Our Currency, Your Problem

0:04Jacob Shapiro Hello, listeners.

0:04 Welcome to another episode of the Jacob Shapiro podcast. Um, this podcast got a little wonky. Uh, it's Rob, coming on for our biweekly chats. Uh, president Trump has been talking a lot about interest rates and even more about j Jerome Powell, calling him a stupid person, a bad person pushing for him to reduce interest rates, and he's, he gets to replace Powell.

0:25 Um, the, the new Fed chair will be in place by next May. So I wanted to start here and ask Rob a simple question, which is, which way are interest rates going based on all these things? And is this an exceptional level of political interference or not? And of course, Rob, in classic faction, like, said, okay, well we gotta talk about all these other things if we're gonna answer that question.

0:42 So our goal in this podcast was to try and talk about, okay, what's happening at the Fed? What's happening with Jerome Powell? What's happening with interest rates? And we try and tie it in the end to something very, very specific. 'cause I think sometimes, like, you know, the podcast is super interesting and we always wanna be interesting and entertaining, but we also want to be somewhat functional and useful.

0:59 So at the end we try and take a step back and say, okay, in our, in our lives, what we're doing in our day jobs, how are we translating this? And so if that's useful, great. If you wanna talk about anything you heard on the podcast. You can email me at jacob@jacobshapiro.com. Um, otherwise, uh, yeah, that's just about it.

1:15 If you like the wonk, get ready for it. Uh, if the wonk scares you away, hey, I've been told that my voice is pleasant to fall asleep too, so, you know, it's a multipurpose tool. Cheers, and see you out. All right, listeners, here we are. Uh, I'm feeling refreshed compared to where I was, uh, last time we spoke.

1:34 Rob, I hope you're feeling good.

1:36Rob Larity Uh, it was about 102 degrees Fahrenheit here yesterday, but other than

1:40 that, uh, things are, things are good.

1:44Jacob Shapiro I saw that.

1:45 Uh, I, I can't say I'm that sym, but you know, I can't say I'm that sympathetic, but I'm also in New Orleans, so I'm literally just walking from, you know, icebox room to icebox room in the air conditioning. Um, but yeah, it's, it's no fun.

1:58Rob Larity It's no fun and there's no air conditioning, but you'd be

2:00 surprised how old buildings seem to. Especially old stone buildings seem to retain their

2:06Jacob Shapiro coolness pretty darn well, actually.

2:10 Oh no, that, that's true. Like we used to build, like, you know, people used to build houses to accommodate like the weather. Like our, our house in New Orleans was theoretically built in the eight, in 1853. Um, and probably when it was designed it was really good, but then like people came in and did all sorts of other stuff.

2:23 So now you need Central air to like, cool it off. But like, we've forgotten all those things and, and you know, air, air conditioning is a great, it's, it's one of those things. I was joking actually with some of our friends on a call yesterday, like, uh, you know, I jack it down to 66 every night. I'm spoiled.

2:37 I can't sleep unless I'm literally freezing under the covers right now. So anyway, but you, you guys are not here to listen to me talk about my sleep habits. Um, Iran, Israel war over, uh, out of the news cycle has nothing to do with anything. Who knows what's next? Is it gonna be tariffs? Is it gonna be another war?

2:53 Is it gonna be something else? Um, Rob and I wanted to zero in, I. Though on something that I know is near and dear to your heart, Rob. 'cause uh, it's been a tough couple of months to be Jerome Powell. He's sort of getting, it's not quite the fauci treatment, but we're starting to get there with how much flack he is taking, um, from President Trump.

3:10 President Trump sent him a handwritten note, uh, with a bunch of World Central Bank rates, uh, printed out. And I mean, his, his, uh, his handwriting is so strange, but here I'm just gonna read it for the listeners. Jerome, you are as usual, too late. You have cost the United States a fortune and continue to do so.

3:25 You should lower the rate by a lot, hundreds of billions of dollars being lost, no inflation, Donald J. Trump, and then an arrow saying, you know, United States has 4.5%, uh, interest rates. He, he wants it to be around where Switzerland and Cambodia are between 0.25% and 0.45%. Um, I'm sorry, is there, I just

3:44Rob Larity say Switzerland and Cambodia.

3:46Jacob Shapiro Yeah, that's, those are the, those are the two lows.

3:49Rob Larity Those are the, those are the bookends of stability.

3:51 He's looking to, uh, to emulate. I gotcha.

3:53Jacob Shapiro Well, I should say his bookends, uh, those are the first two.

3:56 His bookends are Switzerland and Thailand, and then in the sandwiches, Cambodia, Japan, Denmark, and the Seychelles. Uh, so there's, if we're, if we're being accurate, but I think your point, um, is still the same. Uh, it's much nicer than what President Trump has said recently to Powell. He has called him in public, a fool, a numb skull, and a stupid person.

4:16 Those were all direct quotes from the president of the United States. Um, he is railing against, um, the Fed for basically costing Americans lots of money, everything else. And so the reason I wanted to talk about this is because, um, you know, Trump lo loved to, to go after fed chairs even before, uh, he was president and he advocated the exact opposite of his current position.

4:38 Like he's willing to go all over the place. Um, but he's also threatened. A, to get rid of Powell, which seems to me to be pretty impossible. He would've probably done it already if he could have. And B, he has said no. Well, the next Fed chair who I get to appoint in a couple of months, like they are gonna be different and they are gonna cut rates and I'm gonna pick someone who is gonna cut rates.

4:57 And I had a couple different questions I wanted to throw at you, Rob. I wanted to talk about whether this is unprecedented or whether it's normal for this level of con. Split between a Fed chair and the president. I wanted to talk about the, you know, the fed board of governors because this is not just the fed chair waves a magic wand and gets to do something with interest rates.

5:12 So I think there's a sort of more complex conversation to have there. Um, and then there's just the fact that we're having the conversation, which from a market sentiment perspective, is gonna move things. Um, but I thought maybe we should start at just the highest level and put ourselves on the spot.

5:26 Because the real question is, you know, we're sitting here July 2nd, we're recording, we'll get this out in the next day or two. Um, you know, where are interest rates going to be down in six to 12 months? And are they going to be down because of pressure from the White House? Um, or are they gonna be down because of the market?

5:42 Or do you think they're like gonna be sort of steady because like that's the trillion dollar question. And then maybe we can back into some of the nerdy stuff about the Fed. And I expect that you're gonna stick up for your boy Jerome. 'cause you said very nice things about him and he's really getting, like, he's really taking it on the chin unfairly.

5:59Rob Larity I love Jerome.

6:01 I, I would stand up for you, Jerome, against Donald Trump. If you need me, I'm in your corner. Uh, where do

6:09Jacob Shapiro you want to begin with that series of questions?

6:10 What do you think I wanna begin with? Do you think, like on December 31st or whenever Jerome's, uh, you know, term ends, um, like do you think interest rates are going lower from here? Like do you think by the end of the year or by this time next year, the United States will be closer to Denmark and Switzerland in that list?

6:27 Um, or not?

6:30Rob Larity Um, this is another one of those things where really having clear

6:34 definitions is so key because lower by how much over what time period. Like we're talking about a very complex system of yield curve and doing lots of different things in different places. If you just want to talk about the short end of the curve, I mean the. The consensus is that there's going to be meaningful rate cuts in the coming six to eight months.

6:59 Um, I think it's hard to ignore that consensus. I would fade that consensus a little bit. And that's sort of my view, just looking at what's happening with the macro. Like there is a macro slowdown happening and I don't wanna talk about macro 'cause this is, this is a different kind of conversation, but just, just to put a pin in that like mm-hmm.

