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Treasury and the Fed Are Sending Conflicting Signals · The Financial Exchange Show

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Speaker 1: Zadath and Mike Armstrong.
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Speaker 2: Chuck, Mike and Tucker with you here on the Financial Exchange.
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Speaker 2: Hope you had a great Presidence Day weekend. As we
1:21
Speaker 2: kind of kicking to high gear in February twenty twenty five,
1:24
Speaker 2: here the United States and Canada spiraling towards a trade war,
1:29
Speaker 2: according to The Wall Street. Wait, Michael says, August twenty third,
1:37
Speaker 2: twenty twenty six, we've already seen this show. Why are
1:41
Speaker 2: we doing this again sixteen months later?
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Speaker 3: So we Yeah, we are looking like we are heading
1:51
Speaker 3: back towards some trade fiasco with Canada. We were allegedly
1:56
Speaker 3: nearing a deal as of Tuesday or Wednesday of last week.
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Speaker 2: Seemed like we're going to get across the finish line. Yeah,
2:01
Speaker 2: and then suddenly broke down on Friday.
2:04
Speaker 3: Canada called their trade negotiator negotiators back to Ottawa. And
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Speaker 3: here we sit with tariffs imposed on what is a
2:15
Speaker 3: twenty billion dollar, twenty billion dollars worth of Canadian goods.
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Speaker 3: It's about five percent of what comes over the border
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Speaker 3: being slapped with tariffs, and Canada reciprocating with tariffs of
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Speaker 3: their own that are due to go in place soon.
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Speaker 2: After Labor Day. Weekend, so a little bit of time
2:33
Speaker 2: to get something done, but not a ton.
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Speaker 3: And the question is will this be resolved in a
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Speaker 3: week or will be will we head into what the
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Speaker 3: Wall Street Journal describes as a spiral, which we've seen
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Speaker 3: seen with several other trade negotiations here, and quite.
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Speaker 2: Honestly, i'd call it a coin flip. I have no idea.
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Speaker 2: I don't know that we've actually seen a spiral with
2:55
Speaker 2: Canada or with other countries, any of them.
2:58
Speaker 3: Yeah, I mean, you know, the thing that I can
3:00
Speaker 3: close most closely call a spiral was with China when
3:04
Speaker 3: we ended up with one hundred and thirty percent of
3:06
Speaker 3: tariffs at one point that lasted like a month and
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Speaker 3: a half. Yes, and even that, I mean spiral would
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Speaker 3: indicate that one of the economies is heading down the toilet,
3:15
Speaker 3: and that didn't really happen. So I don't know that
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Speaker 3: we get there with Canada either. I suspect that at
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Speaker 3: all is negotiating, negotiating tactics on both sides, and again
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Speaker 3: I would consider it a coin flip as to whether
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Speaker 3: or not we head towards higher rates of tariffs or
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Speaker 3: a resolved deal in the next thirty days.
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Speaker 2: The reason I say that. I don't think we've ever
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Speaker 2: gotten to with spiral is. Again, aside from that very
3:42
Speaker 2: brief period where the US in China were, you know,
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Speaker 2: raising tariffs on each other.
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Speaker 3: Did we hit two hundred percent? Well, well, what was
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Speaker 3: the highest rate of tariff that we saw? Which was
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Speaker 3: completely meaningless?
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Speaker 2: I have no idea because it was never actually imposed true.
3:55
Speaker 2: You know, it was like okay, like it's based on
3:57
Speaker 2: like the day of departure, not date of entry, and
3:59
Speaker 2: so like there's.
4:00
Speaker 3: Your teriff's gonna be eighty percent, Well, yours gonna be
4:02
Speaker 3: one hundred.
4:03
Speaker 2: It was like a.
4:06
Speaker 3: It's like a preschool game of you know, well your
4:09
Speaker 3: tariff is infinity.
4:12
Speaker 2: Infinity plus one. Yeah, your yours is the whole universe. No,
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Speaker 2: it takes these back seat. You can't double stamp a
4:18
Speaker 2: triple stamp. I have a buddy of mind college who, uh,
4:24
Speaker 2: you can't triple stamp a double stamp? Yeah, because you can't.
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Speaker 2: But no, I would have digressed too far. Honestly, I
4:37
Speaker 2: can't get excited about this. The US Canada tip for
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Speaker 2: tat tariffs. I don't care. And it's not because this
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Speaker 2: isn't potentially meaningful. It's potentially meaningful. What's like the average
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Speaker 2: length of tariff at this point, I don't know, not long.
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Speaker 3: I feel for you if you are listening to us
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Speaker 3: from Maine, New Hampshire, Vermont, or somewhere else in the
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Speaker 3: country that's a border. Yeah, no, it matters for you,
5:11
Speaker 3: especially if you work in the tourism industry in any
5:13
Speaker 3: of those spaces, because, regardless of what gets negotiated, from
5:17
Speaker 3: what I have heard, plenty of tourism focused industries have
5:22
Speaker 3: seen a meaningful shift in willingness of Canadians to travel
5:26
Speaker 3: to the US and do these types of activities, and
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Speaker 3: that might not be immediately fixed by a negotiated trade deal.
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Speaker 2: And so I feel for those folks.
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Speaker 3: I think that part is impactful regardless of where we negotiate.
5:39
Speaker 3: But to your point, it's pretty tough to get concerned
5:42
Speaker 3: or excited about something like this when we've seen it
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Speaker 3: a dozen times in the last six months. Yeah, well
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Speaker 3: it's just eighteen months. When did we start all this April.
