Welcome And Listener Feedback

SPEAKER_00 0:01

Hey, welcome everybody to the Armchair Economist Podcast. I'm joined once again by my buddy TXMC. What's up, buddy? Hey man, how's it going? It is going well. Hey, just before I kick things off today, so a few of you guys watched last week, or a couple weeks ago, I guess, at this point. Thank you so much. Um, if you guys are enjoying this video and this content, please like and subscribe. We want to grow the channel as much as we can. Um, and please do leave us some feedback in the comments. We're really just experimenting at this point. Um, this is meant to be a casual conversation. As kind of the title explains, you know, this is a casual conversation between friends who say like to stay up to date on all things politics, markets, and and uh economics. Um anything to add there, TXMC, before we kick things off?

SPEAKER_01 0:49

Yeah, no, just would love to hear some feedback if there's something people want us to do more or less of as we kind of get comfortable with our format here.

SPEAKER_00 0:57

All right, sounds good. Well, we're gonna

Jobs Report Doubts And Data Revisions

SPEAKER_00 0:59

start out with some brief discussion about some topics in the news. We've got a couple that we want to cover today, and then we'll follow that with a longer discussions on on two other topics. So the first thing that we wanted I wanted to chat about today uh is the jobs report, right? So roughly 160,000 jobs, I think it was 168,000 jobs were added. Um and I guess there's I I kind of want to go at this from two parts. Do we really think because the the data's been so up and down. And then we had that whole issue where he dismissed the head of that department in the government. Like, are we sure like we're reporting accurately? Were they ever reporting accurately under any past president? And if this is accurate, like what's what's going on? So I'll kind of let you kick things off. I have a couple thoughts of my own, but I kind of want to get your take before I weigh in.

SPEAKER_01 1:47

Yeah, so I mean, I I've I've some of the content I've made on my own personal channel uh recently has been about um how weird the labor market is and how we have uh the lowest labor force growth of any non-recessionary period in U.S. history. So there's a lot of weird things going on already. Um and the headline job figure that gets reported is a seasonally adjusted figure. And so there's these adjustments that go into it, these like assumptions. The birth-death model is something people hear about you hear people talk about sometimes, kind of uh and there's some other assumptions built into the calculation. And so, like, one thing that's weird is whenever we get these headline figures, they're usually revised dramatically over the subsequent two or three months. And then each quarter, we get a fully revised like quarterly adjustment uh to labor from like six months prior. And every time that has happened for the last couple of years, it's been revised down. There's been a couple of times where total employment was revised down like a million jobs over like a quarter, I think about a year ago. Um, the most recent one was smaller. But I think those things kind of hint at the system struggling to uh project job growth, actual what what real job growth is, because so much weirdness is going on in the labor force, like it's overestimating jobs in each revision, it's having to pull back from that. Um, you know, when that happened in the 2000s, when we started getting a lot of negative job revisions, that was a sign that the economy was weakening. But we still had like normal demographics. Now it's quite different. Now we have basically no labor force growth, we have negative net migration, we have older demographics, you know, a lot of people retiring and stuff like that. And so I think that's messing with the figures. Um, but to to answer your other question, are these numbers even trustworthy? I think that is very questionable. There's a there are several data series, very important ones, that have zero that have no data for last October because they just didn't get released. The BLS just didn't give us those figures. They didn't uh the BEA didn't give us CPI numbers, and there's a couple of uh employment figures. I think I think non-farm payrolls also was missing a figure. And so you know, are we getting the real numbers? I don't know. I think it's there are a lot of incentives for the government not to give us the actual figure. Um but I do think like most of the weirdness that we've been seeing um and a lot of the revisions are because the demographics have changed and like the system is just not projecting it very well. So we get these big figures, whatever you said, 160,000 jobs. You know, you know, I bet it gets revised back to half of that, you know.

SPEAKER_00 4:34

And last month we had a loss, I believe, right? I think we were we were negative. I so a couple of things. One of my you know biggest pet peeves with with the jobs number that everybody looks at is labor force participation is really not included in that, right? You fall off of this report if you've been unemployed for more than six months, right? If you're no longer collecting unemployment, you don't count. And and so late it really it really gives a poor reflection of I think labor market health. I think it shows some like directional indicators, right? When unemployment's growing, it shows more of a recent trend. Uh but if you're looking at like long-term structural unemployed, it fails to capture that. And my hypothesis or thesis is since 2020, we have an increasing amount of long-term structural unemployed white collar workers. And they kind of act funny in the economy because they spend less. But a lot of these folks, especially a lot of the folks getting dismissed from big tech, have decent retirements they're now pilfering to get by. Um, but there is long-term highly educated, talented, unemployed people coming from Fang companies or you know, equivalent levels of competence who are long-term unemployed right now and can't get and can't get jobs. And I know that very anecdotally, but I have a lot of data points. And and the reason for that is is my day job. I've been in white-collar recruiting and executive recruiting for 15 years. Um, and so I I just talk to these people who are sitting unemployed. Now, I'm in Austin, Texas. This is a tech heavy community. And I think we we on the upswing of AI, we participated in the research of AI, but none of the companies that came from Austin ended up winning or producing anything. I think what some people fail to realize is there was a lot of companies building AI products before open AI that lost a lot of funding. You know, still in a large degree, right? Like there's a you know, place in town that was called Cognitive Scale. I think it still exists under and got bought. But Microsoft gave them like $50, $60 million, and I think they raised like a C round or a D round of $100 million. So not a billion or 15 billion like OpenAI doing or whatever it is, but some serious money. But I I think that my particular community, I guess, you know, along the way of saying is I think we've probably been impacted more than some of the other tech communities, like a New York or a San Francisco, negatively, because we were very uh uh heavy with a SaaS uh B2B type community. So I I just I just feel it feels like we have negative white-collar job growth over like the the medium term, if we consider a medium term five years. And so I think that's what I have with the unemployment number. Now, all of that said, um one one leading indicator for me, and I pay attention to stuff given what I do, is if companies are hiring recruiters, and net net they're hiring a lot of recruiters right now, hiring a lot of internal recruiters.

