Carry Trades & Cracks in the System

We take a deep dive into the structural role of the Japan carry trade in global markets, exploring how low Japanese rates have fueled risk-taking worldwide. 

As conditions shift, we examine the early signs of stress and what an unwind could mean across asset classes. 

The episode also analyzes the decline of the Situational Awareness Fund, highlighting key lessons in portfolio construction, liquidity risk, and macro sensitivity. 

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Transcript

SPEAKER_01 0:00

From Wall Street to managing hundreds of millions in climate money, Nick and I used our alphabetic tube of credentials to discuss the investing and tax strategies that actually work. Oh, and we played Division I college football together. So strapped in. This one hits hard. Let's go.

SPEAKER_00 0:22

Alrighty, folks. We are going to start this conversation about situational awareness, but it really is about Ken Griffin. We're also going to talk about Japan intervention, the potential thematic unwind that some are warning about. And we will close with what I call the question of the year. You got to stay tuned for that because I'm going to call something that has never happened before. And we're going to see how crazy Taylor thinks I am.

SPEAKER_01 0:49

Yeah, because I have no idea what's coming here. You wouldn't divulge it. So let's do this.

SPEAKER_00 0:53

Wouldn't do it. Well, let's start with situational awareness. It was very much all over the news Thursday and Friday. Lots of people breaking down the timeline of this 24-year-old supposed savant. You know, one might say he just got lucky and ran a hot hand like playing blackjack in at the casino. But um, I think the story is actually just about how cutthroat Wall Street is. And I think Ken Griffin pulled off a maestro of a move and likely has already added tens, if not 20 billion dollars to Citadel's coffers, uh, because he took out this kid. So why to break that down for us? What you saw?

SPEAKER_01 1:35

This is one of the most savage moves I've ever seen. There is there is no free lunch on Wall Street, and leverage is something that can be employed at times well, but when it goes bad, it just goes so darn bad. And I think Ken was literally pulling strings behind the scene that was just impressive or market manipulating or whatever. So here's kind of the landscape. So you've got this Leopold Ashenbrenner, who is this savant in the AI space. He launches, well, let's back up at one second. He graduates from Columbia University, valedictorian at 19 years old. And then he goes on to be instrumental at Chat GPT, um, open AI, and then spins out, he gets fired. And he got fired because he basically was a whistleblower saying that, hey, this is going to start breaking into hacking into underlying companies, and the world isn't ready for it yet. Talking about the power and the amplitude of what AI could do, and he was just the ultimate believer in it. He looked like an absolute investing genius. He started out with $200 billion. I'm sorry, $200 million.

SPEAKER_00 2:40

Million million dollars.

SPEAKER_01 2:41

Million with yep, $200 million. So really not very big in the grand scheme of things.

SPEAKER_00 2:45

Yeah, on a Wall Street level, that's not very much.

SPEAKER_01 2:47

It's nothing, right? And so, but he had some prominent backers. Um, but anyway, so he starts investing this money and he gets hyper concentrated in chips, semiconductor chips, and then also memory surrounding the AI trade. And so what happens is that that was late 2024. Those trades start to take off.

SPEAKER_00 3:07

Let me stop you right there because I think it's even bigger than that. At least what I have read, but you're on Wall Street, so tell me what I've read. That's just incorrect. So not only was he levered on hardware memory to the tune of four X or what they call four turns, but he had an opposite trade on software to the downside. He did, and that was levered two to two and a half times. So he had this pair trade that basically said, you know, the the the picks and shovels of AI are gonna go higher, and you know, legacy software was gonna collapse. Correct. And frankly, that theme was on point.

SPEAKER_01 3:44

He was spot on spot on for a little while for for a little while, and you know what? Like long term, and we'll get to what happened, but long term, this could have continued to play out incredibly well for him. It could have. So he takes he takes 200 million dollars and turns it into 45 billion. Now, there was new inflow of capital coming in that obviously got him there, but nonetheless, the returns were absolutely astounding. He was right on the picks and shovels, and he was right on the software demise on the other end of it that AI would just take over and you wouldn't need Salesforce, et cetera. And then what happened was you obviously had this just euphoric blow-off top that took place in those underlying assets. And so the assets start to pull back. And when anything goes euphoric, the drawdown is is so dramatic. And so in the past month, specifically the memory stocks are down 40%. And so Ken Griffin starts to look around the industry and he's like, okay, who's hiding leverage?

SPEAKER_00 4:36

I want to again, I want to stop because again, the you know all of this, but the audience might. So again, if you're if your your bullish bet is levered 4x and one of those trades falls 20, what you're supposed to do is you take that 20 times the turns or four, which equals 80%. Correct. Yeah, you know, it it feels beautiful on the upside, but it feels nasty on the downside.

