Forward Guidance: A New Era Is Beginning In Markets | Weekly Roundup

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Show notes (from RSS)

A new era at the Federal Reserve may be reshaping how markets think about rates, volatility, and the role of central banks. But is the market interpreting Kevin Warsh's first moves correctly?

This week, we break down Warsh's first FOMC meeting, the end of traditional forward guidance, and why they believe peak hawkishness may already be behind us despite the Fed's messaging.

We also discuss the AI capex boom, the future of Bitcoin and MicroStrategy, tightening liquidity, housing affordability, and whether markets are entering a fundamentally different regime. Enjoy!

TIMESTAMPS:

00:00 Intro

01:13 Forward Guidance Is Dead

08:28 Rate Volatility Returns

13:08 Why Hikes Won’t Happen

18:33 Liquidity Gets Tight

26:15 The AI Buildout Meets The Fed

35:55 The Summer Market Setup

42:39 MicroStrategy's Market Test

46:18 Bitcoin’s AI Opportunity Cost

53:29 Crypto Needs To Adapt

01:00:46 Gold Sentiment Hits Extremes

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DISCLAIMER

Nothing said on Forward Guidance is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only. Any views expressed are opinions, not financial advice. Hosts and guests may hold positions in the companies, funds, or projects discussed.

Transcript

Jack Farley: We have to have a new name now For Guidance is dead. So introducing Task force.

Quinn: The market right now is pricing in two hikes by mid-2027. Their hugely hawkish pivot comes at a time when oil prices are down dramatically from their last two meetings.

Tyler: We got the high CPI print peak hawkishness forward guidance and now everything's kind of collapsing.

Jack Farley: I'm still a big believer that we're hitting peak hawkishness here, but I think volatility is going to go higher at the same time.

Quinn: It's easy to be hawk hawkish when stocks are at all time highs and everything's rosy.

Jack Farley: Man, this hurts. But like, I know there's no way in hell that we're hiking at the end of this year. Nothing said on For Guidance is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests and the Blockworks team may hold positions in the company's funds or projects discussed. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. All right, what's going on, everybody? Welcome back to another round of edition Forward Guidance. We are recording on the first week of the Kevin Warsh Fed. We just had the Kevin Warsh Fed first FOMC meeting this week and we have to have a new name now for Guidance is dead. So introducing Task Force. I feel like I don't know what, you can't made this but this is freaking awesome.

Quinn: That's fitting for the new hairstyles too, as I just laugh when I. We open it. It's our pictures and Tyler looks like an absolute meathead and I look like I look like a. A convict, I think.

Tyler: Yeah.

Jack Farley: People are saying you guys are looking better than before.

Tyler: So I like it. I might. I might keep it. Honestly, it's. It's hot here in Texas.

Quinn: Yeah, it's scorching here. So it feels good.

Jack Farley: Nice. That's sweet. Yeah. 4 guidance is dead. Long live Forward Guidance. I mean, even though it's the name of our show, I think all been kind of stern critics of this style of monetary policy for a long time. Obviously the dot plot was one of the main issues that I felt like I had. It was just completely useless. So it is interesting. So anyway, lots to talk about on this. Let's start from the top. Wash just lit on fire. The statement pretty much cut like 80% of it out. Very succinct. I love the ending of it. Just the committee will deliver price stability. Mic drop. That's it. Starting with this. Curious to get you guys thoughts on, on Warshaw's first meeting. What's in your head?

Quinn: I, I just, I thought, yeah, there's, there's a lot, I mean stocks ended basically the same as they were going in. So there was a lot of.

Jack Farley: After yesterday, today.

Quinn: Yeah, yeah, no, there's a lot of noise. I mean, I think there's a lot of good that he's talking about. We can get into some of the changes. The balance sheet updating the committee's views on how the policy versus balance sheet transmission mechanisms work for policy. This dot plot stuff is pretty wonky. Their hugely hawkish pivot comes at a time when oil prices are down dramatically from their last two meetings. And I think it sort of just gives credence to the idea that, you know, I'm skeptical that when War says he wants to revamp the data right after all the stuff Trump's done, you're like, hold the phone here, what's this mean? You know, are we just going to work cut through it at any, you know, at any cost? But at the same time, all the best inflation forecasters knew the last two Fed meetings that this inflation thing was coming. And now the same probably astute forecasters are seeing the disinflation coming post War. And so it's just a classic Fed reactive months late versus front footedness. So it lends some credence to what he says there. And I think, I think a lot of it was just to try and lay, to lay to rest the Fed independence concerns and playing politics because everyone was super nervous that he was going to give in to Trump and all this stuff. And at the end of the day, like nothing's really changed. Trump still wants rate cuts. Bassett wants, everybody wants it. I think they will, you know, get a less hawkish policy eventually than what, what was displayed this week.

Tyler: Yeah, I think to, to keep up our peak hawkishness narrative from last week, I think we, maybe we were a couple days early, but we saw the two year yield spike and that flattened the yield curve and now, you know, today the two year hit 420 and it kind of backed off a couple basis points. I'm, I'm pretty sure given break even inflation rates that things are getting pretty tight and real rates are tightening global liquidity pretty hard. We're watching, we have a bunch of charts to back this up, but the dollar's breaking out here higher and the Yen is breaking out of a 20 year base. So there's lots of stuff he changed and kind of derailed. I was a bit shocked at the market reaction today. But here's the. The thing about the Fed now is you can change the rules to the game, but it takes a lot of time to change. The players like to do a stupid sports analogy which is like, you know, in the NFL when they made pass interference like a lot they used to have these big 6 foot 5 wide receivers and you know, they would be super, you know, athletic and they would throw deep bombs. And now you have these little tiny guys on the field like Cooper cup who are like little tiny wide receivers. And because they change the pass interference rules, these guys are so, you know, jittery and fast. So it takes a while once you change the rules to change the players on the field. Right. But the players on the field will adapt. And today we saw, you know, nothing really changed, was volume rolled off. You know, the vix, you got the VIX smash. After the Fed spoke, you were, you're heading into a seasonal period of low volatility. Systematic guys were still levering up into the momo stuff and nothing really changed. But if you do look at the macro, the macro is changing. Meaning like you have dollar, the dollar's doing something different, the yen's doing something different. The only thing that I'm watching now is if credit spreads really break out. Because if liquidity is tightening and we're seeing credit spreads just putts along lows, which allows this capex cycle to keep going. But if the dollar starts breaking things elsewhere in the world, you'll get that reverse carry trade. So I think that's the main catalyst I'm watching here from a macro basis, but I don't know, I kind of like less jawboning from the Fed. I joked around on Twitter last night

