Why the Fed Risks Losing Control of the Bond Market | Andy Constan
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What's up, everybody? My name is the major caffeine is and you're listening to hit enforces a podcast that inspires investors, entrepreneur s and everyday citizens to chAllenge consensus narrative and learn how to think critically about the systems of power shaping our world. My guesses in the episode of hidden forces is andy constant, the founder, and propriety of damp spring advisors, who previously worked that bridges associate has an idea, generate more recently a brave Howard has chee strategist and spent seventeen years at Solomon brothers, where he served as head of global equity derived dence.

And and I spent the first hour of our conversation discussing the subject of a recent letter he published in which he warned that the federal reserve, by continuing to lower interest strates and ease monetary policy, is at risk of losing the long end of the bond market, paradoxically tightening financial conditions in the process, taking us from what could be a soft landing or no landing scenario to a reacclimatise inflation and a very hard landing for the economy. We discuss treasury issuance, management of the feet baLance sheet, the waited average maturity of assets in the portfolio and how conditions in the U. S.

Economy measure against the feed summary of economic projections in the second hour we did into the government's finances, its fiscal picture and how the election makes acerbity or alleviate trans that have been in place for decades. We also discuss equity markets, the broader of the equity rally beyond the magnificent seven that's been underway this year, earnings expectations for these companies, whether they're elevated a conservative and how we should go about valuing them. If you want access to that part of the conversation and you're not already subscribed the hidden forces, you can join our premium feet and listen to the second hour of toil's episode by going to hidden forces that I O slash subscribe.

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Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guess are solely our own opinions and should not be relied upon as the basis for financial decisions. And with fact, please enjoy this timely and thoughtful conversation of my guest, andy constant. Andy constant, welcome back the hidden forces.

thanks to make very good to be here.

It's great having you on.

I do well. Got my son to beard started.

Do you Normally shave .

in the summer time? now? I am always at one of the two gray beards, but now it's getting a little .

out of the other show. One of them is the two gray beard. That's the name of video of business partner .

once a week, videos and investment portfolio that we used to create a long only beat the smart bea portfolio o that is really designed for people who are not supermodels ders, but our long term investors.

yes. And you also are the property and author of damp spring and the damp spring reports. And what prompted to this conversation was actually the most recent report that you put out, which was titled warning. And I think you published on november third, a few days before the election and before the fmc meeting and in that letter wrote that, quote, the risks are high, that the consequence of next F, M, C will be the fed of losing the long end of the bond market. Yeah.

what did you mean when you wrote that?

Why did you write IT and you still feel this way?

So again, when one creates a warning, I was very careful in that report to not say that it's a prediction. There is a difference between a prediction and a war and a risk. And so coming from that standpoint, let's start there. I think there is a risk that the fed will be too easy relative to conditions such that the economy heats up and the long term bond market starts to sell off.

And once the long term bond market sells off, it's harder to manage the financial conditions, which you know, i've been saying for many, many wealth really the whole period of of the tightening cycle and now the current easing cycle that the federal funds rate is not what the economy is driven by any more. And the fed seems to be very focused on the federal funds, right? That's their main level and not at all focused on the impact of financial conditions on the market.

And so what i'm hoping for from the fed, I imagine everyone is hoping for from the fed, is for them to nail the soft landing. And to do that, you need to avoid a meaningful disruption in any of the markets, but particularly the markets that long term investors hold because that since the covered inflationary period where prior of that, most hommony corporations and anyone who is needs to borrow, borrowed at extremely low rates for term. And that allowed baLance sheet of both corporations and household who own assets to really strengthen all of the last few years as asset Prices relaid.

And so that has allowed corporations to continue to raise wages, to maintain employment and so on. And also, anyone who is needs to spend can be save by selling assets or borrowing against assets. So I look at financial conditions as being we know they're very but easy.

So to achieve a soft landing in the real economy, which is uh, G D P growth that is consistent with trend growth and inflation, that's a target. I believe it's also important that to have that soft landing hold is for the financial markets to achieve a soft landing. And while there are some debate on whether the economy has soft landed or you know, the summer IT looked like he was heading for a harder landing.