SPEAKER_01 4:59

Yeah, and so you're you're spot on. So what starts to play out there is Ken starts to look around. Ken is this massive Wall Street veteran, known savage, uh, to do whatever he needs to do to make money, as he's supposed to. And he starts looking around and goes, Where's the leverage? Who's swimming with their pants down right now? To use a Warren Buffett analogy. And he goes, Look at this 24-year-old. I'm gonna put him directly in my crosshairs. And so he knows that he's getting close to massive margin calls that he's not gonna be able to afford. So then Ken goes, What's going on this week? And now we're talking about last week.

SPEAKER_00 5:33

What's yeah, I mean, this all happened like this is like Monday, Tuesday, he's having these conversations.

SPEAKER_01 5:38

Correct. And so what he goes is, okay, well, we got a Federal Reserve decision coming on Wednesday. Yeah, and right now there's this real outside chance of about 20% that the Fed rate hikes. And he goes, you know what? Whether I think this or not doesn't matter whatsoever. We're gonna put out a headline that Citadel, in all the prowess that comes behind that name, thinks there's going to be a surprise rate hike. And I remember you let's put this in real view.

SPEAKER_00 6:08

I texted you this.

SPEAKER_01 6:09

You texted me this. And you're like, what is going on here? And I'm like, what the hell? I'm like, and and at the time I couldn't put the pieces together. I'm going, there's no chance that he thinks that a rate hike is actually coming. Because when you look back last week, if they hiked rates, they would have looked foolish for not having hiked rates the month before because the data had actually gotten marginally better. So there was no way that you could walk yourself into a corner to say, yeah, logically they're going to, you know, interest rate hikes here. It just couldn't happen. And so, but anyway, Ken doesn't give a damn about that. He's like, I got money on the line here, and I know I can squeeze this little dink. And so he goes, All right, we're gonna put out a note that we think a surprise rate hike is coming. Yeah, and the day that that gets published, the memory chips sell off or memory stocks sell off 14% in a day, in a day, and so times four, times four. So what is that 56%? Yeah, 14 times four is 15 or 56. So all of a sudden the margin calls are there, they can't afford it.

SPEAKER_00 7:16

It's not even more. I mean, because again, when you think about being a levered player, you know, as I see as I kind of talked to somebody in the charts over the weekend, you could see Leopold selling, like he was selling himself Monday, then Tuesday, Wednesday, he got some calls, and then by Thursday it was forced selling, correct? He wasn't even involved, it was correct, correct?

SPEAKER_01 7:36

And and the great thing about Citadel on the other side, great. Well, I'm not sure that's the right word, but the thing about Citadel on the other side was it needed to be a big player to take there was a half, there was five people that could have said yes. Correct, correct, and it had to be someone that wanted the trade to be to be long in those underlying names, yeah, and so but that caused a full market cascade. Oh, yeah because when you got 40 million, when you got 45 billion on the outs, you've got to now have this situation where they're for selling, that's causing forced selling in other places, and it's this cascading effect banging downwards, and then boom, the bottom hits, citadel swipes the assets over onto their balance sheet, and that day, yeah.

SPEAKER_00 8:21

And again, I want to be clear not only did they swipe the assets onto their balance sheet, but they did not do that at market price, they got a discount to 100, 100, 100, and then bang, memory starts up 20 that day.

SPEAKER_01 8:39

It's like this is I mean, the the brain behind that that put those underlying stars together, because I I really don't think that move can be justified with anything else besides for Ken Griffin looking around and going, This person's leveraged to the gills, he's seen as a savant, other people followed into the trade are leveraged in the same direction he is. When he unwinds, others are gonna unwind, it's gonna cascade downwards, and I can strangle him.

SPEAKER_00 9:07

Yeah, yeah, that's right. So, rumor has it that situation awareness has zero public book. There are reports that he's still got 10 billion or some number, but I believe all of that is just um uh one of the AI companies about our anthropic. Anthropic, thank you. Drew a blank. So again, he he's out, and uh he did put out a note saying, Hey, blah blah blah, I won't use leverage again. But this is well, did you know what?

SPEAKER_01 9:31

Do you know what that poor bastard was doing this weekend? He got married. Are you kidding me? Could you imagine your career is just absolutely crumbling around?

SPEAKER_00 9:41

Does he even care though?

SPEAKER_01 9:42

He's 24, he's a baby, and you know what? Like, this is so stereotypical or whatever, but like if you look at a picture of him, you're like, Oh, yep, yep, that's that that's him.

SPEAKER_00 9:54

That's yeah, no, I uh exactly. It's exactly who you would think. It's it's funny. I I I get like super villain vibes from him.

