Episode 005: Forward guidance’s end

(upbeat music) - Welcome to the Thematic Edge. I'm here with my good friend Mark Farrington of the Global Watch Tower. And we are back to discuss the latest developments. It's been a busy two weeks, Mark. And I'm going to make you do a lot of the work here because you've been really focused on one of the issues that I think both of us have been sort of outliers on in terms of, you know, how geopolitical realignment would happen. You know, from my perspective, it's really been about this whole, you know, as I've described it, "Lakhaza Nostra Americana Forum Policy." And yeah, it's rough, yeah, it's tumble, but at the end of the day, that is real politics and it would actually work. You have come at it from a different angle about the international relations, their and strategy behind all of these things, but we get to the same place. So I think I'm going to ask you to review what happened last week at the ASEAN meetings and the APEC meetings out in Asia when President Trump was out there. And then I think we need to of course talk about what's been going on with Central Banks because as listeners will know, I've been a very firm central bank critic, you've been a significant central bank critic as well. And I think we are getting to a point where the rubber is going to meet the road. I've been saying that for a while, so I could be wrong here. Maybe this is more hope, even though I actually don't hope for failure for my colleague at Central Banks, but I just, this cannot keep going on. So let's start with ASEAN and APEC and what I think is really interesting is that you found the whole ASEAN meeting and actually the lead up to it over the last several months to be far more important than the meetings between, or the meeting between presidents, she and presidents Trump. So why do you feel that? And like what did you think was accomplished at the ASEAN meetings and how does that fit into this sort of train of events that led there? - Okay, excellent. That sounds like a good topic to kick off with. Well, I think that you and I have spent a lot of time and energy articulating after liberation day that there was a strategic plan behind all this madness and chaos that was announced in Q2. And some of that plan started to be revealed, I think, during the summer when people started to understand that you can't have a trade war with China without working on the redirection of exports and all of the supply chain issues as well. So in a sense, you needed all of your trading partners, allies and competitors alike to adopt a similar strategy towards China, otherwise China would just circumvent as it typically does with sanctions and trade barriers. And so I think ASEA for me culminated in a big signing ceremony of that thesis where our previous view of bifurcation maybe 10 years ago would have naturally assumed Southeast Asia was in the US sphere of influence. That was debatable, I think, up until last week where China had become such an important part of everyone's GDP in Southeast Asia through the value chain of imports and exports eventually to the West that many might have viewed countries like Malaysia, Cambodia, et cetera, even Vietnam citing China on this so-called trade war. But as you saw from the deals that were signed, they basically recognized the same risks that the US was flagging in its tariff strategy. And in particular, the critical minerals event which happened were China began to constrain exports through export license was recognized as a risk by everyone including all of those in its value chain in Southeast Asia. So the critical minerals deal with Malaysia and with Thailand, MOUs with Thailand and Vietnam and critical minerals deals with Malaysia and Cambodia, I think they all just validated this risk and this strategy and confirmed that when it comes down to it, Southeast Asia is going to stay in the West orbit. That's where the end consumer is that they need to service and they're gonna have to manage the China risk somehow. So I think that was a very, very big win for the geo economic strategist behind Trump. And so I would say also that countries like Malaysia were probably a little bit worried about standing up to China. They have perpetually been on the fence and they're very critical of the West on a lot of social and foreign policy issues. So I think I got the impression that they were happy to use Trump's presence there in Kuala Lumpur as the kind of bully that forced them into it so that they could go to China and say, "Well, it's not us, it's those bloody Americans forcing us to do it." And that gave Malaysia an out that it probably wanted anyway. And then I think also the some of the other MOUs like with Cambodia and Vietnam on critical minerals processing or whatever, these might not end up being that critical and amounting to a lot at the end of the day and they may end up being cards to be traded as the US tries to assert its control over the Caribbean Sea. Because really these are countries which are deeply aligned. Cambodia and Laos and Myanmar in particular, they're unlikely, I think, to swing to the West and we'll eventually stay very close aligned to China. But you know, we've got this nearer broad sphere of influence battle going on between the US and China. And our Caribbean is China's Southeast Asia and the US entourage went right into China's backyard and signed these amazing deals ahead of the Xi Summit. So that allowed Trump to then move up North to South Korea for the AIPAC meeting and be standing there with a pile of reciprocal trade agreements and MOUs that showed China that the world understood the export risk that China was posing and I think it helped him tremendously gave him leverage in the deal. So that's why I say it's so important, not necessarily more important than getting the final deal with Xi, but I just don't think you were to go off the same final deal with Xi unless you had all that success leading up to it. - Well, so what would you say? I mean, a lot of people would say that, the US actually backed down, right? They gave away all sorts of things. I mean, one, you can respond to that, but at the same time, my position has been all along. I still don't understand why China is frankly capitulating as much as it is. And that's not to say that the US hasn't capitulated a lot. It's just that I continue to view China's critical position in so many parts of the global supply chain as immense leverage that if they really wanted to, they could shut down US industry, European industry, others within a matter of weeks. And it's not just rare earths, it's in pharmaceuticals, it's in microchips, not just the auto chain, but every part of the manufacturing process refining of all different types of commodities throughout including oil for a lot of places like Southeast Asia, frankly. Why have they not brought to bear those tools more forcefully? Why have the Chinese capitulated as my question, but there is this other question, all sorts of other people would say, well, what did Trump get? It seemed like he actually gave away stuff there. So how do you answer both of those criticisms? - Okay, I'll do the shorter one first, which is the idea that Trump gave up more than he received. The fentanyl tariffs, which as people need to remember were the first tariffs announced. And one of the reasons I think Trump's administration fell so confident in announcing, unilaterally, the fentanyl tariffs in the beginning of the year, is because who can