7:19 The macro is slowing noticeably and all else equal, that is likely to provide some scope for at least one or two rate cuts. It's, you know, how that plays out is hard to, to see the, the thing that really matters that people care about is what is the sort of longer term, average level of rates. Mm-hmm.

7:40 And that is the important thing. And, and the takeaway there, I think pretty clearly. I have a pretty, you know, good amount of conviction on this thesis is that the average level of rates is going to average significantly higher than it did in the pre COVID period. Um, that we're heading out of a fundamentally deflationary environment, which has been really in place since the telecom bubble of 2001, 2002, and that that environment has changed and now we're entering a period where the, the biggest constraints on the economy is not sopping up excess capacity, excess demand, or excess supply, excuse me, at the margin, it's about overcoming bottlenecks and shortages and supply side constraints, whether it be labor

8:28 or supply chain or all these things. All of that suggests, and especially if you look at immigration, demographics, labor force participation rates, blah, blah, blah, blah, blah, like there's just no way We're going back to the rate situation of 2018. Uh, of, of Trump first term. Um, that seems pretty clear.

8:47 So if that was, is what Trump is hoping for, that is likely to be very much disappointed.

8:55Jacob Shapiro Yeah.

8:55 I mean, you know, if, if you take him at his word in this letter, like us interest rates are 4.5% and he wants them down, let's give him the benefit of the doubt. Let's take the highest rate on his, uh, you know, where they should be Thailand at 1.75%. I mean, that's what, 300, like 300 a, 300 B like cut.

9:16 Like, is that like, that's not something that happens unless like the sky is falling right.

9:21Rob Larity Yeah, there's, there's not gonna be a 300 basis point cut.

9:24 Like, I'll just, that, uh, like, I'll just say that flat out. Um, and over the next

9:30Jacob Shapiro 12 months, they're not gonna cut it.

9:32 Like, uh, you know, to that point, like, I, I guess they can't even do that because like, like the new Fed chair is gonna take over in May, and you would think that you'd have to have somebody in there at least pushing that if you were gonna get anywhere there. But like, you're basically saying like, yes, you might get some cuts over the next eight to 12 months, but that they'll probably be like 25 basis point cuts, like, probably nothing bigger than that.

9:53 Right. Is that what you're saying?

9:54Rob Larity Well, I think this is opening up into the bigger and more interesting

9:58 conversation, which is a, how is the economy fundamentally setting up? Mm-hmm. Which we started talking about. But then B, what is the Federal Reserve mechanism? Like, how do the personalities interact? How does that institution work? You know, how has that worked historically? How is it different now or not different now?

10:19 And the short version of the answer is I don't think it's fundamentally different from what we've seen in the past. So we can talk about that. Um, but that's gonna be what answers that big question. It's, it's, uh, it's a, it's understanding what are the parameters of this model that we're building and then people can sort of make their own decisions, rather than me saying, oh yeah, this is not gonna happen or it is gonna happen.

10:42 Um, 'cause there's a lot of moving parts, you know, the economy being the one that's the hardest to gauge. Like, where are we gonna be 12 months from now? I don't know. Like, I could look at what's happening right now. I could see the different sort of shifting gears moving in different directions. Like right now it looks like we're having a meaningful slowdown, but not some massive depression.

11:02 Um, or massive, you know, really severe recession that that's just not on the horizon. Um, things can change, but that's the status quo right now. So, um, anyway, it's worth getting into each of those moving parts and talking about them. 'cause that's really what's gonna dictate the big picture stuff here.

11:19Jacob Shapiro Okay, well let's start with the mechanics and then let's

11:21 start about the economy and see if we can't land the plane from there. Um, so let's talk about the mechanics first of all. So it's not the Fed share who sets interest rates? You know, those who are market fluent who listen to this podcast will know that, but a good chunk of you are not. So let's talk a little bit just, you know, very black and white, um, who actually sets interest rates.

11:40 Um, Rob, do you want to sort of lay it out very simply? Um, I know you've done the background on this, so I'll let you go into the details. Alright. Um, well do double check me 'cause this is not my wheelhouse here. But, so my understanding here is that there is the Federal open Market committee, which consists of 12 members.

11:58 Um, it's the seven members of the board of Governors of the, um, federal Reserve System, along with five regional fed presidents who were then selected by their own boards and there 12 regional fed presidents overall. So they, they. Rotate in and out, um, each year of this open market committee as voters in general.

12:18 Now the Fed chair is one of these members, so he's sort of a first, um, he or she is a first among equals. Um, and based on what I've been able to understand, the Fed chair has a lot of, um, role in building consensus and in convincing other people and trying to tell them, you know, this is the strategy, this is where we need to move forward.

12:36 But it's not like the fed chair can just say, Hey, you 11 others, like I am the king. You have to do what I'm saying. We're all, uh, gonna vote sort of in general. And the way that the math breaks down right now is that there are only two people on the federal open market committees, 12 voters who have shifted towards possibly cutting rates soon.

12:54 Uh, my understanding is also that President Trump. Has basically appointed those two people. Those are his two appointees. He'll have one more appointment to make coming up in January. Then he's gotta pick his Fed chair replacement. So theoretically he could get to four, maybe you could get maybe to five appointments by the end of his term presidential term.

13:13 But realistically speaking, we're talking by next May four out of the 12 being people who would be loyal to President Trump. That's not nothing, especially if you're dealing with a consensus making body and one where political pressure can move the needle meaningfully. But it's not like President Trump is gonna replace your own Powell and the next day, like the Fed chair is gonna do whatever he's wanting.

13:34 He is gonna have to build consensus. And then as, as you said, like all of these governors are watching the economy and they're making decisions, um, sort of based on that. Did, did I do a good job that, that, that that was the simplest way I could explain it to myself?

13:47Rob Larity Yeah, I, I think that's totally right.

13:49 I think another way to, to approach. The yeshu is to point out that America does not have a central bank. Like it's easy to forget that you say, oh, the Fed, the Fed, the Fed, you, you're picturing like this building with all these people on their, like that's the bank. No, there is no, there's a, a network of banks and the New York Fed is sort of the first among equals and they're the ones that actually implement, you know, primarily the policies that are enacted.

14:17 But the Fed board is sort of like the meeting of the five families and the Godfather. Mm-hmm. Like there is no, there is no central thing. It is a federation of decentralized, uh, independent institutions. So if you had a central bank, it'd be much easier to be like, Hey, click, let's reduce rates. 'cause we replaced the guy or the woman who's in charge of the Central bank and the Federal Reserve system is, is really quite unique in that it does not work like that at all.

14:47 Um, so yeah, that's, that's the

14:49Jacob Shapiro key thing.

14:50 You, you hit the nail on the head. Yeah. So that's the mechanics of it. And then here, here's where I was really gonna lean on you, which is, is this unprecedented? Because like, it seems to me that there has been conflict in the past between fed chairs and president, like the president's, the, the historical example that was easiest to pull from was Richard Nixon clashing with, um, his Fed share, whose name just went out of my mind, but I'm sure you'll, you'll help me.

15:16 Um, Chesney, yeah, there you go. Because he was trying to keep rates, uh, low ahead of the election and was dealing with high inflation and things like that. Um, but it does, well, I don't know, like is it different? Um, and this is actually a question about Trump in general. Is the pressure that he's putting on the system different than any other like US president has done?