SPEAKER_01 10:00

That's oh you get Sam Bankman. By the way, by the way, he worked for SBF Sam Bankman Freed. He did for for a period of time. I I think hysterically, on some charitable endeavor that was that was they're connected. They're they're connected, right? And so, you know, it's uh you know what's real funny about SBF?

SPEAKER_00 10:22

If you really just step back and and look at him as a trader or investor, same thing, same thing.

SPEAKER_01 10:30

He's made some great calls, but this is literally the best lesson that anybody could ever see on leverage. It doesn't matter whether you're right, you've got to be able to stay in the trade, exactly and Wall Street's savage. Like in the video that I put out today, I'm like, if Wall Street sees you doing that, they can move the market to force you out of that trade, and that's exactly what took place here. He was right, he's still right.

SPEAKER_00 10:56

Those chips and those semiconductors doesn't matter, doesn't matter, doesn't matter. He sold it a discount, and by Friday, Citadel was probably up 20 billion.

SPEAKER_01 11:07

Savage, and and that's why uh yeah, that incredible, incredible. The storyline there, you couldn't you could you they should do a movie on the I'm just gonna that was my next question.

SPEAKER_00 11:16

Do you think a movie is coming? I think a movie is coming, yeah. Well, let's let's talk about this thematic unwind because uh Goldman Sachs over the weekend, because this is you know, this is all over the news, put out a warning that there might be uh up to 185 billion in additional forced selling from thematic or trend uh funds. Uh again, Leopold is not the only one. He may have been the most public and certainly the the first one to get shot. Uh, but there be me maybe some more pain coming. What do you think?

SPEAKER_01 11:46

It's just not normal to see in the markets the largest companies in the world bang up and down 10 to 15 percent. Like literally last week, what did we see? Microsoft up 15, Apple down 10, Meta down 15, uh Google up seven, eight. Yeah, like that that that's not a normal market. The market is really trying to find a direction right now. They're trying to figure out is this AI trade something that we want to perpetuate ourselves through? Is it gonna play out? Are we gonna pay the hyperscaler side of it? Because we know outside of the hyperscaling, they have profitable businesses that at least can be a backstop for this. Do we want to continue to bet on hyperscalers are going to continue to build and therefore we're gonna continue to buy the picks and shovels around it? Are we going to have this outside sideswipe of Kimmy 3 and stuff coming out of China that's a fraction of the cost? There is a lot of swirling winds around the number one thing that's driving the entirety of the market right now, and that's AI. And it's getting called into question. And all of these thematics are either one time directionally in favor of AI or two to three times because they're leveraged as well.

SPEAKER_00 12:58

Yeah. Again, folks, you know, there's a lot of people. I think you said it earlier incorrectly, Taylor. There's a lot of people seeing what Leopold did and having wild success, right? 200 million to 45 billion in a 24-month period is unheard of, even on Wall Street. Um, obviously, now we know there was a theme behind it. But yeah, I think there's I think there's more pain because when I step back, I'm not a Wall Street veteran like you. I actually think the first cockroach was South Korea. Leopold is the second one. And if you know anything about cockroaches, there are very rarely two.

SPEAKER_01 13:33

You turn on the lights when you can find the switch and they scatter in all directions. Yeah, I mean, what Leopold experienced is exactly what happened in South Korea. I think I heard over the weekend that at that juncture there was 350,000 accounts liquidated, and they thought that by Monday, yeah, yeah, to zero to zero, right? Yes, where they said, okay, thank you for investing. You now have no money. And so I think by the end of the weekend that they're that this was maybe it was the all-in podcast or something, that it might be one to one point three million accounts fully liquidated.

SPEAKER_00 14:06

Yeah, so I have data on that because I this because again, I've been researching this and I do think South Korea was the was the first quake. So about two weeks ago, maybe it was three weeks ago, after one of their companies went public, HK Heinix or whatever it was, they had one draw, yeah, they had one drawdown at that point. And this was the data from the all-in podcast: 350,000 accounts went to zero, some negative, but 1.3 got margin called. What um what they were talking about, the all-in podcast is that data is three weeks old. So now they're expecting probably over a million accounts got called to zero. But in South Korea, what happened last week is they the government stepped in and says, Hey, we're gonna support this. And yeah, I don't know. It's just it's just wild.

SPEAKER_01 14:48

It's this is an area where I think that supporting the market is is is not a something that should be done by any government at this juncture. Because what what you're doing is you're saying now, like, okay, literally you went to Vegas. Like, that's what people are doing when they're leveraged in these trades.

SPEAKER_00 15:06

You're you're in Vegas, and you still have slot machine, you won a couple times, and you're upset that you lost on the next one.