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Speaker 2: Eighteen months ago? It's just like, what am I supposed
5:55
Speaker 2: to do with this? Like, as someone looking at this
5:58
Speaker 2: broadly for the US and world economy, buy up all
6:01
Speaker 2: the hockey sticks you can now it's too late. It's
6:04
Speaker 2: too late, okay, and I suck at hockey. So I
6:08
Speaker 2: think that in looking at this, I'm honestly just tired,
6:14
Speaker 2: because it's like, Okay, I could spend the next twenty
6:17
Speaker 2: minutes explaining to people exactly what this means, and then
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Speaker 2: it can all be undone by the end of this week,
6:23
Speaker 2: and now I've wasted all of our time. So here's
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Speaker 2: the deal. If you have higher tariffs in place from
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Speaker 2: any country to another country, it means that the cost
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Speaker 2: of goods is going to go up with goods coming
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Speaker 2: from that country into the receiving country, plain and simple,
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Speaker 2: full stop. The company that pays the tariffs is the
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Speaker 2: one that's importing the goods. So it ultimately is just okay,
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Speaker 2: are they going to choose to pass that on or
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Speaker 2: see lower margins. We know this, by the way, because
6:51
Speaker 2: of the tariff refunds that are going on now, and
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Speaker 2: we also know this because of the waiver of tariffs
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Speaker 2: on a certain amount of I think it's like three
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Speaker 2: hundred thousand metric tons of beef imports that the President
7:01
Speaker 2: waived last week because he wanted to reduce the price
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Speaker 2: of beef in the United States. So everyone in their
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Speaker 2: grandmother knows that tariffs increase the cost of a good
7:11
Speaker 2: if it's actually applied to them. We saw this in
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Speaker 2: the data last year where if you look at stuff
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Speaker 2: that doesn't get made in the US, most namely the
7:17
Speaker 2: one place we saw it very clearly audio visual equipment,
7:20
Speaker 2: because no one makes TVs in the United States because
7:23
Speaker 2: it's economically dumb to do so. Not saying that we
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Speaker 2: shouldn't have some that are made, I'm just saying economically
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Speaker 2: it doesn't make sense, and so we don't make them here.
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Speaker 2: And so the price of audio visual equipment went up
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Speaker 2: like fifteen percent last summer, which is okay, basically what
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Speaker 2: the tariff rate was on the countries that we largely
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Speaker 2: import these things from. Got it. Other than that, I'm
7:45
Speaker 2: not going to get involved in like the he said,
7:47
Speaker 2: she said, because I just none of us were there.
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Speaker 2: None of us were there. And honestly, if I'm being
7:53
Speaker 2: completely like transparent about this, I only have time for
7:58
Speaker 2: one of those at a time, and right now I'm
8:00
Speaker 2: fully focused on the Fed versus the Treasury, Like I
8:04
Speaker 2: gotta be honest, that is so much more interesting to
8:07
Speaker 2: me than whatever is going on here. So maybe a
8:11
Speaker 2: deal gets worked out. Maybe it doesn't. I don't really know,
8:15
Speaker 2: but I can't spend any more mental capital on this.
8:19
Speaker 2: And as Mike said, look, I'm freaking sorry for like
8:22
Speaker 2: the businesses that do have relationships cross border that are
8:26
Speaker 2: feeling like they're just being ping ponged back and forth,
8:28
Speaker 2: because that sucks. Yep, especially because they're mostly small businesses.
8:31
Speaker 2: That's not a good place to be.
8:33
Speaker 3: Auto industry would be particularly hard hit if this escalates.
8:36
Speaker 3: They tend to ship vehicles back and forth across the
8:39
Speaker 3: US and Mexican border Canadian US Mexican and Canadian borders. Yeah, yeah,
8:47
Speaker 3: a dozen times during the manufacturing process. Huge problematic Historically speaking,
8:52
Speaker 3: when this is flared up, US alcohol industry has taken
8:55
Speaker 3: a hit that's been targeted by the Canadians. Enough said,
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Speaker 3: right where else are we going to go with this?
9:01
Speaker 3: It could be resolved in twenty four hours, It could
9:03
Speaker 3: escalate if it escalates. Yeah, there's some key areas that
9:08
Speaker 3: are probably more hurt than others.
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Speaker 2: So that's the situation between the US and Canada. We'll
9:14
Speaker 2: see how it evolves over the next week or two
9:16
Speaker 2: month or two Again, I don't know exactly where it's
9:21
Speaker 2: gonna go. But it's just again. I woke up and
9:25
Speaker 2: I was like, we're literally back in February of twenty
9:28
Speaker 2: twenty five, and honestly, wasn't my favorite month in markets.
9:35
Speaker 2: You just they just it just wasn't. So let's take
9:41
Speaker 2: a quick break when we come back. Scott Besen's got
9:44
Speaker 2: a piece that he puts in the Financial Times. We'll
9:48
Speaker 2: discuss the piece, but I also want to discuss why
9:51
Speaker 2: he put it in the Financial Times. Next.
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10:14
Speaker 2: All right, Scott Besson is the US Treasury Secretary. Over
10:17
Speaker 2: the weekend yesterday, actually, he published an op ed in
10:23
Speaker 2: the Financial Times. It's titled an Economic d Day is
10:26
Speaker 2: Coming for Iran, and he basically outlines, look, it is
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Speaker 2: time for the United States to enact, you know, stricter
10:35
Speaker 2: measures not just against the Iranian regime, but on those
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Speaker 2: who supported economically, such as those who you know, buy
10:42
Speaker 2: oil from it, facilitate commerce with it, and and so
10:46
Speaker 2: on and so forth. So there's a few things to
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Speaker 2: take from that. But before we get there, Michael what
10:52
Speaker 2: do you know about the Financial Times? Pink? It's pink
10:57
Speaker 2: h British? Yes, who's the primary readership of the Financial Times?