15:35 Because all US presidents like appoint their loyalists, um, you know, since Andrew Jackson, like it's to the victor goes the spoils and putting people in positions of power. Um, but President Trump also does seem to have a real. Uh, at least one of the differences in his second term versus his first term is he's not really brooking disagreement.

15:51 Like there's no James Mattis or Rex Tillerson or HR McMaster among his selections, he's picking people who toe the line and people who don't toe the line very quickly find themselves no longer, uh, in the administration. Um, and so, you know, that's obviously his cabinet picks and things like that, but you can feel him trying to push the same way or trying to treat the, the open market committee the same way that he's treating his cabinet.

16:13 And maybe that won't work or not, but at least from where you're sitting, if we're putting on, you know, the sober glasses is, is he pushing the boundaries? Is he just like, is he in unprecedented territory, he's just really aggressive about it and he's got a, a core style? Or is he doing something that is meaningfully different?

16:29Rob Larity It's a really interesting question because it gets to, um,

16:35 it gets to sort of one of the key like aspects of this institution and, and the short version is my answer is gonna be, no, it's not fundamentally different from what we've seen. Actually many times in the past, and we can talk about that. Um, I think the style is different. I mean, it's Donald Trump after all, but in an administration that has killed so many sort of sacred things and, you know, broken boundaries in all senses of the word, this is not breaking boundaries.

17:07 And I think part of the reason for that is because the Fed is such a, an obvious target for, um, the legislative branch and the executive branch. Like this is something that's come up many times in the past. It's something that's built deliberately into the Fed's structure to resist this and to try to maintain its independence.

17:30 So what he's doing right now is not really fundamentally different from what Richard Nixon did. Um, you know, even, even more so I think a, a more blatant example would be, um, one of my, uh, my least favorite presidents, uh, Harry Truman. Um, you know, during the, the very famous period during the, the Korean War when the 1951 Fed, uh, act was updated to really formalize the role of the Fed after he basically tried to do what Trump is doing.

18:04 And, um, and you know, that's a very fascinating story in itself, but it's not unprecedented to try to do this sort of interference. I think the thing to watch for that will be interesting is if he tries to go in an sort of extra legal way to interfere because all of these barriers are that you just described or placed in front of him.

18:28 Like he really can't force anything. The Fed is gonna do what it wants to do, what it thinks is right. And even if you put in sort of. People who lean dovish, when you're in that committee environment, it's very difficult if the data is obviously pointing, you know, north and you're saying, oh yeah, south, south, south.

18:49 Like those are very smart people. You're in a, you're in a room, you know, hashing it out. It's not so easy to just appoint your lackies and have them do exactly what you wanna do, you know, irrespective of what the reality is. And that's what has been shown in the past. Like, uh, Truman appointed his lackey, so to speak, who turned out to not listen to him at all.

19:11 And actually, very famously, like years later, Truman saw, uh, it was actually William McChesney Martin who later clashed with, with Nixon, but he saw Chesney McChesney Martin on the streets of New York. And reportedly he just saw him and said, traitor. So, you know, there's a lot of drama and stuff like that in the past.

19:31 So it's not coming out of left field, this sort of thing.

19:37Jacob Shapiro Yeah.

19:37 Um. And, and what about, and so I've seen a couple, or when I was reading about this, and obviously you've studied the, the Federal Reserve system longer than I have. There was some disagreement about the role of the Fed chair, or at least when I was doing reading, like some people, or at least some folks that I were reading, was saying, you know what, like this is more.

19:55 Of a consensus building committee. They're gonna be driven by market data, they're gonna be driven by all these other things. They're insulated from politics. And then there was another camp that was sort of like, well actually the fed chairs usually gets what he or she wants. Now, sometimes they can't, like there was one example that was quoted about Alan Greenspan changing his vote at a meeting after he ended up in the minority, because he didn't want to have the chair going against what the rest of the committee decided.

20:17 But the, the greater point being that the chair does have a significant capacity to influence the decision making of other people on the committee. And I'm wondering what that tipping balance point is. 'cause if you already have two Trump appointees, you're gonna get a third and then you get a chair.

20:32 And if you get a chair who's coming in there, you know, saying, Hey, we gotta cut rates. We gotta cut rates, we gotta cut rates, we're gonna cut rates and spends all of their energy like muscling and trying to convince them and massaging data and. We've already seen from this administration, by the way, they're not, they're not afraid to play fast and loose with data and to strip things out of CPIs and to put things in.

20:51 Like, um, so if we're thinking just about the role of the Fed chair, like where, what's the right way to gauge the importance of the Fed Chair, um, decision that Trump is gonna make?

21:02Rob Larity I think you have to, you have to widen the scope of that, and you have

21:05 to talk about the mandate of the Fed, and then within that mandate, the decision making structure of the committee. Right. Because just to set, like the historical stage here.

21:18Jacob Shapiro Mm-hmm.

21:18Rob Larity Originally, the Fed's mandate was not what it is today.

21:22 Like the Fed's mandate today is to balance, you know, the purchasing power of the dollar IE, you know, beat inflation and unemployment. That's really only been the case since this series of events in 1951. Prior to that, the Fed was really put in place to sort of lubricate the functioning of capitalism because we had all of these crises, the 1907 panic, you know, like the economy was so immature at that point, like money would get super tight like right before the harvest.

21:52 Like that's how, you know, old school things were. And then as World War II was the thing that really changed everything and that series of events where, you know, the question of pegging rates or not and what constitutes like an emergency that you have to throw long-term thinking out of the window in order to meet, you know, in Truman saying, well, the Korean War, this is an existential crisis.

22:19 We need to peg rates. You're not doing your patriotic duty, blah, blah, blah, blah, blah. Um, that's what led to the, the sort of solidification of the current mandate, which is that balance between inflation and unemployment. So that's the mandate and that's what everyone knows, like that's ingrained in their DNA.

22:35 All of these people who are on the board. And then within that you have like, I mean, anyone who's been on a committee or some academic committee like these are a bunch of nerds. They're a bunch of like banky, they're like, it is not really like bankers anymore. It's like economic, academic nerds mostly who take up these positions.

22:57 So, you know, just picture Princeton University and how some committee would work on Princeton. Yes, the chairman of the committee has a lot of influence and they're sort of leading the conversation and they can shift things in one direction or another like clearly. But at the same time, it's really hard in an environment like that where these people like this is their life.

23:21 They're not politicians, they're not elected. Like this is the apex of their career to, to do this job. It's very hard to get them to like just fall in line and be like, well, you know, black is white and white is black. Like meaning an interpretation of the numbers in front of them. Like when the examples you're talking about like with Greenspan or like where a Fed chairman has been able to really kind of shift things in one direction or another.

23:49 It's been sort of like things are open to interpretation. Like just take Arthur Burns like perfect example. He was the fed chair throughout, uh, the majority of the 1970s. He was Nixon's guy, so Nixon brought him in and famously everyone shits on Arthur Burns. Like, oh, you know, he was a dove and he caused this inflation.

24:10 But it wasn't like that. Everyone understood, oh, this is Nixon's man, he's gonna cut rates 'cause Nixon wants it. Like Arthur Burns had a very compelling like mechanism and understanding of why he thought raising rates wouldn't have been productive. And how that was really important. Like the economy was just had to run hot 'cause all the baby boomers were entering the workforce.

24:34 You know, you had just shortages of energy, just things that like interest rates couldn't fix. And his view at the time, which I think has been sort of justified in hindsight by a lot of people was that, you know, this is probably the right level of interest rates. Like we just can't do anything about this inflation and this is the optimal level.