Quinn: that

Tyler: this guy actually wants free markets. We'll see. But there's a great chart I put on Twitter where it was like the amount of words in Fed releases for the past basically 15 years. It was just a parabolic rise of Fed communication which I called volatility Stiflers. They've basically been trying to pound volatility by using the Forward guidance for 15 years. If that's gone, I don't know, maybe we'll be in like a way different market and the systematic, you know, asset management bubble will just go away and you'll have a lot of different stuff happening. But that's going to take some time.

Jack Farley: Yeah, I think, I think Secularly like rate volatility is going to go higher from here. I think. Yeah, like I, I'm with you and wrote something quite similar to the fact that yeah, look, forward guidance in the way it was being used was a, was an innovation brought forth from Bernanke because at that time when we had the zero lower bound on interest rates like they, they could not bring rates negative. But what they could do is give forward guidance to ensure that there was no rate volatility multiple years into the future to ensure that people could lever up and do all these different things and, and f further ease financial conditions. And yeah, that's just not the right tool set for this world of higher secular inflation that we're in anymore. It's a good thing. I think that it's moving on and I think it was really interesting to look at the price action yesterday versus today. I'm still a big believer that we're hitting peak hawkishness here, but I think volatility is going to go higher at the same time. And I think that's the whipsaw markets we're feeling is that we did have. This is the SCP data. So even though Kevin Warsh did not submit his own dot, the rest of the committee did and it was really interesting. Like the peak hawkishness we were talking about last week was for the most part just the market based forward expectations of it. And it felt like yesterday was sort of the Fed marking the market, the expectations that were into the market from what was in their own dot plot. And so you had that like final capitolary move where it's like okay, yes, we think that there's higher odds of a hike coming at the end of this year, but the market's already mostly been there. Yes, we went a little further yesterday into the end of the session above that, but we've already given that. Back to your point, Tyler. The two years rallied since it feels like we're in equilibrium now between the Fed and where the SOFA market was at. And so once the market digested that you go to the next day which is that, okay, well look like are we really actually going to get a hike or not? Suddenly that's what the market needs to start digesting. And it's like, oh wait, oil's back in the 70s, break evens are lower. Like a lot of things are actually turning. Will these hikes actually happen? And then suddenly the market has to digest that at the same time of like higher rate fall and the fact that like WARSH won't be prescribing it as much anymore. So I just feel like there's this huge whipsaw because he didn't provide his own dot. The rest of the committee drove the ship. Like all those super hawkish dots were probably just like Fed presidents not even on like the, the governors that were just kind of trying to drive that narrative and then suddenly the market just woke up this morning or even after hours yesterday and was like oh, oh wait, are we actually going to get hikes? Like maybe not.

Tyler: Yeah. This is also a good quote from Blackstone CEO. He said if you look at shelter costs which are the biggest components of cpi, I would say they're running in the low ones versus government data in the low threes and that will be helpful to the new central bank chair particularly after the wars of the Rio Vermeer and wages have gone from call it 5% in the US two years ago to 3%. So again that's helpful. I think the picture after the war ends will be that was, will be better than most people realize and I think everyone's starting to digest that which is we got the, we got the high CPI print peak hawkishness for guidance and now everything's kind of collapsing I think besides I guess some, some pockets of consumer goods like Apple's saying iPhones are going up and because of memory prices. But like on the whole if you look at housing, the large components of CPI and pce, I, I think those might be rolling over here.

Jack Farley: So I mean, I mean look at this of one year inflation swaps. Like we are, we are back to where the war started. Like yeah, I, and this is, yes, this is just following oil but like that's what drove the hawkish expectation since and you know, yes you can look at what's going on with like core inflation. Like core CPI was hot too. But I think a lot of what was going on there was related to the end inflation from tariffs that was going on and tariffs aren't a thing anymore. There are some weird stuff going on with shelter inflation. Owner's equivalent rent folks will remember we were talking about how back in, I think it was October during the government shutdown shelter inflation, they marked out a zero. So just the base effects of coming out of a zero mark on that led to higher shelter inflation. And so now we've reverted and so I think that's peaking out like headline inflation is already going to be in the gutter next month looking at where oil is right now and the swast market is pricing that. So I don't know, I very strongly believe that this was the capitulatory moment yesterday of peacockishness. And I think it's done from here on out.

Quinn: Yeah, if you go to slide 35 there's this chart that just shows the change in their dot plot and it's really inconsistent because they basically have multiple, many governors have hikes this year and then cuts with basically under 12 months from the hikes, which is very abnormal. And says to me that they're reacting to the oil prices that are now coming back down again. And if you go to the next slide, I just, I tweeted this out. I just, it's, this is what's most ironic to me is just yes, the inflation prints came in April and May and this month, but it, we know it, we knew it. That oil is down 30% from their last dot plot when, when they pivoted, when they remained dovish in the next slide. If you just look at it, you know the one thing was, did sort of like give more input on or at least allude to is was keeping an eye on the markets and understanding what the market's telling you. The yield curve flattened dramatically which does not coincide with inflation problem usually. I mean it's hiking cycle or growth problem and could be a mix but you know, two year yield bottomed the day Operation Epic Fury started. And then I put the other tweet from Trump signing the peace deal here. So when you go into, on the next side too, Felix, as you mentioned, the, the components of, of inflation being core services, core goods, energy and food. Food's non existent energy is going to be coming down core, core goods as you mentioned tariffs were refunding so there's net zero tariffs at the moment. And core services, is that housing? So it's, it's just strange to me and that's why I just keep thinking it's got to be sort of a politic to, you know, sell this narrative that the independence is there. He's not Trump's, you know, handpicked guy because it doesn't really make a lot of sense to be doing this now. And I get it. Rectifying past mistakes. That was a lot of his message was, you know, the, the track record of the Fed is brutal. We're going to correct that. So I guess I get that if you go to 41 and just the last kind of thing on this topic is the positioning. So this was from last week. So most of this move has been front ran. We're, we're looking at the, a record Short position in, in SOFR from the fund fund category.