SPEAKER_01 7:38

Really.

SPEAKER_00 7:38

Um yeah, more so than I've seen probably in three or four years. And so for a very long time, yeah, that was the first position to go. You're not growing, even if you're flat, you get rid of your recruiters. There's no there's nothing for else them, you know, anywhere else for them to provide value inside of their business, uh, inside of your business. So a lot of people I know got out of the business entirely, especially in tech recruiting, which is is really kind of gone away. Uh, but you're seeing a lot of companies hiring or rehiring internal recruiters, and anecdotally, I can also tell you that the FANG companies are secretly hiring their engineers back. Um, they're not getting the the employment bump or the productivity bump, not employment bump, pardon me, um, from AI to the degree they thought they were going to. Um, and you will see jobs posted saying they're looking for people who used to work for them. Um I've also seen a and this was about nine months ago to a year ago, I saw them trying to hire recruiters who had used to work for them to come back into a recruiting role to hire previous or alumni employees back.

SPEAKER_02 8:42

Right.

SPEAKER_00 8:42

Um so so that's that's another interesting piece of data. I don't know where that all adds up, but I I have my own problems and questions with the employment data. And I I just kind of view it as like a you know a green or a red, you know, triangle, right? Up or down. It's kind of like the Dow Jones, like, eh, directionally maybe it gives you some indication, but it doesn't feel like a good, good data point. I don't know.

SPEAKER_01 9:04

Yeah, and you know, the there was a piece that was published by the Fed earlier this year, and they talked about how with labor force growth so low, I mean it's basically zero, that on any given month, the job figures could be as likely to be negative as they are likely to be positive, right? Because breakeven job growth is is basically like 10,000, 20,000 job jobs a month. You know, if they're if if the labor force isn't growing, the amount of jobs the economy has to create to maintain employment is subsequently also very low. And so on any given month, we could have negative job growth. And so you said, you know, we had a negative one last month and we had this big one this month. It's really hard to kind of square the circle on what's going on in the labor market. And like I looked at who has been leaving the labor force. And like to your point, you know, you're seeing in in your your industry, you're seeing less hiring. They're there, you know, recently they're hiring back their recruiters. But like the on the idea that we have a lot of long-term white-collar joblessness, it is weird because they they they aren't showing up as part of the lay for the labor force has been shrinking. And if you look at who's been leaving it, it's not people our age, like the like in the most recent figures, the people who are leaving the labor force are people between the age of 55 and 65 who have college educations. And like those are early retirees, and they're probably doing it because the stock market's been up 25% a year for like three years straight, right? Yeah. And so I I think that's what I think. But I don't know that all those retirements are voluntary, right? Like I think that's what they're doing. They may not be. Yeah, they may not be, but they're people of means, right? They're they're they're people who are close to retirement, who have educations, who likely have careers, and they probably have uh good retirement savings. And so like that that's been the majority of who's been leaving lately. And uh the it's hard. If you look at prime working age labor force participation, which to your point, if you stop participating entirely, you fall out of the labor force. But prime age, meaning from 25 to 54, that group of people, everyone who wants a job effectively has one. Like if you look at that bucket's labor participation, 25 to 54, it's basically at series highs. It's like at the hot near the highest levels it's ever been, which means effectively everyone in that group trying to find a job has a job. But that doesn't mean that that everyone who is in America who's in that age group is looking for a job, right? They may have been sitting at their house not participating in anything. Because to be a labor participant, you either need to be employed or be officially unemployed and seeking work. And so, like, maybe, maybe there's a group of Americans that don't fit in that cohort, but if so, they kind of are hidden from the data. Like, there's not some big pile of because there's data called not in labor force, and there's some that it's they slice it up by age, and there's not like some big growing pile of young, prime working age people not in a labor force that's like swelling. It's not, they're not showing up. And so uh it is it's a little weird, it's hard to suss out.

SPEAKER_00 12:08

Yeah, yeah. It doesn't feel like the people who are unemployed my age are there's everybody who wants a job is getting one. Like I anecdotally it doesn't feel that way, but it's interesting that we have that data. Last point I want to make before I move on because we've kind of you know went a little long on this topic is given how important and the mandate of the Fed this data is and the mandate for the Fed is what two things. Lower keep inflation stable and and and maintain uh you know what they consider full employment, which by the definition currently is what five percent in a five percent unemployment rate. If we're if we're if it's almost four percent, it's like four point one. Yeah, I know, but I'm saying is it used to be considered in you know as far as like below five. Yeah. Below five was was what we're shooting for. My point is is given how inaccurate the data is and given that the fact it doesn't account for labor force participation to any degree, I just don't think it's a good measure for the Fed to use. And it's the one they use. I mean, obviously they're a lot deeper and more complex, but very, very not very often are they going against the trend that shows up in that number. Right? And and that's what they they point to to defend it. Anyways, we should move on.