24:54 So what I'm saying is like, that was a valid argument. That was his view of like a very complicated matter and he just happened to fall on like, you know, one side of the argument versus other people on the other side. Whereas like what you're describing, you can't just come in and just bludge in your way with no good argument to be like, well let's cut interest rates 300 basis points.

25:14 Why? Well, you know, room full of nerds with charts. Uh, 'cause I think we should do it. You know, like that's a, it sounds easier in, in theory than it would be in practice.

25:27Jacob Shapiro Yeah.

25:27 Okay. Well, sort of last question maybe on, on mechanics, and this starts to give way into, um, the politics that we're talking about here. You know, Scott Bessant, another fellow that you like, who I confess I'm less impressed with. Um, uh, currently the Secretary of the Treasury. Um. He has also been publicly criticizing the Fed chair.

25:47 So I wanted to ask, first of all, is it normal for that to happen? And then Besson is also being floated as one of the names that will replace Jerome Powell and Besson has been fairly open about like he's happy to serve wherever Trump wants him, which to me says, yeah, I'll do that job if you want me to do that job.

26:02 He'd probably like that job better than the job that he's in. I'll, I'll quote him just last week, he said, federal Reserve policymakers seem a little frozen at the wheel with regard to deciding on rates. My worry here is that having fallen down on the American people in 2022, that's a big comment right there.

26:18 The Feds now looking at their feet rather than looking ahead. We have seen no inflation from tariffs and nothing is more transitory than import levies with regard to their impact on consumer prices. Um. What is Bessant doing? Does he, does he want the job? Do you think that he would be the person with the gravitas to come in and shift the committee towards what Trump wants?

26:40 Because he will speak their language rather than sending them, you know, large printouts of paper written with Sharpie on top of them. Um, and is it normal for the treasury to pile on here and for all these different like, cabinet levels to go after the Fed chair? In that sense, and I, I think it's also a pregnant question because, um, you know, you, you mentioned that these are all nerds.

26:59 If somebody is gumming up the works and if Trump knows that, you can imagine a scenario in which he makes life miserable for those nerds until they step down and he gets to a point someone else, like these are people who probably don't wanna be in the limelight. And President Trump has shown that he can put you in the limelight, uh, if he wants to, and Jerome maybe can handle it, but I'm not sure that all these others could handle it if the eye of Sauron like turned on them.

27:21 Um, but anyway, that, that, you can take that if you want, but it was really the bestin part and how Bestin is working into this that I wanted to. Get your take on

27:30Rob Larity Beson reminds me, I, I told you I was reading that biography

27:33 of Johan la uh, you know, Mao's right hand man and Beson reminds me of Johan Lai a lot in that I think he is fundamentally an extremely impressive and fundamentally good person who's in a position where he has to say terrible things for political reasons, otherwise he's gonna be sacrificed. So that's, that's my sense of best and, and why he says stupid.

27:59 Shit. Like I can understand how he's justifying in his own mind the stupid shit that he says. 'cause like sort of if he twist it, it makes sense using like macro logic. But, you know, just to, just to throw that out there in terms of him and, and his incentives. I'm sure he would love to have either discuss.

28:17 Well, and I just,

28:18Jacob Shapiro I just wanna underscore in that metaphor, that

28:20 means Trump is Mao for those of you listening, like I just wanna Yes. Highlight that

28:26Rob Larity temperamental, uh, you know, all that stuff.

28:29 Um, so how, you know, uh, does the Treasury and and the Fed have a history of butting heads? Absolutely. I mean, the Treasury historically has been the mouthpiece for the executive branch in browbeat the Fed and getting its point across. I mean, going back to your Nixon example, like John Connolly. Is it John Connolly?

28:54 Uh, dude from Texas. Yeah. I mean he was, he was very the guy who said, it's our currency, but it's your problem very famously. Um, I mean he, he is the exemplar of this sort of long line of treasury secretaries who are just like bulldozers for the executive branch, um, when it comes to monetary policy.

29:14 So it's definitely not an outlier, uh, in that regard. Um, I think Besson would probably take that job yearly if he thinks that there's not much interesting stuff he can do from a treasury standpoint, which I think he's probably recognizing like a lot of the things that he may have been hoping he could have done are not, are not gonna happen because he is dealing with mal.

29:38 Um, so yeah, I, I think he could very well be nominated. I think he would probably do what he thinks is best 'cause he would be somewhat insulated and look to create his legacy that way. Um. Which would be like, you know, dovish leaning, but traditionally like standard monetary policy. And, and to get to the point about the 2022, looking at your feet, like this is a really important, um, nerd topic to dive into very briefly.

30:09 One of the key like critiques of the Fed historically was that they were too backward looking. That they, you know, like every committee that they were chickens and they wouldn't act until it was obvious what was happening until you saw the whites of their eyes, so to speak, on, on the data. And naturally that caused major issues.

30:31 Like in 2007, Bernanke famously, you know, going on and on about, oh, inflation is the problem, not deep, like, and missing obviously some major changes happening underneath the service. Um, Powell, you know, similarly, like they've had to deal with this quite a bit. In terms of when you have these shifts, when do you actually, do you anticipate what's going to happen?

30:54 But then you have this super complex system, how do you know what's gonna happen? It's really hard to say, and the Fed has been actively trying to be more forward looking a little bit in terms of how it sets monetary policy based on what's likely to happen. What, like what, what's changing at the second derivative rather than, you know, the first derivative.

31:16Jacob Shapiro Mm-hmm.

31:16Rob Larity So that's really what Besson is getting at, is he's saying like,

31:20 okay, you know, in 2022 you should have known and started jacking up rates, you know, sooner in order to head off the inflation that was so problematic and now you're making the opposite mistake. Um, which maybe they are. Maybe things are collapsing or slowing much faster than, than it appears. It doesn't seem likely, but that's the argument he's trying to make.

31:44 It's a self-serving argument. 'cause the Fed should be. Being more forward-looking and that's what, what they're doing right now. But it's very easy if you're looking for an excuse to bash them to say, Hey, you know, CPI today is under 3%. What are you doing? Why are rates, you know, over 4% still?

32:02Jacob Shapiro Um, well, and and he was also very critical of then

32:05 Treasury Secretary Janet Yellen for relying more on short-term treasuries during that same time period. And he's done the same thing, but obviously interest rates are higher. Um, but it seems like he wants to ramp up sales of longer term securities because, you know, I, I asked you point blank at the start and you correctly deflected, and we went into a longer thing, but somebody asked Vasin where he sees 10 year yields by year end, and he said, oh, well, it depends on many things.

32:29 Inflation will come down and the whole curve in parallel can shift down. And he is also said, you know, if he was the Fed chair, that he would do what President Trump wants. So he's very clearly like telegraphing to you that he thinks inflation is going to go down. Um, that, and that either he or somebody else will be pushing for the Fed to lower interest rates, um, by the end of the year.

32:50 And obviously he's gonna use, and then he wants to use that when interest rates are low, I guess to. Restructure American debt and to try and make it more affordable like that seems to be like the top secret plan. But, um, I don't know like how top secret is it if I'm here in my flamingo shirt talking to you about it.

33:08 Like, that seems like lining up an awful lot of things that are gonna go correctly for him to do it. But it goes back to the question about whether Donald Trump is someone different, because it does seem to me that like he would have some, like he, he has the potential to put someone in a position of power who will say, yes sir, we will make the data say what you want it to say in order to do this thing.

33:30 Um, you know, uh, Besant has even talked about how, you know, he doesn't agree with the criteria that the Fed is using to make decisions about interest rates. So theoretically, if he was the Fed chair, he would change the criteria or he could try to push like different criteria and use that. Um, going forward.

