Title: Luke Gromen & Darius Dale: Which Inning Are We In?
Show: Thoughtful Money (host Adam Taggart)
Guests: Luke Gromen, founder of Forest for the Trees (FFTT LLC); Darius Dale, founder of 42 Macro
Date: 2026-09-13
URL: https://youtu.be/0-Bw776zKNg
Length: 1:50:11 (6611s)
Note: Joint two-guest discussion — Gromen and Dale both speak at length; ">>" marks a speaker change in the source auto-captions. The source archived here is Luke Gromen; Dale's views are attributed to him by name on the analysis page. Fillers (um/uh/you know), stutters and false starts removed; wording otherwise verbatim, every (mm:ss) cue kept in place. Auto-caption garbles corrected: "Groman"->Gromen; "Tagert"/"Tagger"->Taggart; "Bessant"/"Besson"->Bessent; "Worsh"->Warsh; "Yelen"/"yelling"->Yellen; "VHimar"->Weimar; "Neil House for"/"Neil How"->Neil Howe('s); "Peter Turin"/"Peter Church"->Peter Turchin; "Groy brothers"->Gracchi brothers; "Amam Donnie"->Mamdani; "Dio"->Dalio; "nipple corporate profits"->NIPA corporate profits; "Murkan Capital"->Myrmikan Capital; "Reichkes marks"/"Reich's marks"->Reichsmarks; "GI calculations"->GSIB calculations; "aization"->Argentinization; "fft-lc.com"->fftt-llc.com; "tenure"/"10ear"/"10year"->10-year; "fiveyear fiveyear"->5y5y; "ourstar"/"RSTAR"->r-star; "Kiss"->KISS (42 Macro's model; "Dr. MO" is its companion model); "fork turning"->fourth turning; "HIPS"->hips; "RAAS"->RIAs; "gold is a cell"->gold is a sell; "67 billion people"->6.7 billion people; "lifeurers"->life insurers; "the's levels"->Darius's levels; "run at haunt"->run it hot; "Jensen Wang"->Jensen Huang; "sanguin"->sanguine; "asic"/"asmtoic"->asymptotic; "boyed"/"boiled by"->buoyed by; "Pantabellum"->antebellum; "Treasure Secretary"->Treasury Secretary; "capital deep diving"->capital deepening; "statical"->statistical; "Daryus"/"Darus"->Darius; "thoughtfuloney.comdiy"->thoughtfulmoney.com/diy. Left as spoken (unverified): "Nick Neoth"/"Neath" (a Substack writer on life-insurer affiliated reinsurance — possibly Nick Nemeth, not confirmed) and "Tom Gober". The captions stop at (1:46:53) with the host's sign-off; the closing Thoughtful Money advisor / conference promotion is omitted.
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(00:00) the end of the ninth inning ends in paradigm E. what inning would you put us in right now? Or in paradigm C, but what inning of the ball game would you put that? >> it's impossible to know with precision, but I would say somewhere between the top of the third and the bottom of the fourth. >> I would say we're maybe more I don't know sixth, seventh or even eighth inning.
(00:29) Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart. And today we have the very great good fortune to welcome back two of the best macro and market minds to this channel. I'm talking of course about Luke Gromen and Darius Dale. Gentlemen, thank you for joining us today. >> Thanks for having us here.
(00:48) >> it's a real pleasure to be here, man. I'm a huge fan of you both as people, as analysts. this is going to be awesome. >> it will be. And we did this a few months back and folks really enjoyed it and over X you two were talking and said hey it's high time we did this again.
(01:05) I'm so honored and privileged that you guys chose to come back to thoughtful money as the platform to do this on. And I will just say going forward the door is always open anytime you guys want to have one of these discussions. They're not really debates but they're just sort of thoughtful discussions as you two think through where you agree and where you disagree.
(01:22) anytime you want to have them, we'd love to have them here on Thoughtful Money. Now, gentlemen, there's a lot that's going on right now. so, lot for us to roll our sleeves and dive into. I also did ask the audience on X for questions for you two and got a whole bunch. So, we're going to have no shortage of things to talk about.
(01:41) before we turn in the camera here, Darius, I thought you floated a really good idea for kicking us off here, which is just to say if the whole progression here is ending in a destination that you feel fairly confident about and I'll let each of you determine what that destination is. What inning would you put us in right now on the way to that destination? And Darius, maybe let's start with you and then Luke, I'll give you a chance to give your answer right after.
(02:11) >> I appreciate you, Adam. Thank you again. Thanks again for having me. I be careful, by the way. You're you invited to leave your door open to a former offensive lineman. [laughter] >> Just push your way in there and make the whole >> open up your fridge. And it's like, oh man, is Darius still here? [laughter] So, I may take you up on that, but no, in all jokes aside, we're dealing with some, some pretty interesting times, and, this is, I think the last
(02:40) few months have kind of brought to the forefront of consensus, some of the things that Luke and I have been talking about in our research for quite a long time, for, I would say Luke, in your case, for at least half a decade, probably my case for, almost going on four years now.
(02:55) which is there is a disequilibrium in the Treasury bond market that has manifested its ways manifested in various forms and fashions through policy through financial markets and ultimately in our view we think it's going to have a pretty meaningful ramification on politics and society we're not there yet in terms of the latter part but we've certainly seen enough of the mile markers breached to give us a lot of confidence that's where we're ultimately headed so if I can
(03:23) just take a quick second to kind reintroduced our paradigm framework because I think that's been a very it's been very helpful both helpful in terms of understanding all this stuff because it's a lot of complicated stuff but also helpful in terms of helping investors stay on the right side of market risk and actually make money in financial markets with a lot of these ideas.
(03:41) So if you can just throw up on the screen Adam where we have we list our different paradigms of this kind of supply demand disequilibrium in the bond market in the treasury bond market u paradigm a being the fiscal dominance that's perpetuating the disequilibrium in short there are too many bonds being created and not enough buyers of the bonds it's as simple as it gets but the reason there's not enough buyers of the bonds the primary reason is that there's a lot of geopolitical forces that are pulling
(04:06) capital away from the US markets and so that's sort of paradigm a that's as a starting point. We would argue that we tipped into that starting point kind of during 2020 and 2021, we really saw that accelerate and really since 2022, we've kind of been in this in this in this stasis.
(04:22) paradigm B. So, if you think about paradigm A being a disequilibrium in a sovereign bond market, we've seen this movie play out, hundreds of times really across, millennia and different societies. But in the Western world, we've probably seen it play out several dozen times over the last, call it five, six hundred years.
(04:39) And the reality is, there's only really three acceptable treatment options for this debt disease, if you will. one, you can try to cut your way out of the problem in terms of deficit reduction., we tried that with Doge. Luke and I were on your show in the fall of 2024 that basically said, this is going to be a joke.
(04:53) Get, get us out of here with a stupid chainsaw. That turned out to be right. So, we then shifted, we noticed the administration shifting to paradigm C, which is the grow phase. The grow being the second of the three, three options, acceptable options rather, to deal with this kind of debt disease.
(05:08) They're going to try to boom the economy. They are booming the economy. The economy is booming. It's likely to continue booming for an extended period of time. But ultimately, once they run out of the boom phase of the economy, they're going to be left with, pretty dire choices as it relates to, containing yields and ultimately the influence of tighter, tighter longer term interest rates on the economy.
(05:28) So ultimately where a lot of these economies wind up going particularly the economies that print their own debt and their own currency you tend to wind up in this in this paradigm D which is what we call default via debasement. you the default via debasement could take many forms but typically it involves some expansion of the monetary base for the central for the monetary authority to remove and warehouse the risk from the rest of capital markets.
(05:49) And then ultimately once that plays out, we've seen a few quite a few extreme examples throughout history whereby you do too much paradigm D and you upset the apple car from an inflation standpoint and ultimately you wind up with major political realignment and total war which is actually quite consistent with Neil Howe's fourth turning framework my former colleague and one of my mentors Neil Howe his fourth turning framework was kind of aligned on paradigm E as well.
(06:12) So that's where we think we're headed. We're in paradigm C now. You could last maybe a few years in paradigm C. you'll probably last, five to 10 years in paradigm D and then ultimately paradigm E is probably the highest probability outcome on the other side of that. >> Okay.
(06:28) So, [sighs] the end of the ninth inning ends in paradigm E. what inning would you put us in right now or in paradigm C? But what inning of the ball game would you put that? >> it's impossible to know with precision, but I would say somewhere between the top of the third and the bottom of the fourth. >> Okay. All right.
(06:46) So, we still have a fair amount of this game to play. It may not necessarily be fun from here to there and paradigm E isn't a fun paradigm in and of itself, but hopefully if Neil Howe is right, it ends with a first turning and we come out of all this pain with a new world order and we build something great on the other side of this.
(07:08) Luke, how does this compare to your general overall view of things? I think his framework is excellent and I think it dovetales very closely with my framework. I think we're probably further along in the game. when I look at when I for me my temperature gauge of how hot we're running or where we are in the innings is what I call true interest expense as a percent of receipts.
(07:39) So your interest your gross interest plus your entitlements plus your veterans affairs. So it's your interest plus your interest like obligations as a percent of your receipts. >> Mh. >> And what has grabbed my attention has in recent weeks has been what was shown in the third quarter treasury borrowing advisory committee report or TBAC report which showed that through fiscal third quarter in a pretty decent economy true interest expense is 105% of receipts.
(08:08) So, our interest and interest like obligations are already more than receipts. So, you're already into a print or default type of scenario, right? You either got to print the interest or you're going to have to restructure something. And critically, we've run this enough times and this is why I say I think we're further along in the game in terms of innings is we've done this already several times since call it 2019, right? 2019, 2020.
(08:34) So we've seen true interest expense. I first highlighted this back in 2016 and back then when you added defense on top of it, it was 60% of receipts, right? So you had interest, entitlements, VA, defense was only 16 or it was only 60 65%. Now just interest and VA and entitlements are 105%. We saw it get to 120% during COVID and we saw what the solution was which was you cut rates to zero.
(09:06) The Fed buys a lot of bonds. you inflate, inflation goes into the high single or low double digits depending how you want to measure it. Receipts explode nominally and true interest expense which hit as high as 120% during COVID at the depths of COVID fell to 80 or 85% by 2021. And so essentially you kind of inflated your way out of a danger zone and so you gave yourself more time.
(09:32) And so we've done this a couple times already. The challenge in doing this is that every time you do this, you buy time, but something that's really underappreciated I'm finding on Wall Street is that the United States owes a substantial portion of its obligations in a currency it cannot print. We frequently hear, well, it's not a problem because the US owes its currency and it owes its debt and a currency it can print.
(09:57) And that's true nominally for the federal debt, but it is absolutely 100% not true for the hundred trillion dollars plus we owe in entitlements because social security is inflation adjusting. And for Medicare, Medicaid, and veterans benefits, we owe hips, knees, pharmaceuticals, doctor's time. These things are finite.
(10:14) They are things that neither Bessent nor Warsh can print. And so that those entitlements th those currencies that they can't print hundred trillion plus overall and it's $3 trillion plus a year now. So it is fully about 60% of annual outlays is owed in a currency they can't print and that inflates faster than they inflate.
