The transition from Fed Chair Powell to Chair Walsh represents a fundamental shift in monetary policy frameworks, particularly regarding how inflation is conceptualized and managed. Powell viewed inflation as an external force that the Fed must respond to, while Walsh believes inflation is a choice by the Fed itself. This philosophical difference affects how forward guidance, interest rates, and the balance sheet will be managed, with Walsh potentially decoupling rate decisions from balance sheet decisions. Understanding this regime change is crucial for analyzing how real interest rates, long-end yields, and currency movements will interact in the coming months, as the Fed's policy actions will increasingly diverge from traditional patterns.
FOMC Setup: How Powell’s Last Meeting Reshapes the Real Rate PathAjouté :
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Ladies and gentlemen, welcome to the capital flows. live stream. Appreciate everyone joining. We're doing these live streams every single day, 8:30 a.m.
Mountain Standard Time, covering markets and the trades that we're taking in them, and I think more importantly, the framework we're using to really analyze things. So, we'll be covering several things today on the front of where we're at in mortgage right now, how to think about FOMC tomorrow, and and I also want to really touch on a lot of comments people have been bringing up about how I'm thinking about specific trades. And James, if yeah, you guys don't know him, he's going to be on these live streams every single day. He has a lot of great content on YouTube that I'll link below for everyone. And you can go through all this stuff on James Rosenthal and the James the place I actually wanted to start today and I think this will connect into this you know a lot of the content that you do is you know I've we we have the market down today equities are down bitcoin's down purr's down oracle's down every you know all these things are shifting right and you know what I you know it's it's kind of funny I get always this stream of comments every single time something is the opposite as of the view I've shared. How would you think through kind of shifting kind of uh having a less emotional response to seeing the market go against you or go with you or something like that? How would you kind of reframe that a little bit as it relates to kind of where we're at today?
>> Yeah, you can hear me right because I'm on a new >> Nice. Uh yeah, it's not easy, right? I think um if you're if you're brought to the point to actually go seek out Capital Flow's account and comment uh about a down day.
Um, one I I think like maybe you're approaching this uh a little too halfhazardly and not well thought through. And uh if you're if you're dumping off the responsibility onto somebody else and want to go play the blame game, um you're not going to have a career here. Uh can you follow somebody's trades because you have conviction on their reads and it aligns with you? uh and you've thought about the risk you want to take on it and the time horizon uh needed and you know the economic calendar and you understand the last three weeks of price action like if you did all that it is very unlikely that you would be smashing your keyboard this morning saying oracle's down you know per two no you know I'm at the Bitcoin conference and it's like I don't you know there's the the energy conference guys aren't over here saying, "Oh, no. Bit I'm packing things. I'm packing up our showcase here, boys.
Bitcoin's down 2%." You know, like Satoshi was wrong. So, I just uh I'd maybe think about how how you're how you're approaching this whole thing. It doesn't mean like I hate down days, too.
I want it all to happen now, right? But if you think simply about like what today is, I mean, what is today?
Tuesday.
uh Tuesday pre FOMC, pre a lot of the big Wednesday and Thursday earnings after a massive run off the lows that nobody thought would happen. Do you think that maybe there could be a couple bad days in there? Do you think that maybe uh the fact that it's Powell's last conference and that we're heading into this kind of new worsh, do you think some risk might come off the table? Do you think positioning might be shifting around? If so, then shut the [ __ ] up.
>> That's my thoughts on it. I guess >> I think I think those are good. I think it's I think it's helpful to kind of you know reframe what is h I think you know separating exactly the market view from your emotions is key. And the only reason I I bring this up is for everyone who is on stream right now and is trying to to spend time focused on, you know, these different changes. I know that the people who are professionals and here for the market view, they they'll say like, well, this stuff, you know, I know how this works.
I've, you know, been in markets for a while. I know how to manage my emotions, which is great when we, you know, look at something, you know, for for anyone who has, you know, been, you know, following along with anything that I've been doing. You know, I've talked about my largest positions are PER and Oracle.
Uh, my view I we actually talked about this in live stream yesterday that it actually is not totally unreasonable to have the S&P pull back a little bit >> and then bid after FOMC. So, you know, we're we're not even seeing anything that insane overall happening after this massive run. Um, and then again, you know, bonds continue to be at these lows. Stocks are outperforming bonds, which makes sense in this regime that we're in. And, you know, crude is ticked up barely. I mean, barely. We're up 3% on the day. So, my view, and you know, also on gold and silver, you know, if we can't make a bottom and begin to bid out of FOMC, that would probably shift my view a little bit. And I'm gonna lay out some of the drivers for that for uh paid subscribers today. But, you know, just just I I like to think about this as, you know, if I'm if I look at my portfolio right now, I will look and the per position will be down. I'll see a dollar sign there that says, "Hey, I lost money, right? Or I'm down money today." And what I need to do is I actually always look at positions. I know some people avoid looking at positions when they're down. I think that's totally dumb. I think you should always look at them and feel them and understand well what's my risk management process for this and I always think about okay let's say I'm completely wrong on per let's say I'm completely wrong on Oracle you know if I if you bring that idea up you know people don't like that because they they think in their mind wait I could lose money on a trade this might not actually play out the way that capital flow said and at the end of the day you need to be able to separate your own emotions from the actual ideorally possible. Am I positioned for that? No.