33:46 I don't know, how do you respond to that?

33:49Rob Larity Um, on the latter point, what he says now and what he would actually do

33:53 are, there are two very different things. Um, so I think you just have to put that aside. Uh, for the hypothetical, um, I think he's right about Janet Yellen. It's funny, I was looking at a list of all the, uh, all the bonds that are trading at the lowest prices relative to par, uh, just the other day.

34:12 And the worst performing bonds are all of these super long term like 50 year bonds that mostly sovereigns but also companies like Apple. And, and that released, you know, about 10 years ago when rates were absolutely in the floor. And they've gotten clobbered since then, obviously. But that was a really smart time to be issuing 50 year debt.

34:37 Like maybe, maybe we should have been doing more of that. And I think that's a very valid criticism of Janet Yellen. 'cause they were reduced the term. Term, you know, the weighted average term of the debt during that period. And that was, that was not very smart. Um, so, or at least in hindsight, which is always 2020.

34:56 But, um, the, the long term yield thing is, is really important. And I think Beson has a really impossible job, uh, which is why maybe he's looking to leave it, which is the, the quantum of debt is just too high now, right? So we're at like 120% of GDP and we're not in a deflationary environment anymore, which means the natural interest rate is gonna converge on some higher level.

35:26 So we've talked about, you know, ticking time bomb and all the, you know, the percentage of government revenues that are now going toward interest expense and blah, blah, blah. So you don't have many options here to get out of that. And what I think Besson is hoping is that he can take advantage of the periods when you have cyclical slowdowns and, and very possibly, like if you look at the 10 year yield right now as we talk, it's 4.29%.

35:55 It has just kind of gone sideways for an extended period of time here and it's sort of coiling in this narrower, narrower band. So all of this shit is going on in the background and the 10 year yield is just sort of like going into its corner and just looking around and saying, ah, like which way am I gonna go here?

36:15 And I think it'll tell us a lot which way it breaks outta that band. One potential scenario, which I think is probably the more likely one in the short term, is that it falls below that band 'cause we're entering a real macro slowdown. I think that's probably like, even if you just look at what's going on in the inventory cycle right now, like we just had a really weird whipsaw period with all the tariffs and there was a huge pull forward of demand.

36:40 And you can see in the data now people are buying things that are subject to tariffs and the stuff that's not subject to tariffs, they're not buying. And the sales of those are getting the crap kicked outta them. Like airlines, hotels, services, things like that. Um, all of that suggests that we're, we're gonna have a bit of a hangover here.

37:00 Uh, and an inventory puke out after the build that we just had that could bring yields below and break that, that narrow band. And in that case, I think Besson would be looking to say, Hey, you know, yields are now 3.5%. Let's issue some 10 year debt. Let's issue some 20 year debt. Um. That I think is his plan is to sort of slowly term it out when you get those opportunities, hopefully increase growth opportunities or growth, you know, potential long term.

37:31 And then you sort of grow your way out through nominal price growth, wall, avoiding sort of any big refinancing walls by, by terming that, that out. But like you really need everything to work perfectly to work. And, and the problem is 10 year yields are really, really smart. Um, I know I'm referring to an inanimate object here, but they're super smart as James Carville, you know, would say.

37:59 And, um, so much of this is about expectations and credibility and a lot of the, a lot of the things that Trump is talking about and best is sort of echoing like, oh, we should be lowering rates because then like quite possibly that could increase the 10 year yields. You know, if it's viewed as being inflationary in the short term and sort of a sign of just, you know, institutional deterioration, you know, like we've been talking about, um, because it wouldn't have the credibility that it would be that would remain, and this is going back not to talk too much about in 1951, but that was the crux of the issue in 1951, was Truman was like, well, why don't you just peg 10 year yields so that we can just spend whatever we want?

38:47 And the issue was like no one expected that it was credible that that would be maintained. So like everyone is gaming it, unless you believe that that's gonna happen forever, why would you buy, why would you buy bonds? You know what I mean? Like, you have to have the credibility. And this is getting to Bernanke dealt with this on the other side where he needed the credibility of like, Hey guys, I'm gonna be super irresponsible with monetary policy.

39:10 You better go cause some inflation. And like that was a real struggle because people knew. Yeah. You know, he's not gonna actually do a helicopter drop of money. Like, that's just not gonna happen. So I'm, I'm sort of rambling here, but my point is like, it's very, very difficult to take this complex system that's self-referential and forward-looking and, and use like one tool to be like, oh yeah, let's just lower rates along the board.

39:35 Like the unintended, unintended consequences are always gonna outweigh whatever, like, linear thing you try to do by poking the system in one specific place.

39:47Jacob Shapiro Okay, that makes sense.

39:49 And I think before we get back to the, the bigger question of interest rates, I think we also need to talk about inflation and trade then. 'cause based on what you're just talking, I think that's gonna be a major factor in this. Um. Yeah, July 9th is when a lot of the liberation day tariffs are supposed to go back on.

40:03 You can feel the media cycle turning away from that Israel Iran war back to nonstop tariffs. Um, last week you had, uh, president Trump saying that a deal was signed with China. Doesn't seem to be so much a deal. It's a framework according to China's Ministry of Commerce, uh, that literally says China will.

40:21 I mean, like what it says is that China will review and approve export applications of control items. Uh, that means like rare earths and magnets and things like that in accordance with the law. But basically it's a quid pro quo. China's not gonna limit exports of rare earths and special magnets, and the United States will cancel some of their restrictive measures, uh, recently taken against China.

40:39 That's it. And that's like basically all the detail that we have right now. And we're getting a flurry of these sorts of things like Trump tweeted, or truth, or whatever the heck we're supposed to call it this morning, that the United States had a trade deal with Vietnam. And that instead of a 46% tariff rate announced on Liberation Day, it would be a 20% tariff rate and a 40% levy on anything that was a trans shipment from a third country.

41:00 Um. There has been a lot of smoke, um, about a potential US India trade deal. Um, and this is one I've been trying to follow closely 'cause I didn't think that negotiations would go particularly well because of how frustrated India is with the United States after the United States intervened and the Pakistan India skirmish and basically it was taking credit for using tariffs to reach some kind of agreement.

41:23 The Indian government has been very blunt about how things did not go the way that the US says that they have gone. Uh, but at the same time, like Indian Press said, you know, Indian negotiators stayed over in Washington at the end of last weekend. There's a deal that's coming. There's still some hangups on us agricultural access to the Indian market.

41:40 That's something that farmers are really, really gonna want. Something that India really doesn't wanna give, um, some other concessions. Um. That are also sort of gumming things up, but maybe you're gonna get some kind of deal announced. I would just note that Japan, uh, continues to double down. Um, like Japan, uh, Japanese Prime Minister Shakiba said that he was gonna protect his national interest and trade negotiations, that Japan is different from these other countries because, quote, we are the largest investor in the United States end quote.

42:09 Um, this is something that you've brought up in general. So I think like the, the table's being set for a real showdown between Japan and the United States going forward, with the point being we're about to get a flurry of deals. And I'm curious, number one, how real you think those deals are. Because my base cases, these are, this is lipstick on the pig.

42:27 These are not meaningfully different deals to the extent, even if this Vietnam deal is real and who knows if it's real, it hasn't been announced by the United States or Vietnam, like Trump is tweeting about it. Like I don't exactly know how to measure like the reality of it. And it's still saying, okay, well you, you went from 40 plus percent to 20%.