And now since then, it's looking like IT maybe a no landing. And obviously, we have the election and all of those things that influenced economy. Let's assume it's heading or at a soft landing for that to be maintained.

Financial markets have to return to Normal and they can return to Normal rapidly and disruptive ly or they can return to Normal gradually. And that's what the warning was about. IT was financial markets are not Normal at all right now, doesn't mean they're gonna go down or crash, do anything like that, but they're not Normal.

They need some meaningful adjustment in order to return to a Normal financial market regardless of what the real economy is doing. And so I can tell you why I think that. But in order for the soft landing of the real economy to occur, I think we need to move toward a Normal financial market.

I don't want that to the a rapid descent, because a rapid descent can have a secondary effect that can cause A A hard landing in the real economy. And that's what i'd like to avoid. So the warning was to tell the fed, you were very, very double sh.

You've been very, very double sh all year because you felt that the financial conditions were restrictive. Every pressure financial conditions are restrictive, including the most recent one. When they're not, they're just not restrict tive.

The economy is going between two and half and three percent real GDP, while very short dated, P, C, E, inflation is near target longer term one year, and certainly most recently, a tilting up of the one year shows inflation above target. C, P, S 或 C， P, I, still well above three percent. And jobs are historically strong, if not slightly less hot than they were in the midst of.

And so that's not restrictive financial conditions. That's financial conditions that can manage through at current levels and deliver warm, if not hot, economic activity. And so my point to listening ers is that if you remain easy, conditions will continue to warm up and you have the potential of having the bond market steepen aggressively. And if the bond markets deep and aggressively, it's fairly likely that risky assets will correct in a more rapid way than they need to, and that could create a economic hard landing. So what i'm hoping for is the fed stays little hawkish longer instead of being resolutely double h.

alright. So let's I like this. Let's clarify some points and bring the clarity that you bring to your reports, which are really excEllent.

I want to say that I don't just say that in general action, I get a lot of value out of your writing. And I love how reflectivity too. By the way, andy, I love that you reflect under process that created the results that you put forward in your projection.

So let's do that and let's also create structure around your response. First of all, I just want to clarify something when you talk about steepening, where you're describing as a steeping ing of the yield curve and you're describing a bear steepening, a potential bear steepening, which is the the long rates rise, not the short rates drop. Yeah, but let's actually start from first principles.

So first of all, you talked about financial conditions coming back to Normal. First of all, how do we measure financial conditions? And then what are Normal financial conditions.

right? So many people measure in many different ways. I think one of the best ways to do IT is to see its works, as power regularly says.

And to see its works, you see whether the economy is contracting in a disinflationary slowing growth way. And clearly, we've been in a tansy supply chain driven inflation period and now were in a disinflation period that has made a lot of progress. And maybe I will continue to go on and reach target or maybe I won't, but it's heading in the right direction.

While real growth and employment that are just ganging busters, not ganging busters. I mean, we've had harder growth and we've had tighter employment, but there's no sign of IT in its work. So that's one thing.

And then the other thing is the conditions of those who want to borrow and the conditions of those who are able to end. That's another sort of what I would call fundamental analysis that one would do. It's not market based and it's not results based, which was the first category.

So again, the framework is results based conditions of those who wanted borrowin land and market based. So when you look at conditions for those who want to borrows and land, while there is always a bank that struggling and there is likely banks that will fail, the biology, the banking system has almost never been as able to end as they are right now. And they're not lending much.

They're lending a little bit lately, but not much, which tells you something about financial conditions. They're able and willing, but they're not lending. So why is that? That must be a demand issue.

People don't want to borrow, and we know that to be true because housing activity is slow, mortgage financing are non existent, relocations are being impacted by homeowners who have low mortgage unwilling to pass up and to move, and job activity is mostly stable. They're still are trends in the economy in terms of where people want to live that having some impact. But corporations don't need tomorrow.

You know the biggest corporations in particular are flush with money. They don't know what to do with the money, so they're not borrowing. And small businesses, you know they're struggling.

We do have A K shaped sort of economy going on. So there's always some that are struggling and have too much that. But by and large, there's no demand for borrowing and there's plenty of supply.

