Wall Street is Watching Something More Concerning than Oil

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This order of magnitude was actually much higher than it was during the tariff panic of April of 2025. So what happened then is we had a-- [MUSIC PLAYING] Everyone's been freaking out about oil and stuff. But the scariest thing going on in the markets is actually happening in bonds. The treasury market just had one of its worst weeks ever when it comes to treasury auctions. I'll get into why, and I'll also get into why it matters so much. The thing about the auctions is that basically gives us a window into what is potentially going to happen to long-term interest rates, which obviously affects everything. Right? Not just long-term interest rates. All interest rates. Yeah, that's true. I know that as someone who I was in investment banking, I was in capital markets, but I never really thought about interest rates. A lot of people don't realize that like, you talk with the Fed, right? Trump obviously cares so much about what Jerome Powell does. He's the chairman of the Fed. The thing is that the Fed typically controls those shorter end rates. It is the market that is controlling the longer end rate. So the demand for, call it the five year, 10 year, 30 year points on the yields curve, literally, I mean, if there's not enough buyers, guess what happens? The yields go up. Yields go up means that your mortgage is going to go up. The cost of borrowed to get a car or credit cards. So this has obviously huge impacts on everything. So for those of you who don't know us, I am Jen Sarvock. I'm joined here by my best friend, Kristen Kelly. And I spent the better part of a decade working on the trading floor at Lehman Brothers, Barclays, and Morgan Stanley, specializing in interest rates. So this is my real house. And I think that your experience is indicative of the experience of most people when it comes to treasury auctions is either ignorance or total indifference. And I think one of the reasons for that too is treasury auctions are like one of the last places on earth where there's truly kind of this old, tiny apprenticeship model where you can't just go, I tried to do this myself. I tried to use Claude to assist me with some of my research. And it was like, I physically cannot do this because either you need access to a Bloomberg terminal which you guys have heard me lamenting my lack there of ad nauseam. And then the other part of it is so much of the knowledge about what's happening in the treasury auctions is actually still passed down in kind of this old school oral tradition between the trading desk and the sales force and everyone who's on the trading floor. It's kind of this cool thing. So we are so lucky that we get to talk to some of the senior thought leaders around the street who are working on the desk still. But if I were to give you a little story time of what it's actually like being part of a treasury auction, here's how it works. Okay. Prior to a treasury auction, the bonds that are going to be issued in the auction have not yet been issued. Trade is what are called when issued bonds or WIs. And they trade not on a price basis, but as a yield spread to the current on the run, most recently issued bond of that same maturity. So if we have a five year auction for simplicity's say, let's talk about the current five year note, let's say it's trading at a yield of 4%. And let's say that everyone in the market looks at the new five year note. Five year notes are auctioned off monthly. So there's an additional 30 days of term premium. And then there's the impact of the supply, the total number of bonds being issued into the market. So the market will assign some value to that term premium, that one month of term premium. And the total amount of supply that everyone has to take down, meaning how much do the, does the treasury have to entice you by paying you a higher yield to get you to come by those bonds? Let's say for all intents and purposes, the market has assigned a value of one basis point to that extra term premium and supply. Okay? So the WI would be trading at 4%, plus one basis point equals 4.01%. So that trades in the market openly, ever since the auction is announced, the day the blah, blah, blah, the QCIP, all that fun stuff. So treasury traders around the street are going to be making markets in this WI for people who either currently own bonds. And they want to roll that position forward, and they want to potentially play for a richening or a cheapening of that role, etc, etc. People who want to be short, potentially playing for the auction to go poorly. We can talk about all those strategies in another time. But basically those bonds trade up until 1 p.m. the day of the auction. So the auction happens at 1 p.m. Prior to that, anyone who wishes to participate in the auction is submitting in their bids. There's two types of main bids. There's competitive and non-competitive. Competitive bids are the majority of bids in the auction. Non-competitive bids are limited in size to be very, very small. So like we can effectively just kind of ignore that. But that's all the people like, I don't care. I'll pay whatever it is. I just need to get these bonds. Okay. Then we've got competitive bids. And amongst competitive bids there's three main types. There's direct bids. So that's people who have accounts set up with the treasury. Think, I don't