stan druckenmiller is wrong

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Oh my goodness, I'm doing it again.
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I mean what rests within my head?
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First of all, I am the Used capitalist.
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I am Hugh Hendry.
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And my head is feeling like a a can, an empty can with the stone in it.
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I don't do any podcasts, and then suddenly I can't stop doing podcasts of these little essays, but um Bear With Me?
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Do I want to say that?
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Is that like what pops up on your social media?
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Um, you know, do you come here often bear with me?
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Uh my name is, you know, get to the boy.
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This one's a this one's good.
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Humble brag.
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I'm starting with a humble brag.
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What if the Bond vigilantes?
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What if these mythical creatures what if they're looking at the wrong country?
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And this essay is discussing the um the entertainment that we've had this week with Stan Drackenmiller, otherwise known as Stan the Legend.
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Um I mean arguably the greatest living investor.
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I've said it.
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Um why?
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Because you at least 30 years without a drawdown and making 30% per annum.
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30% per annum?
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If you compound it 15%, that's your compound annual growth rate, you double your money every five years.
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Stan was doing it every what two, three years?
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For 30 years! Remarkable.
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Anyway, Stan, Scott Bessett, the US Treasury Secretary, um, the analyst on the trade that brought down Sterling.
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Did the trade bring down Sterling or did the ridiculous nature of the politics and the economics bring down Sterling?
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And then we've got to throw China into the mix.
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And the question is, or the declaration I should say, is why the wrong balance sheet?
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That would be a sovereign balance sheet.
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Um, why the wrong hint, hint, Chinese balance sheet may be breaking.
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Maybe this whole cuffbuffle about US Treasury bonds has got very little to do with fiscal profligacy.
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I mean it's got everything to do with fiscal profligacy, but the motivate the motivation, the reason these politicians are running five, six percent deficits to GDP overspending on the public account is to compensate for forces in the Far East.
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I mean, let's discuss the gunslinger's error.
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I'm gonna clear my throat here.
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This is really painful to say, and I know I'm going to regret it.
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But here it goes.
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Stan Drakken Miller is wrong.
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I've been building to that sentence.
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Heavens, I don't know how many drafts I've gone through trying to write this.
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I've been dancing around it.
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I put qualifications, I put my profound affection, esteem for the man.
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But I'm the guy, I'm the acid guy that mocks the others when they do that.
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So, you know.
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Like they say with the girls just speak your mind honestly and with respect.
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So Stan Stan, I believe, is wrong.
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He's not wrong about the s the the the the what's he called, Bessant, the secretary.
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Treasury secretary is what I'm struggling to say.
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He wasn't wrong about Scott fiddling with the signal, the market signal.
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He's probably right about that.
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Stein is not wrong that governments that that deny the fundamentals of the sovereign arithmetic, eventually they lose.
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Eventually.
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I mean you know I have Japan and the widowmaker of the JGB.
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Decades of macro mavericks shorting a bond that only wanted to go up.
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That that of course has changed, but um eventually governments that fight fundamentals they lose.
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That's as close to a law as macro produces.
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But I think Stan's wrong about what the fundamentals actually are.
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I think he's wrong about the balance sheet we're staring at.
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And I think he's wrong in a way that it matters because a man of a legend like Stan writing a piece like that in the Wall Street Journal, you know, it can make the wrong argument feel like the obvious one.
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And my brothers and my sisters.
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I'm I'm not having that.
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The obvious argument is everywhere.
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It is everywhere right now.
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The 30-year treasury bond, right?
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Yeah, you've heard about that.
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And I'm sure you've heard that it's just hit a 19-year fan mock horror, a 19-year high yield.
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Greater than 5%.
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And we lost.
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I should have said, remember the Niedlerhofer rule?
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The rule of five, which I apply to the 10-year, to the notes, not the 30-year bonds.
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But Niedrohofer, he died, he died two weeks ago.
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May he rest in peace and may he may he create financial mayhem in the heavens above.
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Anyway, 30 year treasury, 19-year high, not price high, but yield high through the fives, and every respectable financial publication on the planet is treating this event as confirmation that Washington is finally, that Washington is gloriously, that Washington is getting the market discipline it fucking deserves from the long awaited return of the bond of vigilantes.
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Talking of the financial press.
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The lunatics, that's what they are.
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And they've taken over the asylum.
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The Financial Times and the Wall Street Journal gleefully running daily open eds.
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They even recruited my man, my man Stan the legend, Stan Drucken Miller himself.
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Like I say, the greatest, the greatest macro investor of his generation.
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But a man with with maybe one flaw, just one flaw.
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And that's that he could he could genuinely sit on the editorial committee of either of these esteemed Schuthouse financial publications without anyone raising an eyebrow.
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Stan has a little bit of the kind of the the the the wokey kumbaye, cum baya.
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Maybe that's the flaw.