SPEAKER_01 15:11

And and and we'll and we'll let we'll we'll we'll let you have all the fruits of your labor, labor that when it goes up, but there's no retribution on the other side. And what you do is you just perpetuate bad behavior there. And and I it's not to say that like there aren't things that happen, you know, if a bank goes down and you've got over 250 grand in cash in it, like I have no problem with the government backstopping that. Yeah, that's you you weren't risking, you know, at least you're not you weren't reading their balance sheet, yeah. Correct, correct. And that's not your fault necessarily at the end of the day. Um, should you have it? No, but at the end of the day, you're not going out there trying to gamble it, which is what's going on. And then you you just create this perpetuating bad behavior, which is I I don't see that as productive for anyone, you know. Yeah, the the whole the whole evolution of the world is is again now I'm in a rabbit hole of religion and stuff like that. That's not the point of this, but at the strong survive, right? And so you need to have those traits passed on of the strengths and and lessons learned along the way.

SPEAKER_00 16:06

My audience knows my story. I was one of those geniuses last time that turned seven grand into 200 and actually said out loud, I'm smarter than Warren Buffett. And then Mr. Market cleaned my clock to the tune of 80. So I have been there on a much much less zeros, but I know exactly how that feels.

SPEAKER_01 16:23

Yeah, that's Davy Day Trader. Remember talking about him?

SPEAKER_00 16:26

Yeah, Portnoy. Yeah, Portnoy, yeah. Who is this Warren Buffett schmuck? I remember that. I was like, oh my god, you're gonna get it. We were both laughing at the time. We're like, this is gonna blow up. This is gonna blow up, yeah, and it did Portnoy crazy. All right, well, let's talk about Japan intervention. Uh, the Japanese government has long um had currency controls in Japan, they kind of dumped them earlier last year, I believe. But uh, something I don't know, I think for the first time, correct me if I'm wrong, but it looks like the US has stepped in to the tune of five to ten billion dollars to also support the yen. What the heck is going on? Is the yen carry trade just destined to blow up?

SPEAKER_01 17:05

It it seems like it is, but it can't come as a surprise. Like we we we've been down this line before. It did blow us up. It was almost, you know what? I think it was August 6th of 2024. So almost exactly two years ago to the date, you had a light CPI print, or which way did it go? Whatever the CPI print came in, surprised the market.

SPEAKER_00 17:27

Surprise, yeah.

SPEAKER_01 17:27

Yeah, and then our rates moved, and then what happened was you had a backup in in rates on our end, and all of a sudden you had this this this trade that that that was making sense where you could go and use a free ATM where you actually got paid to use the ATM in Japan and and take that money and invest it basically in the Mag 7, which was what playing out at the time, and then that unwound it. And I don't think that if the Japan carry trade unwinds more fully, I don't think we get caught with the pants down. We can't. You can you can't watch a slow-moving train wreck that's taking place right now. Okay, all right. Well, you and and by the way, if you feel differently there, certainly, certainly tell me.

SPEAKER_00 18:10

No, I I mean it's all over the charts. I just I just ask myself at some point, like, what's the point? Like, are we just literally kicking the can down another nine months? And what was five billion this time will have to be 15 billion next time.

SPEAKER_01 18:24

It's like respect to the same point we just made. Like now, this is countries, don't get me wrong. It's not, you know, SK Heinex and people being leveraged to SK Heinex and then being backstop by it, but like let the markets do what they're gonna do at some point, and yeah, investors have to learn lessons, you can't behave badly and then expect the government intervention to step in and write the ship for you. And and that's the same thing that's playing out, it's a much broader scale with the Japanese, you know, yen and the carry trade that's been taking place there. But I also think it's more sophisticated investors that are involved there, too. It's not mom and pops that are using an ATM that's all the way on the other side of the world to buy here, it's hedge funds and stuff. And and hedge funds are smart enough to get out of the way of this.

SPEAKER_00 19:03

Yeah, well, most of them, most of them, right?

SPEAKER_01 19:05

Fair, fair. Well, not all of them. This was a hedge fund we just saw situation.

SPEAKER_00 19:09

Yeah, so all yeah, it's not all of them, but yeah, most of them will. So now for the question of the year, and I want to set this up before I get there. So, one of the things that I think is going on right now, it actually goes to something you just said. I think Kevin Warsh is tired of Wall Street playing the Fed, right? What what he called playing the referee. Uh, I he thinks that Wall Street has an unfair advantage, they've been able to play the game and print money for too long. And he is doing everything he can to remove forward guidance, less meetings, canceling press conferences, not dot plot. And you know, that is gonna have ramifications. I'm telling my audience that that means the 10-year and 30-year bond is gonna go higher because the risk premium is gonna spread out. Uh, I also think the mortgage spreads will get wider because again, if you're they don't know what the hell they're talking, they don't know what they're looking at. It's I mean, the only thing they can play with is risk, and and you know, the market got used to you know, understanding the game via the referee's eyes for 25 years, right? Forward guidance, forward guidance, foreign guidance. They were never surprised. Now they're gonna be surprised. And um I think that might come in September. So here's my question, and I want to know on a scale of zero to a hundred how crazy I am. So I believe that the feds, one of the feds' only tools now for forward guidance is the vote. And we went from 12.0 to 9.3. I think what we're gonna have in September, because I do not think I think inflation is gonna get worse. So I'm I'm calling that kind of leading into this. Um, we're gonna have inflation go up the next couple of months in in the CPI readings, and I think we're gonna have a seven five vote, and Walsh will be one of the five. We have never, ever, ever had a rate increase where the Fed president is on the opposite side, so that is what I'm calling it.

