Scott Bessent: Inside Trump’s Treasury; War Costs; & Why Bond Market is King

20:20Wilfred Frost:Well, I don't think it's the The level, I think it's probably the duration. If you recall, even in 2008, we had the record spike up to, I believe - 140 something. 147. So I think it's the duration. And I think that President Trump's energy policies have insulated the US quite a bit. We're record liquids production with both crude and natural gas. Natural gas prices have been little affected, and a lot of that goes into the energy, the household bills. So, and again, the president is focused on his mission of wiping out the Iranian missile capabilities, their manufacturing capabilities, their air force, their navy, and their ability to project power beyond their borders and to cut off the head of the snake as the leading architect of global terrorism.

21:29Scott Bessent:ED HARRISON You've obviously pledged to help in the insurance process for ships with Lloyds of London pausing on that detail. Big announcements in the last 24 hours about releases from strategic reserves from both the IAEA and you as well. It hasn't worked in the short term on oil prices.

21:46Wilfred Frost:MARK BLYTH Well, no, no, no. Let's back up. The market lives in the future. So we got the oil spike on Sunday night. and I think maybe at one point we were up about$30. And then overnight, the FT published that the IEA was considering a 300 to 400 million barrel release. And then we had the biggest single reversal in one day history that day. So it was already priced in. So we had a G7 finance ministers meeting on Monday where it was discussed, energy meeting, ministers meeting yesterday, and then, excuse me, Tuesday. And then yesterday, I was in the Oval with the president for the leaders meeting, and the leaders confirmed that it would, in fact, be a 400 million barrel release, which is the largest in history.

22:38Scott Bessent:Yeah, I fully accept that. The news of a potential release brought prices down from their peak, but clearly we're still up 50 % or so from where we started the year. I guess my point is, are you starting to think, if this does keep persisting as it is, that the Navy has to go into the Strait of Hormuz to help ships get through, which would have a big effect?

23:02Wilfred Frost:Look, that was always in our planning, that there's a chance that U.S. Navy or perhaps an international coalition will be escorting oil tankers through. There are in fact tankers coming through now, Iranian tankers, I believe some Chinese flag tankers have come through. So we know that they have not mined the straits.

23:27Scott Bessent:And was that what you were just discussing in the situation room?

23:30Wilfred Frost:We were discussing a plethora of things.

23:32Scott Bessent:And is it your belief that the volume of ships going through the Strait of Hormuz will be improving immediately from now?

23:41Wilfred Frost:It is my belief that as soon as it is militarily possible, the U.S. Navy, perhaps with an international coalition, will be escorting vessels through. And that came up just now in this situation? Your words, not mine. But again, we've been planning for this. We've done scenario analysis for months, for weeks. leading into this. But it's a prospect in the coming days then? It is a prospect as soon as we have complete control of the skies and are degrading their, they have no air force, the Navy is sunk literally and figuratively, and the munitions factories, the rebuilding capabilities for the missiles, they completely degraded.

24:42Wilfred Frost:So as soon as it is possible for safe patch to ensure safe passage, we will do it. And, you know, again, with the DFC insurance product, this was something that we had already anticipated. And because Lloyd's does call force majeure and the policies drop away. So we think that 20 billion in insurance for tankers going into and out of the Gulf will be enough to insure a circular insurance program.

25:19Scott Bessent:And tons more to get to on your policy long term, a couple more in this area, if I may. What is the running cost at the moment of this war? A billion a day? 10 billion a day?

25:31Wilfred Frost:Again, I'm not keeping the running costs because in the US, we separate Treasury from OMB. So that's why I'm the Treasury Secretary, not the Finance Minister. Paul Park. Well, a number came out today, and the public number that was released today was about 11 billion thus far.

25:50Scott Bessent:Thus far? Thus far. Over a couple of weeks. And how long, as you look long-term at America's finances, how long are you planning for this conflict to continue for?

26:04Wilfred Frost:Again,$11 billion is a lot of money, but we have cushions built in, and it's not something that we have to worry about over this horizon.

26:18Scott Bessent:There's no chance you could be knocking on the president's door to say, we have to pause on this, we can't afford it.

26:22Wilfred Frost:Oh, absolutely not. Absolutely not. What we've seen last year was continued and increasing foreign interest in US Treasuries. US Treasuries had their best year since 2022. And we were the only G7 bond market with lower yields last year on the 10-year.