11:01
Speaker 2: Financial media? Heavily European, but yeah, also Asian. Like it's
11:08
Speaker 2: it's big overseas, Like I dare to find outside of
11:13
Speaker 2: people that work directly in finance, I dare you to
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Speaker 2: find a single human being who reads the Financial Times
11:20
Speaker 2: in the United States. Agree, there's probably like twelve of them,
11:24
Speaker 2: and they're weird. I think I'd be unaware that people
11:29
Speaker 2: outside of financial or or business read it overseas either.
11:33
Speaker 2: But maybe that's you know, maybe that's more the case.
11:35
Speaker 2: But it's just like it's not even in the United States,
11:38
Speaker 2: like you could see someone who says, hey, I subscribe
11:41
Speaker 2: to the Wall Street Journal, but I'm not in finance. Correct.
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Speaker 3: The Financial Times is read by the guy in the
11:47
Speaker 3: suit on the commuter rail. Not anymore, but they used
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Speaker 3: to be, you know, carrying the Actually I called it
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Speaker 3: pink because the pages were actually shaded pink.
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Speaker 2: But it's like it's it's an international publication, yes, and
12:01
Speaker 2: so the medium is somewhat the message in this case,
12:04
Speaker 2: in that Scott Besson could go to any paper in
12:08
Speaker 2: the world and say I want to publish this, and
12:11
Speaker 2: they will say, great, we'll put it, you know, right
12:14
Speaker 2: at the front of the op ed section. Yep, maybe
12:16
Speaker 2: even put it on the front page. They got it.
12:19
Speaker 2: But he chose the Financial Times because he knows the
12:21
Speaker 2: audience that reads it. He didn't pick the Wall Street Journal.
12:24
Speaker 2: He didn't pick the New York Times. He didn't It
12:27
Speaker 2: was very much dedicated towards an international audience. Correct, Like
12:30
Speaker 2: it wasn't meant to be read in the United States.
12:35
Speaker 2: So this then gets to the question of Okay, so
12:38
Speaker 2: you've now told the international audience this, and I'll quote
12:42
Speaker 2: here just because I want to, you know, really hone
12:44
Speaker 2: in on it, because there's one paragraph that I think
12:46
Speaker 2: is the message I. Ron's enablers purchase and transport its petroleum.
12:51
Speaker 2: They facilitate the flow of its finances through exchange houses
12:54
Speaker 2: and free trade zones. They welcome Iron's flights and maintain
12:57
Speaker 2: registries on its behalf. They turn a blind and I
13:00
Speaker 2: to see more and fuel transfers in the illicit use
13:02
Speaker 2: of their banks, all while concealing the extent of their complicity.
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Speaker 2: In short, these countries calculate appeasement of the regime to
13:10
Speaker 2: be the safer course, but they would do well to
13:12
Speaker 2: consider the consequences of sustaining it. So basically outlining, hey,
13:16
Speaker 2: these are the things with which we have a problem,
13:19
Speaker 2: and now we're going to do something about it, not
13:22
Speaker 2: just sanctioned the Iranian regime. But there's there's another paragraph
13:27
Speaker 2: in this that caught my eye, and it's the one
13:29
Speaker 2: immediately after that I have to get into because there's
13:38
Speaker 2: two different readings of it, and one is charitable, and
13:43
Speaker 2: a charitable reading of it's like, okay, this is fine.
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Speaker 2: A non charitable is like whoa, that's that's aggressive. And
13:50
Speaker 2: here it is in the seventeenth century French philosopher I'm
13:54
Speaker 2: not great with like French names. Actually it's a Blazer's
13:57
Speaker 2: a Blase I like Blase Blaze Blaize. Pascal gave enduring
14:02
Speaker 2: expression to the to the dilemma beneath this temptation. So
14:07
Speaker 2: Pascal again lived in the mid sixteen hundreds, and Pascal's
14:12
Speaker 2: wager is a famous argument basically for people to believe
14:18
Speaker 2: in God. That's what's being referenced to here. Basically, the
14:21
Speaker 2: premise is, okay, if you hypothesize that a god either
14:25
Speaker 2: exists or does not exist. The downside of believing in
14:30
Speaker 2: God is far less than the downside of not you know,
14:34
Speaker 2: because of you know, eternal damnation and everything. And so
14:36
Speaker 2: most people at some point in their life choose to
14:38
Speaker 2: believe in God because there's not really any you know,
14:40
Speaker 2: visible downside to doing so. So keep keep that in
14:45
Speaker 2: mind when you're hearing about Pascal's wager. Here in the
14:49
Speaker 2: seventeenth century, French philosopher Blaize Pascal gave him during expression
14:52
Speaker 2: to the dilemma. Beneath this temptation, he understood that uncertainty
14:56
Speaker 2: does not absolve men or nations of divine judgment. And
14:59
Speaker 2: basically the re in the ark and is like, look like,
15:01
Speaker 2: when you die, if you didn't believe in God, there
15:04
Speaker 2: is one you're gonna be way worse off than the other.
15:07
Speaker 2: In fact, it demands a more exacting appraisal of risk
15:09
Speaker 2: and imposes a higher price for its era for its error.