42:43 You're still gonna tax the trans shipments at 40% and it's the trans shipments that have kept things probably relatively stable here over the last couple of months. If you look at Chinese exports to your trans shipment com, uh, countries like Vietnam and Thailand and Indonesia, Malaysia, they're through the roof.

42:58 'cause trade is like water. Unless you literally block every single hole, it will find the market that it needs to go around. Another example of this is look at German exports to the stands like your Kirstan and. You know, Kazakhstan and things like that. It's not like the Russians have given up on buying BMWs and Mercedes.

43:13 They just can't buy them direct from the Germans, so they're going to Kyrgyzstan or wherever else and buying them. Not trying to drive by, you know, uh, assault the Kyrgyzstan government there. But like, that's, that's just how trade works. Um, so to my, to my mind, these are superficial deals, but maybe there's gonna be some sense of normalcy or complacency in the market.

43:31 And then this gets to the inflation question too, because the last CPI, you know, even though this data is now a little bit compromised, like the Bureau of Labor Statistics has talked about how they're having to strip out some indicators because they don't have staff to keep track of everything that they used to.

43:45 Like, that's like screaming in the back of my mind. Um, but you know, CPI is. Let, let's call it stable. I mean it was like up a little bit, but it was up 0.1% in May. Um, if you look at the breakdown, it's still energy that's driving things downwards because energy prices are so down, it's bringing the whole thing down.

44:00 It would be a lot higher if you sort of stripped out energy probably more to your three or 4%. So before we get into where interest rates are going, like do you, where do you think trade and tariffs are gonna land on this and where do you think inflation is going? Because Scott Bessant very clearly says, no, inflation's gonna go down.

44:17 And that's what's going to buttress the argument against interest rates. So where are you sitting right now based on what you're seeing? This also gets into the macro picture that you're looking at.

44:26Rob Larity Yeah, I mean, there's a lot in there.

44:27 Um, let's start with the inflation and then we'll back into the trade deals. Um, so. There's a few different factors going on. Inflation, like you're right, energy is a huge component of what's going on right now. Food prices have been going down again, I don't know if anyone's seen the price of corn.

44:45 Um, it's not looking pretty. Um, so all of those things have been, have been contributing. Um, the biggest driver of inflation is housing. And housing inflation is still significantly positive after being, you know, through the roof over the last few years. Like, um, owner equivalent rent is how they calculate housing.

45:09 That's the biggest component of the total CPI bucket. And that's basically a proxy for house prices, so everyone knows what those are doing. So, you know, obviously what's happened in the last few years is that housing inflation just jumped significantly and now it's just like it's still high and it's slowing because ironically, the rise of long-term interest rates and mortgage rates is doing its work.

45:35 So you're having a major demand degradation because people just can't, can't get mortgages at the rates that they need to flip out of existing homes into new homes. So anyway, that's, that's all kind of down the rabbit hole of housing. But suffice to say, like the cyclical factors of inflation have been not very bad.

45:54 So inflation looks okay. And then getting to the whole, like cycle. Cycle versus average. Um, yeah, I think besson is probably right. Like all things considered inflation is going to kind of clunk around where it is right now unless something drastically changes. His argument, specifically on the tariffs is a fatuous one, and I'll explain it.

46:18 So what he says is when he is saying this comment to, uh, Powell and, and things like that, first of all, we have no data on what happens with. Major tariffs because as we mentioned before, the only other time this has happened has been in the teeth of the Great Depression. So, you know, throw that data out, it's not worth anything.

46:36 Um, what best's argument is, is he's saying, well, tariffs don't cause inflation because you get shifts in what people spend. So if you consider like the US households as one, you know, simplified household, and they have a hundred dollars in wages that they're gonna spend, if the price of eggs goes up, you know, 50%, then you're gonna just buy fewer eggs and you're going to, and, and, uh, you're gonna shift your spending to other things.

47:06 So his point is like the to that a hundred dollars doesn't change. So unless the a hundred dollars goes up, you're not gonna have aggregate inflation from tariffs. You're just gonna have people shift from one bucket to the next. Does that, does that make sense? That's a kind of complicated, I don't think I explained it super well.

47:23Jacob Shapiro Um, it's hard to explain.

47:24 Well, because it's, I mean, it's sory, but yes, I, I understand what you're saying.

47:28Rob Larity It's sory, but it's saying like, okay, the price of eggs goes up

47:30 50%, but because people need eggs, the price of cars is gonna go down 20%. 'cause they're, they're taking the car money and putting it into eggs. So up 50%, down 20% and then inflation doesn't change. 'cause the a hundred dollars is still the same. That's, that's the argument. Um, and that's really stupid because it ignores the fact that prices don't just go down very easily.

47:52 So like, if consumers stop, like if demand weakens for some set of goods, like imported goods, um, the price of those doesn't go down like businesses, like we've talked about this when we talked about macro recently. Businesses have been sort of. Creaming, uh, the crop here because they're getting really high margins.

48:13 'cause they've been very slow to ratchet prices down in accordance with like the normalization. So the point is like the price of cars doesn't go down 25%. Um, to use the example like the car dealerships are gonna sit there and just not sell the car rather than cut the price 25%. And when you're measuring inflation, it doesn't matter how many cars you're selling, it's what is the price of the car.

48:36 Right. So that's, that's just to explain why Besson is saying that it's a fatuous argument, it's a self-serving, serving argument. He knows better, but it's the most convincing argument he can think of that tariffs are a good idea. Right.

48:51Jacob Shapiro Well, can, can I push back, well, not even push back for a second.

48:54 Help me understand why Nikkei then is reporting, or at least reported last week, that export prices for Japanese vehicles bound for the United States fell 20% per unit year on year. So what, what, what is the 'cause that sounds like actually, yeah, like the car prices can fall 20%. And I mean maybe that's also different 'cause Japanese companies are thinking about the yen and they're thinking about tariffs and things like that.

49:17 But there's at least like the export prices of those vehicles seem to be down.

49:22Rob Larity It's really different when you talk about

49:23 wholesale versus retail markets. So when was the last time you went to a car dealer and like, the price of a car was down 20% from a year ago when you last looked at it? Like, not on amo. Like, you know what I mean? Just like, so, um, you know, obviously, and cars are a little more flexible than other things, but, you know, toothpaste, like whatever, whatever you wanna look at, it just, it's much more stable at the retail level, even as things kind of tend to shift around within the supply chain.

49:54 Mm-hmm. Um, so, so yeah, it's, uh, that's, I, I think all we need to say about his argument there. The, the trade thing is a really important one and like we could talk about each of these individual things and why India's pissed off and why the Japanese are really pissed off. 'cause they've been playing along with the United States for 75 years and, you know, uh, justifiably think that they're, uh, that they're due some special consideration which they're not getting.

50:25 Um, you know, I think the only observation I would make is really kind of a higher level one that tries to connect them, which is when you look at where the United States has had success in striking these trade deals in the past, it's been part of a broader package, a broader vision, which is like all of these countries relative to the US have more protectionist tendencies.

50:47 It's really important to remember, like the US is on the technological frontier. The country at the technological frontier wants free markets because they're the best. They make, they make stuff the the best on average. So they want to have access to sell their stuff wherever they can. And that was the case with Britain.

51:04 It's the case with us, like relative to everyone else, it's always the least protectionist. So you're going naturally to other nations that are more protectionist, India, Japan, like, you know, obviously we all know this, not to mention like Vietnam, like these places. I mean, industrial policy is, is the playbook.

