Save the Bond Market, Crush the Dollar? | Chase Taylor

0:18Mining Stock Daily: All right, everybody, welcome back in to Mining Stock Daily. Moving right along today, and actually, we're going to get a little bit of market commentary, but we're going to focus on the bond market. Unless your head was in the sand, hopefully on a beach somewhere the last couple of weeks, the bond market really has been the macro story. And because we are somewhat tourists on the macro front here on Mining Stock Daily, we're going to focus some attention here with Pinecone Macro, my friend Chase Taylor. So Chase, good to see you. It's only fitting that you have a picture of Stan Druckenmiller on the wall behind you for people Obviously, it's a podcast, so they can't see it.

0:57Mining Stock Daily: But he's a huge person into this story lately, a trifecta between Stan, maybe representing the market, the Federal Reserve, Mr. Warsh, having some comments from Jackson Hole on Friday. But that's all coming after Treasury Secretary Scott Besant doubling down on canceling out some long-end bond purchases. So, listen, like I said, we're tourists here on the macro side. I don't necessarily at all. We'll pretend to be an expert in debt. But this obviously has some huge implications. Can you kind of paint us the picture of what is going on from the highest levels here? yeah so it's funny you mention this because it is a bit of a love triangle because we have Druck who was actually you know a friend and and mentor for both Warsh and Besant so it is it's it makes for an interesting story away from just the pure macro but at the end of the day yields bond yields on 10 20 30 year treasuries were getting uncomfortable for Scott Besant and you know and you look at the interest cost of the debt and stuff like it just it's not comfortable um and if you go back you remember scott besson said like hey you should grade us on the 10-year yield um which i think you know was going decent until the iran war started and since since that began you know 10-year yields up significantly um so i think it was making him uncomfortable he wanted to at least slow down that increase so what he what he'd announced what kind of started of this whole party was he was going to double the size of the treasury's buybacks.

2:48And what that means is they take some cash, they give it to you for an old, less liquid, what they call off-the-run treasury. So you have an old bond that no one really wants to buy off of you because for whatever reason, its characteristics make it less liquid. So the treasury would take that from you and give you one that's more liquid essentially which does make sense like that's a liquidity tool not a macro tool per se it's not like it's not there to move the price it's there to take care of liquidity but whenever he said we're going to double the size of that whenever yields got uncomfortable you could tell the market kind of took that as like wait a second are you are you are you trying to move the yield or or just is this a liquidity tool um and for a day it really it worked.

3:36You know, you had bond yields down like nine basis points on the day. And I was like, all right, this is going to work. The next day it unraveled, went all the way back up to where it came from. And on that day, this is where it kind of gets important. It kind of shows he was trying to get that yield down because he was like, oh, well, we may do more than double it, you know. So like that showed me and I think the markets, he's there to manipulate the yield lower. and then it got even worse the next day because the market didn't care about that the market didn't respond with yields lower instead you come back the next day and some unnamed official or whatever tells cnbc we might use the tga to get these yields down which meant the government's checking account they would deploy that to go and buy back these bonds and essentially you fund that by selling some six-month debt to go buy some 10, 20, 30-year debt with the idea being bring down the average maturity of the U.S.

4:36national debt, essentially. The whole point of that is to get less supply of the long-term stuff, which will help get the yield down, which at the end of the day, they're going to eventually do. It was weird that it happened with no emergency whatsoever. And I think that was a main point that Druck, you know, put in his Wall Street Journal op-ed was, hey, like, there's no liquidity problem here. There's no, you know, like, the economy's fine. Employment's fine. Like, everything's fine except you don't like the price, and that's not a cool reason to go and jump in and intervene here. Since then, like, to this morning, Bessent, it seemed like, tried to kind of put the toothpaste back in the tube a little bit by saying like, oh, like I'm not here to, you know, change the price.

5:22I was just, I can't do that for more than like a day or two. Like I was just here to make sure, you know, everything was reacting the way it should be with the facts at hand. So he might be trying to walk it back a little bit, but the 10-year yield is making a new high for the whole move for the whole year today. So we'll see how long he can wait on the sidelines before he probably has to jump back in.

5:44Mining Stock Daily: And can I, so they are, they're selling, they're selling short year or short duration to fund the purchases of, of the long durated bonds on their books. Totally get that. But where things are getting really interesting here, Chase, at least visually for me, looking at the chart in walks, Jackson, uh, uh, Kevin Warsh from Jackson hole on Friday has a very meaningful hawkish tone and really kind of puts his stake down, which is almost, it could be maybe perceived as kind of pushing back against Treasury Secretary Besson's move. But the two-year, the short end of the curve, just rates went sky high because of it.

