93. Bond Market Breakdown – Is the Fed Losing Control? - Drunk Real Estate

Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
I went to Canada and

(00:01):
I have my two rifles
and we go there and you go
and you have to
do all the checks,
everything else you get there,
then you got to do
the checks again,
leave the airport,
have them go through everything
for some reason
and then go back in.
And so I'm talking to the guy.
I'm like, wait,
why do I have to go back
and go in?
You guys already
checked everything.

(00:21):
And he looks at me
and he gives me a lecture
in Canada,
and he starts going off
about how we know
where our guns are.
We respect firearms, right?
Everything else,
they lose my guns,
they lose my guns.
Guess where I found them?
Sitting in the middle of.
An airport at.
2 a.m..

(00:43):
Out where everybody.
Walks through on the floor.
Welcome to Drunk Real Estate.
Grab a drink.
And enjoy the show.
Hey there.
Welcome to episode.
93 of Drunk Real Estate.

(01:04):
I am Kyle Wilson,
Ashley Wilson's husband,
and we pulled it off.
I appreciate it, guys.
I had a bit of a snafu
last night.
I ended up going to the Fliers
and Columbus Blue Jackets
hockey game
instead of coming
to the podcast,
so I will take that on me
publicly.
Apologize to you guys
because I feel bad,
but I appreciate you
making it work.
It's now recording on Wednesday.
Thanks for coming, Jay.

(01:24):
Thanks.
Hey, I was happy to do this.
I always like having the episode
really close to to release.
Like, we're
releasing this thing in about
12 hours.
11 hours from now.
We're releasing this thing now,
I know
we've been recording earlier
because our awesome,
producer Alex needs a day, a day
and a half
to actually get things ready.

(01:45):
So we're putting her on the spot
on this one, but,
but pretty cool
that we're releasing this thing
in about 11 hours.
Yeah, especially these days.
Like, things
change by the tweet.
So exactly,
everything we say has a 5050
shot of actually
still being true
tomorrow morning.
So I know there's there's
a little bit of sickness
going around in your household,
but are you
are you still drinking tonight?

(02:06):
I am so yeah,
I am drinking but I'm doing.
It's late,
so I'm doing some coffee
to keep me up
and then throwing
in some Kahlua into the coffee.
How do you drink coffee
this late?
Doesn't it keep you up like
it's decaf.
So then how is it
keeping you up?
It'll still keep me up.
There's a little
bit of caffeine,
even in the decaf coffee.

(02:27):
So, and trust me,
I'm really sensitive to it,
so there's probably
will keep me up.
How's it going, Mauricio?
Dude, it's going to be back.
Missed you guys last week,
enjoyed a little vacay
with the fam.
Got to see,
Jay for a few minutes,
in Sarasota.
And, I'm
glad I got through today.
I don't know if you guys heard,
but zoom was down nationwide.

(02:48):
I had my elite coaching
call today, and, like, freaking
the zoom was down.
What happened?
I didn't know that.
But zoom didn't work.
Yeah, zoom wasn't working.
And so I was, like,
scrambling at it, literally.
So my things like 130,
it came back at like 127.
It was back.
So I was like half,
half the people joining
Google me
to other people joining.
Anyway, glad to be back.
Glad I got through my coaching
and today I'm doing that.

(03:09):
The solo Red Cup.
Kind of. Not really.
If I told you
this was a vodka cranberry,
would you believe me?
I you know, we always believe.
That's what it is.
And it's a vodka cranberry.
You're an. Attorney.
You're not allowed to lie,
are you?
Basic sorority girl. Drink.
Got it. Boy.
Mauricio, I never lie.
I just need a cherry on top.
What's going on, man?
Doing good

(03:29):
with the real red solo.
Not these imitation.
Filled with a real Diet Coke.
That's right.
Real Diet Coke, baby.
Awesome.
Well,
we got a lot to talk about.
A lot to to debate,
I think on this.
Whoa, whoa, whoa.
We forgot to ask you
what you were drinking
last week.
That's right, I always forget.
I think I said

(03:49):
you got to pay yourself first.
I should start doing myself
first. Right? What's the.
What's that?
Profit first. That book.
I got to start doing that.
Woodford Reserve.
I got to get rid of this bottle.
So I'm.
I'm going to drink it
until it's gone.
So that's what I'm doing.
Are we are we debating?
Are you wearing
a collared shirt?
And AJ
because it sounds like
you're the only one
not wearing a collared shirt or.
Oh, yeah, you did.

(04:10):
You did get the memo.
Okay. Got it. All right. Good.
Just was a little concerned.
I was close.
To. Going neat to Noah.
Wow.
Was that the pinky?
Did you just
stick the pictures there? Yeah.
You know.
Kyle's got class.
Yeah.
Well, yeah.
You actually hold it
with two fingers, you know,
and the pinky is just
the one to extend.
All right, we ready
to get into this?

(04:30):
Let's do it.
Let's talk about the bond
market.
Because,
everyone was
freaking out about stocks, and.
But we like to talk
more a little more
about the bond market,
due to its close ties
to real estate loans,
particularly
the ten year Treasury.
While bonds historically
have a pretty set playbook
in terms of volatility,
then stocks go down.

(04:51):
People flock
to the safety of bonds.
The bond yields go down.
This is why that
poor couch potato
index fund mix took off.
As it was,
it was better than had,
hedge funds and stuff like that.
Well,
we saw a bit of an
anomaly last week
where the stock market
was heading down rapidly,
but bond
yields were actually rising,
which implies that investors

(05:12):
were not running
to the safety of bonds.
So, J, why don't you,
explain to us
how we should be interpreting
what's happening?
Yeah. And, I'll do that.
I want to step back
a little bit because,
I think you did a reasonable job
of explaining that for people
that already understand it,
but I want to make it
a little simpler.
So when we're talking
about bonds, two things
that we really need
to understand.

(05:32):
First thing is U.S.
Treasury bonds are considered
ultra safe.
They're literally the safest
investment on the planet.
And or
allegedly, they're
considered the safest.
In fact, we refer them to that.
There's actually two companies
with higher ratings by Moody's.
There is,
but we still refer to U.S.
Treasury bonds

(05:52):
as risk free assets.
I mean, nothing's risk free,
but that that's kind of the
the the benchmark for risk
free is U.S. Treasury bonds.
These bonds pay a fixed amount.
So we call that a yield.
So whatever
the rate of return
we get is a yield.
And because they're paid
by the U.S government, literally
the only risk to them is
if the government
for some reason

(06:13):
stops paying on them.
And that's why
they're considered
the safest investment
on the planet.
So number one is ultra safe.
And the second thing
we need to understand,
just like you said, Kyle,
when money flows into bonds,
when money,
when people invest in bonds,
the yields.
That rate of return goes down.
When money,
when people take money
out of bonds,
that rate of return,
the yields go up.

(06:34):
So different
than the stock market
when people put it in
stock market goes up.
And so two things that
that we need to understand.
So here's the weird thing
that happened last week.
As you said,
Kyle again,
when the stock market goes
crazy, people get scared,
start pulling their money
out of stocks.
What they do
is they flee to safety.

(06:54):
And what that normally means
is they take their money
out of the stock market,
and they put it someplace safe.
And historically,
that safe place that they put
the money is in bonds.
So it's very common
for when the stock market
starts to go down,
especially when we
have big movements down.
Investors will take their money
out of the stock market
and they'll
put it into bonds for safety.
And then again,

(07:14):
when money goes into bonds,
bond yields
drop, the rate of return
drops, the interest rate drops.
And so what
we would have expected
to happen
over the last two weeks
since Liberation Day,
the stock market
has been down at this point.
I mean, at one point
it was over
10% this point, about 6%.
But what we would have expected
in a normal timeline

(07:35):
is that when the stock market
goes down by 6%,
we would have seen bond yields
go down as well.
Again, people
moving money out of the stock
market, putting in bonds.
We haven't seen that.
In fact,
what we've seen is that bond
yields have actually gone up.
Not quite as much as stocks
have gone down.
But still 2 or 3% bond
yields have gone up over
the last couple of weeks,
which is crazy anomalous.

(07:57):
We're not used
to seeing this happen.
It likely means one of
two things.
Number one, it means that,
people are taking money
but they're not
putting into bonds.
They're putting it
into something else
so we can talk about
what that something else
might be or two.
The second thing
that could be happening,
and maybe it's both.

(08:17):
But the second thing
that could be happening
is people are actively
selling off bonds
for some reason.
They're not selling bonds
to put the money
in the stock market,
but they're selling off
bonds for some other reason.
And when we talk about people
selling bonds,
and moving the bond
market, we're not we're talking
about large investors,
hedge funds,
institutional investments,

(08:38):
insurance companies,
or even other countries
that own large amounts of bonds
to, to move the market.
Like this.
So crazy thing happening.
There are some
benign explanations.
Their explanations
that don't mean anything
necessarily bad is happening.
The two most likely are
number one,
we've seen this before.
We saw this in 2008.