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I can't decide.
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Franchement, as the French say, my head's a blur.
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But categorically, Stan's delivered the verdict.
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The secretary, Bessard, he's interfering with the Treasury.
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And he's fucking with the price.
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And governments that fight fundamentals, they always lose.
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They always lose.
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Okay, so Stan, Amen, Amen, Amen to you and your greatness.
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But the argument that everyone's carrying, carrying around this week, I think it's reached the kind of saturation point where it stops being analysis and it becomes like an accepted wisdom.
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I hate accepted wisdoms.
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I said capitalism is all about the the not the conceit, but the the loneliness and the courage to conceive of contentious narratives, not not accepted wisdoms.
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And what none of this is Stan and Scott drama, what none of it accounts for is that let me tell you a few things.
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Long duration treasuries, we call them notes.
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They've already suffered one of the greatest capital destruction moments in the past 100 years.
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The previous holders of these treasuries routed, flailed, hung out in public, large listed American banks have gone bust, gone bankrupt in the last four or five years for having had the audacity to lend to the US government.
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The asset has become socially embarrassing to mention.
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I mean, you know, the idiots on Twitter just love shoving the TLT up my ass.
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Four years of sellers doing their worst.
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And for all this noise, the long data stuff that they're fighting over, do you know what?
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First of all, it's barely 17% of the outstanding treasury market.
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That's durations of 20 years and more.
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20%, 17-ish.
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Roughly one Nvidia.
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I've been saying this in rooms, and and people look at me with the particular patience you reserve for us the smelly other guy who's who's lost money and is building intellectual architecture around it.
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You know, I I lost your money, but I was right.
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That's not what I'm saying.
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But since but put this in your smelly cigarette and smoke it.
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Since January 2008, I gotta say there's some shit housery going on in the headlines, the financial headlines, because you see, the 30 year, the yield, it spent only about 5% of that time.
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Above 5%.
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That's the Niederhofer rule.
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That the the US economy just is so financialized that when yields rise above that, because there's been no sustained rise in the natural rate of American profitability.
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And I think it's set to rise at the unleveraged rate of profitability in corporate America.
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I think markets are surging because they get a sense of this.
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But it's premature for yields to be above 5%.
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And it's premature because it tightens monetary policy and it slows the economy down.
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So this great shrieking, look at the treasury, it's out of control.
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Well, we since January 2008, these moments have been more like flares of sunspots on the surface of Jupiter.
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I don't know.
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Like they're flares, but this is 5% of the time.
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5% where it becomes a little bit perhaps hysterical.
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Now I've been waiting, waiting for a girl like you, is that a song?
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I've been waiting for the moment when this becomes when it becomes not just interesting, but interesting enough to own rather than mainly internet, interesting enough to write and talk about it endlessly.
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And so somewhere in what follows, I I think I stop, I think I stopped waiting and apologizing for my comments on the on the treasuries.
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There's one thing being down and out on Wall Street, which it I mean does have a certain romance.
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I'm a romantic fellow.
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But then there's the voluntary decision to buy the 30-year paper while everyone everyone else around you explains why this will be your obituary.
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That's an interesting question.
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I'm looking at the mirror and I'm saying, a man, a man needs a mission, but a man needs to retain some dignity, right?
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And my friend, the market, you know all those price charts, but they've yet to weigh in with with a decent buy sign.
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And as you know, I'm at my happiest paying higher prices, not lower prices.
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So when I look at the what am I looking at?
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I've got some TLT, I think it's the constant futures price.
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I think it's round about dogsville.
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But we need that, we need that at I'm I'm moving around my screen.
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I wonder if that affects the noise.
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Yeah, the 10-year note.
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And I'm maximizing my chart.
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It's down there around about 108.
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Yeah, let's call that 108.
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And regardless of what I'm about to say to you, let me just make this clear.
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I am not buying the TLT at 108.
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Now, somewhere maybe 115, 10015, but really 11 no 120.
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Then in my crazy world, everything will have aligned.
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Now, Stan, Stan going to the Wall Street Journal to tell his former protege, of course, is now the Treasury Secretary of the United States, very grand.
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And Stan yelling at Scott and saying, Stop fucking with the bond market.
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I mean, we should just again take a moment.
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Let's take a moment.
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Let's we're not thinking about the last time we had great sex.
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Maybe, maybe I just thought about it.
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But let's enjoy for a moment Stan telling Scott to stop fucking with the bond market.
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The master of Macro has taken to the house journal of the global elites who perpetually bitch about America and the global dollar system.
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These mastheads that Europe's amazing and America's just going down, really.
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Tell that to the GDP differential the last uh 15 years.
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Remarkable.
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Truly remarkable, actually.
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But there's Stan's apprentice has the keys to the American treasury, and there's something almost Oedipus, Oedipal Except Oedipus never had to worry about 30-year duration.