Tyler: So how bad is that going to get squeezed?

Quinn: Yeah, I would imagine. I mean the thing that I kind of think about is like, okay, everyone's a bit stunned because we went from, you know, the Fed running their mouths non stop to then nothing at the same time that we're getting this dot plot at peak inflation and growth in my perspective. So it's just a curveball on a curveball of confusion and sort of makes people want to see the data come, come through and the next Fed meeting six weeks away. So there is still time for this to play out and I think we'll see that in July's CPI print and probably the labor market starts to cool too from its previous pace. You're already starting to see that in some of the weekly data. So yeah, we're beating a dead horse here. But I, I just, the market right now is pricing in two hikes by mid-2027 and only one of the 19 committee members who might not even be a voter, we don't know, has a more hawkish at three hikes view. So I just, it's strange to me

Jack Farley: how this, I think that's a super important point about how the dots can be given from like, like I said, it's these presidents that are probably non voting and maybe they just want to give, you know, a quick F you to wash coming in and you know, rocking the boat a little bit and it's like, okay, well look, I'm a non voting member. Who the hell knows if I'm even going to be on the, on like a president in a year's time. Who knows? Like, all right, I'm going to ramp up my dots here as, because it's the only tool I have at my disposal. I don't know, I mean, I feel like it's just this classic scenario where the market is just like, the trade is like we're going through all these. There's one more I want to show here. Just. So this is the short end positioning but the long end positioning too is like the whole street short bonds.

Tyler: Like, it's so good. I love these setups. This is like, this is my favorite. It's just like matching the sentiment surveys when they get really extreme. But you're like, this is, it's the easiest fade ever.

Jack Farley: Yeah, but, but here's the thing is the market does not let you have that, that fade easily. Like, that's why like all the, all the smart, you know, stir traders, I know they're all just like, you know these, these hikes aren't happening. Buying so far. Like I think we're all in that camp too but like you know they're, it's going to test you. And it felt like yesterday was just that final test. We're just like whoosh, man, this hurts. But like I know there's no way in hell that we're hiking at the end of this year. And so it's just like testing you to have that resolve to the end of this trade.

Tyler: Well that's the funny thing is like people hear, oh he's super hawkish. Rates are going to go up. And then you see, you know the 10 year yield went to 450 almost and just get smashed down today because it, it really is putting a, a pin prick in, in potentially growth and definitely inflation like inflation long term inflation expectations I think are, came down on that hard. Here's one of my favorite charts. Felix is 51. I love, I love this chart. It's a two year nominal yield which is the white line versus the two year break even which is the orange line. And the ratio or the spread of each below shows you kind of like when that spread is rising. I view it as global liquidity is getting taken out of the market. Meaning you get paid to own bonds right now when that spread is higher versus back in 2021 when it was negative, you were, you were losing money by actually buying bonds. So now it flips. The whole risk reward of like the 6040 portfolio is like if you're a boomer, you actually get paid to own yield now. So what does that mean for, for equities I guess. And, and it rejiggers a lot of, a lot of things on that front. And then I guess should I go through the, the other ones I have too now? All right, so what did, what did this do? When global liquidity gets constrained, if you go to 52, the dollar starts rallying, right? Because everyone kind of flees into U.S. assets. And then if you go to the next one, this one I thought was kind of interesting. This is the 20 day historical volume and the 7 day historical volume of the dollar. And generally when you get, the way I see it is when you get a policy shift and you get some funky happening, first it goes to fx, then it goes to yields. You get volatility in fx, volatility in yields, then credit spreads widen. That's kind of the chain of effect. And then you get the PE multiples get compressed once credit spreads widen because you can't just you know, keep having the magic money machine of debt. So we saw, you know, if you look at the seven day historical volume that the dollar went up and like currencies are obviously very low volatility. So like this is not like a big, big move by any means, but it's enough where it's breaking out in the charts where hey let's, let's watch this. Because if this keeps going and then volume keeps going higher and higher on the currency side then all the global capital flows, they go and they're like oh crap, I can't hedge my currency because it costs way more when the volatility is higher. Right. So go to the next one. After that you can see the yen. This is a super long term chart back to the 70s. You can kind of see we were basing from like I don't know, 1985 to basically now. And if you think about this is like, you know, what was the plaza accord was 85 to weaken the dollar and now we're almost at the exact opposite point at the same price and we have this new Fed mandate where we'll, we'll see what happens. But like the one thing that's tricky to me is okay Japan's, the yen's really weakening and breaking out. You know, it's getting weaker here. That's when this is rising, that's getting weaker to the dollar. But now oil's rolling over there. They're a huge importer of like commodities and if you have this like deflationary impulse, they don't need to hike as much. Which means, you know, more, more capital should come in and it should keep a lid on the end. So we'll, we'll kind of see how that shakes out. And then here, go to the next one. This is the twos to tens curve and in the US and so I wonder if this is really the framework which is you have so much boomer cash. Like there's a lot of cash in the boomer generation that is searching for yield. And by like saying you want price stability, you take the long end down, right? So we're seeing as this rolls over the curve flattening. I'm wondering if he investment, you know, at their little breakfast meetings are saying listen, we need to term out this debt because we, we basically issue 85% of our, our bonds now in the treasury on the front end. So by getting the yield curve flatter, you actually allow us more duration for besson to kind of term out. You allow that, that's it to Term out that from the front end. And Torsten Slok had a great, a great chart. This was slide 56. And you know why we haven't had a rate spike in the last, I don't know, five years. It's this. They've literally been an emerging market issuing 85%. Everyone's shorting bonds and you're shorting bonds against. I said Besant is you're literally shorting bonds. A guy against the guy who broke the bank of England and the pound. So he's manipulating the US yield curve to essentially nullify any of those things. Now I think what they're really trying to do is Besson made one comment about the U.S. housing market yesterday. He said actually policy rates are restrictive to U.S. housing. And that was the.