disagree with cracking down on a societal killing drug? The Chinese have a history of anti-drug use and it's very strict enforcement of their laws on drugs. It seemed like an era you could actually get agreement on pretty easily. The pushback against that was many people believe the China was using fentanyl as a sort of hybrid warfare weapon against the US population, which you know, may or may not be true. I can't really comment on that, but I think that if you stand across or sit across the table from President Xi and say, look, we need you to collaborate on drug enforcement. This is something that's important for both of our countries. Let's be reasonable. I think you have a better chance at getting an agreement than some of the other topics. And remember, Secretary of the Senate has said publicly a number of times that if imbalances go away, tariffs are meant to melt away. Well, for sure the fentanyl tariffs is the one as supposed to melt away the quickest. If we get the compliance, like we did from Mexico and not enough of Canada, but mostly from Canada and China, the fentanyl tariffs should melt away to zero. So I think Trump just offered a little down payment on that. It was only 10%. There's still a long ways to go. And I think he will continue to use that carrot approach to entice greater cooperation from China. And I think China, in the end, will agree that that's a problem that's not serving anyone's interest and will collaborate on. So that's one point. On the bigger picture story that you flag, I think that it gets back to what many of us called was this own goal on China's side by announcing export controls globally on critical minerals. I mean, this affected batteries and this affected components and a whole host of just ordinary consumer goods across nearly every country in the world, including its own value chain in Southeast Asia. I mean, that is really what galvanized consensus in ASEAN about what the risks were because it was so generic and broad-based. As a retaliation against the US or something incredibly specific, NVIDIA's number one most powerful black-well chip being controlled and an expansion of the export control list entities and things like that. So I think that they both took a step back from this stance on the entity's list, the so-called 50% subsidiary rule for the US and China on its global critical minerals export controls. So I consider that a kind of wash, both walk back, but it doesn't walk back the messaging. The US was attempting control an extremely powerful technology component that has a whole host of military applications and China was trying to control batteries and inputs into what is basically the modern economy. So I think that that's a win in the US regardless of a calculation on net terror for net exports control. And so that's why I don't consider this to have been a China victory in any sense and to answer your question about leverage. I wrote a piece last week on weaponizing dependency. I think that critical minerals episode validated that theory, which is you can create dependency. It's an extremely powerful tool. But as soon as you use it once, the game is over. Because now every country in the world will develop a national security policy about reducing dependency. So unfortunately, I think China has shot themselves in the foot with that one. Their dependency strategy as a form of global leverage has now peaked. And they will see that leverage slowly decline now from all countries, but in particular, the West and the coming years. I don't disagree with that point, by the way. I will say that it was interesting that you said, you'll answer the shorter one first and went on for five minutes and then answered the longer one in 30 seconds. But-- [LAUGHTER] I self-control. Far clearer in your mind, why the Trump was winning. But anyway, I don't disagree with this point that once you reveal that, you've basically played your hand. But the issue is that that's realistically going to take-- could take five, could take 10 years for some of these things. And when you look at what's going on in Europe, I mean, I wonder whether it's going to take a decade or more. Their response to all these things seems to be incredibly weak. And they are dealing from a very weak hand, I think. And indeed, one of the events of the last couple of weeks that I thought was most interesting was this next spirit, the Act Go Right, where the Dutch government came in. I believe at the behest of the Trump administration, actually, if I recall correctly, it's not-- It's in the same direction as policy. And they produce these cheap microchips that are used in all sorts of different equipment, but particularly are important to the auto industry. And a Chinese company bought them out some years ago, and the Dutch used some obscure law to be able to go in and seize the company. Unfortunately, they didn't take account of the fact that all their factories are in China. So the Chinese said, OK, fine. We'll seize the factories. Yeah, but they were just trying to comply with US policy. I don't think it was an economic decision. Otherwise, yeah, they would have recognized it. This is to this point that China has this whole-- it's a multi-layered segment that's going to take years, years to overcome these things. And I've always felt that this is the battle that the Trump administration is fighting, is that the West has allowed itself to be put in such a bad position that it's going to take years for them to come out of this. And over that period of years, the US or China has a significant advantage because the West has just allowed themselves to get so far behind on so many different things. And I think you're right on that. But when people flag what looked to be a moment of-- I don't want to say comrader. That sounds too deep. But a moment of understanding between she and Trump as they kind of stared at each other across the table, I think they both understood that a aggressive trade war is detrimental to both sides. So it's almost like they're fighting the war a little bit honorably. So China was allowed to preemptively export and dump everything it could in the first quarter before liberation day, as was everyone else. And now the one-year reprieve on critical minerals is going to give the US and surely the Europeans and Asians all an opportunity to stockpile critical minerals. So they're going to imports of critical minerals from China is going to go through the roof everywhere in the world for 12 months. And then who knows? Maybe by that point, China will understand the leverage is mostly going anyway. I'm not a technical expert. But my understanding is it's about a two-year time frame for closing the gap to say 50% on critical minerals. Whereas the technology gap between say NVIDIA's black well chip and the nearest indigenous competitor in China is something more like 10 years. Now that might just be public relations, propaganda, et cetera. But it is viewed as a technological hurdle versus just a time, effort, energy, and losing a regulation hurdle to catch one critical mineral. So I view the latter as an easier challenge to overcome. I don't know if that's accurate or not, but that's my view. I have my skepticism about that. What I will say-- and again, I'm going to be criticized as being some sort of Trump, Acolyte, or cheerleader. I would say that the whole experience, all of this absolutely validates everything that everyone's been complaining about about the Trump approach of broad tariffs across