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Like the banks that went under in 21-22.
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And Oedipus, at least, he did his own writing.
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Ooh, that's a little bit of a low a low smack.
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You see, there's the other small indignity buried inside all of this, Stan's uh thought piece or opinion piece.
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It sounded like AI.
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It sounded like it was written by AI.
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Probably because it was written by AI.
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Readers and other non-entities, they started smelling the machine of of the smelling the machine oil in the text.
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Someone ran it through one of those detection programs and got the rather unambiguous verdict that 100% of the text was AI generated.
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Now, the detractors of the AI, I think they're mostly useless Luddites, addressed as statistics and the model majority.
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And I I certainly wouldn't I wouldn't convict a parking ticket.
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What am I talking about?
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I would not convict a parking ticket on the evidence presented by those who don't like text written with the help and assistance of AI.
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That's just damn stupid.
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But I do like the idea that someone had that very old-fashioned idea of actually just asking Stan, hey Stan, did you write this with AI?
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And he's like, Yeah, I use I use AI to write all the time.
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Same with his calculator doing mathematics.
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I thought Stan would do it with his fingers and his head.
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Anyway, once you know that AI wrote Stan's peace, you can't quite unknow it.
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But whatever.
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My only complaint is that there's none of the blood or the intellectual vandalism that I associate with a great macro trader thinking aloud.
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It's more the kind of passage where something true escapes.
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Yeah, that and when I speak, I'm like when I speak.
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Sometimes the truth escapes.
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Sometimes.
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The stance piece, however, it reads like a very intelligent machine was asked to make a very intelligent man sound like what a machine thinks a very intelligent man sounds like.
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And that's a sentence.
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That is a sentence.
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I wrote that sentence, but I'm aware that maybe it describes the risk of war.
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Um challenging Stanley.
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Let's move on.
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My god, my head, that can.
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That can, that empty can with the stone rattling inside it.
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Tim Robbins, he died.
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Did he die this year?
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The or last year.
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Great, absurd writer.
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Someone has to have to remind me.
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The book.
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He he I've mentioned this before, one of my all-time favourites, the audacity of it.
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And it's it's an empty can of Heinz beans.
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It's a I think it's the left black sock.
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And I think there's a a teaspoon.
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And these inanimate objects actually become characters and they're on a road trip around America.
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I would recommend it to you.
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Now the quarrel is kind of disappointingly prosaic.
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The Treasury, the American Treasury, said on the 19th that they would double their long-dated buybacks.
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Who knew?
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I didn't even know they were doing that, but from 2 billion to at least 4 billion.
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And that would be concentrated on the 10th to 30 year part of the the curve.
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And it would persist through November.
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And the yields on those bonds fell, which is to say the price rose as everyone briefly got excited.
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But by the following day, the whole move had round-tripped.
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The yields were kind of, if anything, they were above where they'd started the week.
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Marcus did what Marcus did.
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They considered the intervention, they delivered their judgment, stifled a yawn, and got back to work.
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No opinion.
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No op-ed was required, done.
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On the mechanics, as a good writer, the Financial Times did I say that.
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But yeah, I like Robin Wigglesworth.
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But Financial Times, esteemed shit house institution.
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Where the people who run things go to explain to each other why the things they're running are being run correctly.
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Drives me.
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I mean, it really drives.
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You gotta read it, but again, the editorial and the big chiefs of that paper.
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Not my not my my my tribe.
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The Financial Times piece was sharper than Stan's original.
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In it made the point that every dollar of debt the Treasury buys back.
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Well, that's financed by a dollar of debt that has to be raised.
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What you're doing is you're doing duration shifting, not demand creation.
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It's like an operation twist.
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But the Fed twists, and the Fed twists with an infinite printing machine, whereas Scott and the boys at the Treasury are trying to twist with borrowed money and kind of defeats the point.
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So maybe Scott should have sequestered Kevin's Fed.
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Kevin, Kevin, another protege of Stad.
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Kevin running the Federal Reserve.
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Scott really can do with Kevin's ability to manufacture an infinite supply of dollars.
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I mean, that that would have moved the needle.
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Anyway, US is selling$111 billion of new.
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Before this happened, we knew the the timetable.
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And so it looked like it was$110 billion of new long data.
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So quite small.
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And$110 billion to be raised in the quarter.
00:22:31.039 --> 00:22:36.960
And so even if the buybacks doubled, we're talking about really, really small, really, really small billions.
00:22:37.200 --> 00:22:41.279
You reduce the issuance from maybe by 10 billion.
00:22:42.720 --> 00:22:46.640
A trillion dollars of treasuries trade every single day in the cash market.
00:22:47.440 --> 00:22:49.680
10 trillion is noise.
00:22:55.519 --> 00:23:00.000
And then like Scott got a bit peeved and he's like, Well, I need additional firepower.