And you can see that with credit spreads, credit spreads have been going in one direction, and that indicates very little demand tomorrow and lots of supply to arment. Now that's a market based thing. So now let's jump into market based things that determine financial conditions.

And so you know, the simple thing is, if you look at all the people who want to borrow or land, what are the rights they're getting? You know what's pricing? So the government is able to borrow at, I don't know, for thirty on ten year notes, whatever the rate is like before twenty five, whatever does they can borrow? Uncial, mortgage creditors, corporate prety, much everyone who wants to borrow in the debt market is seeing both relatively low long term rates and and very tight spreads.

So that tells me that people who want to borrow to either consume or invest in the real economy have cheap cost of funds, add that extremely high equity Prices relative to where they've been not. And I even mean particularly high in like, oh my god, I could. These are incredibly rich.

I mean, they were a lot cheaper six months ago, more a year ago than they are now. So the ability, if somebody wanted to raise money, and Michael sellers, a great example of that, he's getting paid three times the Price of the thing he's going to invest the proceeds in. So there are there are places where you can raise money.

Now the funny thing is no one needs IT. No one needs the money. So that tells me that people don't need to borrow, people don't need to finance to do capital investment. And that tells me that conditions are easy from a market pricing, from a suppliant demand of lending and borrowing and from a work power works what's happening in the real economy um while the fed appears to think that the tailor rule is a judgment of financial conditions and the tailor rule suggests that financial conditions are tight because real fed funds rates are higher and getting higher as this inflation occurs.

So the tailor rule, the data. Upon which a tailored depends is what GDP unemployment rate.

what are the key metrics? There are two metrix there, output gap. And there is also a secondary way that people look at that, which is the labor gap, but also inflation, the desired inflation target, the actual inflation that's being experienced and the employment rate fits into that version where you have the labor gap.

So it's all in there. And in the most recent S, C, P. And september, they fed projected a four point four percent. Unemployment rate is currently four point one, but was four point three after that bad nfp in in August, which seems to a panic defeat a bit.

And P C inflation um based on you know will get a lot of information this weekend, uh this week with the C P I PC inflation is gonna really, really struggle to come in anywhere close to two point six percent on an annualized basis and probably will be two point eight to three percent where they had a two point six percent target. And H G D P growth, they had a two percent target and it's gonna harder than the map for sure. Um so pretty much every factor, what I call the three legs of the tailor role, are suggesting the fed shouldn't cut, but they probably will.

Well, haven't they? Sorry, didn't they? You mean cut again? They just continue. Yt, what I want to do here is also great .

listeners cut. I thought they were going to cut november. They did.

I think they're onna cut in december. They shouldn't. But you know that i'm not the fan.

So great. So we're going to do a number of things here. First of all, I just want to clarify some acronis you throughout in case people are S C P is the summer of economic projections and np and on farm payroll number.

Um I think I want to clarify something for listeners who might be confused here because what you're basically saying is financial conditions are loose. We need to slightly tighten them so that they don't a become much title themselves on account of the bond market. Significantly increasing term premiums, which is to say demanding a higher return for duration risk on long bonds.

And counter intuitively, your way of achieving luster financial conditions is by raising the short term industry or your suggestion for the fed is to is to raise, not ray, sorry, or is to not to not a lower short term interest strates, which again, counter intuitive for someone listening the same wait. So andy wants to loosen financial conditions slightly by keeping a higher, shorter magistrate. How does that work explain for listeners what they might be missing in that concept, right?

So firstly, the way I wanted describe that is I don't want the fed to be as loose as they are planning to ease as much as they are planning. I'm not suggesting they titan, i'm saying is less.

is less using the fed funds rate as the proxy and forward guidance and forward guidance.

which was what the summary of economic projections provides. And there are rhetoric. So i'd want them to ease less, if at all.

Now if the is less, let's to say that means tighten, right? Okay, you're right. That means tighten. Easing less means be more tight. So one would think that if you're saying keep short term interest rates higher, that should tighten the economy and risk a harder landing. Well, that's true that I am suggesting that because the alternative of staying loose for longer is that the long term interest rate, which as I said, the fed is very focused on the fed funds rate and I am very focused on what is actually happening and impacts the economy, which is the longer term interest rate and financial conditions, as i've defined.

because the credit complex takes its cue more from the long end than IT doesn't the short end mortgage car financing stuff like that.