the economy. The fact is you don't know what's critical in your economy. Why communism doesn't work or state-controlled economies don't work as well as market-controlled economies? Because bureaucrats don't understand all the different things that are actually necessary. So the whole approach where we just focused on specific things that bureaucrats identified was a problem because all of a sudden you found, oh, wait, there's another whole area over here. We were totally unaware of. And this is a classic example of it. You have to re-industrialize broadly across the economy. There's just no getting around that. Olding a big tariff wall around the world's biggest economy was a really smart move. And I think this has been validated by the experiences the last few weeks. I think you're right on that. And I think you're saying-- I mean, we've mentioned this in past podcasts, but we're seeing a more frequent and broader set of anecdotes that suggest former close partners and allies call it Europe and the Anglo-Saxon countries, et cetera, plus North Asia and the Middle East. One by one, there has been both security decisions and economic decisions in the same direction as the Trump-grand strategy. Either pushback on Chinese dumping, controls on certain types of exports that they had never had on before, or new security arrangements that show that they are no longer going to formulate a strategy on pure dependence on the US. And at the same time, they're not swinging into the hands of the US enemy. They're literally building new regional relationships that allow them greater autonomy from both sides, et cetera. So I don't want to use the term compliance, but I see this kind of conversions going on globally to the type of new world order that Trump's policies signaled was about to happen. Well, look, I actually think, especially when we get to Central Bank Actions, things like that, we're both going to be patting ourselves on the back a lot in this podcast. But I'm just going to pat myself on the back on this one. I mean, I think this all is in line with all the research I did on global entropy. And as you talked about, both of us were pointing this out around liberation day, the sort of horrendous reaction you had around the world to Trump's policies. And one of the points I made at the time was that actually most of the rest of the world had a very positive view of the US and of Trump around this. It was really the Western allies in their elite who blew up at this point about my La Casa and Australia and the iconic point is that being nice, I know people would like to think about it that way, but you can go on all day in terms of your international relations studies. It's actually people act in interests. And the US coming out and forcing people to face their interests and pushing China to expose themselves as misaligned with all these countries' interests is what swung this all around. And so it was all actually very predictable if you stop paying attention to silly financial times headlines about everyone being upset about these things and actually looked at what are the underlying interests. This was just straightforward. And then cultural ties, strong cultural ties have been very important to this. The countries that have been most culturally tied to the US, the Anglosphere, as much as people like Albanese or Mark Carney or even Kierstharmer have criticized Donald Trump and are offended by him personally. Those countries have moved along with the US more than anyone else simply because the cultural ties are actually really important and they matter. So interesting because when you put it in that context like you did, it makes me think that the humans have become as dependent on large language models as all of the quants because somehow people's opinions are affected by what has repeated the most. The narrative that gets repeated the most and the country that has the most attention focused on it all get a natural amount of waiting in people's analysis. We don't analyze China in the same minutia that we do the West because China doesn't release anything. It releases state curated official documents and press, et cetera, or in the worst case propaganda. It's not an open book the way the West is. And the open book is much more attractive to the mainstream press and journalist world where they can get access to documents and write something. They don't write on China not because it's interesting. It's just because it's not enough there for them to write something compelling and new. And people shouldn't misunderstand that as one side having all the problems and the other side not. It's just more information about one side than the other. And I think then if you just look at the data points that then really do matter, the deals that are being made, the strategic decisions that are taken, the performance of the economies, the performance of the risks assets in the different countries, it's quite easy to conclude what's really happening. So China has, I'm not one of those people that predict a China collapse every two or three years, but I can say that China has, sorry. - You've been very good on that, by the way. - Yeah, because China has tremendous resilience against certain types of problems. But then there's a few problems that it doesn't have resilience again against. And with the property sector collapse and the MPL's building up a bit in the banking sector, this is one of those areas that the state-driven economy isn't very effective at cleaning up. And the same will be this big reorientation of the global trading system. This is not one that it will respond quickly to and effectively. It's going to struggle too. And so more than this we've written about that, instead of throwing it in the category, well, China has all the leverage because it has 80% of the critical minerals. China has all the leverage because it can produce 30 million EVs and nobody else can et cetera. Those are actually overshoot positions that need to correct and by correction, that means profit loss and profit loss to stay down enterprises and consequences et cetera. But market isn't ready to write that or focus on it or punish it for various reasons. And to bring it back to the markets that we care about, ultimately, a state economy is not dynamic enough to restructure internally through animal spirits or private sector competitive instincts. It only relies on macro levers. And historically, it's been currency devaluation. China had a massive currency devaluation in the '70s and in the '80s and then the last big one in 1994. And since WTO entry, it's had only small adjustments. I think 5% and 2015 when it was trying to open its capital account a little bit to comply with IMF analysis that was the prerequisite for entering the SDR. And then another small devaluation during the first trade war in 2018, 19, less than 10% though, eight or nine. So China has not had a big currency devaluation event for a very long time. And I think there's overshoot and all these geoeconomic areas that it wants to exercise leverage is now a problem rather than a strength. And the macro lever that corrects a lot of those is currency devaluation. And I think that is not a very attractive option. And eventually it might be, I think, I'm going to give you credit here. We should move on to monetary policy. But I'm going to give you credit here that China's ability to do this. So the reason why it's able to absorb these massive losses because they have created a closed loop