Right. If we begin to change kind of the regime that we're in and all of the the things shift and we move down, would I actually set up a scenario to buy more or would that tell me to get out of my position or what what would that tell me? And there are all these very realistic probabilities that could take place. And what we need to do is say, okay, let's zoom out and say, what's the macro regime that we're in? How do the specific trades that we're talking about fit into that macro regime? How could I be right or wrong on those trades? And then after I understand that scenario analysis, then from there, how do I set myself up for success to say, okay, if we go do this, I'm going to get out of the trade. If we go do this, I'm going to add to the trade. If we go do this, I'm going to do X, Y, and Z. And I think if you want to to be a professional and interact in in in markets, you know, markets are going to figure out your point of, you know, most vulnerability and just, you know, stick its finger in that wound and, you know, see how long it takes for you to kind of squeal. And so I think that's just one of the most important things to to understand as we go through everything today. you know, whatever your position is, even if you're up on positions, you said, "Hey, you know what? I took a short, now I'm on sides, or I'm doing this trade, now I'm on sides." It doesn't matter whether you're down or up. The most important thing that you can have in any moment is thinking clearly about the next stage of whatever is going to happen. So, I that's going to be the focus that we really have to say, okay, well, where are we at today in the price action? How do we connect it to FOMC tomorrow? and how are we going to pull all these moving parts together for the larger regime that's taking place as we transition from Worsh uh or from Powell to Worsh. So that's going to be the the focus for today. James, anything to kind of build on that as we're going as we kind of begin to go into this idea of Powell and Worsh and things like that.
>> Yeah, just to piggyback on your comment about separating like the emotions and stuff. This is something I talk about a lot is like most people will say you need to be a robot when you're trading.
You need to like remove your emotions.
You need to you know blah blah blah be more like an algo. That's just impossible. And you you need to what what I like to say is like I could be emotional but like I need to sit with those emotions and stare straight at them. You know, I need to feel them. The obstacle is the way. Uh as your favorite author would say, right? It's like uh it's like ekal to walk right into that abyss because it'll matter in the future like if you if you can let's take purr or whatever for example right if you're in purr and you've you've been in this position for a while and we've had some severe draw downs in there and each time they happen you can go back and you could kind of clearly explain hey why did we get into this position in the first place right and then you could kind of objectively go through that and be like, "Okay, we had these eight reasons. Are any of you know have have now is that only four of those are still true and like there's actually a large change that's occurred and I it actually warrants like trimming my position or getting out completely or whatever it may be like uh then then maybe sure. But if if you walk through and you say like, you know, my my uh reasons for being in this trade are are all still the same and it's just this drastic price movement that is spiking something else inside of me. Um you need to basically recognize that and accept it because this trade is going to play out how this trade is going to play out, right? And then what about when you're in the next one? What if what if it's Oracle or if it's something in six months or it's 12 months and that position goes down and you feel the same things? What are you going to take away from this result like this experience and then add it to that next one? What are you going to learn from it? Right?
Because I've felt these drawdowns and positions I have convictions in for a long time. And there's been many cases where I make an error. I make a blunder and I like just can't handle it and I exit the position to make myself feel better in the moment. Um, not because I went back through my thesis and said, "Hey, things have really changed here. I don't want this position anymore." So, I would really think about staring that monster straight in the eye and understanding what it really is.
thinking back about why you're in these positions in the first place because it's gonna ma it might maybe maybe you still [ __ ] up in this trade or maybe you don't but it's going to matter for the next 10 15 20 big positions you put on when you experience the same exact emotions.
Yeah, I'm gonna when I when I think about that, I just think about how am I going to execute with excellence across all of the trades I run in the next six months? How do I set myself up for success for that? And so much of that is not saying I just need to get the one macro thesis and this one you know uh you know put myself in some artificial place of scarcity so I don't make an emotional decision or let me just be unemotional or something like that. I think it goes back to how can I continually kind of implement the process of excellence with all the plates spinning at the same time and then from there that gives me the clarity of like what it means to execute and manage my risk. I think that's just so key because you have to you know there's not these like plateaus that you hit for your what you learn or your mentality or emotions or anything like that. all the continuous process of improvement. And that gives you a seat at the table to take swings as opposed to I'm going to hit this like level of knowledge and macro. I'm going to hit this level of emotional clarity so I won't do this anymore. It's I just think about all you have to take all those little things that you do. You probably remember like one day or a week where you executed so well because you got your health in order, your mindset in order, your like consistency and discipline in like learning things and reading macro and you know going through your thesis. You probably remember executing really well. And it's because you had that continuous process, not because you did one thing right. And I just think about that so much. And I think it even connects to like where you are right now, right? going to Vegas, spending time there, meeting people, like investing in the potential ideas that could come from that, the relationships that could come from that.
And I don't think even, you know, people don't understand kind of like some of the background where, you know, you have a lot of relationships with people you've met in Bitcoin Vegas and other places that are now, you know, really helping you a lot >> that no one really would even talk about, right? They're going to say like, "Oh, you know, I went to this thing. A lot of it was boring. I met these like four people. What What did I do?" Right.