SPEAKER_01 13:17

We should move on. We should. Uh if if I can just say the last thing on that is I think in this environment, because the labor force is growing so low, job figures are probably not what the Fed is using. I think in this environment, uh jobless claims, actual firings, and the unemployment rate become much more important to look at as for if you're the Fed. And we could talk a little bit more about that when we get to the bond market stuff later. Yeah. Talk more about the Fed. But I think in this environment, they can't look at job growth because it's broken.

SPEAKER_00 13:47

Yeah, yeah. That's too bad. All right.

Peace Talks And US Europe Fatigue

SPEAKER_00 13:50

Uh next thing I wanted to cover in the news, and we can kind of do this quickly. And this this is being filmed on Sunday, the 6th. Um, but towards the end of this past week, um, surprisingly, all of a sudden Whitkoff and and Kirshner showed up in in Moscow, you know, followed by a next day trip to Ukraine, and you know, now a restart of of peace talks. Boy, it really feels like King Umpalumpa is searching for a victory before the midterms, because I I I don't see what else is going on here besides that. Uh currently the war for in you know for Russia is going poorly. Ukraine's kind of figured out this asymmetric warfare to a degree, long-term drone strikes have really been ruining the industrial capacity of Russia. Really feels like they're, you know, maybe on the verge of collapse to a degree. There's been talk of uh of you know a draft or a conscription conscription event, whatever they want to term it in Russia. They they have a marketing problem because it's not very popular.

SPEAKER_01 14:51

Right.

SPEAKER_00 14:51

Um and and then as a result of some of this, uh Putin's been doing some hybrid warfare in countries like Germany and Poland. Uh I believe there was a drone factory that was destroyed that caused about three and a half million euros of damage, I think I read. Um they're doing similar things in Romania, flying drones into Romania. So I under any normal regime, you know, I would think of this as you know as an effort to kind of decrease the the temperature a bit. But with this guy, you you have to ask yourself, what is he getting out of it? And that's the only thing I can think of. Because it doesn't feel like now is the right time to negotiate. So my prediction of what happens to this, and I obviously you know what your take on it is nothing. This goes nowhere again. Because unless unless unless m Russia's gonna concede a a large swath of land, right? Maybe they get the Donbass, maybe they get Crimea, they walk away from everything else. I don't see Zelensky agreeing to any type of peace.

SPEAKER_01 15:50

Yeah, I don't I don't know either. And and and um this is certainly this is a probably an area where you're more informed than me, this particular, you know, conflict, um just based on what I know about you and the things that you're interested in. I think you know about the more about this than I do. Um but it does seem to me generally that the US kind of wants to remove themselves from this get get this conflict off of their board, so to speak. It seems like the U.S. is tired of it, right? Yeah. And they they they want it to end somehow. And in in and maybe to the surprise of Europe, or maybe it would have surprised them to know this three or four years ago, it seems like maybe the US might not even care if that involves some of the loss of the territory of Ukraine as it currently stands today, as long as this thing ends, right? And I and I think that kind of speaks to the U.S.'s general retrenchment uh uh in in their posture towards Europe over the last few years. They kind of they're like, hey, you guys need to take on more of your own defense. You guys need to spend more, we're not always gonna be there. We're we might even just pull troops out of out of Europe, we might pull out of NATO, all these different threats. And I think directionally, they just kind of speak to the U.S. is kind of tired of bearing most of the security burden of what's going on in Europe. And even if we played part of a role in helping to start this whole thing, or at least to exacerbate it, um, then I you know, that's kind of water under the bridge at this point, and they just kind of want it to be over. That's the the the vibe I get from it.

SPEAKER_00 17:20

Yeah, I I mean and this is and we talked about this last time, you know, Trump pushes on stuff that actually sometimes he has a point in, and then this kind of stance with Europe to a degree is uh is tactless but understandable in insofar as you know we we were their defense security blanket. They weren't really providing us, I I think besides staying in the petrodollar system, right? If if that was you know the the the back room accord, like, hey, we'll participate in your petrodollar system as long as you you know continue to defend us. But I I don't think that US really kind of received any type of favoritism towards other trading partners and and whatnot. And I think Trump really correctly identified that, right? Like, you know all of our our agricultural goods were blocked for GMO reasons. I kind of get that, but maybe there's a way to work through that, especially on some of the organic stuff. Um a lot of our exports were blocked. They they did a lot of business with with China specifically and importing. And then, you know, prior to the Ukrainian War, I would even say that Europe caused this conflict, especially Germany uh and some of the other countries, you know, by the the Nord pipeline, right? So, and I mean Germany cut itself that you know, sliced its own wrists open to a degree. Sorry for the graphic nature of saying that. Um they did.

SPEAKER_01 18:37

Yeah, but Trump laughed at them in his previous term, didn't he? We've talked about that before. He he laughed at them. Like, you guys are shutting down your nuclear plants, you're morons. I can't believe you're doing this.

SPEAKER_00 18:45

Yeah, just to buy natural gas from Russia, who who is a natural enemy. Um and so I yeah, I I struggle with Europe and this conflict. I I definitely support Ukraine in this conflict, but I get why Trump is backing away because we we weren't we weren't getting our due. It wasn't a reciprocal relationship anymore. Right.