00:23:00.079 --> 00:23:02.720
I'm gonna tap the treasury, the TGA.
00:23:04.400 --> 00:23:07.839
But yeah, it just felt like he was doubling down, bad hand.
00:23:08.000 --> 00:23:10.160
Walk away, Scott, walk away.
00:23:11.119 --> 00:23:12.559
What were they the goons saying?
00:23:12.720 --> 00:23:32.319
Every basis point of artificial yield suppression is a subsidy, subsid subsidy to procrastination that's suppressing the long-rate sugarcoats, the interest cost projections, and it tells the incumbents, or it lets the politicians tell the voters that the debt is someone else's problem.
00:23:32.400 --> 00:23:34.240
Blah, blah, blah, blah, blah, blah, blah.
00:23:36.960 --> 00:23:42.240
And of course, there is the stench of the midterm elections coming up.
00:23:42.720 --> 00:23:53.279
Is it just an extraordinary coincidence that the Treasury Secretary is trying to get mortgage rates down ahead of a very important midterm election?
00:23:53.519 --> 00:23:54.720
I don't care.
00:23:56.880 --> 00:24:00.319
Because here's what Stans Letter doesn't say.
00:24:01.119 --> 00:24:21.599
And I think what the framework, the Wall Street Journal and the Financial Times have, they have no obvious place for this logic, but the deficit, it isn't primarily, primarily primarily, the budget deficit in America isn't primarily a failure of American fiscal discipline.
00:24:28.240 --> 00:24:41.680
It's the accounting counterpart, accounting counterpart of a global trade arrangement in which the surplus countries led by China, Japan, Germany, they recycle excess savings into dollar assets.
00:24:42.400 --> 00:24:51.599
They do so because they've put no domestic market, no domestic mechanism to absorb these great excess savings.
00:24:53.519 --> 00:25:02.880
And so America runs the corresponding deficit in savings because the system requires a debtor of last resort.
00:25:03.039 --> 00:25:08.799
And America volunteered for that role going back 30, if not 40 years ago.
00:25:09.680 --> 00:25:11.920
That was a bit of a word salad.
00:25:12.559 --> 00:25:14.720
Let me see if I can say it again.
00:25:15.039 --> 00:25:15.839
Different words.
00:25:16.000 --> 00:25:18.079
Maybe I say it more slowly.
00:25:18.319 --> 00:25:20.240
Michael, Michael Pettis.
00:25:21.680 --> 00:25:22.640
Wonderful.
00:25:22.799 --> 00:25:27.519
The wonderful economist, I would call him the John Maynard Keynes of today.
00:25:27.680 --> 00:25:32.240
And he's been making this argument for years, if not decades.
00:25:32.640 --> 00:25:36.160
And it starts from something so simple that it sounds like a trap.
00:25:37.359 --> 00:25:53.359
If one part of the world saves more than it invests domestically, and it runs persistent external trade surpluses, then another part of the world, it must be the mirror image.
00:25:53.519 --> 00:25:55.839
It must absorb those savings.
00:25:56.079 --> 00:26:05.519
Because the planet can't run a current account surplus against itself, against like empty space.
00:26:05.839 --> 00:26:10.960
I mean, that I hope you understand that that is an economic law.
00:26:12.400 --> 00:26:21.039
And I know it sounds like a defense of American fiscal malpractice, by the way of these Chinese saving habits.
00:26:21.119 --> 00:26:29.200
And I've checked, I've checked that interpretation several times, many times, and it keeps being what the accounting actually says.
00:26:29.519 --> 00:26:34.799
China, Germany, Japan, South Korea, etc.
00:26:35.359 --> 00:26:41.119
They've all been recycling external surpluses into dollar assets for decades.
00:26:41.759 --> 00:26:48.319
Now so yet that compresses compresses.
00:26:48.400 --> 00:26:51.920
I mean, it it lowers American borrowing costs.
00:26:52.000 --> 00:26:53.279
That's cool, yeah.
00:26:53.759 --> 00:27:03.839
And when you lower interest rates, borrowing costs, you typically inflate asset prices and American asset prices are immensely inflated.
00:27:04.000 --> 00:27:09.599
Inflated sounds like a little bit prejudicial, but asset prices in America have gone up considerably.
00:27:09.920 --> 00:27:10.960
Considerably.
00:27:11.200 --> 00:27:15.920
They've appreciated a rate of over 10% per annum for the best part of 30 years.
00:27:16.079 --> 00:27:16.559
Wow.
00:27:17.599 --> 00:27:22.559
But it makes American manufacturing progressively less competitive.
00:27:24.640 --> 00:27:45.839
So I say to you, the trade deficits and the fiscal expansion that accompanies the deficits accompany, sorry, the fiscal expansion, the budget deficits are a necessary follow-on to the trade deficits.