26:46Scott Bessent:And just finally on this, you issued a 30-day waiver on Indian refiners who had been prevented from buying Russian oil. They got a 30-day waiver on that. Is it a matter of regret to you that Russia is benefiting from this conflict?

27:05Wilfred Frost:Well, again, I think it's an inevitability. And that's why we gave a 30-day waiver, because the Russian barrels are on the water. And it is a quick source for the Indian refineries. The other way to think about it is those barrels are going to end up in China anyway. So. But is it a shame that Russia benefits? Sorry, again, that it is unfortunate, and we hope that it will be in a micro period that they will benefit.

27:48Scott Bessent:Let's touch on China next then. Obviously, you're due to travel to meet the Chinese in Paris in the coming days. A lot of people look at some of the US foreign policy actions and wonder how you connect the dots. Venezuela probably eased oil prices, whereas Iran's done the opposite. But is one thing that links them that China suffers from US action both in Venezuela and in Iran? And was that part of the design of the action?

28:15Wilfred Frost:Well, nothing was done with China in mind. We're looking after US interest. With US interest, we had a near-failed narco state in the Western Hemisphere. President Trump has made it clear that we want to protect our neighborhood. We have a substantial movement that over the past few years of our Latin American neighbors, many from very far left, Bolivia, Chile, back to center -right, maybe far-right governments who want to embrace market principles and want to be allies of the U.S. So I went down to Argentina last spring and because I was in a U.S. government aircraft, we had to fly around Bolivia because Bolivia had closed U.S.

29:03Wilfred Frost:airspace, their airspace to U.S. military aircraft. Now Bolivia is our ally. Chile had briefly gone far left. Now that they are right, the president-elect has already said that he wants to be an ally of the US again. I think this is a generational opportunity in the Western Hemisphere to show the benefits of being allies with the US, both militarily, economically. And I would go back, Iran, that the military operation here was to keep them from being able to ring fence with their missile capabilities, the ability to create an atomic weapon inside of Iran, because what is being done now, imagine if Iran had had two or three times these armaments in a year or 18 months.

30:09Scott Bessent:This episode of the Master Investor Podcast with Wilfrid Frost is sponsored by BMY Investments, a trusted partner for many delivering financial solutions to investors and institutions worldwide. This sponsorship does not constitute financial advice.

30:31Scott Bessent:Let's touch on the Fed and what the domestic policy should be long term, but in the short term. Does the situation with the oil price change your outlook of how soon they should be easing?

30:46Wilfred Frost:Again, there's a balance here. I think the Fed is worried about maybe the energy component triggering inflationary expectations. On the other hand, it'll be the duration here to see how much it slows the economy. And is that slowdown permanent? Or is it just potential energy that can turn into kinetic energy within the economy? And we will bounce back quickly after that. And the other thing that I think is important to know here is that if the oil price was below 60 at the beginning of the year, once this conflict is over and resolved in favor of the US, I think there's a chance we can move to a substantially lower oil price regime over the medium term.

31:36Scott Bessent:A different question as it relates to the Fed. I mean, this is hypothetical. But if we were in a scenario, I mean, I think if you look at the US long bond yields, you've done a remarkable job in light of a lot of challenges, medium and short term, in keeping long yields down. And your debt management has been down to that, more short term issuance. If you were hypothetically in a situation where the Fed had to hike rates, would you issue more long debt again instead?

32:07Wilfred Frost:Again, we are collaborating with the Fed in terms of Treasury handles debt management. I think what you're asking, would the Fed maybe go back to QE? I don't know. That's their decision. But I think we're such a long way from that, it's not even worth talking about. Let's talk more long term about the Fed.

32:33Scott Bessent:You are an Anglophile. We'll maybe come to that. You've spent a lot of time in the UK. Do you admire the Bank of England model more than the model you have here? And there's a couple of things to point to there. Well, you're going to jump in.

32:46Wilfred Frost:Well, again, they're very different institutions that the Fed wears many hats. And the Fed is a much bigger, much more sprawling organization with the regional banks, with regional bank presidents. The board is much bigger and then that gets constrained into voters. The Bank of England has separated, there's a Monetary Policy Committee, then there's an Operating Committee, only the governor is on both. We call upon our Fed to do a lot in terms of monetary policy, in terms of regulatory policy, and then just this sprawling organization

33:34Scott Bessent:I guess there's a couple things in mind that I was particularly pointing to. One is the Bank of England directly reports to the Chancellor and to the government as opposed to the legislature. For extraordinary measures like QE, the Chancellor of the Shekha actually has to approve that, even though it's assumed that they will automatically. And the inflation target is actually a range, 2 % plus or minus 1. Are those factors, sort of factors you'd like to embrace?