SPEAKER_01 19:05

Um And I think the the cost of the prior security architecture is no longer in the interest of the U.S. to maintain. It's just too expensive to be the global security umbrella anymore. And so I, you know, we've seen for I mean, you can go back to the Eisenhower administration and the different pieces of the U.S. government were trying to encourage Europe to spend more on defense and they never they never have. Um if you go back to the first Trump term when he went and visited NATO, uh he complained that they weren't paying their bills and he he threatened to pull out of NATO if they didn't start spending more on defense.

SPEAKER_00 19:38

They weren't. They were under one percent.

SPEAKER_01 19:41

Correct? Correct. And even at that point, even back then, they still had multiple countries that were below two percent, which at the time was their goal. And since then, the U.S. has said, well, I think you should double that. It should probably be closer to four percent. And what do you have now in the last couple of years? Germany suddenly is going to be spending a lot more on defense, France wants to spend a lot more on defense. They're starting to listen a little bit. And part of what I've been wondering, and uh not to put the card ahead of the horse with some of the stuff we might talk about with Iran, but just kind of generally what I've been wondering is like if the U.S. wants to get its allies to carry more of the security burden and kind of and integrate more with us, but act act more like proxies of us rather than us having to physically go in and deal with conflicts with our own equipment. But if we want to make everyone else build up their defenses, spend more on defense, it might mean that they have to be put in uncomfortable situations to cause those decisions to happen, right? Because if we just continually swoop in and try to save everything, uh it never drives any action. But if we kind of make Europe a little uncomfortable, maybe we pull some of our resources back while hammering this rhetoric, maybe it actually starts to get them to spend money. And and I've been wondering if something uh similar to that is coming out of what's going on with the Strait of Hormuz disruptions, also with our Middle Eastern friends.

SPEAKER_00 21:02

Yeah. Yeah, I I think that's right. All right.

Bond Yields And The Cost Of Debt

SPEAKER_00 21:06

Well, let's pivot into talking about the bond market a bit. And I I think this is kind of just being a general discussion. It feels like the bond market is starting to finally hold the U.S. accountable for a lot of poor choices, right? So some of those choices are systemic long-term, 50-year choices, we'll call it since the you know the Reagan days. Um kind of kind of under both parties, continuing to increase the deficit. I think the exception being under the Clinton era where there was just a tax surplus, right? There was an economic you know boom growth due to technology growth. Tax rates were higher than they are now. Um a lot of positive things that were happening. And then, you know, we spent said surplus and then started a war in you know, Iraq and Afghanistan and ran further into debt. So it feels like they're finally holding us responsible there. And it also feels like foreign governments are selling our debt off or buying less of it. Um and further, you know, kind of increasing our borrowing costs because they're not incentive to to participate. And I think there's two, you know, major cohorts there. I think there's the the Middle Eastern cohort, which you know, our agreement with them is stay on the petrodollar. Um and the way they spend their dollars is to buy our debt in it, you know, just like China kind of does. The way we they we were they were exporting a lot to us, so with the dollars that they received, they bought a lot of our debt. Well, I I think that the Middle Eastern countries feel like feels like they're they're trusting us less and less, and you know, maybe a little bit more willing to depend on each other or or other third parties. And I think this whole thing, this whole toxic soup, puts the petrodollar at risk sooner than I thought it was gonna collapse. What are your thoughts? On all of it.

SPEAKER_01 22:48

Yeah. Um bond market, there's a lot of things going on in the bond market. I think it's you know, if I had to like list the factors, sh yes, I think um, you know, U.S. fiscal management leaves something to be desired. But if you look around at the developed world, we're not the only one who has that problem. Yeah. Um we are not we are not the weah we are not the only developed country that spends too much money and has terrible demographics and tens or hundreds of trillions of unfunded liabilities in the form of changes and entitlements. Right. China, Japan, the multiple countries in the EU, us, Canada, we're not alone there. But because we're the at the gooey center of the financial system, we probably get a little bit more attention. But I think, you know, what's going on in the bond market, I don't know if they're yet holding us accountable. I think there are a lot of reasons why the 10-year yield is not higher than it might probably should where not higher than it is today. And some of those have to do with the Treasury not issuing a lot of duration over the last few years on purpose to try to help mitigate long-end yields. But I think, you know, if we're talking about a world where uh spending is going to increase, I mean, if you look at the rhetoric coming out of Germany, France, the EU generally, the UK, Japan, us, Canada, everyone is focused on increasing growth, right? Because actual nominal GDP is not growing quickly enough for us to continue to manage our debt burdens as a collective group of people around the world in a responsible way. That the math just kind of stops working, particularly as the demographics get worse, uh, and we don't have a lot of real growth in the population. And so when you look around at all this growth, all these growth mandates and all of this increased desire to spend on infrastructure, reordering supply chains, increasing defense spending, all that kind of shit that's that's good that's going on. I mean, that's that is the rhetoric out of every G7 country nowadays. Uh, that is a lot of future bond supply that is coming to market, right? And then if you add on to the fact that we're in the middle of an AI capex boom, which has another seven, eight hundred billion dollars coming in the next year, and most of that is gonna be yeah, that's all bond issuance as well, right? And so, like the the market is looking at this absolute tsunami of fixed income coming its way in the form of corporate and sovereign bonds. And that necess those things necessarily mean the market clearing yield probably is higher. And then if you add on to the fact that nominal GDP is actually accelerating in the United States, it's at over 6%. In the most recent quarter, it's running at 8% annualized. That is huge nominal GDP figures. The 10-year yield is below 5%. Those the the 10-year over time tends to follow nominal GDP. Unlike us, if you smooth them out with a moving average, they kind of directionally follow each other. There's a huge gap there. And that also probably means the 10-year yield should be higher if nominal growth is going to be higher. And so, like, you know, I you can kind of put all this together and just say, wow, the world of low interest rates is probably well behind us for the foreseeable future, just because of all of these factors. And like I know people just kind of land my plane here. I I know that when people hear that, a lot of times, especially in FinTwit, they assume, well, the debt burden is just too high. We just can't allow that to happen. So they're just gonna step in and they're just gonna lower the rates. And they can't do that without a crisis. They can't do that without a crisis. Like on a benign Tuesday, we're just gonna install yield curve control. Like, no, that's not how it's gonna work. What's gonna work is bond yields are gonna keep going higher until something breaks, and then we will get the crisis response.