00:27:45.920 --> 00:27:48.960
And that's not a character failure of Washington politicians.
00:27:49.200 --> 00:27:54.640
They have character failures, they have many character failures, but this is not one of the sources.
00:27:55.359 --> 00:28:10.240
No, what I'm discussing is the balance sheet counterpart of a system that every every everyone in the world demanded America maintain this is it reciprocity?
00:28:10.400 --> 00:28:17.200
Like America would be the the deficit to the surplus of the mercantilists.
00:28:17.519 --> 00:28:24.640
Every other nation in the world demanded that America, America's the only one that has the scale to pull this off.
00:28:24.799 --> 00:28:27.599
And everyone demands that it continues with it.
00:28:27.759 --> 00:28:38.799
And yet, they're all nodding along to the these opinions being spouted in the Financial Times and the Wall Street Journal about American fiscal irresponsibility.
00:28:40.400 --> 00:28:59.039
I mean, if you're living overseas, if you're a mercantilist and you're living on off living high off the back of all of this, and you're saying, yeah, and you're saying you're reprimanding America for fiscal irresponsibility, that's a collective brass neck.
00:29:00.880 --> 00:29:01.759
That's what I call it.
00:29:01.920 --> 00:29:04.000
I mean, it's like, are you serious?
00:29:04.559 --> 00:29:09.680
I mean, I've run this argument back and forward past people who find it too convenient.
00:29:09.839 --> 00:29:12.079
But the accounting keeps surviving.
00:29:12.319 --> 00:29:14.079
It's fucking annoying.
00:29:14.480 --> 00:29:30.319
So Stan is Stan is a gunslinger who's been short, long treasury duration in kind of modest size, but kind of long enough these last four years that maybe the trade's become the man.
00:29:31.440 --> 00:29:34.160
I just don't think it's destined to become the legend.
00:29:34.559 --> 00:29:40.640
I'm probably wrong to say this, but the letter, you know, it read to me like somebody, have you read the letter?
00:29:40.720 --> 00:29:41.759
I've read the letter.
00:29:42.000 --> 00:29:46.960
Like somebody defending an identity rather than being prepared to reconsider a position.
00:29:47.039 --> 00:29:48.720
I know that's wrong.
00:29:50.160 --> 00:30:00.160
But Stan's letter, the one he wrote or he had it written by the AI, it's it's very precise about what Bessent is doing to the price.
00:30:00.319 --> 00:30:05.039
But it's, I want to say a great word, it's willfully silent.
00:30:05.680 --> 00:30:12.400
Stan is willfully silent about why the price got here, got down here in the first place.
00:30:13.599 --> 00:30:15.680
And it didn't get down here because of Bessend.
00:30:16.079 --> 00:30:18.079
It didn't get down here because of Trump.
00:30:18.640 --> 00:30:28.240
It's the accounting logic of a global trade arrangement that's been running for 30, if not 40 years, and it can't be unwound quietly.
00:30:30.240 --> 00:30:37.039
Stan wants America to stop accommodating the surplus, the Chinese surplus.
00:30:39.759 --> 00:30:52.559
But he hasn't, I don't think he he he seems to have grappled with what happens if America stops accommodating the Chinese surplus, stops running budget deficits.
00:30:56.240 --> 00:31:16.240
I mean, the last time a major creditor sat in China's current structurally tenuous position without a functioning deficit absorber on the other side, that system lost its stabilizer and it tore itself apart.
00:31:17.119 --> 00:31:20.880
The creditor stood aloof on its own.
00:31:21.200 --> 00:31:23.680
Charles Kinderberger, there's a name.
00:31:23.839 --> 00:31:29.039
Look up Charles Kinderberger, read his famous book, Manius Panics and Crashes, etc.
00:31:29.680 --> 00:31:34.160
We might just be entering a generation where that book is worth reading again.
00:31:34.400 --> 00:31:39.359
Anyway, he called it the catastrophic absence of a lender of last resort.
00:31:39.839 --> 00:31:42.799
Me, I call it 1929.
00:31:43.279 --> 00:31:45.839
Almost a hundred years ago, 100 year cycle.
00:31:46.000 --> 00:31:50.880
Do we have another year to make money before it all goes to hell?
00:31:52.079 --> 00:31:53.200
I can't say.
00:31:54.000 --> 00:31:59.039
I can't reject that hypothesis, not hypothesis, just a question.
00:31:59.680 --> 00:32:03.359
But I want to say force China to keep its surplus.
00:32:13.119 --> 00:32:21.519
Choose that path, and you've replicated the 1929 issue at fucking industrial scale.
00:32:22.240 --> 00:32:33.359
And this remember, this isn't a world with a global banking system that's that's been stress tested by exactly one time in 2007-8, and it barely survived.
00:32:33.519 --> 00:32:36.799
So the gunsing slinger, my man, the legend stan.