But now you kind of at a point where now it's all compounding. So, I think that's kind of really interesting. You we can talk about that a little bit before we go into the slides as well.
>> Yeah. Well, I know one of my strengths is like uh touch points with people and kind of trying to keep up keep up a connection.
And even though, you know, probably a bunch of people in the comments might say like, "I would never go to Bitcoin Vegas. Conferences are stupid." Blah, blah, blah. Why would I bother taking my time? Well, whatever, man. You know, like to each their own. Like to me the point is I like to go I like to feel you know maybe maybe somebody in Purr maybe Global Flows would take a flight out to New York because he wants to have one dinner with one person associated with Purr to get a better feel for how their operations are or something like that, right? Maybe that'll add or take away from his conviction on the future of the company. Well, that's a flight. That's time. That's time away from doing this.
That's all in an effort to maybe improve his conviction on something, right? And that's >> a little small percentage, right?
>> Very small percentage. And that dinner might get cancelled and it might be not worth it, right? How many times have I visited you and it's like maybe we talk about something that like really is impactful. Most times we do, but there have probably been trips where I come back and I'm like, well, you know, whatever. It was kind of like we just enjoyed some food and that was that, right? Like I just uh this goes back to like what we always talk about is like trying to stifle volatility. It's like if you're trying to like package up your emotions to move through this space super cleanly, it's like you're just trying to dull the volatility that you're experiencing externally and internally. And if you want to um you know what do you think Elon Musk and Alex Karp and all these guys are trying to dole volatility to to become great like they're not they're they're walking straight into the face of everything. So I don't know something to think about.
Somebody said lots of James fbombs today. Yeah. Well to be honest I drop fbombs all the time. I try to keep them out of the streams as much as I can but sometimes >> we're we're working on them guys. We're working on them. Okay. This isn't a G-rated show, you know.
>> Well, it's it's all good. It's all good.
Uh we'll I I know. Uh I usually or I don't I don't at all really like cuss on social media or stream or anything like that, but it's okay. We all We're all We're all working through stuff. Um >> you're afraid of the volatility.
>> I Yeah, that's that's what it is. It's Let's Let's reframe that as my insecurity. Um the I wanted to start with that because when we are going through uh what we have for today, the reason why I wanted to kind of start with, you know, these these ideas that myself and James just covered is because you can go through this entire slide.
You know, think about it. There's two different people that are going to go through these live streams and these slides. one is going to take so much out of them because they're coming with the right mindset and the other is just going to be like, "Nah, that just seems like a bunch of just random stuff, right? It doesn't matter how intelligent or smart you are or where you're at in life. If you come into a situation with the wrong mindset, it it's just going to seem worthless no matter what. But if you come in with the right mindset, it kind of doesn't matter what situation you're in, you're always going to learn something from it." And so, you know, as a reminder, everyone, if you are here, everything is laid out on capitalflows.com.
If you want the slide deck afterward, it'll be laid out for free on the website. Every single thing, every day is laid out on the website. If you guys aren't there yet, I would strongly encourage you go to the educational primer section right here. You can go through all the educational primers and then you can also go through the most recent >> primer section right here. You can go through all the most recent reports and then I would, you know, really encourage you. I'm going to link it in today's go through decoding the wars testimony what the Fed actually said uh the Fed uh the next Fed chair actually said that is going to be really important context for today because we're in a spot where this is Powell's last meeting. So Powell's exit we're going to talk about what does it mean to hand off from Powell to WSH.
And so this is Powell's last, you know, SCP and we're moving into this warish regime and Powell is presiding over the last meeting before the framework changes. Every line he draws on our star on our the balance sheet becomes kind of a a baseline that Worsh inherits. Now, you know, Wars could crush that and say we're not doing that or we could just totally kind of switch and flip the script. And the silence today that Powell has if he's going to try to go through and have a smooth exit is going to be meaningful because you know Worsh when he came out in the last meeting he talked a lot about the balance sheet and these changes in how he thinks about things. It's a very you know fundamentally different framework. You know, if you if we go back to the slide deck that I shared on the Worsh side, you know, one of the things that I shared is that, you know, Worsh believes that inflation is a choice by the Fed.
Powell doesn't believe that. Powell thinks that, you know, inflation is just kind of a thing that happens accidentally and the Fed has to respond to it. The Fed doesn't real or you know Powell refuses to acknowledge that the Fed is also a direct input into inflation. And so this is you know the entire idea that wars covered that is when you have these move up in prices we've had a you know 20 to 30% real loss in the changes in CPI. the Fed would have had a 2% inflation target rate during this time right here. This is where inflation would be. We're now up here in CPI. And this is actually before the energy crisis that we're having right now. So, just begin to realize that when we think about this change that we're in, this is a massive gap for how the two Fed chairs think about inflation. And I believe, let me pull up this other chart because this is This this chart is going to be very important.
Let me see.