Jack Farley: I thought that Wash said that yesterday. Yeah, yeah.

Tyler: And I thought initially the market read that as dovish and it went, you know, and it rallied. But maybe what he's trying to do is if you go back to the yield curve, it's like obviously like most mortgages in the US are based off of you know, the 30 year yield and longer duration. I think they're trying to basically flatten the yield curve here so that we have a generational turnover in housing. Right. If you get mortgage rates down then you get boomers are basically, they gotta be selling home. Affordability is just terrible. And not only that, but then you can lower your interest costs if you get that long end down longer term and you can basically issue debt longer out then our deficit and interest costs should, should theoretically shrink on that end. So we'll see if that's what happens. I don't know, you, you probably need growth like I guess you could say this is like growth is going down with inflation longer term. That's sort of what this is saying. So I don't know that that's sort of my big macro read here is we got to make sure number one the dollar doesn't cause some, some problems with the carry trade. The yen doesn't cause some, some problems with the carry trade. And the interesting part to me is high yield credit spreads barely budged. This whole thing, they barely moved. The CapEx cycle is completely intact. And, and to give you two charts on that, let's go to 3:59. This is, you know the data, this is from JP Morgan's recent data center CapEx.

Jack Farley: Oh that was a great report. I was reading that.

Tyler: Yeah. So this is just, we are seeing a rate of change slowing. So like initially, you know all, all the, the big AI Beneficiary names they flew basically because you know, year over year we're watching you know, 80% year over year spending now we're dropping from you know, 506, 75 billion to 860 and the growth rate drops to 45. So, so there could be some tempering there. But then if you look just largely there's the next slide. This is slide 60 going out to 2030. Like there's still massive amount of capex spend and if high yield isn't budging like this is a free money machine like you might. I don't think the hyperscalers will because their free cash flow is going down. They might not be the play but there's going to be a lot of opportunities which I think we're seeing is, is a lot, a lot of these things are ripping. If, if you take just a look at. I think I forgot to paste it but it was. Oh, hold on, let me. This is a really good chart I wanted to show.

Quinn: This is.

Tyler: I'm going to put it slide 61. Okay. Yeah. This is the Goldman Sachs Hyperscalers versus Goldman Sachs AI beneficiaries. And you can see money coming out of the hyperscalers. Right. This is the two indexes and basically you're seeing what we've called this pretty accurately which is I think Quinn was on this first to give him credit is all the AI bottleneck stocks just absolute rip show. So and I just don't, unless high yield credit spreads blow out, I just don't see that stopping. So that's where I'm at. Watch the carry trade.

Jack Farley: But that's some good stuff.

Tyler: This narrative has, has long term legs.

Quinn: Go to go to 42 and then I want to come back to the AI but just the last thing round out the Fed is this is his, this is the task force list. I was thinking maybe all the Fed committee members are revolting against Warsh because he's cutting everybody's speaking budgets. And so all these guys that would just go out three days a week and get paid hundreds of grand to talk, they're probably pissed because they're just like you cut my income by like 2 million bucks a year because now I'm not given speaking to hers. I have to actually do work.

Tyler: That's actually great.

Jack Farley: That's so funny. That's so true.

Quinn: But like, I mean it's hard to argue with a lot of these things on the list and I think the, the biggest, that is probably also the most important is the balance sheet and it's pretty notable to me that the yield curve is doing exactly opposite what Warsh has communicated he wants to do, which is shrink.

Jack Farley: Yeah, yeah, we thought there'd be a bull steepening.

Quinn: Yeah and. And it's probably cadence and timing I guess because. Because clearly there's other things at play. But I mean that's what his policy says he wants is and that's what Bessant wants supposedly that's what they say they want a reduced footprint, less duration on the balance sheet and using the rate policy transmission mechanism instead of the balance sheet expansion tools. So that has huge ramifications if they do it granted Besant, you know and they all chirped Yellen and the active treasury issuance and then they kind of continue the same policies. So it's hard to know what is actually going to get done. But if that does that has big ramifications for, for who benefits rebalancing. He talked about this a little bit, didn't show a lot of skin on it but it's clear he understands it and you know that those are things that would be really good for Main street and remove some of the accommodation for mega cap tech and you know, the, the AI trade just because they've been such beneficiaries of the Fed suppressing the long end and short end being abnormally high. So that's part of the view too why this is peacockishness because it's clear a lot of the committee doesn't understand or view the same view the, the balance sheet first rate policy transmission mechanism the same. But that's a change he wants to put through and it would make sense it would take a couple months to work with the board to kind of get them on the same page with that. So we'll see. We're going to need a lot more data points.

Jack Farley: I mean so I'm just trying to put a few things together and workshop this in, in, in real time. But look like the question that we're all trying to figure out and going into this was like what are warship's priorities? What does he care about? Because you know, old school Warsh was all about, you know, he was a hawk. He didn't like qe. He wanted us to get out of the game of a balance sheet messery. And then suddenly like right before the war he started talking about like rate cuts and, and the productivity boom of the AI thing which was very counter narrative to what he's always been about. So that was confusing which led to the narrative of okay, maybe we're gonna Deregulate the banks. He's going to cut rates and get out of the balance sheet, is going to offset therefore that steepening of the curve. But now, I mean putting what Tyler just mentioned about what's important to the AI build out, it's being able to do, being able for, for hyperscalers to fund the build out. They've already tapped their cash flows. We're getting into the issuance side of things now. We have equity issuance going on. We've had corporate bond issuance for a while already now. I mean just today I saw that like SpaceX is already looking at a $20 billion bond issuance. Like the bond issuance is clearly very important to this next phase. And how are, how are long, how are corporate bonds priced? Not off so far off, floating like off the, off the longer end of the yield curve. So okay, putting these things together, Warsh in that team, they really care about making sure that the build out wins and that we beat China. We also don't like the balance sheet game, but we also want to make sure that we're lowering long term yields. Sorry, I'm just working this in real