know, China. Foreign central banks. Exactly. Then there's indirect bids. And by the way, foreign central banks can be indirect bids as well. But generally speaking, all the clients of an investment bank will call up their salesperson, call up the desk and say, hey, listen, I'd like to submit a bid through you in the auction. That's the main way that bids are submitted. And that's called an indirect bidder. And then there's primary dealers. Primary dealers are actually obligated to participate in the auctions. They're kind of the bidder of last resort, basically, to backstop these things. And so what we look at when we look at auctions is not only where did the auction actually stop, meaning what were the results. And we'll talk about that when it comes to the actual yield. But also the makeup of those bidders to determine the health of an auction. So going in at 12.58, 12.59, everyone's watching where this Wi, when this one issued bond is trading. And that's trading at a yield. OK, again, for all intents and purposes, we called it 4.01. What'll happen is it's usually like one guy on the Treasury desk who's kind of running the auction. Either it'll be the individual trader for that section of the curve. So if it's a 30-year auction, it'll be your long-end trader. If it's a two-year note auction, it'll be your front end trader. Just to really quickly interject, because I think that the front end, long-end, belly of the yields curve, these are things that your average interest rates person is like so fluent in for your investment banker, private equity professional. Think about the term structure of interest rates. Term structure of interest rates. Yeah, you have the yields on the Y-axis, and then you have all the various maturities on the X. So as you get longer out, right, you're going from call it overnight to one year to two year to three year to five year to seven year. Blah blah blah. The long end is the 10 year, 30 year, whatever. And then the front end is the shorter duration. So whoever has the honor that day of calling out where the WI is going into the auction, what they're basically doing is they're looking at what that yield is as exactly one o'clock. But let me be clear. It's one of these things where it's not like you have a nuclear clock, right? It could be just ever so slightly different by a fraction of a basis point in terms of where our despotic, grotesque, whatever it is. Then there will be the powers that be at Bloomberg that will decide, like what the, you know, what the ab level was. And Bloomberg is the one that decides, so they're also saying. They don't decide. It's just like they have their own recording of it. They're like the timekeepers. They're like the ones who like the official. No, there's nothing official. It's just, well, it's the official news source, right? So I think this will move in the markets there in terms of what I say in a second. Exactly. So what'll happen is is all of this information, what's all of the bids are tallied up. US Treasury options are actually Dutch options. Meaning unlike a Christie's or a Sotheby's, where the highest bid wins the whole thing, right? You're bidding for a dinosaur skeleton at Sotheby's and you're like $25 million. And then this guy says $26 million. $26 million gets the whole skeleton. Your person who bid $25 million doesn't get like a rib bone or whenever, you know, the whole thing goes to that. With the US Treasury, they need to competitively come up with a price where all of the bonds can be sold. You can't have any like laying around that didn't get spoken for. And we talk about this all the time in terms of corporate bonds that, you know, Apple or Amazon or meta or whoever will come to the market with corporate bonds and we'll be like, oh, the deal was three times over subscribed or the deal was 10 times over subscribed. All the Treasury options are over subscribed, yes. Okay. But a massive order of magnitude and because they're competitive, what you do when you're bidding is you submit the lowest interest rate that you would be willing to accept if you win those bonds. So our WI was trading at 4 spot 01. If you really want those bonds, you're bidding $390. You're bidding $380. You are willing to accept a much lower yield to get those bonds. But if you're like, I'll take another ride price, maybe you're like 405, right? Like and see what happens and roll the dice. And so when the auction results are announced, the yield where the auction stops, meaning that is the lowest yield at which every single bond was spoken for. That's where the whole thing clears. So if we were going in at 4 spot 01 and everybody really wanted those bonds, everyone's bidding $390, $390. Maybe the auction stops at $399. That would be said to be stopping two basis points through. That would be indicative of a really strong auction. We'd still want to look at what the breakdown of participants was, which I'll get two in a second, but that would be said to be stopping three. If it comes right at 4 spot O1, that means that it came on the screws. Then let's say nobody really wanted the bonds, but they were like, "I want them," but like, "No, badly." The auction stopped at 4 spot O3. That's called stopping short or eighth tail. The order of magnitude is the size of the tail, so that would be a two basis point tail. What we would then look at is the participation of direct bidders, indirect bidders, and primary dealers. To