It's interesting you you have to look through history about when like the short term rate was the only thing they ever used in the past until two thousand and seven, that's all they used. The money supply in the short term, right?

There was no Q, E. What was the waited eleven maturity of the face portfolio? Three, two thousand and eight.

they didn't have .

one IT was all short term.

They didn't purchase financial assets. The only way they created money or have money supplies by doing repo or reverse repo, depending on whether they wanted to increase that is an asset purchase program. They had no asset purchase programme prior to two thousand and seven.

You know, some people like to go back to the forties. They had an asset purchase programme in the forties. They had yield curve control in the forties.

But where I think getting distracted, the point being that cutting infrared rates does not necessarily cause long term bond yields to fall. Cutting the fed funds rate, which is the overnight interest rate, does not necessarily cause long term rates to fall. And you can see that pretty clearly.

IT doesn't necessarily even mean two year rates fall. When you cut the short term interest rate, they cut fifty basis points in september on the overnight interest rate and two year interest strates rose by eighty basis points and sixty basis points and ten year interest strates rose by eighty basis points. There's your counter intuitive point.

I just urge people to differentiate, raising and lowering the overnight interest rate, meaning the rate people get on money markets verses changing the long term rate, which the fed doesn't control the market does unless they are pursuing Q, Q, V, and then they have an influence. So the point being, we already saw the reaction in long term interest rates, which rose eighty to one hundred basis points since the fed cut fifty basis points. And i'm suggesting that if they keep doing that, cutting more than the market needs, long term interest strates will go up even more, which will be a aggressive tightening in financial conditions and threaten the real economy, which is actually borrowing at the long term rate.

yes. So this, I think, is a really important concept, and I hope that people got IT. And it's another way of saying that you think that the bond vigilantes are not dead and that the market still has a say in terms of what the Price of credit should or could be and that financial conditions can be tightened outside of the fed control.

yeah. I mean, there's this term bond vengeance ties. I don't know who those guys were, what they were doing. But you know, if you look at bonds, do you want to own them here? Don't own them here.

There's not a lot of people that are active managers of money that think the ten year bond is a great value relative. I mean, that could rally in the next two, three weeks, who knows? But is IT a great value relative to cash right now? There is very little.

Um now that said, who's buying at all? There are buyers and I think they attend to be some of the long only money managers who are allocating to repeated sixty, forty anything that has a bond component, pension funds, insurance companies on are sort of consistent buyers of treasuries and they are the buyer. And there isn't then sort of what I would call a buyer strike. And so that means that there's probably not much value in bonds right here. But you know, is somebody gonna step up and chAllenge that, that I think the data and the fed will determine whether somebody step up and starts selling those bonds.

Let me care for something. So first of all, is your presumption that the fed believes that inflation is beat and it's returning to target?

absolutely. okay. Well, I don't know about that power, certainly does. I don't know if the whole committee is of that mind. But power, power in this press conference this week, last week was so certain in describing the components of inflation, how and how they were going to target.

So if he's right and inflation is returning to target, would that be sufficient for you to change your mind? Or would concerns about financial stability resulting from easy financial conditions still be a concern? Because we had low inflation in the world, two thousands.

And you can make the argument that the feds biopic c focus on C P I. P, C, I blinded IT to the inflation of asset Prices in the party that was happening in the real state market and in structure, products and travails. Ves.

I think if we continue to see data that supports a economy that is having real growth at trend, not above that, has employment that is not getting tighter and has inflation that continues to return to target, that the financial markets will Normalize.

So let's dig into a little bit more into the macro economic picture that would determine some. You touched on a number of these points in your initial answer to my first question of the interview, but let's again create some more structure around them. And let's especially dig into the government's finances, which is an important part of this. What is that? The story that you would tell, the micro o picture, you would draw about the economy, inflation and especially the government's finances, including quantity, duration of issuance and the effect of these variables have on the financial conditions in unfed policy.

right? So again, I think the economy is doing very well. Real growth is above trend, boosted on because population growth might have been modestly improved by immigration policies of the last four years.

