Title: Stephanie Pomboy: Has The Grand Game Just Changed?
Show: Thoughtful Money w/ Adam Taggart (livestream)
Guest: Stephanie Pomboy, founder of MacroMavens
Date: 2026-09-02
URL: https://youtu.be/exSmBxjCMlc
Length: 1:03:51
Note: Auto-transcript (pasted), cleaned remove-only - fillers (um/uh/you know), verbal tics, stutters and false starts removed; wording, numbers, names, hedges and every (mm:ss) / (h:mm:ss) cue otherwise verbatim. Garbled names left as heard: "Adam Kagert/Tagert" = Adam Taggart; "Kevin Walsh/Worsh/Wars/worse" = Kevin Warsh; "Dr. Art Laugher/Lafer" = Dr. Arthur Laffer; "Fed shares" = Fed chairs; "Machznney" = (William) McChesney Martin; "Bessant/Besset/Besson/Bessing/Basset/best" = Scott Bessent; "Vulker" = Volcker; "bomb vigilant" = bond vigilantes; "doubbish" = dovish; "credit default swamps" = credit default swaps; "you bag seven" = the Mag Seven; "Andrew Melon" = Andrew Mellon; "willina/Willamina" = her bulldog; "the vow" = the valve; "Mumami" = Mamdani; "Grant, David, Vincent Williams" = Grant Williams. "zort" and "gosh who fantasy" unresolved. The host's read of "created only eight years earlier in 1983" is a misreading (the Fed was created in 1913) - kept verbatim. The opening ~00:03-01:45 (her knee, her bulldog) and ~59:53-end (MacroMavens plug, conference promo, outro) are kept here, not analyzed.
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(00:03) All right, and we should be live. Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Kagert. And we are very lucky to be joined today again by the macro maven herself, Stephanie Pomboy, for her monthly macro and market outlook. How you >> here? I am. [laughter] >> I'm doing great.
(00:26) How are you doing? >> I am good. Let me just get rid of this conference banner. although I'm sure I'm going to bring it up again at the end of the discussion. I'm doing great. Things are coming fast and furious both in the outside world and also in the tagert inside world. So I look a little blur eyed and my hair's still wet.
(00:45) Please forgive that. >> But first Stephanie, let's start with the most important thing here which is that your knee is recovering quite well it seems. Oh, I thought you were gonna ask. The most important thing is willina, but that's [laughter] okay. >> Well, that is I'm getting there.
(01:05) I've never broken anything before, so this is all new to me, and it's frustrating to be mentally prepared to do everything I used to do, but have my body not quite be ready to be there. But I guess this is part of the recovery process. So, but everything's going great. Thank you for asking. >> All right.
(01:25) Well, and then now that you shame me, how is Willamina doing? >> No, I'm joking. She's doing great and she's snoring at my feet here. So, if you hear those soothing sounds of Bulldog, I apologize. I can mute her. >> No, they're very soothing. I hope we hear them. All right, Steph. Well, look, as you know, I have to name these live streams before we've actually talked with one another.
(01:45) >> So hopefully, this title will hit near the mark of what we're going to discuss today. The title is, "Has the grand game just changed?" And I pulled that up because there's a lot of things that have been going on that have the potential to be sort of game changers going forward.
(02:06) >> I've got a whole list of them and obviously you probably have some of your own, but I'd love to get your reaction to some of these things. First off, we have a Fed that is really seemingly trying to become much more non-interventionary. >> Kevin Walsh is, and he reaffirmed this at his Jackson Hole speech.
(02:30) He is trying to restore the purity, the integrity of the market signal, >> right? And as you know for decades now the Fed has been one of the chief culprits in placing its thumb on the scale by all the interventions it's done. And Wars and I agree with him on this.
(02:49) He said look we should be reacting to the market signal. The market shouldn't be reacting to us. >> The market is a much more efficient machine and therefore we really want to understand what that machine thinks. So I interviewed Dr. Art Laugher about a week ago who knows Kevin personally and has for a long time. And in his words, he thinks Kevin is going to be one of, if not the most meaningful Fed shares of his lifetime and he shared online shared on the video.
(03:24) So I'm sure he's not uncomfortable with me sharing it. But he's 86, he's >> Yeah, I know. >> He's on a lot of Fed shares. Yeah. >> And he's personally known them. I mean, back to Machznney and >> so obviously that's pretty high praise coming from him. He sees that Kevin's role he thinks could be like measured in decades.
(03:45) He thinks that he might be at the Fed for the next 25 years. Worse is still relatively young. >> Yeah. >> Who knows? But if that's the case where we've got somebody in there who really tries to restore the Fed to the resource of last resort versus the resource of first resort it has been playing for the past couple decades.
(04:06) >> And can potentially sort of sit in its hands as we go through run-of-the-mill corrections and not jump in. That just could be a really different world. In fact, I think it's a world I'd like to live in. I'm curious. Yeah, >> agreed. I mean, basically, we're talking about eliminating the Fed put that has been >> put in place with chairman Greenspan in 87 and has been steadily burnished Fed chairman after Fed chairman for the four decades since.
(04:41) And I think it's actually kind of an interesting parallel. We can get into this when we get into a broader market conversation as opposed to just talking about the Fed right now. But thinking about Kevin Worsh's tenure similar to that of Greenspan in terms of taking the reigns at a time when he is clearly articulating a very hawkish position as Greenspan did in 1986 when he was appointed and watching the long end of the yield curve edge higher and higher and higher while the stock market essentially is thumbming its nose at
(05:18) higher interest rates, which is exactly what happened from the end of 1986 all the way through the summer of 87 into the fall until finally the stock market couldn't defy the pull of interest rates any further. But it's kind of an interesting parallel because both Fed chairman were green came in had these grand plans to be more hawkish and in the case of Greenspan obviously not only did he end up having to capitulate but he then became the father of the Fed put right >> so it's kind of just an interesting
(05:56) context and I think about it every day as I watch these 10-year yields here but also globally move higher and higher and equity investors at least to listen to the financial media and all the pundits who get paraded forth there seem to be not terribly perturbed. I mean they see it as something that's not super positive, but they don't view it as an existential threat to the economy or the stock market right now.
