A New Era Is Beginning In Markets | Weekly Roundup

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Intro

We have to have a new name now. Forward Guidance is dead, so um introducing >> Task Force. >> [laughter] >> The market right now is pricing in two hikes by mid-2027. Their hugely hawkish pivot comes at a time when oil prices are down dramatically from their last two meetings. >> We got the high CPI print, peak hawkishness, forward guidance, now everything's kind of collapsing. >> I'm still a big believer that we're hitting peak hawkishness here, but I think volatility is is going to go higher at the same time. >> It's easy to be hawkish when stocks are at all-time highs and everything's rosy.

>> And this hurts, but like I know there's no way in hell that we're hiking at the end of this year. Nothing said on Forward Guidance is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only, and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests, and the Blockworks team may hold positions in the companies, funds, or projects discussed. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. All right, what's going on everybody?

Forward Guidance Is Dead

Welcome back to another round of edition Forward Guidance. We are recording on the first week of the Kevin Warsh Fed. We just had the Kevin Warsh Fed first FOMC meeting this week, and um we have to have a new name now. Forward >> Ooh, yeah. >> I feel I feel like that's >> I don't know who the hell made this, but this is freaking awesome. >> That's fitting for the new hairstyles, too. As I just laugh when I we open it and it's our pictures, and Tyler looks like an absolute meathead, and I look like I look like a

a convict, I think. >> Yeah. You're you're still >> People are saying you guys are looking better than before, so. >> I like it. I I might I might keep it, honestly. It's It's hot here in Texas. >> It's Yeah. It's scorching here, so it it feels good. >> Nice. That's sweet. Um yeah, forward guidance is dead, long live forward guidance. I mean, even though it's the name of our show, I think we've all been kind of stern critics of this style of monetary policy for a long time. Um obviously the dot plot was one of the main issues that I felt like I had. It was just completely useless. Um so, it is interesting. So, anyway, lots to talk about on this. Um let's start from the top.

Warsh just uh lit on fire the statement. Pretty much cut like 80% of it out. Very succinct. I love the ending of it. Just the committee will deliver price stability. Mic drop. That's it. Um Starting with this, curious to get you guys' thoughts on on Warsh's first meeting. What's in your head? >> I I just I thought Yeah, there's there's a lot I mean, stocks ended basically the same as they were going in. So, there was a lot of >> After yesterday today, yeah.

>> Yeah. No, there's a lot of noise. I mean, I thought I think there's a lot of good that he's talking about. We we can get into like some of the changes, the balance sheet, updating the committee's views on on how the policy versus balance sheet transmission mechanisms work for policy, you know, this dot plot stuff is it kind of is pretty wonky. I mean, they their hugely hawkish pivot comes at a time when oil prices are down dramatically from their last two meetings, and I I think it sort of just gives credence to the idea that you know, I'm skeptical that when Moore

says he wants to revamp the data, right? After all the stuff Trump's done, you're like, "Hold the phone here. What's this mean? You know, are we just going to work cuts through it at any you know, at any cost?" But, at the same time all the best inflation forecasters knew the last two Fed meetings that this inflation thing was coming. And now the same probably astute forecasters are seeing the disinflation coming post war. And so, it's just a classic Fed reactive months late versus front-footedness. So, it lends some credence to what he says there. And I think I think a lot of it was just

to try and lay to lay to rest the Fed independence concerns and playing politics because everyone was super nervous that he was going to give in to Trump and all this stuff. And at the end of the day, like nothing's really changed. Trump still wants rate cuts. Bassant wants Everybody wants it. I think they will you know get a less hawkish policy eventually than what what was displayed this week. >> Yeah, I think to to keep up our peacockishness narrative from last week, I think we maybe we were a couple days early, but we saw the two-year year-old spike and that flattened the yield curve. And

now you know, today the two-year hit at 420 and it kind of backed off a couple basis points. I'm I'm I'm pretty sure given break-even inflation rates that you know, things are getting pretty tight and real rates are tightening global liquidity pretty hard. We're watching We have a bunch of charts to back this up, but the dollar's breaking out here higher. and the yen is breaking out of like, you know, a 20-year base. So, there's lots of stuff he changed and kind of derailed. I was a bit shocked at the market reaction today. But, here's the the thing about the Fed now is you can change the rules to the game,

but it takes a lot of time to change the players. Like, to do a stupid sports analogy, which is like, you know, in the NFL when they made pass interference like a lot they used to have these big 6'5 wide receivers and you know, they would be super, you know, athletic and they'd throw deep bombs. And now you have these little tiny guys on the field like Cooper Kupp who are like little tiny wide receivers and because they changed the pass interference rules, these guys are so, you know, jittery and fast. So, it takes a while once you change the rules to change the players on the field, right? But, the players on the field will will adapt.

And today we saw you know, nothing really changed with vol rolled off, you know, the VIX you got the VIX smash after the Fed spoke. You were you're heading into a seasonal period of low volatility. Systematic guys were still levering up into the momo stuff. And it nothing really changed, but if you do look at the macro, the macro is changing. Meaning like you have dollar the dollar's doing something different, the yen's doing something different. Um, the only thing that I'm I'm watching now is if credit spreads really break out. Cuz if if liquidity is tightening and we're seeing credit spreads just

putz along lows, which allows this capex cycle to keep going, but if the dollar starts breaking things elsewhere in the world, you'll get that, you know, reverse carry trade. So, I think that's the main catalyst I'm watching here from a macro basis, but I don't know. I I I I of like less jawboning from the Fed. I I joked around on Twitter last night that uh this guy actually wants free markets. We'll see We'll see. But there is a great chart I put on Twitter where it was like the amount of words in Fed Fed releases for the past like basically 15 years. It was just like a parabolic rise of like Fed communication, which I called vault volatility stiflers. They They've basically been trying to pound

volatility by using the forward guidance for 15 years. If that's gone, I don't know. Maybe we're we'll be in like a way different market and the systematic, you know, asset management bubble will just go away and you'll have a lot of different stuff happening, but that's going to take some time. >> Yeah. I think I think secularly like rate volatility is going to go higher from here. I think Yeah, like I I'm with you and wrote something for quite similar to the fact that yeah, look forward guidance in the way it was being used was a was an innovation brought forth from Bernanke because at that time when we had the zero lower bound on interest rates, like they they could not bring rates

