1. Score One For the Referee

Speaker: 00:00:01

All right, welcome to the

first daily discernment.

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This is going to be an almost daily,

and I say that because there's not

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something to talk about every day.

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So don't expect one of these every day.

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But on market days where there's something

to talk about, like today, I'm just

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gonna a kind of five to twenty-minute

probably video, outlining what it is I

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found particularly interesting that day.

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And I'm calling it discernment because

every day that goes by, I feel like we

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have more and more inputs flying at us.

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You know, more news, more alerts,

more prices, more people talking

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about all of those things, more

people talking about the people

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talking about all of those things.

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really an ungodly amount of information

flying at us too much for all of us.

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think more and more important every day

is the ability to discern from all of that

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flying at you, what is actually important.

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this, you know, is important

to me from a AI standpoint too.

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You know, we all use AI now.

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we probably all use it more and more.

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Being able to discern what from the

outputs it's giving is important, what

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makes sense, what, what you should

carry with you, what you should leave

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behind, what you should have corrected,

what you should ask a different AI

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to steel man for you, et cetera.

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Like, becomes really that's the skill

set at this point of using AI in, in this

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line of work, at least in my opinion.

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word discernment, as I used over and

over the other day on, the Daily Dots, it

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just gets more and more important to me.

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So I figured why not call this

little show the Daily Discernments.

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today the thing that stood out to me

was obviously, the Treasury Secretary's,

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we'll call it manipulation in markets,

at the end of the day, you know,

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suppressing yields through buybacks.

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Huge, huge thing to me today.

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Now, the actual mechanics

of the program, not huge.

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They can do technically thirty-eight

billion dollars worth per year, which

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is, you know, a drop in the bucket.

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It means nothing.

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But the signal of-- from them that they're

uncomfortable with where rates are and

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they're willing to do something about

it, that's far from, far from small.

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Like we did a lot more than

thirty-eight billion dollars worth

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of damage in markets today, right?

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You had, you know, gold, silver,

Bitcoin, other commodities, some,

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some foreign country, you know, ETFs.

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Pick, pick a liquidity proxy, right?

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Like all kind of ripping higher.

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Hit bond yields.

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I mean, they only put in a four-day

low, which is not a big deal

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if we're being real about it.

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But hey, nine basis points on

a thirty-year, not nothing.

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almost point nine percent on the dollar,

definitely not nothing for one day.

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it just felt like a really important

moment for markets for, for many reasons.

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but also I wanna talk a little bit about

the way I see the forward-looking view

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of this, from, from this point forward.

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at the end of the day, they're,

they're doing buybacks, and if

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you don't know what that means, it

literally means they take some cash

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and they buy back some, older bonds.

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They don't have to just do that

in duration, but clearly the

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point they made today was, "We're

gonna do this with duration."

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So think of it this way: sell

some T-bills, you know, very

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short-term debt, take that cash,

go buy, say, a thirty-year with it.

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and some of those really are

truly illiquid, so this is

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a liquidity management tool.

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not crazy at all.

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Now, suddenly one day when yields are

a problem, doubling the You know, like

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kind of obvious what's going on there.

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Same thing as what's been going on in oil

markets where, you know, Pakistan just

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knows that a deal is imminent, you know,

for the fifth time, stuff like that.

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Not all that different in that sense.

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One of the reasons it's important to me

is because this is too small to work, it

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won't be long, in my opinion, because I

have a very firm view on, you know, some

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significant inflation coming our way

in the next few months, whether that's

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tech inflation from the AI build out,

that's, you know, food inflation because

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of El Nino, energy inflation because

of the war, other forms of inflation

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because of the war, because it turns

out energy is not the only thing that

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goes through in straightforward moves.

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We have all these different

sources of inflation kind of all

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seeping into prices right now.

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Imports and the dollar going down

because of this doesn't help.

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so if you're like me and you see

this inflationary backdrop, knocking

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yields down by nine bips one day on

a kinda one-off announcement of doing

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more buybacks than you thought we

were gonna do is not enough to hold

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back the long bond whenever we get

more and more, you know, inflationary

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data and, and signs from the market.