(06:24) So >> yet being the operative word. Exactly. >> Okay. So, I'm going to contrast Worsh with Bessant in just a second, but let's do that through what's happening with yields. So, we now have long-term Treasury bond yields back up at heights where they haven't been for a long time. I should know this off the top of my head, but I don't.
(06:47) I don't know whether we're talking a decade, whether we're talking >> I think it's 200, I have to double check, but I thought it was since before the global financial crisis. before. Okay. So, basically the highest it's been in two decades. >> Years. Yeah. >> And I think the big question right now is just how high is it going to go, right? And so we have been it was funny when the Fed started hiking rates in response to the crushing inflation that we saw back during COVID. There was a lot of
(07:23) discussion about okay well look the economy is a lot more indebted now than it was in previous cycles. >> Yeah. >> At what yield does the economy start to really buckle under? And back then when I [clears throat] was asking that question people were saying like three three and a half. >> Yeah.
(07:41) >> And obviously the economy right now is able to withstand five plus on the 30-year. I guess my so there's that question. Plus a lot of people have said hey look the past 40 years was a bond owners market right you had nothing but declining yields and therefore prices were going up and it was just a wonderful time to make money in the bond market.
(08:10) A lot of people are saying that era has now ended. Interest rates are going to be on a secular rise going forward. Whether that's true or not, that's what the short-term game field is seeing right now has been higher and higher rates. Two questions for you. One, do you believe that we are in a secular new era for higher interest rates going forward? And two, do you have kind of a best guess as to how >> might be too high for the economy to bear? >> Well, I'll answer the second question first if I may. And that is I have
(08:48) been really sort of my view of the markets has really been shaped by one chart and I think I've confessed this for years and that is the long-term chart of Treasury yields and just noting the financial crises that we've had over the last several decades. And what you find is that we have had financial crises occur at successively lower and lower levels of interest rates which is not surprising because we've been levering up more and more as interest rates kick down.
(09:25) So your sensitivity to any increase in rates increases dramatically as you take on more leverage. So, just going back to that chart as a frame of reference, I was one of those people you talked about earlier who was saying, we can't handle the truth when it comes to higher rates. It rates will barely move higher and it will be lights out for marginal borrowers and the economy.
(09:49) And we have seen, obviously we've, you have talked about it endlessly, this parade of corporate bankruptcies, which is the greatest wave of corporate bankruptcy since the global financial crisis. It's just that they haven't been high-profile enough to capture the attention of the average investor out there.
(10:09) But there have been a lot of credit stresses and obviously you see it on the consumer side, too. It's just it hasn't reached that point where it sort of devolved into a crisis yet. But I think you've got clear stress under behind the curtain that's building and we know what we've seen a lot of re marks for the private credit world where assets that actually have to trade are trading at huge haircuts to what they were marked to prior.
(10:44) So we know that all is not nearly as strong underneath the surface thanks to these higher rates and the massive amount of leverage in the corporate sector as well as the public sector and the consumer. So I think that that's my answer to the first part is that I'm one of the people who would have thought we would have had a crisis by now.
(11:04) And I think when I go back and try to explain why it is that we've made it for basically three years or actually four, they started raising rates in 22 without we had SVB and again we've had all these corporate bankruptcies but we haven't had a cataclysmic financial meltdown.
(11:27) And when I try to conjure some explanation as to why we've managed to withstand a level of interest rate increase that I never anticipated we would. I keep coming back to the idea that the markets were so inured to the Fed put that the attitude starting in 2023 after SVB the Fed came in and immediately started to inject some juice into the system again.
(11:51) And so that burnished that Fed put again. And the investors basically, starting in the as they put together their forecast for what 2024 was going to be like, we're factoring in Fed rate cuts and then in 2025 Fed rate cuts and then in 202, so it's just year after year they say, "Okay, well, it didn't happen this year, but it's right around the corner, right?" And so what they do is they do these extend and pretend games just to get from today to the moment when they think the Fed is going to cut. And
(12:22) what's really important now obviously if you take Worsh at face value is that this notion that the Fed is going to cut anytime soon has just gone right out the window. To hear him talk as you said, first off, the Fed isn't going to be interventionist. It's not going to run in with the fire hoses anytime the market gets a little discombobulated.
(12:50) So that Fed put is going to start to become less of a factor. Problem is, going to dog analogies like Pavlov, we spent the better part of four decades tutoring investors that the Fed would always be there. And I don't think that you untrain that behavior in four days or four weeks or whatever. It's going to take repeatedly getting bonked over the head with this hawkish message.
(13:21) We're going to need to see the stock market, for example, down five or 10% in a handful of days or weeks. And Worsh refused to have any kind of doubbish commentary related to that. And we're going to have to do that over and over and over again to persuade investors that, hey, maybe this guy actually means business.
(13:45) Because I think right now, part of the issue is you've got the administration kind of talking out of both sides of its mouth. You've got Besset on the one hand who couldn't be more interventionist. First he does the yen intervention, then that fails, then he comes forth with this Treasury buyback announcement, and that kind of the announcement flubbed.
(14:04) We'll see what the actual execution does. But then at the same time he's getting up there and talking about all these things he's going to do to intervene in the markets. Wars is saying, I love the fact that the bond market is sending us a signal and we don't really need to tighten because effectively the bond market's doing it for us and this is how it should be.