SPEAKER_01 21:15

So you're saying seven, uh which is what I thought you were saying, seven hike, five hold. And Walsh is one of the hike in the five hold.

SPEAKER_00 21:23

Yeah, yeah. So I really have two questions. So first, I think that's coming, but when I really play this out and I'm behind and I'm at one of those big tables with all these people, and and they count the votes and it comes seven five. I'm not sure Kevin Walsh could go out to the media with a seven five vote when he's one of the five. So he might be forced to make that vote eight four. Yeah. But I I'm gonna call it right now seven five rates are going up, and Kevin Warsh doesn't want them. What do you think? How cra I mean, like how asinide is that idea?

SPEAKER_01 21:57

No, no, I I If inflation moves the direction that you're talking about, yeah, that's the first step.

SPEAKER_00 22:03

Yes.

SPEAKER_01 22:04

So they can't continue to say now it's 58 months of us not being in the directional move of our two percent targets. You can't keep saying it unless you're gonna do something.

SPEAKER_00 22:15

You can't, and we already have three, we only need four more, and there's plenty of Fed presidents that are like Williams this morning said, Hey, my expectation is for inflation to fall in the second half. And again, if it doesn't the next two months, you're kind of stuck, aren't you? You've got to raise at some point.

SPEAKER_01 22:30

You you do, you do, and I can't decide whether Kevin Warsh is incredibly qualified for the job or not qualified for the job. Yeah, it's kind of binary. I cannot figure out what the F is going on, and and it's not it's not very clear to me. I love what he's done with the task force. Um, you know what?

SPEAKER_00 22:54

I I I I'm gonna I want to push back just to because I think it is all I think it's all theater. I think this guy came in with a with a you know with a post-it note saying these are the five things I want to do. And he's like, How can I make that happen? He's like, Oh, let's go get some task forces, but they're all gonna come back with my answers. He's like, I what I imagine is he has an envelope that's sealed, and he's like, I'm gonna write down what they're gonna say, and then like five months later, we'll get the answers. And he pulls out the card. Look, I'm right, I'm a magician.

SPEAKER_01 23:22

Well, if if you take that cynical view of it, I agree with you. If you take the view of I'm bringing in industry experts to, you know, to to help guide my opinion, then then then I love it. There are real question marks out there, like uh Andreessen. Andreessen's donated $25 million in the last year to things that are uh, when I say donated, he has contributed politically $25 million to things that will perpetuate AI further into the future. And it's like, can you look at that and now say that this task force doesn't have a conflict of interest? And so, like, there are definitely question marks outstanding there. I do think that Mark Andreessen is is an incredible talent, and I think that if he is doing what is believed by him to be the right thing without conflict of interest, I think he's the right person to be there.

SPEAKER_00 24:11

Yeah, just be clear. I met him, I actually know Andreessen, I haven't talked to him in decades, but I I worked with him closely at HP because we bought his company. And the first thing I'll say about him is you guys think he talks fast today? Whew. He was an he was he was up in octave before. He he just talks so fast, but I do think he is, I think he is he's doing it for the right reasons. But again, I am cynical of Warsh. I think Andreessen came to this because he thought he had a real ability to change things, but again, I'm telling you, Warsh wrote down the answers in an envelope, it is sealed, and he's gonna pull off a you know a magician's trick by telling you the five answers. It's it's all just a fucking game.

SPEAKER_01 24:48

So, what it what what is your take on Warsh?

SPEAKER_00 24:50

I guess I'm interested because I so so here's my take.

SPEAKER_01 24:54

Yeah, go.

SPEAKER_00 24:55

So here's my take. I think Kevin Warsh again, I studied this for so long. Let's go back to Kevin Warsh's first go-around with the Fed, right? Uh, he wasn't the chair, but he was one of the Fed presidents, and he left, he quit in protest because he didn't want the money printer to go again. Yep, let's not forget that because I think a lot of people have forgotten that.

SPEAKER_01 25:17

Yep.

SPEAKER_00 25:17

So, what does he really think of the money printer? He thinks the money printer has helped Wall Street get rich, the top of the K get rich, and mom and dad have been crushed.