And productivity appears to be a productivity miracle in place that's generating trend growth that might be two and a quarter percent, but we're still higher than that. Inflation is in my view, sticky and still above target um but you know is going in the right direction. And labor is in great shape, historically great shape, but not as hard as IT was in mid covet. And and assuming .

also this latest N F P print is also very noisy and doesn't, let's say, suggest a deeper trend because IT .

wasn't a good print. Yeah no doubt i'm not a big believer in over analyzing individual prints. And I look at the panic of data that represents the job market, and I don't see uh reason to be extremely concerned.

So okay, so let's dig in on the the government's finances. What is the state of the government's finances? How is the yield on long term det been suppressed in your view? Because I think that's an argument you've made with respect to how the treasury has managed issuance as well as how the fed has managed run off and reinvestment of its portfolio. And how should we think about that long term?

Let's take a snapshot. So taking a snapshot today, approximately twenty five percent of the outstanding U. S. Debt is composed of bills and floating rate notes. And so those are they have very short term maturities or they have essentially three month duration in the case of the floating rate note. So they are for all intense bills.

And so they're very subject to the changes in interest strates because once you finance a ten year bond, you have ten years before you're exposed to a change in yields. And so that's the current distribution of existing U. S.

debt. And that's. On the high side of the amount of bills outstanding, typically what the government does is IT keeps its issuance of coupon bonds, which are two years and longer out to thirty years, relatively stable and predictable.

Over time, they typically grow because the deficit and the national debt grows, but stable and consistent, and in times when there is high demand for government spending or the economy falls apart and there is no tax revenue, and to maintain spending, they need to borrow more aggressively. They borrow with bills, and so the bills percentage goes up. Typically, that happens. And IT has consistently happened during recessions, where the tax revenues go down because of lower economic activity and the spending goes up because of people out of work and the need for a safety net. And you get more financing, which is done with bills.

And also in the recent recessions, shorter magistrates s have fAllen dramatically.

That also reason why IT doesn't typically have to do with market timing of interest strates. What IT typically has to do with is because if that were the case, locking in ten year notes, which a number of people, I think, drug and mother mentioned.

criticized for not doing IT during the pandemic.

not doing IT during the pandemic, when they could have finance ten years at one percent and other financial bills at four and a half percent. The problem is that during a period of time in which interest stator are at one percent, selling a bunch of risky bonds to the market at one percent, and financing in the ten years space is a major tightening of financial conditions. IT forces people to shift from assets the day audio into these your bonds.

which which looks .

them in but also are just risky. They're forget that their low interest rate, they're just this could have happened at five percent.

We saw this regional banks that on us. Treasury ies at lower interest strates after the fbi's to raise interest strates, and they had to set up the bank term funding program example, right?

So yes, the point being that if you anna borrow money fast, you borrow IT at the part of the yellow curve that is has the most demand. And the part that has the most demand is the part that most cash like because people will pretty much, all day long, give up their bank count or their cash to buy a one month bill. But asking them to give up their cash for a thirty year treasury is much less likely to get large amounts of supply.

You know, we're talking about massive issues that happens during recessions. Now let's just move forward. We haven't had a recession here where issue over the last you know two years since quantity tightening started. And by the way, since that happened, you know things have been pretty damn good in the last two years. Fifty percent of the debt that was issued that is now outstanding was deals instead of twenty five percent.

which is where they, the treasury, the outstanding asura.

So they significantly issued bills relative to coupon bonds during a period when being for pretty good. And so what does that mean? So what IT means to the financing of the country is that over time, getting back to a more Normal, again, this is about Normalization.

A more Normal level of treasury bills relative to total issuance. Total outstanding of treasuries below twenty percent is a target. And to get there, you need to issue a trillion dollars of coupon bonds and retire a trillion dollars of builds.