(14:23) This is how monetary policy is supposed to operate. So, I can understand why there's so much uncertainty on the part of investors right now because you're getting two different messages and the theory and I'd be interested in what you gleaned from Art Lafer on this because he's been long talking about a Fed Treasury accord Allah what Vulker did in the 80s and the idea was I thought that basically you would get the Treasury to go in and beat Congress down to get a little bit more fiscal restraint that would just naturally reduce pressure on
(15:02) the long end of the yield curve that would enable Worsh to actually make good on his promise to shrink the balance sheet. [clears throat] And then as those rates came down, he could also start to cut the Fed funds rate. So, I thought that was generally the hope and expectation, but right now the markets are certainly not cooperating if that's the plan.
(15:22) >> Okay. I'm gonna ask you in a little bit about has the put just been transitioned from the Fed to the Treasury now. >> Yeah. >> [clears throat] But let me ask a couple quick questions first. So I'm wondering if one of the reasons why we haven't seen the economy buckle as much as maybe we would have thought if asked a year or two ago, what do you think it's going to be like with the 30 year at 5 point where is it right now? like 5.3 or something like that.
(15:52) >> Something around 52, I think. Yeah. >> Okay. And there's three things I can think of off the top of my head that may be softening the blow. One is the massive amount of AI capex spending that's going on right now, right? That's just it's going directly into the economy to build these data centers and stuff.
(16:12) So, that is directly stimulative to the economy. We have had a boom in manufacturing and with all the reshoring efforts and government grants going into that space. So the heartland of the country really has had quite a nice turnaround. It's still a turnaround that's in progress but a lot of manufacturing has reemerged there.
(16:38) And then third, yes, higher interest rates place greater gravity on the economy, but they also act as a stimulus. I mean that 5.2 5.3 is going into the pockets of whoever owns those bonds. And there's a lot of older people out there that own a lot of bonds. So those are all things three things that could be cushioning this.
(17:01) Do you agree, disagree? >> Yeah, I absolutely agree on the AI thing. I would add in the corporate profits boom related in large part to that. But I would also acknowledge that that's a relatively new story. When the Fed raised rates in 2022 and then we had SVB and then year after year after that investors were looking for the Fed rate cuts, AI wasn't driving economic activity.
(17:29) In 2023, 2024, that's a relatively that's like the last 12, 18 months that we've really seen that become a huge story. And obviously, 50% earnings growth related in large part to that has been a huge tailwind that's enabled investors, if you're an equity investor, you can look at the fundamentals or liquidity and one of them has to be operating in your favor.
(17:55) If we're in a recession and the fundamentals are dismal, at least the Fed could be providing liquidity and therefore that gives you a tailwind. And so right now you have the situation where the sort of hawkish stance of the Fed and the higher rate environment is being offset by positive fundamentals, which frankly I much prefer to see.
(18:18) I'd rather see a non-interventionist Fed and an economy that, and markets that are driven by economic fundamentals rather than interventionist monetary policy. So for me, if this is in fact where we're going, it's a very positive long-term thing, but in the near term, it's going to be a real comeuppance for investors who are just not prepared for the kind of >> support that they've actually been tacitly relying on for four decades.
(18:53) >> Yeah. Also, it does beg the qu or raises the question what if something happens to these AI capex flows, right? I mean, we're still in the middle ground here where we don't really know what the return on investment is going to be from AI and if it's less than is currently imagined and folks are imagining quite a lot.
(19:17) >> Yeah. Those flows might start turning off and then that would definitely remove one of those pillars of stimulus that I mentioned >> and there are some kind of eerie echoes. I was thinking actually yesterday about in the summer of 2007 we saw the commercial paper market begin to unravel and that was really the sign that the bubble tied to the whole housing market was actually the financial side of it.
(19:47) You had the housing bubble bust in 2005, but it took a long time for that to actually reverberate back onto the creditor's balance sheets, but the first place you saw it, the flash point, was really the asset back commercial paper market. And that started to come unglued in 2007. And I was thinking about that because I'm thinking about the higher borrowing costs we're seeing for hyperscalers and the increase in credit default swamps.
(20:13) And so in the credit market, which is always the first to sniff out potential issues, there's clearly some anxiety around what you're talking about, like will the reality live up to the promise of AI and is the circular financing and all of this malinvestment fear really wellounded? And it seems to be that the credit markets are saying, "Yeah, we need to really demand a greater risk premium for this stuff.
(20:45) " Whereas on the equity side, it's still fairly zippitydah. [clears throat] [laughter] >> Well, and it's interesting too, this isn't a closed system. So with the hyperscalers increasingly funding their capex with debt we have this dynamic where rates are going up on the treasuries for >> a variety of reasons but now they're also going up because there's just a lot more supply out there yeah >> for credit purchasers right >> I have to take credit for this because I was talking about forever this
(21:18) crowding out of the public sector by all these private companies and now I see it everywhere everyone's talking about crowding out okay a little Johnny come lately. But one thing that's worth noticing is that people fixate on credit spreads and that's all they look at and they'll say well junk spreads are narrowing so everything must be fine.
(21:40) Yeah, but junk borrowers are now borrowing at 7.4%. Yeah, >> I mean they were borrowing at four at the depths of the pandemic zero money bonanza and that debt is rolling over at these rates that are now >> we've been talking about this for years, but in your opinion are the chickens starting to come home to roost? >> You're seeing it again.
(22:07) You see the bankruptcies, but you're also seeing ratings downgrades. And so I guess the question is, do we reach a point where the companies that are trying to roll their paper can't roll their paper because of the higher rates, but also the competition for capital. Because if you're an investor right now, boy, you have plenty options out there as to who to lend your money to.