SPEAKER_01 25:26

He's not wrong. Let's be clear on that.

SPEAKER_00 25:28

Again, that's where this whole thing starts. And I think Kevin Walsh has been creating this plan on how to, you know, change the rules so that Wall Street is not so, you know, that hasn't figured out the game, and maybe mom and dad have a fighting chance.

SPEAKER_01 25:46

But I'm not sure what the end goal of this black box, Pandora's box that you can't see inside. I I don't understand the goal of it because what it's doing is it's costing us all tax dollars at the end of the day, because you have the interest rate premium blowing out on the long-end bonds, which we have to pay.

SPEAKER_00 26:04

And so but also the saving, what savings rates, mom and dad's savings rates go up, you know, theoretically.

SPEAKER_01 26:10

So again, there's the I again, I think this is no, yeah, but no, because the savings rates are tied to the front end, and what we have is this steepening yield curve right now where the back end's moving higher, so yeah, all of a sudden you have mortgages becoming more expensive based on the 10-year moving higher, the certain small business loans, credit cards, all of it. And but the but the but the savings accounts on the front end, that's no, that's true. They that they they haven't seen that move higher. So I I I just cannot I cannot figure out why you're you're you're trying to cause confusion. I really don't I I don't understand it.

SPEAKER_00 26:43

No, and again, I'm I'm I'm telling you what I think he's doing, and I I can't tell you why. Because again, I think you're right. And I'm telling you, I just told people this morning this is going to cause an accident. This is the accident is coming.

SPEAKER_01 26:56

You you you have a 30-year treasury right now that's higher than it was the highest 19 years ago, correct? 19, correct. Like, is there anything productive that comes from that?

SPEAKER_00 27:08

No, you got a you got a country that's 41 billion dollars in debt. Let's not forget that.

SPEAKER_01 27:13

Yeah, yeah, that only gets worse. It's you know, behind Social Security, it's the number one expense we have is debt financing, right? I mean, it's it it's just and it's getting away from us, and I I just I don't understand what the how long how long can he go?

SPEAKER_00 27:27

How long can he go without giving guidance? Because something is going to break.

SPEAKER_01 27:32

Well, think about this. So, like, there's no benefit coming from this. What I mean by that is if he comes out and says, I'm gonna raise interest rates, raising interest rates should control inflation. Inflation is what drives the back end of the yield curve. So if we think inflation's coming down or or it's gonna come down based on higher interest rates, that's gonna suppress the 30-year treasury rate. What he's doing right now is not only is he not controlling the 30-year treasury rate in inflation, but he's causing confusion, which is costing us more money because the 30-year treasury is going up because the market says, I have no idea what the hell is going on here.

SPEAKER_00 28:07

Yeah, this I mean, again, I I I've told my audience that I expect mortgage rates to have a seven handle by the end of the month, which is not good, right?

SPEAKER_01 28:16

It's not good, it's fucking terrible.

SPEAKER_00 28:18

Yeah, it's just and then business loans will go higher, credit cards are gonna go higher. This I mean, he keeps going. The accident could be a recession.

SPEAKER_01 28:26

Not it, not it could be, it will be if if this you can't have runaway interest rates because keep people can't afford to finance things at that point, and so all of a sudden, that debt financing, and we're and we're seeing so it's coming in twofold. It's not coming just from the confusion that's taking place on that side, but you also have now the hyperscalers and things like that, where their debt financing costs are going up as well, and that all of a sudden negative free cash flow. Yeah, you couple those two together and people start to want to take on debt a lot less, and then the downtrend of where that debt gets spent starts to dissolve, and then businesses start to have less productivity, less revenue, less all the things. I there's there's nothing good coming out of what he's doing right now.

SPEAKER_00 29:09

There's going to be an accident coming.

SPEAKER_01 29:12

The question is I I think it, I think you've already started to see the accident playing out in front of us, and now what does he do? He goes back, he has to come in and raise rates, right?

SPEAKER_00 29:20

Yeah, that so I I that's because again, I go back to just playing the chessboard, right? So you my belief is Kevin Walsh gave President Trump a pinky swear that he would not raise rates, but of course, he's only talking about the federal funds rate. What Kevin has done is he's not again to date, he has not raised the funds rate. He has not correct. But if you look at the 10-year note from the day he took office to where it is today, it's up like 37 basis points, which is a Fed rate increase, more than a Fed rate increase. Correct. So I think he's walking around going, Yeah, I got him fooled, but you know, I'm doing what I want to do.

SPEAKER_01 29:56

So well, if he doesn't now move in September, what happens to the long rates?

SPEAKER_00 30:03

They're going higher, dude.