6:26Mining Stock Daily: And so now you're seeing, you mentioned the 10-year, but the two-year is almost back to those same high levels, about 4.35%, right? And so what's the implications now with the short end of the curve moving higher with Scott Besson needing that supply to come on to buy back the long curve. I mean, this seems very convoluted. Yeah, and to even underscore how convoluted it is, one of the selling features of these two guys together was they know each other. They've worked together. They're going to be tight. They're going to coordinate policy really well in a way we haven't seen for a generation. And then the reality is, Warsh sells us on, hey, I don't have to hike.

7:13because the long end is basically hiking for me. Like those, those rates on the 10 year are bringing in financial conditions. You know, they're, they're tightening them up. I don't have to hike. But then three weeks later, Besson's like, well, I'm not going to let the long end hike. I'm going to try to get that, those yields down. So like he basically just cut the legs out from underneath Warsh and what he was trying to stand on. So you have one side saying that's hiking for us. And the other side saying, we're not going to let it hike for us. That, that made it pretty awkward. And it's your point.

7:42He was definitely hawkish. He sort of took back some of the dovish leanings he had said in July, which the market in a lot of ways appreciated. But at the same time, if you're going to hike, you're going to get two-year yields up because the 10-year and 30-year and stuff, it can divorce itself from the policy rate. The two-year can't. The two-year is just going to do what the policy rate is going to do, more or less what it thinks it's going to do for the next two years, obviously. So if you start getting hawkish and talking about hikes and the odds of that hike goes up, the two year has to go up with it.

8:16And to your point though, like if you're gonna try to go from terming out the debt to putting it all at the short end, if you hike, that makes that interest cost just explode. And that's the big risk here. Yellen did this best end despite criticizing that as doubling down on it or maybe tripling down on it. But if you have the whole debt at the front end, man, you really cannot hike because then the interest cost just gets crazy. So it's a risky strategy. And for folks out there, one of the reasons this is important, like a 30-year treasury bond could not be anything less like cash, right? That is a long-term investment that you really get rewarded for not moving.

8:58You get rewarded for just holding it until the end. Whereas like a six-month bill is as close to cash as you can get, essentially. It's super liquid and pretty similar to cash. So if you take these long-term assets and you turn them into essentially cash, it can be spent in a way that a 30-year is not going to be spent. And that ends up being an inflationary impulse because turning a long-term asset into cash that can be spent in the economy, you change the dynamic of the debt in a way that's very inflationary. So they're trying to fight inflation in a sense with inflationary policy in a way. It's a get-out-of-jail-free card that takes you really close to the jail.

9:41Mining Stock Daily: Yeah. I think the question is still out there. How effective is this going to be? We saw within 48 hours. I mean, that question continued to get asked because we saw, you know, as you said, the day Bessence News came out, obviously yields came down. But within two days, they were right back to where they were. And that's where we remain to be at today here. So, I mean,$4 billion isn't that much in the grand scheme of things here, Chase, but like how effective is this going to be? Or could we potentially see kind of like kind of going back to the old QE days where they first announced QE and it's like, ah, yeah, well, we're going to pin, you know, 500 billion.

10:22Mining Stock Daily: Oh, we'll just do another 500 billions, you know, consequently right after that. It seems like it could really start escalating almost out of control because people expect that to happen. Yes. So the buyback as a liquidity tool is not going to do the trick. It's just way too small to matter. But if they actually use the TGA to go way higher, so this$4,$6 billion thing, it's a limitation they put on themselves. So basically, like, in these, quarterly, they come out with this big announcement and plan for the way they're going to do the debt. And in that, they kind of, like, put limits around themselves.

11:04And that's what this$4 billion or$6 billion thing is. There's nothing stopping them from just being like, here's a$100 billion buyback. With the express point of bringing long-end yields down, they can do that. That would work. Like, no doubt about it, that would bring those long-end yields down if they did it that way. so far they floated that they want the market to know that they might they can do that but they're trying to back away from it and that was kind of like one of the reasons I think Druck dropped the thing was like you know these six billion dollar buybacks who cares like that's just meaningless

11:37Mining Stock Daily: but whenever they're whenever they're like hey we'll use the whole government checking account to go after this thing and that thing's like a trillion dollars like that was when I think Druck was like whoa whoa whoa like this is crazy like now you're escalating way past anything that makes sense and you're but if they did that, it would work. It would get long-term yields down. The problem would be, of course, it's a very inflationary policy. So again, you're fighting inflation with inflation, which doesn't really serve your interests, especially medium, long-term. Can you get the yields down short-term by doing it?

12:08Sure. Broadly speaking, though, at the end of the day, the biggest reason yields are up is nominal growth is really high, and then you have a war, and you have agriculture inflation coming from El Nino. This is a really inflationary backdrop. So, like, you can go at the roots to get after, like, the real stuff and the war, you know, try to get the deficit down. Those are the reasons this is happening. Or you can just treat the symptoms of, like, you know, I have a fever, so I'm going to take some Advil to make it go away. But, you know, you're not getting at the root cause here. So, it's up to them.