15:13
Speaker 2: Pascal's eponymous wager now applies to Iran's lifelines. So what
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Speaker 2: I'm the charitable way to read this is he's saying, look,
15:23
Speaker 2: when you all come to meet your maker at the end,
15:26
Speaker 2: you're gonna wish that you had not enabled to regime
15:29
Speaker 2: like this. The uncharitable way of reading it is, hey,
15:34
Speaker 2: now you're dealing with us and judgment is coming with
15:37
Speaker 2: like the maker. Like again, I read it the first
15:41
Speaker 2: time and I read it that way and I was like,
15:43
Speaker 2: I'm not sure about that, and then I read it
15:45
Speaker 2: the other way. But either way, like it's it's a
15:47
Speaker 2: powerful statement for him to be making sure, like like
15:51
Speaker 2: when we're talking about the the the word choice and
15:57
Speaker 2: the selection of well, you're topic politicians' actions to eternal damnation,
16:05
Speaker 2: right exactly. So it's just a question I think of,
16:09
Speaker 2: who is you know, meeting out the judgment in this case.
16:12
Speaker 2: But it's it's kind of like, okay, so like you're
16:15
Speaker 2: saying that you're serious. But now we get to the
16:19
Speaker 2: same point that we got to with Kevin Warsh a
16:21
Speaker 2: couple months ago, which is you're gonna have to prove
16:25
Speaker 2: that you're serious because talk is cheap. And Kevin Worst's case,
16:30
Speaker 2: the question that's now being asked is, hey, you just
16:32
Speaker 2: Jerome Powell dressed up with you know, different clothes and
16:35
Speaker 2: a different tie, or do you actually have something you're
16:38
Speaker 2: gonna do differently? And in this case with Scott Best,
16:40
Speaker 2: and it's gonna be okay, you serious about this? Or
16:43
Speaker 2: is this gonna be something that you threatened but ultimately
16:46
Speaker 2: don't go forward with because you're you can't deal with
16:50
Speaker 2: the economic consequences domestically. I'll also raise the most.
16:57
Speaker 3: A pretty important question with all of this, Does any
17:00
Speaker 3: of it matter if China sticks to their guns and
17:02
Speaker 3: what they said last week? Because what they said last
17:04
Speaker 3: week is screw you. So here I mean, correct me
17:10
Speaker 3: if I don't let me missummarize the words of that
17:13
Speaker 3: Chinese minister that spoke out. I don't remember it precisely
17:16
Speaker 3: I spoke, but it was basically, we don't care.
17:19
Speaker 2: We're going to keep operating the way we are.
17:21
Speaker 3: And so if you convince I don't know, the Philippines
17:26
Speaker 3: to no longer purchase as much ironnie and oil, does
17:29
Speaker 3: it matter, Well, it's not an economic d day if
17:33
Speaker 3: you don't stop China.
17:35
Speaker 2: Correct the question, like the question is is there going?
17:41
Speaker 2: What is the attempt going to actually be and what's
17:43
Speaker 2: it going to look like? And this is the second
17:46
Speaker 2: time now in two segments that I'm having flashbacks to
17:48
Speaker 2: the spring of twenty twenty five, because again, this is
17:51
Speaker 2: this announcement, this press conference is coming at two pm? Right?
17:55
Speaker 2: Does this feel an awful lot like the Liberation Day
17:58
Speaker 2: announcement in early April of twenty five.
18:03
Speaker 3: A lot of hype, much ado about Well, I don't
18:07
Speaker 3: know what we're going to It's just like the Liberation
18:09
Speaker 3: Day announcement back in twenty twenty five was what it
18:13
Speaker 3: was because it was an absolute It was built up
18:16
Speaker 3: to be something really big, and then it was something
18:19
Speaker 3: really big that had to be pivoted immediately because it.
18:22
Speaker 2: Was so bad. This I don't know if that's when
18:24
Speaker 2: that's gonna look like. Again, you said, if you're really serious,
18:27
Speaker 2: then you've got to go after China. Yes, are we
18:31
Speaker 2: going to get the same thing? Because we China and India.
18:33
Speaker 2: This is the thing. We went through the whole China
18:35
Speaker 2: thing for about ninety days in the spring of twenty
18:37
Speaker 2: twenty five, and then eventually we got to a place
18:41
Speaker 2: where again I don't know, like I'm not gonna take
18:43
Speaker 2: any sides, but like both sides were just like, Okay,
18:46
Speaker 2: we're good with this. We're not gonna do it anymore, yeap,
18:48
Speaker 2: Like this is too painful for all of us. Let's
18:50
Speaker 2: let's move on. So my question on this is, like,
18:55
Speaker 2: what are we actually going to get, And I don't
18:58
Speaker 2: how much pain are we willing to tolerate? What's the question.
