Gonna Need a Bigger Boat
Yesterday I said Treasury would need a bigger boat and compared buybacks to the Cheeto as a door lock - today (faster than expected!) that became clear. So I cover the buyback fail and the need for QE, the economic war against Iran, the China/Switzerland trade deal, Walmart earnings, and more supply coming thanks to the giant Anthropic IPO.
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Transcript
All right, welcome back to
the second Daily Discernments.
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:Turns out two things, two days in a
row to have something to talk about.
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:and amazingly enough, have a few things
to talk about, not just one or two.
4
:we'll start with, with the
buybacks because that was
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:what we covered yesterday.
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:and I, I sent out the meme with the
little Cheeto, door lock trying to
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:hold, hold the door open or door, door
closed yesterday saying, and I talked
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:about it on the show yesterday, the
buyback's not gonna be big enough.
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:They're gonna have to move to QE.
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:and that the chances were the market was
gonna pressure this stuff because that's
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:what markets do, 'cause it's too small.
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:It's not enough to, hold back war
inflation and El Niño inf-inflation.
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:Sure enough, today, bond
market completely, retraced
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:the whole move of yesterday.
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:So we had this, significant, move in
the markets, manipulation, whatever
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:you wanna call it, intervention, if
you wanna take it a little easier
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:word, to get yields down, and that's
completely undone literally the next day,
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:showing exactly what I'm talking about.
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:It, it's just not, it's not a, a real
enough solution, so eventually we're
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:gonna have to get to QE or something
like QE, like I said yesterday.
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:and the, and the pressure to,
to do that might come quick
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:and might come with force.
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:and to talk about the war and,
and that El Niño inflation, oil up
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:again today and oil kind of has been
going up almost every day lately.
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:And then you look over at ag prices,
almost all ag prices up today, and I
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:think you can continue to see that, and
you're starting to see input prices go up
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:with, with fertilizers, stuff like that.
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:So- This just gets really hard for the
Treasury and the Fed to do anything
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:about any, anytime soon that isn't,
in, in many ways counterproductive.
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:But they're gonna have to, because
again, they can't let yields go six,
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:seven percent out on the back end.
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:They just can't.
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:So they won't.
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:but how long it takes for them to
truly respond will be interesting.
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:Speaking of that, today they did respond.
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:Scott Bessent came out, went out of
his way to say, "Hey, yesterday we
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:said we'd go two to four billion.
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:Hey, that may be, it may be
bigger than four billion."
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:And the market was like,
"Yeah, I don't care."
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:Just didn't, didn't really
move the market at all.
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:So as I keep saying,
gonna need a bigger boat.
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:be fun to see what they do on that next.
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:Brent oil passed ninety-three today,
so again, that pressure is mounting.
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:gasoline at, is up past
four ten, I think, a gallon.
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:Diesel, like, five fifty.
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:So the pressure, the
pressure continues to mount.
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:The administration did come out today
and announce that they're gonna let
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:winter gasoline be pulled forward and be
used earlier, than usual to help, bring
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:down the price with some extra supply.
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:Obviously, that will help until winter.
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:Like, I think that goes without saying
that that's sort of a, a seed corn,
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:eating strategy that has its own
potential downside risks, come winter.
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:So that'll be interesting to, to
watch Staying with sort of this theme,
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:the big thing is for the last week
or whatever, maybe week and a half
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:has been, "Oh, don't worry about it.
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:We're not, we're not, we're
not gonna bomb Iran anymore.
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:We're gonna, we're gonna pivot to
this massive, huge, unprecedented
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:economic warfare against Iran."
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:And we saw perhaps the first leg of
that with the Emiratis announcing that
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:they are basically delinking themselves
financially, economically from, from Iran.
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:Now, I've also seen some reporting that
says, "Yeah, but that's actually…
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:What-- The way they're actually gonna
roll that out is gonna be tiered.
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:It's not gonna be all at once.
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:They're gonna start with some small
stuff and maybe keep moving up."
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:So that may not have the teeth in it
that it sounds like early on, which
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:could be more, kind of like we've
had a lot of information warfare
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:without anything to back it up,
obviously, in the last six months.
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:So even, even this UAE is gonna do
this thing could be a little bit of
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:a more of a information warfare than
an actual economic warfare thing.
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:We'll see.
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:Maybe it ends up being very real.
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:And if it is, like, like I've said,
that is substantial if the UAE,
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:really, really were to like cut
every cord between them and Iran.
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:But it's hard for me to imagine, because
if they do, they're just gonna get bombed
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:by Iran, and that'll be problematic.
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:Obviously, they lose out on a
lot of income, as well from…
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:Because they…
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:The reason they have a lot of
financial and economic ties is 'cause
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:they make a lot of money doing it.