system where the state suppresses consumption and creates excess savings in the economy that is then monopolized by the state to pay for all the losses of that excess capacity. And because they own all the means of production, they own all the means of finance, everything within that closed loop. The CCP has total control over that. That's why you don't face a Japan-like scenario. You pointed this out to me more than a decade ago. I said, this is why China is different from Japan in the 1980s and '90s. You don't have seven Zai Bahtzu. You have one. And-- One Zai Bahtzu. --loop that doesn't care what anybody else in the rest of the world. So there's no question this will be a massive economic loss through time. And the Chinese people are going to suffer from the Communist Party's wasting of all these resources over decades. But there will not be a financial crisis as a result of this unless there is some sort of revolution in China that breaks that closed loop system. Now, you're absolutely right. That's why I said, a currency devaluation is the safety valve so that you don't have a financial crisis. I don't think China would ever have a financial crisis as you said, too much control. It has the DeCronian control to go in and just take all the MPL's off of the banks, stick them in an AMC, and recapitize everyone, and put them back in business the next day, which you don't have that option in the West. So it won't have a financial crisis. But it can't control the equity market because equity market-- --it doesn't have one more step matters. This is what I'm saying. So let's move on to the next topic. Because I think it's very related to this. I mean, the point that you were making earlier before we went off on that about this difference in information-- Yes. Information asymmetry. We know very little about what's really going on in China. And what you get is curated data and commentary. The Communist Party wants to allow you to see. Whereas in Western societies, for all our complaints about it and for all the things we could complain about, lack of transparency and things like that, overall, you do get a lot more information. And that does have a big effect on beliefs. And I think this is one of the things where when we think about the central banks in the last week, part of the criticism that I think you and I have long held for what's been going on with central banking is they are trying to-- and I don't want people to take this the wrong way. But they're almost trying to act like the Communist Party of China. We're going to control the message and tell you you're going to go in this way. The problem is they don't actually control everything. But there is this illusion of control that has developed. And I think it's really led market pricing off the rails in many key respects. And we're coming to a point where I think the rubber is going to start to meet the road here. I've been saying that for a while. So again, I could be totally wrong. But we are getting to a point where it's really hard. We did have a pretty strong reversal in the Fed last week, even though they don't want to admit it. So we had the G3 central banks. We had the Fed, we had the B.O.J. We had the ECB interestingly. So even though the Fed cut-- and there was-- I think this gets to exactly this sort of feedback loop between markets and the Fed, where the Fed says markets know what they're talking about. So we should listen to them. But then we guide markets and tell them what they should think. And it's this circular loop. We're going to cut 25 basis points next week. Oh, well now it's priced in 25 this month. We need to cut. That's it. They did this. But then they did actually try and change their forward guidance. And I think we can have an extended discussion about forward guidance and QT and all those things. But the net effect of this was you did have a pretty radical shift in the US yield curve. You didn't have that happen in Europe or in Japan. In fact, actually, crazy enough in Japan, if you look at the OIS curve, it actually came down slightly, whereas the US yield curve lifted quite significantly. And the European curve was sort of in between. The front end didn't move. But the back end tried to move it in sympathy with the US. So let me start with what do you make of what we learned from Central Banks last week? And then let's get into, I think, what I've turned being is believing how beliefs actually drive market prices. But when it contradicts fundamentals, it will ultimately break. And that break is not going to be pretty. So let's start with last week's meetings. What are your thoughts around them? OK, that's interesting. I thought you were going to tell me that the Central Banks Communication Policy is a bit like the CCP's Communication Policy of China, which I think is a fantastic analogy, which I've never thought of. But yeah, sometimes you can become a hostage of your own communication policy. And for sure, that's the case for China. So maybe it's not such a funny anecdote, actually. It's probably very true. In the case of Japan-- and that's almost the title of the sub-stack I wrote this week-- is they are trapped by their communication strategy. And they're trapped in two ways. I know you like to make the point that the Central Banks have trained the markets not to expect a rate cut or height at the next meeting unless they're told in advance. And so-- and this is a very poor, deformed version of the original idea behind inflation targeting and forward guidance regimes. Because everyone stops analyzing the reaction function and the real economy and just only sits in line and waits to be told whether there's going to be a move at the next meeting or not. Japan has that problem because the stock market penalized a governor away to so badly last year that-- obviously, the Bank of Japan is a bit traumatized by that. They've had guidance from the cabinet since then that you need to prepare the market. You need to improve a communication. So now we can never-- there's no such thing as a live meeting where we don't know which direction it's going. If it's a live meeting, it needs to be 85% discounted. Otherwise, it's actually not a live meeting. So that has become an unfortunate inhibition in the market. But the other aspect of communication, which I think you were alluding to, which is more important, is the forward guidance is not so much about their analysis of the economy anymore. It is their analysis about where they are in relation to their inflation target and where they are in relation to inflation expectations. And then all this theoretical debate, rather than an update about what they got right or wrong in the high frequency economic data for the last couple of months, and what shocks they see on the media who rise and that are going to probably intervene in their plan or their rate path. And so the communication between the central banks and the market is just extremely poor now. It's not very fruitful. And I would say to the degree that the Fed had the courage to sort of change the narrative, was driven a little bit by its echo chamber. It wasn't so much, as you said, vigilantes penalizing it in the market with break even or eukers. It was more like respected economists and commentators writing about the Fed's seemingly failure to acknowledge that inflation is at 3%. One of the best headlines I saw is, in the FT, was has the inflation rate target been changed to 3%. And it was not a joke. It was written like, what else