(10:42) And so it's very much a Weimar gold war reparations problem where the more they print, the faster the stuff they can't print accelerates and runs away from them. It's an em emerging market debt crisis problem. And given that we are now 105% of receipts in a good economy, they need to do something to print, which will buy them a little more time, but that will quickly reverberate into higher prices of these things they can't print.
(11:18) And so we're I would say we're maybe more, I don't know, sixth, seventh, or even eighth inning. we're into the sort of the like because and I think in part of it is the reason I say that is Bessent's doing buybacks not to the people are starting to not believe Bessent right I would say it would be earlier if there was still you know when I was first saying hey this is a problem like no no no this is just for liquidity management when Yellen did buybacks in 24 right and now we're doing it and everyone in their mother is like hey they're just shifting to the
(11:51) front end and retiring older debt because there's not enough demand for this stuff. So I think there's a greater recognition of it which means the reflexivity of each iteration is going to accelerate from here. So I think we're more like the like it's the sixth, seventh, eighth innings of this.
(12:11) Maybe they can get away with it one more time, but I think more likely it's hey the six billion in buybacks we're doing is going to turn into eight. It's going to turn into 10. And, at some point the market's going to go, "Wait a second. He's just buying back the whole he's just buying back the whole back end.
(12:27) I know what to do with that, which is buy gold, buy stocks, buy anything that is finite." [snorts] >> okay, great. And look, one of the things I got a lot when I told people you were coming back on was really to try to help identify the places where you guys have differences of opinions. And I'm not trying to stir anything up between the two of you.
(12:47) It's just that's what makes a market, right? is different people look at the same data and come to sometimes different conclusions. we'll talk about this later. So, but I just want to earmark it., when you talk about inflating kind of being the playbook here, Luke, and for a long time, I've heard you say, governments have to decide whether to do start inflating or start dying, right? but that contributes to this wealth divide that we have, this growing wealth divide, right? This K-shaped economy that we're hearing, right?
(13:17) When the inflation happens, people who own assets, they're able to offset a lot of the cost of that inflation because the prices of their assets are rising at the same time, but it's a minority of people who own the vast majority of assets. Everybody else just gets the inflation and their cost of living and gets increasingly left behind.
(13:38) So, obviously, there's a social cost to all this inflation that at some point in here presumably has a breaking point and we can we can get to that later. Darius, I just sort of I watched you taking some furious notes as Luke was speaking and so if you have any things that you want to chime in on about what Luke specifically said, I want to give you a chance to do so.
(13:54) >> Oh, yeah. I was actually not going to chime in as Darius. I was going to put do my best Adam Taggart impersonation and ask Luke if we're six to eighth inning, what does inning nine look like? That's a that's a that's pretty far along. Yeah, I would say it starts to look like what maybe what we start, started to see today, which is Bessent does a $6 billion buyback, which is bigger than the four or five they were talking about, but within the range.
(14:24) And what the 10-year do, right? 10-year sells off five basis points. >> Yeah. >> Now, what's he want to do? So, right. So, check to you. So then now you're I think in the eighth he's going to have to upsize it again and when he does and the bond market runs away from him again then what and so then I think we quickly we get into because I also think it's very noteworthy that today gold was up what a percent and a half with the 10-year up five basis points right there's a literally an army of people on Wall Street and at RIAs
(14:59) around this country that will tell you it gold is a sell if rates go up and there is everyone else in the world 6.7 billion people out of the 8 billion that tell people no that's wrong when you have 120% debt to GDP and you are moving toward a fiscal crisis when rates go up gold is a buy not a sell right so we're seeing gold rise with the rise in rates with Bessent doing the buyback which is ostensibly attempting to control the long end or manage the long end I won't say control because but that's a touchy word but manage the long
(15:34) end or the and so that's why I think these are the types of things we'll see the ninth in ninth inning I think looks like they'll do away with pretenses and they'll just buy whatever they got to buy they'll upsize it to whatever it's going to be and then you're going to see gold moving 100200 $300 days I think when rates probably aren't moving a whole lot more.
(16:01) >> So, so Luke, in Darius's outlook there, his ninth inning is large-scale political transformation. You didn't use the word unrest, Darius, but I'm going to throw that in there. And you also said war, right? so, Luke, do you see a, a culmination that's involves that much of evil as well? What does your ninth inning look like for the regular person? I think it depends on policy choices.
(16:34) I think, when you get into the later innings, you'll start to see things like healthcare executives being assassinated in the streets of Manhattan. >> Okay. Well, >> I think you'll see, political I think you'll see political figures assassinated like we saw a year ago tomorrow. >> Check that out.
(16:52) I think you'll see formerly safe areas of major, financial hubs like New York having people walking around stabbing tourists in, Times Square. >> I think you'll see a Marxist get elected mayor of New York City 25 years after 911. >> Right? So, you're seeing these are all symptoms.
(17:15) It's one of these I have a friend of mine who said humans, it's interesting because humans can feel acceleration, but they can't feel speed. Right? you're in fast car, you're in a plane, you're taking off, you feel it. But once you're cruising at 450 miles an hour in a plane, take your seatelt off, walk around. And so I think we're cruising at 450 mph already.
(17:32) And so sometimes it's hard to feel the change of speed. So in terms of policy choices, I think it's going to be very inflationary. That's it's that's I think in the cake. Absolutely. And I think it could be very high inflation. I think they'll lie about the inflation. I mean, we just had in the New York Times yesterday that the, the US government lied about the levels of asbestous and chemicals in the air after 9/11.
(18:01) >> told people it was safe, it wasn't. >>, if they can lie to you about, hey, this might give you cancer 10 years down the road, but stay in Manhattan. Don't leave. Like the line telling you inflation's four instead of eight. Like that's a that's an easy layup. >> Oh, yeah.
(18:16) so I think they'll that but then it gets to policy choices which is part of what has happened in policy in this country has been immigration has not necessarily been about offering opening up the doors to welcome everybody. Yes, that's what it did. But what it was really in no small part about was if we do that then we can cap wages for the working and middle class.
(18:44) and that way we bolster corporate profit margins to all-time record-wise. Mhm. [clears throat] >> And so this isn't a political statement, but when I look at what the Trump administration has done in both times to restrict immigration, and if we go back to Clinton in the 90s, it sounds like Clinton's policies about immigration is what Trump's policies are today.
(19:10) then in theory if you con constrain immigration greatly in this country while you inflate then wage inflation is going to go up a lot >> and profit margins are going to go down profit dollars will go up and that's how you narrow the two legs of the K in theory in theory that's a more optimistic view of what how it can go in my opinion.
(19:44) That's why I say some of it depends on policy choices. Now we start layering in robots, we start laying in AI, it may not be enough. That's where it starts to get tricky. >> looking. >> So I can, I can build, you tell me what picture you want me to build for the for the for the paradigm e and I can make it as happy or as ugly as you wanted to.
(20:10) I can make us all holding hands and singing kumbaya by the end of this show or I can make us all be basically putting away all sharp and pointy things before the end of the show depending on [laughter] how we want to go. But that's why I say it depends on policy choices to a great extent. >> Okay.
(20:27) So for a couple of things, one, you gentlemen will have opportunity whenever you want to come back on this platform along the way and call audles based upon what you're seeing out there. But what's interesting is one of the comments I got on Twitter when folks knew you were coming on today, they said, it seems like Luke is generally more bearish and Darius is generally more bullish.
(20:47) and it's interesting that might be true about the markets in the near to midterm. I don't know. We can get into that, but right now it seems like Darius's paradigm E is a lot more grim than potentially yours, Luke, because you sort of feel like you can paint all sorts of different pictures. Is that an accurate statement, do you gentlemen think? >> I don't know. I mean, it depends.
(21:11) I mean, it really does depend. like this can go a lot of different ways. >> I'll tell you some ways it is historically gone. [laughter] You're not going to love it. So this I hope put this chart on the screen now. This chart shows this is from Dr. Peter Turchin and his colleagues at the Complexity Science Hub.
(21:32) They've been doing a lot of research on kind of you know what makes societies build up and break down. and they've been studying this for I want to say the better part of two decades now with a ton of historical data that we've tapped into in our research and just trying to summarize you know when economies have a lot of our what we I've termed the reverse Robin Hood effect they call it the wealth pump at the complexity science hub which is basically using the government to extract wealth from
(21:57) the working class you these outcomes tend to be very poor right this is a historical probability select outcomes they had gotten up to a hundred societies kind tagged with a database at the time. This was back in 2023 when this data came out.
(22:13) I think they're up to like 300 societies now across several millennia. And so of the first 100 societies, these are obviously the societies with the best data., the Roman Republic, French Republic, early, antebellum, US Republic, etc. And the base rates are not great. And obviously, if you're forecast, you got to start with the base rate and maneuver from there if you have data to tell you that the base rate is going to be wrong.
(22:35) 17% of societies that have our reverse Robin Hood, K-shaped type dynamics end with systemic violence or they feature systemic violence against elites. 20% of those societies have recurrent civil wars lasting for about a hundred years or more. 40% of those societies feature assassination of rulers. 50% of those societies see substantial population decline.
(22:56) 60% of those societies see state collapse via conquest or disintegration into multiple states which in my opinion I think is a reasonably high probability outcome if Florida and Texas decide they don't want to be in a union with New York and California anymore 67% of these societies decide feature systemic downward mobility of elites and 75% 75 of the hundred again this is the hundred best in terms of the data that we had that they had to collect 75% of society's future revolution civil war or
(23:25) So this is the base rate. And so when we get paradigm E, we're not sort of hing our finger in there and coming up with these types of conclusions, we're essentially saying we are on track for one or more of these outcomes. And in order to get off track for one or more of these outcomes, we need to see a sign substantial reversing of the reverse Robin Hood effect.
(23:44) And in our opinion, we think that not only is the stantial reversing of the reverse Robin Hood effect not happening, the exact opposite is happening. The reverse Robin Hood effect is accelerating to new all-time highs. if you look at the chart of labor's share of national income plunging to new all-time lows of 50.3%.
(24:00) Again, when we created our jobless recovery theme in October of last year, we forecasted the blue line would fall off the bottom of the page and that the red line would jump off the top of the page. Well, every time we update the chart, the blue line goes further down the bottom of the page.
(24:13) The red line goes red line is capital share of national income. These will be corporate profits. That continues to jump off the top end of the page. And so, this right here is a perfect snapshot. Let me get rid of my doodling so people can see this better. This chart right here, the spread between the blue line and the red line, which are obviously accelerating.
(24:28) In our opinion, we think AI is going to accelerate the demise of the W2 workers. >> I was just going to ask you about the impact of AI on this. Do you think it's going to widen it even further? >> It's going to widen it even further. It's going to widen even further. Concentrate wealth in fewer and fewer hands, and ultimately concentrate, the power in fewer and fewer hands.
(24:49) And so ultimately, not only are we not on track to, in this reverse Robin Hood effect K-shaped policy dynamic, we're actually accelerating it maybe through no fault of the of their own via policy makers, although I would take offense to that statement. but, the actual technological development in the economy is contributing to it as well.
(25:07) And this is something that you know when we when we anchor on these big themes like Peter Turchin's elite over production framework which is in our opinion the kind of the core driver of this reverse Robin Hood dynamic. You have Ray Dalio's big forces framework. You have the disintegrating geopolitical war order that's coinciding with our disintegrating domestic political order and then obviously Neil Howe's fourth turning cyclical framework.