Quinn: time, but I think you're nailing this,

Tyler: which is not to talk over you, but they're moving monetary policy from the public sector to the private sector. They're actually letting the private sector do the heavy lifting. If you actually let the prices tell you what, what it is, supply and demand actually let things work. Which means once the corporate bond market sees oh, we're over supplying, you know, all this, this issuance from SpaceX, from Meta, from Google, from wherever, who, you know, issue longer term debt, once that overwhelms the market, that should, the prices in the market should tell you and then they'll react instead of, you know, I think what he was trying to say is this has been a whole reaction function previously. And the other thing that I think what's going on is they do have a view which is AI, is that productive? Right, like, and that should keep like I guess prices over long term kind of somewhat stable is my read. And if you can have better data that shows, oh, we're having a disinflationary backdrop with AI productivity then this, this policy makes a lot of sense. But there's also the world is not that simple and there's lots of geopolitics to battle with so we'll see how long they can stick with it.

Jack Farley: But like, look, what are they trying to like the long term yields, what does that achieve? It helps them with the corporate bond issuance. It also helps them with the housing market, helps with both sides of the K versus what does short term rates cutting do? Like not nearly as much. And it aligns with a lot of other things. Because what was so confusing to me is yesterday, you know, Trump was asked what's your thoughts about a potential hike? And he's like, yeah, it might happen, I don't know. Which is like completely different from what he was saying recently.

Tyler: Yeah.

Jack Farley: And you know, maybe something got into him about how the fact that, okay, like if we can tame the long end here, we can make housing affordable again or like at least mortgage rates, some are more affordable and we can ensure the build out happens so that the US can stay on top of the race for AGI against China. And we got out of like this whole song and dance of the Fed and get to a point of we actually have resolve in the Fed which could potentially lead to like lower term premiums in the long end. I don't know. I'm making this up at like real time. Oh, go, go ahead, Quinn.

Quinn: It's just the last thing I'd say on it is, is it's easy to be hawkish when stocks are at all time highs and everything's rosy because at the end of the day that's when you should be pushing back and fighting the inflation.

Tyler: But

Quinn: it's a different story when, when you have inflation still well above target and equities are down 10, 15% and you have to act in that regard too. So I think it's, it's opportune time to be coming in for war because frankly the decisions aren't that hard right now. Like it's just not that controversial of a time because the, the administration's managing volatility and propping up the markets in so many other ways and the treasury has a big, big, big, you know, hand in doing so. But the first test will come when we get that, you know, adverse reaction to some something and they have to decide because that's when you really decide if you care about inflation or not.

Tyler: Where there's credit, once you get the credit problems. That's, that's where I think things, this policy will get revisited because I think

Jack Farley: he has the summer. I think like there's a lot of tailwinds ahead here now. I think like you have oil going lower, the Iran war was, you know, resolved. Don't know who won that thing, but it's anyway like it's, we're moving on from it. You have that, you have that sorted out. And then if you look at just a couple of charts on micro market structure here from Scott Rubner at Citadel. But look, you have the, you have quadrature witching happening today too. Again, it feels like every quarter it's the record one. This once again it's record $8.3 trillion notional. But so you have this happening and then right after that we're going into the summer and you know, summer seasonality for me it's about like whatever trend we're going into the end of June and into this quarterly OPEX is like probably going to hold into it, you know, at the same time too. Like we have that one more meeting for more for six weeks but then you, you have the break. You know, we'll have the Jackson Hole thing in August. But like a lot of things are setting up for I think this consistent grind lower in volatility. You had the seasonality tailwinds at your hand as well in the summer. It's just like this low volume grind up. And then this is another one interesting as well from Scott. But just looking at household cash as percentage of total financial assets, like there's actually still quite a bit of cash on the sidelines as well that's unallocated. So I don't know, I feel like there's a lot of time for things to play out and it feels like those, those tough moments probably won't happen until the fall. And I think you have the summer to let these tailwinds shake out and figure out, you know, all those task forces that he wants to do. And at the same time I feel like we just, we just see Vol roll off and then, you know, the volume targeting funds will reallocate and it just, I feel like we're going to enter this after we get through today in this quad riching. Like, I don't know, I feel like we're just going to go into that classic summer grind.

Tyler: This is a wild chart. Like when you think about like why, why the market's at all time highs and people are sitting in cash but there's been so much wealth created. Maybe that's part of the, the problem is like they got nowhere to put it and they just keep recycling back into bonds, which is why bond volume just stays low. Yeah. And I guess maybe that's what it is. That's just, it's wild. What I do know though is this is probably, you know, the K shaped economy. I'm really curious how they solve that part of it because things have been really Good if you own assets. But I'm, I don't know how you solve the inequality problem. Besides, you know, I, I do have to say the Bernie Sanders thing, did you guys give that a read?

Jack Farley: His policy on legislation for owning AI companies.

Tyler: And I'm like, hey, at least they're trying something. Like, I, I have to, I, I don't love, like, I'm a free market capitalist at the end of the day, but you know, I'd rather have, you know, if, that, if there is a way to solve these issues, I guess you do it that way. I'm afraid of what the repercussions are 20, 30 years from now. But, you know, at least they're trying to figure out problems to the social contract, which I'm okay with, like come to a bipartisan solution there.

Jack Farley: But I mean, nationalization or at least national ownership of AI companies is like highly bipartisan. I mean, it seems like Trump and that team's trying to go off their version as well. Like, yeah, seems like this whole song and dance with the fable banning thing is them trying to get to strong arm some sort of ownership of anthropic and the frontier models too. Like, it's that, that part feels inevitable.