And so that's the snaps shot. That's what the current status of the portfolio of the U. S. Treasury and the direction needs to go now .

in order to Normalize what is the role that need to be played by treasury and what is the role that need to played by fed, and in the absence of CoOperation by treasury, in other words, of the treasury wants to continue issuing short term paper. What can and should the central bank do in this case?

okay. So the impact of not extending issuance meeting not is showing on the longer end of the year curve coupon bonds two, three, five, seven, ten and thirties is that, that eases financial conditions because people who would otherwise have both those bonds can buy something else like corporate bonds, which would give corporate the ability to buy shares or they might actually buy shares or they might buy crypto, or they might buy something with the money that they would otherwise by those bonds with.

And so it's an easing of financial conditions that means that savers have a narrower amount of things to save and that means that there is, you know, cheaper borrowing. So that's the impact that would happen. Now the fed could say, fine, we think financial conditions need to ease.

That's what they're saying now they think they're restrictive, so they may play along. And in fact, I think they have play along with that on the last few years as the treasury definitely did what I did and the fed definitely has been saying for over a year now that their policy is restrictive. So will they continue to play around? I don't know, maybe.

So just to clarify something here because, again, this is the other side of the conversation, this this is a compendium to the conversation about the fed's policy and shorter ministration, which is baLances sheet management. Your criticism has been that they should have reinvested one off from the portfolio into short duration securities rather than to longer duration and also that they should have conducted out right sales. What exactly has been your criticism of the fed baLance sheet management? And again, this is part of a larger argument that you've made that we need to get back to some kind of Normal conditions because if we don't, the market will impose them honors and it'll be much worse.

right? So when quantity of tightening was announced in december of twenty twenty one, I said that this was script the night for markets and that we are going to experience a significant cell off and financial assets. And actually, I was a little slow to adjust.

But ultimately, that is in fact what happened in the last in the next nine months. But at the same moment that I said all those things, I also said that what had happened is that the fed was going to use what is called run off to do quantitative tightening versus what the U. K.

Does in which, instead of letting what, let me explain both one of those things are, since I sometimes assume that everybody knows all this stuff at this stage. So let's start with what is run off. That means that the fed has a bunch of bonds, and when they mature, they let them mature, and that's all that happens.

And so their baLance sheet is reduced by having their bonds mature and turn back into cash. So that will run office. Alright, sales are saying i've got a bond.

I'm going to sell IT to the market. And IT may have two years to maturity. IT may have thirty years to maturity, but i'm going to sell IT to the market. And so those are the two ways the quantity tightening can be done. The fed shows the runoff way. Now that doesn't mean that one is outright selling of bonds and the other is this sort of silly thing that just because the money that the fed gets when a bond matures has to come from somewhere and IT has to be funded in some way, and the way it's funded is by the treasury issuing box.

So what quantity tightening done via run off does is IT takes the choice of what bonds to sell for optimal monetary policy reasons from the fed who couldn't sold the bones out, right, but chose to run off to the treasury, and they get to choose what bonds are sold to the market, what bonds the market has to absorb, and thus what bonds impact monetary conditions. And so that's been my whole view from the getcha, which is the what I call the original sin of the fed is choosing to use run off instead of outright its sales. But here we are.

They've done that. So how does IT played out? Well, as I said, since quantity tightening started, the treasury has made the choice to issue fifty percent bills to fund their obligations, including paying the feed back, which is a historical high amount of bills.

And so to me, that has muted all of the Q. T. impact. And what he has done is IT has created the impact of Q T as something that may or may not happen in the future.

And it's flat in the yield curve as a result.

is suppressed long term interest rates and more. The important thing about that is it's kept financial conditions easy. The Janet yelland, whether intentional or not, by selling fifty percent bills over the period of time when qt was in play, has eased financial conditions by keeping long term interest strates lower than they would otherwise have been if he had just issued that extra trillion dollars in long term coupons instead of bills.

And now she's painted herself in a corner where she's financed so many bills that the next treasury secretary is gonna. Oh my god, i've got all these bills to roll every year. I need to turn out my debt. And IT also .

leaves the treasure vulnerable to a sudden shift upwards and interest strates and financing costs.

right? You know, they have some confidence that the friends on their side, though, the friends not hiking rights.