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So if the next CPI print comes in at--

let's say the thing's expected to be point

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three and it comes in at point five, the

thirty year is not gonna be like, "Yeah,

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but they're gonna do some buybacks."

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Nope, it's just gonna blast through

new highs, and that's gonna put

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a lot of pressure on the Fed and

the Treasury to do, you know,

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more than some buybacks, AKA QE.

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Obviously, they're not gonna call it QE no

matter what they do in that environment,

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but that's what they're gonna have to do.

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They're gonna have to use some

balance sheet, whether it's the

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Fed's, whether it's yours and mine,

whether it is the banking system.

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Somebody's balance sheet's gonna

have to become a, a, a big warehouse

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to store a lot of this duration

so that they can cap yields.

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We've all-- Well, I

shouldn't say we've all.

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most people have known this

stuff's gonna come for a long time.

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It's, it's driven our investment

decisions for a long time 'cause kinda

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obvious this is where it's all headed.

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It's the reason people like me like

and have owned gold for a long time.

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for me, it's a reason I am always

open to trading crypto even though

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I'm not a buy and hold crypto person.

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Like, because you're gonna get too

much liquidity at, at different

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points because of the stresses placed

on the architecture of our market,

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from inflation and from the kinda

secondary effects of inflation hitting

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the deficit and the deficit hitting

inflation and inflation hitting the

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deficit in that nasty loop that we have.

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some reasons I think this was important,

you know, particularly today was, you

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know, I wrote a piece three weeks ago,

if you wanna read it, just shoot me

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an email, chase@pineconemacro.com.

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I'll send it to you.

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about the fact that, you know,

Kevin Warsh basically said like,

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"I would not have to hike back

three weeks ago in the July FOMC.

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I don't need to hike because

inflation's doing it for us,"

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is essentially what he said.

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He said, you know, like those, those

back-end rates, they're moving higher.

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They're tightening up

financial conditions.

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That's doing, that's

doing the work for us.

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Like, why do we need to do it?

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And I kind of wrote all the

reasons I thought that was wrong.

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Here we are three weeks later and, and

kind of, we're kind of proving that

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was wrong because we can't actually let

the bond market do the tightening for

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us because it's, it's too problematic.

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It's too painful.

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so we're gonna have to fix that.

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Now, if you do this, if you, you

know, give some Novocaine to the

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thirty-year, but then you don't raise

rates, you don't follow through with

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the, with the policy rate, then you

have the worst of both worlds, and

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then rates are really gonna wanna go.

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The dollar's really gonna wanna go.

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So that whole, you know, credibility thing

from the Fed that frankly gets, you know,

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overemphasized and, you know, every time

the Fed makes the smallest mistake for

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the last thirty years, everyone's ready to

talk about credibility and how they don't

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have any, and they're gonna lose control.

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And I, I've been guilty of this myself.

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Usually nonsense, right?

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in this case, it might start,

start being kinda real.

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So that's something to, to keep in mind.

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This is also important 'cause if you

go back to that presser, you think

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about Kevin Warsh, he's saying, you

know I want the market to just look at

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the data and make its judgments there.

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I don't want it looking at us.

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Don't, don't look at the Fed, you

know, and I think that applies

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also don't look at the treasury.

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Well, if you're not looking at

the Fed and the treasury, you

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have to look at the data, make

up your own mind that way, right?

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Like, oh, high inflation,

like let's go up, whatever.

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Now I think that's, I don't

think that's a good idea.

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I think the Fed should always, or the

bond market should also be looking

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at policymakers that just make sense.

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Unless policymakers are doing nothing,

then they are important, right?

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And in this case, it's policymakers'

job to keep inflation down, which

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means it's the bond market's job to

look at the inflation and look at

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the policymakers and be like, you're

gonna do something about that, right?

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And as long as they are, then

you can take that into account.

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I think last month messed with the,

spooked the bond market because the

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bond market's like, wait, if I'm not

looking at you to keep inflation from

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becoming a long-term problem, and

you're saying it's kind of up to me,

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then I have to overreact as the bond

market to any potential inflation.

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And I would argue we have

started to see that to a degree.

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so his whole, you know, like, oh, I

don't want it to look at the referee.