51:23 Um, and you're trying to convince them to basically give that up. And in the past where you had this as part of the vision of like, you do this, you're joining the, the international order, this is the, the global sweep of history. This is, this is how you're gonna get rich. You're gonna join the west.

51:42 Like yes, you're gonna piss off local interest groups, local powers who don't want this. But in the end you're gonna have more wealth and more power from doing this. And then you're gonna be able to buy them off and you know, and that sort of thing. Now, like when you look at all these individual cases, I think that's a, the common thread that I see is like that whole vision has been crapped upon and it doesn't really exist anymore.

52:08 And these are being pitched as like, bully deals, like, do this or we're gonna hurt you. And that is just, it's just tough sledding. It's a tough pitch to make in these nations that have been, you know, following the, uh, sort of industrial policy playbook for a long time. Like a country like Japan, deeply, deeply suspicious of outsiders.

52:32 How many like Japan has relative to other similar nations, has the lowest amount of inward FDI of any of them. They do not want Americans in Japan. They do not want American products. They do not want American, you know, investment in the country that is in their DNA. And it's very similar to, you know, in a lot of places.

52:53 So. I think lipstick on the pig is, is one way to put it, another way to put it is just like, it's too late to, to try to salvage anything meaningful from this. Like even if these things happen, they will be done in a half-hearted and, and, you know, probably not followed way, um, just to get Trump off your back or, or view this as a transactional thing to buy time or kick hand down the road.

53:20 It's fundamentally different from the sorts of things that we saw even 10 years ago where you were looking at like, hey, the TPP, this is, you know, whatever example you wanna look at. But that at least had the rhetoric of loftier things and, and this doesn't.

53:36Jacob Shapiro Do you think that means ultimately that all of this trade mellow

53:40 drama will not impact inflation that much? Precisely because it's just gonna be about making deals to placate the bully and things will continue to work as they were before, which is like, there was, I. A couple week period there where it looked like the US and China were really gonna have a breakdown.

53:54 And you saw it in shipping and maritime transport and things like that. But like things have gotten mostly back to normal. We haven't seen a huge, um, like spike in prices to Bea's point. So do you think that, I guess the question I'm zeroing in on is, is the meaningless of the deals themselves going to prevent any kind of sharp spike in inflation?

54:13 So they'll take credit for deals, but things will basically work the way that they have before. And so prices won't do much in the long term. Some of these countries that you're talking about will be deeply suspicious of the United States and look for alternatives, but they're not gonna do that today because they don't want to commit economic suicide.

54:28 Um, so, you know, Japan has some leverage that maybe other countries don't have, but most of these countries, whether they're Canada or China, even, like, are going to do the things in order to keep things going. Like, does the party keep going or like, do you think, 'cause you know, when we're going back to liberation day, if you, if you apply the Liberation day tariffs for real.

54:45 If. Like, I would think that you would get an extremely sharp spike in inflation that would not be transitory because it would take lots of money and lots of time to produce these things in the markets that you wanna produce them in now. So I, I think that's what you're saying, right? Like the, that the deals are meaningless and therefore they're actually probably won't, that be, won't be that big of an impact on inflation.

55:04 Is that the right conclusion to draw?

55:06Rob Larity Yeah, I mean, we're starting from a status quo of

55:10 like nothing's really happened. Like we've had tariffs on Canada and Mexico, like those did happen. Most of the other stuff didn't really happen and we're just dealing with the consequences of people anticipating they were going to happen. So you, we had a ton of pull forward demand in the inventory cycle, like going up and down, like choppy sea is like just crazy.

55:29 Like you look at the charts of how these things, like economic data doesn't move this way absent some crazy external factor. Um, so yeah, I think I. Definitely if he were to implement these Liberation day tariffs, it would be a big, big deal. Like there's no, no question about that. Especially if the economy were just like, like in the past when you've had this, oftentimes it's come when like growth is really slowing or there's other factors kind of dragging down inflation.

55:59 And the tariffs haven't been that big. Like I think it creates some complacency around how big of a deal this is. 'cause it does, things don't adjust. And for the reasons that I mentioned, like they do have an impact contrary to what Besson is trying to say. Um, so whether that happens or not, I mean that's, that's really a political analysis that's in, that's in your wheelhouse, um, striking of these deals.

56:23 Like going back to essentially like a status quo thing or like, do you get slightly lower tariffs from some of these key trading partners? Like I. It doesn't really matter honestly, like in the end, inflation isn't driven primarily by tariffs, which is why this is such a weird series of events. 'cause we're not used to thinking that much about tariffs.

56:43 They don't really matter that much. Like they matter for, you know, longer term business fundamentals and market share and stuff. But absent some weird shock like inflation is driven by other things and tariffs like are kind of a, their own separate world in terms of what you're analyzing. So I don't think it's gonna have a meaningful impact on inflation if they do strike some kind of deals with some, you know, some symbolic reductions in tariffs or whatever.

57:11Jacob Shapiro Okay.

57:12 All right. So we've gotten nerdy on the fed, we've gotten nerdy on trade. Why don't we land the plane here and get back to where we started, um, which is interest rates. And I know that, you know, it has to be how much and over time and things like that. But let's, like make it, um, let's make it a little bit more concrete maybe, or, or tell push back if this is not a good scenario to consider.

57:30 But if you look at, say, US equities, let's just look at the Dow Jones like we are back where we were on, around November 27th, so shortly after the election we're around where we were on January 27th. Um, sort of same levels for US equities. You had a sharp drop after the liberation day tariffs. But you know, if, if you're just looking at the year, year to date so far, like not a whole heck of a lot has happened.

57:51 Bottom line, market levels. Um. If you're advising someone, or, and obviously this is not investment advice, you should consult a professional, blah, blah, blah. Or you can talk to us if you want to. All those like things in in mind, like if you see like US equity sitting, where they're sitting, which is riding pretty high, uh, and you've got, you know, Trump saying cut rates and best saying the deals are coming and everything is fine, and we just blew up Iran's nuclear program.

58:15 Like they're, they're selling this big positive thing. Um, do you keep riding that train? Or if interest rates are gonna go down in an eight, 12 month period, um, is now the time to say, ah, like maybe bonds, like maybe bonds Maybe now is your time because if interest rates are gonna come down from here, you can lock and yield.

58:31 Like maybe things go up from there. Or like, do you stay away from that sort of tactical decision?

58:38Rob Larity I don't see any scenario in which anyone should buy bonds.

58:45 That's a pretty blanket statement. We don't own any bonds for our clients, uh, except for some very specific situations. But bonds have become the lifeblood of almost every investment portfolio. The fame 60 40, that's a terrible idea no matter what happens. Like that's, that's my kind of big view on, on bonds, uh, risk assets and equities.

59:13 Um, you know, I've been pretty consistent in saying that this is not a good time to be aggressive in owning risk assets. I don't think that's a particularly shocking or, or crazy thing for people who are listening to, to, uh, to, to, to get, um, you know, there's a lot of different factors into that.

59:33 Um, one of which is just we've been in a multi-year, very, very strong bull market that, um, essentially started with COVID and, and the stimulus that came out of COVID, just really letting loose that coincided with the ai, uh, investment. Boom. You had a, a double, double whammy and we're still sort of riding the fumes of that.

59:59 Um, that said, if you look at, uh, you know, I'm just repeating myself, but if you look the story that has not changed, the average US stock, the small cap, the micro cap, the speculative, crappy crap that has never recovered the 2021 bubble heights. So what we're seeing right now is you're seeing yes, like very, very aggressive risk, risk taking, but it's very narrow.