So you wrote in a another D. S, R. Report that you publish something two weeks ago that, quote, the market has not fully Priced anticipated increases and treasury supply. The expected benda report next week in this report, I think was I remember what .

report refining announced quarter .

refunding announced the a this banana report next week will likely be met by markets with a sign of relief. However, one day the market will awake into the reality that the sunni of supply is gathering offshore. With field curves flat in term premiums quite low, markets will eventually fill the obvious headwinds and hunker down for a multi year storms.

So this is what we're talking about right now. What is A A multiyear storm? What are you concerned about happening? Because you just said as second to god that the fed can be CoOperative is that the fed will be caught between having to fund the deficit and rising levels of inflation. What is your concern? What would that storm look like?

It's so funny compared to the conditions today. What i'm talking about looks like a storm. I'm talking about a fifty to one hundred basis point increase in long term interest strates.

I'm talking about a yield curve where two year rates are about where they are the day and ten year rates are five five and a quarter. Thirty year rates may be five and a half um i'm talking about a world in which the P E. Multiple is eighteen versus twenty two.

Yeah we're also in a world though where debt and deficits are very high in interest payments are actually be high. So those relatively small moves on our historical basis can have huge impact .

and rip effects. Well, you know we can discuss the cost of funding the government and what such a thing a storm like. Just described would actually cost them to be onest.

IT won't cost anything because a higher long term interest in is only modestly going to increase the treasuries cost of dead if you get that Normalization and bills rates fall from five percent to four percent on what is now six trillion dollars of issuance, you're gona save one hundred basis points on six trillion, which is a lot sixty billion dollars. So I don't want to go off into the how expensive are the proportion of our budget that is interest. It's red hearing in my view.

People talk about that sustainability that is a potential issue in the future, but it's not relevant in the short term. The government can Operate at a four percent interest strate to five percent interest strate to six percent interest strate. They might struggle at a ten, eleven, twelve percent interest strate.

That might be a big issue. But that's not what i'm talking about. That's not the storm i'm just talking about. We've been Operating in an environment in which the yield curve has been extremely supportive of assets and not Normal. What is Normal is a positively sloped field curve.

You look at the average slope of the field curve through all periods in which were not in the midst of a recession or emerging from a recession. Or are you just look at every piece of data, the average slope of the tooth tense servers between seventy five and one hundred and twenty five basis points, and that's all i'm talking about. And the reason why, you know, my concern is there's a trillion dollars of duration that needs to be sold to the private sector that is currently being warehoused on the baLance sheet of the government.

There's a lot of demand in a positively sloppy ilker for treasury bonds. People like to borrow short and lend long. People like to borrow at four percent and buy a five and a half percent treasury bond.

What they don't like to do is borrowed five percent and buy a four percent treasury. Not so it's just a very Normal and healthy yield curve to be positively sloped. And so i'm not talking about some sort of domer scenario.

I'm talking about the market over time, not in a violent bear steepening bond venture, inflationary positive growth, all that source of crushing the bond market suddenly and taking the legs out of equities in a violent way. How to talking about? Let's head toward Normal. Let's get a positively slow field curve. Let's get the multiples of equities down even if he takes three, four years of just caution in terms of financial conditions instead of aggressive easing that the fed seems to be on a path to.

So I want na dig a little bit more into the fiscal picture and how trumps agenda on immigration tarifa tax cuts and potentially fiscal spending impacts things. I also want to discuss equity markets, the broadening of the equity rally beyond the magnificent and seven that's been underway this year.

Earnings expectation for these companies, whether elevator or conservative, how we should go by valuing them is a but we're going to do that in the second hour, andy. For anyone who is near the program, hidden forces is listener supported. We don't accept advertisers or commercial sponsors.

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Just like you're listening to this episode right now, andy, stick around, are going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of the days conversation, head over to hidden forces that I O slash subscribe, join our premium feed if you want to join in on the conversation and become a member of the hidden forces genius community, you can also do that through our described page. Today's episode was produced by me and edited by Steven ogc law. For more episodes, you can check out our website at hidden forces that I O you can follow me on twitter at cov, and you can email me at info at hidden forces that I O as always, thanks for listening, and we'll see you next time.