(Any views expressed below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
Good morning,
The risky thing about writing these notes the day before is that so much can change by the time they go out Friday morning. Because right now, right now I’m feeling vindicated. If you’ve been following along, I’ve been saying for weeks that it feels like we’re back and that while I wasn’t 100% sure if we found a bottom at $58k, I felt it in my bones that we were back. And as I’m writing with BTC at $80k, I feel even better that we are back. It hasn’t been that easy. You’ve essentially had to call bullsh** on Warsh’s tough talk and ignore the pundits calling for doom and gloom around yields that have been blowing out.
It was just Wednesday that the Fed was likely to hike rates this month. 24 hours later odds flipped to a hold.
The title for today’s missif: Japan, Iran, and the orange man was chosen for no reason other than it rhymed. Sorry if it was misleading.
What it really should’ve been called is “Don’t Fight The Treasury.” Let me explain.
The bond market has been sending a pretty loud message lately. The US 10-year pushed through 4.8% this week and the 30-year got back up around 5.3%. Japan has been getting absolutely smoked, yields are moving higher across most developed markets and suddenly everyone is talking about the bond market again.
The problem for the US is that it now has more than $40 trillion of debt. When long-term rates move higher, it isn’t just mortgages and corporate borrowing that become more expensive. Trillions of dollars of government debt eventually have to be refinanced at those higher rates too. Interest expense goes up, deficits get larger, Treasury has to issue even more debt to fund them and the bond market is asked to absorb even more supply.
You can probably see the problem 🌀
There is an obvious way out of this, but I don’t think anyone is going to like it. The US could dramatically cut spending, raise taxes, reform entitlements, accept a recession and basically take the medicine required to permanently fix the country’s balance sheet. If a benevolent dictator had a 30-year mandate, maybe that’s exactly what they would do. Take a few horrible years now in exchange for a much healthier country down the road.
Unfortunately, politicians don’t have 30-year mandates. They have 4 year election cycles.
Nobody is getting elected by promising higher unemployment, lower home prices, a weaker stock market, reduced government benefits and higher taxes so that somebody else can inherit a cleaner balance sheet ten years from now. I’ve mentioned this before but when Elon Musk came into DOGE talking about ripping trillions of dollars of waste out of Washington and then gave up because he couldn’t make a dent, I…bought more bitcoin.
This tweet made me laugh.
Instead of taking the medicine, the path of least resistance continues to be managing the symptoms and buying more time. Japan is probably the most extreme example of what that can eventually look like. When debt levels make meaningfully higher interest rates increasingly difficult to tolerate, policymakers start interfering with markets that would otherwise force the adjustment.
We’ve seen that all year in the yen, including increasingly aggressive intervention to keep the currency from disorderly moves.
The US obviously isn’t Japan, but I think the underlying problem is beginning to rhyme. The difference is that America has the luxury of issuing the world’s reserve currency and a Treasury market that sits at the centre of the global financial system. That gives them far more tools to manage the problem.
And I think they’re going to use them.
Iran makes the timing particularly ugly. Higher energy prices add another inflationary impulse at exactly the moment Washington desperately wants borrowing costs to come down. That’s why Warsh can spend one day talking tough enough that markets price another hike while Trump is standing across town demanding the lowest interest rates in the world.
Both sides make sense based on the problem they’re looking at. Warsh sees inflation. Trump sees a $40 trillion balance sheet that increasingly cannot afford high rates.
And from Vance yesterday:
All of the political pressure is firing in one direction and things are only going to get hotter as we approach midterms. Let’s not forget about what we’re about to see in just a few weeks from now. The orange man undoubtedly has big plans. He will be campaigning day and night leading up to the November 3rd midterm elections. It will be an all out blitz and who knows he might even have the rocket man by his side.
We already know what the DNC (or DSA) is going to be pushing. Free this, free that, take from the rich, give to the poor. It’s been working very well in NYC and other States that are feeding off the real problem facing every day Americans which is affordability.
If Trump got his way, tariff stimmies would be hitting right about now but that is not the case. It will be very interesting to see what goodies the Republican Party can promise because they know the topic de jour is affordability and I don’t think they have enough time to educate everyday Americans on why government run grocery stores and free public transport never works - just ask the Bolsheviks as they say.
Whatever the “right” long-term policy might be, nobody in Washington wants voters walking into November with their mortgage rate still elevated, their 401(k) down and unemployment moving higher.
Does that mean I think we should get as long as possible now, ahead of all the directionally bullish mumbo jumbo? Bitcoin has already had a pretty big move closing out its best August since 2017 up 25%.
I remember 2017 very well. My career as a bitcoin salesman started just after the September 2017 red box. The months following were pretty legendary.
I’m not suggesting we’re about to repeat that. I wouldn’t be surprised to see some chop, especially after the recent move up. But I also don’t think I want to get too cute trying to trade around what I think is becoming a pretty obvious macro setup.
Never a dull moment these days.
I’m off to the beach.
Have a great long-weekend!