see how that all broke down. When they're dependent on the dealers, is that your Morgan Stanley is on the world, like they're bidding on behalf of these other people? You're JP Morgan's exactly. Being a primary dealer can be both a blessing and a curse. Like I said, you are required to participate in these Treasury auctions, which means you get all the benefit of all these clients submitting orders through you. You get all this information value of who's participating in the auction. You know all this stuff. You obviously have a direct lineage. The Treasury, all that fun stuff. That also really helps, for example, if and when the Fed is doing things like quantitative easing and open market operations, and people want to submit bonds to be offered to the Federal Reserve. We always talk to everyone's like, "QE is printing money, right? They are buying bonds from primary dealers, and then injecting new dollars into their accounts effectively. They are the ones doing that mechanism, and they are making money in that process. Sorry, you wanted to say something. Yeah, I just wanted to remind people that when we say quantitative easing, it's this idea that the Fed is actually stepping in as a buyer in addition to China, whoever, all these other sovereign funds, etc. So you have the Fed putting additional thumbs on the scale to try to get those longer-end rates down. And to your point, they do that by your Morgan Stanley's whoever. Like they have these open market operations, and they say, "Hey, Morgan Stanley, Barclays, whoever." Like do you have some bonds? You would like to sell to us. And then they can obviously go ahead and execute that. So I want to just make that other quick point that it's, I think, a detail that is so in the common knowledge of quantitative easing. We all hear it. I think we all use it. But I think a lot of people, when they hear it, they don't actually even know what that means. So that's exactly right. And so we used to have physical sheets of paper where open market operation is basically the reverse of a treasury auction. You have your hedge funds and your asset managers say, "Okay, today the Fed has announced that they are buying bonds in the five-year bucket. They call you and they say, "Hey, I want to offer these issues at these levels, and you have to write it on these sheets and then hand it into the people, and they'd have this big machine at the end of the row and get it into the Fed and submit it before the 11 a.m. count-offs, so it was the opposite, right? And the Fed would kind of pick and choose what levels they wanted to buy things." And the last thing we've talked with this before, but I think that it's also so important to understand that again, obviously the Fed should set some shorter term rates. That quantitative easing used to be thought of as like the bazooka. Like they would not take the bazooka out unless it was super necessary. They took the bazooka out in 2008, and then they continued to use the fucking bazooka. So it is something that like, well now it's just commonplace. Like the Fed just quantitative eases. It's not supposed to be like it back in the day, it was just be like a great glass in case of emergency, and that's going to then obviously like come into our fiscal irresponsibility problem that we talk about a little bit later, but I think that understanding that the quantitative easing situation like is part of what got us into some of the potential fiscal irresponsibility mess. But anyway. No, to piggyback on what you said, there is some confusion about whether the Fed can or cannot buy directly from the treasury. I think that gets a little confusing for people. When you look at the actual auction results in addition to the direct and direct and primary dealer breakdown, you'll also see a line item called the SOMA portfolio. That's the system open markets account. So that's where the Fed, for example, let's say after the massive round of quantitative easing that they did in 2020 after COVID, they have securities that are rolling off their portfolio. They're rolling, we talk about the curve, they're rolling down the curve to maturity. When they get all the money back at maturity from that principle, sometimes they don't necessarily want to shrink their balance sheet. So they'll just say, hey, put it back in here, please. Like it's, and it doesn't impact. This is very confusing to a lot of people. Like the quantitative easing, because they'll see the SOMA portfolio. It's on almost every single auction sheet calm down. Okay. You know if the Fed suddenly announces a new quantitative easing regime, okay. So anyways, and this will come back into our conversation later when we talk about some of the proposals on the table. But so what happens is, is when we get that auction stop, it actually takes a while for the things to flow through to where the normies like me today can get them. And there's a nice little PDF of the auction results that pops up on the Treasury direct website. But in real time at like 101 and one second or whatever, there's a big flashing red Bloomberg headline with the auction stop and all of the details of the breakdown. So that's what the Treasury desk will be shouting out to everyone. So the people working on a trading floor get that information much quicker. And they're also able to see the historical data of whether things tails or stop through in a way that I can't because those 1 p.m. levels, that's