Tyler: Yeah. And if you're going to have 20, 30% GDP, like, I mean, and you, you give the taxpayers the benefit. Like, we're, we're liv. We're, we're, we're living in interesting times here. It's like I, everyone was hating on AI, now they're like, holy, this is pretty impressive.

Quinn: Like, well, I think it changes the narrative if you give ownership, you know, that's, that's like really the only way they can sell it and keep the bubble going and sell it to, to the people who aren't in the top point 1% getting, getting filthy rich off it. And it is funny how closely aligned you know, the two parties are on the topic because basically it's just the unit party system again. No one wants to pop the bubble, no one wants to cut spending. So what do we do? We just steal from the corporates and

Jack Farley: anthropic dividends to the plebs and then we'll call it a day?

Quinn: Yeah, I mean, we pop, we prop their bubble up. So in return we should get something and so will pay that out and then. But it's all kind of like crazy because who would, why wouldn't you take this if you're them, like, dumping your bags on the American public at ludicrous valuations? It's exactly what Elon's doing.

Tyler: Yeah. You know, you know, I made this comment on Twitter and I, I don't think people really got what I was saying. But like, the irony of the Knicks winning while mom Donnie's the mayor is. It's kind of fascinating where I have a theory that like, you see where the economic growth is and where things are really changing in the Social Contract by who wins like titles. Like when we, when the Golden State warriors are winning, the tech boom was happening and you know, out west, the Giants are winning. When I was growing up in the 90s, New York was dominating. They, they won every championship. I moved to Boston. It's basically me, but I moved to Boston and then the Red Sox won. The Patriots run. Boston was crushing there. It's kind of a fascinating thing and I wonder if it's because, you know, capital's allocating there. But my point was maybe there's a world where, like mom Donnie, in an AI, massive productivity boom, where the Social Contract is just like that type of power, the socialist type system works if you have something so productive as AI. And like, I'm open to that, which is, you know, there's, there's clearly a lot, a large portion of, of the country getting left, left behind. But it's, it's, it's kind of, it's weird to think about, I don't know, like every political philosophy thing I've learned, you just throw. I guess you have to throw. Throw out the window.

Quinn: It's kind of nice.

Jack Farley: Yeah. Should we kick the hornets nest a little bit and talk about what's going on with MicroStrategy?

Tyler: Yes,

Jack Farley: Queen, the floor is yours. Like, you know, I don't know if people have probably heard our thoughts and know what our opinions are on this whole situation, but like, we got to talk about it. I mean, this major new low in stretch, all these questions coming forth and yeah, floor is yours. Quinn, what's your thoughts right now on this whole thing?

Quinn: I actually think I'll go contrary to my recent views. I think it's getting a lot more interesting down here because it's not like over or bankrupt from a going concern perspective. It just requires management to do something they haven't done and have been very stubborn and hard headed about, and that is rectifying the situation. So the, the problem is the market's testing their liquidity concerns with them still buying, issuing shares and not building cash quick enough to cover their liabilities and service their debt and preferred dividends, but instead using that money to continue buying Bitcoin and Then Bitcoin's price falling and then having to sell more at lower prices. And the thing is is MSTR still trades above it's like let's say liquidation value to use a better term because there's all these M navs and different calcs. But if you just take out the debt, the pref from their bitcoin holdings, MSTR still trades above the, the liquidation value. And so he's going to keep using that as the release valve. It gets in more interesting when that starts to trade in the 90s and it's closer to that value. But yeah, he really, it's not rocket science. Like he just needs to raise the cash to prove to the market and address concerns about their liquidity that they can cover a couple years of dividends and interest, that they can service their next few maturities on the debt stack. And then I think you'd get a fat bounce in their whole capital structure. But they're doing the opposite.

Jack Farley: They're just, they don't want to continue

Quinn: to lever up and these, if you look across their everything in the equity side it's trading distress and so you have to address it like time usually doesn't. The market tests you. Like everybody knows what's out there. Like no whale is raising their hand and saying I'm going to be the hero that's going to buy 5 billion of Bitcoin while the largest holder of 5% of the asset class is imploding

Tyler: in front of our eyes.

Quinn: You have to just rectify the situation and then it's fine. But until he does it, it's this bleeding.

Tyler: Yep. I think he just over complicated it and over, you know, levered it and I think he didn't really anticipate this AI build out and the productivity from the. I think the big thing is I go back to it. The battle of centralization versus decentralization and centralization is clearly winning with AI right now. And those miners that have all the AI capacity or have all the electrical capacity are now flipping to the more economical thing which is a centralized economy. And when eventually that'll change and it'll go back to Bitcoin. But I don't know when that's going to be. But there might be a margin call before then because of the leverage in microstrategy. But you have to manage your balance balance sheet. And this is I, I was, you know, one of the early people that saw the, the ARB when back in. I'm not trying to, you know, pull my own tires but like when MicroStrategy first issued a bond, I was at Blockworks and I wrote a big piece about how like the use of collateral, bitcoin as collateral is a game changer. And then he was monetizing volatility with converts. And then, you know, I, I saw this whole thing and then it just, it got crazy, right? Like it got crazy. And then there was a real narrative change, which is capital was seeking out the most productive use. And there wasn't really, if you think about that, that, that stupid equation of like productivity and inflation, the delta between the two, and that's where you make your choices and assets. So when productivity is growing a lot, that means you're going to go to that. Right? But for a while there, while bitcoin was really working, there was nothing really that productive in the economy. That's the thing. Something switched and now you do have a productivity boom.

Quinn: Right.

Tyler: I think that's really what's going on, is bitcoin serves a purpose long term when there's not real growth and when governments keep stewing the economy with fake money. Right. That's, they were, they were literally just trying to create productive economic like companies by, by diluting our currency. And now they, they cross the rubricon where they've actually created productivity. You know, they did it by, by diluting enough and now that money is seeking the higher returning asset, which is AI infrastructure.