SPEAKER_00 26:50

Have you made a chart? I know you like to make your charts and graphs, where it shows like the delta between like the 10-year rate and the the Fed window rate, right? You know, the Fed funds rate that they advertise.

SPEAKER_01 26:59

Like, well, like the well, that's like the yield curve. You know, you can look at the 10-year, two-year, or the 10-year, three-month to see those.

SPEAKER_00 27:07

Like, what's like has there been like I'm assuming there's been like a spread, uh, increase growth in the spread between the Fed funds rate and the 10-year and what I'm assuming that's getting worse.

SPEAKER_01 27:18

That's the weird thing about this is the the bond market, the yield curve, the distance between the front end and the long end is relatively flat. There is a distance, it's a positively sloped yield curve.

SPEAKER_02 27:29

Yeah.

SPEAKER_01 27:30

Uh but what's interesting, I actually was just looking at this the other day. You know, there's talk about maybe the Fed is going to raise interest rates soon. I don't know if they will or not. I'm still a bit of a coin flip. The market seems convinced that they probably will. But if the Fed actually started hiking right now, this would be the flattest yield curve since 1965 at the start of a Fed hiking cycle, which kind of says that the market doesn't fully believe that future interest rates are much higher than current interest rates, which in the context of everything I just explained, nominal growth, all this spending, what that seems to imply to me is that the market doesn't believe that rates can be much higher than this, much further down the road, that some combination of factors is going to cause them to come back down.

SPEAKER_00 28:20

So I I heard several people who I follow uh give a thesis that Walsh's whole plan was to inflate the debt Walsh. What did I say, Walsh?

SPEAKER_01 28:32

Walsh, Walsh, whatever.

SPEAKER_00 28:34

It comes out in the wash, comes out in the wash.

SPEAKER_01 28:37

Comes out in the wash. That's right. He wanted to inflate the debt away.

SPEAKER_00 28:41

Yeah, he wanted to inflate the debt away, right? And so, you know, go back to 1945, 1946 in this country, uh, keep rates low, run the economy hot, uh you know, screw over everybody with savings, right? Anybody who owns a uh a house or has a big mortgage is gonna really benefit, you know, those type of things. Um and while I find that repugnant, like I think that's probably the best path forward, right? Like it feels like that has the least amount of pain. Um we'll have to learn a lesson after that, right? And we're gonna have some some nasty years, but like that seems to be the shortest distance between us and a stable economy again. Uh but it it just doesn't feel like the market's letting him do that, nor is the current admin with you know, trade wars and in in wars in general. So it's it's interesting. It'll be interesting to see what happens. Um, because I it feels like the Fed chair, and I kind of agreed with people's assessment of what he would try to do. Because I I think that's the only that is the least painful out, even though that's going to be really horrifically painful.

SPEAKER_01 29:46

Right.

Financial Repression And Capital Controls

SPEAKER_01 29:47

So that you're talking about financial repression, and that is a topic that I've been spending a lot of time the last few years learning about because I also think it's likely. Um, but I I see a lot of hurdles uh to us getting there, right? So, like right now, this is we're not currently in a real financial repression regime. We we still have a Federal Reserve that is pretending like it's independent and pr and fighting its its dual mandates, and currently its priority is more tilted toward inflation. And so as long as that is the case, we can't really be in a repression regime, however, um that it is a playbook. And so like there's this paper that was uh came out in 2015, 2015. Uh it's famous now. It's called The Liquidation of Government Debt by Carmen Reinhardt. And it's basically it looked at the last 250 years of sovereign debt and it and it looked at debt to GDP levels, and they basically found that like over certain thresholds, around 90, 100%, um government you know, growth is significantly impacted, and that's often when you start to see things like outright sovereign default or a soft default through inflation and the destruction of real purchasing power, right? And so that's how there's a long history of that happening. Uh, you know, uh over time, or over centuries, uh most of the time it's default. But in a fiat system today where we can create money out of thin air, which with just a keystroke, the most likely release valve is inflation and the destruction of purchasing power for savers, right? People holding bonds and things like that. And I think that like we could, we could have a whole, we could spend a whole hour talking about this, but I think that we will eventually get to that point. But we can't get there, kind of what I was saying before on a benign Tuesday. You know, like we can't just roll out the kind of yield curve control that we implemented during World War II for a lot of reasons. One of them being the banking system is no longer that corralled and domesticated. There's a lot more cross-border flows. Private gold ownership is not illegal. You know, like there's a lot of things that are different. And so if they tried to do that, Bitcoin, one of your favorite topics? If they tried to do that today, just look to right now, and we tried to say we're gonna suppress yields and pump nominal GDP, uh, then they would have massive capital outflows. We'd have a we'd have a global financial crisis like bigger than 2008. But I think what we will I think we're gonna have to inch our way there, and that it's going to slowly, incrementally be more and more draconian measures to limit the freedom of capital, right? Like right now, uh I'm currently writing something about this for my Substack. And if you look around, there are, if you see what the UK has been doing with their pension reforms, what Japan is talking about doing with their pension reforms, uh Ursula von der Leyen, uh who you know, who runs the EU, she just gave a speech a week ago about how idle savings are lazy and how they need to put those savings to work for European investment. Uh, like all of these different places are all saying, hey, uh, we've got a bunch of capital sitting around, and some of it's not invested here. A lot of it's invested in the U.S. stock market and thing in places overseas. You know, Emmanuel Macron gave a speech two years ago and then reiterated it a few months back, uh, complaining about how much money France and the EU sends to the United States every year in the form of foreign investment, right? They buy our stocks, they buy our bonds, they buy our corporate bonds. Uh and I think you're starting to.