(22:32) The federal government needs a ton of money, municipalities need money, consumers need money, and then you've got this AI boom that's driving corporate borrowing massively. Plus, they're trying to roll $1.2 trillion in debt from years ago. So, this is where you'd think you'd get to a point where some high-profile company tries to roll their paper or tries to issue some new debt and it really does not go well.
(23:04) And I think you're starting to see a little bit of that here and there with some of these borrowers. So you stay tuned but right now there is such a complacency around any potential risk coming from the credit market side that it's going to take a while to penetrate that I would think. >> Okay.
(23:32) All right I want to get over to this potential new era of increasing intervention on behalf of the Treasury. Scott Bessant has recently intervened with his version of operating operation twist to try to bring down these higher yields on the long end, which really hasn't been working. >> And he also intervened in the yen market with Japan.
(23:57) Which I'm sure Wars has got to feel a little bit like, dude, you put me in the seat. I'm sure they had lots of conversations about this new role of the Fed and being less interventionary. I'm sure Wars is doing a little bit of like, hey, I'm trying to execute the playbook we talked about and you're going the other direction.
(24:13) >> Yeah. >> Real quick, I just want to read this >> post on X that I was reading right before we hopped on, Steph. And I believe this is the type of future you would like to see. This is going back to the past. Okay. The 1921 depression was one of the sharpest economic contractions in American history, and the federal government let it burn itself out.
(24:39) Unemployment hit roughly 12%. Industrial production collapsed. Prices fell hard and fast. And within 18 months, the economy roared back without a stimulus package, a bailout, or a federal jobs program. The Federal Reserve, created only eight years earlier in 1983, had inflated the money supply aggressively to fund World War I.
(25:00) The inevitable correction arrived in 1920. Prices had doubled during the war years and the credit bubble. The Fed had to deflate. Pain was unavoidable. President Harding did something no modern politician would dare attempt. He cut federal spending from 6.3 billion in 1920 to 3.2 billion by 1922. He slashed tax rates. He let wages and prices fall without propping them up artificially.
(25:27) Treasury Secretary Andrew Melon simply allowed the market to liquidate that investments and reallocate capital toward productive uses. So he's basically saying we've had time in history where people were, let's say, courageous enough, smart enough to say, look, the best clearing mechanism here is the market. Yeah.
(25:47) Let's not get in its way. In fact, let's try to take some things out that we've done in the past that has influenced the market like raising taxes and stuff like that. Let's just get them down. It's going to be painful. We'll take our licks, but it will truly be transitory.
(26:04) The market will clear and then >> investment will start flowing back in when people start seeing good values. [snorts] >> I'd love your reaction to that in general, but I'm guessing that's what you would love to see here going forward. Oh, absolutely. I would like to see, I'm sort of an Austrian in my economic bias.
(26:25) I'd like to see the economy do its own thing, complete free markets without this constant intervention by the Fed or the Treasury, which I think quite frankly is why we're in the situation we're in today. How where do I place the odds of that happening? I'd say very low. However, Donald Trump, this is his second term, so he really has nothing to lose in terms of letting the economy actually go through some torturous cleansing of excesses.
(27:00) Because history, with the benefit of time will vindicate that decision, but it will be brutal in the near term. So the question is, is he willing to have his legacy for the next five years be miserable and be the most hated president or whatever to then live on in history as having done the right thing and actually set the economy back on a sound fundamental foundation. So we'll see.
(27:32) One thing I know for sure is there's zero chance of anything like that happening between now and November 3rd. Yeah. >> Because we've got to get, that's obviously I think all of these policy moves we're seeing from the Venezuela oil, 65, what is it? 65 billion billion barrels or >> barrels.
(27:52) Yeah, I've got that on my list here. Okay. Game changer. So, yeah. from that to importing beef to Bessant's Treasury buyback announcements. I think all of these things are desperate attempts to kind of get an upper hand in this affordability argument between now and November 3rd and they'll just do whatever it takes. What happens after that I think remains to be seen.
(28:17) And there is, you could make the case that, like I was just saying, that if they want to go down in history and really create a lasting legacy, they have an opportunity to do it by actually ending this era of massively interventionist policy. It's just kind of ironic to see all these crazy frantic interventions in the leadup to that kind of a shift.
(28:39) So, it would be quite a dramatic change. But yeah, I'm hopeful. I mean, we'll see if Worsh is really the Hawk that he purports to be, >> right? >> But I thought his, I actually wrote the cover note for my report last week. I said, you had Scott Basset with a very interventionist policy and Kevin Worsh with a free market policy treatise.
(29:10) And the question is going to be how do those two play out over the next several months because they do appear to be at odds. But as you were saying, it's hard to believe that they haven't been in discussions together and have some kind of game plan a joint game plan for where they're headed.
(29:34) >> Well, I asked Dr. laugher about this because he's been an adviser to presidents forever >> on both sides of the aisle and I don't know if he knows Scott Besson personally but I'm sure he's one degree of separation from that and he knows Kevin very well and he was like he sort of almost laughed it off he was just like no it's not drama it's not a battle between the Fed and the Treasury he said they're just serving different masters >> right worsh has to obviously
(30:07) report to the banking system and then has whatever mandate he thinks he has to be independent and all that type of stuff and he's like best at the end of the day works for Trump and Trump at times is just going to tell Bessant get this done and Bessant just has to say yes sir right so that just might be the case here is what Art was thinking >> okay [clears throat] so do you think and maybe it's too early to tell But do you think that the chief intervener going forward from here is
(30:41) going to be the Treasury instead of the Fed? >> Well, in the near term for sure, but the problem is, and this is what I wrote about for my clients this week, is this idea, when Bessing came out first with the Yen intervention, obviously a spectacular failure, and one that he should have known full well going into it was going to fail.