34:03Wilfred Frost:Well, if we work backwards there, there is an inflation target. And I don't know how many letters. All it requires is the governor to write the chancellor a letter and explain away why they haven't met the target. And look, I'm old enough to remember too, when the chancellor actually set the rate. And I believe - Before 1997. Yep. And it was both. And same with the Bank of Japan. So, Bank of Japan and Bank of England actually separated themselves from the government at the latest point.

34:40Scott Bessent:And is those kind of things you'd like to move back towards?

34:43Wilfred Frost:No, no, no, no, not at all. And in terms of QE, I actually believe that the Bank of England's QE policy was better than the Fed's because I think extraordinary measures should only happen in extraordinary times. And the Bank of England stepped in. I think they've stepped in twice in the past few years. Once during the early days of COVID. I don't remember the exact timing, but let's say March, April, maybe May, and stabilized the smooth operation of the gilt market. And then they moved away. The Fed continued buying for years afterwards. And I believe that that's one of the things that got us the great inflation, 22 and 23.

35:31Wilfred Frost:I wanted to touch on gold.

35:34Scott Bessent:The US has a lot of gold, but it's valued at a price that has long since outdated,$42 an ounce, and we're currently at 5 ,000 plus. I know you and Kevin Walsh have ideas around reducing the size of the Fed balance sheet, but you also don't want to create a liquidity crisis. this, would revaluing the gold and at the same time sterilizing that provide an opportunity to sell off the assets you don't want without creating a liquidity crisis?

36:02Wilfred Frost:No, I think those are very, very independent. I think if you're thinking about changing the balance sheet, I think that well in the future, the Fed would have to signal that well in advance. And if they move from one regime to another in terms of reserves, that's going to take time. And I think we're also going to have to step back and look at how has banking regulation since the GFC affected the size of the balance sheet in terms of the interbank market, in terms of the necessity for the Fed to hold reserves as opposed to a skinnier reserve model where the banks got their reserves from one another.

36:49Scott Bessent:In terms of the Fed, you turned down the role of Fed Chair, wanted to stay as Treasury Secretary. Why is Treasury Secretary a better job?

36:58Wilfred Frost:Well, you have a musical that was written about the first Treasury Secretary. There's never been a musical about a Fed Chair. I'd like it. I'm not sure many people would. Look, I enjoy the interaction with the cabinet. And Fed Chair is a different kind of public service. I've wanted to do public service since I was a young person and this is you're really in it. You get called to the Situation Room, you're part of the cabinet, you're part of the policy making agenda. You know, I think of the Federal Reserve really as kind of guardians of the dollar, the reserve policy, and maybe I'd like to do it in the future, but I think now we're in an extraordinary moment.

37:45Wilfred Frost:There's so many things that need to be done by the Treasury Secretary to ensure dollar dominance, to ensure that one thing we haven't talked about is this building runs the sanctions regime. So in terms of maintaining that in a fulsome way, there's a big national security component. And then in terms of managing the debt and how do we think about that interacting with the Congress for the future.

38:14Scott Bessent:I want to come to all of that in a second. One final question on markets, which is private credit's getting a lot of focus at the moment. We've spoken about the importance of the bond market. We've spoken about stepping into the oil market with the release. If there's problems that unfold in private credit, is that on those people that have exposure there? If they enjoyed the upside when it was going well, do they have to take the downside?

38:38Wilfred Frost:Well, that's why it's called the shadow banking system. It's not the banking system. So, you know, my area of concern is how does, and I don't mean that I am concerned, but what I'm responsible for is how does this shadow banking system interact with the regulated banking system, with the regulated insurance industry? And again, we're seeing, to use a Britishism, some wobbles. And, you know, as we see these wobbles here, there's nothing that tells me that shadow banking is having a systemic problem. But we are monitoring any relationships between the regulated entities.

39:24Scott Bessent:Let's move on to the special relationship and developments there. We've touched on this already. You've lived in the UK before for many years, still go back there a lot. President Trump said last week he's not happy with the UK. He said Keir Starmer is no Winston Churchill. You were speaking about that and what he said in the Oval Office about Spain and the UK last week. And you said that Spain had put American lives at risk. Did Keir Starmer do the same?