19:01
Speaker 2: I don't know, are we willing to tolerate a whole
19:03
Speaker 2: bunch of pain in order to deal with this? And
19:05
Speaker 2: games of Chicken are inherently unpredictable, like you can't predict
19:09
Speaker 2: who's going to win them or how exactly they're going
19:12
Speaker 2: to play out. So I'm again I'm interested to hear
19:16
Speaker 2: what we get, But my goodness, I'm really having spring
19:19
Speaker 2: of twenty five flashbacks right now. Just in terms of
19:21
Speaker 2: news flow, quick break when we come back, it's Wall
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19:49
Speaker 4: Marcut's kicking off a busy week in mixed territory with
19:52
Speaker 4: a pullback in tech. This morning is Wall Street Radies
19:55
Speaker 4: for Nvidio earnings and other inflation reading in the Jackson
19:58
Speaker 4: Whole Symposium this week. Investors are also waiting details about
20:02
Speaker 4: US economic sanctions on Iran. This afternoon at two. Right now,
20:06
Speaker 4: the Dow is up three tenths of one percent, or
20:09
Speaker 4: one hundred and fifty six points higher, SMP five hundred
20:12
Speaker 4: down about a quarter percent or nineteen points lower, NASDAK
20:16
Speaker 4: down two thirds of a percenter one hundred and seventy
20:19
Speaker 4: four points lower. RUSS two thousand is off about a
20:21
Speaker 4: half a percent. Ten year treasureel is down three basis
20:25
Speaker 4: points at four point seven zero percent, and oil retreating
20:29
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20:33
Speaker 4: memory storage companies are seeing losses.
20:35
Speaker 2: To begin the week.
20:37
Speaker 4: SanDisk, Western Digital, Seagate Technology, and Micron Technology are down
20:42
Speaker 4: anywhere between seven and nine percent. Meanwhile, Ali Baba off
20:47
Speaker 4: over one percent after the Chinese technology company announced it
20:50
Speaker 4: was issuing ten point two billion dollars of new shares
20:53
Speaker 4: to non US investors, where all of the money it
20:56
Speaker 4: raises will be used to fund its AI projects, and
21:00
Speaker 4: after trade talks between the US and Canada fell apart
21:03
Speaker 4: on Friday, Steel manufacturers, including new Core and Steel d Dynamics,
21:08
Speaker 4: arising about three percent on the day. Canada is set
21:11
Speaker 4: to target the US steel industry in its retaliatory terriffs
21:16
Speaker 4: that will begin on September eighth, unless they don't.
21:20
Speaker 1: I don't know.
21:21
Speaker 4: I'm Tucker Silva.
21:22
Speaker 2: That is Wall Street watch Peace from CMBC titled Bess
21:28
Speaker 2: and could tap near one trillion dollar Treasury General Account
21:32
Speaker 2: to fund bond BUYDOX sources said, I'm just gonna quote
21:36
Speaker 2: a couple things here. Quote. The Treasury could use it's
21:40
Speaker 2: nearly one trillion dollar General Account to help fund its
21:43
Speaker 2: recently announced plans to increase purchases of government bonds. According
21:46
Speaker 2: to two senior Treasury officials, using the TGA would provide
21:49
Speaker 2: the Treasury with considerable firepower to influence long term bond yields.
21:54
Speaker 2: So here's the deal. If you're not familiar with what
21:56
Speaker 2: the Treasury General Account is, it's basically the bank account
21:59
Speaker 2: for the US government. It gets funded through two different things.
22:04
Speaker 2: The two different things it gets funded through are issuance
22:07
Speaker 2: of US debt and taxes.
22:11
Speaker 1: Got it.
22:12
Speaker 2: So you can't print money from it. You can't be like, well,
22:14
Speaker 2: let's use this and then just like replenish it, like okay.
22:17
Speaker 2: The way that you replenish it is either by collecting
22:19
Speaker 2: more tax revenue or buy borrowing more money. So this
22:23
Speaker 2: kind of gets it like what we talked about last week,
22:26
Speaker 2: which is okay. Ultimately, if you're talking about doing buybacks
22:31
Speaker 2: of this, like, at some way, shape or form, it's
22:34
Speaker 2: going to have to you know, come in the form
22:36
Speaker 2: of either increased tax revenue or borrowing. But the caveat
22:41
Speaker 2: is that you do have this, You do have a
22:44
Speaker 2: little bit of wiggle room because you don't need to
22:46
Speaker 2: keep the TGA filled to a certain level necessarily, like
22:49
Speaker 2: there's a minimum operating level whenever we get into like
22:53
Speaker 2: all the debt ceiling crap that we inevitably get to.
22:55
Speaker 2: What we're talking about is, hey, how low can the
22:57
Speaker 2: TGA go before checks start to bounce from the t Treasury?
23:01
Speaker 2: But look, do you need to hold a trillion in it? No?
23:04
Speaker 2: So could you take one hundred billion dollars from the
23:06
Speaker 2: TGA and buy a bunch of you know, long term
23:09
Speaker 2: bonds with it? You could, and in the short term
23:13
Speaker 2: then you're not increasing borrowing, and so in theory like, yes,
23:17
Speaker 2: it is you know, potentially able to drive what you want.
23:21
Speaker 2: But the counter to that is, okay, that just means
23:23
Speaker 2: that you're gonna have to borrow more money sooner than
23:25
Speaker 2: you thought, which means you're not really doing anything. You're
23:27
Speaker 2: just kind of kicking the can down the road. Yeah, charitably,
23:31
Speaker 2: you're kind of reshuffling those shells with the different stuff
23:34
Speaker 2: on it. Less charitably you are shuffling the chairs in
23:38
Speaker 2: the deck of the Titanic.
23:39
Speaker 3: Well, well, you know, whatever whatever comparison you want to
23:42
Speaker 3: make there, if you think the deficit is as big
23:45
Speaker 3: a problem as some people do.
23:49
Speaker 2: The yield on.
23:51
Speaker 3: The ten years coming down a little bit today, So
23:54
Speaker 3: you know, every day that there's an announcement like this,
23:57
Speaker 3: we see some movement in treasuries, but so far it's
24:01
Speaker 3: been moved down followed by leg up as investors kind
24:06
Speaker 3: of doubt the willingness and firepower of the treasury.