(08:58):
My theory for what happened
in 2008 was normally
when large investors
move money
they're going to put it in bonds
because it's easy
for them to do.
They understand what bonds are
and so it's just a common thing
to do.
But when mom and pop investors,
people like me
and you and the other
50 million people
with their IRAs
and their for one case

(09:19):
when they move money
they don't know
to move money into bonds.
They just keep it in
cash or their IRA
puts it into a money
market for them.
So money
that's coming
out of of the stock
market from us
mom and pop investors
oftentimes
is going to sit in cash,
not going to bonds
and not necessarily
move the bond market.
So that's number one.
Number two,
when we see

(09:39):
really big movements
in the stock market
like we did a week week
and a half ago.
A lot of times that triggers
this thing called margin
calls, where
some investors, especially large
investors, are using leverage.
They're using borrowed money
to invest in stocks.
And when they start
to lose too much,
the brokerage says,
you need to pay us now.
You can't just

(10:00):
keep borrowing money.
You have to actually pay off,
your margin.
And so where do they get
the cash from?
Well,
they might take it out of bonds
and use it
to pay off the brokerage,
pay off their margin calls.
And so that's another reason
why we might see money
coming out of bonds,
when the stock market
is dropping.
Problem
with both of those explanations.
Mom and pop investors

(10:20):
go into cash.
And this margin call thing is
that you would have expected
to see the bond market
start to,
to, to compress to move down,
because a lot of money
would have started going
to bonds
once the major crash
that we saw,
if you want to
call it a crash, once
we saw that big movement down
week, we can a half ago,
we saw a recovery after that.

(10:40):
So people were putting money
back in the market.
And and
so you would have seen
kind of the, the,
the bond market
kind of normalize
and drop back down
if that was the reason
we didn't see that.
So now we have to worry about
are there
something more concerning
going on here.
And the two big things
that might

(11:01):
concern us happening in the bond
market are one.
Investors no longer feel like
U.S debt.
U.S bonds
are the safest investment
on the planet.
Their concern, potentially that
the government
might stop paying,
or they might try
and renegotiate,
bond contracts and,

(11:21):
and whatever.
And so they're scared
to invest in bonds
and they think that
there's a safer investment
somewhere else.
They're investing in gold.
They're investing in the debt
of some other country, whatever.
So number one is maybe investors
are concerned
that that bonds are no longer
as safe
as they were
because of just craziness
in the market.

(11:41):
Number two,
potential concern
is that other countries
and we've heard
Japan, we've heard
China, we've heard
Canada, actually,
are actively selling off
U.S bonds.
They may be doing that
because of the first thing
I said.
They're concerned
that this is no longer
their safest investment
on the planet.

(12:02):
But the other reason
they could be doing
that is to kind of manipulate
the market.
So imagine you're China.
Imagine that you've gotten
these big tariffs against you.
And you want to put
pressure on the U.S
to kind of roll
back these tariffs
or slow down on the tariffs.
If you start
selling off your bonds
and you force
bond yields to go up,

(12:23):
that's going to
scare the market.
That's going to
scare the president
because the president's job
is to keep markets stable,
among other things obvious like
and so
a lot of people
are hypothesizing
that maybe it was China
or Japan or Canada
or some other country
that's selling off a whole
bunch of bonds.
Keyword they're hypothesizing.
Absolutely.

(12:44):
We can't like it's still weeks
before we can find out what
who was actually making
these trades
and what was going on.
So anybody who's saying
this is what's happening,
they have absolutely no proof
or statistics to back that up.
Exactly 100%.
And so here we are.
Bond market is still out
of whack.
It's come down a little bit
over the last few days.
But again

(13:04):
not as much as we would expect.
So something is happening.
There's there's a reason
why people aren't
putting money into bonds,
or there's a reason
why large investors
or countries
are selling off bonds,
but it's just a weird situation.
And again,
the biggest risk,
the biggest concern here,
and we don't know
if this is true or not,
but the biggest potential risk

(13:26):
is that people invest
institutions,
other countries
are losing faith
in the US economy.
They're losing faith in the,
the US government's
either ability
or willingness
to pay on this debt long term.
And they're moving to something
they consider to be safer there.

(13:46):
I think you're over.
You guys are.
Oh, I think overthinking
this a little too much.
Because a couple things
I want to point out, number one,
the the bond
market is a global market.
It is not just the US.
It's not just the US market.
It's not just U.S hedge
fund guys.
Not
this is a it's
a deepest market in the world.
And what's happening
right now is
I don't even think you mentioned

(14:07):
the word terrorist
in the whole Ted talk
you just made.
But like there's
all kinds of crap
going on all over the world.
You talked about the US
stock market going down,
but if you look at the stock
markets all over the world,
they're all going down.
Everybody's in turmoil.
Everybody.
No, no
what the hell is going on?
So there's a liquidity crisis.
People need dollars.
People need liquidity.
And if you look at the dollar
that's been crashing to

(14:27):
and it's not
some nefarious stuff,
it's just they need dollars.
They need liquidity.
And how do they get
the quickest way to get
liquidity is
used to sell your treasury bonds
to get dollars that you can
then sell the dollars.
That's why
the price is going down.
So you can take care of the
the liquidity crisis
that you have at home,
whether it's in Japan and China
and Germany and Euro.
That's really
what's going on now.
It is a little bit surprising
that it usually bounces back

(14:47):
pretty quickly.
Look at gold, for example.
I know we're not
meant to be talking about gold,
but just like every time
gold initially
takes a huge dump. Why?
Because people need
to sell their goal
to do their margin calls,
to deal with whatever turmoil is
they're dealing with.
And as soon as that's over,
they come back.
And you've seen gold rally,
rally, rally at this point.
But it's the same thing
with the dollar, same thing,

(15:07):
the Treasury.
It's the most liquid asset
most of these people
have in other countries
that have central banks.
And so them selling
it is just
like getting the liquidity
so they can take care
of their problems at home.
On Monday,
when we had the big sell off
last Monday,
it was directly
correlated in a 17, basis point
move in yields directly.

(15:28):
So what they found
was there's $800
billion in margin.
So the there's a
combination
of a few things, right.
The margin calls huge.
And there was an
exact correlation
with all of a sudden
after a certain point
Treasury yields started to rise
because the margins got called

(15:49):
and they got hit
at the same time
that this is going on. Right.
We have a few big
change in overall
just dynamics of the market
because China is moving to gold,
which they had announced.
And it's been.
Going AJ can we
can we go back to the margin
call thing first?
Because I think

(16:09):
when people talk
about margin calls
they always talk about
stocks, right?
They make the
margin calls on stocks.
But a similar thing
happens with bonds with and
and it only happens
with the big shops.
And it's called
the basis trades. Right.
And so
and the reason
only happens with the big shops
is these basis trades.
They it's super complicated.
And we could spend
a whole section.

(16:30):
It's the whole reason
I didn't go into it.
And that's the $800
billion trade. The basis. For.
Basically the,
the the long and short of it is,
is that what they do
is they bet on futures
in the bond market.
But since the bond market
typically isn't that volatile,
the the actual spreads
that they're making is so small
that they make a trade,

(16:50):
but they can make trades at like
20 x, sometimes 30 x of the,
of leverage
because it's such a stable.
They're, they're doing
well in bonds.
And bonds are basically
the same as J said as cash.
So they can make these huge
levered bets.
And that's the way they bet up.
And even though it's such a
minimal spread

(17:12):
that they can actually
make a bunch of money
because they levered up
and they and they're,
we're talking about
billions of dollars.
Well, when you see this
massive swing in here,
then they
those get called as well.
And they're actual bonds.
So it's not that
people are having to sell bonds
to pay for stock margin calls.
They're actually
when you're talking
about basis trades,
they're actual

(17:32):
the actual bonds
are the ones
that have to get sold
like to,
to cover those actual trades.
And we're talking billions
because eight.
Hundred billion
dollars on the book,
almost $1
trillion of these trades.
So once again,
like we're all hypothesizing,
but I think I just wanted to
say like, this.
Is the same thing
that happened in Covid.

(17:52):
We saw the exact
same thing in Covid.
People are like,
why aren't yields going
down, right?
Why are yields going up?
And it
we saw this in the first
whatever it was three weeks
correlated the exact same
with Covid.
And the problem is
the snowball right.
It's a snowball
in that
once it starts going
it's like a run on the bank.
Basically it's

(18:13):
it just makes it worse
and worse.
And it gets worse
than more people out
to sell it off.
It gets worse.
More people have to sell off.
And then that makes the big run.
So like to me,
like that explains it
all right there.
But like
instead people
want to try and say,
oh, the U.S is losing
their dollar.
Reserve currency
because no one has faith
and not even close.
Yeah, not even close.
We have it. Yeah.

(18:34):
And that's settled.
Let's move on. Well.
I do feel like
we have to debunk
some of this, though.
Yeah, I, I was, I was joking,
I was.
Joking, like even,
even when you talk about
like China is going to start
selling off all their treasuries
and that's going to tank
the, the, the treasuries market.
Like let's
just put some numbers on that.
The China right now
owns 800 billion.