Rate Volatility Returns

negative. But what they could do is give forward guidance to ensure that there was no rate volatility multiple years into the future to ensure that people could lever up and do all these different things and and further ease financial conditions. Um And yeah, that's just not the right tool set for this world of higher secular inflation that we're in anymore. It's It's a good thing, I think, that it's that it's moving on. And I think um it was really interesting to look Yeah, at the price action yesterday versus today. Like I'm I'm still a big believer that we're hitting peak hawkishness here, but I think volatility is is going to go higher at the same time. Like and I think that's the whipsaw markets we're feeling is that look, we we did have This is the SCP data. So even though Kevin Warsh did not

submit his own dot, the rest of the committee did. And it was really interesting like the peak hawkishness we were talking about last week was for the most part just the market-based forward expectations of it and it felt like yesterday was sort of the the Fed marking to market the expectations that were into the market um from what was in their own dot plot. And so you had that like final capitulatory move where it's like, "Okay, yes, we think that there's higher odds of a hike coming at the end of this year, but the market's already mostly been there." Yes, we went a little further yesterday into the end of the session above that, but we've already given that back to your point, Tyler. The the 2 years rallied since. It feels like we're in equilibrium now between the Fed and where the the SOFR market was at. Um

And so once the market digested that, you go to the next day, which is that okay, well, look, like are we really actually going to get a hike or not? Suddenly, that's what the market needs to start digesting and it's like oh, wait, oil's back in the 70s. Um break-evens are lower. Like, a lot of things are actually turning. Will these hikes actually happen? And then suddenly the market has to digest that at the same time of like higher rate fall and the fact that like wars won't be prescribing it as much anymore. So, I just feel like there's this huge whipsaw because he didn't provide his own dot, the rest of the community drove the ship. Like, all those super hawkish dots were probably just like Fed presidents, not even on like the the governors, that were just kind of trying to drive that narrative.

And then suddenly the market just woke up this morning or even after hours yesterday and was like, "Oh, wait, are we actually going to get hikes? Like, maybe not." >> Yeah. This is also a good quote uh from Blackstone CEO. He said, "Uh if you look at shelter costs, which are the biggest components of CPI, I would say they're running in the low ones versus government data in the low threes. And that will be helpful to the new central bank chair, particularly after the wars and the real premiere. And wages have gone from call it 5% in the US 2 years ago to 3%. So again, that's helpful. I think the picture after the war ends will be that most will be better than most people realize.

And I think everyone's starting to digest that, which is we got the we got the high CPI print peacockishness for guidance and now everything's kind of collapsing, I I think besides I guess some some pockets of consumer goods like, you know, Apple's saying iPhones are going up and because of memory prices. But like on the whole, if you look at housing, the large components of CPI and PCE, I I think those might be rolling over here, so. >> I mean I mean look at this of one-year inflation swaps. Like we are we are back to where the war started.

Like >> Yeah. >> I and this is yes, this is just following oil, but like that's what drove the hawkish expectations since. And you know, yes, you can look at what's going on with like core inflation, like core CPI was hot too, but I think a lot of what was going on there was related to the the end inflation from tariffs that was going on and like tariffs aren't a thing anymore. There's some weird stuff going on with with shelter inflation, owner's equivalent rent, like you'll you're folks will remember we're talking about how back in I think it was October during the government shutdown, shelter inflation the market had a zero. So just the base effects of coming out of a zero mark on that led to higher shelter inflation. And so now we've reverted and

so I think that's peaking out like headline inflation's already going to be in the gutter next month looking at where oil is right now and and you know, the swaps market is pricing that. So I don't know. I feels I I very strongly believe that like this was the capitulatory moment yesterday of peacockishness and I I think it's done from here on out. >> Yeah, if you go to slide 35, I there's this chart that you shows the change in their dot plot and it's really inconsistent because they basically have meant multiple many governors have hikes this year and then cuts with it basically under 12 months from the hikes, which is very abnormal and says to me that

Why Hikes Won’t Happen

they're reacting to the oil prices that are now coming back down again. And if you go to the next slide, I just I tweeted this out. I just It's This is what's most ironic to me is just Yes, the inflation prints came in April and May and this month, but it it we know it. We knew it that oil's down 30% from their last dot plot when when they pivoted when they remained dovish. In the next slide, if you just look at, you know, the one thing Wersch did sort of like give more input on or at least allude to is was keeping an eye on the markets and understanding what the market's telling you. The yield curve flattened

dramatically, which does not coincide with inflation problem usually. I mean, it's hiking cycle or growth problem and could be a mess, but you know, two-year yield bottomed the day Operation Epic Fury started. And then I put the other tweet from Trump signing the peace deal here. So, when you go into on the next slide, too, Felix, as you mentioned the the components of of inflation being core services, core goods, energy and food. Food's nonexistent, energy's going to be coming down.

Core core goods, as you mentioned, tariffs were refunding, so there's we're net zero tariffs at the moment. And um core services is that housing. So, uh it's it's just strange to me. And at that's why I just keep thinking it's got to be sort of a a po- politic to you know, sell this narrative that the independence is there. He's not Trump's, you know, hand-picked guy, um because it doesn't really make a lot of sense to be doing this now. And I get it, rectifying past mistakes. That was a lot of his message was, you know, the the track record of the Fed is brutal.

We're going to correct that. So, I guess I get that. If you go to um 41, and this is the last kind of thing on this topic is the positioning. So, this was from last week. So, most of this move has been front-run. We're We're looking at the uh a record short position in in so far from the fund fund category. So, >> How bad is that going to get squeezed? >> I would imagine, I mean, the thing that I kind of think about is like, okay, everyone's a bit stunned because we went from you know, the Fed running their mouths non-stop to then nothing.