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:It's fruitful.
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:so that'll be interesting to watch.
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:Next week, I guess we're gonna
have a presser Monday about all the
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:economic warfare stuff we're gonna do.
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:And they're, they're teasing
kinda like secondary sanctions
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:on countries that do business.
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:We're gonna crush the countries
that do business with Iran.
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:The problem is, the countries that
do business with Iran are people
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:like Russia and China, in the Gulf.
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:So like, are we gonna crush the Gulf?
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:Are, are we gonna, are we
gonna do something to China?
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:Like, that's the area where,
like, I don't think so.
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:Are we gonna secondary sanction
China in a, in such a meaningful
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:way that they reduce ties with Iran?
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:I'm gonna get out on a limb and say no.
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:And in fact, if we try that, then
they'll just cut off rare earths, and we
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:won't be able to make stuff in America.
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:Just like, we've already, we've
already played this movie out.
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:I, I've seen some people
speculate like, "Yeah, but Xi
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:is coming for this big meeting.
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:Maybe he'll agree to help us out."
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:That would be bidding against himself.
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:Like China wins on such a big level
strategically from the US bogging
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:itself down in the Middle East.
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:this just further makes Iran a
massive client state for them
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:as, as it weakens Iran and makes
them more dependent on China.
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:So I, the last thing I'd really expect
them to do is like stab Iran in the back.
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:could they help out in some way that,
that is, window dressing and meaningless?
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:Sure.
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:I wouldn't be surprised, and I have no
doubt like China would really love to
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:get, more oil and chemicals, feedstock and
everything out of the Gulf or fertilizers,
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:whatever, like whatever it is they need
that they don't make for themselves.
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:Yeah, I have no doubt they would
rather get all that stuff out.
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:But I think what they win long term from
this conflict is a lot bigger than, a few
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:missing barrels, in twenty twenty-six.
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:so I'm highly skeptical we're gonna
actually do anything on secondary
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:sanctions in a way that matters.
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:But what I will say is if we do
something that bites, the, the failure
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:of this thinking is that, Iran is
helpless to do anything in, in response.
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:The reality is obviously they
can play the energy card.
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:They can, they can bomb,
en-energy infrastructure.
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:They can mine the whole strait.
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:They can, hit economic targets
instead of just, energy targets.
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:So data centers, they can cut
undersea cables, they can go after
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:the banking system and all of
our ties with the Gulf through,
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:financial and banking system stuff.
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:They can go after ports.
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:They, like, there's a, there's
a lot of targets they can hit.
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:Like, we can't forget that they have
really capable drones and missiles that
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:they can do a lot of damage with, and
to include significant economic damage.
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:As far as economic warfare goes,
we've spent a lot of our, a
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:lot of our cards there, right?
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:Like, we have played
most of our good cards.
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:We've been sanctioning the living
hell out of Iran for decades.
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:We've ratcheted it up
in the last few years.
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:We ratcheted it up more during the war.
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:So the thought that there's this, like,
low-hanging fruit that's gonna devastate
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:their economy and take down the regime,
like, seems pretty, pretty wishful and,
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:and kind of fanciful in my, in my view.
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:But that's, like, that's the
narrative Besson was going with today.
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:Like, they were gonna take down the
regime with this economic warfare.
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:Well, if we could have done that,
why would, why would we not have
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:done that instead of having to, put
troops in harm's way to begin with?
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:Why would-- Why did we wait six months
to, to implement this great strategy?
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:Like, the, all these questions kind
of answer themselves, obviously.
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:so, but it'll be, I'll be interested
to see what they say Monday, and
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:if they do something real, then
I'll look for very significant
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:pushback, kinetically from Iran.
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:And to that point, Scott Besson also
said today, like, "Oil, oil's spiking
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:today, and I don't understand that.
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:Like, they, they're misinterpreting
what this economic warfare thing is."
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:No, they're not.
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:Like, the, what the oil market is saying
is like, "Oh, well, Iran's gonna hit
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:back and probably do some damage to,
to energy markets, so I'm gonna p- I
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:have to price that in a little bit."
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:But this also reminds me of,
of what I said yesterday.
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:Like, hey, what if this thumb on
the treasury scale is the thumb
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:that was on the energy scale and
they're, they had to take it off?
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:Like, we can't, we can't put our thumb
on energy anymore for whatever reason.
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:Again, maybe it's people not
wanting to be the, the mouthpiece
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:that destroys credibility anymore.
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:Maybe our relationship with Pakistan,
took a step back, and they're not gonna
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:do it anymore, whatever the case may be.
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:Well, we have another day of energy up.
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:No, no jawboning there.
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:Not only no jawboning there, but
kind of like a, an admission that the
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:prices are up, and it's frustrating.