00:32:37.519 --> 00:32:40.480
Sounds like a man begging to meet his own destiny.
00:32:41.599 --> 00:32:43.599
I think about what that destiny looks like.
00:32:45.200 --> 00:32:47.759
It's 1929 overtures.
00:32:49.279 --> 00:32:52.880
Nobody's publishing that in the Wall Street Journal right now.
00:32:54.480 --> 00:32:56.720
So again, let me recap.
00:32:56.880 --> 00:33:06.319
The last time a major economy sat in the structural position that China finds itself was America.
00:33:06.480 --> 00:33:08.079
And that was roughly a century ago.
00:33:08.319 --> 00:33:10.319
America was the creditor nation.
00:33:10.559 --> 00:33:26.799
And after the First World War, they did move from being a debtor to being this power, a global powerhouse, and gold poured in from the trade deficit countries and American manufacturing, especially after the first world war, it made the rest of the world look slow and tired.
00:33:26.880 --> 00:33:30.319
I mean, the rest of the world had been bombed to some of the reasons.
00:33:30.799 --> 00:33:33.279
The conventional adjustment mechanism said it.
00:33:34.160 --> 00:33:59.279
The conventional trade, trade surplus, trade deficit, the convention, the mechanism for it for bringing the return of the mean mean reversion is necessary in trade, otherwise countries run perpetual surpluses.
00:33:59.519 --> 00:34:03.519
That's where we've been, and trees don't grow to the sky.
00:34:04.799 --> 00:34:23.599
But the conventional logic ran that a creditor nation accumulating gold or high-powered money, which would enter its banking system, private banking system as a liability, would require new assets to be created called loans.
00:34:23.840 --> 00:34:42.000
That economy should see domestic activity rise further, prices rise higher until the goods from that country, the tradable goods overseas, became expensive enough for the deficit countries to kind of stop buying them or to buy less.
00:34:42.559 --> 00:34:54.480
And it would make the deficit countries' product cheaper to the mighty American economy, which is to say we would restore trade equilibrium.
00:34:54.960 --> 00:35:01.360
But the Federal Reserve sterilized important gold inflows.
00:35:01.760 --> 00:35:17.519
So what that means is instead of letting the gold sit as a liability demanding an asset on the private banking system and then see the money supply expanded, they didn't allow for that.
00:35:17.920 --> 00:35:22.000
Now the imbalance didn't disappear, but it fermented.
00:35:22.480 --> 00:35:25.920
And when it came apart, it came apart so completely.
00:35:35.199 --> 00:35:37.199
Somebody was fiscally profligate.
00:35:37.679 --> 00:35:42.239
No, it was that the system had lost a functioning stabilizer.
00:35:43.280 --> 00:35:44.159
Britain.
00:35:44.719 --> 00:35:47.920
Britain couldn't play its old role.
00:35:49.599 --> 00:35:54.480
It couldn't be the debtor that could absorb the creditor.
00:35:55.360 --> 00:36:00.800
And America hadn't yet, none of us had really understood what this new world required.
00:36:01.519 --> 00:36:11.280
And so when the crisis broke, the creditor, the American economy, again like China, like I'm suggesting, America back then 100 years ago stood aloof and on its own.
00:36:11.519 --> 00:36:15.440
And the whole machine, it tore itself apart.
00:36:16.239 --> 00:36:18.960
I keep thinking about this more and more.
00:36:20.079 --> 00:36:21.920
It's probably not healthy.
00:36:22.239 --> 00:36:29.920
But the creditor, say after me, Bueller, Bueller, the creditor can be the fragile one, the most fragile one.
00:36:31.760 --> 00:36:34.960
The UK was the debtor a hundred years ago.
00:36:35.199 --> 00:36:46.960
The UK stopped being the dog's body of the creditor, stopped attempting to absorb, to be the feint, to be the mirror to the American surplus.
00:36:47.280 --> 00:36:56.880
And the Great Depression in the United Kingdom was tough, but nowhere near as tough as it was for the creditor and the American economy.
00:36:57.840 --> 00:37:03.519
Now China's industrial machine is genuinely extraordinary in scale.
00:37:03.760 --> 00:37:07.280
And I say that without irony because the scale is real.
00:37:07.440 --> 00:37:10.239
I've been there, I've seen it, it's startling.
00:37:14.320 --> 00:37:20.719
But that machine produces more than China's household sector can absorb, can buy.
00:37:20.880 --> 00:37:23.039
It generates excess savings.
00:37:24.960 --> 00:37:30.400
And China exports that surplus into your backyard.
00:37:30.639 --> 00:37:39.039
And it's done so across multiple economic cycles in a way that makes China look like so mighty and strong because the output is visible.
00:37:39.199 --> 00:37:47.679
But the vulnerability of standing aloof, that vulnerability is not it's not visible, but it's very real.