SPEAKER_00 33:25

That's about all they buy from us.

SPEAKER_01 33:27

Right. Well, I think you're starting to see like the the the tone around this stuff is starting to shift, and governments currently are in the mode of how can we encourage more investment with the large institutions that we have influence over, our pensions and our banks. And it starts out as encouragement, as like, we'd really like you guys to invest 10% more in the UK. Like there's a thing called the Mansion House Accord that the UK just agreed to within the last year. And that's what they're saying. Like we'd we'd like you to invest more. Well, we what it goes to. It's their own version of America first. Sure. But like if you if you carry it forward, it starts out as encouragement, and then as it gets more desperate, it turns into regulation, and then it turns into compulsion, right, at the other end of the spectrum. And we're currently in the first part, and I think over time we start drifting towards more compulsion. And that has a lot of implications. It has implications for the free movement of capital, it has implications for U.S. asset prices because a lot of it is propped up by foreign inflows, but not all of it, but a lot of it is. And, you know, if we're going to expect our allies and partners to invest trillions of dollars in defense and industrial capacity and reordering supply chains and friendlier jurisdictions, they need balance sheet capacity and they need savings and they need to direct capital to those things. And currently, capital just kind of gets to go wherever it wants. So my long-winded answer is like, I think we're drifting towards a world where we will be able we will try to inflate our way out of our debt burdens, but it first requires significantly more capital controls. And I think we're in that stage where it's it's start the walls are slowly being put up, but it it's a f it's a long way off, a long way away.

SPEAKER_00 35:17

I I think the only thing that kind of messes with that timeline is some type of you know major world conflict.

unknown 35:23

Right.

SPEAKER_00 35:28

Yeah, exactly. Exactly. All right. I appreciate you providing some great insight on that. Uh thanks uh TXMC.

Iran And The Strait Of Hormuz

SPEAKER_00 35:37

Uh one one thing that I'd like to cover as our last topic uh this week is is Iran. We wanted to kind of get to this last a couple weeks ago, we didn't. And this seems to be a long-term issue and it's kind of popping its its head again. I know I think last night or the night before uh Iran and US uh sunk three of their you know crewed carrier tankers, right? So I I I know the U.S. sunk three of Iran's carrier, not just like took the engine room out like they have been doing, like blew these things up, basically. And I know I think they uh Iran attacked three Allied tankers, we'll call it. I don't know if it was Kuwait or or UAE or or another one of those, you know, Bahrain in those countries. So they seem to be trading trading shots every now and again.

SPEAKER_01 36:21

I also heard that they shot medium-range ballistic missiles at us. That was one of the news stories where they fi that they fired in Jordan. Yeah, yeah, ballistic missiles at some of our carriers.

SPEAKER_00 36:34

Yes, I'm sorry, that's different. Yeah, so there was a there was a a destroyer and uh and and and uh a carrier that was they fired some ballistic missiles on. Okay. Um they they would really have to put a a pretty large solv together to to to you know impact uh a carrier strike group. Um just to provide some context here. I mean it that sounds horrible and dangerous, and you know, people certainly could get hurt, but um when we've taken old carriers in the past, and I'm thinking specifically of I think it was the USS America, not the current version, but one of the previous ones, we use it as target practice, and it took like two weeks to sink this thing, and we launched everything at it. So could it have caused some damage, sure, but um short of a nuclear blast, like you really have to put a high volume of fire, especially on a carrier. Um now, a carrier group generally has more than one destroyer, some guided missile destroyers. There's lots of air defense, uh, you know, lots of sea whiz, which is kind of the short point defense for for a lot of these things. So more of an annoying, kind of natty thing than anything. But they did launch and destroy some more of our facilities in Jordan at our Air Force base there. Uh they've been kind of doing that all war long. And then we got a president who you know is claiming this isn't a military conflict. Gosh, he sounds more and more like Putin every day, doesn't he? Special military operation.

SPEAKER_02 37:53

Yeah.