1:00:24 It's very skewed towards the largest companies, some of which are just crazy trading net crazy valuations. So we're sort of seeing a, a very like nifty 50 kind of experience, which is exactly what you saw in the late sixties. And I hate historical comparisons 'cause it's always very different. It is, you know, it rhymes more than usual in this case because then you had, you know, these large cap quality companies that were trading at 40, 50 times earnings.

1:00:53 And the view was, well, these are great companies. They're never gonna go away. Like, you just wanna own them forever. You know? And if you look back, that was the, uh, the xeroxes of, of the worlds at that time. And now it's, you know, Costco trading at whatever crazy, like it trades at like 50 times earnings.

1:01:12 Um, so, you know, very similar there. And that's just not something, if you have a time horizon beyond six months, like that's not a risk you wanna underwrite with your wealth or your capital. Like, full stop. Um,

1:01:27Jacob Shapiro yeah, go ahead.

1:01:28 Just why, why, so, I, I just wanna play devil's advocate, like if interest rates are gonna come down, why not buy bonds?

1:01:36Rob Larity Interest rates may come down briefly, but.

1:01:39 If I'm right that the average level of rates is going to remain higher and ratchet higher over time. Um, between that and any potential, you know, us dollar losses, IE inflation, you know, happening like we've, we've just had a 40 year bull market in bonds. Now is not the time to go out and buy, buy bonds.

1:02:04 Like everything points to the risks being pointed in, in the opposite direction. So yeah, I mean bond bond yields like, maybe the 10 year yield is 3.3% 12 months from now. That's totally valid scenario. And yes, you could have a brief moment in the sun for bonds, but you know, as we, as we said, I think last time we talked like that guy who's like, it's a bull market.

1:02:25 It's a bull market. Like if you ask me about bonds, probably for the next 15 years, I'm gonna say it's a bear market. It's a bear market. Like I'm not trying to be too cute about. Timing these little dips, you're just trying to catch the big trends.

1:02:41Jacob Shapiro What

1:02:41Rob Larity would make

1:02:41Jacob Shapiro you think you're wrong?

1:02:42 Like what would falsify your thesis?

1:02:46Rob Larity A big fundamental shift in sort of the gears of policymaking, the

1:02:50 way that politics appears to be working. Some signal that we, you know, the party's over, we've had enough, like there's a shift toward true fiscal rectitude and conservatism that would, you know, that is not like, Hey, let's grow out of the debt by having very high nominal GBT growth. IE high inflation.

1:03:10 That's not good for bonds. Um, it would have to really be a, like taking the Titanic is heading at full speed in one direction. It would require the Titanic to slam on the brakes and do a true like 90 degree turn in, in policy and macro terms right now to turn around and say, okay, you know, this is a real.

1:03:35 This is real buying opportunity for bonds. I mean, the last generational buying opportunity for bonds, just as a reminder, was after 30 years of accelerating inflation and bond yields at 80 or 18%.

1:03:51Jacob Shapiro Hmm.

1:03:51Rob Larity Like, that was then enough, is enough moment.

1:03:54 That was a a point when I know like people forget, but think people thought that like it was the end of the world. People thought the US was collapsing. Like this was, you know, New York looked like, uh, uh, mad Max. And I mean, that's a good time to buy, to buy bonds when you have Paul Volcker coming in and saying enough, you know, we are not at that point.

1:04:19Jacob Shapiro No.

1:04:19 We, we, we have Elon Musk, uh, posting pictures of Pinocchio and Republican congressmen and being sad that they didn't, that, uh, that he believed Trump. Um, okay. Well then last question then. I mean, I. So bonds bad, uh, not a good time for risk, uh, assets and, you know, market very narrow. Uh, and I know this is a theme that we've come back to over and over, but where is safety?

1:04:39 Like, where do you hang out? Like while you're in this particular moment? Is it, I mean, gold is also extremely elevated. Is it go from here, Bitcoin pretty high. Uh, like, like so where, where do you, where do you find space in the market as you're trying to figure this out?

1:04:54Rob Larity I wouldn't frame it as safety 'cause it's always opportunity.

1:04:57 It's just opportunity in different ways. And the two areas that I, I see the biggest opportunity right now are thinking about international assets and foreign assets. Like that is a major, major secular trend that is, appears to be just starting. So those are still super cheap. You know, d like you can look almost anywhere.

1:05:19 And we've talked about this, so I won't go through all the specifics, but that is a major trend that if you, you know, our managing assets, like you should be thinking. Carefully about this 'cause that if, if we're right, this is gonna be like 20, 20 years, like this could be a very long trend because the trend before it has, it's been 20 years since international outperformed us.

1:05:41 Like it's easy to forget, but that's, it's like 2005 that, that's was the, like, the last time that that happened sustainably. Mm-hmm. Um, so that would be a big thing, you know, looking for, you know, we've talked about resilience, resilient currencies, finding these freak islands in the stream that are operating on a different logic because of historical circumstance and, you know, places like Singapore and Switzerland, which, you know, are kind of core to what, what we're doing.

1:06:11 I think there's, you know, the opportunity there and, and it's offensive as well as defensive because it's offensive. 'cause you're, you're making money in dollar terms by shifting into those hard currency areas. Then like really as we move out into the risk spectrum of things, like the big opportunities are in some of that smaller cap underappreciated stuff that's gotten puked up in the last few years, or is deeply out of favor.

1:06:41 And there's plenty of that. Like there's, there's very few opportunities in large cap US stocks. Like they are just very expensive almost across the board. But if you look in the smaller areas of the spectrum, um, and I don't wanna, you know, talk our book or be, uh, be accused of, uh, of, of pitching our wares or whatever, but.

1:07:03 There are areas of technology, there are areas of sort of capital goods, of biotech related, um, companies that are just so bombed out and cheap. You know, I've talked publicly about solar, like look at what's going on with the big beau, beautiful Bill. Solar companies are absolutely, you know, whipsawing back and forth on these political things.

1:07:25 It doesn't matter. Solar, the horse has left the left the barn. Solar is economic. It's going to grow exponentially. You look at companies like Enphase, which has 25% operating margins, has generated cashflow the whole way down in like the worst environment ever. Like, their sales are down like 50% or more.

1:07:47 'cause you had like, I mean I won't get into all this solar stuff, but needless to say, solar has been a very difficult place for the last two years. Um, like some of these companies are just like. Those are the things where the opportunities are the things that are not sexy, they're not in favor. Um, they've, they've gotten whacked from 2021 and sort of are, are living off in the wasteland and no one's paying attention to them right now.

1:08:13 Like if you're looking to be aggressive in terms of spending your time and identifying, you know, um, growth investments for the long term, like those are the profile of companies that, that we're spending most of our time on.

1:08:28Jacob Shapiro Okay.

1:08:29 Anything else you wanna tell the listeners, Rob, before we get outta here? I think this was a good one. I.

1:08:33Rob Larity No,

1:08:33Jacob Shapiro I think I've, I've talked a lot, so I don't want to,

1:08:36 uh, overstay my welcome this week. And you didn't even make an Oliver Oliver Cromwell reference, so it's coming. It's coming. I know. Thank you so much for listening to the Jacob Shapiro podcast. Uh, this show is produced and edited by Jacob Mian, and it's in, in many ways, the Jacob Show. Um, if you enjoyed today's episode, please don't forget to subscribe, rate or leave a review.

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1:09:19 You can also write to me directly at jacob@jacobshapiro.com. I'm also on, on X for now at the handle. Jacob Shap. That's Jacob, SHAP. No DATs dashes or anything else, but I'm not hard to find. Um, see you out there.