all, you know, get weirded Bloomberg's buttocks and they keep that behind. It's like, it's like a you see our like auction results. I think it's how you can get the data on. You're like getting the Bloomberg turf. Like it's the I know, I know like my heart. But anyways, so it's funny because I remember getting asked by a friend in 2009, 2010, who was who like thought I was some evil megalomaniac working at an investment bank. How had and she was like, but where are you getting this information? I don't understand how like you know all this stuff about the markets. And I was like, that's just Bloomberg because I took it for granted that like all of the market debt. This seriously sounds like an ad for Bloomberg guys. We are not sponsored. But all of this market data and information is flowing so freely, both between kind of like the new sources and then between the trading desks, right? Everyone has an IB chat. Everyone has a macro chat. Everyone has a, you know, their sales coverage, etc. So everyone's talking to each other constantly and that's where that flow of information is happening. And so by the time you see something in the Wall Street Journal, know that it has been wandered through these mechanisms endlessly and it is such old news that I didn't move in the market by the time you get there. Anyways, so that's what a treasure action is like. And one more story time before we get into all this. So you can imagine right that this can be pretty exciting because if there's a big tale of the auction stops massively through, that's new information, right? It's new information that like nobody one of these bonds, if you're a primary dealer sitting on all of them, you're like, you know, like you may be puking these things back out into the market or if you were someone trying to cover your short and the auction stopped through and didn't get them, you're like, ah, so if things were feeling weak going into an auction, you might see a massive sell off afterwards or vice versa if things were strong. So it is brand new information to the market. And I will never forget in 2011, we were sitting there waiting for an auction and it was like one o'clock, one on one, one, two. And I was like, where are these auction results? And it was right after the awful tsunami and earthquake in Japan. And so we've got our broider speeds up, we've got the Bloomberg and everyone's searching. And I see this headline come up in like one of my Reuters boxes. And it was like, it was like Fukushima plant melting down. And I was like, ah, ah, ah, Fukushima, and the head of the treasure chest was like spinning out more off like, and I was like, I think there's a new clear plan. I was like, I can't really read the sound, I'm like, I don't know what's happening. And I was like, I had 10 men standing across the screen to be screaming at me. And like the market was like, whoosh round, like it was insane. Because it was the Fukushima plant on the verge of meltdown. And so any good treasure auction results a couple of minutes later. Okay, so where does that mean best? Now that you know how treasure auctions work, we had three historically quite weak auctions this past week. So the way the treasure auctions work is they're broken up throughout the month. So that the treasure doesn't just like auction off billions and billions of dollars worth of debt all on one day and hope that everyone's having a good day. So they try to space it out over the course of the month. And so the last week of the month, we get two, five and sevens. And they are all new two year, five year and seven year notes. And so the two year auction tailed by about two basis points. But that wasn't really the big story. All three of the auctions tailed. The big story was that the dealer takedown in the two year note auction was about 24%. Historically, the 12 month running average of dealer takedown in these two year note auctions is running around like 10%. So this really quickly, the double. And do the dealer takedown is that because they are forced to takedown some of it because other people are not showing off because everybody else didn't show up. Exactly. So when you have really low indirect and direct bidders, guess who's left? The dealers. So they are sitting there choking on this paper. Now because Kristen, you are now such a brilliant student of DVO ones, you know that even billions and billions of dollars worth of two year notes is not a ton of risk. But we also got a week, five year note auction with similar stats, not quite as dramatic and a week, seven year note auction. And another thing I want to point out is when we talk about the order of manages of these tails being two basis points or one and a half basis points or eight tenths of a basis point, it's not just about the absolute order of magnitude of the tail. It's about what was the price action leading up to it? Because guess what? We could say the auction stopped two basis points through. But if we sold off ten basis points and built in that concession before the auction, okay, well, yes, the market maybe underestimated demand and thought it needed a bigger concession that was built in. But like that wasn't a great auction result, right? That wasn't a whole run, the fact that it's set to two basis points through. So we had a big backup in yields as well accompanying all of this price action. And so why that was also concerning is because this order of