Come on. There we go. This is really in the 2020 period of time. right here in red is when Powell changed the entire inflation framework and he said, you know, we're going to target 2% over time instead of 2% inflation at whatever period of time that we're in. And then they fell behind and then they had to catch up and now we're kind of in this period in the middle and we're trying to kind of thread the needle. And so this is, you know, August 2020 is when their inflation framework changed. As soon as it changed, you had this massive meltup.
Now, in today's world, it's going to be very different because Worsh and Powell are going to, I think, frame things very differently. And by the way, guys, sorry, I didn't I'm going to put the chat up on the the screen. If you guys have any questions, put them on the chat. And then if you guys are watching this, uh, I'd really appreciate if you guys are able to retweet it on Twitter. If you guys are on YouTube, throw in the comment section and let me know what you focus on in markets and I'll be able to cover that. If you have any questions, um, I'll be able to cover that as we go into the different changes that we have uh on the price action side when we start going through those. So, any thoughts or questions, throw them in the comments section. Again, please retweet this uh on on Twitter as well.
Going back to this handoff, when you have this change in forward guidance, Wars doesn't really believe in forward guidance in the same way. And so, we're going to have a new path for how they think about forward guidance. I think Worsh might try to get rid of forward guidance overall, or maybe he might just try to reframe the importance of it. But here's where we are today. And you can see that over the last several days or excuse me, several months, the Fed has kind of viewed interest rates moving down. That's their projection. And then here's the realized rate that we've had.
Now, that's very different than what we're at right now. If you look at the forward curve right now, we're pricing for April 100% probability of a hold.
So, when you look here on the left, you can see that 100% probability of a hold is priced right now. And then you basically have a hold priced for almost every other meeting this year. So as we're moving into this meeting, the entire idea is that there is going that the market is saying no cuts this year and no hikes. And you can even see right here in the Z6 contract, we have a ton of volume flowing through that is really setting the range. And this is actually setting the range for the market right now because as we chop around these levels, we're very very unlikely to have the Z6 contract move up to 25 pips or move down to 25 dips of cuts on cuts or hikes. So this oscillation in the middle is going to frame everything. And you'll even notice that what has taken place over the last week is that inflation expectations have actually risen a bit.
And you'll see here one-year inflation swaps have gone up. Now that's a key thing to note because two-year inflation swaps have also gone up. Inflation risk is rising in the system. Five year the same 10year 30-year a little bit but mainly on the short end right here which is why you have the two tense curve in inflation flattening more. Now, here's the thing. Inflation has risen more, but the Fed is not responding, which is why real rates have gone down. So, this means that the Fed is pausing as real rates or excuse me, the Fed is pausing into inflation accelerating over the last week. That connects to why right now we are seeing UB back down at lows because the long end is pricing what the Fed's inaction is doing. Now it's not significant. We still don't have the move index, you know, really popping back up to these same levels. So volatility is lower. But when you look at UB or you know ZB or ZN, these are all moving back down a bit which has caused the curve to shift a little bit.
If we look at TW's 10ens, we've been in this range. But if you look at 10's 30s, we've actually steepened a little bit more. Now we're flattening back down.
And then you have twos fives has just been in this kind of range right here as well. This tells you this, you know, framework tells you that the market is watching for how this regime change will take place because if wars comes out and says, you know, we're going to have basically inflation run hot or we're going to anchor inflation to if inflation rises, we're going to cut rates into that, but we're going to cut the balance sheet into that as well. we're going to cut rates and cut the balance sheet if that takes place. Worsh is going to completely reframe that. Now, people will say, "Okay, well, yeah, but you still need the Fed to vote on things and you still need all the, you know, members to disscent or whatever it might be."
That is true. But the thing that Worsh is going to do is really, in my view, reframe how that forward guidance works, how exactly he's going to put pressure on other Fed members, and how he's going to reframe a lot of the data that's taking place. And I think he has the ability to be able to do that. So, this is why real rates are going to be so important moving forward. And I cannot express enough how if you understand interest rates right now and where they're restrictive or not restrictive and how it connects to nominals versus inflation swaps versus the real yield and how that connects to the economy. That is going to be the differentiating factor to understand what is going to take place with with interest rates and the Fed balance sheet because Wars has already indicated I'm gonna pull this up. You can see that in red right here you have inflation swaps and then in this turquoise green you have real rates and then up here you have nominal rates. The Fed controls short end rates but long end rates price the difference between that especially for long-term duration issuance and fiscal policy and long-term growth expectations. And so the key thing is that you know the quoteunquote R star which is where is a restrictive enough level so much of it is going to be connected to real interest rates right now. And you'll notice that real interest rates were negative during this entire period of time especially even long interest long end real rates for a little period of time in 2020 and 2021.
But the key thing to notice is that inflation, if we begin to tick back up a little bit, which we are right now, if that feeds into core and war is not aggressive into that, that's why you can have long end rates push up a little bit, which is why, you know, I've laid this out. There's three things that could slow down this credit cycle. It's longend interest rates moving up too much and too fast, or it's, you know, crossber liquidity shifting. Right now, long end rates are moving up just a little bit. And I would not be surprised to see as we move into FOMC a little bit of a push in the 10-year to right here, which again is why I'm neutral bonds.