SPEAKER_01 30:04

They're going higher. We're putting ourselves in a corner right now. It's like raise raise rates. Yes, the front end moves higher a little bit. Well, I mean, the market's already got a price, so whatever priced in it's not gonna move higher. What you're gonna do is you should compress the and we're like nerd talk squared right now, but it should compress the back end of the curve.

SPEAKER_00 30:24

But here's the problem if he raises rates but he doesn't give guidance for the next meeting, it doesn't matter. It's the guidance that was the it's how this thing kind of played, right? We've had we've had some form of guidance for 25 or 30 years.

SPEAKER_01 30:40

Well, he can't he can't pivot on that. No, he can't. That's that it's been his calling cost. Yeah, yeah, yeah.

SPEAKER_00 30:49

This is um it'll be interesting if the market what what I told people that I think is coming is is is it and again it's in August because this will happen quickly. Much, much like this $45 billion fund, it'll happen, you know, it happens slowly and then all at once. I suspect the bond vigilantes are gonna have enough of this nonsense and they're gonna rip rates higher and it's gonna force him to react, right? He's gonna 10 of the 11 Fed presidents have been tested. This will be his test.

SPEAKER_01 31:17

I just wonder, is there more to come?

SPEAKER_00 31:21

Meaning, uh, have the bond vigilantes already had their their no, there's gotta be no, it has been, in my opinion, too orderly at this point.

SPEAKER_01 31:29

It has been orderly, it's just it's just been a walk higher. You're not you're not wrong there.

SPEAKER_00 31:33

It will be one of those parabolic green candles or whatever you guys.

SPEAKER_01 31:37

And by the way, that's gonna crush bonds, but that equities are not gonna have a walk in the park when that happens.

SPEAKER_00 31:42

No, and where I play, it is going to crush commercial real estate. Commercial real estate right now has something like a trillion dollars in debt refinancing and probably another trillion of extend and pretend nonsense. Yeah, you get these you get these rates ripping higher, and banks are gonna start foreclosing in mass. That is gonna be a train wreck and a half.

SPEAKER_01 32:03

And our frozen housing market, not commercial, residential, is just gonna remain frozen.

SPEAKER_00 32:08

It's a depression, and I've said that for three years. It's a depression. Four million transactions in a market, we usually do six. That's not good.

SPEAKER_01 32:15

So let me spin it back to you because I I'm trying to give some benefit of a doubt somewhere, but I'm trying, I'm I'm starting to struggle with the grasp at those straws. What is the game that he's playing? What what what is the what is the end goal of these actions? Him, him obviously being Walsh that I'm asking about.

SPEAKER_00 32:35

I mean, the one thing I ask, and I don't have an answer. So this this is right now is a question without an answer, in my opinion. Is does Kevin Walsh want to reset asset prices lower? Like, is that is that the game he's playing? Are we just trying to blow shit up? Is that what's going on? No, I'm I'm I'm no again. If you look at what happened during the pandemic, the last four years, Kevin Walsh might say this is because we printed money the second time. Remember, he revolted the first time we did this. Now we've done it a second time because of the pandemic.

SPEAKER_01 33:05

Is the long game the iteration of this? If I blow up the top end of the K, which is kind of what you're suggesting, then therefore there's not enough money to chase around assets. Therefore, inflation falls, and the bottom of the K has their head above water for the first time. I mean, that is a terrible, terrible. Like, uh I'm not saying you're you want to talk about a recession. Woo! Yeah, yeah, yeah. Like, let's take all the lubrication out of the system that allows the trickle down to uh that I again that's it.

SPEAKER_00 33:36

That that's I mean, when I look at the game and I ask myself, is is you know, because again, if he wants to blow up asset prices, he's doing a pretty good job of it eventually.

SPEAKER_01 33:45

Well, he's also like this phantom of the opera where you can't see him, you can't hear him, you you have no idea canceling the press conference now, so you can't even ask him questions. So I mean, he could be doing whatever whatever the hell he wants to back there, and and he's but at some point, the other Fed members, and this was to your point before.

SPEAKER_00 34:03

This is why 7-5 comes in September.

SPEAKER_01 34:06

Yeah, and that's this is exactly why that's why you need to have someone start to step up and say, like, hey, I'm not entirely sure what your thesis of being so guarded and not telling us at all. Like, what are they looking at? Strip down core, like what what what what is that's the one that pisses me off.

SPEAKER_00 34:23

I don't give a shit if you tell me the PC is horrible, but tell me what the number like tell me what the measurement is, right? Right, yeah, and he's not even doing that.

SPEAKER_01 34:31

No, no, he's not at all. And it's strip, trim, whatever, like you know, there's 92 acronyms that they're putting up. Yeah, yeah, it's just so I I don't know. This is I I hope that Jackson Hole, I don't expect, I hope that Jackson Hole comes along with some at least a shot. He's he listening doesn't want to give forward guidance. We're not getting that, but at least some understanding of what the heck it is that his end goal is here because it's it's very unclear to everybody in the market.