(31:06) This is the guy who was at George Soros's right arm when they went up against the Bank of England. And a central bank >> can only push its currency in one direction indefinitely and that's lower. You printing money can get your currency to go as low as you want. You can't make your currency go up indefinitely.
(31:30) You can do these little tweaks around the edges, but ultimately the fundamentals will always win out. And that's what George Soros proved to the Bank of England. So, I thought it was kind of a little bit of a reckless gambit on and a desperate gambit on Scott Besson's part to get Japan to stop liquidating treasuries.
(31:48) So then when he came in with a buyback announcement, which, going from two billion to four billion or it may not sound like a whole lot, I'm sure on a per auction basis it could be meaningful. But when the markets didn't really seem to view that as having a whole lot of oomph, he dropped a little bomb about the TGA and using the Treasury general account to fund these buybacks and made the observation that that's almost a trillion dollars worth of firepower that he would have at the ready to buy back
(32:23) treasuries. And I'm just gobsmacked at how many people ran with that and said, "Yeah, well, we don't want to get in front of that. He's got a trillion dollars to hold down the long end of the yield curve, so he can get a lot done." Well, I don't know what world they're in because we're running a$ two trillion dollar deficit.
(32:43) Where do they think the Treasury has some secret trillion dollar slush fund that they can access with which to buy down the long end of the UK? They don't. This is a checking account. That money has all been pledged and then some. It's just that right now due the vagaries of the calendar, there's a trillion dollars sitting in there that hasn't yet gone out.
(33:07) So he can in that interim tap some of that money, but ultimately he's going to have to replenish that. That money just doesn't drop from the sky, >> right? >> So he doesn't have a trillion dollars. It's all nonsense. So, I think he did that to kind of scare this is my new theory on it just as shortterm. I'm viewing everything through the lens of whatever it takes before the midterms.
(33:32) So, that's kind of my operating framework now is they're going to do it. >> He's just using that to scare off the bomb vigilant. He's like, "Don't get in front of me. I'm going to zort you with my supposed one trillion." >> Right? And if you look at, and I've been highlighting this for a while, if you know I've been bearish on rates, saying yields were going to keep going higher, but the one caveat I've talked about is that you have this massive spec short position in the long end of the yield curve.
(33:57) And if they got a sense that either the econom is going to be some kind of gosh who fantasy fiscal discipline or that Bessant was going to immediately stop issuing any longdated paper or whatever you could have the catalyst for a massive short covering rally and it would be sizable because we've never seen short positions really this large.
(34:18) So I think that was it. He's saying, "Here, I have a gun and it's loaded with a trillion dollars worth of TGA money that I can use to scare you guys off. So, get out of that, short >> your short positions." And obviously, that would send bond prices higher and yields lower. Right. >> Right.
(34:38) And if he could in the short term that's the key is it wouldn't be sustainable because nothing would fundamentally have changed because he doesn't have that money and he's going to have to replenish it and all there is no fiscal discipline and yada foreign central banks are still diversifying and all of that stuff. But if he can do it and flush them out in the next month, then interest rates come down, mortgage rates come down, and it might be enough for the average Joe who's headed into the polls for the voting booth for the midterms to
(35:07) say, "Hey, look, suddenly mortgage rates are down 100 basis points. This whole affordability thing is starting to look pretty good for me." So I think that's the gambit. But just to go off on a tangent a little bit, what I proposed is that if Scott Bessant really wants to have a trillion dollars to put forth sustainably toward holding down the long end, he could do that tomorrow.
(35:34) And all he has to do is revalue the gold reserve from $42 an ounce to where it is today. And that reserve would go literally from 10 billion to one trillion overnight. >> Overnight. So he could do he has that potential kitty there. So that's just something to kind of keep in mind. I know it's like a radical idea, but we could end up that could become more of a mainstream conversation.
(35:59) >> Okay. Can I just ask you this? Why do we do that? Why do we still gold on the books at such an antiquated amount? >> It's a really good question. I wish I had an answer. I have no idea. But when Bessant, everyone remembers when he was first appointed he made that oblique comment about monetizing the asset side of the balance sheet and a lot of us gold bulls immediately started doing this okay what's the number going to be so who knows it's probably in the realm of conversation
(36:36) somewhere but I'm not proposing that that's going to happen anytime soon but I think it will become more of a discussion point. If the bond market continues to do what it's doing here right now. >> Okay. Kevin here in the live chat just mentioned the next question I was going to go to.
(36:58) And let me see if I can share my screen here. >> That's not Kevin Worsh, is it? >> It [laughter] not Kevin Worsh. Unless he's going incognito here. >> Yeah. >> All right. So, yeah, I think this is right. All right. Can you see this? >> Yes. Okay. >> So Japan's bond yields have been just going off to the races.
(37:27) >> And I think I don't have my glasses on here, but I think they're up near 3%. This point in time, 2.8 or something, I think. So this [clears throat] has potentially really big implications. Again, the whole topic of this title of this live stream is game changers. Could these rising yields get to the point where the carry trade really starts to break down because there's just not enough of an arbitrageable difference between Japanese debt and US Treasury debt? Well, I think the answer depends on the
(38:06) dollar yen relationship because that's been the offset. They've been raising rates for a while and initially the concern was when the BOJ abandon the yield curve control that you would upend all of this carry trade that's been in place for years and years and who knows how many trillions of dollars are tied up in it.