That drags down equities, I don't know, 1% 2%. And then we reverse right back down and or just stay, excuse me, stay neutral on on the 10-year and stay within this range right here. And then ES begins to, you know, reverse back up right here. But overall, my view is not bearish ES or anything like that because we have a positioning divergence in IGV, which is why you see IGV holding these levels right here. But you actually have tech down. So tech is down 240 uh basis points on the day whereas IGV is down 67 bips. So that tells you about where long short positioning is in the tech sector.
And that's my view is that you were having this setup where you're likely going to have these interest rate drivers and Wars' stance toward those.
May maybe it'll pull down the index a little bit. Not a ton. If it does, it's a buying opportunity because we have this positioning divergence in software versus real rates. And so all of this comes back down to how they're going to talk about the DOT plot moving forward as Powell leaves. I my opinion is I don't think Powell is going to stay around as a Fed governor um if he's not the chair.
Just doesn't it's not a great look um in my opinion. Maybe he will, but I don't think he's going to do that. And so now we're bringing into question forward guidance which is going to shift how people think about rates. You can see here, here's the Fed's SCP dotplot projections as Whoops. Here's the SCP's dotplot projections as we have gone through these different periods of time.
And you can see how the actual the actual change that's taken place has been a lot more aggressive on the upside and it's been really off on the downside as well. they've, you know, said cuts and then not cuts and now the the forward curve is really pushing around the Fed a lot more than the Fed is pushing around the forward curve. And so all of this connects to what I want to do is go to the balance sheet idea.
>> Can I ask you a question first?
>> Yeah.
>> Um well, two things. one uh do you think Worsh is if is one of the like tools I guess Worsh could use is by changing the kind of forward guidance um the way the way they view it or the way they kind of uh speak it. Uh, can he change that enough to where he'll basically throw off the other members?
Like, uh, cuz right now they've been doing things a certain way for a really long time. He changes the framework enough, maybe it will be easier for him to kind of um, align them with what he's trying to do, if that makes sense. And then second, how does generally the baton handoff go between Fed chairs? Is it is it usually been smooth? Has it been been shaky?
Like generally speaking?
>> So yeah, I think two two points there.
Number one is this idea of how does a interest rate decision get made, right? which is Worsh is the leader yet he is one vote amongst all the other Fed governors to make a decision right and so technically it is a voting process right it's not a unilateral decision by a single individual so it's not like war can come in and say I don't care about any of you guys I'm just going to cut rates peace right or you're all fired right so that's one which is why this idea of dissents is soant so important and it's also why no one really sees this in the background but like the fact that Powell has gotten everyone on his side for the lowest period of descents in history. Uh you know I'm sure there's there's other periods where it was a little bit lower. Uh but it wasn't as extreme in terms of the situation we're in today and uncertain as it is today.
It shows in in many ways how tactful Powell is on the back end of things that he's gotten like a bunch of yesmen around him and he's basically swayed all of them to agree with him. And so that's that's one. The second thing is that now he you know Worsh needs to one reframe how the market thinks about everything because he's one of the main communication channels. You know, Worsh doesn't think that we should be having all the Fed governors communicate a ton, right? Like you have Fed governors come out all the time and say what they think and all this stuff. He doesn't think that we're going to have that in the same way. And the idea is that when we have this situation where you have all these people that need to vote, you have to have wars actually swing the vote in many ways. So he has to on the on the front side on the public market side actually change how people think about things but that's only going to be valuable in so much as he can actually change things on the back end with the other Fed governors. So that's one. The other thing is that in terms of Fed governors changing I think let me pull this up. I know I have a slide on this one. uh the so for example in the 2018 yellen to Powell uh the first six months of the Powell regime saw a complete repricing of the dot plot a hawkish drift and ultimately the Q4 2018 reversal uh and you had a repricing so that was the driver of 2018 and I'll actually share a chart on that because I think that's super important in 2018 if you go to uh real interest rates and look at what happened during that time. Let me see if I can pull this up.
You will notice that real interest rates in 2018, the reason why equities were selling off is because you had real interest rates rising right here in 2018.
>> Can you can you see that? Is that is that clear?
>> So, those are rising in 2018. But you'll notice that during that time as well, >> epic trading by the way, >> epic epic trading in 2018, quarter 4, legendary >> in 2018 right here, you also have nominal rates rising. So you have nominal rates rising as well because the Fed is pushing up rates. But the key thing is that especially on the short end for two-year inflation swaps, this was the really key thing that did everything is in 2018, you actually had inflation swaps falling. So you had the Fed hiking into falling inflation.
That's why the market sold off.
>> So right here you have inflation expectations falling into December of 2018. As that takes place, the Fed hikes into that or is hawkish into that, excuse me. And as a result, real interest rates rise and it pulls down equities. So that's why you can recognize and I'll go back to this chart. Let's see if we can >> I guess that shows the power too of the the guidance and the the optics, right?
like like you were saying his ability to sway the public's view on markets because if they were just hawkish in saying like this is something we would consider while in while inflation swaps were falling.