39:58Wilfred Frost:Again, that we delayed being able to fully implement the military plan. And I think that the main concern was the use of base Diego Garcia. And the U.S. B-2s had to do a 37-hour round trip rather than, I think it's about a three, three and a half hour round trip. So, you know, to the end, you know, constantly refueling over. So, you know, I think any delay, you know, causes an increase in risk. And again, you know, President Trump is the commander in chief of the U.S. forces. And, you know, again, being in the situation room with him, that he so solemnly takes that leadership role in terms of his commitment to maintaining the lives of our service people, that anything that upsets that upsets him.

41:04Wilfred Frost:And I think that's what got the very strong reaction.

41:06Scott Bessent:And but just to clarify, you said of the Spanish, anything that slows down our ability to engage puts American lives at risk. The Spanish put American lives at risk. So did the UK do that, too?

41:18Wilfred Frost:Again, I think we have a great historical relationship, and I think we'll get it back on track.

41:25Scott Bessent:How unhappy is President Trump with Prime Minister Stalman right now? Yeah.

41:32Wilfred Frost:Again, belatedly, the prime minister offered to put resources in the region. I believe that there are resources in the region. And we have a long-term relationship. There will be some bumps in the road. I think we will eventually get back on track.

41:52Scott Bessent:Have you heard any discussions of the King and Queen's visit due in the spring being canceled? Not at all. In terms of relations more broadly over the last year, year and a half, and trade coming into that, you announced more tariff investigations yesterday under Section 301 of the 1974 Trade Act. Targeted countries like the EU, a group of the EU, Switzerland, Singapore, Korea, Norway, the list goes on. A lot of allies there. Interesting timing, given that you're at war. Is now not a moment where you want to make sure all of your allies are onside?

42:31Wilfred Frost:Well, look, I think if going back to the tariff level that we previously had is going to take an ally offside, then they weren't allies. And we're operating now with a global 10 % tariff. And I can tell you that the allies and all the countries that have done the trade deals with us have all come and said, we like our trade deal. We want to stick with that. So I think this is a good opportunity for me to explain any misperception about these investigations. These investigations are part of the normal course of business. The Supreme Court ruled that the president does not have the ability to use IEPA tariffs, the emergency power.

43:17Wilfred Frost:to apply tariffs. But the Section 301s, which President Trump used in his first term, has been challenged more than 4 ,000 times in court. So all we're doing is reconstructing the tariffs under a different authority that I would expect that everyone just goes back to the deal they had within the 150 days that we're allowed to use the Section 122 tariffs.

43:43Scott Bessent:So yes, there was Section 301. Section 122, would that mean that the UK is going to go up from 10 % to 15 %?

43:52Wilfred Frost:Again, Section 122 right now is still at 10.

43:55Scott Bessent:It's still at 10. I guess the broad point, you're saying that it's putting tariffs back to where they were, but not to where they were a few years ago for allies, and an interesting time in the middle of trying to get people on side. I guess when you've had these conversations with G7 finance ministers in the last week to coordinate policy on strategic reserves of oil and petroleum, did you approach that thinking it would have been more helpful to have a more friendly, conciliatory relationship with those people?

44:30Wilfred Frost:So again, everyone knew we had telegraphed well in advance that since the Supreme Court hearing that we believe that the Supreme Court will rule in our favor. But in case it doesn't be advised, this is how we are going to do it. So we've had a substantial communications policy in advance. We told everyone this is how we will reconstruct the tariff wall. and I think everyone's well-braked and well aware of it.

45:01Scott Bessent:I guess in the last week or two, we've been reminded of US policy that might be taking a step forwards without allies necessarily all coming on board. We talked about the clashes with Keir Starmer. I've heard you say very often, and the President said too, that America first doesn't mean America alone. That is your intention and your aim from all of your policies. Do you ever have conversations with your counterparts that makes you worried that that choice won't be available to you? That America alone is starting to be how they see the actions that you're taking?

45:39Wilfred Frost:Well, I think you're seeing, as I said, I was in the Oval Office for the G7 leaders call. And the G7 leaders were all pretty much rallying around what the U.S. is doing, congratulating us for taking out this Iranian cancer on the world. And they're more concerned about how does it proceed. We're seeing what may be an international coalition in terms of the Straits of Hormuts. That many countries have offered their minesweepers should it be necessary for detection. And the other thing too, because I don't think in terms of our allies, there's anyone in the world who wanted the Iranian regime as it currently was constituted and the power it projected to continue.

46:34Wilfred Frost:What we're also seeing too is the Arab nations that in the Gulf, they are shocked by the Iranian attack on them. And I think that they've gotten a rude awakening that imagine an Iran that was two or three times stronger than they were 12 or 14 days ago on February 28th.