(18:55):
Yeah. In U.S. treasuries. Right.
You know, just
in the last two years when the
when the U.S was doing
quantitative tightening,
they took 2.1 trillion
off their books.
It's nothing compared to.
What they
they buy
8080 billion in a month.
They could just cover
the entire China in in ten.
Months. Just like that.

(19:16):
So like to think that China's
all of a sudden going to start
dumping all their treasuries and
and the US government's
not going to step in
and just buy them
is asinine to me.
So I don't think.
China is going to.
Denominate you.
Like,
there's this idea
what China
will just sell off their
their dollars or their bonds.
That's not how global
currencies work.

(19:37):
If they did that,
they would literally tank
their own economy overnight
and they would be devaluing
their own currency,
which only represents
2% of the total
trade in the world.
It would be more effective
for them
to tell the Wall Street Journal
that's what they're going to do
and not.
Yes, they're.
Actually doing.
It's not going to do much.
And I think this is
I think this is a key point

(19:58):
in this discussion, that
what other countries can do
to us,
is limited in actual scope,
but it can scare us.
And it can put the U.S
in a situation
where it feels like
it doesn't

(20:18):
have a lot of control.
Here's the here's the problem.
The fed controls
interest rates
at what we call the short end.
They control the really short
duration interest rates.
So we have this thing
called the federal funds rate,
which is basically the the
we loan you money for
for six hours, right.
And they have
full control over that.
When you hear that
the fed lowered or increased
rates, it's

(20:39):
that ultra short term
borrowing money for
for a few hours rate.
They have some
control over
like the one month rate.
So borrowing money for a month,
a little bit of control
over the three month
rate, the one year rate.
But as you get into the two
and the five
and the ten year
bonds,
the fed doesn't typically buy
or sell those.

(21:00):
They don't control those rates,
they don't set those rates.
Those are controlled
by the market.
And so if China
or Japan or Canada
or anybody wanted
to kind of spook our market,
what they can do
is they can start selling off
those longer term bonds.
As AJ said,
yeah,
the fed could step in
and say,
okay, we're going to
we're going to start buying up

(21:21):
some of those bonds.
But for the fed to do that,
that's scary
because we we know
when the fed steps in
and starts
like buying up assets.
That reminds us of 2008,
reminds us of 2020.
And so I think what China
or Japan or Canada
or any of these countries,
if they really wanted to do this
and again,
like you guys

(21:41):
said, it's very possible
they're not we don't know.
But it's very possible
they're not.
But if they did want to do it,
the biggest leverage
they have
is more the fear factor
than their ability
to really destroy our market.
But that said, I mean,
if there was some
coordinated effort
for a bunch of countries
to sell off a bunch of bonds,

(22:02):
there's some people out there
who actually think
this is the strategy
of the administration.
And I wrote about this
on Facebook a couple days ago.
It's not a horrendously
bad strategy.
Imagine a situation
where China,
Japan, the two largest holders
of Treasury bonds,
a couple other countries
start selling off

(22:23):
a whole lot of bonds.
What we're going to see
is we're going to see
our interest rates go up.
We're going to see our bond
yields go up.
And that's going to be bad
short term.
But think about it
on a little bit of a longer
term level.
Longer term
these countries are going
to really decide
they need
U.S bonds for a couple reasons.
One, again,
it's the safest investment
on the planet.

(22:43):
But two, as long as we're still
buying stuff
from these countries,
we're buying that stuff
with U.S. dollars.
And these countries
don't like to keep
all of these U.S.
dollars on hand.
What they typically do with them
is they use them
to to buy bonds.
And so if they sold off
a whole bunch of bonds right
now, there'd be huge supply.
There wouldn't
be a lot of demand
because there's so much supply.

(23:04):
But in six months or 12 months
or 24 months,
all of those countries would
now have this demand
to start buying again.
And what happens when there's
this all this demand
and they want these
Treasury bonds.
What could the president do?
The president could step in
and say, I'll make you a deal.
I'll sell you more bonds.
But if you want to buy
a ten year
bond, I'm going to sell you

(23:24):
the ten year bond at,
at, five year bond yield.
I'm going to make you
take a discount on that bond
if you really want them.
And if there's enough
demand out there
for these bonds,
the president
may have some leverage
to basically sell
more expensive bonds for cheap.
Yeah,
but what percentage
of those bonds
are they buying directly

(23:45):
from the government
versus just secondary market?
We just had an auction.
What was it like a week
and a half ago,
you know,
and oh, shocker,
if go look at that auction.
Where there were two auctions.
Sorry, two auctions,
but the
it was the highest
foreign demand in history
for U.S.
treasuries in history.

(24:06):
They actually they had
so much demand
that the yields actually
came down during the auction.
Because bonds
stabilize foreign countries
currencies.
So what happens is
when they're having market
sell offs and turmoils
and their bond markets
are crashing, other countries
buy our bonds
to actually stabilize
the bond market crash

(24:27):
in the United States.
So let's say
we have a bond market crash
that's actually
significantly worse
for a lot of other countries.
And the bond vigilantes
is what we're talking about.
So other countries
being bond vigilantes,
selling off bonds
to penalize the U.S.
government for actions
they don't want
this happened in the 80s.
In the 90s?

(24:48):
Well, the government stepped in
and basically said
the fed stepped in and said,
we will stabilize markets
any time we have bond vigilantes
to make it
so they wouldn't do it.
So because of this and doing it,
it was a very clever
thing to have a bond vigilante
who was like,
I don't like your policy.
And they were actually
really afraid
of private,

(25:10):
institutions where they go,
the government.
President,
you're not doing something
we like.
We're going to sell off bonds
and really hurt you guys.
And then that's
when the fed came in
and stepped in and said,
we will stabilize the markets.
We will not allow
bond vigilantes
to change
our underlying currency.
And I think that would actually
if China did that,

(25:31):
I think that would like
help the president
and his cause.
I think you would say
this is economic nuclear war.
China is going after us, right.
So the Fed's going to buy bonds
and we're going to
go after them.
But that's been
the real bond
vigilantes has been a thing.
They were in that 80s
the early 90s.
And it really took

(25:51):
the fed coming in and saying,
we won't allow it
for it to stop.
Yeah, that's a rumor.
I heard rumors that the,
I don't know how much stock
to put in any of these rumors,
but that the,
the administration
were going to start
buying some of these bonds
to to get these deals down.
And they were sort of
going to be starting a
I forget the word
they used
calling the the notes back,
basically buying up
the bonds themselves,
since the Federal Reserve

(26:12):
doesn't look
like they're going
to be reducing rates
anytime soon.
So I don't know if that's
how much weight
you can put on that,
but that would be
an interesting strategy
to for the government
to start buying back their own.
It's like a stock buyback.
Yeah.
I think the important thing here
is to realize
that we
talk about the stock market,
and the stock
market is important
to a lot of us

(26:33):
who invest in the stock market.
And we get terrified
when the stock market
starts to drop.
We love it
when the stock market goes up.
It's good
for 401 K is in our investments.
But there's this whole
other market, this bond market
that has a much bigger influence
on our daily lives.
Because it's what, again,
sets interest rates.
It sets mortgage

(26:53):
rates, it sets car loan rates,
it sets credit card rates.
And so understanding
how again, maybe nothing
nefarious is going on here,
I'd say
there's probably more chance
that there's nothing
nefarious going on here
than there is something
nefarious going on here.
But it is important
to understand
how the bond market works.
And,

(27:13):
and this is something that
if you're running the country
and you're setting
economic policy,
you really need to be thinking
about what
the risks are and, and where,
the US has exposure
and, the bond
market is one of those places
that, again, probably not
catastrophic exposure,
given that, that,

(27:33):
the vast
majority of, of our bonds
are held by people in the U.S,
which is great.
But there is some exposure
there and certainly,
that as we saw last week,
movements in bonds,
whether it's from
another country or just
from normal market
stuff,
can get really scary

(27:55):
interesting.
And I want to throw one
final thing
out here
for my fellow underwriters who,
who listen to this podcast.
Just so because misery loves
company here.
But we when we underwrite
deals, we have we look at this
what's called
a sofr forward curve.
And that's just a prediction
of where
the overnight funding rate's
going to be.

(28:16):
Which more so is
tied to
the actual fed funds rate.
And I've never really seen
anything like this
when I have to plug this into
my underwriting model.
Where to Jay's point,
the fed can control
the front end interest rates
somewhat,
but once it gets
to the long rate and they can't.
And so what we're seeing
is with this forward curve

(28:36):
is that
the front end of it
is what they can control.
And you could see
it goes down at a
at a predictable rate of them
dropping interest rates,
but then it hits a point
in about like a year where they
they can't control it anymore.
And the curve has to fit
what the current long
and interest rates are.
So all of a sudden
the curve just takes off.