>> I mean that that market fell apart 25% I believe into the last quarter. Yeah, it it was and I think especially in 2018 and 2019, you know, growth was a lot weaker. And I think that's, you know, we we're in a similar situation where if if Powell, excuse me, if Worsh is a little bit too aggressive in terms of any hawkishness, which I actually don't think he will be in terms of the interest rate side, but that could really impact the economy and also markets. But I think the the key differentiator for where we are right now is that Worsh for for the longest period of time, the Fed has said, "Oh, let's cut rates and expand the balance sheet." Oh, things are not going well. That's fine.
We'll cut rates and we'll expand the balance sheet, >> right? Oh, things are going well, like we need to hike. Let's hike and decrease the balance sheet. So, they did both kind of in unison.
The thing with Worsh is he is trying to break that divergence where the price of money and interest rates and the quantity of money in the balance sheet are now going to diverge even more. And if if you were trying to understand where a lot of macro liquidity has come over the years, that's not just from real interest rates. It's been from the quantity of money in the system, which is from either the Fed, from the Treasury, from private sector liquidity or crossber flows or commercial banks.
But it has to come from one of those. It can't it can't just like appear out of nowhere. And if you map those correctly, then you know why capital moves out the risk curve and why you know these you know the the views for oh well the reverse repo has hit zero so we're going to bow till the contract and liquidity or some of these arbitrary views about the treasury general account. Those are all single inputs into a very dynamic structure for liquidity. And so liquidity in itself is not cyclical it's path dependent. So in the same way that you have you know I think this goes back to this idea of path dependency where the there is uncertainty in the system there's a lot of chaos and this idea that liquidity moves in this smooth cycle to the upside and downside is just not realistic to what actually changes in markets which is why anyone who's trading markets actively especially within a liquidity framework they're not using you know a liquidity cycle thing that just kind of oscillates perfectly up and down. They're always looking at what's the amount of liquidity in the system. Also, you know, one of the things that I'm doing all the time is saying, you know, we have a real interest rate curve, right? Right now, we have one year real rates at 21 bips, two-year real rates at 79 bips, and then 5-year real rates at, you know, 1.29.
you know, you have real interest rates across the curve and then you have real interest rate curves that are steepening or flattening, right? And so you can see here, we've actually had the real rate curve, hang on one second.
We've actually had the real rate curve steepen during this period of time. That is a really key thing to note. And when you have, you know, real rates steep, real rate curves steepening on the day, so 23, 24, 27, right, in terms of the dates, that's something I'm watching really closely as it relates to equity rotations. And you want to see how real interest rates are pricing across the curve, as well as how those connect to this forward curve for nominal interest rates for or for sofur for the Fed's actions for Fed funds and for sofur. So all of these things I think are very dynamic and you have positioning taking the other side of them and things like that. So it's not this very simple clean oh is liquidity expanding or contracting. I mean a lot of times liquidity will contract in one tenor versus another and not on the short end right you'll always have these push and pulls on either side and then you need to compare that to the economy and then positioning and all of that stuff. So that's the entire point of all these live streams. So right now what we are seeing is I'll go back to this slide deck. Here we go. I I if you understand this idea right here, this is going to make sense for a lot of the changes that we see in liquidity and positioning. The long end always prices the short side policy air. So basically long end interest rates if there is a mistake by the Fed or in policy by the Fed long end interest rates or the currency always price it always the long end always prices what a short end policy side error is conducting. So if the Fed cuts too much or hikes too much and you say well what's too much uh there's ways to establish that but a lot of that connects to well the longend interest rate is going to price their policy air.
So if they hike too much, they're going to have long interest rate price the the change in that. And then same with the currency. And so the entire point of this is watching the yield curve is how you're going to understand what the Fed is going to do in the next or what the Fed is doing right or wrong. And so I have a, you know, basic visual of this where if the Fed makes a doubbish error, they cut too much like 2021 and 20 uh beginning of 2022, then you're going to have long interest rates rise, which is why we saw the curve steepen in that period of time. If you have a hawkish air, right, which is the 2018 period of time you mentioned, James, you will have what happen? You'll have the curve flatten and you'll have equity sell off into that. And if you have inaction, for example, 2024, 2025, you have bare steepening where the Fed uh or steepen or twist where the Fed pauses and long interest rates move up. Every single time you are going to have long end interest rates, so the 30-year yield and the DXY or the currency always reflect the net expression of the Fed's policy air.
>> And so that's what you always want to watch is the currency against all these changes that are happening in real time.
And the way that all this stuff is going to get more complicated is that Worsh might move with this regime shift might move interest rates in one direction and the balance sheet in another direction. And so all of the guys who have been trying to map liquidity this entire time and kind of doing a whatever job at it, okay job, it's going to get that much more difficult as we move into the next several of years with Worsh because, you know, you've had the Fed cut rates right here. You had this doubbish air where you see long interest rates rise and the Fed hasn't even, you know, started hiking yet. And so you have long interest rates rise. Same thing during this period. You can see in 2018 that you were talking about James, long interest rates begin to fall and the Fed is pausing. So the Fed is pausing into long and interest rates falling and we're in a interesting period of time now because the Fed is pausing into inflation rising. So that's why you've had you know a lot of these shifts and a lot of it connect to the dollar bidding a little bit. But the question is is if that transmits into core CPI which is going to be the entire question about uh the print today or I'm sorry the print on Friday for PCE and how the how responds today that's going to be really important for how that kind of begins to to play out. So, you know, I I believe that we are moving into a brand new framework where mapping these changes in like what's the currency taking place relative to the Fed, how are long interest rates taking place relative to the Fed and then how does all that connect to nominals, reals, inflation swaps, and across the curve. Those will be the key things to understand as we move into that period of time. And that's one of the things that I'll be laying out for paid subscribers on the Substack as how do we map those flows exactly and how do we connect them to every kind of change that we are seeing right now.