46:58Scott Bessent:As we start to wrap up, Mr. Secretary, I know we're nearly out of time. You've described in the past your old boss, your old mentor, Stan Druckenmiller, as the best investor you've ever worked with. And I think you've described Warren Buffett as the best stock picker you've ever worked with. And you've reflected, I think, on the past on his two rules of investing. Number one being don't lose money. Number two being don't forget rule number one. And spoken about how you have to earn the right to be able to take risk. You have to stay in the game. Based on how big your chip stack is, you'll make different decisions.

47:35Scott Bessent:Is it fair to say that the size of America's chip stack today is smaller than it was a decade or two ago?

47:44Wilfred Frost:No, I would think it's the opposite. That I think we have this leadership. We have an energy dominance. That if we've been where we were a few decades ago in terms of importing energy as opposed to exporting energy. We have this technological lead, we have this military lead. Our military, before President Trump came in in the first term, was substantially run down. And you were talking about China earlier. And if I think, what are the three things that China envies the US for? It's our military. I think our military is more powerful and more lethal and more respected than it's ever been. I think that our technology, that the US leads the world, and we just keep pulling away.

48:33Wilfred Frost:That now with this AI boom, we're going to have over 70 or 80 % of all the compute in the world up from 40 or 50 a few years ago is going to be in the US. And then the economy, the Europeans celebrated 0.3 % growth. I don't think we celebrate that.

48:52Scott Bessent:Well, I didn't say the UK.

48:54Wilfred Frost:The EU celebrated 0.3 % growth. It was better than expected. And I think once things get back to normal after this conflict, that the US is going to grow at 3%, so 10x.

49:10Scott Bessent:I guess the debt is higher. The oil reserves suddenly lower.

49:15Wilfred Frost:But the debt to GDP, which is important, deficit to GDP, debt to GDP, is higher everywhere in the world. That's a post-GFC fact. That is a post-COVID fact. So in terms of relative strength, I think we're much better shaped.

49:35Scott Bessent:As we do wrap up, final questions for you, Mr. Secretary. This is something we ask everyone on the Master Investor podcast, which is, as you know from intro, I like to try and give our listeners an edge. And to wrap up, what is the overriding piece of investment advice you have for our listeners? We often ask for career advice too, and you're more than qualified to cover both topics for us.

49:58Wilfred Frost:Well, I'll do the career advice first. Career advice, you never know what's going to happen. You never know what's going to happen. I started out Yale 1980. I didn't know journalists, computer scientists, computer. I think you're too young to remember, computers used to have these cumbersome things called punch cards. And when I got to Yale, we just switched to screens. And so being a computer scientist was miserable. I didn't become editor of the Yale Daily News, which was the best thing I ever lost. But I did an internship in finance and realize that the quantitative side and the qualitative side, the quantitative side of the computing, qualitative side of a narrative is actually what the investment business is all about.

50:50Wilfred Frost:You think about scenarios and then can you prove it? And then in terms of investing, I tell everyone you have to know what level of risk you're willing to take. You have to do what you're comfortable with and you just shouldn't get out over your skis. That's the main thing. You never want to have to sell at the bottom. You never want to find yourself like chasing at the top. Is America out over its skis in the Middle East right now? Absolutely not. As I said, every day we are moving ahead of plan and Iran is degraded. There was a message from the bunker from the new Ayatollah. We haven't seen him, so let's see if we see him.

51:42Wilfred Frost:You're suggesting he's no longer alive? Is he a compass menace? Is he injured? Is he under threat from the other members of the regime?

51:55Scott Bessent:Do you think regime change is on the cards in the days ahead then?

52:00Wilfred Frost:And again, our goals are the three that I talked about. But once these things go in motion, you never know what's going to happen. They take on a life of their own beneath the surface.

52:12Scott Bessent:I can see we're very much out of time, Mr. Secretary. I really do appreciate all of your time in Canada today, not least because, as you proved in the middle of the interview, we know how busy you are now more than ever, Mr. Secretary. Thank you so much for joining us. Good to see you. The Master Investor Podcast is sponsored by BNY Investments, LSEG and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes.

52:50Scott Bessent:This podcast is produced by Paradigm Productions and Master Investor Limited in association with Birdline Media. If you've enjoyed the show, please do subscribe on YouTube or click follow on your podcast platform and you'll be automatically notified each time a new episode drops.