(25:27) You put those three frameworks together in our opinion it's hard to not wind up in paradigm. Paradigm E is the overwhelming high probability outcome. Particularly if we if Luke is correct and we are correct that paradigm D default via debasement, accelerated money printing and ultimately, more aggressive monetary and fiscal policy to you know, to warehouse all that Treasury bond risk.
(25:50) If that becomes the path of policy, then we're ultimately going to wind up in paradigm D because obviously inflation will exacerbate this, this angst, this anger that the game is rigged and there's no point in participating in the current setup. All right. Well, well, this got dark real fast here.
(26:07) [laughter] but it is interesting. so >> I'm still very bullish. [laughter] >> Well, we'll get to that in a moment. so, I've interviewed Peter Turchin, really fascinating fellow, and a couple things about that conversation stuck with me in an unsettling way. One was he said for all the countries that he tracks that he has the data for that he measures kind of your percentage of getting to some point of revolution he said the US was the highest on his list which kind of shocked me given where at least a lot
(26:40) of European countries are right now but anyways he seems to think that the risk here is pretty high and Darius you just gave a really good data driven reason of some of the things we are likely to experience unless there's a dramatic reversal al of that reverse Robin Hood effect which it does not seem to be in the cards anytime soon.
(27:01) But he also talked about there's three essential ingredients sort of for revolution and one of which is a surplus of elites >> and I think when we look around the western world right now we really have that in spades. I was actually just at a presentation last night by Jonathan Turley where he was basically talking about the American Revolution and then kind of comparing and contrasting to where we are today and a lot of the questions that came up there was about sort of the decline of society right now and certainly a lot of
(27:33) the issues of our education system and we've essentially overproduced a bunch of degreed credential people who can't get jobs or at least can't get on the on the lifestyle track that they want to get on. So, we seem to just have a breeding ground for a lot of the things that you just posted there that tend to happen in these type of fourth turnings.
(27:56) >> Oh, yeah. 100%, man. It's I mean, you see with the rise of popularity DSA, I mean, the Republican party has been split into two parties, MAGA and traditional conservatives, Democrats parties been split into two parties. You got your bulldog Democrats, and you're the rise of this DSA kind of populist leftwing.
(28:13) you know that's just that those are those are just manifestations of the fact that we have too many credentialed elites chasing too few seats. Peter Turchin's reverse musical chairs analogy that he talked about in ages of discord and then and end times perfect analogy. Imagine playing a game of musical chairs whereby instead of removing chairs you just keep adding people.
(28:32) >> Now imagine the amount of chaos that at some point that game will descend into as you have more and more people chasing fewer and fewer chairs. you ultimately have a lot more political instability. And ultimately what tends to happen with this elite overproduction phenomenon is the elites themselves start to weaponize the popular miseration, the miseration that we're highlighting with labor share of national income plunging to new all-time lows, being forced down by globalization, forced down by technology, forced down by regulation.
(28:59) the 1982 merger guidelines basically kickstarted this whole thing., this reverse Robin Hood effect dynamic is creating the popular miseration that the elites need to, weaponize this., you think about the Gracchi brothers in human history.
(29:14) that's essentially what you're seeing with the Mamdani or someone like that in terms of rising to power. So, I don't want to make this whole conversation about, what the endgame is, what the bottom of the ninth inning looks like because as again somewhere between we're somewhere between the third or fourth inning and the sixth or eighth inning right now.
(29:28) And so, I think it's important as investors that we play the game that's in front of us. So, if you don't mind, >> yeah, and that's where I was going to go with this because I if I remember back to what you were saying, Darius, when you said we might be in the third, bottom of the third or whatever, there still could be 10, 15 years of this ahead of us before we get to plan E.
(29:49) So, it's not necessarily like this is all just, the wheels are all coming off tomorrow on this. And Luke, I think even with your sixth inning analogy, doesn't necessarily mean we descend into the worst of everything tomorrow. >> Yeah. Oh, yeah. Yeah. to be to clarify. Yeah, I would tend to agree we're probably if E is the end then yeah then we're probably more like third fourth. Yeah.
(30:10) Then I was thinking more like in terms of a bond market crisis I'm saying sixth seventh eighth. So no I agree I don't Yeah there's a lot of game to be played between here and there on the on the on the paradigm E I think. >> Okay. Can I can I can I agree with that? >> I agree with Luke. If we are specifically saying that the kind of bottom of the ninth in this scenario from an investment standpoint setting aside paradigm E at the bottom of the ninth is bond market crisis, fiscal crisis, then I think we are much closer
(30:37) along. I would agree with Luke. We're probably somewhere between the seventh eighth and I think by the end of next year certainly not by the end of 2028 in our opinion we will have experienced that bond market crisis that ushers in paradigm D. So yeah, we're a lot closer in that in that regard.
(30:51) >> Okay, great. A couple of things there. So Darius, you're in paradigm C right now, which is run it hot. >> Paradigm D is screw it. We just got to print our way out of this. >> ballparkingish. You're thinking that transition from C to D is going to happen in about twoish years predicated by some bond market crisis.
(31:13) Did I catch that right? >> Yeah, correct. Yeah, we think that can happen by the end of next year at the earliest in terms of full-blown Feds doing yield curve control. It's pretty explicit what's happening here. I think that's probably the earliest we would see something like that. I think they have other levers they can pull, namely bank deregulation.
(31:30) They can relax the SLR more. They can, change the GSIB calculations or the liquidity stress test calculations to make treasuries favorable. You can take some pressure off the system right now in ways that kind of extend that runway between and kind of keep the paradigm C game going. But ultimately we think by the time you get a couple more years into the AI buildout in terms of the incremental taxation of global capital that represents relative to bonds which are very horribly mispriced. In fact if I can just go
(31:56) through a couple quick charts on that we run a very complicated model a series of complicated models to try to ascertain what the equilibrium level of the 10-year is on our on if you look at our yield curve model that's essentially saying that the fair value on the 10-year nominal treasury yus 5.2% 2%.
(32:14) if you're just taking the yield curve back to a pre GFC mean level, which we would argue is a, a bond bear would argue that's a generous destination., I would argue that's a mean a mean, mean destination. You compare this to the infl our inflation expectation model, the median or so the fair value for the 10 years is about 5.74%.
(32:34) Our term premium model, the year the fair value for the 10 year is 5.99%. our real yield model, the fair value for the 10 year 6.13%. And then our nominal GDP model, if you look at the spread between the 10-year and nominal GDP growth, the fair value on the 10-year is about 6.27%.
(32:51) And so when you take the mean of those five models, which are, the five different ways that, fixed income investors that we speak to across the global buy side, Treasury Secretary, Scott Bessent himself is a former client. Obviously, one of my former clients is a is a was on the short list for Fed chair.
(33:05) So, we, we have some very important bond fund clients in terms of who we communicate with, and this is how they think about pricing duration risk. And at least according to the mean of our five models, the fair value for the 10-year nominal treasury yield is 5.87%. And so Bessent's panicking at 4.7 something percent.
(33:23) You got to imagine that if the natural drift of financial markets which in our opinion will only accelerate in the coming years as AI as a hyperscalers increasingly shift to financing AI capex with debt and not equity andor free cash flow that's ultimately going to accelerate this process to repric in the 10 year towards its fair value.
(33:40) And so ultimately we think there's just going to be a line in the sand that Bessent is going to try to draw with the TGA. they'll try to draw that line in the sand incrementally with bank deregulation, but ultimately they're going to have to draw the line in the sand with the Fed's balance sheet and so that's where we think this is all headed and we think we'll be there in the earliest with yield curve control by the end of next year probably sometime in 2028 by the end of 2028 is when we'll see some very explicit form
(34:03) of yield curve control where they're targeting a level of interest rates. >> Okay, so let's dig into this and Luke I'll give you a chance to respond to that in just a second. but let's also make sure we talk about what this looks like for investors along the way, right? So, people may hear Darius, "Oh gosh, big bond reckoning coming maybe as early as the end of next year.
(34:28) Does that mean I just get out and go to safety and just bunker down and cash and gold or whatnot? Or, is there still a lot of room to run here with parts of the market on the way there?" And Luke, you've talked about, this being largely an inflationary path and a lot of times in inflation, yeah, you want to own some gold and stuff like that, but you also oftentimes want to own stocks as well.
(34:48) So anyways, let me let you first respond to what Darius said about just sort of the timing and the extent of the potential bond reckoning that he sees coming up. >> Yeah, I think that the timing and the reckoning the timing of the reckoning and then the levels he highlighted, I think make perfect sense.
(35:06) You've got the fiscal side that we've discussed. You've got the AI competition. I mean they it's extremes inform the means and so as an example hyperscalers are said they can afford 8%. Best and can't means the 10 year is going to want to go towards 8%. and at what level towards that number do we have a problem? I don't know but it's probably before we get to 8%.
(35:34) The other thing I think it's really underappreciated in bond markets is historically these levels at the long end would have had life insurers and pensions buying substantial portions of that issuance and they're not. >> And I think part of the reason they're not is because of what's essentially a Mexican standoff happening as it relates to private credit which is life insurers and pensions have bought a lot of private credit.
(36:03) >> Mhm. and the problem is they are now holding them on the books at marks that don't reflect reality. Number one. And number two, if they were to sell, and as long as they're holding it to maturity, that's okay, right? >> But if they need to sell private credit to buy treasuries, they have to take the they have to market to market, >> right? They have to take >> and even if they don't sell, if their competitor sells it all of a sudden, >> anybody sells, you're gonna start seeing that in some way, shape, or form.
(36:29) And when you look at the numbers, and Nick Neoth here has done really good work on this, helped by Tom Gober, a former life insurance auditor and fraud investigator, I believe, with the FBI. When you look at the setup, and Neoth has done really good work on this in Substack, I'd encourage people to take a look at his work on that.
(36:54) the gist of it is that the life insurance industry cannot sell private credit to buy treasuries basically at any level. >> Mhm. of Treasury yield because the marks they would ostensibly have to take would be not just problematic. But Neath has pointed out that of the reinsurance that the $10 trillion life insurance asset 10 trillion asset life insurance industry has 1.
(37:20) 54 trillion of it is affiliated reinsurance. In other words, it is not arms length. It's I'm not going to use the f-word, but it's essentially it's a imagine me writing you an insurance policy and then reinsuring it with my wife, selling, so now it's off my books, but it's on my wife's it's on my wife's.
(37:42) I don't have a problem. I am reinsured by Mrs. FFTT LLC. >> Well, there's Right. So, that's what's happening in the life. And so when you back this up, I think it's really important as it relates to treasuries and what Darius highlighted because what it means is that one of the natural buyers in size for duration >> there's no level at which they're a buyer because they're up to their chest in private credit that they cannot sell without taking a catastrophic mark.
(38:15) And where when I say catastrophic I'm not being hyperbolic. Neoth points out that 1.54 trillion in affiliated insurance compares to like 647 billion dollars in total reserves in the industry. In other words, if the marks are bad enough, they're out of reserves. And if they're out of reserves, guess what they're going to sell to fill in the hole? >> Treasuries and mortgage backs >> to raise capital.