SPEAKER_00 37:55

Um But it feels it feels it's this feels like the definition of Quagmire. And to kind of set this up a little bit, um I personally would have not kicked this horn in its nest. But it's it's pretty hard to unkick this, especially given that they don't need a lot of military power to control the street of Hormuz. They just need the threat of occasionally striking vessels going through, because it is it is a it is a really narrow natural choke point. Um and so, in short of putting boots in the ground around the street of Hormuz and probably um you know you know the more densely populated part of Iran towards you know the Iraqi border there, I just don't I don't see how this ends. And I really think we would be there already had our president's advisors not tell him, like, look, you go in there and this is gonna be Ukrainian Russia, right? We're not prepared for FPV drones and cheap medium-range drone attacks and that type of stuff. Our military is state of the art circa 2005, right? When we kicked off our war uh against terrorism. It's it's not ready for the modern battlefield. And so I think why we're expending all of this all these munitions is is because we we can't put boots in the ground because we know we're gonna lose a ton of lives and that will just be political suicide for the Republicans. Uh I think they're thinking that that that coldly as far as you know their calculations. And in general, I the mix of munitions that that Trump is using or Trump's militaries are using are are standoff musician munitions, right? So uh early in the war uh I believe it was an F-15 strike eagle that was shot down, I think a couple of them. And um we recovered one of the pilots, but the other one took like a week or better, and they basically created a landing strip in order to cover this, create you know, recover this one guy, uh, which they lost multiple cargo planes on the ground there and left a ton of equipment behind. I mean, so this one guy took billions of dollars to recover, basically, which is not sustainable. I think that whole experience um you know shied our president off of using cheaper, like guided munitions, right, like glide bombs, because he doesn't want to put our planes in harm's way because he's worried about the optics of it. So it just feels like given his kind of style of leadership and the state of the world, that this is stuck, but it's it's not it's not tenable long term to keep it this way. So if if we walk away now, within three to five years, we're gonna have boots on the ground in Iran. So it just this just feels a bit of a can kick. Um and the other thing we did wrong from the beginning is not get our allies on board. We should again, just like the whole trade war, you know, we really are going after China. That's what everybody really wants to go after. Instead, we just pissed off the rest of the world um i in the whole trade war as well. We did the same thing with this conflict. We didn't consult any of our allies, didn't get any other any other folks uh you know willing to participate in the Middle East has ticked at us, the you know, Europeans are ticked at us. I I just I don't think this could have been handled in a worse way. I want to get your take on this.

SPEAKER_01 41:06

You know, something I've been wondering, uh I'm certainly not a geopolitical expert, um, but you know, I I do think it's it does seem clear that uh on some level uh we underestimated Iran's ability to be pesky, you know, and their ability to kind of uh push back.

SPEAKER_00 41:24

This is like what was gonna happen was like written into US doctrine for for years. Literally in US war planning and doctrine, it's that they're gonna first thing they're gonna do is sorry I'm tapping the table if I'm causing noise. It's all good. It's all good. The first thing they're gonna do uh is shut down the certain remote.

SPEAKER_01 41:40

Right. Well, so what I've been wondering is like kind of like on a I I think I floated this idea when we were talking about Ukraine earlier, is like there are there appear to be uh some things that the US would like to see changed, either in its its posture or in the actions postures of other trade partners and allies.

Energy Routes And Strategic Incentives

SPEAKER_01 42:03

And you know, one way to do that is to get everyone in a room and sing kumbaya and agree to to make some changes. Another way is to make people uncomfortable and force them to make changes. And and if you look at the current conflict through that lens, I think it makes it kind of interesting. And so some of the things that I see are That's a great take. So, like I think what you know, a lot of people have said, well, this isn't about Iran, this is about China. And I think you could make that argument, right? China buys 80% of Iran's oil exports. Uh though they have been able to weather this better, I think, than people would have assumed because they're massive repositories. Huge reserves. Yeah, they have like a billion barrels of oil. Uh and they've also they've got they've bought some of the kind of like floating reserves and some of the other things, they've kind of piecemealed their way through this conflict. But if if I think about how valuable the Strait of Hormuz is for Iranian leverage and what a prolonged disruption could do, if you start looking at like what other people in that region are doing in reaction to this prolonged disruption, which everyone thought was just a quick war. We're gonna go and we're gonna smash them, we're gonna kick their ass and we're gonna leave and somehow win. That never really made a lot of sense to me. And I think I think the dragging out of this is part and parcel of the US's plan. They can't say that, but they could make it.

SPEAKER_00 43:35

That's why you keep they keep kind of going back and forth.

SPEAKER_01 43:38

Right. Yeah, maybe we get close to a negotiation, oh, but then it falls apart. Oh, maybe we're gonna have an MOU, oh, then it falls apart. And the the the long term trend is that nothing really changes. But if you look at what the Saudis are doing or what the Emiratis are doing, they're currently accelerating their build outs of pipelines that go in other directions, right? Saudis have been building. Up some of their capacity towards the Red Sea and they've got in a pipeline.

SPEAKER_00 44:05

And the Emirates are going to they're they're bypassing the Oman Oman part of the strait, right? Because the Oman has has is um disjointed, right? It has a piece up by the Cert of Formuz, and then it's on the And they have that little peninsula that sticks up into the strait.

SPEAKER_01 44:19

And there's a trench. I heard they were they were they were digging through the back part of that peninsula to try to create another wrap.

SPEAKER_00 44:25

The back part of that on the other side of the Arabian Peninsula is part of the UAE, right? So they they have a direct pipe uh pathway to to have a pipeline there. So I mean but what about Bahrain? What about Kuwait? What about Iraq? Like that oil gets stuck.