>> I think that's a great uh slide though like figuring out how to basically grade the Fed in real time.
>> Yeah, that right there like and the trajectory of it. It's almost like a fear and greed of index of sorts on uh how well they're playing, you know, like a real time report card or whatever. Um it's just interesting because like Trump like, you know, bringing like zooming back out the like rhetoric by Trump and everything is, you know, we we want the cheapest interest rates in the world. We want to get rates lowered. We want blah blah blah blah blah. And that hasn't really subsided. So, it's just an interesting shift coming up because clearly interest rates are still elevated. And I guess this whole situation is giving a little bit of a buyout for wars or whatever early on to be like, look, we can't cut rates now or something like that. But how do you how do you think they play around that whole rhetoric? Because because it's kind of been implied for a long time that worse comes in, he cuts rates. And I think a lot of normies that barely kind of know think that's coming still regardless of like what inflation and the energy shock and all that is happening. So, how how do you foresee that? Like, you know, when Trump has to come out and answer questions about like, well, I thought you said you were going to lower interest rates and like not only did they not, but like the pause is still being priced out for like the whole year and into next. Well, I think that what what could happen is that Trump, I think, is just saying whatever he's going to say to get Worsh in there.
I think that's like the first thing, right? And I think they're going to walk a fine line because I don't think that Worsh is I don't think Trump's just trying to get War in there and just cut rates to say, "All right, cut him to zero. You're in." like it would just be a really bad um or a challenging look for Worsh to come in and say, "Hey, we're going to cut uh interest rates by 100 bips this year, so we'll do four cuts."
>> You're just like, "Whoa, where did that come from?" Right? He'll do it incrementally, but I think the key thing is that Worsh will use Worsh first has to get everyone on his side. Then he has to change interest rates and the balance sheet and he'll work with Bessant to do that because like remember like everyone's saying like, oh well Trump has no clue what he's doing.
If Trump times cutting a deal and also other geopolitical actions and gets, you know, Jared Kushner in there trying to cut a deal and some other changes with OPEC and he talks to everyone and also talks to, you know, cut some deal with China or something else like that and that causes energy prices to collapse and then they just hit interest rates lower as they contract the balance sheet a little bit. that could be this massive goldilock scenario for markets >> if that begins to take place.
>> So I don't know what what all is going to play out exactly, but I do know that it's unlikely for Wars come in and say, "All right, we're cutting rates by 100 bips this year."
I think what Wars is going to do is he's going to try to shift and create new data sets, create a clear process, uh, and reframe, get people on his side at the Fed. I think he's going to do that in a winsome way and then he'll work with Bessant and Trump in a coordinated way to try to implement all this because one of the things that we don't really talk about is and let me actually pull up this chart is that you know the let me see I'll let you keep going but I'm almost saying it facitiously because everything that Trump kind of has said there always seems to be a reverse outcome. um and their ability to walk the line and kind of move forward anyway is pretty crazy.
So I I don't expect uh that to happen.
It's just that's what's been talked about for so long and I know there will be a lot of people still on finit that come out and say like worship is coming in time to cut rates, you know.
>> Yeah. Yeah. Not really. I guess how I think about it a ton.
>> Yeah. Um, let's see.
Monthly. Here we go. I mean, this is I can't see, by the way. I don't know if you're >> I know. Yeah. Yeah. I'm just pulling this up. This is the total amount of bills outstanding.
And the the reason why this is important is that when we go when we think about the Fed's issuance or I'm sorry the Treasury's issuance and we say okay the Treasury needs to fund its outlays it has stuff that either the or well basically it has stuff that it needs to pay right from the government side or interest payments or whatever it might be.
When the Treasury issues bills, those in many ways are injecting very short-term money into the system. If the Fed injects issues bills into the system, it means they need to pay something right away uh because those are going to, you know, basically roll over in a little bit. But, uh they know that they can issue bills because bills are functionally money. That's it's much easier to issue bills into the market than it is bonds like a 30-year bond.
Which is why during this period of time right here in 2020, they issued so many bills into the market. Not bonds, but bills. They issued some bonds. They should have issued more bonds. They didn't. It was really dumb. They could have locked in a 30-year mortgage rate at like an insane rate and they didn't do it. Like just imagine the people who like totally fumbled buying a house in like 2021 even though they had the money and they're like, "Ah, I just I don't want to risk it." Like that's what basically the US government did with their entire debt. They could have just issued everything and put it all into 30 most and then but they didn't. When they issue bills that is an over bonds that's a net liquidity impulse into the market because you're adding more short-term money into the market than long-term money. So you're taking you know taking out some duration risk. So if if I have a choice to say, am I gonna I need to pay the interest payments on the debt that we have and pay Medicaid and all these other government outlays and all this other stuff and all the all these weapons that are going to get, you know, used in these conflicts, are you going to issue bills to do that or bonds to do that? If you issue bills and issue a ton of bills and barely any bonds, that injects on net more money into the system. And now there's some qualifications for that. Yeah, whatever.