(38:32) But the weakness of the yen became the vow. That came the opportunity. And that's why I thought again that Bessant's intervention was a little bit of a high-risisk gambit because on the one hand he's trying to get them to stop selling treasuries, but he risks unwinding the carry trade if all those speculators felt like he was serious about continually, if the US and the Bank of Japan or the Ministry of Finance got in there and were on a regular basis intervening and basically had like a yen put you
(39:07) we're going to hold the floor here. Then that could have meaningful implications for financial markets all over the globe because the yen carry trade was just sourcing money to put positions on all over from emerging markets to Europe to AI hyperscalers and all of this here.
(39:32) So everything would get tied up in that if he did pull the rug out from under it. So I think, it's kind of a globe answer, but rates in Japan obviously are skyrocketing and there's negative implications for their debt and deficits just like we're seeing here as well with soaring interest expense. But as relates to the carry trade, I think it all depends on whether they can stem the decline in the yen.
(40:01) And again, it's really hard when a currency is fundamentally moving, it's moving lower for fundamental reasons. >> Yeah. >> Then it's a very hard job to try and fight that. And again, I go back to Soros versus the Bank of England. He just made that wager like you cannot fight the fundamentals indefinitely.
(40:23) You can try and you can spend a lot of money and the thing with the central bank is that the money they spend is quantifiable. >> yeah, that's why Soros was able to hold the line is, he would get beaten up, but he would be able to quantify, well, they only have this much ammunition left. [laughter] >> So, all I have to do is suck it up for another however many iterations of this.
(40:48) >> All right. So, you touched a little bit on this earlier, but just real quick, Steph, how seismic would it be, if at all, but I think it would be somewhat at least, if the carry trade did go away? >> Gosh, I mean, I have no window into how you would quantify that really. Just that it's been around for so many years and it had been the chief source of financing for a lot of lever positions, but I wonder if it really became less and less of a factor as we got into our own 0% money spectacular here. So it
(41:30) may not I think it would be impactful but it may not be the systemic rugpull that it would have been let's say precoid >> for example >> and I don't know the answer to this maybe you have better insights than I do but let me just pull up one more picture here share screen yeah let's do it and you were talking earlier clear about how much more leveraged the system is now than it was in eras past.
(42:03) >> So here's just the federal debt, right? And then there's also private debt on top of this. But I just want folks to remember back [clears throat] during the.com bubble, [laughter] the federal debt was a quaint, less than six trillion. >> Okay. Yeah. >> And going into the great financial crisis, it was under 10 trillion. Right.
(42:24) It had doubled. That's a big deal. It had doubled in about 10 years. But it was less than 10 trillion. Now obviously it has more than quadrupled since then. This has got the this doesn't have the latest 40 trillion number on it but yeah going from under 10 to 40 plus trillion is more than a quadrupling.
(42:48) So you talked about how a lot of levered bets are made off the carry trade. I mean the world is just so much more levered now. >> Yeah. So potentially could that make the carry trade ending even more significant because all those levered positions, if those flip over, the guys holding on to that leverage, all of a sudden they're really vulnerable.
(43:11) >> Yeah. Oh, absolutely. But I think it's also just a point, whether it's positioned via the yen as the source of borrowing or dollars or whatever, just the pure leveraging of financial assets globally is a huge vulnerability, especially in an environment where you're seeing global bond markets rerate, in a pretty aggressive fashion, >> right? And by the way, this isn't the whole picture, but margin debt is at its >> Yeah.
(43:42) >> highest level ever, right? Right now. >> Yeah. Yeah. >> Yeah. So that's a sign of that extreme leverage. >> Yeah. Absolutely. And then just getting sort of granular people who are dismissive of this concern about leverage and the impact of higher rates on it will point to things like 50% earnings growth and therefore US corporations can easily manage any increase in debt service because they're making so much money.
(44:11) But again, you've got to think about this as the halves versus the have nots because the balance sheet positions of the top 10 companies is decidedly different than it is for the 490 other companies. And that's just in the S&P. I mean, if you broaden the lens out to all US companies, it's much less inspiring.
(44:37) But even in the you bag seven we're now seeing companies go free cash flow negative. So this myth about corporate balance sheet strength hopefully has been shattered. But if not it will be as these higher rates really begin to bite into earnings at some point via higher interest expense. And then for the marginal guys, maybe to the point that they just can't continue as a going enterprise.
(45:08) So that's why you've seen a lot of these corporate bankruptcies is presumably they were highly levered and their debts were rolling at substantially higher rates and they just couldn't make it happen. >> All right, so Steph, we got about 12 minutes left. I want to try to squeeze one more main topic in there before we start wrapping things up.
(45:30) So you mentioned briefly earlier the deal, the agreement that has just been struck between the US and Venezuela. >> Yeah. >> For a very substantial amount of Venezuela's oil reserves. And Trump is out there doing what Trump does best, which is pounding his chest and saying this is the best deal in history, and I've just doubled America's oil reserves and all that stuff.
(45:57) And let me just say there's parts of this deal that I'm not going to address here in this conversation, folks, because we'll just be talking about it all day then. Which is, the morality of this is, it's a lot of people have been saying, what are you talking about? We forced regime change on this country by kidnapping and removing Maduro.
(46:24) And this agreement isn't it's a gun to the head agreement, right? This isn't we don't know if this is the will of the Venezuelan people or not, right? But generally as the deal is being pitched is it's great for everybody, right? These are oil deposits that the Venezuelans themselves have had a tough time tapping, for the past close to 30 years under socialist rule there.
(46:52) There's been just massive underinvestment in the oil infrastructure after it was nationalized and it's pretty decrepit anyways. But I think a lot of the deposits that America is taking over here, I think might be ones that haven't even been tapped yet by Venezuela. So Venezuelans are looking at this saying, man, we're going to be spending the next couple decades hopefully rebuilding the infrastructure that's now outdated and we're going to tap those fields.