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:again, not that I'm saying
we can't jawbone oil again.
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:Like, we can.
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:We probably will.
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:but still, still interesting.
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:The other thing I was gonna talk about
really quickly, honestly, I'm probably
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:just gonna note it, is, is Walmart's
earnings were pretty, pretty bad, and
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:Walmart got hit pretty hard today.
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:notable to me just because it's kind
of a validation of what should be kind
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:of clear already, but, like, the, the
real income's taking a hit from, from
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:the inflation that we see from, from
the war and, and honestly more and more
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:every day it's gonna be from El Niño.
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:Not to mention, the AI build-out
and all the other things that
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:are inflationary right now.
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:Like, that inflation is, is outstripping
wages, which, it goes without saying,
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:that hurts people's spending power.
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:So to see, to see some earnings
misses from, from p- people
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:like Walmart is not surprising.
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:I think we're gonna get more of it.
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:Obviously, some retailers are
gonna still do surprisingly well.
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:It's not gonna be some giant
earnings catastrophe for
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:everyone that sells something.
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:But worth noting, when real incomes
get hit, like, yeah, well, so
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:does, so does consumption, right?
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:Unless you take the savings rate to
absolutely nothing and people are
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:running u-up on credit cards, like,
you're gonna have consumption problems.
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:So worth noting.
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:another thing, Anthropic.
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:Now everyone, all of a sudden, I'm
seeing all these reports that people
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:are expecting them to raise more money
than SpaceX just notable for me because
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:again, this goes back to the supply
thing I keep talking about and how the
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:reason I don't think the market can be
strong is because as soon as it gets
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:strong, someone's gonna sell you some
stock, and it makes it really difficult.
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:And I think that's one of the,
the, the problems actually
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:Chinese market has right now.
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:They've had some blockbuster tech IPOs,
which is awesome for them long term,
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:and it's gonna add tons of value to
their equity market over, over time.
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:But right now, it's just adding
a bunch of supply and, and
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:that's makes it hard to go up.
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:And you've seen that.
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:so for the US market, I think
that Anthropic, IPO is gonna hurt.
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:Now, it's gonna be interesting
to see the way they structure
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:the lockups and everything.
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:that was the interesting thing
with, with SpaceX was, interestingly
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:engineered lockup, situation.
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:They, they tried to engineer a squeeze on
the front end that people could sell into.
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:basically none of it's really worked,
but, that's something to keep in mind
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:here come, coming this fall that it could
hurt markets is an- the Anthropic IPO.
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:And the last thing I'll mention
is, is a trade deal announced
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:between China and Switzerland.
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:Notable.
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:you basically just have
almost a full-blown free
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:trade agreement at this point.
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:The, the Swiss already weren't
really charging any tariffs on
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:China, very, very, very, very little.
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:But China's got a good bit on Switzerland.
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:They, they essentially dropped them.
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:Ninety-nine point eight percent of
Swiss exports to China are now tariff
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:free and all the important stuff
that they build that is now tariff
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:free, like watches, like we all know.
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:and that was interesting because
that was like a big give from
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:China, which you just don't see.
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:Like usually China extracts
every inch they can in any kind
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:of negotiation economically.
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:They don't give for the sake of giving.
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:It's just, it's just not how they roll.
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:They shun soft power at every turn, and
they always seem to maximize what they
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:can get for themselves in like a very sort
of zero-sum game way e-even though they
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:always present themselves as very win-win.
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:In a lot of ways they are, like
from a market's standpoint, from
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:a free-- basically a frankly an
Adam Smith kinda way, like, right?
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:we'll help you, you'll help us.
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:But they're also very predatory in many
ways, like as we, I think all know.
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:very, very well done pre-predators.
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:Like they're, they're good at it.
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:so to see them like basically give and
not get much back in this update to
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:the free trade agreement was notable
'cause it felt like, are they like
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:giving something to a European economy?
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:To gain like goodwill and soft power.
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:Like, because if that, if so that's
interesting, especially considering
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:the fact that, Switzerland's
had tough negotiations with the
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:US that haven't really worked,
haven't really been finalized.
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:so to see them do this deal where they
get, they get a lot, from, from China,
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:where they basically have free trade
going back and forth, that felt notable.
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:And if I, if I'm right that maybe this was
a turning point where China does a little
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:more to gain soft power and not just to
win every negotiation on, on the purest
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:terms, that will be important to watch.
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:but that's it for me today.
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:That was two in a row.
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:I expect kinda two to three a week,
so maybe a few days before you see me,
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:unless, unless we get some more, some
more interesting things happen tomorrow.
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:We've had a cluster of, of good stuff for
two days, but we may, we may go a week
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:now with nothing worth talking about.
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:We'll see.
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:But, until next time, cheers.