(38:42) So there's this where how this impacts the treasury market I think is the convexity of the move I think might end up being far greater than we think. In other words, I totally agree with Darius's levels. When you take a potential big buyer of duration and take them out where there's just not a price level where they can buy because of what they would have to do.
(39:06) you could see that five, 48, 52, 58, 62 happen fairly quickly. I think you will get regulatory I think you're going to get regulatory relief. Maybe even you could see, some sort of Fed repo facility for private credit or for stuff for the life insurance industry. you could see some sort of regulatory relief where if the life insurance industry buys the long end, they don't have they can not have to count it against their capital.
(39:39) so they don't have to sell the private credit. That's just QE through the life insurance industry. That and again that's fine. I know what to do with that. Buy gold, buy stocks, sell dollars. That's pretty straightforward. So that's that is I think another issue to layer on to sort of story-wise to those levels and timeline that Darius highlighted.
(40:04) I it tend to agree it makes a ton of sense to me when I look at it from sort of a narrative sort of qualitative basis as opposed to how he's looked at it quantitative. They're matching up relatively closely. they're headed in the same direction and that's usually a pretty good sign when you're kind of approaching an issue from two different directions and coming to kind of the same conclusion.
(40:26) >> So I tend to agree. >> Okay. So I've got some followup questions, but Darius, your eyes got his biggest dinner plates there a couple of times. So I want to give you a chance to chime in real quick. Darius, in your answer, and then Luke, you might want to apply on this, too. So let's say you're right.
(40:40) Let's say the 10-year gets to 5.87. What does that do to the economy? Can the economy handle yields that high? But anyways, feel free to initially start with whatever made your eyes pop so large, Darius. >> Oh, my eyes pop because Luke is spot on when he's saying you they have to bring the qualitative with the you have to combine the qualitative with the quantitative.
(41:00) And this is super forecasting 101. the you start with the base rate that's the macro that's the data and then you use the qualitative the data points which may be hard to model but you actually need them to confirm reality and adjust away from the base rate this is how all great forecasters super forecasters forecast so I'm a huge fan of your work Luke I've always been a fan of your work because you do you understand the value of piecing together the puzzle the doing the hard stuff it's I
(41:25) mean it's not easy but it's relatively easy to build these models if you have the appropriate training right it's relative relatively hard to piece together all these different puzzles from different news sources, different data sources. So, u, I commend you on your analysis, my friend. >> All right.
(41:42) what to my earlier point, let's say you guys are right and we do have 10-year yields up near 6%. Can the modern economy with all its leverage, can it function still at that level? >> It depends, right? It where's the dollar?, if DXY is at, I don't know. I'm gonna pick a number here, >> 85 or 82 instead of 98, then I think it probably in 5.
(42:11) 87 or six on the 10-year, I think it can kind of work. If DXY is at 98 and we're at 5.87 or 95 and we're at 5.87 eight, seven or six on the 10 year then no I don't think the economy I think that's going to be very problematic and that will start manifesting in some of these debt spiral dynamics where we'll have receipts fall nominally interest rates rise deficits rise deficit rise rates rise rates rise receipts fall you get into this debt death spiral in the US and across the west by the way so to me the answer is always when you look at
(42:54) what level can it can the economy sustain the dollar I think is an important question not just domestically but arguably internationally as well when you look at I mean think about what Secretary Bessent has spent the last month trying to do what has he been trying to do at the end of the day weaken the dollar against the yen.
(43:16) Why >> to get yields down at the long end or and you can I can make there's a reflexivity to that statement and it works in both directions actually. In other words, you get rates down at the long end, get the dollar down, get the dollar down, get rates down at the long end.
(43:30) It's they're it's true in both directions. the issue is that foreigners have borrowed 13 to 14 trillion in dollar denominated debt and they own 22 24 trillion net of dollar denominated assets. And so to the extent rates go up and the dollar stays here, they're going to sell dollar assets in order to raise dollars to defend their currencies, etc.
(44:00) If the dollar falls, it takes the pressure off that dynamic. It creates balance sheet. It accelerates global growth, because there's so much borrowing in dollars. >> You weaken the dollar and global growth and glo global balance sheet both grow. And so that's the trade-off.
(44:20) Now, it's tricky because if you weaken the dollar too much too fast, then inflation expectations rise, now you're going to have increases in inflation expectations. you're going to have increases in term premiums and again so you're they are managing a very tricky situation because they need the dollar weaker but they can't it has to weaken in an orderly basis or else it can also create that same debt spiral dynamic >> right and I get those I get those sort of issues between the rest of the world and the US I'm just thinking
(44:50) internally in the US one we do have this debt maturity wall re rewaiting that is going on or rerating that is going on amongst corporate America and if they're having to you know if debt's expiring that's on their books at like 3 4% and then they're getting it having to refinance at like I don't know if the 10-year is at six practically they're couple points north of that generally to me that seems like a really big deal and even just I mean we kind of have a
(45:24) broken housing market right now But, mortgage rates are at eight or nine. you start really having a pretty big negative wealth effect across most American households. So, I just have a hard time thinking we can kind of just sort of easily shrug off 10-year rates at the at the levels that you gentlemen think they could be at in a year, year and a half's time.
(45:47) so anyways, Darius, I'll let you chime in on this. >> Yeah. No, I so in our opinion, we think not only is the economy not only is the economy capable of handling it, in our opinion that move to the equilibrium level of interest rates that's implied by our model is only going to happen because the economy can handle it.
(46:08) if you go to slide 29 in our in our deck, we show >> and is that because they'll be running it hot enough to support that? >> Yeah, they're running it hot and we have this thing called AI that's orthogonal that it's also incre adding a lot of growth., if you look at the Treasury's numbers, it's about a third of GDP growth over the past couple of years.
(46:24) Probably on its way to about, 40 maybe even on the high end, 50% of GDP growth. And don't forget, we're in a nominally hot economy right now that's growing what 8% on a on a nominal GDP XG government and exports basis., we've been basically growing at or above trend for most quarters for the past few years in this statistic.
(46:43) Again, 8% compares to a pre-COVID trend to 4%. We are currently growing double the normal rate of nominal growth in the most recent quarter and it's been above trend every quarter since we authored our paradigm C run it hot theme in April of last year. And so this is an economy that is being buoyed by fiscal stimulus.
(47:00) It's being buoyed by deregulation. It's being buoyed by an orthogonal, aggregate demand shock that is, a massive capital investment cycle. And so the question is, can the economy sustain higher interest rates? We would argue the economy is the reason for the higher interest rates.
(47:15) if you go back to our slide 29 here when we authored our resilient US economy theme in the summer of 2022 when everybody was freaking out about recession we said hey look one of the things that I think is mis most misunderstood right now in this fiscal dominance regime everyone's focused on the monetary dominance regime especially in 2022 they thought rates would interest rate increases would lead us to a recession.
(47:37) We were of the view that no this is actually going to make the economy more resilient and here's why. If you look at the amount of cash that's on household sector balance sheets when you combine checkable deposits and currency and money market fund assets, we have more than tripled to 11 trillion from $3.
(47:52) 5 trillion just prior to co Let me say that again. We've more than tripled the amount of cash on household sector balance sheets in the 70% of US GDP economy that is consumption to 11 trillion. So higher interest rates is a is a is a is a form of stimulus income support to the ag consumer sector in ways that we have not seen ever in the history of this time series.
(48:13) >> That is true. Let me just ask you to square this with a couple of things. net national savings I believe is down near almost zero at this point in time. so is this again back to the K-shaped economy here, which is the rich people who own these financial assets, it is a big stimulus to them, but the vast majority of households are not participating in this >> 100%.
(48:40) This is one of the most important charts in all of macro. I've been saying this for years. If you look at the approximate next month marketable Treasury debt supply as a percent of global savings or US savings, we're in no man's land. We're 30 39% of global savings comparatively to a long run mean of 23%. We're 235% of US savings comparatively to a long run mean of 124%.
(49:00) And the spread between the current values and the long run means of these time series is money that is coming from our net international investment surplus economies to plug our current account deficit. That money used to go to, interest rate sensitive sectors like housing and autos. That money used to go to small business America, small, small business USA.
(49:19) It used to go to low to median income households in the form of consumer loans and mortgages. It's now going to Uncle Sam and the rich people who finance Uncle Sam in the bond market. That's it. All that what I just shaded in. The yellow that I'm shading in is diverted money that used to go to the bottom of the K-shaped US economy and is now going increasingly to the top of the K-shaped US economy.
(49:40) And the reason for that is obviously global savings are not f they're not infinite., there's not an infinite amount of global savings we can, tax at any given time to, create these, create these economic outcomes. In fact, if you look at global savings at $31 trillion in the most recent year, the trailing 10-year growth rate of global savings for the past decade has been troughing at all-time lows.
(50:00) we're currently at plus 55% on a trailing 10-year B growth rate basis. That's compares to a long run trailing 10-year growth rate of long run mean trailing 10-year growth rate of 89%. And so we've been basically at all-time lows in the growth rate of global savings for a decade now. At the same time, we're accelerating the demand for global capital.
(50:19) And so accelerating demand for global capital in the context of that is you I wouldn't say scary because there's things you can kind of do to offset this in certain respects, but at the end of the day, and this kind of brings the Fed back into this discussion, at the end of the day, what needs to happen is interest rates need to gravitate higher to balance marginal demand for capital with marginal supply of capital.
(50:39) That's it. That's all that's happening. And so we run a model here that tries to ascertain what r-star is, which is that equilibrium level of interest rate, real interest rate that sets marginal supply of capital equal to marginal demand of capital. And so over the past kind of six, nine months, the upper bound of our estimate range has risen by about 75 basis points.
(50:59) The lower bound of our estimate range has risen by about 100 basis points. Now the effective funds rate when you deflate it by 5y5y inflation swap pricing is below the lower bound of the market's estimate of new of r-star. and so what does that mean? Well now we have an accommodated Fed modestly accommodated Fed.
(51:16) historically when you have a modestly accommodated Fed or an accommodated Fed at all you either have an inflation problem accelerating inflation or both. And so in our opinion this bringing the Fed back into this the Fed's got a really interesting choice to make here. Does it hike interest rates in a way that makes Bessent's job that much harder in terms of, capitalizing the capitalizing Uncle Sam? Does it hike interest rates to remove this accommodation and kind of arrest the arrest the decline in bond prices,
(51:43) arrest the increase in bond yields, or does the Fed sit idly by and let itself get more and more accommodative over time in ways that threaten the bond market will eventually force the Fed to enact some form of yield curve control? I don't know the answer to that because we don't really truly know what Kevin Warsh's reaction function is, nor do we really know how the persuasive his reaction function will be with his colleagues at the FOMC.
(52:05) But in our opinion, we think this is going to wind up in the same place, which is they're going to wind up monetizing the debt, in ways that are, at first clever, but increasingly they won't be so clever because the numbers will just be that much big be that too big. >> All right, I'm going to come to you in just one quick sec, Luke, to get your thoughts on that.
(52:24) Darius, last time I chatted with you, month, month and a half ago, your default outlook was that the Fed was probably going to do a flex, and, hike quarter point, maybe even twice, to kind of just sort of back the bond market off a bit, but then to set itself up to be more accommodative going into 2027.