24:09
Speaker 2: So we'll see if this time's any different. Now, yields
24:12
Speaker 2: could be coming down because oil prices are down a
24:14
Speaker 2: couple percentage points today as well. They could be coming
24:17
Speaker 2: down because you know, they've just gotten too extended in
24:20
Speaker 2: the last week. Again, like you never know why anything's
24:24
Speaker 2: you know, going in one particular direction on any given day.
24:27
Speaker 2: What I do find interesting is, regardless of which way
24:30
Speaker 2: treasury yields are moving right now, up or down on
24:33
Speaker 2: a particular day, gold's only moving in one direction, and
24:37
Speaker 2: that is up and like again like Gold's had like
24:41
Speaker 2: almost a twenty percent blowout top side. Now after getting
24:45
Speaker 2: down into the thirty nine hundred range, you know, midsummer,
24:48
Speaker 2: it's forty seven thirty one and up another fifty bucks today.
24:51
Speaker 2: So I do think it gets back to the idea
24:55
Speaker 2: of okay, like, yeah, you can do this, but it
24:57
Speaker 2: doesn't change the underlying dynamics, which are Hey, there are
25:01
Speaker 2: two reasons again, there's several reasons why yields can rise.
25:06
Speaker 2: It could be that investors are concerned about the level
25:09
Speaker 2: of debt that's outstanding. I generally dismiss that for short
25:11
Speaker 2: term market moves, because when yields come back down, it's
25:14
Speaker 2: not because the amount of debt went back down. It
25:17
Speaker 2: could be because the growth prospects for the US are
25:20
Speaker 2: better than they've been previously. I buy this a little
25:24
Speaker 2: bit because of the amount of capex going into the
25:29
Speaker 2: AI trade and things like that. There's a bunch of
25:31
Speaker 2: money being spent to build stuff in the US right now,
25:34
Speaker 2: and so I think economic growth at the very least
25:36
Speaker 2: has a higher floor under it than the last couple
25:38
Speaker 2: of years, and potentially a higher ceiling. I buy that
25:41
Speaker 2: as a possibility. It could be because investors are concerned
25:45
Speaker 2: about inflation. YEP. I buy that as well. So all
25:48
Speaker 2: these things can factor in. But ultimately what matters here
25:52
Speaker 2: is the Treasury Secretary saying, look, we don't want to
25:56
Speaker 2: have interest rates on the long end to be as
25:58
Speaker 2: high as they are. That's the message that you take away,
26:01
Speaker 2: no matter what the proximate cause is. Treasury is saying
26:05
Speaker 2: we want those yields down, and that is directly at
26:08
Speaker 2: odds with what we've heard from the Fed in the
26:10
Speaker 2: last four weeks.
26:12
Speaker 3: Yeah, it's not that the Fed came out and said
26:15
Speaker 3: we want rates higher in the same way that Besson
26:17
Speaker 3: said we want rates lower, but they did say that
26:21
Speaker 3: they don't need to do anything else because those rates
26:23
Speaker 3: have gone higher. So it stands starkly in contrast to
26:28
Speaker 3: Warsh's own presentation on things. And there's really no more
26:32
Speaker 3: important question to answer this Friday, And I have no
26:35
Speaker 3: idea if he'll be willing to do so.
26:37
Speaker 2: Well, he doesn't have to. There's no press conference on Friday.
26:40
Speaker 2: Friday Friday is Kevin Worrish gets to say whatever he wants,
26:44
Speaker 2: right and there's no pushback.
26:46
Speaker 3: And if he completely ignores any of this, then I
26:52
Speaker 3: think that's more telling than even.
26:54
Speaker 2: If he gives a bit of a discombobulated message on
26:57
Speaker 2: all of these actions. I mean, here's some worst quote
27:00
Speaker 2: from literally four weeks ago. Rates are higher today than
27:04
Speaker 2: they were forty two days ago. Markets have made decisions
27:07
Speaker 2: because we have stepped back, in part from trying to
27:09
Speaker 2: influence those market judgments. We're saying like, yeah, the market's
27:13
Speaker 2: doing its own work. We don't have to. And then
27:16
Speaker 2: Besson comes in three weeks later and he's like, Nope,
27:18
Speaker 2: we have to. I gotta pay the bills now. Again,
27:21
Speaker 2: this is part of this is a difference in role.
27:23
Speaker 2: Kevin Warsh's job is not to pay the bills. Kevin
27:27
Speaker 2: Warris's job is to keep it on inflation, promote price stability,
27:33
Speaker 2: and maintain a strong job market. Promote full employment, full stop.
27:38
Speaker 2: Those are the two mandates of the Fed. You can
27:40
Speaker 2: argue whether those mandates are good or bad, but that
27:42
Speaker 2: is what his dual mandate is. Scott Besson's job is
27:46
Speaker 2: to pay the bills, and those things can come into conflict.
27:50
Speaker 2: We've seen this before historically. Look at the post World
27:52
Speaker 2: War two period that we saw from forty five to
27:55
Speaker 2: fifty one, and by the time the post World War
27:58
Speaker 2: two period was over, inflation was like on an annualized basis,
28:01
Speaker 2: like up to twenty one percent in mid twenty in
28:03
Speaker 2: mid nineteen fifty one, before they were finally like, okay,
28:07
Speaker 2: we got to stop like capping interest rates because we've
28:10
Speaker 2: dug out from you know, the death that we ran
28:12
Speaker 2: up in World War two, and now you know, we
28:16
Speaker 2: we gotta you know, stop inflating our way out of it.