SPEAKER_00 34:58

Well, again, let me just let me take my unanswered question and throw it back at you. Could Kevin just be saying the K-shaped economy has gone on too long? I want to take care of the 80%. I mean, could that be tax the top? Tax the top instead.

SPEAKER_01 35:13

That's a better thesis. Then I mean, I'm not saying that I I want the top end tax. Don't get me wrong, I'm not a I'm a I'm a small government guy, but like blow up the top, like that. I I you it's better to just take the money from the top and give it to the give it to the bottom than it is to just blow up the top, like that's ridiculous.

SPEAKER_00 35:32

Yeah, well, it's uh I didn't plan to do this, but I'm feeling spicy this morning. Uh, it looks like Mayor Mamdani is gonna roll out these uh grocery stores with uh prices 30 below. And the most thing that just happened this morning, or at least I saw it this morning, so it means it probably happened yesterday. Uh, he's gonna require an ID to go to the grocery store, but not vote. How does that make sense?

SPEAKER_01 35:56

I this is to your point before, when things get stressed to an extreme, which is which is where things are going right now with the K-shaped economy, where I I I'm not being unforgiving. I understand that people on the low end are struggling, I understand prices have gotten away from them, and I understand that it's not necessarily pretty if you're not a privileged individual at this juncture. Yeah, but it does create lunacy, and and what's playing out right now in New York City is lunacy between again, don't don't tell us who you are and vote, but we need to know who you are when you go to the gas station or grocery store in order to purchase these discounted uh government subsidized groceries.

SPEAKER_00 36:39

Yeah, I thought I I it's funny because a couple of days ago on my daily financial news, I'm like, hey, these grocery stores are gonna be great, they're gonna be celebrated, they're gonna show long lines, everybody's gonna be smiling and happy, they're gonna look amazing on Instagram politically. Oh, they're gonna look amazing. Uh, but I actually pontificated that um, you know, people from New Jersey and whatnot would come because again, who wouldn't who wouldn't drive, you know, 30 miles to get 30% off? Because I assumed they wouldn't do IDs because IDs are racist. But this morning I've learned that apparently IDs aren't racist if you want to buy groceries, which and I am having a tough time understanding.

SPEAKER_01 37:19

And these are I'm I'm not as I I live in this state, which is crazy that you're more aware of it than I am. But this is just for New York City residents, correct?

SPEAKER_00 37:28

Well, yeah, well, apparently this morning they're gonna have to do IDs at the at the check-in, so only New Yorkers could come. So that again, I assume that wasn't because Mondani said that IDs are racist. So I assumed he wouldn't require IDs to go to the grocery store, but I'm apparently wrong.

SPEAKER_01 37:43

Half of half of New Yorkers, too, and I guess these maybe the the argument here is these aren't the people that need it. Half the New Yorkers are imports from Ohio and Iowa and California and Texas, they don't even change their ID when they get here. So it's like, but maybe maybe again, maybe those are the higher end of the K that aren't necessarily reflective of who needs this.

SPEAKER_00 38:02

Yeah, but I was surprised that an ID. I can't understand why you need an ID to grocery store, you need an ID to shovel snow in New York, but you don't need an ID to vote. I mean, I don't get it. That's just crazy.

SPEAKER_01 38:13

Shoveling snow, that's a that's a damn crime. There you go. There you go.

SPEAKER_00 38:17

Well, this is always fun. We take lots of twists and turns. Again, oh wait, you never answered my question. How crazy am I to think we might get a seven five vote in September with the Fed raising and Walsh is one of the fives? Am I is that a zero percent possibility?

SPEAKER_01 38:31

Well, I I just I just think that if that's the case, then Walsh is getting bullied and and he flips. So I think you are crazy to say that, but I think the logic that gets you to him flipping is not crazy at all. That's what the numbers warrant.

SPEAKER_00 38:43

Yeah, so so just to be clear, because I think you're right, if in the room the vote comes back 7-5, he will flip his vote, so it's 8-4.

SPEAKER_01 38:50

And God forbid if that information leaks. Oh my god.

SPEAKER_00 38:56

It will leak. I somebody's gonna say something somewhere. Yeah, that's gonna be crazy. Well, Taylor, you're always fun. Where can people find? Oh, and by the way, you put out an amazing 60-second clip this morning about situational awareness that people need to follow. I don't know how you get five minutes inside 60 seconds, but it's well done. Uh, where can they find you?

SPEAKER_01 39:16

You're the best. You're the best. Find us on Instagram, it's the easiest place. TikTok also works. We're at Life Goal Investments.

SPEAKER_00 39:22

Thank you.

SPEAKER_01 39:22

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