(52:47) Is that still your default outlook? >> Yeah, 100%. I mean, I think they should they should hike here. and here's why. If you look, if you study the move in bond yields, so bond yields bottomed, the 10-year nominal treasury bottomed in late February on the February 27th. Since then, it's backed up 85 basis points.
(53:04) 73% of that or 86% of the move has come from the real rate and 21 and 12% has come from the inflation higher inflation expectations. If you break down the move in real rate, only 18 of it has come from the real term premium, which means 55 basis points of that 70 of that 85 basis point increase has come from the real expected real rate increasing.
(53:23) So the expected path of the policy and then the if you break down the 12 basis points of inflation expectation increase it's basically 11 to minus one split between inflation expectations and the inflation risk premium. So what we can surmise by this is that by far by far the biggest part of the move in the interest rate and the long bond move have come from the real rate pricing.
(53:47) And so what this means is that this competition for capital is driving up the equilibrium price of interest rates on both a nominal and real basis that sets marginal supply equal to marginal demand. If the Fed does not respond to that and allows its policy to get increasingly accommodative in the context of this back up in r-star, then ultimately the Fed will be contributing to the selloff in bond prices.
(54:09) And so at the end of the day, I don't really know how the Fed doesn't get out of this without hiking interest rates unless it's willing to pull forward yield curve control into Q4 of 2026, which in my which in my opinion would be a mistake because trying to stay in paradigm C for as long as possible is the best policy choice.
(54:27) pulling forward paradigm B, which naturally pulls forward paradigm E as a result of all the inflation it's likely to produce regardless if they report it or not, which I agree with Luke. They're not going to report it appropriately. So, but people aren't stupid. They're going to they can feel college tuition and medical bills and groceries and gas. They're not idiots.
(54:42) So, and so in my opinion, I think they're going to have to hike here, if only just to kind of keep the paradigm C game going, before they have to be forced into paradigm D. All right, Luke responded any way you like, but in general, Darius thinks in the short term Fed may hike here.
(54:59) In the longer term though, if I understand you correctly, Darius, he doesn't see how the Fed doesn't step in and has to start monetizing the debt. >> They will. They will. That's a guarantee. >> Yeah. Yeah, I think it the chart highlights something we've been highlighting, which is I think they're going to lose the long end no matter what they do because really if you raise rates now, especially since we're now three years into shifting issuance to the front end, for the reasons that Darius highlighted, that savings
(55:26) that's there, you're basically giving a pay raise to 65 million boomers because at the end of the day, those assets are owned by wealthy boomers, boomers overall. And something I don't think a lot of Wall Street models are factoring in is the marginal propensity to consume. Historically, senior citizens had a very low marginal propensity to consume.
(55:49) The baby boomers have kind of broken the model on that. They are a very, >> shall I say, indulgent self-indulgent generation. >> That's putting it nicely. I could be meaner. >> What are you talking about? The generation is all about themselves. What are you talking about? >> They are self-indulgent. And so if you raise rates, you're going to be giving the most self-indulgent generation in American history in at least a hundred years, the wealthiest generation in American in world history, free money, and they have a hard stop at death, right? So they have they are
(56:18) self-indulgent and they know they're going to die probably most of them in the next 10 years. And so you raise rates, it's going to, I think, accelerate growth. We know mathematically it's going to accelerate the deficit, which is going to then accelerate inflation on a lag. and I think it will the growth in inflation expectations the long end I think rises on that and I think the dollar probably strengthens on a US hike a Fed hike which then also increases foreign selling of the long-term long end of the curve as foreigners
(56:52) again have to sell what they can not what they want to raise dollars to defend their currency as we just saw in the case of Japan. so you raise rates, long end's going higher. They cut rates, long end's probably going higher as well, at least initially. because you are obviously cutting rates into an 8% nominal growing economy, >> not serious about curtaining inflation.
(57:21) Yeah. >> Right. And I think if you don't cut, you're probably going to lose it. So I think it feeds back into the long ends going higher no matter what they do. And that's just sort of part and parcel to being where they are on a debt basis and then where with entitlements coming off balance sheet on balance sheet at the pace they are they don't really have a choice to that.
(57:41) I think the only choice they face is do they want to blow up the US fiscal situation faster or slower. And the challenge is the Fed is not supposed to be thinking about the US fiscal situation at all. But >> a that's I think a lie. But B, I think it's the most important thing, which is to say if he raises rates, you're going to be talking about curtailing the interest rate sensitive stuff while increasing the deficit.
(58:08) So your deficit's going to increase the receipts down, deficit up, the fiscal situation implodes faster. >> It's going to force them into the sort of the yield curve control necessity faster. If you cut rates, you actually are going to you we're kind of back to the COVID model that I example I gave 2021 where you shouldn't be cutting rates in the same way that Powell shouldn't have been cutting rates with home prices doing what they were doing, etc., etc.
(58:36) right? >> But from a fiscal perspective, we went from 120% true interest expense to receipts to 85% in like 12 or 14 months. The trade-off, of course, was 8 to 12% inflation, midterm losses for Biden around inflation as a key electoral issue, they're jammed. Like there's no to me, and that's part of why when I say, hey, I think we're in the sixth, seventh, eth inning as it relates to the debt side is >> doesn't matter what they do.
(59:08) Like and I step one needs if they want if the Fed wants to be relevant again, they need to devalue the debt to GDP like yesterday. >> which is devalue the dollar big, right? Write up gold, buy down the long end of the curve., >> I think a perfect example again, the extremes inform the means. The easiest way to fix to lower the deficit politically would be to cut interest rates to zero and shift 40 trillion of shift all have Bessent shift the entire $40 trillion debt into threemonth T bills yielding zero
(59:44) interest expense would go to basically zero on 40 trillion in debt. The deficit would come down by almost a trillion and a half proforma of interest. >> Yeah. And now all of a sudden instead of a $2 trillion deficit at $2.1 trillion deficit, we're running a $600 billion deficit. Voila.
(1:00:04) I just I just solved his three arrows for him. Now the trade-off, of course, is inflation's going to go nuts, >> which is just going to help receipts. But that's the extreme case of what they need to do. >> Can I can I give you kind of a counter to that? So if the Fed does that, yes, inflation goes bonkers because you're monetizing the debt.
(1:00:22) You're increasing the money supply. What about the potential for stable coins to come into the mix here and basically be a brand new source of demand for treasuries that the Treasury can sell into? Basically, they can issue a bunch of debt at the short term to then buy off the long-term treasuries and essentially just do what you just said there, but without increasing the money supply.
(1:00:51) >> I think it's just the same thing. It's just it's just because when you think about it, where are you going to pull when you think about where the right so stable coins are going to be backed by T bills. >> Mhm. >> In theory, the if you are a domestic corporate treasurer, you're sitting in T bills today, right? With your cash, just as an example, you're making whatever you're making three and a half 3.75%.
(1:01:20) T bills yield zero by law or excuse me, stable coins yield. >> Yeah, I don't think domestic providers are going to be super interested in stable coins, but the rest of the world could be very interested in them. >> Yeah, there too. May maybe, maybe. But there's this other side of the balance sheet that I've seen this argument and that's they're ignoring the other side of the balance sheet to this, which is let's again extremes inform the means.
(1:01:48) Let's say we go to the Euro dollar system and say, "Hey, every Euro dollar deposit out there now has to be fully backed by a US bill and if you move it into a dollar stable coin, you will in the next crisis have Treasury back or Fed backing. And if you don't, you won't. >> Mhm. you were immediately going to create a run out of dollars into stable coins in primarily Europe, Asia.
(1:02:18) >> Great dollar strengthens. Demand for T bills. Guess what happens? Those people own $22 trillion net of US dollar denominated assets, including $9.4 trillion in treasuries and $13 trillion of stocks. And to the extent you have just pulled dollars out of their system into dollar stable coins for T bills, you will force them to sell treasuries and stocks until their hands bleed.
(1:02:51) When they do that, when stocks crash as a result of that, which they will, >> you are by a dollar shortage in Europe and in Asia, >> stocks will crash in the US and around the world. And when that happens within a couple of months, the US deficit is going to increase by hundreds of billions of dollars. Consider that in 2022 and 2023 the US deficit increased by450 to500 billion at full employment due to nonwith a decline in nonwithheld receipts.
(1:03:24) That non-withheld receipts that's stock gains that's stock options and deferred ex >> comp. And so within 9 to 12 months at the latest you with stocks falling as a result of that stable coin gambit you are going to have the stock market crash you are going to have non-withhold receipts plummet and you're probably going to end up with at least as big a deficit if not bigger.
(1:03:49) So it maybe it buys you a few months at most at most. And that assumes that you can come up with enough buyers, right? Like Africa, sure. Could they buy someone? It's a couple hundred billion dollars, maybe. >> Yeah. [laughter] okay. I totally get that risk. And maybe this is a naive question, but just think about the rest of the world.
(1:04:09) Not countries per se as sovereign countries, but just the people of the rest of the world, right? You go to almost any country and say, "What currency would you prefer to earn and transact and save in?" They'd say dollars. and all of a sudden stable coins give them a means to do so. So, could the potential demand just from the billions of people in the rest of the world who finally suddenly get access to stable coins be a positive cushioning factor here or is that just too nice? >> It depends because what do all those people actually really want? They don't
(1:04:44) want dollars. They want a higher standard of living, right? They don't >> they want >> Yeah. But they were like a currency that's not going to have in >> Yeah. But they don't have a lot of savings, right? They don't that there's not a lot of savings in Africa. There's not a lot of savings in India and grow, right? There's, the Indians save in gold anyway, but that's neither here nor there.
(1:05:03) they want air conditioning. They want electronics. They want cars. They want a coffee maker. They want all of the things that we have. Where's all that stuff made >> in their country or in Asia >> or in China? >> Yeah. >> Right. So that to me is another side of it where it's yes, to the extent they have savings, sure, they'd rather save in dollars probably until the Chinese show up, who oh by the way are probably already their biggest trading partner >> and are investing in infrastructure all over their country., pick a
(1:05:37) country. The Chinese are bigger investors in their country than the Americans are almost without fail. And the Chinese go, hey, why use dollars? Use yuan >> backed by gold. And so now you can have a zero. Now anywhere else in the world that's not America, throughout Asia, throughout India, if you can have dollar or you can have gold, what are you going to take? >> Okay.
(1:06:05) And I'm curious, what probability do you place on a goldback one alternative? Oh, what probability >> extremely high? >> It's already it's already exists. >> It's already it's already exists basically. >> Yeah, it's already there. So to me the dynamic is not so much gold or dollar. The dynamic is who makes the air conditioning unit for cheap, who might, right? You can have a scooter, an electric scooter that drives you a 100 kilometers, which is what is used throughout most of Asia.
(1:06:35) >> Mhm. >> And it's $400, high quality charges for, in China it charges for one rem. And oh, by the way, they also make the solar panels, they also make the, the charging equipment, etc. So to me the question is not do people want dollars or do they not want dollars.
(1:06:55) The end of the day the dollar is just a vehicle to get the stuff that's made in China. >> Right. Okay. >> And so that's the counter that's the right Larry Summers came out and said listen when the an emerging market governor said to me or emerging market official said to me when the Americans come I get a lecture. When the Chinese come I get an airport.