(47:20) We don't even know when we're ever going to get to this other stuff. And so if the US comes in and is able to extract that and then sell it and give us a share of the profits, that's just gravy to us. All right. And it's a lease. It's a long lease, but it's a hundred-year lease. And presumably, at the end of 100 years, if things aren't going great, they can just say, "Hey, you know what? We're not going to renew the lease, and we're just going to keep all the rest for ourselves, right?" [snorts] >> And then obviously Trump is saying,
(47:45) "Hey, look, it's a substantial amount of new oil for us. The US is the country that has the most heavy crude refineries by far versus any other nation. And so, we can basically use this stuff. We can sell it. We can mix it with our light sweet crude and that actually helps us a lot in improving our refinery process to be able to get all the full range of distillates.
(48:10) So, all that stuff. So I guess my first question is how much of if this plays out the way that the people who are pitching us to it are promising, how big of a gamecher do you think this is? >> Well I mean it's a gamecher for us long term. I think here again the timing of the announcement is all related to trying to persuade people that oil prices are going to be coming down meaningfully at some point.
(48:40) And then if you can persuade them that they're going to be coming down meaningfully at some point, maybe you limit the degree to which they're going up in the near term. It helps dampen the increase in oil prices that's being driven by the situation in Iran. So, this is kind of a way to cushion the blow of that.
(49:01) Obviously, as you've mentioned in your excellent synopsis of this whole thing, it's going to be a long time before any of that oil is actually being used, refined, and then actually used as an end product in a way that actually impacts the average person's life here in the United States.
(49:28) I totally get that and I've just been asking questions around this announcement and I've gotten a huge ton of blowback. Because I think people miss the part where I say, >> this could be a big deal assuming that it plays out the way that parties are hoping for right now. Yeah. >> But here's a comment from Jack.
(49:49) >> Venezuela is a nothing burger. It won't be relevant for 5 to 10 years. I a thousand% agree. And that's just how oil extraction works. You got pay a bunch of money and >> put a bunch of infrastructure in first and then it takes a while before the oil flows start coming.
(50:06) So I totally grant him that and I'll grant him the 10 years, right? Like we won't really see much that's going to start impacting the price of oil for a decade. Okay. >> But then there's as long as the lease stands, right? then there's 90 years of excess profits and excess inventory. Like >> that should be a huge long-term bonanza.
(50:26) And I do think if it goes out this way, it could really help suppress the price of gasoline for decades. >> Yeah. >> After the initial decade that we do our investments >> right now, >> I would agree with that. I think that the next few years, however, it's irrelevant. Well, it's not irrelevant because as I said, the degree to which people expect there to be massive supply down the road will help limit just how much higher prices necessarily go in the near term.
(50:58) I think it's a cushion in some degree. And it's helpful as a cushion, not only going into the midterms with the Iran situation going on, but also once Iran wraps up. And I think I mentioned this to you in the last conversation. I don't think oil prices drop like a stone. I know Trump is telling everyone as soon as we're done, and so did Besset yesterday, oil prices are going to go down and everything's gonna be fine, but the entire world now has to rebuild all its oil reserves that were depleted in
(51:30) trying to protect their populouses from the increase in prices. So there's a massive rebuilding and then you'd have to assume that the AI bubble goes bust if you're going to have a bearish call on energy because that's another source of demand that would seem to be steady state if not accelerating.
(51:53) So I think there are reasons why this helps long term. To dismiss it is sort of like saying if Trump I mean this will be wild but if Trump actually were able to get Greenland that suddenly having access to all those rare minerals wouldn't mean anything to us. It wouldn't be long-term it doesn't make a difference. To me to dismiss the Venezuela thing is sort of akin to dismissing >> that.
(52:21) You're basically saying we're going to get the US access to all of these strategic reserves that are incredibly valuable and will become increasingly valuable as we move into this sort of AIdriven future. I'd be reluctant to poo poo it, but in the near term, I'm a energy bill. I think prices are going to stay where they are at a minimum, if not move higher, not explosively, but just continue to edge higher based on the demands both of the economic and cyclical demands, but also the replenishing of global
(52:55) >> res [clears throat] globally. Yeah. No, I totally agree and again I think >> I don't think many people are expecting Venezuela to be a positive >> move the needle. Yeah. >> Yeah. move the needle thing for years and I'm right with him, right? I do think it could really move the needle beyond that.
(53:15) Again, if everything goes as the way they're saying and the next regime just doesn't come in and reationalize everything and all that stuff. I'm quite sure there's been a lot of >> provisions in the agreement and also some backroom discussions that say, hey, if you try to reationalize this, you're going to feel the full weight of the American military or whatever.
(53:34) But >> but let me bring in two other things. >> but can I just get a quick respon? The one thing that it could do that could be beneficial immediately is that between Iran and Venezuela, we've now greatly compromised China's access to its main oil. So, it could be more. We're thinking about this in terms of analyzing the price of oil, but maybe we need to think bigger about analyzing it from the standpoint of Trump's trade negotiations with China, not trade, but also national security,
(54:08) all of the geopolitical issues related to trying to basically put a strangle hold on China. So this, we're maybe too myopic in thinking about this strictly as an oil deal because it may be just as much, if not more so, a China deal. >> I completely think it is. I mean, a huge part of us going into Venezuela was to slam the door >> on China, which was trying to get more and more involved there.
(54:36) And I think very much the same thing with Iran, too. I think you can't look at Iran without looking at through the lens of the overall geopolitical game, which is essentially US versus China. >> Yeah. >> So, let me bring two things in here real quick. One is, >> right now the pressure between US and Canada has been ratcheted up, right? >> Yeah.