Jack Farley: Yeah, I've been reflecting on that a lot and like what the role of bitcoin is here on out because it, to your point, like for, for many years there, there was always a saying of Tina, there is no alternative because look like you had, we were in this secular stagnation since 08 and the only thing that was working was the large caps like the mags, the social media companies or whatever. And what would happen is that they would have, they'd make a bunch of money on ads that we would show to people. They would have a bunch of profit on high margins, then they'd give it back to investors as buybacks because they didn't know what else to do with it. So there's just this endless buyback flywheel. Then at the Fed you have this whole era of forward guidance, whereas we didn't know what else to do other than to buy a bunch of mbs and bonds and say that rates are going to stay low for a long time and do all these things that the Fed was not really meant for. And you had no interest in capital investment of any form whatsoever. No industrial boom. And now suddenly have the opposite. In all three of those you have very high capex use. There's use for this capital other than just buybacks. Now it looks like the, I mean I think Warsh is, is doing good things on net here but there's also the other side, the more cynical view which is that he's just trying to consolidate power and make things more obfuscated. I'm sympathetic to that. But like overall, objectively, like when you look at those task force mandates, like there's every, all five of those Fed watchers have been cynically saying we need to, we need to change these things really badly. And now somebody shown up who says we're going to do this and now everybody's in a fit. But if you have the Fed, that's, if you have central banks that are getting their shit together, more usefulness for capital to invest into things like you don't have Tina anymore. You have the opposite. There's like endless proliferations of ideas to allocate capital towards versus a non yielding asset. So it's a tough spot to be in.

Quinn: Yeah, he just over levered too. I mean the, the thing that all the. I remember this time period on Twitter that lasted a couple weeks or months where people thought Stretch STRC was a free money printer, all the while not realizing that it's just priming common equity holders. So if you look at the chart, the day that Stretch launched and started going live was the top in mstr. And every issuance just takes claims away from common and gives it to, gives it to the press. So that's what's happening. And you know, he just kind of overdid it with the dividends. Now he's staring down the barrel of having to increase the dividend yield to who knows, 12 to 13%. And that just adds a bigger drag on your cash flows as a business that has no revenue. So it's just, it's his classic greed. And. But he can rectify it. Like he can fix it. He just.

Tyler: Yeah, you have to do the hard thing.

Jack Farley: Yeah, they don't want to do the hard thing. And like, I don't know, I wanna, it's. There is a, there is a part, there's a port, there's a role for bitcoin in a portfolio. But this whole thing needs to be sorted out first. Like, I don't know. I just feel like to me what this whole thing represents is initially is a good idea. I'm with you Tyler. But now it's just been taken way too far, way too greedy. And it's, and it's obfuscating the original vision and ideals of bitcoin that I got into in like 2018.

Tyler: I don't know, it was just a giant arb. It was a boomer arbitrary right when. Yeah, I think this is really a fourth turning to first turning moment where it's like for, for 15 years there was no companies I really wanted to invest in because like there was. I didn't. I never bought Facebook because I hated what he was doing, you know.

Quinn: Yeah.

Tyler: It was ruining society in a lot of senses. And I like. And I. There's. I know there's a lot of good things that came out of it and but, but like in general there. All those companies were just a giant arb. From like newspapers to like advert. It was just advertising arm and, and they. It. It wasn't real growth. Now I'm seeing cool companies in like the private markets that I'm like dude, this is awesome. Like there's real stuff. They're solving biotech like cancer and it's awesome. Like there's, there's when in that world, I don't know, like bitcoin will have moments in history. Like I don't think it's going away but like when you have like a whole generational turnover of productive things and money's actually going to seek them out and you're building out like all these like the, the rails and maybe we'll over lever it and it'll blow up and then you'll have to print more money and dilute the currency. But like for now it's looking pretty good.

Jack Farley: Yeah. Yeah. Maybe it's on the other side of that as insurance to like the state capitalism AI build out thing on the other side. That's when it's time to own it again. You own some golden bitcoin. But yeah, yeah, it's just the opportunity cost is too high right now.

Tyler: And the other thing is like I've always said this about crypto in general and I'm just gonna. There's certain things that it could have been but they were just so bad at marketing it. And like every time you'd hear like a altcoin pitch you'd be like, you are so bad at the narrative. Like what is the use case and why do I need it? And make it simple for me. But they could never do that. And I. That's. There's so much capital that's been wasted here. And, and I will say this, there's another thing. The government campaigned on like Helping the industry. They just did not at all for their votes. And like, you know, me too. But like you're just like, what, how, how? And, and you could make the conspiracy theorists would say they just did it to centralize the economy even more and just create like this oligarchy of people, which is totally valid. And I, I, I don't know how to feel about that. But I, I do know that crypto never really, like, they didn't help themselves on the D5 side where there's a lot of great things. There's some unbelievable stuff that was created that I thought was so good. But they lost the bank to the banking cartel is my view. Maybe that'll change.

Jack Farley: But one for every one legit project. There was 10 scams. Yeah.

Tyler: And it, yeah, the 10 scams didn't help. Is like, and the guy, I mean, I remember going to a block works conference. I was like, I don't understand anything. Sometimes these, like, these projects. What are you saying? Like, what are you saying? Spoke there a guy spoke for like 45 minutes. I'm like, dude, you got, you need like a guy, a PR guy to tell you how to say this. Simply, sorry, I, I probably been holding that for like 10 years.

Jack Farley: But like, no, I mean, but then

Tyler: when you get like a really good project, like ave really made a lot of sense to me. It's like this is the banking system simplified?