28:19
Speaker 3: So I have to keep going back to why this
28:22
Speaker 3: is so important. Yes, they are directly contradicting each other.
28:25
Speaker 3: That can happen all the time in politics, in government,
28:30
Speaker 3: it's you know, not often, it's not often not the
28:33
Speaker 3: case that you know, different elected officials or appointed officials
28:37
Speaker 3: don't get along terribly well.
28:39
Speaker 2: With each other. I'm not suggesting they're not getting along.
28:41
Speaker 2: I have no idea, no right, like, we don't know.
28:45
Speaker 2: But there's a couple of ways to read this.
28:48
Speaker 3: Either Besent has taken actions that are going to pretty
28:51
Speaker 3: much paint wash and the Fed into a corner. Or
28:55
Speaker 3: they are working together on something, and it's really hard
29:00
Speaker 3: to know which. But in either case it spells dramatically
29:03
Speaker 3: different outcomes, one of which could be substantially higher inflation
29:07
Speaker 3: for a longer period of time. Another could be a
29:10
Speaker 3: federal Reserve that needs to completely swing in a different
29:14
Speaker 3: direction on its actions in order to get inflation under control.
29:17
Speaker 3: And I don't really have a strong feeling as to
29:20
Speaker 3: which one it's going to be.
29:21
Speaker 2: No, this again, this is the most exciting, most dramatic
29:25
Speaker 2: season of the FED ever. Yeah, And I wish, you know,
29:30
Speaker 2: how they do like hard knocks for football preseason for
29:33
Speaker 2: the NFL. I wish they did like again, not even
29:37
Speaker 2: I know, we talked about like like almost a scripted
29:39
Speaker 2: reality show, but like I wish they just had like
29:41
Speaker 2: someone doing a documentary at the FED right now. Yeah,
29:45
Speaker 2: I would get like seventeen subscribers on Bloomberg you could,
29:50
Speaker 2: But like, you know, I wish that, like last Wednesday,
29:53
Speaker 2: we had someone in J. Powell's house and he wakes
29:56
Speaker 2: up and sees the headlines just like whatever. He's as,
30:00
Speaker 2: you know, he's got a tagline Powell. Yeah, is there
30:03
Speaker 2: a laugh track? Here we go again? It's time for
30:09
Speaker 2: Powell power or something like that. I don't know, you know,
30:12
Speaker 2: we're like, you know, Worsh comes in as like worsh
30:15
Speaker 2: decision ever you know, like something like you know, they
30:18
Speaker 2: could all have like I don't know why they're all Uh,
30:22
Speaker 2: who's the guy from the Fantastic four that turns into
30:24
Speaker 2: the rock? Yeah? Is it the thing? I don't know
30:29
Speaker 2: hasn't been my most commonly watch Marvel. I'm pretty I'm
30:33
Speaker 2: pretty sure it's the thing. Yeah, the thing, the thing.
30:36
Speaker 2: I don't know why they all have to be like,
30:38
Speaker 2: you know, the thing going like it's clobber in time.
30:40
Speaker 2: But you know, it would be nice if like our
30:43
Speaker 2: fed chair did that. No, No, that would be no,
30:47
Speaker 2: that wouldn't be great. It's not a good look. It's fine.
30:50
Speaker 2: That's why you don't put a rock in charge of
30:52
Speaker 2: the Federal Reserve. Let's take a quick break, and when
30:55
Speaker 2: we return, let's talk a little bit just about borrowing
30:58
Speaker 2: costs and their impact on households and businesses. Again, we've
31:01
Speaker 2: been talking a lot about the bond market more generally.
31:03
Speaker 2: Let's talk about that now.
31:06
Speaker 1: Tekst us six one, seven, three, six, two thirteen eighty
31:10
Speaker 1: five with your comments and questions about today's show, and
31:13
Speaker 1: let us know what you think about the stories we
31:15
Speaker 1: are covering. This is the Financial Exchange Radio Network.
31:30
Speaker 2: He's here in the new York Times. It's titled the
31:32
Speaker 2: economy got loose used to low borrowing costs, their exit
31:36
Speaker 2: could pose risks. I'm actually like, we've already gone through
31:40
Speaker 2: the transition from like extremely low borrowing costs to you know,
31:45
Speaker 2: kind of more historically normal ones. When is this going
31:49
Speaker 2: to happen?
31:50
Speaker 3: Because mortgage rates have been over six percent for four
31:52
Speaker 3: years now. Yes, So I think the greatest risks were
31:56
Speaker 3: when the rate of change was high back in twenty
31:58
Speaker 3: twenty two, and that's where we you know, almost slipped
32:00
Speaker 3: into recession the end of the year, and very certainly
32:03
Speaker 3: in the first half to two thirds.
32:05
Speaker 2: Of the year. We're in a very stagflationary environment. So
32:11
Speaker 2: I think the place that I land on this is
32:14
Speaker 2: the reason why rates were so low from two thousand
32:17
Speaker 2: and eight through early twenty through twenty twenty one. The
32:23
Speaker 2: economy sucked for most of that time, and so it
32:26
Speaker 2: was a function of, hey, there's not really any meaningful inflation,
32:30
Speaker 2: and the economy's bad in particular, like unemployment was really
32:34
Speaker 2: high until about twenty fifteen, and yeah, so borrowing rates
32:39
Speaker 2: were very cheap. I don't think we should wish to
32:43
Speaker 2: get back to those rates, because ultimately it means that
32:47
Speaker 2: something went really wrong in the economy and nothing we
32:49
Speaker 2: could do would stimulate it to a better place than
32:53
Speaker 2: it was. Yeah, I think there's.