(28:57):
So if you see this,
if this forward curve,
it goes down like it
normally does and it bottoms out
and usually it levels off
somewhere near
the bottom, maybe a little bit.
And it just instead
it just takes
off, keeps going off
up to the right
and it ends off,
it's still going up.
So, it's, it's
one of those weird times
that we just
we know that
this is not a normal time.
And I think what

(29:18):
the conclusion
we're coming to
after discussing this is that
it's just a volatile time
for both bonds and stocks.
And it's
I don't know about you guys.
I don't want to be in
volatile market.
So people are probably
just a little bit skittish
to put their money
in either one. Yep.
And unfortunately,
Jerome Powell came out today
and basically said,

(29:39):
he and the fed
are not going to step in
at this point.
And really do anything
about the volatile markets.
In his words,
the markets are doing
what you would
expect them to do.
And there's there's
lots of stuff going on.
And so if we were hoping
for a bailout from the fed,
if we're hoping for a rate cut,
basically,

(30:00):
unless there's
other economic data
that supports cutting,
the fact that the,
the market's going down
and bonds are going up
isn't going to be
the thing that drives them
to actually take any action.
Well, we'll probably do
an economic update
next week,
but just a quick one where it's,
14% chance of a rate cut in
May and a 61% chance of a

(30:20):
rate cut in June. So,
but that's been volatile, too.
That's been
everybody knows
nobody's ever bullish
about a rate cut
in the upcoming one.
But everybody assumes stuff's
going to change after.
Sure. It'll be better.
Yeah, with more luck and no.
Chance of a rate cut next month.
But after that 100% chance.
I'm sure that it'll happen.
Yeah. Okay.

(30:40):
We should start discussing.
I mean, I'll tell you what.
The chances are a rate got zero,
but, like,
what are the chances
of a rate hike?
Like,
what's that 5050
to 2 to one against like.
I mean that's not to discount.
No chance.
I'm I'm
putting close to zero chance
that they're hiking.
You can't hike into
what's going on right now.
I thought at the beginning
of the year,
you know, it's

(31:01):
just like I said last year,
like, rates
aren't going to go down.
I thought there was
more of a chance of them
going up.
I don't think so anymore.
Yeah.
After the whole tariff thing.
No, not a chance.
You can't hike
into this volatility.
Yeah.
I think next week
we can talk about the
the tough spot.
The fed could end up in over
the next couple of months.
And Jerome Powell
we've been talking about it
on this show for a month or two.

(31:22):
And Jerome Powell
finally came out today
and said yeah,
we could be
in a really tough spot
in a couple of months.
And so,
let's make that a topic for you.
Yeah.
He like,
let's make sure next week
you talk
about the fact that he won't be
in a tough spot much longer
because Trump
apparently is going
to replace him.
So he's not even gonna have
the trouble anymore.
We can talk about that, too,
I think.
I think he's going to be the.
Next year though.
His his term runs out in 2026.

(31:43):
And they're just like for show.
They're saying,
oh we're going to start
the selection process now.
But they're not
going to boot them.
They're just going to wait
till his term runs out.
Dude, the Justice Department.
Is looking into it.
They're looking at the
legalities of it. We'll see.
I just picture the guy from
Wolf of Wall Street.
Belfort, a Jordan Belfort.
I'm not leaving.

(32:07):
All right.
Actually,
I think it's better for Powell.
Powell can blame it
all on the tariffs
and everything now. So.
But All right.
Let's speaking of tariffs.
Should we talk about it
for the 30th time
I mean it's all everyone's
talking about the tax on tax off
that came of before.
So last week
though we actually saw
some reprieve
where tariffs

(32:28):
finally got a 90 day
kind of just stay of execution.
With the exception of China,
which now has a
I can't keep
can't keep up with is is it
1,000,000,000% tariff on.
G gets infinity three infinity.
Yeah.
It's
I don't know what it's at now.
The administration would claim
that this was all
negotiation tactic.
This was part of the plan.

(32:49):
But the end goal of what
they're trying
to get to still remains
a bit cloudy.
And just like every politician
and news reporter out there,
we on this podcast
have our own theories
as to what the ultimate plan is.
But, first, AJ,
why don't you kind
of tee this up for us
so we can talk about it?
So it's been, crazy
last few weeks.
It seems like it
just changes every single day.

(33:10):
So it's only been a few weeks.
Why does it feel like
it's been six years?
Why?
I hate it
if people say like,
oh, 90 days, that doesn't,
you know,
that seems like a long way away.
Trump's administration
has only been, what, 85?
It feels like it's
been a decade.
Yeah.
Yeah.
It's, changes daily.
Sometimes multiple times a day.

(33:31):
All right.
So since the
overall changes have been made,
we had the,
I guess pause.
You could say.
Right, that,
took place
now, China was the one
that was obviously accepted.
Who knows what's going on there.
They just keep going
back and forth.
So it's like infinite.

(33:51):
We have a 10% baseline tariff.
Across
pretty much everyone.
And then outside that,
they're supposedly
be doing
individualized negotiations
with different countries.
Everything's on pause now
for the time being.
As of right now, we have a

(34:15):
think here five
that five different countries
that have, pulled this up.
All right.
So we have
a five,
five different countries
that have now come to the table
and refresh it. It's up to six.
I thought it was ten.
I heard ten. Text.
Yeah. No I'm kidding.
I'm kidding.
I was like,
if you if you refresh it like.

(34:35):
Check Truth Social
AJ come on you. Gotta be up to.
Shake it. List it.
So we've got,
the elimination or
mass reduction of tariffs.
We have five countries
that have agreed upon that.
The reduction came from,
I think it was Cambodia
who went from 35% to five.
Other than that, we have active

(34:56):
negotiations
that are currently taking place.
We have 50 countries
that are negotiating
out of the active negotiations.
We have roughly
that are at the table
negotiating their tariffs.
That gets
20 something as of right now,
including Japan,
Vietnam, Italy,
India, Australia,

(35:18):
on and on and on and on and on.
So the pause is supposed
to be giving leeway
for the negotiations
to take place.
Five countries have come out
and already
agreed upon
or said that they will eliminate
or reduce to 5% of the tariffs.
The pause is supposed
to give way for that.
And then after the pause,

(35:39):
we'll see what resumes.
China was
obviously not included in that
because they
want to punish them,
so bad actors and they'll
just keep duking it out for.
Can we just avoid getting
in pissing matches
with dictators
like he has to answer to nobody?
He we do realize that, right?

(35:59):
Like he can make his
his citizens suffer with.
Yeah. He'll make them starve.
Won't be the first time. Yeah.
Like they're they're.
Like he got sick. Like.
Literally he's like,
I will just let him starve.
I'm just like, we've got.
We've got like, Congress
that needs to be reelected
in like 18 months.
And we've got,
you know, I got
I got a infinity.
And we have and.

(36:20):
We have people
who are going to protest
and loot and riot and stuff.
And like, we have laws
that are going to prevent. Them.
From like being beaten
and thrown in jail.
So his.
Friend the French will just.
Give up. Right. But China now.
And and the other thing is
like we already saw this
the last time Trump
put tariffs on China.
Right. Like what did they do.
They shipped all their [..]

(36:41):
to Mexico
and then Mexico
exported it to the US.
So like what's stopping them
from doing that?
Again I don't
I guess
I don't get like 145% tariffs.
Like they'll just ship it
somewhere else
like Russia
did it with the sanctions
with all their oil.
Right.
They they sent it to
India or whatever.
And then India sent it back out.
Like what's
what's stopping
them from doing that?

(37:02):
I guess I don't,
I don't get like this whole
like massive tariffs
on one country.
I mean might might you.
Yeah. Go ahead.
You know, I just
but basically we have, you know
there's two factors
but they've state
or what they're trying to do.
The deficits is
obviously a large one.
And I think the picking on China

(37:23):
trying to get the president,
I don't think it's picking on
you're not picking on China.
China has been
the biggest abuser
of the relations.
And that's been a stickler
for the administration.
And to say abuser is
an understatement.
And this is not something
every single president
has talked about.
This Obama talked about this
at length,
where China was a bad actor,

(37:44):
a bad player,
and wanted to do something
about it.
This I mean,
Bush, it's been
this has been forever.
And so this was something
that was
everybody just knew
when agreed upon.
Nobody's did anything about it.
Corporations stole IP.
It was abusive.
I mean, there's

(38:04):
no other way to put it.
And, that is why
this is the target.
So they're the biggest abuser.
They said, this is done.
We're over is
who knows what it'll lead to.
But the other countries,
they get a chance to negotiate.
We're not negotiating with China
as of now. We'll see.
Yeah, I think that's the
I mean,
I think everybody's

(38:24):
talking about that,
that that's really the end game.
And the question is, is tariffs
the proper tool to fix that?
That's the question out there.
And and maybe he's doing it
with all these other countries.
And he's actually stated that
I think he came out
yesterday saying,
you know
anybody who cooperates
with China
they're going to be sanctioned.
And so it's kind of
using a leverage
on the other countries
so that they don't
they don't help China out.

(38:45):
They really want to.
I think it's clear to me
that they really want
to isolate China.
But everybody all these
you know,
and I
look, I don't do any business
which I'm kind of
worried about my Amazon friends,
nobody's been
talking about that.
But all these folks are selling
stuff on Amazon.
You know, where they buy
all that stuff, right?
It's from like Alibaba
and, you know, in China.
And so
those tariffs going on
I don't know how you're going
to see a lot of Amazon
sellers go out of business.