Quinn: I also, yeah, I, I also think that like to play devil's advocate because, you know, I haven't touched crypto in quite a while is just like keeping it super simple and stupid is like liquidity hasn't been good really. You know, we've gotten these like band aid rate cuts over the years and it's really, liquidity's been, as we talked about, hijacked by the treasury and the White House because the Fed can't do anything due to inflation. And so in this world where instead of the traditional liquidity routes that are avoided because they don't let any crises or recessions happen that then instigate the liquidity, they're using stock market volk effects and kind of manipulatory things with passive flows and so none of it trickles down. And I kind of think too, like we moved away, we talk about it here post Covid when they really stimulated Main street and demand and wages were growing and the economy was vibrant. You know, they moved away from the demand side stuff to all supply side, you know, pump more oil, try and you know, manipulate certain things at the, at the Fed and Treasury and none of it's reaching the people that would actually buy this stuff either. Like, so I kind of think that eventually, you know, one you're going to, the market's going to resolve the sailor situation at, at some point in time. And I think also you sort of just need to get some volatility and traditional assets that instigates a normal response from, from monetary and fiscal because liquidity is waning and it has been waning and it should continue to until there's a bigger crisis type event. So to me it's just a factor of, of that more so than anything. And obviously all the altcoin stuff that, that's just garbage. But the bitcoin side itself is, it's just struggling from macro environment issues.

Jack Farley: I think, I think it's valid to keep that like eye on the prize that I. There's a lot of things to figure out. We gotta, we gotta sort through the, the DAT mess and especially now like MSTR, like the rest of the DATs have just gone to zero. We gotta sort out these altcoin tokens that don't represent any sort of meaningful claim on cash flows that are just there to be sold by like foundations because they have their own equity. And then altcoin like that needs to be sorted out, the regulatory aspect needs to be sorted out. We need to get Clarity act passed so that we actually know what's allowed or not allowed and it's not just like this whole song and dance. The crypto industry is going to look very different in a year or two. And I think what comes from this rubble will generally be good and I'm excited for, but we're in limbo for now of having to sort through these messes and through the misallocation of excessive capital from 2021. Like that just that, that sowed the roots and now we're paying the price and eventually some good things will come forth.

Tyler: There was a lot of good things created. I hate to be such a hater, but there was a lot. There is way more nonsense. And granted it's not like I didn't trade, you know, dumb altcoins at times like a total hypocrite because, because we've

Jack Farley: all traded memes that was wild.

Tyler: Like yeah, they were probably a little quit community and it was just like yeah that, that was nutty. But, but you know, that being said there people worked really hard and create a lot of good stuff. It just never made it out.

Jack Farley: The cipher, you know, that's, that's always what I'VE told like friends that ask me about like working in the crypto world, I'm just like look like 70 of it is a scam and a grift but the 30 is actually quite cool and I, I am optimistic for it to break out but we gotta, we just gotta get our house in order first.

Tyler: Do you know.

Jack Farley: And you know, it's yeah, kind of

Tyler: nuts to me is like takes like you know, to wire money and to settle trades. Like I still have to take care of trade breaks like when they happen in the public markets and you're like hey, you know xyz can you talk to this person to sell this trade? And it's like that problem has been solved by crypto for you know, whatever, 15 years. And I, I just, there's a giant arb there that's just absolutely massive. I can't like when every time I, I try to transfer money from my bank they, they, they shut it down because it's like oh you, you need a full body scan and they give you a cavity search. And I'm like okay, yeah, yeah, I don't want that. Like I don't want my bank to like tell me what I could do with my money.

Jack Farley: And yeah, like yeah, there is. Yeah. All right, well I think we did a good job of being balanced there but like yeah, we just got to get our house in order and yeah, it's sort of like the post2000.com bust. You know a lot of, a lot of stuff was crap and died out and then a few things came out of the other side and I think it's the same case. It's just, it's going to take some, some more time and in the meantime, you know, everybody's partying like crazy in the AI world and, and that's great too.

Tyler: Yeah. I got one really interesting chart to end on. If you've made it this far, can you go to slide 57? I, I, I love seeing like extremes. It says from Lee Coppersmith he said gold six month put the call skews near 10 year highs. CTA position in gold is collapsed toward the first percentile on a one year look back. And you have to remember that I, I purposely top ticked the gold market with my dancing meme.

Quinn: That is awesome.

Tyler: We gotta replay it. We gotta replay that. I knew I was doing it but now so that you know that I'm not a total. This is, this is, we're getting a complete opposite end of the spectrum of I love it and no one's even talked about it. It's really incredible watching how these just human nature goes from ping pong of dude, extreme bullishness to extreme bearishness.

Jack Farley: There was photos of people lined up to buy physical gold just like a few months ago.

Tyler: Yeah.

Jack Farley: And now nobody. Like.

Quinn: Yeah, that's what happens when you have the heaviest government hand in markets ever. You just get face ripping multi, you know, in both directions. That's also a characteristic of a bubble, by the way. Everyone wants a point to 2099 and stuff, but look back at what the volatility was in those ascents. And I mean, just like crypto bubbles too. There's just nasty drawdowns and rip right back. And it kind of feels like every asset is exemplifying that structure now. It's not just stocks. It's not just crypto. It's. And it's metals, it's oil now. It's. It's oil producers now. I mean, it's just zip, zip, like, yeah, you know, probably here to stay central.

Tyler: Centrally planned world. Centrally should centralize asset management. You always end up at extremes. Because I. I learned this from working at Franklin Templeton. I traded for a guy, you know, he. He ran $100 billion. He was the smartest guy in the market. I. I really think this guy's in incredible. And he. He could only buy a sector when it was on sale. Like, he could only sell a sector when there was insane bullishness. It was like every baby boomer owned this thing. And it's just like, it was incredible watching. When you think about how centrally planned or centralized the asset management industry is, like, you can only. In moving those titanic assets is like you have to do it real slow. Real slow. And like, I think that's to. To your point, Quinn, is like, it always ends in a. It's a conflagration of volatility. And that's where this guy monetizes. He monetizes all the ball. And he. He's incredible. He's incredible. But that's, you know, little story for the end. I'll. I'll save the end. I'm going to be. You should get him on at one point. But he's. He's. I think he's the smartest guy on the planet.

Quinn: After you, of course.

Jack Farley: Yeah.

Tyler: Oh, yeah. He finally busted my balls. One hour in.

Jack Farley: All right, guys. Always a pleasure. That was fun. Good stuff. Have a great. Have a great long weekend.

Quinn: Happy Juneteenth.

Jack Farley: Yeah. Happy Juneteenth.

Quinn: It.