magnitude of dealer take down was actually much higher than it was during the time of the car of panic of April of 2025. So what happened then is we had a series of bond auctions where the direct bidders and indirect bidders voted on how they felt about the tariff announcements with their wallets. And they said, we're not showing up for your auctions. And that was a way of effectively strong arming Trump into saying, okay, like that was the first taco. We talked about it at the time that the equity market price action wasn't the scariest thing. It was the prospect of potentially failed bond auctions. So I want to be very clear that the order of magnitude of indirect and direct bidder participation was actually much lower for these auctions than it was for those. Now those were long end auctions, tens and bonds, versus these front end auctions. So they mean less, but I do think it's an important statistic to consider. - No, and I was gonna say, I mean, I think what's interesting is at the time last year, there was a lot of chatter about Trump trying to tank the economy so that we would have lower interest rates as we're obviously trying to fund ourselves because the US, we operate obviously at a deficit, meaning we have less in tax revenues coming in every year than what we are spending. And a big chunk of what we are spending money on is the interest rate on our debt. And so people were like, Trump's trying to tank the economy. This is 40 a chest that we can get lower rates. And what ultimately happened is obviously, it didn't work so well because obviously like - Higher interest rates. - People not showing up and rates going up. And like that's kind of what's happening right now a little bit is like the impact of rates going up is the US is going to need to spend more money to service the debt, which then makes the deficit go up and blah, blah, blah, blah. So anyway, I don't know about that. - Yeah, no 100%. And I think we thoroughly debunked that myth or if it had been a strategy, I think they decided to interest it very quickly. So what happened here is also really interesting and led to the fact of what we saw on Friday. So the options were earlier in the week. And then Friday we had a total reversal. But what we saw the entire month of March throughout the first 30 days of the Iran more effectively was a bare flattening of the curve. We saw a repricing in both the US, in Europe, in the UK, everywhere. So effectively, what happened was that front end rates sold off to a greater order of magnitude than long end rates. As global markets began to reprice the effects of an inflation shock in terms of their implications for central bank policy. Meaning in the US, and if you recall from the last Fed meeting, we still have like one cut on the median expectations for the Fed, where we got from was one cut being kind of the baseline outcome to now two 25 basis point hikes being de facto the market's expectation. - Really? - Correct, in terms of where, like, cause the curve used to look like a nice piece swoosh where Fed overnight rates, the way to think about it, I think I can draw this out. This Fed overnight rates, right, 350 to 375, were here, right? And then things dipped down, and then were much dipped down to the two-year point at call it like three and three eights. And then were much higher as we build in that term premium going out. We went from that Nike swoosh to effectively more of a conventionally upward sloping yield curve, where now the market is pricing in steady state of hikes. And that happened both in the US and much more dramatically in the UK and in Europe. Now in Europe, there's not just one euro curve, right? Like everyone in the EU has their own bonds. You've got Boons, you've got BTPs, you've got everyone's little internal bond markets, you've got OATs exactly. But so this happened kind of writ large and was more amplified in Europe and the UK, which don't have the same level of energy independence that the US does. So we went through this massive repricing. As everyone said, Flasian chalk from oil. And that means that central banks are going to need to hike. I think the other thing that happened was that positioning was very crowded in the wrong direction. So one of the articles that you highlighted, Kristen was the fact that Caxden and UK hedge fund blew up. They lost, I think they lost like $1.5 billion, $1.3 billion. And they had been very low in the last week. They had been very loudly and proudly calling for a massive repricing of guilt. So UK bonds in the opposite direction. So they thought that there was way too much term premium and there were way too much bearish fiscal outlooks priced into that bond market. So they were long and they had effectively a bulls steepener on the curve bear flattened. So just the opposite of everything that they were looking more massively and they got carted out. And I think a lot of people coming into this year had those similar kind of consensus trades on. Because all anybody was talking about, all we talked about in our newsletter, on our substack in all of our conversations coming into the beginning of the year was how is everybody going to reprice that level of fiscal irresponsibility into the long end of the curve? Meaning that long end rates should be rising faster than front end rates. And if anything with a weakening labor market, the risks were asymmetric to central banks needing to ease to effectively