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I just want it to play the ball.

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Well, now all of a sudden we have the

referee in there, you know, kicking the

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ball and like making the net bigger.

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And so we're back to the fact that

the bond market has to play both.

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And I think that will just get worse.

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I think they're gonna have to do some form

of QE before long because as it turns out,

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you know, inflation's gonna be too high.

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They're not gonna be able to let rates

go where they need to go, which means

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rates are gonna pressure them and

they're gonna have to do something to

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kind of, you know, euthanize that rate

problem by getting it off the balance

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sheet or on a different balance sheet.

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which to me is gonna

be QE, some form of it.

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And that might happen way faster than

people think if market pressures are

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gonna try to take the 30-year up to,

to 6% plus, which I think is possible.

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now if the war ends and, you know,

El Nino doesn't hurt crops as bad as

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it looks like it at least could and

other things, not just crops, but,

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you know, we have rivers going dry,

so it's hurting, you know, transport,

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it's hurting electricity production.

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It's, the severe weather parts

of it, you know, heavy rains in

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South America that hasn't even

really become a big problem yet.

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There are all kinds of ways that that

could spiral into an inflationary

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problem other than just like, oh man,

we don't have enough corn in this crop.

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So that the energy inflation, which

is kind of obvious, you know, gas

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for Europe, oil for everybody,

obviously diesel for everybody, which

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feeds into essentially every price.

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You know, it's kinda funny.

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Y-you have AI inflation, which has

capital goods inflation, imports running

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at like six percent plus inflation,

which is not something we're used to.

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you have obviously memory and chips

inflation running rampant, electricity

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inflation running pretty hot.

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So it's not like it's just a little bit

of food and energy that you can just

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write off and like it'll be over soon.

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Like, nope, you have tech

inflation on top of it.

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Not to mention tech is competing with

the treasury to sell long-term debt,

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just making both more expensive.

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This kinda helps that, but it also kinda

supports demand for the AI build-out,

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which in its own way is inflationary.

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And that's another point I'll make

is these buybacks, if you think

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about it, are disinflationary.

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They push the dollar down,

which is inflationary.

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It makes imports more expensive, right?

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you can see that today.

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Go look at commodity prices,

you know, platinum, palladium.

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Not, not just gold and silver and, and

Bitcoin, but platinum, palladium, copper.

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Like there's a lot of less monetary

metals that, that rip today.

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It's just how this stuff works.

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Dollar's down, things priced in

dollars are up, like kind of,

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kind of a one-on-one thing, right?

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But also you look at long-term

inflation expectations or even

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short-term inflation expectations.

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If the authorities aren't gonna take

inflation seriously and are gonna,

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are gonna fight against the symptoms

instead of the cause, which is what this

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is today, well, then you have to kind

of recalibrate to like they care more

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about the symptoms than the disease.

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I have to price the disease getting worse.

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and I think you saw

that a little bit today.

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At last check when I looked, the

two-year inflation swap was at like six

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basis points, and that's a day where…

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That's a day with the dollar,

or excuse me, oil down.

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So that to me shows this move by the

treasury is you're just inflationary.

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So that is not good for yields.

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So if you have an inflationary

policy that's trying to help bring

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down yields, and then you get some

more inflation, the bond market

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will be looking at kind of both.

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And again, I think they're gonna get

pressured into a, into a QE situation,

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which is the whole thing's interesting

because obviously you go back to

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Scott Bessent heavily criticizing

Janet Yellen for, you know, all this

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intervention and messing with the

cadence and the composition of, of

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like bond issuance and doing it,

you know, for political purposes.

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This program literally ends

one day before the election.

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So I'm not even blaming them.

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Like it, it's just what people do, right?

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You, you find ways to keep as

many economic things as good as

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you can going into an election.

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Now, I think we're doing it more

forcefully in ways that we don't care

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if they hurt medium to long-term, which

is more of an emerging market kind of

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vibe, which we have a lot of these days

where, you know, emerging markets, they'll

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just throw money at people going into

elections and stuff, even if that's gonna,

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gonna lead to not being able to pay the

IMF the money they're owed or whatever.

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Like we've always spent

money going into elections.

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That's just part of how this all works.

