remains kind of fundamentally undersupplied. I saw last year having a modest under supply annual average. I see this coming year, likely, assuming we don't get, and we're going to talk a lot about various policy risks coming down the line, but assuming those don't completely derail us, I see less likely having another modest supply deficit this year. So, if we have a low inventory position and another modest supply deficit, that means we're going to enter an even lower, or we're going to trend towards an even lower inventory position, and I think that means gradually higher prices from here, probably in the kind of, like low 80s Brent basis. And it's not that much higher than we are right now. I think, we're recording this on January 28 and where I'm looking at my screen right now, crudes that are out, $77.60 for Brent. So, I would say probably about 3, 4, 5, bucks higher is probably where I see fair value right now, that's kind of where I see us trending.
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