00:37:48.960 --> 00:37:58.880
The vulnerability is in the accounting, and China needs someone to absorb the surplus or look out below, boys and girls.
00:38:00.159 --> 00:38:05.360
So again, go back and let's just let's see if we can nail this.
00:38:05.519 --> 00:38:14.960
For a long time, America volunteered to be that dog's body, to be the United Kingdom of the 1920s.
00:38:15.280 --> 00:38:40.719
Now I'm asking you to imagine that that stops, that arrangement arrangement stops, not in speeches, but in the numbers, that the tariffs they bite, that the capital stops flowing as freely, and that these surging treasury yields, they push higher and higher, and they push the United States into a deep recession, deep enough that Americans simply buy less.
00:38:41.360 --> 00:38:42.320
What happens then?
00:38:42.480 --> 00:38:52.239
China will be left with factories built to supply demand that's disappeared, and it'll have a domestic consumer that's too weak to replace it.
00:38:54.079 --> 00:38:58.480
Let me tell you, day follows night, prices will fall, margins will collapse.
00:38:58.719 --> 00:39:00.239
What margins in China?
00:39:00.480 --> 00:39:03.760
Industrial profits, again, what profits, but they'll get crushed.
00:39:04.000 --> 00:39:10.719
And the property collateral, you know, the thing that no one talks about in the banking system, it's got to deteriorate further.
00:39:11.519 --> 00:39:14.719
This is the part the Bon Vigilante story misses.
00:39:14.960 --> 00:39:18.320
It looks at America's deficit and it sees the problem.
00:39:18.559 --> 00:39:21.360
I'm looking at the surplus country.
00:39:23.119 --> 00:39:38.159
I mean, I'm looking at China, and I feel like the market is this damsel in distress who's been who's been ropped and tied and stuck on the train line, and I can see a locomotive coming.
00:39:46.400 --> 00:39:52.320
China can't keep its trade surplus unless somebody else agrees to run one.
00:39:52.559 --> 00:39:57.760
So America can be autonomously good to itself.
00:39:58.559 --> 00:40:02.400
China requires the kindness of strangers.
00:40:04.400 --> 00:40:11.280
And long duration, 30-year treasuries have had a historic massacre.
00:40:12.159 --> 00:40:14.559
I mean, yields, they moved.
00:40:14.880 --> 00:40:29.119
30-year yield moved from like less than remarkably from less than one percentage point, I think about 75 basis points, to being what five, 540 basis points from the pandemic lows.
00:40:29.360 --> 00:40:36.719
I mean, we destroy capital like with a ruthlessness that we haven't seen in the stock market for a while.
00:40:37.519 --> 00:40:44.000
And and the safest asset, remember we used to call the treasuries the safest asset in the Western financial system.
00:40:44.800 --> 00:40:47.840
Again, we're like embarrassed and we're you have to apologize.
00:40:47.920 --> 00:40:51.440
I mean, I get ridiculed for any comment on TLT.
00:40:52.320 --> 00:40:58.000
I've apologized for suggesting or trying to own it two years ago.
00:40:58.239 --> 00:41:00.079
I've apologized more than once.
00:41:00.320 --> 00:41:06.800
But now the consensus position the Walk Street Journal and the Financial Times, Stan the Legend, Barclays Research.
00:41:07.039 --> 00:41:08.960
Do Barclays have a research department?
00:41:09.360 --> 00:41:10.400
Why do we care?
00:41:10.639 --> 00:41:13.119
It's JP Morgan or Morgan Stanley.
00:41:14.000 --> 00:41:20.880
I'm for sure every fucking mediocre fund manager you'll meet at a conference or in the street, do you meet fund managers in streets?
00:41:21.119 --> 00:41:23.679
They're all saying that the treasuries are fucked.
00:41:24.159 --> 00:41:29.920
I want to say when every name in the room has arrived at the same verdict about an asset, when they say it's fucked.
00:41:30.079 --> 00:41:31.280
I say fuck them.
00:41:31.840 --> 00:41:36.159
The verdict is usually, forgive me, vulgarity comes so easy.
00:41:36.400 --> 00:41:40.239
The verdict is usually, it's already in the price, it's in the price.
00:41:40.480 --> 00:41:44.079
Now it doesn't mean the consensus is wrong about every fact.
00:41:44.320 --> 00:41:46.639
It just means the consensus is priced every fact.
00:41:46.800 --> 00:41:54.159
It knows it's priced its opinion so thoroughly that the remaining risk is asymmetric.
00:41:54.320 --> 00:42:05.039
Again, it's you make money from the contentious narrative, not the pleasing logical narrative, the narrative that the market hasn't noticed.
00:42:05.920 --> 00:42:08.400
And the entry point, the price entry point.
00:42:08.880 --> 00:42:11.360
I mean, we're sitting at the bottom of a pit.