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But I think it's that, I think that

stuff's getting more egregious,

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kind of ratcheting effect.

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It just gets a little worse,

you know, every cycle.

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Um One thing I want to mention

is the weighted average maturity,

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which I, I think is now kind of

become the, the, the most important

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chart in the world to watch.

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Because at the end of the day, if they're

going to do these buybacks in a way

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that, that lowers that average maturity

of the whole debt, and they are also

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going to just issue less of that stuff,

which obviously they're doing, like, and

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that goes back to Yellen, you know, more

bills, keep duration about the same.

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And I could even see a situation

where we just kinda stop selling

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twenty, thirty-year bonds

because no one wants them.

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You know, like it d- it-- the price

is just not good enough to even do it.

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I think that would be very problematic.

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Well, it, it's gonna be one of those

things, like all this stuff fixes

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problems for like a year or two or

five even maybe, and then it makes

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everything way worse long term.

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it makes everything more inflationary,

harder to pay for, but it's all

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inevitable, I would, I would argue.

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It's kind of just part of a, a

long-term debt cycle, the big cycle,

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and the way they kind of tend to end.

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We've been here before.

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We've, we've had the high debt-to-GDP

and had to burn it down with inflation

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and yield curve control, like

running, running stuff hot, financial

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repression and capital controls.

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All these things are, I mean,

they're just in our future.

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Some of them are in small ways, you know,

we've already had them even in this cycle.

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If you go back to the '40s, we saw

it, um, y- you know, you name it.

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It's, it's just kinda

the way this stuff works.

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But watching that weighted average

maturity here in the next, you know,

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two, three years is gonna be important.

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I think it's gonna come down more

than people expect because of things

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like this, because of when they

do QE, they're not-- I don't think

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they're gonna buy a bunch of bills.

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I don't think they're gonna

buy a bunch of two years.

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I don't think they're gonna

buy a bunch of five years.

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I think they're just gonna sit on

twenty, thirty, ten-year stuff,

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to keep it from running away.

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Now, at the same time, I think they

would love, love, love to cut rates

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to bring all the front-end stuff

down, get that interest expense line

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item down to make the, the deficit

a little tiny bit more palatable.

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but we'll see how that goes.

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Um Obviously, this is bad for

the dollar after-- especially

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once we get to the QE part.

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Like, between here and QE, like, I

think markets can kind of unwind some

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of what they did today and sort of

put that pressure back on, on Bessent.

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Markets, markets like-- When markets see

softness, they like to hit it, right?

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Like, you see someone who's not, not

willing to, to fight for something, then

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man, you just, you just pounce on it.

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Like it just…

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That's how markets work.

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Like, and, you know, bond vigilantes

are called vigilantes for a reason.

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So now that I think we know roughly

this level of bond yields, is a

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bit of an uncle point for the,

the Treasury, I think markets will

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find a way to go pressure it again.

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: 00:15:14

and hey, maybe we have another trick up

our sleeve that isn't QE that can kind

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of build a bridge from buybacks to QE.

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: 00:15:19

I'm, I'm super open to that.

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There's all kinds of, there's all

kinds of shenanigans you can do, you

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know, within Treasury before you have

to have the Fed go buying stuff up.

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But what I will say is I think a lot

of people are gonna view this next

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round of QE as like the last, whatever,

two, three, four, I don't know, lost

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count, and it's just not gonna be.

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Like this is gonna, this is gonna

start not with, you know, one

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and a half percent inflation.

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This is gonna start with four,

maybe higher percent inflation.

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This is gonna start with seven,

eight percent, you know, deficits,

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not two percent deficits.

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It's gonna start with forty-plus trillion

in debt, not, not fifteen, twenty.

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Like, all these dynamics

make it, make it different.

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the credibility of like, "Man, we just--

we can't cut rates anymore, and we have

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to do something," that, that QE and,

"Man, we can't control the bond market,"

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that QE just those are not the same.

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So keep that in mind.

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: 00:16:10

one-- something I, I posted on Twitter

today that I, I definitely wanna mention

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: 00:16:13

was, you know, we, we went from saying

like the-- we were letting the bond

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market kind of like do the hiking for us.