SPEAKER_01 44:41

It does get stuck. And but the longer this goes on, the greater the incentives and the more time allowed for all of these producers to find other ways to get their product out that doesn't go through the thing that Iran can influence. And so like maybe that's part of the maybe that is one particular like victory that the U.S. can claim out of this is that they strategically reduce the value of Iran's geographic location. And they disperse Gulf oil production energy, because it's also LNG, all those things, and they they they disperse it into other routes. And at the same time that that's happening, you know, that it that pushes a lot of the adjustment cost onto Asia and things, because you know, Japan, they get a lot of their energy from there, Korea gets a lot of their energy from there. And so what do they do? They start maybe buying more from the US, or at least more from people that produce in the Western Hemisphere. And so, like, while we are trying to strategically lower the value of the Strait of Hormuz area for global energy production, we also are trying to tighten our partnership with Venezuela. We have uh Guiana and Brazil are putting in a lot more investment on their crude production. Uh and I think like you could envision five, six, seven years from now, like a world where there is like a unified Western Hemisphere energy basin from like Alaska to Argentina. And I'm not saying it's all controlled by the U.S., but is under some kind of U.S. influence or is part of a strategic agreement, or is usage of it is tied into some new trade agreement, like we're trying to get a trade agreement done with Argentina right now. And I think there are bigger things at play than just like what are we getting out of Iran? I I think that this greatly increases the strategic value of all Western hemisphere energy production because it makes us we we can come in as a backup supplier while these disruptions are going on.

SPEAKER_00 46:46

Yeah.

SPEAKER_01 46:47

And so I I think like I I don't know if I'm making perfect sense, or maybe this is too scattered. Yeah, I know it's but I think there are some there's some things that we could get out of this that don't just involve us beating Iran. Maybe we just kind of make it uncomfortable for people for long enough that the game board changes.

SPEAKER_00 47:02

Yeah, I I I so I think a couple things. Um I think everything you said might make sense, but I think it still starts with China and and why, right? And we talked about last time how China added the the German electro-grid size of electricity, worth of electricity, to its its grid in in one year time. And it the world is quickly moving towards electrification and away from oil. And the one with the you know, the country, the major industrialized country with the with the with the largest incentive to do so is China, because they don't have a lot of natural oil reserves and very little, which is also why they're trying to take over parts of the South China Sea. Um But I I think oil and that energy and the petrodollar is becoming less important over time. And it's less and less leveraged. And so it feels like to a degree what you're talking about, maybe we're we brought forward some of this conflict earlier than we would have liked to, or some of this strife earlier than we would have liked to, because we're we feel like we're losing control. Now is our time to make a move or a power play. Well, we we that we still have the petrodollar system to use as a tool.

SPEAKER_01 48:03

Uh because it's Yeah, I think I think that's possible. And you know, to to the to the petrodollar comment, I think because Middle Eastern producers are not recycling dollar surpluses into treasuries at the volume they were in the 70s and the 80s and whatnot, yeah. I think the disruption, the the realization that Iran can strike locations uh with asymmetric warfare, you know, they cause $100 million worth of damage to Qatari LNG production capacity with a couple of $40,000 drones, uh, and they've disrupted a lot of our bases and things like that. You see increased uh talk of defense agreements from like Saudi Arabia and the U.S. Suddenly they want to buy a lot more of our armaments.

SPEAKER_00 48:47

And so the dollar recycling mechanism. Pakistan and Saudi Arabia signed the uh mutual defense pact.

SPEAKER_01 48:53

Yeah, and so like what this starts to look like is okay, well, you know, you guys don't want to buy a bunch of our treasuries, that's cool. How about you buy more of our weapons systems? And because and and when you do that, that creates years, possibly decades, of future demand because you need parts and upgrades and additional training, and it creates more of an integration and more of a stickiness in the dollar system. Whereas if we just relied on them buying our treasuries, that is going to structurally weaken over time because of the stuff we talked about in the last segment. And so, like, I think by creating more demand for U.S. defense manufacturers, and you know, we could we could try to figure out if we're actually going to be able to produce enough weapons to sell to all these people because we seem to be running low on our own. But we're getting agreements in place for people to spend money on us to buy our defense manufacturers, and I think that that is a new mechanism to try to keep stickiness in the dollar system since treasury demand is kind of waning among sovereigns.

SPEAKER_00 49:47

Yeah, makes sense. Well, I

Wrap Up And Calls To Comment

SPEAKER_00 49:50

think that feels like a good place to kind of leave it for the week. What do you think? Do you have anything else you want to add to that in TXMC?

SPEAKER_01 49:56

No, I think we covered most of it. I do think the Iran conflict is fascinating. Again, when it first started, I was like, well, this is probably just about China and how long can we hurt Iran? But the more I think about it, the more I think that we're kind of forcing others to renegotiate defense agreements, move supply around, and we're kind of forcing a bigger change to the game board. And I'm really interested to see where it goes, just kind of like as an observer, even though it's also very stressful because it seems like we're kind of like on the knife's edge of a broader kinetic conflict. I don't really want that to happen.

SPEAKER_00 50:30

Yeah, yeah. We're definitely a lot of saber rattling. Yes, yes. Well, hey, TXMC, thank you so much for for joining me this week. Um, anybody who's still listening, make a comment down below. I made it to the end, or I made it all the way, just so we know how many people actually watch this thing to the end. Uh, and we look forward to to seeing you again, again. Like and subscribe, and we'll see you next time. Thanks, y'all.