(1:07:12) [laughter] Right? That's the former Treasury Secretary of the United States. Like, yes, if they're going to hold savings, they'll probably hold it in dollars until the Chinese go up and say, show up with, hey, what do the Americans give you for your dollars? And it's like, well, I can't get certain semiconductors anymore, and I can't get Iranian oil anymore.
(1:07:32) And because those have all been sanctioned, and I can't get that because if I do that, then the Americans will sanction that. And they just grab this from that people, and my governor and the Chinese show up and go, you know what? We don't care what your internal politics are. Take this yuan stable coin.
(1:07:46) You can exchange it for gold in Hong Kong, Dubai, London, Shanghai, Singapore, and in the Oh, by the way, everything the Americans sell you, we make. It's all our stuff. And that's the dynamic I think that the stable coin gambit until we have an industrial base doesn't really matter. I don't I think it'll help on the margin.
(1:08:04) But in terms of some of the things that Bessent has laid out of, hey, three trillion by X day, I think it's a pipe dream. >> Okay. Can I can I chime in on this because this is Thank you, Luke. That was a master class, man. I've been thinking about this for months >> and, nerds like us, we tend to go to bed thinking about stuff like this.
(1:08:24) Wake up thinking about stuff like this. And I haven't I normally I wake up in the middle of night, I start typing on my phone notes and stuff. Nothing. I have not gotten to a point a place where this actually makes any economic sense. I think it's just a narrative in the market. And here's why. the stable coins can't possibly solve the problem.
(1:08:44) And there's two reasons why it can't possibly solve the problem. The reason number one is where's the money going to come from? Luke, I think you alluded to that in your statement. If we show on chart on slide 114, we just show kind of the main cohorts of foreign treasury securities right now. Right now, it's, foreigners are about 30% of the market.
(1:09:00) 12% of that is the official sector. The biggest owners right now are the Euro zone in aggregate about 6% total. Japan at 4% the UK at 3% China's low and declining at 2%. All of these economies, their share of the marketable treasury securities market peaked years ago, decades ago in certain places in Japan and China's case.
(1:09:21) And so you have to assume that the advent of stable coins is the solution to other countries wanting our debt. But that's clearly not the case. We can already see this., you brought up the point that, countries in Africa that may, favor stable coins in Latin America, places where we've seen a lot of currency volatility, a lot of political volatility historically, may view stable coins as a, kind of a welcome, vehicle to park their savings in the context of the domestic banking system, etc. But
(1:09:48) the reality is do they have enough money? This chart shows all the major net international investment surplus economies. I think we have like 1 through 10 here charted against the US as an international investment deficit and the reality is all these countries are already meaningful participants in the treasury market and at decreasing rates and so you would have to find an alternate massive source of net international investment surplus to tap into in order for this intractable
(1:10:14) problem to go away and oh by the way even if you did that you would have to offer them high enough interest rates to entice them into taking that taking that currency risk. And the problem with offering high enough interest rates is that you're probably going to strengthen the dollar in that scenario.
(1:10:30) Our model shows that dollar is highly inversely correlated to global liquidity. It's positively correlated to currency volatility which is inversely correlated to global liquidity. It's positively correlated to bond market volatility and bond and interest rates because obviously anything that makes liquidity go down is going to make bond prices go down and interest rates go up and bond volatility go up.
(1:10:49) So you can see a scenario whereby if they do the stable coin thing as effectively as they could possibly do it, i.e. some country from the universe lands on America, it lands on Earth and we have just a ton of international investment surplus to dig into to tap into and issue these stable coins into.
(1:11:06) They're probably going to do it in a way that inflates the value of the dollar and drains global liquidity that ultimately compounds this problem to begin with. So stable coins are not going to solve it from that perspective. And then you take a look at it from another perspective, okay, which is their goal for this whole program obviously is to take out I want to say the bill market is currently owned about 20 to 25% of foreign investors.
(1:11:27) that was that peaked at about 50% I want to say in 2011 to 2012. So their goal is obviously to financially oppress foreign investors into the bail market, offer them rates that are below market rates in a way that ultimately makes the dollar go down in value. Now that's wonderful to do. That's great to do.
(1:11:45) and there's obviously a lot of scope for them to do that. We're only at 32% of debt maturing in the next 12 months of the total., they could take that, back in the late 80s, it was up at, 50% almost at 50%. So, we know that's probably the plan.
(1:11:59) That's what they want to do. But in my opinion, I don't know that solves the problem. And here's why it probably doesn't solve the problem. Well, if you look at the, the ascent of gold in recent years, in terms of, FX reserves as a share of international FX reserves, the rise in gold has corresponded to the decline in dollar share, but more importantly, the decline in price in bonds.
(1:12:22) the moneyiness the inverse of liquidity the moneyiness of the Treasury bond is declining right now because investors around the world particularly the private non-bank sector which is where most of the treasury risk has been warehoused in recent years the private non-bank sector is choking on too much of this stuff and so if you're going to try to financially repress this segment of the market at a time where they're already saying the moneyiness of the of these longerterm securities is declining in ways that we can't
(1:12:49) trust to be there 30 years, 10 years from now, 20 years from now, 30 years from now. Therefore, we have to, basically exit this system and allocate an increasing share of our assets to gold. That tells you that you can't financially oppress your way out of this problem either. So you let's summarize stable coins if it's successful you're going to have to offer a market rate that actually makes people want to own the stable coins in a way that can inflate the value of the dollar push down liquidity push up
(1:13:16) currency and bond market volatility interest rates which obviously will compound the current problem or you can somehow find a way to financially repress them into stable coins in a way that further causes the dollar to decline in value and further makes international investors leerary about owning long-term US debt. at securities.
(1:13:33) I mean, if you look at the tick data, treasuries are, public sector securities are about 24% of the total, down from over 50% of the total., the foreigners when they allocate assets to the US to plug our current account deficit, they're increasingly going to the corporate bond market, the equity market.
(1:13:49) They're not, they're not capitalizing Uncle Sam, they're not capitalizing the mortgage market. And so ultimately, I don't see how stable coins can possibly be the solution to this problem. either rates are going to be too high and make the dollar go up and make the problem worse or rates are going to be too low which is what they I think they really want to do in terms of financially repressing us or financially repressing those foreigners in a way that ultimately make the bond prices go down faster. And so ultimately the only way
(1:14:11) out of this problem if you just look at this chart this is I said if I said the slide 119 was the most important chart or sorry my apologies slide 119 was the most important chart in macro certain if this is 1A 1B would be slide 97 here where we show the different cohorts the main cohorts of the buyers of marketable treasury securities.
(1:14:34) The blue line is the Fed here the dark blue line their share is now at 14%. It peaked out at 25% in 2021. the red line is US commercial banks. Their share is now 15%. It peaked out at 33% in 2003. The black line is the foreign central bank, the foreign official sector. Their share has peaked that peaked out at 40% in08.
(1:14:51) They're now down at 12% and still declining. And so the residual of all that is the global private non-bank sector. So investors, insurance funds, pension funds, folks who in theory buy could buy stable coins, their share has risen from 36% at the end of 2021 to 59% currently. So, they're backed up about 2,300 basis points.
(1:15:12) If you try to incrementally financially repress this setup, this setup whereby the so much of the marginal warehousing of risk in this market in the marketable treasury market is wound up on the hands of investors who are seeking Xanti units of return for the securities that they hold in their portfolio, which is very different than commercial banks who buy for regulatory reasons.
(1:15:36) The Fed obviously buys to implement monetary policy. Foreign central banks obviously buy to park their reserves and in quote unquote a safe deep liquid market., these are all non-economic agents. This light blue line, the private global private non-bank sector is the economic comportion of this of this of this market.
(1:15:52) And so if you try to financially repress the economic portion of this market, they're obviously going to sell. And if they continue to sell, it pushes down the value of the dollar. it pushes up at long-term bond yields because ultimately the moneyiness of those securities is declining alongside the value of the dollar. So I don't see how you can financially repress your way out of this problem over the long term which ultimately means we have to wind up with some form of yield curve control whereby the Fed is expanding the monetary base on a net basis to warehouse this risk.
(1:16:20) If they don't then this problem is only going to get bigger and bigger. the K-shaped economy is only going to get more and more K and ultimately you're only going to wind up with a bigger and bigger budget deficit in response to all this. >> Okay. So short term neither do you see stable coin as the silver bullet here and two >> the opposite neither do you believe that Wars is going to be able to stick to his hawkish mantra long term.
(1:16:44) I would I would say that if they were able to use stable coins domestically to the extent where you can sort of regulate them into the basically the velocity of the economy if you somehow are able to you know every time I am ordering a pizza there's a stable co I mean there's a stable coin that is tied to a tea bill kind of is but again here too the only way that works is if we go back to that implies rates are zero and all of the debt is at >> right >> is at the and That's wildly inflationary. That's like there you
(1:17:17) >> and you know that ultimately amounts to it., you're repressing your own populace, which is another word for a tax increase. >> Right. Right. Right. Yeah. Okay. So, gentlemen, it we're an hour and 20 in. I could talk for three hours, but I know that you guys have busy schedules and other demands on your time, so we're going to have to sort of start the process of landing the plane here.
(1:17:39) a question that I would like to get into with you guys. I just don't think we have enough time for it. I'll just mention it and if you've got a quick point on it, great. But Darius, you were talking about how much of the GDP growth that we're seeing ex the government and FX related issues or import export issues is really being driven by a lot of this capex spending, right? This hyper hyperscaler capex spending.
(1:18:12) what if anything about the AI boom keeps you guys up at night right now? So, in other words, Darius, if there was something that would compromise those AI capex flows, I imagine that would then change the picture pretty materially for you, do you guys worry much at all, if at all, that, AI capex spending may be getting way ahead of the productivity booms that we're expecting to get out of this? or do you think it's only net good? we could talk for another hour on that.
(1:18:43) So, I don't I don't want to really crack open that Pandora's box now. We could save it for later. But maybe if I let you guys just opine 30 seconds each on that. Darius, you're I can see your fured brow here. So, [laughter] >> Adam, my brow is always furled, man. [laughter] That's neither. I'll tell you. [laughter] Anyway, I would say whatever the opposite of losing sleep at night, I would be with respect to AI and AI investment. and here's why.
(1:19:16) this is our capital deepening model. Capital deepening is historically been a leading indicator of sustained uptrends in productivity. Capital deepening being [clears throat] that, this the ratio of capital increasing relative to the, kind of the human labor, kind of the stock of labor in the economy.
(1:19:33) And this capital deepening model which takes the sum of employ equipment R&D investment and software investment the sum of that as a ratio of employee compensation we've risen about 400 basis points or so over the past few years to an all-time high of 22.3%. You go back and you look at the last few times we have this data since I want to say the late 50s.
(1:19:55) the last three times we've seen this two of those three times we saw a sustained durable increase in the growth rate of productivity. if you look at the bottom panel here, it just shows a trailing 10-year growth rate of productivity. And, in the 1960s cycles, we saw a, just a sustained, compounding, elevated level of productivity growth.