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: 00:16:24

We went from saying like Let's keep

an eye on the-- on, on, on bonds.

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: 00:16:31

Let's watch those for signal.

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: 00:16:33

We went from that, let's listen to the

bond market, it'll tell us what to do.

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: 00:16:37

Went from that to telling the

bond market to shut up because

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: 00:16:39

we don't like what it's saying.

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: 00:16:40

It's almost like the, the

scene in, in The Odyssey of, of

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: 00:16:43

going through the siren song.

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: 00:16:44

Like, just being tied to the mast

and having to hear the bond market

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: 00:16:47

just scream the worst stuff at you.

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: 00:16:49

Like, we don't actually wanna hear it.

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: 00:16:51

So to me, I can see this, this buyback

is almost like putting the, the wax in

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: 00:16:56

our ears, like we don't wanna hear it.

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: 00:16:57

But that, that has all these other side

effects to include y-y-you better hike, or

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: 00:17:02

you're gonna have some problems, I think.

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: 00:17:04

And one other thing I'll mention is,

and the last thing is, if the thumb

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that is getting put on the bond market

with these buybacks and whatever else

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: 00:17:14

comes next is the same thumb that

was getting put on oil, then that's

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: 00:17:19

a very interesting market signal.

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: 00:17:20

It's a very interesting,

especially for oil traders, right?

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: 00:17:23

But also just inflation

traders, which is all of us.

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: 00:17:25

if let's say, you know, the fella at

Axios said, "Hey, I'm-- like, I'm,

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: 00:17:31

I'm done, like ruining my reputation.

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: 00:17:33

I can't do this anymore.

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: 00:17:34

Like, you guys gotta

figure something else out."

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: 00:17:36

And let's say, you know, maybe

Pakistan said the same thing.

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: 00:17:40

Well, you gotta find a new way to

like, keep markets from like, punishing

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: 00:17:44

you for this war too hard, right?

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: 00:17:46

And I think w- this would be

like a natural thing to do.

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: 00:17:48

Like, well, all right, well, we

can't manipulate oil anymore.

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: 00:17:50

Let's go manipulate bonds for a little

bit and see what we can do there.

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: 00:17:53

I'm not saying that's what is happening.

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: 00:17:54

Like, we might be back to-- we may

have another-- a new jawbone about how

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: 00:17:58

like imminent peace is breaking out and

there's gonna be a great deal in, in

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: 00:18:01

the next eighteen hours or whatever.

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: 00:18:02

That could happen tomorrow, and it

could come from Pakistan or, or Axios.

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: 00:18:06

But I just…

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: 00:18:07

I don't know.

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: 00:18:07

I just get a feeling like, because

now we're saying, "Oh yeah,

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: 00:18:10

we're not even talking to Iran."

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: 00:18:12

Like, we've gone from like, "Oh,

we're talking and it's going

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: 00:18:14

great," to like, "All right, we're

not, we're not talking to them."

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: 00:18:16

And then all of a sudden it seems

like we're putting our thumb on bonds

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: 00:18:19

instead of, instead of oil, possibly.

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: 00:18:21

Obviously, Scott Bessent

can, can do both at once.

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: 00:18:24

I think he can walk and chew gum.

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: 00:18:27

But I think it's possible that

instead of two thumbs, there's one

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: 00:18:30

and it moved from oil to bonds.

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: 00:18:32

Just something to kinda keep in mind.

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: 00:18:33

Could be wrong.

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: 00:18:34

I could look stupid here in a

week, but we'll see how it goes.

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: 00:18:37

But that's it for the first, first

episode of, The Daily Discernment.

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: 00:18:42

And these are eventually, maybe

this one, maybe not, are gonna end

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: 00:18:45

up pushing out to my, YouTube feed.

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: 00:18:48

Or sorry, from the YouTube feed

to, a pod- the podcast catchers.

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: 00:18:52

I just gotta figure out all

the linkages and get all that

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: 00:18:54

stuff tied up at the back end.

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: 00:18:55

But that's it for me for today, and I'll

be back the next time there is something,

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: 00:19:00

worth, you know, our discernment together.

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: 00:19:02

All right, cheers.