00:42:12.880 --> 00:42:16.800
The gates of hell opened up, and I find myself in this pit.
00:42:22.239 --> 00:42:26.320
I mean, Stan wants let's try and wrap this up.
00:42:26.559 --> 00:42:32.400
Stan wants the bond market to discipline the Treasury Secretary.
00:42:32.800 --> 00:42:39.679
I think the bond market spent four years disciplining everybody else.
00:42:41.199 --> 00:42:44.880
And with a four billion of buybacks, is it interference?
00:42:45.039 --> 00:42:47.360
I say it's a sideshow.
00:42:47.840 --> 00:42:51.360
There's a much greater worrisome question.
00:42:51.679 --> 00:43:02.639
What happens when the global surplus, when the recycling machine, when the mercantilists that produce the treasury glut, what happens when they finally lose a gear?
00:43:02.880 --> 00:43:04.559
When they come unstuck?
00:43:05.599 --> 00:43:08.719
Stan, Drachamilla Stan, my dear dear Stan.
00:43:08.960 --> 00:43:11.039
Stan is a fucking legend.
00:43:12.159 --> 00:43:14.000
And he's wrong.
00:43:15.119 --> 00:43:16.000
Baby.
00:43:27.199 --> 00:43:28.800
Remember the macro compass.
00:43:28.960 --> 00:43:30.239
We have four quadrants.
00:43:30.400 --> 00:43:33.039
We have the SP, we have US equities.
00:43:33.280 --> 00:43:36.000
Quadrant one, we have US treasuries.
00:43:36.239 --> 00:43:39.760
$40 trillion of treasuries from cash to 30 years.
00:43:40.159 --> 00:43:42.079
Then we have alternatives.
00:43:42.320 --> 00:43:47.119
That might be like$200 trillion as your private equity, as your gold, your Bitcoin.
00:43:47.360 --> 00:43:48.639
And then we have cash.
00:43:50.480 --> 00:43:51.920
There's a lot of cash.
00:43:52.159 --> 00:43:58.400
Actually, there's only about$18,$19 trillion of dollar cash in bank deposits.
00:43:58.960 --> 00:43:59.679
And you know what?
00:43:59.760 --> 00:44:09.280
There's$45 trillion equivalents in Chinese bank deposits, which is, I think, again, tells you that the risk to the currency in China.
00:44:09.920 --> 00:44:12.559
Anyway, I'm gonna take everyone's contempt.
00:44:13.119 --> 00:44:17.519
Um and I'm I'm so close to taking the bonds.
00:44:17.840 --> 00:44:18.639
So close.
00:44:18.800 --> 00:44:19.679
Just not yet.
00:44:19.840 --> 00:44:20.960
Give me 115.
00:44:21.039 --> 00:44:24.079
Let's look at the the 10-year, is it the futures of the TLT?
00:44:24.159 --> 00:44:25.199
I think it's the futures.
00:44:25.440 --> 00:44:26.559
Uh 108.
00:44:26.880 --> 00:44:33.199
Um give me 110, give me 112, give me 115, give me 118, and I might start buying.
00:44:33.440 --> 00:44:37.280
I'm staying at the most despised major asset class in the Western world.
00:44:37.440 --> 00:44:47.760
And at a consensus so airtight that expressing any interest in duration, it marks you as either naive or professionally finished.
00:44:48.000 --> 00:44:50.960
I mean, I'm I was professionally finished a long time ago.
00:44:53.599 --> 00:44:55.679
So they go we're finished.
00:44:55.840 --> 00:44:58.079
Or take the bonds eventually.
00:44:58.320 --> 00:45:00.400
But first I gotta call a friend.
00:45:00.719 --> 00:45:01.840
Ring ring ring.
00:45:02.000 --> 00:45:02.480
Wow.
00:45:02.719 --> 00:45:08.880
Um still well, today's Friday, you'll be listening to this maybe Saturday or Sunday.
00:45:09.039 --> 00:45:13.760
Um no, today is Thursday, so you'll be listening to this Saturday.
00:45:14.239 --> 00:45:14.960
Maybe Friday.
00:45:15.119 --> 00:45:19.199
I'm off to LA today, um leaving my hotel at the Soho Grant.
00:45:19.360 --> 00:45:20.079
It has been fun.
00:45:20.239 --> 00:45:22.400
It is there was repetition in there.
00:45:23.280 --> 00:45:25.440
I think I repeated myself a little bit too much.
00:45:25.599 --> 00:45:35.840
Um I I do, I sincerely hope um you find something in these macro tales um from the acid capitalist.
00:45:35.920 --> 00:45:41.440
Um my love and my best wishes, and my bisous to you all until the next time.
00:45:41.599 --> 00:45:42.960
I am Hugh Hendry.
00:45:43.360 --> 00:45:46.719
Um, this has been an acid capitalist production.