(39:06):
But yeah,
I mean I think that's ultimately
what he's trying to do.
And and it sounds like he's
putting some pressure
on the other countries
that, that if they,
you know,
they don't cooperate
with the U.S.
and not deal with China,
they'll they'll either
terrorism them
or use a tariff as the tool.
I just don't know
if that's the right tool or not.
And what I don't know
what else you could do,
I guess I don't I don't know.
And I think that's the problem,
to be honest.

(39:26):
We're okay.
We can't fight in the courts.
There's no court system
that's available to us.
And so what we can't
I mean, really,
you know, when you look at it,
what do you do?
What does the government do?
There's such
limited tools outside
extreme measures
that you can, I guess,
push on pain points will say.

(39:47):
Hey, here's my issue.
I learned this lesson
back when one of my kids was
three years old.
We're on a road trip,
we're driving,
and my youngest son had this,
this stuffed animal,
Froggy doggy.
It was this.
There was this stuffed frog,
and he was hitting my other son

(40:08):
with this stuffed animal.
And I got
for some reason,
I just got so frustrated.
And I turned around
and I said, you do that again,
I'm going to throw Froggy
Doggy out the window.
Five minutes later,
what did he do?
He hit his brother
with Froggy Doggy again.
My wife looked at me and said,
what are you going to do?
And I knew I wasn't
throwing this froggy

(40:28):
doggy out the window
because my son,
my son would never sleep again.
He would never. He just.
He wouldn't sleep again.
I was in a no win situation.
I made a threat
that I was hoping
I wouldn't get called on.
I was hoping my bluff
wouldn't get called.
And now I was in a really,
really tough situation.
And I'm concerned that
that's the situation

(40:50):
we are in with China right now.
So, one of you guys
just mentioned how,
Trump is saying to other
countries,
if you cooperate with China,
we're going to make
it harder for you.
The EU came out today
and said,
we're not cutting off China.
And so now what is
what do we do?
Do we cut off China and the EU?

(41:12):
And when other countries
say, hey,
the EU is not cutting off
China, that's,
that's let's, let's,
let's join that pact.
Does do we cut them off
at some point?
We're going to be in a situation
where we're at a stalemate.
And if she doesn't
pick up the phone and call Trump
and Trump doesn't
pick up the phone and calls
and we get three,

(41:34):
six months down the road
and their
economy is an absolute shambles.
Are we going to let our economy
go into absolute shambles?
Is that something
we're going to do,
or are we going to give in?
And neither of those obviously
are optimal solutions.
We don't want to give in
because then we look weak.
We lose a ton of leverage
with all these other countries,

(41:54):
but we also don't want to follow
through on this threat of,
we're going to let this go on
as long as possible.
My
what I suspect is
going to happen
is and I was
we were texting
today about this, I suspect
and I've been saying this
for a few months,
that Trump had two ways
to play this whole tariff game.
He could have gone with

(42:15):
this whole trade game.
He could have gone
with diplomacy
and tried to negotiate
without the massive tariffs,
gone to Congress and said,
hey, I need your backing here.
We really need to to fix this
and hopefully
get Congress on his side.
And then I think
he has four years to do this.
If he can kind of get
everybody on his side
the other way is Congress.

(42:36):
I don't care what you think, I'm
leaving you out
and other countries.
I don't care what you think.
I'm just going
to push on your pain points
until you give in.
That might work,
but he's only
got about six months
to really use that strategy
before Congress says, hey,
if the economy's going to shit,

(42:57):
we're going to
we're not going to get reelected
next year.
We're only 18 months
from the next elections.
If the economy goes to shit,
we're not going
to get reelected.
I'm not going to get
I'm going to lose my job.
And I suspect
there are a lot of GOP
senators and congressmen
and women
that are going to say, hey,
I'm not losing my job
because of tariffs.

(43:17):
And so in a few months,
I suspect there's
going to be a revolt
from Congress
where Congress says, hey,
we're not going to allow this
to go on any longer.
And this might be
kind of Trump's
golden parachute.
It could be Congress
coming in and saying,
hey, president shouldn't
have this authority.
Tariffs are historically
the purview of Congress.

(43:37):
We've been nice.
We've let him do this.
But now we're taking our power
back. Sorry, Mr.
President,
we're not letting you do that
anymore.
Legally, we're taking this back.
And now Trump
can throw up his hands and say,
I was willing
to ride this out forever.
But Congress tied my hands.
And so I suspect
that's how
this is ultimately
going to play out,

(43:58):
is that that Congress
is going to step in,
and maybe
it'll even be negotiated
behind closed doors
and we'll never know about it.
But I think Congress
is going to step in.
They're going to say,
we're not allowing this
to happen
any longer, and Trump's
going to throw up his hands
and say, I would have won.
But Congress stepped in and.
The Joe Biden student loans.
Right? Right. Yeah.
You know, I wanted. To, but.
I wanted to,
but they want to let me.

(44:18):
Court Congress. Exactly.
Same exact thing.
You think I mean,
I don't quite understand
the I'm not
you know,
I'm not into as much politics
as you are, J
but, like,
you know,
there's a Congress person
who's up for reelection.
Want to go and get reelected
going against Trump.
How's that going to play in his
his or her district?
My, I think
it's easier to get reelected.

(44:41):
Going against Trump than it
is going into
an election in a depression.
And if I think what Jason, it's
going to get easier. Right.
Like if you
if things get worse and worse
and worse
in six months from now,
then it will be easier for them
to go against Trump.
And this could be an offering.
Again, I think this could be
an off ramp for Trump.
This could be his way
of basically

(45:02):
getting out of the stalemate,
but being able to blame it on
somebody else.
I actually think that would be
a brilliant move.
He gets to back off a little bit
and he doesn't have to
look weak.
Yeah.
And two years from now,
if anything wrong
happens, he's saying, well,
if you were to
let me go through with
the tariff.
It would have been. Awful.
Absolutely.
It was, it was,
it was all Biden's.

(45:23):
And so I guess my question is
though, like, is this
is this his endgame
just been China
or is this kind of like
he has multiple end games.
He just like uses tariffs
to kind of,
you know,
whack as many nails as he can
or like,
does he have one
unified end game
like in mind
with this whole like.

(45:45):
The deficits have been a problem
with Trump forever.
Forever
like when you
see the trade deficit
or the national deficit.
The trade deficits.
He has had an issue
with this for so long
that goes back
a long, long time.
And to, you know, at this point,
he's not wrong.
You know, Warren Buffett
famously said it,

(46:06):
you know,
when he was warning
about the trade deficits,
he's like,
we have a very big farm.
He's like,
we're rich family with the farm.
Every year
we want to consume 4% more.
So what we're doing
is we're taking
part of that farm
and we're mortgaging it off.
And then we're consuming more
from somewhere else.
But then they own
part of our farm.

(46:27):
And he's like, eventually
those mortgage rates
start to go up
and you have less
of less production
from your farm
because somebody else
has rights to it.
And he's like,
that's we're selling off
pieces of our economy,
you know,
as a as it goes
on, as the trade deficits
and we're paying for it.
And so I don't
I don't understand
what does that mean
selling off

(46:48):
pieces of our economy again
in, in, in pure economic terms,
China is selling us stuff
that has economic value.
We're handing them U.S.
dollars that have
economic value, a fair
trade, dollars
for products or services.
What's what's the problem there?
What do you mean
what's the problem with sell?

(47:08):
With us getting charged
more than them.
But no no no no no,
let's let's let's ignore
the the US getting charged
more than them.
Unless this is the whole
thing with with China.
We're talking about
a trade imbalance.
What about a trade and a trade
and a trade deficit?
China selling us
$100 worth of their product,

(47:29):
and we're only selling them
$30 of our product.
There's a $70 trade imbalance.
That's what I'm.
Getting trouble
getting $70 worth of product.
Understood.
But that's what that's
what the trade balance is.
So I'm with you
like when you when we talk about
selling off
piece of the economy.
I'm not following that either.
But because it's just
it's not actual dollars
that we're owing.
It's just there's
just an imbalance or mortgaging.
To to AJ's point,
we're mortgaging the country.

(47:49):
What does that mean?
What does that mean?
We're mortgage?
I don't understand
what that means. We're debt.
Like when we sell treasuries.
We're selling treasuries
that are backed by our country.
But what does that have to do?
But what does that have to do
with the trade
imbalance with China?
Here, I'll read you
what Warren Buffett said.
So because it's like going.
Further into deficit.
It just means
what it really does.
The issue is
that you've got more dollars

(48:10):
that are going in
one direction to the other.
I think that was
one of the big things
that Buffett always talks about.
Yeah, he says it affected our
our country has been behaving
like an extraordinarily
rich family
who possesses an enormous farm,
an immense farm.
And in order to consume
4% more than we produce,
that's the trade deficit
we have day by day,
been selling
both pieces of the farm

(48:30):
and increasing the mortgage
on what we still owe.
And then he goes, and.
I think that's
more of a commentary
as to towards
like how we pay for things than.
Necessary. Yeah.
Because we pay them basically,
we pay them with IOUs
like we don't have stuff, so.
We have to.
And so we have a 4%
trade deficit.
And so also does the point.