are we meant to deduce from this? And so I think the Fed did feel the heat a little bit, the intellectual heat, that they were negligent on this level. And then suddenly, not only did we get two dissensions from the FOMC, we got a lot of commentators come out and say, you know what, I'm not very comfortable with what the market's discounting on the Fed. And then we got the response and Powell, I think, looked very uncomfortable in his post-meeting press conference. Nobody's speaking with conviction and nobody's focusing on analysis of the real economy. And it's a problem in Japan and it's a problem in the US. And I can't really say on the ECB, because I didn't watch any of the press conferences. But I assume it's falsely there. There kind of been also a ran central bank at this point, anyway. OK. Sorry, all my European friends are going to hate me for that one. But look, I think that the underlying issue-- and you and I have, I think, been very aligned on this is that Ford guidance, all measures, has been a mistake, especially if you're a credible central bank. If you're not a credible central bank, then maybe it can be potentially useful. But all you're doing with Ford guidance is setting a benchmark for you to be proven wrong. And frankly, central banks have done a very poor job over the last 20, 30 years. I mean, I make this claim all the time. And it's verifiable. You can cut there. I've done a far better job forecasting the US economy, US inflation, and Fed interest rates in trend than the Fed has. I mean, you look at their revision schedule to the SEPs. It's just terrible. They are terrible. And yet, they insist on trying to guide markets with this. So you've got this on one side, that one, they're really setting themselves up for failure. But the crazy thing is is that markets have actually really bought into this. And I think push back if you want. I think this really reflects the last decade. So if you think about what really drives monetary policy, it's interest rates. What is your policy rate? That is the thing that far and away over anything else matters. The next thing is going to be something like actually the actual fiscal path, not the maturity structure of the debt, the actual fiscal path and what people think it's on. That will affect this and central bank credibility as well. Then you get to Ford guidance to QE and things like that. It's so far down the list of things that actually affect markets. But we went through a decade where interest rates weren't moving at all. Where because interest rates were pinned at zero, central banks or fiscal authorities could get away with seemingly unlimited fiscal policy. So people stopped thinking that fiscal policy had an effect. And so all of a sudden, everyone started focusing on, oh, the stuff that really matters is there. It's central bank rhetoric and these things that they're doing to try and manipulate the yield curve, which be really look in the data. They didn't. But people believe that. And to the fact that you see this, and we've had this debate on this thing before, where I say, look, these things don't really have much effect. And you push back and rightly. And I don't disagree with you that people believe they do. So they do. But that's always a temporary effect. And one of the things I'd point to is just look at the yield curve movements in the last year. Last couple of years, right? What were the big movements? The big movements where people's worries about Trump fiscal policy, swap spreads, term premial all go through the roof in April. And then as Terra for revenues come in, what's happened to all those things? They've started to come back. This last week's QT, the lead up to it, and everyone talking about ending QT? No effect. None. Really? None. So I do think that one big problem out there is that markets need to be disabused of this notion that the central banks actually know what they're talking about. And then that is going to force the central banks to start focusing on the stuff that you and I think that they should, which is, hey, this is what we're seeing in the economy. This is what our reaction function looks like. But we'll see what comes. And we're watching this just like you are. Here's what we know, just being transparent about that. Instead of trying to guide market pricing where they want it, because they're just going to fail. And I do think that I'm surprised it hasn't happened yet, given how badly their guidance has gone over the last few years. I mean, they've been wrong on inflation. Every single quarter, they keep getting it wrong. And then break even continue to believe that they somehow are actually going to get back to target with this logic. So I don't know. I've gone on a bit of a rant there. I mean, do you do a well deserved rant, in my opinion, because you're spot on in that. I think my past points that I made to you, which may have sounded like push back at times, but really wasn't, the two issues about forward guidance or more broadly, the communication strategy of central banks is that they-- like any new tool, they started to play around with it and come up with new iterations. And the iteration when they came up to make a time dependent forward guidance, in my opinion, was a compute abuse of the concept. Because when they started to say, we're not going to raise rates for one year, and we're not going to raise rates, even if inflation goes above our target. When they made those kind of time dependent commitments in forward guidance, it was like saying, the real commonly doesn't matter. Our macro models don't matter. We're going to ignore them, because that's how committed we are to underwriting this, resasset recover. I mean, you can't credibly give a message like that to the central bank. And then two years later, and the cycle say, we're all about inflation fighting. We're all about a hard money or whatever. The-- your audience is just going to look back at you and say, what? Aren't you the guy who just told me to ignore everything? Because it was full throttle to the floor, regardless of what the feedback from the economy was to be. And so I think that was a discrediting episode. And unfortunately, it lingers. You know, it's certainly lingers in the bank of Japan, where they're committing to normalize at this gradual path, regardless of what headline inflation and all the other inflation indicators are saying. And so then the other part of the communication strategy, which I think has deteriorated, is it was like probably a bit of a drug when they announced QE and when they announced the yield curve control. And when they announced twist, you got a market reaction from the announcement effect. And it looked powerful. But to your point, it never stuck. Eventually, the underlying fundamentals drove the shape of the yield curve or level of inflation, et cetera. And so the difference between the announcement effect and incremental adjustments to QT and QE are night and day. Nobody disagrees that the announcement effect is real. Markets will stop, take measure, stop loss or close out positions. But then eventually, they'll come back and they'll invest based on fundamental analysis. Those two aspects of the communication strategy are failures. And I don't know when the central banks will revise them. But that has to be part of the future in terms of restoring credibility. I think that's coming. I mean, look, I like your analogy about how they just just sort of follow down this path and they keep believing