At the same time that we're getting this dot plot at peak inflation and growth in my perspective. So, it's just a curveball on a curveball of confusion. And sort of makes people want to see the data come come through. And And the next Fed meeting six weeks away. So, um there's there is still time for for this to play out. And I think we'll see that in July's CPI print and and probably the labor market starts to cool, too, from from its previous pace.

You're already starting to see that in some of the weekly data. So, yeah, we're beating a dead horse here, but I I just the market right now is pricing in two hikes by mid-2027. And only one of the 19 committee members who might not even be a voter, we don't know, has a more hawkish at three hikes view. So, I just it's strange to me how this works. >> that's a super important point about how the dots can be given from like you Like I said, it's these presidents that are probably non-voting. And maybe they just want to give uh you know a quick FU to to Warsh coming in and and you know rocking the boat a little bit. And it's like okay, well look, I'm a non-voting

member. who the hell knows if I'm even going to be on the on like a president in a year's time? Who knows? Like all right, I'm going to ramp up my dots here as cuz it's the only tool I have at my disposal. Um I don't know. I mean, I feel like it's just this classic scenario where the market is just like the trade is like we're going through the all these This one more I want to show here just So this is the short end positioning, but the long end positioning, too, is like the whole street short bonds. Um >> Like >> It's so good. Yeah, I love these setups. This is like This is my favorite. It's just like check the sentiment surveys when they get really extreme where you're like, This is It's the easiest fade ever.

>> Yeah. But but here's the thing is the market does not let you have that that fade easily. It's Like that's why like all the all the smart, you know, stir traders I know, they're all just like, you know, these these hikes aren't happening. Buying so far like I think we're all in that camp, too. But like, you know, there it's going to test you. And it felt like yesterday was just that final test where it's just like whoosh. Man, this hurts. But like I know there's end of this year. And so it's just like testing you to have that resolve to the end of this trade. >> Well, that's the funny thing is like people hear, "Oh, he's super hawkish.

Liquidity Gets Tight

Rates are going to go up." And then you see, you know, the 10-year yield went to 450 almost and just get smashed down today because it it really is putting a a pin prick in in potentially growth and definitely inflation. Like inflation long-term inflation expectations I think are came down on that hard. Here's one of my favorite charts, Felix, is 51. I love I love this chart. It's a two-year nominal yield, which is the white line, versus the two-year break even, which is the orange line.

And you know, the ratio or the the spread of each below it shows you kind of like when that spread is rising, I view it as global liquidity is getting taken out of the market, meaning you get paid to own bonds right now. When that that spread is higher versus like back in 2021 when it was negative, you were you were losing money by actually buying bonds. So, now it flips the whole risk reward of like the 60/40 portfolio is like if you're a boomer, you actually get paid to own yield now. So, what does that mean for for equities, I guess? And and it

rejiggers a lot of a lot of things on that front. And then I guess um should I go through the the other ones I have, too? Yeah, now that I All right, so what did what did this do when global liquidity gets constrained? If you go to 52, the dollar starts rallying, right? Because everyone kind of flees into US assets. And then if you go to the next one, this one I thought was kind of interesting. This is the 20-day historical vol and the 7-day historical vol of the dollar.

And generally when the you get the way I see it is when you get like a policy shift and you get some funky happening, first it goes to FX, then it goes to yields, you get volatility in FX, volatility in yields, then credit spreads widen. Like that's kind of the chain of effect, and then you get the the PE multiples get compressed once credit spreads widen cuz you can't just, you know, keep having the magic money machine of debt. So, we saw, you know, if you look at the 7-day historical vol that the dollar went up and and like currencies are obviously very low volatility. So, like this is not like a big big move by any means, but it's

enough where it's breaking out in the charts where hey, let's let's watch this cuz if this keeps going and then vol keeps going higher and higher on the currency side, then all the global capital flows, they go and they they're like, "Oh crap, I can't hedge my currency cuz it's costs way more when the volatility's higher, right?" So So go to the next one after that, you can see the yen. This is a super long-term chart back to the '70s. You can kind of see we were basing from like, I don't know, 1985 to basically now. And if you think about this, it's like, you know, what was the the Plaza Accord?

Was '85 to weaken the dollar. And now we're almost at the exact opposite point at the same price and we have this new Fed mandate. Um where we'll we'll see what happens, but like the one thing that's tricky to me is, okay, Japan's the yen's really weakening and breaking out, you know, it's getting weaker here. That's when this is rising, that's getting weaker to the dollar. But now oil's rolling over, they're they're huge importer of like commodities and if you have this like deflationary impulse, they don't need to hike as much, which means you know, more more capital should come in and it should keep a lid on the yen. So

we'll we'll kind of see how that shakes out. Um and then here, go to the next one. This is the twos to tens curve and in the US. And so I wonder if this is really the framework, which is you have so much boomer cash. Like there's a lot of cash uh in the boomer generation that is searching for yield. And by like saying you want price stability, you take the long end down, right? So, we're seeing as this rolls over, the curve's flattening.

I'm wondering if he and Bessen, you know, at their little breakfast meetings are saying, "Listen, we need to term out this debt because we we basically issue 85% of our our bonds now in the Treasury on the front end." So, by getting the yield curve flatter, you actually allow us more duration for Bessen to kind of term out. Oops, I knocked over the >> You allow that Bessen to to term out that from the front end. And Torsten Slok had a great a great chart. This was slide 56.

And you know why we haven't had a rate spike in the last I don't know, 5 years? It's this. They've literally been emerging market issuing 85%. Everyone's shorting bonds. You're shorting bonds against I said Bessen is is you're literally shorting bonds against the guy who broke, you know, the the Bank of England and the pound. So, he's he's manipulating the US yield curve to essentially like nullify any of those things. Now, I think what they're really trying to do is Bessen made one comment about the US housing market.