(1:20:15) We saw the same dynamic happen in, the late 90s, early 2000s. We didn't see that in the late 70s. Obviously, we had wars, we had inflation, we had interest rates going to 20% on the short end. so I think that might have had an issue that might have caused some issues there. but by and large if you have a two out of three chance of seeing a sustained multi-year perhaps decadel long acceleration in productivity growth in our opinion we think that's a really really positive outcome for financial markets in the
(1:20:41) economy. just kind of quickly wrapping up on that you go back and you look at the most recent productivity cycle we saw 150 basis point trend acceleration that's you know that's highlighted down here in this in this table. And so what does that ultimately mean from the perspective of investors? Well, if you go from a 1 to 2% trend productivity economy, which is where we're currently at, to a 3 to 4% trend productivity economy, which is what we're expecting based on the movement in our capital deepening model, then you're
(1:21:06) talking about an 50% acceleration in the trend rate of NIPA corporate profits. A 50% acceleration in the trend rate of NIPA corporate profits is extremely positive because when you study the business cycle, you see that NIPA corporate profits are a long leading indicator for the broader corporate profit cycle, the broader financial market cycle.
(1:21:25) On the way down into recession, you see NIPA corporate profits. They tend to break down about 12 months ahead of a recession., followed by non-front productivity, our productivity, our profitability model. Then growth tends to break down what's called about two quarters out of recession alongside the stock market.
(1:21:39) And so, it's about, six months, six to nine months ahead of a downturn. Nipple corporate profits, are the leading indicator. They're a leading indicator on the upswing as well. They tend to break out durably above trend on a growth rate basis. Let's call it three to six months in a recovery as well.
(1:21:53) that's you know that's a long leading indicator relative to something like next to a month or trailing 12 to a month earnings in both cases whether you're going in a down a downturn or an upturn. So going back to this chart here if we have a s significant acceleration in the profitability of the economy that's being perpetuated by a sustained durable acceleration in productivity then you're talking about a massive increase in valuations for risk assets.
(1:22:19) You're talking about a massive in sorry massive increase in the in the price of appreciation of risk assets and you're also talking about a massive increase in valuations in the value in valuations of risk assets. So answering your question, Adam, one of the reasons I've been so bullish, you've been on your show for years now and then >> with the exception of the two months that ended in April of 2025, we've been bullish since January of 2023.
(1:22:40) Obviously, we got the crash of 2022, correct? As well. So, I think this analysis, if you just set aside everything Luke and I are talking about the inevitability of paradigm D, default at the basement where we started this conversation, that's bullish obviously. But this sort of productivity, this is an orthogonal aggregate demand shock in the near term that should ultimately lead to a equally orthogonal productivity positive productivity shock that increases corporate profits, increases valuations, and ultimately increases the speed
(1:23:08) of the of equity market appreciation. So, in our opinion, this thing's going to bubble. I think we, we have a high probability of seeing a stock market bubble, a gold bubble, a Bitcoin bubble between now and let's call it year end 27, middle of 2028. I think that's probably where this where the strain ends.
(1:23:24) >> Okay. And you're taking into my next question, which is great, but real quick, Luke, are you as sanguine about AI sort of in general, all things taken into account as Darius? >> I'm probably not as sanguine on AI specific. I am as sanguine on the buildout. I prefer to play it via electrical infrastructure equities.
(1:23:49) in part because it is we went 20 years in this country without growing our electrical generation capacity. From 2004 to 2024, US electrical generation basically didn't move. And so it is >> China's China shot the moon. Yeah. >> Yeah. We had 2004 China was 30% as much and China is now two and a half times what we have.
(1:24:14) >> >> and growing much faster. >> And growing much faster. Exactly. So I think the growth of electrical infrastructure related stuff and which is a major catalyst of which is the AI is I think very early days. There's a lot of open field running so to speak on that.
(1:24:35) The AI I think is going to be a massive productivity driver where I get a splinter in my brain and I can't quite think of it but it gets very almost asymptotic which is they are borrowing a lot of money now for hard assets whose primary use case is to eliminate as much labor as possible. Mhm. >> And so they're basically competing with Bessent to undermine Bessent's tax base since half of Bessent's tax base comes from employment.
(1:25:14) And that's where I get it starts to sort of hit this singularity or this asymptotic. I don't know how quite to think of it and how those factors will interplay. I tend to be more cautious about the equities there and in part that is it's we did some work a couple weeks ago that highlighted if you AI is the I think the sixth big capex boom in US history.
(1:25:43) So it was canals, railroads, electrification, highways, telecom and then this and this is the biggest one by far as a percent of GDP. And the conclusion we made is number one, it can go for a while. Number two, once you were two to three years in and you started to see the valuations of the equities where they are, equity markets where they are relative to GDP where we are today, I think we're whatever we are a big number as a percent of GDP over well over 100% of GDP on the Warren Buffett metric.
(1:26:14) the stocks could keep running, but for longer term investors, it paid to take some off the table and just put it in gold because gold actually outperformed the capex boom sector over the full course of the rest of the cycle. and so that's how I really like electrical infrastructures. I really equities. I really like gold.
(1:26:36) I don't think I think AI is probably going to continue given the earnings side. I think is I think I think Darius is exactly right. The earning side is going to continue to get better. I'm just my personal it's my own personal biases here at work. I'm just a cons so conservative once things get to a certain I'm not a momentum guy.
(1:26:59) I and I have a hard time even though I think it's probably going to you know the earnings are going to continue to come through as Darius noted. >> Okay. I've got a ton of follow-up questions about AI thing, but I'm going to shove them to the next time that you guys are on. Darius, you've definitely got something to say, so I'll let you say it, but I'll bring the football to you here, and you can do with it whatever you like.
(1:27:19) the last main theme I want to have in our discussion today is just, okay, so let's make this practical for the everyday investors that are watching this. What investment themes come out of all of this? Luke, I've heard you say, at least you think kind of the mid-stream opportunities around electrical grid buildout and stuff like that and AI, supporting technologies will be really probably going to do well.
(1:27:42) You've mentioned gold a number of times. Darius, you said that you said equities are going to bubble, gold's going to bubble, Bitcoin's going to bubble up until at least this bond market, bond market reckoning that we're going to have in a year plus time. so anyways, respond to Luke any way you like, but if you can sort of start directing it to an investment theme coming out of this, that'd be great.
(1:28:03) >> Yeah, absolutely. So, thank you for that. And Luke, I very much agree with you in terms of where you started, which is where does this all end, right? Because if you have the sustained increase in productivity growth, the highest probability outcome is that at least initially for the first few years, there's going to be a transition period where we have lower demand for labor, if not net outright negative demand for labor, and you can sustain the same level of aggregate demand in the economy, if not more demand in the
(1:28:29) economy. That's the productivity boost, right? That's what you typically see with the advent of new general purpose technologies. And so that kind of takes you to where if you look at slide 104 in our fiscal policy monitor which by the way Luke you're you get free advertising and every time we share our fiscal policy monitor I got your true interest expense metric here in this FFT. Thank you.
(1:28:50) no of course man I appreciate you. so the key takeaway is Luke was being generous when he said only about 50% of federal tax receipts come from workers. 53% in terms of individual income taxes on an annualized fiscal year-to-ate basis. You have to add in I would argue the extra 33% from payroll taxes.
(1:29:08) And so if we have about 85 to 90% of the US federal tax receipts are coming from workers in some in form direct form or indirect form then ultimately we're going to have to have a significant redesigning of the tax collection system which is consistent with Dalio's work in terms of the disintegrating domestic political order.
(1:29:27) It's consistent with Neil Howe's work in terms of the income inequality reduction you typically see in the tail end of four turnings. is consistent with Peter Turchin's elite over production work in the sense that you have the rise of the DSA and these sort of redistributive policy platforms.
(1:29:41) Ultimately what's going to happen is they're going to start taxing the where the money is and where it's being generated. And so you can follow the bouncing ball. It's going to be folks like us on the call who have the privilege of talking about financial markets for a living. It's going to be the companies that are making all the money in AI.
(1:29:57) And so ultimately, in a weird way, the profit rainbow that is justifying trillions of dollars of capex is ultimately, in my opinion, a mirage. Now, that's when the market really starts to break down. But we think, that outcome could be, at least a year away, if not maybe even a little bit longer than that.
(1:30:14) But ultimately, that's going to cause an unwind of the market because there's going to be a wow coyote moment where we realize, how does Uncle Sam pay for all this? And they're gonna go Nvidia. >> That's who >> Jensen Huang. So you're gonna get a big a big check in a few years, my friend. So enjoy the good times while they last, >> right? Or going the right route of California where All right.
(1:30:37) Anybody with over a billion dollars. Wait a minute. That's everybody with over a hundred billion. Well, wait a minute, it's 50 millionaires. Well, actually now it's going to be 20. Yeah. And just keep going down. Yeah, >> that's where the next wave of taxation is going to come from. So we have a high I high conviction belief that there will be significant redistributive policies.
(1:30:54) coming out of the 2028 election and that could cause the market to peak in and of itself in terms of unwinding the bubble. >> All right. And obviously that's kind of your paradigm e sort of which is you start getting really big political reforms like that, right? >> That's a tiptoe towards it. >> Yeah. Okay.
(1:31:13) so I guess Darius, maybe I can give your answer for you, which is, you would say, look, there's a time to get worried about all that and a time to get worried about market valuations, but you don't believe that's now. even though I'm assuming you still feel like the market may have a little dispsia between now in the midterm elections, just given the uncertainty, but in general, you're seeing between now and whenever this bond reckoning really matters, things are >> the bond reckoning is why we're so bullish. It's p it's going to pull
(1:31:41) forward paradigm D. We're already if we had nothing wrong with the Treasury bond market, Adam, the market would be going up because we're moving towards a productivity boom that will inflate profits at a much faster rate than normal. That's bullish in and of itself. the bond market having problems in the context of our geopolitical driven supply demand imbalance and the bond market thesis is pulling forward a Fed Treasury response that is in necessarily maybe it's inflationary and reported terms maybe not but it'll
(1:32:07) certainly be debasement in a way that accelerates the dollars the base rates versus stocks gold bitcoin dollar >> and that's your paradigm D right >> exactly dollar goes down about 8% peranom versus stocks and gold it goes down about 35% peranom versus bitcoin pulling forward paradigm d will accelerate those debasement rates probably took 10 to 20% for stocks and gold peranom 30 45 50% for bitcoin that's the price charts going up but in reality all that's happening is there are more dollars being created
(1:32:34) right the supply of those the demand for those scarce capital assets is increasing >> got it okay so and again I think I'm giving your answer for you which is people are saying [clears throat] okay dear so well so well so well so well so well so well so well so well so well so well how do I play that the shorthand answer is well hey come become a subscriber to 42 macro look at the you our kiss and Dr.
(1:32:54) MO models and they will basically be calling the shots in real time about how you should be allocated according to each of those three big buckets of equities gold and bitcoin. and as you've said in this program many, many times, the portfolio, even though it's very simple, it's intentionally very simple, it's constructed in such a way that it has long-term outperformed many benchmarks that you've compared it to, including just, sitting in the general S&P.
(1:33:24) so, okay, that if that's the correct shortand, then let's come over to you, Luke. so you mentioned gold a couple of times, but do you have a sort of a similar outlook? Meaning next year or so things are probably likely going to be pretty good sailing for a certain basket of assets and you can you can define that basket any way you like or do you have more concerns about this story this party ending sooner? >> No, I like the way Derry's framed that where the bond issues are pulling forward a liquidity response. We've
(1:33:52) we've phrased it as do S&P up in dollar terms but down in gold terms. So you look back you can go back to fourth quarter 18 or first quarter 19 when Powell pivoted because of those bond market issues. That was one of the very early signs that there was a problem. the S&P total return is actually down about 10 or 15% in gold terms over the last eight years even though it's up I want to say almost 200% in dollar terms.