(48:51):
It also does point to
we wouldn't
have as big of a problem
if we produced more in house
and exported more.
We actually are.
So there is
production is important.
So if we're sending
our companies
are going overseas,
our dollars
are actually building
infrastructures
and investing in other
countries to produce.
So we don't get the benefit

(49:13):
of that production
infrastructure, anything else.
We only get the benefit
of the consumption.
But that's not China's fault.
China's making stuff
and we're buying it. I mean,
Buffett also
says I
run a trade imbalance
with my dentist every year.
I pay him money
and he pays me nothing.
So is the right answer.

(49:33):
Well, that's not fair
that I'm paying my dentist money
and my dentist doesn't
pay me anything.
In order to rectify that,
I'm going to go
get my dental license
or get my wife
to get to to go to dental school
so that we can do it
all in house.
No, there's nothing wrong
with paying somebody else
to provide a product or service
that they can
that they can provide.
That's cheaper
and more efficient.

(49:54):
Talk about this before.
Though, like it is,
it is different
and it's obvious.
It's obvious to that.
It's I think it's no,
that the fact
that China is an adversary,
like a.
Major one
that steals, abuses us
economically, but.
That is a completely separate
discussion
from a trade imbalance.
We have a trade imbalance
with Canada.

(50:14):
Is that is that just as bad?
Is there a trade imbalance
with with China?
No.
That's why we have a massive
trade war with China
going on in Canada's past.
But no, no,
we have a big trade
imbalance with Canada.
Also,
if the issues
the trade imbalance,
why is why is Canada
not just as bad as China?
Okay.
The trade imbalance.
But we don't have an imbalance

(50:35):
in tariffs.
We don't have an embarrassing.
But that's not
what the administration's
complaining about.
The administration
is complaining
about the trade imbalance.
They're saying that
we need to be selling them
as much stuff
as they're selling us.
And until we get to
zero differential
in what they're selling us
and we're selling them
that we're

(50:56):
getting taken advantage of.
And I don't understand that.
Are you. Mad?
I don't I haven't seen that.
That's been said.
Scott Besson has said that.
Peter Navarro has said that.
That he wants
to equal out the trade.
100%. Wow.
And I think
and I think you're getting that
for Warren Buffett.
Because when the trade,
what happens
in the trade imbalance
is that there's more dollars
obviously going to,
let's say with China,

(51:16):
more dollars going to China.
China then turns
around, buys treasuries.
So essentially we're
sending out treasuries,
which I think is
where the mortgage,
the mortgage analogy comes from,
because we're basically
providing them
with Treasury bonds.
And they
they're holding those with
their IOUs.
So we owe China
more and more every every year
when we have a trade imbalance.
That's what I know.
That's Warren Buffett's
complaint about the deficits.

(51:37):
But we also.
Talked about this
before that it is
I think it is
partially just
our reliance on China
who is an adversary.
Right.
It's okay for us to be,
you know, run
trade imbalances
with with friendly countries.
And they're not to
the point of the
what's it 5X1
way with with China.
A fair trade imbalance is great,
a fair trade imbalance.

(51:57):
People that aren't abusing
that we don't have
radically different tariffs.
So the market incentives
are wildly skewed, like
when the playing field
is skewed.
Not in our favor
and we are actually
supporting it.
That's when the imbalance
becomes a problem.
It's not a fair trade.

(52:18):
Yeah.
Well, I in a country
that can manipulate
their currency as well
and they do a lot of shady
there.
That this is once again
every president
for how long has been like
this is an adversary.
This is a massive problem.
They're they're corporate
sabotage is incredible.
And we've
we've discussed this
previously because China

(52:38):
you know the back
and forth with
China has gone back.
You know this has been a month
and making where they've China
has gone back
and forth with the U.S.
But I guess my the one,
the one thing
I want to hit on here
is, is there
some other motivation here
as to this whole trade thing?
I know, Jay,
you mentioned something about,

(52:58):
Maria Lago Accord. Yep.
As a possible and end game.
Is that still something
that we believe is possible,
or does it seem like he's
kind of moved away from that.
I think.
Well, and
so that's not something
that he has even talked about.
And I think this
this warrants
a whole separate segment
on, on on another episode.

(53:19):
But basically
the Mar-A-Lago accord
is based off of this document
that an economist wrote
150 page document
that basically suggested
that one way
that we could potentially,
reduce our debt
and put ourselves
in a better fiscal position
moving forward.
Is essentially
we strong arm
other nations

(53:39):
around the country,
into renegotiating our debt.
So basically,
we go to China
and we say, you've got
$1 trillion in debt,
$800 billion in debt.
And instead of keeping
$800 billion in debt,
what we're going to do
is we're going to take
your 800 billion
in in Treasury bonds,
and we're going to replace it
with 100 year bonds.
That pays 0%.

(54:00):
And if you want to trade with us
and you want to be
in our good graces,
you're going to accept that.
And that was kind of the thesis.
Well, yeah, I
think that's a
really important topic
that not a lot of people
are talking about.
The whole Mar-A-Lago
accord thing.
There's a lot of
different nuances to it.
A lot of different options
that they can be discussing
at a Mar-A-Lago accord.
And so like maybe let's,

(54:21):
let's push that next week.
We'll make it.
I think it needs its full topic,
maybe in a full episode
talking about that
and why
why don't we do that next week?
What do you think?
I think it's a great idea.
One of the things we're
we are good at on
this show is
I think we introduce
a lot of topics
that people are hearing about
for the first time.
So I suspect,
this is going to be
another one of those topics
that we're going to talk about

(54:42):
and everybody is going
to look back in
in a month or two and say, hey,
I heard that there first
on, on Drunk Real Estate.
The one thing I don't think
we've, we've talked about,
though, that is making rounds in
the news,
is the fact that China knows
that they can't win a straight
up tariff war there.
You know, they export
five X to us.
We export to them.

(55:03):
So that math is
not going to math.
I don't think we're going to
try and win
a war on math with China.
But what they've realized
is that's not the only way
they can hurt us.
And they've started doing
interesting things like,
I've read that there's certain
rare earth minerals,
that they,
they do
like 90% of certain minerals
that are,

(55:24):
used for electric car batteries,
chemicals for manufacturing
jet engines, lasers,
spark plugs, things
like that,
that they provide the world
with 90% of.
And they haven't straight up
said like they're
they're disallowing the U.S.
from doing it,
but they've
all of a sudden made
those required
registration minerals

(55:45):
so that U.S.
companies now
have to apply to be registered.
And they're basically
cutting out
us, U.S companies
from doing that.
So that's not
the only way they can hurt us.
Yeah.
And here's another fun fact.
I mean, certainly,
that's something that we,
we look at
and we say, okay,
where else
can we buy
those minerals

(56:06):
and those rare earths from,
what other countries have them?
Fun fact,
one of the biggest suppliers of
those is Ukraine.
And so,
if everybody
remembers back
a month or two ago,
we were trying to negotiate,
with Zelensky to,
to get, minerals deal
so that we could get access
to a lot of their minerals.

(56:26):
Very possible.
In retrospect,
I don't think
any of us realized it
then, but in retrospect,
you got to wonder
if Trump realized
that he was going to want that,
to kind of cut off
some leverage
that China was going to have.
So you think sometimes
people show up in a suit
this time?
Well,
I think he's got more leverage
now that he knows that,
we need those minerals

(56:46):
more than we did
a month or two ago.
But, yeah, I,
I don't know
a whole lot about, like,
what that supply
chain looks like.
And do we have enough
of those minerals
to last us
two months or six months
or three days?
I don't know,
but I have to assume that,
there's some amount of time
that this is going to be bad

(57:08):
for us in the U.S and so do we.
But do we do
we need to isolate those?
Because, I mean,
maybe I'm mistaken here,
but when you get to the level of
reciprocal tariffs
that we're
we're at with China
and China, the U.S.,
China I mean it's
basically a block, right.
Who's importing
anything at 125% tariff?
I mean,
nothing's going
to get traded to those price.

(57:28):
You chicken feet right?
I mean, maybe if the
eggs go back up in price.
But, I don't know.
It's a to me it right now
it's like nothing's
going to be coming into the
I mean has anything
been coming in?
I guess it's more of a question
I haven't really looked at that,
but I mean, what
what in the world
is going to be coming in at 125
on a well or 245 on.
All right,
and then what's
going to be sold into China

(57:49):
at 125 or what's.
As a as I brought up before,
what's just going to go around.
Right.
It's going to go to one
country first.
It's going to go to Cambodia
who just negotiated their 5%.
And then Cambodia
is going to export it to us.
So I guess
like to me,
anything above
a certain percentage,
it it's going to cost them less
to export somewhere else first
and then to the U.S.

(58:10):
Right. Right.
I mean China will
basically use the playbook.
They're going to
start diverting. Right.
They're going to try to the it's
essentially planned economy.
They're going to go
for the long term.
They're going to stay in.
They're going to divert goods
and services
to try to lower the financial
destruction on them.

(58:30):
By still getting around
and starting
to get goods and services out.
So that way they can
hamper that a little bit.
And then from there
they're going
to keep subsidizing
their which they are.
They're taking on debt
like crazy
because they're subsidizing
manufacturing
all those private sectors
that are getting ready for it.