themselves and going on. And it almost reminds me of this story, nursery rhyme story, when I was a kid about-- there once was a woman who swallowed a fly. And then she swallowed a spider to swallow the fly. And then she swallowed a mouse to fall. And so forth. But this is exactly what central banks have done here. So if you remember, it starts with back in 2003, when the Fed had raised into the unprisoned level of 1%. And they said, hey, we're going to hold rates here for a considerable period. And then, of course, six months later, they were raising rates. And somebody said, well, fool me once. Shame on me. You fool me twice. Shame on me. And that's why QE became necessary. Because QE was basically a form of credible forward guys. Well, hey, I'm buying bonds. So I can't possibly be thinking about raising rates. And I think that they've shot themselves in the foot with that in terms of what happened in a 2021-2022, where they continued QE all the way past time for them to give it up. And then next thing you know, they're hiking rates at 50 basis point clips and doing 500 basis points over the next year. So I don't think QE will ever work the same way again, because they've actually destroyed the whole guidance mechanism from it. But there is this broader point that I keep coming back to that it was inappropriate in the first place. This was your point, right? That you can't make these commitments, because you don't know the future. And especially when they've been so bad at predicting the future. And so I think that is really gets to this point about, we are close to a breaking point here. I think it's been increasingly apparent to people that it was the press conferences, especially for the Fed, have gotten just ridiculously confused over interest rate policy. They can't seem to explain it. Well, we're cutting interest rates because the job market is telling us that, but we also know that the job market is labor constrained. Well, wait, which is it? Jay, is it this one or that one? And I think that fundamental problem, that they think that they control the path with their rhetoric, but then even explain or justify their actual policies is coming to a breaking point and to exactly your point, the people that they seem to care about oddly enough, they've started to get real criticism from even some academic economists. That, hey, what you're saying makes no sense. This policy is getting close to a policy here. And so I do really wonder, are we at the point where that whole view of central banks are going to, they're all mission and then the second great god of markets is markets themselves. Markets, bond markets, no. And yet, if you go back and look at history, bond markets have consistently got it wrong. They got it totally wrong in the 1970s. You lost money like mad in the 1970s, investing in bonds. - Yeah. - Want to say the bond vigilantes of the 1980s, got it right. The fact is if you look at the term premium, it took 30 years for markets to bid down that term premium, even though inflation came back down much faster than that. So I would say markets were even wrong then. Then they completely, they were so off sides in 2020, just so off sides. And here we are today, break evens, keep getting it wrong over and over and over again. And yet, people still want to rely on those things. So I do think we're getting to a breaking point. I mean, do you, am I wrong here? Am I finally going to get this right? - Actually, I think it's a derivative of one of the conversations we had a few podcasts back where I was arguing that vigilantes are alive. They're just not in the normal places, like term premium and break evens, et cetera. And now I think we might have to conclude that they may never come back in the break even or term premium space because that market is driven by some other dynamic, which we're not particularly aware of. And the vigilante form might be just public criticism and it might be replacement of all the governors with different types of people and shrinking of the size of the Fed mandate. You know, it might be like institutional reform is the vigilante market effect of this decade. Because I don't like you, I don't have confidence in the market punishing the Fed either. We've seen the stock market punish White House policy and White House responding, but we haven't seen bond market punishing and getting a response from the Fed. Maybe you could argue, you know, percent paid attention and he's been shortening duration and making, soothing press conferences ever since. So the bond market reaction in Q2 definitely elicited a response from the treasury, but I can't say that it did from the Fed. - Now you've seen none of that. So I do, and you know, sadly, they keep pointing to stable inflation expectations. The only thing that they can point to that stable is break even inflationate. Those are not inflation expectations. I will say this over and over and over again. Those have nothing to do with inflation expectations. Those are bond traders pricing of future inflation. Actual inflation expectations are set by consumers and firms. That's what drives inflation. And they're not in the bond market. - Yeah. - And by the way, if you look at any measures we have of those, they've all gone up. So how can they talk about stable inflation expectations and that it is this terrible broken loop between the central banks and markets looking at each other and reinforcing their own craziness? It will break. This cannot continue because actual inflation is going up. - Yes. And you know, we talked a bit about the 70s as an analog in the past. And for me, I have never been a fan of one aspect of the 70s analog, which is the second inflation spike that happens in the late 70s. I thought, surely it's not possible to repeat that. That there was too many structural events. The breaking of the gold standard earlier in the decade and then the OPEC forming and controlling oil prices in the latter half. So it was a very difficult period. And I sort of suggest that they can be forgiven for having gotten a wrong twice in one decade. But now watching this episode, I can really see how second bouts of inflation do take place so close to each other. Because the rationalization of the first episode now is borderline negligent. And the fact that we only have to raise Fed funds to 5% actually to break the back of the first inflation episode, if inflation expert fully break it. - Yes. And that's my point is that we never saw the disenquering of inflation expectations. But imagine if we had both the inflation shock and the disenquering of inflation expectations, the Fed would have to raise rates well beyond 5% and hold them higher, much longer to bring them back down. That's why historically, no one has ever messed with inflation or risked inflation expectations because the penalty for getting a back under control is so high. And I don't feel like the Fed behaves paying due respect to that potential penalty. - Exactly. And this is the problem when people say, well, you have a dual mandate. Yeah, but all you're doing is robbing Peter to pay Paul because if you screw up inflation expectations, and I'm sorry, I will argue that what you just said is not correct. They did allow inflation expectations to de-encour. They very clearly have. They're just not acknowledging it. And again, bond markets are not acknowledging it. That's the problem. - I see you mean by the actual inflation expectations. Have de-encour. There's no question about it. - I see. I think