Yesterday, he said, "Actually, policy rates are restrictive to US housing." And that was the I thought >> Maybe Warsh said Warsh said that yesterday. >> Warsh, sorry. You Warsh said Warsh. >> I thought initially the market read that as dovish and it went you know, and it rallied. But maybe what he's trying to do is if you go back to the yield curve, it's like obviously like most mortgages in the US are based off of, you know, the 30-year yield and longer duration. I think they're trying to basically flatten the yield curve here so that we have a generational turnover in in housing, right? If you get mortgage rates down, then you get, you know, boomers are basically they have they got to be selling. Home affordability is just

terrible. So, you you know, and not only that, but then you have to lower you can lower your interest cost if you get that long end down, longer term, and you can basically issue debt longer out than our deficit and interest costs should should theoretically shrink. Um on that end. So, we'll see if that's what happens. I don't know. You you you probably need growth. Like that I guess you could say this is like growth is going down with inflation longer term. That's sort of what this saying. So, I don't know. That that's sort of my big macro read here is we got to make sure, number one, the dollar doesn't cause some some problems with the carry trade.

The yen doesn't cause some some problems with the year carry trade. And the the interesting part to me is high yield credit spreads barely budged. This whole thing they barely moved. The capex cycle is completely intact. And and to give you two charts on that, let's go to 59. This is, you know, the data this is from JP Morgan's recent data center capex >> Oh, that was a great report. I was reading that. >> Yeah. So, you know, this is just we are seeing a rate of change slowing. So, like initially, you know, all all the the big AI beneficiary names they flew basically because, you know, year-over-year we're watching, you know, 80% year-over-year spending. Now we're

The AI Buildout Meets The Fed

dropping from, you know, 500 and 650 75 billion to 860 and the growth rate drops to 45. So, so there could be some tempering there. Uh but then if you look just largely, this is the next slide. This is slide 60. Going out to 2030, like there's still massive amount of CapEx spend and if high yield isn't budging, like this is a free money machine. Like you might I don't think the hyperscalers will cuz their free cash flow is going down, they might not be the play, but there's going to be a lot of opportunities, which I think we're seeing is is a lot a lot of these things are are ripping. If you if you take um

just a look at I think I I forgot to paste it, but it was um oh hold on. Let me this is a really good chart I wanted to show. This is I'm going to put it in slide 61. Okay, yeah, this is the Goldman Sachs hyperscalers versus Goldman Sachs like AI beneficiaries. And you can see money coming out of the hyperscalers, right? This is the two two indexes and basically you're seeing what we've we've called this pretty accurately, which is I think Quinn Quinn was on this first to give him credit is all the AI bottleneck stocks just absolute rip show. So and I just don't unless high yield credit spreads blow out, I just

don't see that stopping. So that's where I'm at. Watch the carry trade, but >> That's some good stuff. >> Yeah, this narrative has uh has long-term legs. >> Go to go to 42 and then I want to come back to the AI, but just the last thing round out the the Fed is um this is his this is the task force list. Uh I was thinking maybe maybe the all the Fed committee members are revolting against Warsh because he's he's cutting everybody's speaking budgets. And so all these guys that would just go out three days a week and get paid hundreds [laughter] of grand to to talk, they're probably pissed because they're just like, "You cut my income by like 2 million bucks a year cuz now I'm not giving speaking tours and I have to

actually do work." >> That's actually great. >> That's so funny. That's so true. >> But I mean, it's hard to argue with a lot of these things on the list. I think the the biggest that is probably also the most important is the balance sheet. And it's pretty notable to me that the yield curve is doing exactly opposite what Warsh has communicated he wants to do, which is shrink. >> Yeah. Yeah, we thought there'd be a bull steepening. And and it's probably cadence and timing, I guess, cuz cuz clearly there's other things at play, but um I mean, that's what his policy says he wants is and that's what Bullard wants, supposedly. That's what they say. They

want a reduced footprint, less duration on the balance sheet, and using the rate policy transmission mechanism instead of the balance sheet expansion tools. So, that has huge ramifications if they do it. Granted, Bullard, you know, and they all tripped Yellen and the active Treasury issuance, and then they kind of continued the same policies. So, it's hard to know what is actually going to get done. But if that does, that has big ramifications for for who benefits, rebalancing. He talked about this a little bit, didn't show a lot of skin on it, but it's clear he understands it.

you know, that those are things that would be really good for Main Street and remove some of the accommodation for mega cap tech and you know, the the AI trade just because they've been such beneficiaries of the Fed suppressing the long end and short end being abnormally high. So, that's part of the view too, why this is peacockishness, because it's clear a lot of the committee doesn't understand or view the same view the the balance sheet first rate policy transmission mechanism the same. But that's a change he wants to put through and it would make sense it would take a couple months to work with the board to to kind of get them on the same page with that. So, we'll see.

We're going to need a lot more data points. >> I mean, so I'm just trying to put a few things together and workshop this in in in real time. But look like the question that we're all trying to figure out and going into this was like what what are Warsh's priorities? What does he care about? Because, you know, old school Warsh was all about you know, he was a hawk. He didn't like QE. He wanted us to get out of the game of of balance sheet misery. And then suddenly like right before the war he started talking about like rate cuts and and the productivity boom of the AI thing, which was very counter narrative to what he's always been about. So, that was confusing, which led to the narrative of okay, maybe we're going to deregulate the banks, he's going to cut rates and get out of the

balance sheet is going to offset. Therefore, that's steepening of the curve. But now, I mean, putting what Tyler just mentioned about what's important to the AI build-out. It's being able to do being able for for hyperscalers to fund the build-out. They've already tapped their cash flows. We're getting into the issuance side of things now. We have equity issuance going on. We've had corporate bond issuance for a while already now. I mean, just today I saw that like SpaceX is already looking at a $20 million bond issuance. Like the bond issuance is clearly very important to this next phase and how are how are long how are corporate bonds priced? Not off SOFR, off floating like off the off the longer end of of the yield curve. So, okay, putting these