(58:50):
And then they're going
to start using things
like rare earths.
They're going to start
leveraging their connections
with other countries,
everything to apply
on the United States.
So they figure
we can
try to avoid most of the pain
we can hold in longer.
And then we are going
to leverage
the key
things that
the United States needs that
we don't.

(59:11):
I think one. Of the biggest.
Is to plan, right.
Like they
they Trump already
kind of play this playbook
the last time by saying
we're going to do tariffs.
And China was like,
oh we have exposure here
and they've been preparing
for it.
It's the same thing
with Russia when,
you know they annexed
Crimea event
first before invading Ukraine.
They saw what the world
response was.
And they're like,

(59:31):
oh shit, we know
what's going to happen now.
And so they were more
prepared for it
the next time, and we couldn't
hurt them as badly.
Well, and this goes to show,
I think, a lot of things,
one thing
that's really interesting to me
is the social impact of it.
And as far as politics
or anything else
where I think
in the United States,
we didn't realize the risk
we had.
I think if you went back

(59:52):
before Covid,
nobody understood it.
All the risk of
what was produced here
and what was not produced,
it wasn't something
anybody talked about.
Whereas today
it's actually a really,
really big thing.
And to hear people to hear,
wait, China can just stop.
We don't mind here anymore
because a lot of
those rare earth minerals,
guess what we have?

(01:00:14):
We have them in our state here.
A lot of them.
We can't mine them.
So you have a lot of people
that are going.
We are now
have a geopolitical storm
with another country
that's giving us key
essential things for security.
Like a lot of these minerals
go into technology and security,
which we have.

(01:00:34):
We just don't mine
because why
we want to give them
the dirty work and us to get it.
And we keep everything
nice and pretty
and say
we don't destroy the earth,
even though we do.
It's just through them.
But I think that all of a sudden
this is opening up these huge
issues where
it was great
when there was nobody

(01:00:54):
that could even question
our power or authority,
nobody would ever step up to us.
It was just implied,
you're going to do
whatever we say and be grateful.
That's not the world
we live in anymore.
And these security threats
like we found out from Covid
and everything else,
these are real threats.
And the whole system
that it's being run off of.

(01:01:15):
We have all these weak points
as a country
that we've never had ever.
And that is changing
the way
people are looking at global
trade now.
And that just wasn't around.
Everybody's talking about
we're sitting here
talking about it.
We didn't ever talk about this
5 or 6 years ago,
and I don't think
that's going to end.
This is
I think we now look at it

(01:01:36):
and I don't think it's a oh,
Trump's gone.
That's not going to
end because the system
still being cheated by China.
And now look at the amount
Americans that now realize
all the things that China's
doing to basically game
at intellectual property,
the trade imbalances,
currency manipulation,
the IP theft, on and on and on.

(01:01:56):
People didn't talk about that.
Or if they did, it was like,
oh, that's annoying,
but we just get so much cheap
stuff, we're okay.
I don't think this
stuff's going to end
and how we view the world
now, where we have Europe,
who's at war
and the exposure that we have
when we're paying
for all these war.
The American conscience,
publicly, I think, has shifted

(01:02:18):
from all of this.
But the American conscience
also likes cheap stuff,
like they don't want
to pay more money, right, right.
And so one of the reasons,
a big reason
and maybe less so lately,
but a big reason is the labor.
Right.
And so people
used to go to China
because labor now Labor's gone
a little bit too expensive
and they're actually
moving it to Mexico.
But that's the main reason.
So if we want to continue
to pay $15 an hour minimum wage

(01:02:38):
and they're paying $15
a year
over there or $15
a month over there, then
what do you think's
going to happen?
And the only way to fix
that is to artificially make
our prices
more expensive or their price
more expensive
in order to compete.
But that just means
everything's to
be more expensive. All right?
People love to be
outraged on the outside. Right?
But when it comes down to it,
if it affects their life,

(01:02:59):
then they're not going to be,
you know,
you read about all the
the working conditions of Amazon
and everyone's like,
oh, that's awful.
But if you're like, okay,
well let's add a
$2 to every one of your orders
that all of a sudden
everyone shuts up, right?
And you know,
like we don't the Uber Eats
delivery driver,
you don't want to see him
pull it up to your,
your house
all sweaty
and running around and stuff.
You just want

(01:03:19):
your food to show up
and not have to look at it.
So it's it's
just where it comes from.
I mean, you got the idea from
China
went negative for the first time
since guess when 19. 90.
Hundreds of billions
leaving China and headed
to where
other countries
to build infrastructure.

(01:03:40):
So in the short
term,
China may win in the long term
unless we come to
some really good agreements,
things like that.
And just I think that this is an
I mean.
Well,
while maybe there'll be one big,
beautiful agreement,
as we know that,
Trump likes to do
is big, beautiful

(01:04:00):
one big beautiful thing.
Maybe that's
that's the Mar-A-Lago accord.
We'll talk about it next week.
Hey, can I give you a
can I give you a fun fact?
Because I was just,
a quick Google search,
name the country that is number
eight on the list
of most rare earth
elements, like, that, access
or export of rare

(01:04:22):
earth number eight on the list.
Idaho.
Greenland green.
It's all making sense now.
It's all making sense.
It's coming into view.
Trump's had a plan.
On.
We could do an episode on
Greenland, too.
Actually,
I I've been reading that
I went down the rabbit hole
in Greenland
for for a half hour.

(01:04:43):
The one time.
We need to do another
predictions episode.
I want to
I want to do a prediction.
Watch
what's going to be
coming through of Greenland.
Which one's
pretty good prediction.
First,
we can't do a prediction show
before we do a conspiracy show.
I want a conspiracy show
so badly.
All right, but not next episode.
We already have that locked up.
Don't forget.

(01:05:04):
Okay.
Top ten.
Mauricio,
you got something for us?
The top.
The top ten.
Fastest top tens on the show.
No.
So,
we were discussing
about bond yields and, like,
where people would
put their money,
and so I thought it'd be
interesting to go through,
other.

(01:05:25):
So the ten year
treasury is the one
we always worry
about other countries
and what their yields are.
And I'm going
to start going down the list
of the highest yields.
These are just
major bond markets
and in other countries
the highest yields.
And I want one of you
to stop me.
The first one
that if you
if you thought that the US
dollar was going
to keep depreciating

(01:05:46):
the first one,
you would actually
put your money in.
Okay, right.
It's the turkey's
got to be on there somewhere.
But let's. Go. Yes. Exactly.
So but like you're not going
to put your money
in Turkey, right.
Even if you thought
the US dollar was going
to keep depreciating.
Right, right.
You you're not going
to put it in Turkey.
So when you get to that way,
when you get to
the first one, is always.
The first one that you guys
would put your money
in under the premise

(01:06:06):
that you believe that the US
dollar is going
to keep depreciating.
Well, you got
you got a hold,
you've got to hold the
because I assume
you're gonna buy their bonds,
you're going to hold the bond
to maturity,
let's say ten years.
No, you don't
have to necessarily
hold in maturity.
Well, we'll say a year.
You got to hold it for you.
Okay.
You believe that the US dollar
is going to depreciate
for the next year.
So you're going
to put your your money
so you owe it.
So I'm not buying their bonds

(01:06:27):
I'm actually just
literally buying the currency.
We're doing a currency swap.
Well.
Well no you're buying
their bonds
at the yield
that that I'm going
to I'm going to give.
You got to really spell it out
for your money.
Got it. Yes, please.
Argentina's on the list too.
Right. Argentina's on the list.
He's got Maria.
She's got to know all the rules
before he signs off. Yeah.
All right.
So number one,
as you said,
Turkey current yield 32%.

(01:06:50):
Would you put
your money in there.
No takers next. Year.
But but you.
Could we could go to Turkey
on vacation. Right.
And then that would make sense.
You're making this
a long top ten here.
So Russia 15.5% yield.
You putting your money there.
No takers.
All right.
Brazil I'm thinking yeah.

(01:07:12):
That's not yeah.
I've got to go fast here
Brazil
14.7% yield on their ten year.
Anyone?
Nope.
South Africa 10.9%.
Yield
still Mexico 9.8% yield.
No.

(01:07:32):
Okay.
Now it gets interesting though
India 6.4% yield anyone?
No one's doing India.
Even if you think the US dollar.
Is going down.
All right
I think this is where everyone's
going to jump on.
United Kingdom 4.6% yield.

(01:07:54):
If the United States
goes down though,
the UK is tanked.
All right, we'll keep going.
New Zealand 4.5.
There is there.
An Iowa
I mean at this point
you're just putting it in
the U.S you're losing
And and
guess who's next on the list.
The United States.
Yeah 0.3
percent on their ten year yield.
Yeah.
So I guess the exercise was

(01:08:14):
where else
are you going
to put your money guys?
Okay.
I'm still
I'm still thinking about I'm
still thinking about Russia.
I might fun fact.
I did that
I, I was
playing hockey in Russia.
I don't even
I like it is embarrassing
how big of a risk
I took doing this.
Looking back at it.