32:56
Speaker 3: There's perhaps more to why you know, inflation was low
33:00
Speaker 3: during that period of time, Like, Yes, high unemployment is
33:03
Speaker 3: a pretty good guarantor of lower inflation. Remember, too, we
33:08
Speaker 3: were still very much open to importing stuff from all
33:12
Speaker 3: over the globe. But you saw substantial either deflation. Yeah,
33:18
Speaker 3: are arguably deflation in some areas of consumer products, such
33:22
Speaker 3: as all sorts of technology, electronics, appliances, all sorts of
33:29
Speaker 3: stuff there.
33:30
Speaker 2: It was pretty deflationary.
33:31
Speaker 3: And you could argue that we've reversed some of that
33:34
Speaker 3: globalization piece as well. And so I think there's multiple
33:39
Speaker 3: things that now make twenty twenty six and beyond look
33:43
Speaker 3: like it could be an environment for higher interest rates
33:46
Speaker 3: for longer, paired with higher inflation for longer. But yeah,
33:53
Speaker 3: I don't see if we sink into recession in twenty
33:56
Speaker 3: twenty seven, for example, I'd have a tough time blaming
33:59
Speaker 3: it on high interests.
34:01
Speaker 2: Yeah, it's if interest rates aren't moving from where they've been,
34:05
Speaker 2: which we've been stuck in a pretty like ultimately narrow
34:10
Speaker 2: range over the last several years.
34:12
Speaker 3: Yeah, thirty, your mortgage rate's gone from six to seven
34:14
Speaker 3: percent for four years.
34:16
Speaker 2: It's just been pingponging back and forth. Basically, Is that
34:19
Speaker 2: any different from when it used to go from like,
34:21
Speaker 2: you know, thirty your mortgage from like three and a
34:23
Speaker 2: half to four and a half. Like, no, just go back.
34:26
Speaker 2: We didn't sit there when it, you know, was in
34:28
Speaker 2: that range and be like, oh, now it's like four
34:29
Speaker 2: and a half, like the world's ending, Like, no, it's
34:31
Speaker 2: it's range bounds.
34:32
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35:39
Speaker 2: So this Friday, we do have the Jacksonal Symposium for
35:43
Speaker 2: the Federal Reserve. We've yet to be able to obtain
35:47
Speaker 2: a copy of the menu, not that we've tried very hard,
35:50
Speaker 2: but the policy brief will be out at eight pm
35:54
Speaker 2: on Thursday, actually, so markets will get a preview of
35:56
Speaker 2: at heading into the Friday session. And I'm curious, you know,
36:01
Speaker 2: exactly what we hear from Warsh as he tries to
36:03
Speaker 2: fine tune his message into something that I think still
36:07
Speaker 2: maintains the core tenets of what he believes in, but
36:11
Speaker 2: maybe is just packaged in a more palatable way for
36:14
Speaker 2: the market, because I think if you're worsh the way
36:17
Speaker 2: that you're looking at it. I made this, you know,
36:18
Speaker 2: comparison like last week, Hey, is the problem the pizza
36:22
Speaker 2: meaning like what you're actually saying, or is it the
36:24
Speaker 2: box just the packaging and how it's wrapped up? And
36:28
Speaker 2: I think for Warsh, at least at this point, if
36:32
Speaker 2: I were worsh again, we all have, you know, a
36:34
Speaker 2: little bit of ego, and we all have, you know,
36:36
Speaker 2: kind of a self preservation instinct that's probably pointing him
36:39
Speaker 2: towards saying I believe in my message. I just phrased
36:43
Speaker 2: it wrong and I need to hone it in order
36:44
Speaker 2: to package it better.
36:46
Speaker 3: Claire Jones, she is the one who has previously kind
36:49
Speaker 3: of reported from the fat maybe you know las in
36:55
Speaker 3: terms of influence and ability to report with the Fed's
36:58
Speaker 3: thinking first sentence, you know. Federal Reserve Chair Kevin Warsh
37:01
Speaker 3: will seek to soothe investor's nerves in a crunch week
37:04
Speaker 3: as mounting signs of economic strain threat threatened to cast
37:08
Speaker 3: a shadow over the annual Jackson Hulsom Posium. Yeah, that
37:13
Speaker 3: seems a little bit different in terms of the messaging
37:14
Speaker 3: we've got from the last two meetings. I don't know
37:16
Speaker 3: if it'll end up being true, but that would seemingly
37:20
Speaker 3: be the message that Warsh is trying to get out here,
37:23
Speaker 3: is that he will be delivering a message that attempts
37:26
Speaker 3: to soothe investor's nerves. To me, that would mean addressing
37:30
Speaker 3: the seeming conundrum between him investment.
37:34
Speaker 2: Or conflict. He does not. He's not gonna mention it.
37:36
Speaker 2: I don't think he will. I don't think he'll mention it.
37:38
Speaker 3: Yeah, which isn't going to sue any investors nerves in
37:41
Speaker 3: that case.
37:42
Speaker 2: Which means that given that we are on to the
37:48
Speaker 2: next meeting, the September meeting, which is in twenty three
37:51
Speaker 2: days on September sixteenth, quick break here our two coming
37:55
Speaker 2: up in just a bit