things together. Warsh and that team, they really care about making sure that the AI build-out wins and that we beat China. We also don't like, you know, the balance sheet game, but we also want to make sure that we're lowering like long-term yields. Sorry, I'm just like workshopping this in real time, but go ahead. >> you're nailing this, which is not to talk over you, but they're moving monetary policy from the public sector to the private sector. They're actually letting the private sector do the heavy lifting, right? By if you actually let the prices tell you what what it is, supply and demand actually let things work, which means once the corporate bond market sees, oh, we're

over supplying, you know, all this this issuance from SpaceX, from Meta, from Google, from wherever, who you know, issue longer-term debt, once that overwhelms the market, that should the prices in the market should tell you and then they'll react. Instead of you know, I think what he was trying to say is this has been a whole reaction function previously. And the other thing that I think what's going on is they do have a view, which is AI is that productive, right? Like And and that should keep like, I guess prices over the long term kind of somewhat stable it is is my read.

And if you can have better data that shows, oh, we're having a disinflationary backdrop with AI pro- productivity, then this this policy makes a lot of sense. But there's also the world is not that simple and there's lots of geopolitics to to battle with, so we'll we'll see how long they can stick with it. >> But like look, like what what are they trying to like long-term yields, what does that achieve? It helps them with the corporate bond issuance, it also helps them with the housing market. Helps with both sides of the K versus what what is short-term rates cutting do? Like not nearly as much and it aligns with a lot of other things. Because what was so confusing to me is yesterday, you know, Trump was asked, what's your thoughts about a potential hike? And he's like, yeah, it

might happen. I don't know, which is like completely different from what he was saying recently. And you know, maybe something got into him about how the fact that, okay, like if we contain the long end here, we can make housing affordable again or like at least mortgage rates somewhat more affordable. Um and we can ensure the AI build out happens so that the US can stay on top of the race for AGI for against China. Um and we got out of like this whole song and dance with the Fed and get to a point of we actually have resolved from the Fed, which could potentially lead to like lower term premiums in the long end. I don't know.

I'm making this up at like real time. Oh, go go ahead, Quinn. >> It just it the last thing I I'd say on it is is it's easy to be hawkish when stocks are at all-time highs and everything's rosy because at the end of the day that's when you should be pushing back and fighting the inflation. But um it it's a different story when when uh you have inflation still well above target and equities are down 10 15% and you have to act in that regard, too. So, I I think it's it's uh opportune time to to be coming in for Warsh because frankly, the decisions aren't that hard

right now. The like it it's just not that controversial of a time because the the administration's managing volatility and propping up the markets in so many other ways. And the Treasury has a big big big you know, hand in doing so. Um, but the first test will come when we get that you know, adverse reaction to some something and they have to decide cuz that's when you really decide if you care about inflation or not. >> Where there's credit once you get the credit problems, that's that's where I think things this this policy will get revisited cuz >> I think he has the summer, I think. Like

The Summer Market Setup

there's a lot of tailwinds ahead here now, I think. Like you have oil going lower, the Iran war was you know, resolved. Don't know who won that thing, but it's anyway, like it's we're moving on from >> um you have that's you have that sorted out. And then if you look at just a couple of charts on micro market structure here from Scott Rubner at Citadel, but look you have the you have quadruple witching happening today, too. Again, it feels like every quarter it's the record one. This it was going to be a record 8.3 trillion dollars notional, so you have this happening and then right after that we're going into the summer and you know, summer seasonality for me it's about like whatever trend we're going into the end of June and

into this quarterly op-ex is like probably going to hold into it. You know, at the same time too like we have that one more meeting for for more than 6 weeks, but then you you have the break, you know, we'll have the Jackson Hole thing in August, but like a lot of things are setting up for I think this consistent grind lower in volatility. You have the seasonality tailwinds at your hand as well in the summer. It's just like this low vol grind up. Um and then this is another one interesting as well from Scott, but just looking at household cash as percentage of total financial assets like there's actually still quite a bit of cash on the sidelines as well that's unallocated. So I don't know. I feel like there's a lot of time for things to play out and it feels like those those tough moments

probably won't happen until the fall and I think you have the summer to to let these tailwinds shake out and figure out, you know, all those task forces that he wants to do and at the same time I feel like we just we just see vol roll off and then they know the vol targeting funds will reallocate and it just I feel like we're going to enter this after we get through today and this quad witching like I don't know. I feel like we're just going to go into that classic summer grind. >> This is a wild chart. >> when you think about it like why why? You you the markets at all time highs and people are sitting in cash, but there's been so much wealth created. Maybe that's part of the the problem. It's like they got nowhere to put it and they just keep

recycling back into the bonds, which is why bond vol just stays, you know, low. Yeah, and I I guess maybe that's what it is. It's just It's wild. What I do know, though, is this is probably, you know, the K-shaped economy. I'm really curious how they solve that part of it because things have been really good if you own assets, but I'm I don't know how you solve the the the inequality problem besides, you know, I I do have to say that Bernie Sanders thing, did you guys give that a read?

His policy on >> legislation for owning AI companies? >> And I'm like, hey, [clears throat] at least they're trying something. Like I I I have to I I I don't love like I'm a [clears throat] free market capitalist at the end of the day, but you know, yeah, I'd rather have, you know, if that if there is a way to solve these issues, I guess you do it that way. I'm I'm afraid of what the repercussions are 20, 30 years from now, but you know, at least they're trying to figure out problems to the social contract, which I'm okay with. Like, come to a bipartisan solution there.