they're very lovely. - That's the problem. - In unemployment in the future, because they are going to have to raise rights to actual restrictive rates at some point. That is going to happen. And so, I don't know when it's coming. I do feel like we are kind of at an inflection point here because again, inflation, who knows when we'll get inflation data again, but it does seem to me pretty clear that inflation is accelerating at this point. And so that's going to happen. So what? Let me bring that back to a lot of people focused on the debasement trade and saying, well, you know, this is why we were all right to be long gold. I think you and I both have very different views of, you know, gold's appropriateness in your portfolio at this point at these prices. And certainly we've had a retrenchment there, but it's also been the case that, you know, and let's pat ourselves on the back again. You and I have been, you know, outliers on this view that you had a tactical retreat in the dollar following liberation day and that we were going to turn around. And, you know, I think we both identified over the summer. We've kind of gone the extent as far as it's going to go and the dollar is going to start turn. It's increasingly looks like we're right, you know, for sure, but it looks like we're right on that. That doesn't seem consistent with the debasement trade. Gold's a little retreat here. Yeah. So an interesting signal. What do you make of the debasement trade, gold? And if gold doesn't fit in there, what should people be looking at if you are worried? And by the way, you know, should be pretty obvious that both of us are worried about the path of monetary policy. So we're not saying the debasement trade is wrong. Yeah. How do you think about playing that so called debasement trade or policy errors by, I don't think just the Fed, I think across the board, the major central banks? Yeah, interestingly, the debasement theme, you know, predates the inflation episode, you know, even like 2019 and 20 going into COVID, the whole shift into cryptocurrencies was based on a debasement trade. And because they were looking at the stock of US debt and they were listening to people like Delio and Nassim who have always been protecting the end of US economy for the last 20 years that never happened. Great stock watches haven't they? Yeah, exactly. So debas, I throw crypto and precious metals and art and wine and everything, all the alternatives, let's call them the non yielding alternatives into that debasement trade. They become ever so more interesting when there is this huge tail risk of a collapse and the fiat currency system. Okay, hold on, there's also another critical element to all of those things. Yeah. In the world where you have zero or negative real interest rates as a discount rate. Exactly. And non yielding assets can actually appreciate. But all of a sudden when we move back to a normal world of positive real interest, what happened? Now the odd thing is why has gold so? So yeah, but my point is is that these narratives they have been building and gold has little bursts of activity along with crypto and other types of alternative real assets, et cetera. The most recent surge, the parabolic surge and gold and other precious metals starts with this asset seizure of the Russian reserves after the invasion in Ukraine where it is not, that is not a debasement trade. That is not a fear that capitalism will collapse upon itself through overspending and deficits. That is a geopolitical risk where countries can no longer safely put their assets in another country's custody. So that's conflating a couple of different concepts. And gold really took off. And it took off from a type of buyer that really hadn't been part of the story which were the central banks. And I would say that geopolitical risk management had on. It's perfectly fine for central banks, particularly the ones that were buying. Because the ones that were buying had very little gold reserves. Countries like Poland and Czech Republic, they lost all of their gold reserves during the period when they were part of the Soviet block. And after they were reintegrated into Western European economy, they didn't buy gold. You might think those two countries, especially the Czechs after the Nazis and then the Soviets, might learn that actually buying a bunch of physical gold to store isn't such a good strategy. OK, we can get to that point later. I wrote a point that gold seizures have a lot higher frequency in history than currency seizures. So that's a different point. But the people who bought gold were the people who didn't have any. The people who all of the central banks that have high levels of reserves, they bought zero. And they haven't bought any for 30 years because it's a zero yielding asset. It's not a useful-- you don't hold it for liquidity. You hold it as a strategic national asset and it yields nothing and you just store it. So that narrative was that part of the narrative was logical. When it started to become illogical, was when people after liberation day started to say, this is it. This is it. The US economy is going to collapse now. They've alienated all their neighbors and trading partners and they have so much debt. And they had the twin deficits issue. Fiscal deficit for 2025 of 6%, 7%, and a current account deficit of 6%, et cetera. And as a result, we were very near the collapsing of the dollar regime and about to introduce a new bricks-backed gold currency. Like that kind of hysteria was what motivated me to write and push back on the gold thesis. Because I already owned gold when that part of the thesis came along. And one way you can tell that gold is like Dr. Jekyll and Mr. Hyde transforming from being the most secure inflation hedge to a pure risk asset like Bitcoin is when Wall starts to become higher than equity markets and other real assets. So gold Wall started to spike and go through the roof, particularly driven by ETF inflows and things like that. And so it was clearly becoming a risk asset. And so it would not be serving any of the purposes that people were citing for the reasons to buy it and hold it in your portfolio. And it became a classic kind of pump and dump, very similar to what they did to Bitcoin just a couple years ago. But you see, Bitcoin fell, found a base, and is now pretty stable. Gold will fall and find a base and will be stable. Until the next episode of a systemic fear around the Fiat currency system and Western debt levels and all the other things that they have used to justify buying it, they will come again. The one difference, though, is now China has fully embraced gold. And China, as the second biggest economy in the world, and largest producer of gold, has the ability to really start to imprint gold with its socialist characteristics. And I think that it will. It will use gold as a brand of hard money because they have failed to make the RMB any kind of internationalized currency that represents the prominence of that China plays in the global economy. By their own doing, they close their capital market and they're so protective of all the capital flows that they don't let anybody actually freely play with the RMB. One of my favorite stats is 60% of US M-0 is held overseas. 60%. So there's greater circulation of currency outside than ins. The Chinese overseas circulation, 1%. Yeah, no, it goes-- well, you're not allowed to, but also it's just nobody wants to hold it. But that includes CNA and their overseas subsidiary still. 