(01:08:34):
But I was making a lot of money
in Russia
and that was
I made that money right
when they annexed Crimea. Right.
When that kind of mini
war started.
And so
the value of the Russian ruble
went from 33 to 1 to 60 to 1.
So the value of my money in U.S.
dollars that I was making
got cut in half.

(01:08:55):
It like almost overnight
in the matter
of a couple of days.
So money was leaving
Russia like crazy.
And so the banks,
you could just keep your money
in a bank account.
And some of the banks
were paying 17%
just to keep your
money in the bank. Now,
banks would also fold sometimes.
So,

(01:09:16):
you know, I,
I was like, I'm not like I.
I put my money
in the Russian government bank.
Spare bank.
It's worth
it's run
by the Russian government.
So it wasn't going anywhere.
And they were paying a
10.5% yield.
So I kept my money in there
for almost a year,
in Russia
before I brought it back.
And so I got a 10% yield.
And the ruble never came back.

(01:09:38):
And I was like, I'm
tired of waiting.
And I brought my money back.
Yeah, just
where was gold on that list,
by the way?
What? The yield on gold.
That's what it.
You know, like,
can you predict the yield
on the ten year
yield on the gold?
Because I'd love to hear
what that is.
Any hypotheticals? Jay?
I haven't looked at for anyone.
Have I done this one before?
Stop me if I did this one.

(01:10:00):
You have an option of taking
a 100 question test.
Fourth grade math test.
You get a 95 or above
$1 billion,
you get below a 95%.
You die immediately.
I'm.
I'm taking the test,
but I'm kind of cheating

(01:10:20):
because I have a daughter
in fourth grade right now.
So I feel pretty confident
in my ability
to do fourth grade math.
I've been sitting with her
all week. Yeah.
And she has her PSA
or Pennsylvania state exam.
So we've been going through it.
So I take the test.
I also was but like.
Well,
but let's
I don't know if it's
fourth grade,
but like
I think my daughter was doing it

(01:10:41):
like I forgot
how to do long division.
Like without a calculator.
Like, you know, the whole,
the whole little thing
or the little wiggly thing
and the number of like, I,
I mean.
I didn't I'd probably.
It's when she brought up
because she's doing
long division now
when she brought that up,
it took me a moment.
I screwed it up the first time.
But I know conceptually enough

(01:11:01):
what the answer should be
just by doing it off
the top of my head,
that I was able to work
myself backwards
and figure it out.
But you're right,
you haven't done it for a while.
It's tough.
All right,
you you taking the test?
No billion dollars.
$2 billion for ages.
Like you just go to his local
Idaho bank account
and just makes the withdrawal
like it's a big deal.

(01:11:23):
I wish.
Jay, would you take it or not?
It's, I I.
I'd have to. Go back.
How do you propose.
You do this all the time?
You propose the question,
which means you've known
this, like,
at least hours in advance,
if not days in advance.
And still, when I come to you.
Hum Hongo.
I don't know you.

(01:11:44):
You had a week
to think about this.
I'm going to ask ChatGPT
to do 100 question things.
Fourth grade math exam.
We're going to.
We're going to circulate it. I'm
behind it.
I think fourth grade.
You actually,
the thing is,
is that enough of it?
You could like
even though they make you
go through the process of it
and nothing you can kind of do
in your head still,

(01:12:05):
that you would be able
to go back and check
and figure out things
that you've done wrong.
And like the only things
that you won't know
are like shapes,
names of shapes
and like you would have to,
but you could,
as long as you get a day
to study like you would be fine,
I think.
Oh, by the way,
there's time to study
if there's time to study them.
Yeah,
I thought it was just, like,
just cold.
Like you just look right now.

(01:12:25):
Like right now, you.
Reshape the shapes, will get you
some of these shapes, things.
You're like,
oh, if you have time to study,
then forget it. I'm in 100%.
No, I thought it was just like,
right now it's on your ratio.
What's a. Scalene triangle?
What's what?
It's not exactly.
So.
So I just asked, ChatGPT.
To give me five
fourth grade math questions,
and now that I see them,

(01:12:46):
I would 100% take that bet.
I.
Yeah,
I don't even know
what it looks like.
So that's a great question.
Actually.
Like, what are those questions?
I don't know.
I mean,
the one that you just have
to really take your time
because the way they get you
is they have
they're all about word
problems now.
And the word problems
trip, trip you up.
But it's but
are we talking traditional math?
Are we talking this core,

(01:13:07):
this core thing
that they were taught.
That core,
the stuff
that's going on right
now, it's it's weird.
All right, all right.
They always do.
You think the word problems
are messed up?
Anyway, I take a test.
By the way,
the answer
to a scalene triangle.
All three sides are different
lengths. Yes.
Versus an isosceles
triangle versus a,

(01:13:29):
Are we really doing
math questions right now
on the podcast?
Yes. Fourth grade math.
There is not.
One soul that's still listening.
Hey, I'm excited.
They're like,
oh, that reminds me.
I got to go home.
I can't recall, stranger.
I got to talk about math.
Let's go.
All right.
Plugs.
Mauricio,
what do you got for us?
Dr. Daly?
Yeah,

(01:13:49):
I see, I see
are we sell in sponsorships now?
J so I had somebody
reach out to me.
A friend of mine, you
know, Fred Moskowitz.
He he asked me if
he asked me if,
we were selling sponsorships,
and we hadn't done one yet.
And I said, you know,
I'll do a test with you.
I'll let you do it for free.
You just have to give me,
data on, like,
the clicks you got.

(01:14:09):
And and all that sort of stuff.
So, he was our first sponsor.
He didn't pay us anything,
but, but, yeah,
he he got like, 200.
It's like a democracy
or a dictatorship,
and you're just making
these decisions on your own.
I know,
AJ, were you consulted on this?
No. Honestly. China.
Yeah. Yeah.
So? So it's so funny.
I was
I was going to consult
all of you guys

(01:14:30):
when you came, when you,
when you called me up to,
to offer
help on the, on the newsletter.
But I. Still.
I know you all the time, Jay.
All the time. It's.
Last time I. Checked, AJ.
AJ had my likeness
or on that newsletter.
I mean, we have full rights.
To the.
Name and likeness. Of the dude.
You do?
I told you,
you've got ownership.

(01:14:50):
AJ, I saw
you got past something.
I feel like you got something
good to plug here.
Yeah, so I don't remember it.
So we're doing,
a whole thing on YouTube
as well as our,
newsletter we got.
But one of the main
things that we're doing
is articles talking about
which everybody should,
go check it out.
It was on fortune

(01:15:10):
from Warren Buffett.
That's America's
growing trade
deficit, is selling the nation
out from under us.
And here's the way to fix it.
And we've got to do it now.
It's fascinating
to read this today.
Like,
you know, to actually sit down
and go through all his numbers
and why he was
freaking out
about the trade deficit

(01:15:30):
and what could happen
to our nation
and the problems
that it would cause when we
when we consume
more than we produce.
And that keeps going
and that means of production
is lost.
Fascinating. I'm confused.
Are you back
plugging someone else's article?
Yeah, yeah.
Yeah, I'm
going to write about it,

(01:15:51):
talk about it.
But it's just
I think it's fascinating today
to read his analysis of it.
I'm a Warren Buffett fan.
To the to that
stuff for listeners.
There's still four of us here.
Official plug
you plugged into the,
he I know he's
the one who
usually plugs the, the,

(01:16:11):
newsletter he's got.
I'm going to plug
my social media.
I've actually been
posting a lot to,
to to social media.
So, just got investor
on Facebook,
Instagram and LinkedIn.
Wow. Okay.
LinkedIn actually leaked
LinkedIn, the sneaky one.
LinkedIn.
You wouldn't actually
you could post, like,
kind of long form
thoughts and stuff. And yeah.

(01:16:32):
I, I post the same stuff
on LinkedIn
that I post on Facebook,
like long form articles
which I write
almost every day now.
So actually
so that's an
interesting question
because that's where Ashley does
most of her posts.
Is LinkedIn
really
about 10,000
followers on LinkedIn?
But I've never done
any call to action.
So I don't know if,
I have any benefit from that.

(01:16:54):
Nice.
Well, I will plug bad
ass investor Ashley Wilson.
Go check her out on LinkedIn.
Go check out Jay on LinkedIn.
Go check out Ashley.
I'm sure they linked together.
Probably through a
company or something.
But, yeah, like,
actually, she
she loves
doing the LinkedIn stuff
because it,
she gets the most engagement.
People actually write you
back, ask questions,
do shit like that.
And it's not just like slave

(01:17:16):
girl comment on,
Instagram.
So I've yet to get a
slave girl comment
on any of my Instagram posts.
No, no, no, I yeah, well.
I got you J I got you.
Thank you AJ.
All right.
Next week we all back.
All back. Yep. We're here.

(01:17:36):
All right.
I'm bringing them all back.
Yeah, I will my drinks.
Actually,
my drinks are not gone.
I gotta go finish this, but,
I still got to hit the head, so,
I will see you next Thursday.

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}93. Bond Market Breakdown – Is the Fed Losing Control?