I I >> nationalization or at least national ownership of AI companies is like highly bipartisan. I mean, it seems like Trump and and that team's trying to go off their version as well. Like, seems like this whole song and dance with the Fable banning thing is them trying to get to strong-arm some sort of ownership of Anthropic and and the frontier models, too. Like, it's that that part feels inevitable. >> Yeah, and if you're going to have 20, 30% GDP, like I mean, and you you give the taxpayers the benefit. Like, we're we're live We're we're we're living in interesting times here. And it's like I Everyone was hating on AI, now they're like, holy this is really impressive. Like >> Well, I think >> [snorts] >> it changes the narrative if you give ownership, you know, that's that's like

really the only way they can sell it and keep the bubble going and sell it to to the people who aren't in the top 0.1% getting getting filthy rich off it. And it is funny how closely aligned you know, the two parties are on the topic because basically it's just the uniparty system again. No one wants to pop the bubble. No one wants to cut spending. >> So, what do we do? We just steal from >> the corporates >> and entropic dividends to the plebs and then we'll call it a day. [laughter] >> Yeah, I mean we pop we prop their bubble up. So, in return we should get something and so we'll pay that out and then but it's all kind of like crazy because

who would why wouldn't you take this if you're them? Like dumping your bags on the American public at ludicrous valuations. So, like it's exactly what Elon's doing. You know, you know, I made this comment on Twitter and I I don't think people really got what I was saying, but like the irony of the Knicks winning while Mom Donny's the mayor is yeah, it's kind of fascinating where you you you I have a theory that like you see where the economic growth is and where things are really changing in the social contract by who wins like titles. Like when we when the Golden State Warriors are winning, the tech boom was happening and um you know, out out west the Giants are

winning. When I was growing up in the '90s, New York was dominating. They they won every championship. I moved to Boston. I basically me, but I moved to Boston. >> And then the Red Sox won, the Patriots won, Boston was crushing. And there is it's kind of a fascinating thing and I wonder if it's cuz you know, capital's allocating there, but my point was maybe there's a world where like Mom Donny in an AI massive productivity boom where the social contract is just like that type of power, the socialist type system works if you have something so productive as AI and like I'm hoping to that which is you know, there's there's

clearly a lot large portion of of the country getting left left behind, but it's kind of it's weird to think about and I don't know like every political philosophy thing I've learned you just have to throw I guess you have to throw out the window. It's kind of nuts. should we kick the hornets nest a little bit and talk about what's going on with MicroStrategy? >> Yes. >> Quinn the floor is yours. What like, you know, I don't know. If people have probably heard our thoughts and know what our opinions are on this whole situation, but like we got to talk about it. I mean,

MicroStrategy's Market Test

this major new low in in stretch, all these questions coming forth and um yeah, floor is yours Quinn. What's your thoughts right now on this whole thing? >> I actually think I'll go contrary to my recent views is I think it's getting a lot more interesting down here because it's it's not over or bankrupt from a going concern perspective. It just requires management to do something they haven't done and have been very stubborn and hard-headed about and that is rectifying the situation.

So, the the problem is the market's testing liquidity concerns with them still buying issuing shares and not building cash quick enough to cover their liabilities and service their debt and uh preferred dividends, but instead using that money to continue buying Bitcoin and then Bitcoin's price falling and then having to sell more at lower prices. And the thing is is MSTR still trades above its uh like let's say liquidation value to use a a better term cuz there's all these MNAV's and different calcs. But if you just take out the debt, the pref

from their Bitcoin holdings, MSTR still trades above the the liquidation value. And so he's going to keep using that as the release valve. It gets in more interesting when that starts to trade in the 90s and it's closer to that value. um yeah, he really it's not rocket science. Like he just needs to raise the cash to prove to the market and address concerns about their liquidity that they can cover a couple years of dividends and interest, uh that they can service their next few maturities on the debt stack.

And then I think you'd get a fat bounce in their whole capital structure. But they're doing the opposite. They're just They don't want to continue to lever up and these if you look across their everything in the equity side is trading distress. And so you have to address it. Like time usually doesn't the market tests you. Like everybody knows what's out there. Like no whale is saying raising their hand and saying you know, I'm going to be the hero that's going to buy 5 billion of Bitcoin while the largest holder of 5% of the asset class is imploding in front of our eyes.

you have to just rectify the situation and then it's fine. But until he does it, it's just just bleak. I think he just over complicated it and over, you know, levered it. And I think he didn't really anticipate this AI buildout and the productivity from the I think the big thing is I go back to the battle of centralization versus decentralization. And centralization is clearly winning with AI right now.

And those miners that have all the AI capacity or have all the electrical capacity are now flipping to the more economical thing, which is a centralized economy. And when eventually that'll change and it'll go back to to Bitcoin, but I don't know when that's going to be. But there might be a margin call before that because of the leverage in MicroStrategy, but like you have to manage your balance sheet in regard and this is I I was, you know, one of the early people that saw the the arb when back in and I'm not trying to, you know, toot my own tires, but like when MicroStrategy first issued a bond, I was at Blockworks and I wrote a big piece

Bitcoin’s AI Opportunity Cost

about how like the use of collateral of Bitcoin as collateral it is a game-changer. And then he was monetizing volatility with converts. And then, you know, I I saw this whole thing and then it just it got crazy, right? Like it got crazy and then there was a real narrative change, which is capital was seeking out the most productive use and there wasn't really if you think about that that that stupid equation of like productivity and inflation, the delta between the two, and that's where you make your choices in assets. So when productivity is growing a lot, that means you're going to go to to that, right?