1%. Nobody wants to touch it by design. So I actually think that gold is going to-- they haven't quite figured out yet, but they're going to start to use gold. As-- and I mentioned to you potentially, like gold stablecoins is one way or converting the Hong Kong peg to be gold back rather than dollar back, replacing CNA with gold. They're going to start to experiment with gold being their world-facing hard currency so that they can continue to control their population with the RMB. I think that's a brilliant thesis. By the way, we're over time. So we need to cut this off about three or four minutes ago. But-- Let's wrap it up. I will just say on that, because I thought that actually would be really interesting to touch on like the US government shutdown, things like that. But just on that, I would just say quickly, like, look, there are gold stablecoins out there. Nobody buys them. And I don't think China being behind one is going to change that story because, again, now it's even less likely. Why would you buy a stablecoin back by China as a control instrument when you weren't willing to buy it originally? This is why we have dollar dramas. Could potentially all blow up. All the overseas Chinese will buy it. And everyone who's doing bilateral trade with China that has a choice between RMB and the gold back stablecoins, they will take it. So it's not-- If China enforces it in the trade, if they swap that you have to do this trade now in gold, or gold back thing instead of RMB, which I'm not-- Either or. But they're already-- one of the biggest use cases for dollar stablecoins, frankly, in countries where you don't have good foreign exchange access is actually traded with the Chinese. So even there, it's still being very dollar dominated. So China is the number one producer, though. It gives it more credibility. And it has invested a lot of money recently in making Shanghai and Hong Kong as a global trading center. So it'll take some effort. I agree. I'm just saying why would anyone outside of the circle do that? And so actually, the argument that you're making-- I'm not disagreeing with your thesis-- They want to try and do that. I'm just saying it's a failed thesis, or it's a failed approach. Because people don't want a Chinese controlled instrument. That's what they don't want. They don't care whether it was backed by the Chinese government or gold or whatever. They don't want the Chinese backed instrument. Gotcha. OK, there is a-- I definitely-- By the way, look, just quickly before we close here, is you put that together with what you and I have talked about about global bifurcation, and which side is ultimately going to create growth assets versus which side isn't. If the Chinese system, which to a start of our conversation seems to be a shrinking part of the world trading system, is going to be gold back. And everybody else is going to be growth back. Well, guess what? I think things like the price of US equities in gold terms or Western equities in price of gold terms. That ratio is going to go. And oh, by the way, guess what? What is the best inflation hedge in history? It's not gold. It's equities. So I don't want to be super bear-- or super bullish equities here. But if from a strategic asset allocation point, if you're right about China's path, that makes me more bullish about equities versus gold as a portfolio allocation than anything else you could possibly say. But importantly, don't confuse a gold stablecoin with monetary policy. It will just be payment rails. It will not have any effect on their domestic broad money growth, which will just be RMB. It allows them to bifurcate their own economy. Hong Kong and mainland are already a bifurcated economy. This is about thinking in new and creative ways to leverage Hong Kong gold and internationalization of RMB without changing a single thing inside their vote, which is managed by the CCP. That is exactly my point that it won't be used outside of-- they can enforce it inside their system. They can't sit outside. And nobody will ever adopt it because nobody wants to be on Chinese payment rails unless they are forced to, because it's a conditional lending situation. Yeah, but gold-- a gold SCP is neutral. It is-- this is the-- did I say SCP-- stablecoin I meant. Because this is the attractiveness of stablecoins even in the US under the Genius Act. Offshore stablecoins are non-national instruments. Now, I'm going to disagree with you on that one. You are saying that the gold is going to lend this credibility, but who controls the actual stablecoin issued the protocol that is the payment system? Unless China says we're going to set this up as an independent outside thing that anybody can do whatever they want, which is effectively what the US did. The US said, hey, we're going to create a regulated category. So everybody sees that this is a useful category. But we're going to accept any stablecoin that exists anywhere in the world. It doesn't have to be attached to the US. You can use whatever payment rails, whatever underlying protocols you want. To that point, why would anyone ever use-- why would China even set up the gold one when that already exists outside of China? The only reason to do it is to create a controlled payment rails. Exactly your point. And you're not-- nobody's going to use that when independent third party gold stablecoins exist outside of China and they're not being used. Nobody's definitely going to use the Chinese one. This is my whole point. I get your point. I just think that if you look at how they use Hong Kong today, Hong Kong is like their little sandbox where they do market opening measures and grant a lot more transactional and financial freedom in a controlled way and then they build their north connect into the mainland so that the elite and the high earners in China-- And every one of them has failed. None of you ever-- They haven't failed. They just haven't succeeded to some grand view of replacing anything in the West. They're sold outside of China. They are used in China because they are told to use it. And you have to use it under the law. Nobody outside of China uses any of these mechanisms. This is my point. I think that's an exaggeration. I think the degree of success is in the eye of the beholders. When you have an economy with a complete flow capital account, what they want is a bit of activity where they can issue dim sum bonds and panda bonds simultaneously and allow the type of investors to choose between the two regimes. And then as China grows in significance in the global order of things, its credibility, if it behaves properly-- this is why I argued earlier-- they cannot play the dependency-- weaponize the dependency card because this goes against the grand scheme of them having the credibility to be one of the primary underwriters of the global system. As that emerges, they need the tools for people to use. And this is a tool that allows them to keep control of their domestic R&B environment. I agree. It will work domestically. I won't work outside of their controlled closed loop system because nobody wants it. But we're just going to have to agree to this. We're already more than taking this over time. So let's close it off here. And-- OK. Hey, thank you, Mark. We'll come back and do this another time, because clearly we have a lot to disagree about, which is a good thing, because I think we spend too much time-- Only on China's goal, it seems, I think. [LAUGHTER] Thank you, Mark. All right.