(55:01) >> But I think all of this is a way somewhat one man's opinion, I think all this is a way, these 50% tariffs, right? [clears throat] is a way to try to just force whatever final agreement's going to get struck to get struck, right? That both sides don't want these tariffs to last for very long. They're ridiculously high.
(55:19) And so let's presume for a moment that yeah, okay, we find a way to come to an agreement that everyone's willing to feel somewhat decent about and then Canadian oil starts flowing more so than it has over the past couple years, right? Then all of a sudden, the US is really kind of, let's say, in control, but has a lot of influence over Canada's oil and Venezuela's oil.
(55:46) And then if you add to that and again I'm making a lot of assumptions folks. I'm not calling this is all going to happen. But if Iran capitulates >> that's going to there going to be concessions that come along with that again probably affecting its trade with China. Right. So, first off, I have a hard time believing that the US, even if only two out of those three things happen, sort of cements its position as the gas station to the world, the role that the Gulf used to play.
(56:18) >> Yeah. >> I think America potentially and maybe even likely has rested that >> from there. And so going forward, the world is going to be increasingly dependent upon America for dependable oil supply. And amidst all the other things that America is trying to do to reinforce its power in the rest of the world, really being the main guy in town on oil, that's a massive lever.
(56:44) >> Yeah. >> Yeah. And I know a lot of people are going to say, "Oh my god, Iran's not going to capitulate." But if you look at what's going on since we really ratcheted up the economic side of things and basically decided, you know what, we're just going to really tighten the screws on them through the blockade.
(57:04) >> Apparently, things are going from bad to worse there inside Iran. And if things continue that way, >> the regime is at some point going to have to buckle. It's going to buckle because there's a populist uprising. it's going to buckle because other members of the Iranian military start bolting.
(57:24) There's just a lot of reasons that if that pressure is able to be maintained and who knows if it can be. But I think if the status quo momentum continues, it's in the US's favor there. And again, I don't know. I've got no crystal ball as to what's going to happen, but I do know if Iran capitulates and we >> make nice with Canada and this Venezuelan works out, >> that's a gamecher again, not for the next couple years, but for the next couple of decades, high probability.
(57:55) >> Yeah. The one big if that you didn't put in there, and I think it's the biggest if of all, is if the present administration or something similar to it prevails. Because if this Democrat socialist movement of the Democrat party continues to gain momentum and we'll see what happens at the midterms, but we're looking at 2028.
(58:23) All of this could come to a very swift end. >> Probably highly likely. >> Yeah. >> President AOC or Mumami. Yeah, probably very likely. >> Yeah, I mean fossil fuels are not something they're going to embrace. Drill baby drill will not be part of their platform and certainly not accessing oil reserves in Iran, Venezuela, and co well they will cozy up to Canada, but that's about the only thing that it would.
(58:50) So, that would be my big if and I hate to keep bringing it back to politics in the midterms, but ultimately a lot of these policies are contingent on that. This it's very binary. Either we're going to continue on this plan or we're going to go 180 degrees the other direction. >> Yeah.
(59:12) And that's oftentimes what happens with countries, right, is the pendulum swings one direction and then it swings the next direction. And America's really been stuck in that of late where, the first four years of the new administration is just tearing down what the previous one did, right? I mean, it really >> which side you fall on almost doesn't matter.
(59:32) It's just sort of like you're continuously stuck in this pendula chaos and really not a lot of stuff gets moved forward, right? So, yeah, >> that is the multi- trillion dollar question here, Steph. And we get at this point, we're just going to see how the midterms turn work out and see what sentiment's like from there.
(59:53) [snorts] >> Okay. Well, Steph, we're here at the end of the hour. I've got a bunch of other questions for you, but we're just going to have to save them until next time. Okay. >> So real quick, for folks that would like to follow you and your work in between now and your next appearance on Thoughtful Money, where should they go? They should go to macromavens plural macromavens.
(1:00:14) com and you can read sample research and find out how to sign up and all that jazz or follow me on Twitter at s pomboy or here once a month and then also for your conference I'm so honored to be able to join you for that with my partner in crime Mr. Williams, Grant, David, Vincent Williams. Got to get all his name.
(1:00:36) >> Yes, [laughter] you got to get them all in there. >> I'll have to bond with him on that. I'm a fourname person. Are you really? >> Yeah. And it is just folks never do that to your children. >> What is it? Let's hear it. >> My true first name is Andrew. >> Okay. >> So, it's Andrew Adam Parker Tagert. >> Andrew >> Adam Parker. Okay.
(1:00:57) >> Yeah. Wow. >> Andrew Adam Parker Tagert. That's >> Yeah. So, it just plays [laughter] all with TSA and all that stuff, right? Every time I go through TSA, I have to explain. I've got two first names and I go by this one, but the one you're seeing on my passport is >> so it's a nightmare.
(1:01:13) Don't ever do that to your children, kids. >> Oh, god. >> Okay. Yes. So, Stephanie is going to be one of the featured presenters on the faculty for Thoughtful Money's upcoming fall online conference. They don't get better than Steph and Grant, but I say this every conference, but it's true every conference.
(1:01:36) This is the best faculty we'll have had yet. And there's a awful lot of very timely matters to the faculty we'll be discussing that are going to very much influence how people think about investing in 2027. So I won't give the full picture, folks. I'll just say oh and I can put it up here. Go to thoughtfulmoney.
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(1:03:36) I'll let you go and take Willamina out for a walk now that your knee is wonderfully functional. But thanks so much for taking the time to do this again. >> Always a pleasure. Thank you, Adam. >> All right, and everybody else, thanks so much for watching.