solve for this. Yeah, I was going to take everybody's jobs. There's all this slack in the labor market that's not as much in the data yet. That's going to be the surprise. So everyone's caught the wrong way. So when they were in thought that they were going to go down basically. Everyone thought that there was probably more likely that central banks were going to cut rather than hike as their next move. Let's call it rather than like, I mean it like cut. But like, hey, like, do you really think banks are going to hike into a weak labor market? Like, I don't know. And so then what we got was we got this massive surprise in the other direction. So when that happens and everybody gets carted out, you have to reverse your positions, which exacerbates and moves. So we have gotten to this point where now everyone is pricing and all this hiking happening at global central banks. And what you and I have been saying is, OK, I get the theory. You're going to have an inflation shock from oil. But oil means tighter financial conditions. We don't have inflation because everything is going so great. We have inflation because of this very specific exogenous shock that is, you know, calling itself inflicted, I think, is the wrong. But like that is also like kind of within the control of the same global leaders that are responsible. To some extent, you know what I'm saying? For the conditions that give rise to monetary policy. Yeah. And I think it's also important to remember that like, obviously oil going up, that's not great for us if you need to fill your car, if you need to heat your home, if you need to run the air conditioning, all that stuff. But oil then, because of the derivatives, like that is the raw material, that is the substrate, for all the other shit, for your water bottles. For the, I mean, literally, if you can, if you want to eat as clean as possible and go buy everything from Whole Foods, guess what? Shit's still coming in plastic. You have the chicken, like it's plastic, like there's, and then all the other stuff, the fertilizer, like helium, like there's all these other things that are indirectly related that all are going to be going up as well. Because again, from a supply and demand standpoint, supply is now constrained. The demand is the same. And you got a problem. Absolutely. So I think what happened is this reached a fever pitch in this last week of March, where it seemed to be past the point of absurdity. But the problem is, is like, who has the PNL and who has the risk tolerance? Do you be like, you know what? I'm going to step in and risk catching a falling knife. And so I think it got to the point where positions got cleaned out enough, no one showed up for these auctions. The dealers got stuffed with all this paper. And then we got to Friday, there was an announcement of potential pause and strikes. There was rumors of ships coming through the straight of form moves and stuff like that. And all of a sudden it was like, what are we doing? Are we really positioning? Is that really the next likely thing? And so I think that the bond market kind of had a little bit of a reality check, especially the front end, which has been effectively rallied. I haven't checked the markets since we've been talking. But I think we're 20 basis points off the highs and yield into your notes. Meaning if you've got stuff with those bonds at the two-year auction and you held on to them, you're actually sitting on a tiny little bit of happening. So good for you if you didn't puke them out. I think the other thing is we want to remember-- let's try to learn from the mistakes of the past. And we've talked a lot about due current conditions rhyme with 2008. We've got spiking oil prices. We've got a credit crunch. We've got a little bit of a crisis in confidence. Well, into those same market dynamics, the ECB hiked rates in June of 2008, three months before Lehman went bankrupt. So I think everybody looks at the mistakes that were made by Central Banks then and says, like, maybe let's not think that they're going to make the same mistake twice. And that was unequivocally a fatal policy error. So I think that that's what's happened since. And I mean, now we're seeing a re-stepping of the curve that to me makes sense, positioning is a lot cleaner. But I do think it's important to know that as long as we have both-- obviously, this massive geopolitical risk and this stroke of the pen risk that we've been living with in the US, that treasure reactions are something that as an investor and as just like a US citizen, you should be watching and you should be concerned with the health of. Because that brings us to our next topic, which is this question of the US's overall fiscal health. So there was this article that came out last week. And it was in Fortune Magazine. And the title was something like the US Treasury just declared the government insolvent and the media missed it. The total assets and liabilities that they estimated for the US government were 6 trillion in assets and 47 trillion in liabilities. And so we're going to actually issue a bit of a Rebuttal, takedown, truth-telling here, what have you? And we're gonna do a little bit of work as well to explain the political fallout and some of the most bat-shit crazy suggestions for how to fix the US's debt burden that are getting a lot of momentum on the back of that article. So, Kristen, as our resident investor who knows more