But we didn't for a while there while Bitcoin was really working, there was nothing really that productive in the economy. That's the thing. Something switched and now you do have a productivity boom, right? I think that's really what's going on is Bitcoin serves a purpose long-term when there's not real growth and when governments keep stewing the economy with fake money, right? That's they were they were literally just trying to create pro- productive economic like companies by by diluting our currency. And now they cross they crossed the Rubicon where they have actually created productivity. You know, they did it by by diluting enough and now that money is

seeking the the higher returning asset, which is you know, AI infrastructure. >> Yeah, I've been reflecting on that a lot and like what the role of Bitcoin is here on out because it to your point, like for for many years there there was always the saying of Tina, there is no alternative because look, like you had we were in this secular stagnation since '08 and the only thing that was working was the large caps, like the mags, the social media companies or whatever. And what would happen is that they would have they'd make a bunch of money on ads that we would show to people. They would have a bunch of profit on high margins, then they'd give it back to investors as buybacks because they didn't know what else to do with it. So, there's just this endless buyback flywheel. Then at the Fed you have this whole era forward

guidance where it's like we didn't know what else to do other than to buy a bunch of MBS and bonds and like say that rates are going to stay low for a long time and like do all these things that the Fed was not really meant for. Um and you had like yeah, no interest in capital investment of of any form whatsoever, no industrial boom. And now suddenly you have the opposite in all three of those. You have very high CapEx use. There's use for this capital other than just buybacks now. it looks like that I I mean I think Mersch is is doing good things on net here, but there's also the other side, the more cynical view, which is that he's just trying to consolidate power and make things more obfuscated.

I'm sympathetic to that, but like overall objectively, like when you look at those task force mandates, like there's every all five of those Fed watchers have been cynically saying we need to we need to change these things really badly and now somebody's showing up who says we're going to do this and and now everybody's in in a fit, but if you have the Fed that's if you have central banks are going in their together, more usefulness for capital to invest into things. you don't have Tina anymore. You have the opposite. There's like endless proliferations of ideas to allocate capital towards versus a non-yielding asset. So it's a tough spot to be in.

>> Yeah, he just over levered, too. I mean the the thing that all the I remember this time period on Twitter that lasted a couple weeks or months where people thought stretch STRC was a free money printer. All the while not realizing that it's just priming common equity holders. So if you look at the chart, the day that stretch launched and started going live was the top in MSTR and every issue ends just takes claims away from common and gives it to gives it to the pref. So that's what's happening and uh you know, he just kind of overdid it with the dividends. Now he's staring down the barrel of having to increase the dividend yield to

who knows, 12 to 13% and that just adds a bigger drag on your cash flows as a business that has no revenue. So it's just it's just classic greed and uh but he he can rectify it. Like he can fix it. He just >> Yeah, you have to do the hard thing. >> They don't want to do the hard thing. And like I don't know. I want to It's the the there is a there is a part there is a port there's a role for Bitcoin in a portfolio.

this whole thing needs to be sorted out first. Like I don't know. I just feel like to me what this whole thing represents is initially it was a good idea. I'm with you, Tyler. But now it's just been taken way too far. Way too greedy. And it's and it's offuscating the the original vision and ideals of Bitcoin that I got into in like 2018. I don't know. >> It was just a giant orb. It was a boomer orb, right? When >> I think this is really a fourth turning first turning moment where it's like for for 15 years there was no companies I really wanted to invest in because there was I didn't I never bought Facebook because I hated what he was doing. You

know, like >> It was ruining society in a lot of senses. And I like and I there's I know there's a lot of good things that came out of it and blah blah blah, blah, blah, but >> but like in general there were all those companies were just a giant orb from like newspapers to like advert It was just advertising orb. And it and they it it wasn't real growth. Now I'm seeing cool companies in like the private markets that I'm like dude, this is awesome. Like there's real stuff like there's solving biotech like cancer and It's awesome. Like there's there's and when you in that world, I don't know like Bitcoin will have moments in history. Like I don't think it's going away. But like when you have

like a whole generational turnover of productive things and money's actually going to seek them out and you're building out like all all these like the the the rails and maybe we'll over lever it, it'll blow up and then you'll have to print more money and dilute the currency, but like for now it's looking pretty good. Yeah, maybe it's on the other side of that as insurance to like the state capitalism AI build out thing. On the other side that's when it's time to own it again. You own some gold and Bitcoin, >> Yeah, it's just the the opportunity cost is too high right now.

Crypto Needs To Adapt

>> And the other thing is like I've always said this about crypto in general and I'm just going to there's certain things that it could have been, but they were just so bad at marketing it and like every time you'd hear like a altcoin pitch, you'd be like you are so bad at the narrative. Like what is the use case and why do I need it and make it simple for me? But they could never do that. And I it that's there's so much capital that's been wasted here. And and I will say this, there's another thing the government campaigned on like helping the industry.

They just did not at all. >> No, they just destroyed it. >> Yeah, [laughter] destroyed it. >> They used it for their votes and like you know, me too. But like you're just like what how how and and you could make the conspiracy theorists would say they just did it to centralize the economy even more and just create like this oligarchy of people which is totally valid and I I I don't know how to feel about that, but I I do know that crypto never really like they didn't help themselves on the D 5 side where there's a lot of great thing there's some unbelievable stuff that was created that I thought was so good, but they lost the bank to the banking cartel is my view. Maybe that'll change, but

>> Well, and for every one legit project there was 10 scams was also the issue. Yeah. >> And it yeah, the 10 scams didn't help is like and the guy I mean I I remember going to Blockworks conference. I was like I don't understand anything sometimes these like these projects. What are you saying? >> What are you saying? Spoke There was a guy spoke for like 45 minutes. I'm like dude you got you need like a guy to PR guy to tell you how to say this simply. Sorry, I I've probably been holding that for 10 years, but like >> No, I mean yeah.