(1:34:17) And this is this is just like, trying to short Argentine stock markets in peso terms. You would never do it. It's silly. >> it's the same dynamic. It's not quite as extreme or hyperbolic as Argentine, but it's we've called it Argentinization of the US stock market, which is you want to be long stocks in dollar terms and you want to own stocks are probably going to go down over the next several years in gold terms.
(1:34:42) So for us, we've been we've said to clients, we're probably 15% cash, probably 40% gold and gold miners, 15% to electrical infrastructure equities, probably six 7% Bitcoin, five six% Bitcoin, and then the balance in sort of blended large cap equities is how I've broken that down. The cash is the cash and the gold bullion as well is really just about optionality, but especially the cash is about the optionality around the volatility that Darius was talking about as we kind of move forward from here because this
(1:35:24) is implicit in the bond market pulling us forward is it's a highly political we're now in a highly political market, right? You can see again extremes in form the means. There's a great quote by my friend Dan Oliver at Myrmikan Capital showing the overall move in gold in German Reichsmarks as it hyperinflated to zero.
(1:35:48) But the month-to-month price action literally if you were levered long you lost all your money four or five different times in five years and it's not that's a very extreme example. I do not think we're going to hyperinflate but I think we are in an inflation regime. >> And you know why did what spurred the volatility in that case? Well, it was incredibly as you were living through the time, hey, the war reparations may be reduced by the allies.
(1:36:16) I want to buy Reichsmarks and sell gold, which you look back in history and go, that's stupid. You knew the math was going to they were screwed. And in the same way today, it's like earlier this year, oh, sell gold. Kevin Warsh is a hawk. People are going to look back, I think, in three years and go, how stupid were you? That's dumb. The math is sixth grade math.
(1:36:34) That's crazy. You don't sell gold because some guy says he's a hawk. but it's a political market. People believe the narrative shifts and ultimately the math wins out, but the narrative can shift. And that's where I think that cash having the ability to take advantage of those types of opportunities, right? And act as balance.
(1:36:53) And I also look at my cash position as earning a yield on my gold, right? My gold earns zero. If anything, it's slight negative carry. but if I'm gonna get paid three and a half percent in T bills, great. Then I'm really getting played, if I layer if I am advertise that over my gold holdings too, I have a positive one or 2% carry, probably positive one and a half% carry across my cash and bullion.
(1:37:19) >> Okay, that makes total sense. okay. Okay. Well, first off, gentlemen, thank you for being so specific with the assets that you are, following and your specific allocations here. I guess this is for both of you, but I'll start with you, Darius. is there a point along this trajectory where you do expect that there's going to be a material switch to safety and some sort.
(1:37:48) >> Yeah, it could come as soon as this fall, right? I mean, if you botch the communication, if the market perceives that there's a too long of a gap between adequate policy response, the move in the bond market and, current prices, then yeah, you could have some material volatility this fall. But again, we don't think it'll be persistent.
(1:38:08) We think if we see any volatility between now and the peak of the bubble, it's going to be transitory. >> look, you I love your framework in terms of the Weimar analogy in terms of gold being more volatile. Like people don't realize like high volatility is a mother something to trade.
(1:38:23) high volat high inflation volatility breeds higher inflation volatility. and this happens in asset markets. It happens in real economy prices. And then you can study this across many many many different economies. If I can put one final chart on the on the on the screen Adam I use a lot of math and sophisticated models to derive the conclusions that we'd arrive at 42 macro.
(1:38:42) But sometimes you just got to whip out the old the pencil the crayon. And I tried to explain years ago when we were first outlining our fourth turning analysis and we in the summer of 2023 that's when we finally realized that there was going to be that there is a geopolitical driven supply demand imbalance in the treasury bond market.
(1:38:59) it became very obvious to us in terms of the policy response by Yellen and the Fed pivoting to an indefinitely dovish framework. Then at the same time we had pretty elevated sticky inflation and obviously every policy choice we've seen since then has really kind of cooperated that not the least of which is intervening in the Japanese yen market. I digress.
(1:39:18) the key takeaway from this slide is to kind of help investors understand the kind of risk we see from a financial market standpoint. So obviously in a normal regime you just have like a secular uptrend in risk assets. There's obviously cycles. You kind of have this secular uptrend in treasuries at least over the last 40 years in terms of treasury prices.
(1:39:35) Obviously there's hiking cycles, cutting cycles etc that kind of dictate the better auto business cycle will dictate this. This is normal what people are used to for the last kind of say late early 80s all the way through kind of 2020 in a 420 regime particularly in this kind of fiscal dominance world that we're now living in where there's a real policy response to the issues in the bond market you typically have faster appreciation again this is back this is big time
(1:40:02) statistical analysis that we looked at with data going back to 1800 to derive this conclusion and the key takeaway is risk assets actually appreciate faster when you have these types of conditions when you have the supply demand imbalance in the bond market because ultimately the policy response causes the risk assets to appreciate faster.
(1:40:18) It's the what's all what's actually happening is the dollar is being debased faster. That's all it's happening is that the things that are priced in dollars are going up faster, but the real the reality is the scarce assets are going down or the dollar is going down faster versus those scarce assets.
(1:40:30) But what tends to happen is you have these bigger corrections. they may not be more frequent, sometimes they're more frequent. But really what causes these bigger corrections relative to other normal kind of down and distance is this lack of financial oppression, this lack of adequate monetary debasement. and so ultimately you they the policy makers are trying to counteract this naturally decay decaying valu value in treasury bonds.
(1:40:54) and so they can do financial oppression. They can do monetary debasement. But ultimately, you're going to run out of how effective those solutions are., we could be here. If we're here, then you're probably closer to paradigm E. I think we're probably somewhere still here in this part of the system.
(1:41:09) And so ultimately answering your question, Adam, the reason we designed, one of the reasons we designed KISS the way it is because when you're investing, there's a time for carry and there's a time for, appreciation. Capital app depreciation versus capital preservation. When the systems that control KISS, the ball targeted and position sizing, when they tell you it's time for capital preservation, that's when KISS will raise cash and kind of get to the sideline and clip the coupon on the short end of the treasury curve.
(1:41:32) as opposed to being fully invested in stocks, gold, Bitcoin 60, 3010 when it's maxed out. and then there's a time for, capital appreciation. If the Treasury comes out tomorrow and says, "Okay, my bad. Six billion is not enough. We're going to use the whole TGA.
(1:41:45) " Then gold will be up limit up that day. Bitcoin will be limit up that day. I'm sure stocks will be up limit up that day. And so it's not my job as a as a investor to kind of predict all that. I understand where we are in the system, but the reality is the policy makers have a big say on where we are at any given time as well.
(1:42:00) So without having an a crystal ball that says what they're going to do, we trust the wisdom of the crowd in terms of our market regime now casting process. We trust the wisdom of the crowd in terms of our volatility, just the momentum signal process which infused the ball targeted and position sizing and KISS.
(1:42:13) And so our general takeaway is on all this is just kiss and chill, man. You don't have to make all these choices as an investor because this stuff's hard. >> KISS and chill. I love that. all right. So, just to round this out, Darius, for people that would like to get exposure to the KISS model, if they're a more sophisticated investor, institutional investor, want to get into Dr.
(1:42:34) Mo as well, where should they go? >> thoughtfulmoney.com/diy. >> Oh, you're such a good man. Gave me gave. All right. Yeah. And as a reminder for folks, thoughtfuloney does, recommend a lot of financial advisors for folks that want a financial quarterback to manage their money for them. But we know from our surveys that the majority of you are do-it-yourself investors.
(1:42:55) And so we've partnered with 42 macro to provide a solution to the do-it-yourself investor class. And Luke, maybe we need to talk to you about that as well, my friend. but okay, so thoughtfulmoney.com/diy you can go learn all about 42 macros services there, including those two very important models. Luke, for folks that want to follow your research and stay out breast of your view of the market as things may change as we ride these secular trends, but there's the cyclicality that Darius just squiggled out for us there on his chart. where
(1:43:28) should they go to follow you and all your insights on that? >> Sure. Thank you. fftt-llc.com for more information about both our institutional and massmon mass market products. And they can also find me on X at Luke Gromen. >> Okay. Yeah. And Darius, you're our next two, correct? >> Yeah, I'm Darius Dale42 and then Darius Stell on LinkedIn as well.
(1:43:49) >> All right. well, gentlemen, look [clears throat] this is exactly the way that you dream something like this would go. just fantastic discussions. you guys both just continue to shine through, not as just big, brilliant minds, but also just very fine gentlemen as well. I have a ton of questions we didn't get to, which is a great sign that we found a lot of rich territory in the questions that we did tackle.
(1:44:15) And it leaves the door open for repeated returns here for both of you to do this whenever you want to. I guess just in closing here, is there anything that you would like to say either to the audience or to each other sort of in closing about your positions on what we talked about here today? Luke, why don't we start with you? >> I would just say be very careful with your leverage.
(1:44:36) because the Overton window is so wide, we are now into a part of history and in markets where there's a lot of stuff that has never happened before. There's a lot of things that are bigger, more leveraged than there they've ever been before. keep your keep your Overton window wide open. Keep your leverage low is what I would say for the average investor.
(1:44:56) >> All right. Well said, Darius. How about you, my friend? >> Oh, I would say two things. One, Luke, you're a superstar, man. Keep doing what you're doing. No, I'm serious. I'm a huge fan of yours. I think you, you have the courage to piece together the puzzle in ways that I think would upset traditional Wall Street. I can see it.
(1:45:14) I upset plenty of folks on tradition. >> It does. [laughter] I've been I've been uninvited from certain rooms on traditional Wall Street, but I've also been invited to others. I'm on the portfolio advisory committee of one of the hyperscalers. >> That's awesome. >> Caught wind of some of our work and they're like, "We need to know this.
(1:45:31) " Yeah. [laughter] And so I'm like, yeah. So, what I would say is keep up., you're fighting the good fight, man. So, keep up. >> Oh, likewise. You, too. I have nothing but respect for the work you're doing. It's amazing. >> Likewise, brother. I appreciate you. Thank you so much.
(1:45:43) And then one final thing is the distribution of probable economic, policy, and market outcomes is historically wide. The only person living right now that's traded through a fourth turning is Warren Buffett. And we don't know how much longer he's going to be trading. When he stops trading, there will be nobody alive that's ever traded through a fourth turning.
(1:45:59) So, what does that mean? That means as an investor the your ability to forecast the correct outcome both in the economy and financial markets is reduced relative to normal. And if it's reduced relative to normal that means you must supplement your investment decision-making with other sources whether it be people like me and Luke or the market itself.
(1:46:19) You have to listen to the market more than normal to stay on the right side of market risk during a fourth turning. This is not normal down in distance. There are way too many complicated macro factors colliding with each other, orthogonal, correlated, uncorrelated, for a regular person to sit at home and think they're going to do this well.
(1:46:36) Professionals are doing this very poorly. If you're only allocating two or three hours a week on this stuff, God bless you. So, appreciate you. >> Very well said. So, we will wrap it up there.