about assets and liabilities than anyone else, I want you to explain how actual investors think about insolvency and what like, what, how unethical measure that. - Let's be clear. It's not that, when we say they, they, these people who use the word insolven, they took these numbers directly from the balance sheet that was put out by the Treasury. So, like, the numbers that they used were made up. Like, they weren't really necessarily estimating anything. They were just like, here's the balance sheet that the Treasury put out, because if you think about, like, whether it's a company or the government, they put out their financial statements. And so, these financial statements were prepared in accordance with these like boring accounting rules which we're gonna get into. But when this Fortune magazine said, the Treasury declared the US was insolvent, it was because the assets, like you said, were so much less than the liabilities. But there's a ton of problems with that. So, first of all, there's two different tests in insolvency. The first one does look at the balance sheet, right? It does look like, it does look at your assets and it does look at your liabilities. And the main idea is that assets equals liabilities plus equity. Now, if you have assets that are lower than your liabilities, it means that you have a negative equity value which is usually not great, right? If you own a house and the house is worth $600,000, but the mortgage that you're paying is for like a million bucks, that's not great. Like, that's like you have negative equity and like basically the bank is gonna come and probably foreclose in your house. Now, it does obviously matter if you can actually make those interest payments which we're gonna get to you as well because that's another part of this one's whole insolvency test. But the point is, assets less than liabilities is a huge problem. But the balance sheet that was put out by the US Treasury is prepared in accordance with these accounting rules. And the main thing is that, A, assets are on the book at historical cost, meaning like here's some examples of some of the insanity. If you had a military base that was built in say the 1950s, that might sit on the books at like zero because they depreciate. And to even like hammer home, why it's so insane. Look at all the gold that the US has. The gold that is on their books is on their books assuming a price of $40 and 22 cents. They have 8,133 metric tons of gold. The actual price of gold today is 4,500. That's 100 times what it's on their books for. So you can see that there's obviously a huge differential between their assets, what it's on the book set, versus what you actually can sell on the market today. That's called the fair market value versus the book value. But on top of that, there's a ton of shit that we are not including on the books. Like literally the Treasury's own report says the balance sheet excludes the power of the tax, regulate commerce at monetary policy, and the natural resources. So like all of the oil that's underneath the ground and like the national parks and the grand canyon. Like there's all this other shit that is not on the books in the balance sheet. And so if you were to try to, let's just look at like the land, the federal land of the natural resources, I mean, there's been estimates that that is worth something like $150 trillion to $200 trillion. Remember, right now the assets on the books are on the books for call it $6 trillion. And one of the things that we had done is we tried to put out like a little visual on social media to try to just show the absurdity of that $6 trillion number by looking at it relative to like how much an assets and a management of BlackRock or a fidelity have an asset and a management to show that there is just no way that the US only has $6 trillion. So BlackRock for those of you guys who are curious, they have $14 trillion in assets and a management. And like people were like, oh, well, you know, they have all this money from cyber wealth funds from other countries. Sure, but like do you really still think so does the US? - So does the US? - Where do you think is buying our treasuries? - So the whole point is that obviously our assets are wildly understated versus what the US actually has. Now, in fairness, on the liability side, right? Because we said, all right, if you think about your balance sheet, you have assets, liabilities and equity. The assets are understated. The liabilities are gravely understated as well. And so as you think about how much money or how much does the US owe, there's the numbers that were on the books. There's a whole bunch of what's called off-balance sheet obligations. So all of the quote-unquote entitlements, so Medicare, Medicaid, Social Security, and so on. - Social Security. - So should be going to go bankrupt. Like all of these things that, again, the liabilities are way understated as well. So again, the point is A, on the balance sheet side of the test, the numbers are kind of bullshit. So, but like you can't say that the US is insolvent based on those numbers. But here's the second test. It's called the cash flow test. With the balance sheet test, the cash flow test, the cash flow test basically looks to see can whoever the entity is service their debt. So like back to this point with like my house, if you are a gazillionaire and you own a house and sure the value of the house is like lower