>> But then when you get like a really good project like Ave really made a lot of sense to me. It's like this is the banking system simplified. >> I I also I I also think that like to play devil's advocate cuz you know I haven't touched crypto in quite a while. Um is just like keeping it super simple and stupid is like liquidity hasn't been good really. You know, we've gotten these like Band-Aid rate cuts over the years and it's really liquidity's been as we talked about hijacked by the Treasury and the White House because the Fed can't do anything due to inflation. And

so in this world where instead of the traditional liquidity routes, they they that are avoided because they don't let any crises or recessions happen that then instigate the liquidity. They're using you know, stock market vault effects and kind of manipulatory things with passive flows and so none of it trickles down and I I kind of think too you know, we moved away. We talked about it here post COVID when they really stimulated Main Street and demand and wages were growing and the economy was vibrant. You know, they moved away from the demand side stuff to all supply

side. You know, pump more oil, uh try and you know, manipulate uh certain things at the at the Fed and Treasury and none of it's reaching the people that would actually buy this stuff either. Like so I kind of think that eventually you know, one you're going to the market's going to resolve the sailor situation that at some point in time. Um and I think also you sort of just need to get some volatility in traditional assets that instigates a a normal response from from monetary and fiscal because liquidity's waning and it has been waning and it should continue to until there's a bigger crisis type event. Um so to me it's just a factor of of that more so than anything and

obviously yeah, all the altcoins stuff, that that's just garbage, but but the Bitcoin side itself is it's just struggling from macro environment issues. >> I think I think it's valid to keep that like eye on the prize. That I There's a lot of things to figure out. We got to We got to sort through the the dot mess, and especially now like MSTR, like the rest of the dots have just gone to zero. We got to sort out these altcoin tokens that don't represent any sort of meaningful claim on cash flows that are just there to be sold by like foundations because they have their own equity, and then altcoin like that needs to be sorted out. Um the regulatory aspect needs to be sorted out. We need to get Clarity Act passed so that we actually know what's allowed

or not allowed, and it's not just like this whole song and dance. The crypto industry is going to look very different in a year or two, and I think what comes from this rubble will generally be good, and I'm excited for, but we're in limbo for now of having to sort through these messes and through the the the misallocation of like excessive capital from 2020 21. Like that just that that sowed the roots, and now we're paying the price. Um And eventually some good things will come forth. >> There was a lot of good things created.

I I hate to be such a hater, but there was a lot There was way more nonsense, and granted, it's not like I didn't trade, you know, dumb altcoins at times. Like I I'm total hypocrite when it comes to cuz >> We've all traded meme >> That was wild. Like >> There were probably low liquidity and it was just like, [clears throat] yeah, that that that was nutty, but um but, you know, that being said, there people who worked really hard and created a lot of good stuff. It just never made it out the the cypher, you know? >> That's what That's always what I've told my friends that ask me about like working in the crypto world. I'm just like, look, like 70% of it is a scam and a grift, but the 30% is actually quite cool, and I I'm I am optimistic for it to to break out,

but uh we got to We just got to get our house in order first. Um And you know what's >> kind of nuts to me is like takes like, you know, to to wire money and to settle trades, like I still have to take care of trade breaks. Like, when they happen in the public markets, and you're like, "Hey, uh you know, XYZ, can you talk to this person to settle this trade?" And it's like that problem has been solved by crypto for, you know, whatever, 15 years. And I I just there's a giant arb there.

It's just absolutely massive. I can't like but but when every time I I try to transfer money from my bank, it they they they shut it down cuz it's like, "Oh, you you you need a you full body scan." And they give you a cavity search. And I'm like, "Okay." >> You know? >> Cuz cuz I don't I don't want that. We don't want my bank to like tell me what I could do with my money. And >> Yeah. Like yeah, [clears throat] there is Yeah. All right. Well, I I think we did a good job being balanced there. But like yeah, we just got to get our house in order.

>> It's one of like the post-2000 dot com bust, you know? A lot of a lot of stuff was crap and died out. And then a few things came out of the other side. And I think it's the same case. It just it's going to take some some more time. And in the meantime, you know, everybody's partying like crazy in the AI world. And And that's great, too. I got one really interesting chart to end on if you've made it this far. >> Can you go to slide 57? I I love seeing like extremes. It says this is from Lee Cooperman.

Gold Sentiment Hits Extremes

He said, "Gold six-month put-to-call skew is near 10-year highs. CTA positioning gold is collapsed toward the first percentile on a one-year lookback." And you have to remember that I I purposely top ticked the gold market with my dancing meme. >> That was [laughter] awesome. >> You got to replay You got to replay that. I knew I was doing it. And then but now So that you know that I'm not a total This is we're going to get complete opposite end of the spectrum of >> I love it.

>> And no one's even talked about it. It's really incredible watching how these just human nature goes from ping pong of >> Dude. >> extreme bullishness to extreme bearishness. >> There was photos of people lined up to buy physical gold just like a few months ago. >> And now nobody like I'm I'm >> when you have the heaviest government hand in markets ever. You just get face ripping multi you know, in both directions. But that's also a characteristic of a bubble by the way. Uh you know, everyone wants to point to 2099 and stuff, but look back at what the volatility was in in those ascents and there's I mean just like crypto bubbles too. There's just nasty drop drawdowns and rip right back

and it kind of feels like every asset is exemplifying that structure now. It's not just stocks. It's not just crypto. It's and it's metals. It's oil now. It's It's oil producers now. I mean it's just zip zip like >> Yeah, you know what probably here to stay. >> Essentially essentially planned world centrally it should centralize asset management. You always end up at extremes because I I learned this from working at Franklin Templeton. I traded for a guy, he he ran a hundred billion dollars. He was the smartest guy in the market. I I really think this guy is incredible he he could only buy a sector when it was on sale. Like he could only sell a sector when there

was insane bullishness. It was like every baby boomer on this thing and it was just like it was incredible watching when you think about how centrally planned or centralized the asset management industry is like you can only in moving those Titanic assets is like you have to do it real slow real slow and like I think that's to to your point Gwen is like it always ends in a uh it it's a conflagration of volatility and that's where this guy monetizes he monetizes all the ball and he he's incredible he's incredible but that's little story for the end I'll I'll save

the end of it in a minute you should get him on at one point he's he's I think he's the smartest guy on the planet >> after you of course yeah >> oh yeah >> you finally busted my balls one hour in >> all right guys always a pleasure that was fun good stuff all right have a have a great have a great long weekend everybody >> happy Juneteenth >> yeah happy Juneteenth >> [music]