12:43They can make it work, but huge consequences if they do.

12:46Mining Stock Daily: Well, it's all about the signal from every single level, right? I mean, if you break it down, I mean, we've obviously known Fed Chair Warsh does not want the Fed to signal to the market what to do. Like, he's made that obviously clear that that dynamic he wants to change. And I actually tend to very much agree with him. I think that's a very good first step. But on the other hand, Besant's saying the exact opposite. He's signaling to the market what he wants them to do. And so you have these really these polar opposite forces here at work. And it seems like every week we have something new to juggle on the macro front.

13:26Mining Stock Daily: And this one's just – this one's really hard to kind of grasp which one's going to have the upper hand. And I'm just kind of wondering who does – who has the biggest pull here, the Treasury or the Federal Reserve? the person who manages the debt or the person who manages you know the printing press i so the the i'm glad you said that last part because if they weaponize the tga for buybacks they essentially have their own printing press in a sense it's it would be monetary policy from the treasury which is not the point like you know that's supposed to be the feds and that in that sense you kind of alluded to earlier, like this is kind of a turf war.

14:06Now, ostensibly these guys get along and it's not a turf war, but it's starting to feel like one. And I'll make a quick point too, like when it comes to Besson, I think the same thing that happened to President Trump getting really excited after Venezuela and then kind of making an unforced error because things were going so good. I think it's similar for Besson. Like he had just moved the yen around with some manipulation. Clearly, he's helped, you know, manipulate oil prices down through all the job owning and stuff. Like, I think he was getting excited about his ability to move markets around and he thought he could do it with a long bond.

14:41And I think that was just like, you know, a bridge too far. Like, it's one thing to move around the yen or oil, you know. It's a completely different thing to move around a multi-trillion dollar enormous sovereign bond market and all the implications that come with it. some of his commentary this morning makes me feel like maybe he is starting to understand like yeah maybe i shouldn't do that but we'll see i there's no atheists in foxholes so if if this 30 year is going to get to six percent or more important the the 10 year gets to to you know five plus yeah i don't know if i trust him not to jump in there and actually do this stuff

15:19Mining Stock Daily: all right chase before we let you go just give some big you know general thoughts here on you know, where do you hide knowing that there's some uneasy tides in the debt market? And obviously, that has implications with FX and stocks and equities. And we're seeing just some weakness. I think it's just weakness all around in the stock market. Like, it doesn't know exactly where to go. It has a hard time finding clarity whether to go up or down right now. I think that's fair to say. So where do you hide? Or is this kind of one of those points where, hey, you know what maybe sitting off to the side and being patient and waiting for that clarity signal is probably the best place to be so for me all of this points in one direction and that is that we're going to let the dollar become the relief valve for doing too much when it comes to keeping yields down eventually like we had just signaled we're going to cap yields we did it with no crisis whatsoever so obviously in a crisis we will absolutely do it the dollar is the release valve in that whole thing.

16:22So knowing that, we're the two places I want to be real assets. And for me, precious metals are at the top of that stack. And the other area though is like, is going abroad, finding equities, ex-US equities. So good companies, and they could be in Europe, they could be in Latin America, they could be in Asia. Like it doesn't matter. It's just, find great companies abroad. Just the foreign exchange tailwinds will be significant for them over the next 10, 20 years. So great companies overseas, precious metals are the two places I plan to hang my hat to avoid the ramifications of yield curve control, which is what this is going to be.

16:58And that's going to be good for U.S. equities. It's just going to be, you're going to be look up and go, man, nice run for U.S. equities. We're up X percent. But then you're going to look abroad and you're going to be like, man, but those were doing better. And a lot of people won't notice because U.S. equities aren't going to be okay. Nominally, it's just, but you price them in gold or you price them in non-U.S. equities and all of a sudden it's not going to look as good. That's my view.

17:21Mining Stock Daily: So they saved the bond market, but it's going to crush the dollar. That is exactly how I see it going, yeah. Okay. You're not the only one. I've been reading a lot about that idea. I think Shrub's been writing about it quite a bit on his Shrub stack as well. All right, Chase, thanks so much. Pinecone Macro, you guys have been doing a ton of work. Obviously, always been enjoying the podcast with you and Zach. Obviously, go check that out at Bulwark Capital as well. A lot of good ramblings in there. And, buddy, good to see you. I hope we run into each other sometime here this fall in one of these conferences.

17:55Mining Stock Daily: So I look forward to that. All right. All right, everybody. We'll be back with more here on Mining Stock Daily. So do stay tuned. The information presented should not be considered investment advice. Mining Stock Daily and its affiliates are not responsible for any loss arising from any investment decision in connection with the material presented herein. Please do your own research or speak with a licensed financial representative before making any investment decisions.