than all the debt, but if you can still make those interest payments, like the bank's probably not going to come and take your house because it doesn't matter. Like you can basically service the debt. And so the cash flow test is arguably more important. And Jen, I'm going to let you talk about like modern monetary theory and why this is actually the more important test and why the US should not be looked at the same way as a corporation is looked at. - Well, yeah, the biggest difference between the US government and a corporation. I mean, we can list many. One of them is that a corporation can't issue debt in its own currency that it can simultaneously print. So all of the US government obligations outstanding are issued in US dollars. And the US treasury can print more of those dollars should it need. So just like Japan, just like the UK, just like other sovereign nations that issue debt in their own currency, you can't force a default because, now listen, lots of bad things happen if you need to print money to pay off your debts and we can talk about that. But the real reason is unlike a corporation, you can't force a default. The other thing is we kind of say the quiet part out loud, which is the strength of the US military is also really part and parcel of the full faith and credit of the US government at the end of the day. So I think that there are many reasons why this nomenclature of insolvency doesn't work. But we wholeheartedly agree that the fiscal picture in the US is broken and needs to be fixed. And the ultimate goal of this article, I think, was to advance many, if not one, of several different bills, propositions that are all kind of working their way through various legislative bodies to try to do something about this. And so there are a number of these different proposals that are basically like, we need a balance, our budget. Like, how can we do it this way? How could we do it? That way, one of the more extreme ones is to invoke Article five of the Constitution, I believe, which would be to basically say, like, fiscal discipline is part of the Constitution and we need to make it that. So like, I think that would be among the more extremes. Another proposal that like gets a lot of air time is one that has been very loudly championed by a man called Jeffrey Goonlock. We'd love to have on the podcast. He's been talking about this for, I don't know, the better part of two decades. Basically of engineering a polite default. Basically his proposal was twofold. One, to take existing debt with shorter maturities and turn it out against the will of the bond holders. But two, take a three-year bond and make it 30-year bonds and keep the interest rate the same. So you're not getting that term premium. You're basically getting paid the lower interest rate, but it's for a longer period of time. Or to effectively involuntarily refinance our existing long term debt, where say a bond holder owning a 30-year bond is scheduled to receive a 5% coupon and say, you know what, you thought you were getting 5%, you're now gonna get 3%. Like, don't be mad. You can't do that. By the way, sorry. You know what this sounds like? This reminds me so much of all the like, Caesar-pallish nanagons that we're gonna get into and like what the private equity firms are trying to do to their creditors. So, by the way, like, stay tuned for our deep dive into like how private equity firms deal with some of their lenders, but anyway. - Yeah, so you know what's funny? We talk a lot about like political red lines and I know we've gotten also desensitized to the idea of like, you can't do this. This isn't how government operates. This is a red line we cannot cross. You do this once and you never issue sovereign debt again. You never get to be the global reserve currency of the world again without a gun to someone's head. Like that is a very, very scary situation to think of. It's just not feasible. So someone asked us in our comments what my thoughts were about this and my thoughts can be best summed up as hard pass. You could do something like this. If thought experiment only, there were no foreign holders of US government debt if it were only owned by its citizens. And so the logical conclusion you get to is, okay, if you really wanted to go crazy, why not just have the fed by all of the treasuries debt directly? And so these are kind of the insane proposals that do exist within the current laws of physics. But a polite default where you simply just inform all holders of existing government debt that the terms of that debt have changed is a, I think that's crossing the river con. I just think that's something you never come back from. I don't disagree, but I basically feel like that's what, I mean Apollo, like 101, like that's what they started to do. I mean, that's what the sea liability management exercises. Like that's credit or on credit or violence, except for it's a, it's the US for not about violence. But it's actual violence. Like that would result in actual violence. I mean, yeah, that's a good point because the creditors here do in this too. I mean, they don't have armies. So like maybe let's not, but, the, - That is a good point. It's like credit violence. - It's this kind of strange. - Yeah. - So this has been a bit of a treasury fire hose. So I hope you have enjoyed and that this hasn't been two in the weeds for all of you. 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