But the entire idea is that over time if you have more and more bill issuance than bond issuance like we have had that increases the amount of money in the system and it's one of the reasons why we actually have valuations at highs for equity markets right now. It's one of the things that's pushed them up is this composition of the issuance by the Treasury. And so this is why changes by Worsh relative to what Bessant does in their issuance makeup can be very important to watch over the next 3 months because they can just change the maturity of things and that can impact equity markets a ton. Like people have no clue how much that can impact equity markets.
they could just change the duration makeup of where we're at. I mean, if you remember, let me see. If you remember in 2023, I think it was where we had uh Yellen at the Treasury, and she was like, "Oh, let's this right here, let's start issuing more long-term bonds instead of bills at basically at this period of time right here." She said, "Oh, let's just try that and see what happens." And as she did that the market tried it started selling off exactly in lock step. And I remember this because in this period of time like this low I remember because it was the day the Treasury uh the Tback report or whatever it was uh came out uh the CG uh by the Treasury saying what their issuance was and they basically said, "Oh, we're going to have less bonds than we expected and more bills." As soon as that happened, you just have equity markets rip. So it shows you, you know, you can have these types of pullbacks and they and you know, Yellen didn't even do anything crazy during that period of time. A very equivalent thing could happen if wars changes the balance sheet as he als changes that side and they try to time that with some other geopolitical event or other action if they try to, you know, have some other type of thing happen with AI uh or or something like that. I think it's just going to be it's going to throw people off who have these kind of traditional frameworks for how they think about things.
>> It's pretty interesting. It just like when I when I hear you walk through that 2023 thing, it just makes me think of how sensitive the market is in saying like, hey, these are the conditions we need to keep continuing on this trajectory, and if those conditions aren't met, we're going to sell off.
It's like that's like it just seems like the market's in such control. And since >> we talk about how important markets are and uh retirement accounts and the ability to fund all this stuff, the markets just stay in control. Like it's like just interesting there like the like the broader thing is like well why don't you let a big reset happen? I guess the big reset in theory is saying like no markets, you're not in control, right? And just we're going to deal with whatever whatever fight you want to have. Cool. Bring it. But right now, it's just like the market is truly the bully.
>> Yeah. I mean, think about the only time I think the danger in having a reset is what China could do relative to that.
So, for example, you know, in the report that I did, let me try to pull this up.
Let's see.
Let's go to this.
Here it is.
Here's the problem with saying let's just do a reset. Just remember the last thing that we had where there was an actual I don't want to say reset but there was you know the Trump and the administration actively pushing markets around was 2025.
And what was that? The entire point of 2025 was pushing back on China and every other country with tariffs. So it was an active act of aggression toward these other countries. Well, when you think about that and you say, okay, well, China when they you'll notice right here when 2020 happened, when you had that, you know, period of time where you had the recession, China basically doubled down on every single thing that they did and started exporting way more goods and services on net every single year. And what they did is that in the same way of, you know, if I see you kind of getting a little bit, you know, if we're in the boxing ring, I see you getting a little bit more weak, I am going to try to like use that to take more shots at you because I'm like, "Oh, he's getting weak. Let me like try to get some more shots before like the next break, right?" China in the same way when you have this recession when you have the US in a vulnerable point of time because the US operates on these four-year cycles and we also have these constraints with the democracy that we have which is also positive thing we need a democracy like especially relative to China like that's so important when that happens China will use that to establish a stronger hold that's why right Now, all these other countries that are getting impacted by oil, if they allow their countries to go into a recession, China is just going to come in and kind of like, you know, take even more advantage and hollow out more of the industrial base of Germany and the Euro zone and all these other countries um and Japan and you know, everyone, the UK. So, that is going to be a massive issue right now. Now, allowing a country to go into a recession has geopolitical consequences, right? And so, the US will either if if they see that we're going into a recession, they will need to actively push back on that or drag China down in some way with us so that China can't establish a stronger foothold.
Even if that means we go into a longer recession, if as long as China doesn't establish a a stronger foothold in the world, that will be key. Even if it means like some type of consequence.
>> And right now, this is why I believe inflation swaps are rallying a bit more right now. when we look at, you know, the two-year inflation swaps and and what they've done over the last several days, you know, we're moving up right now and crude hasn't been ticking up further, right? So, you know, this is because central banks are not cutting um they're not hiking. And again, the problem is they're they're hiking. If they hike right now, it's not going to change energy prices. But it doesn't matter because even if they can't change energy prices, inflation can still make its way through the system. Like it's a lose-lose scenario. Like people are like, "Oh, well, they should hike." And then other people will say, "Well, it's a supply shock, so their hikes won't do anything." It's like, "Yeah, both are true." Because no matter what, when you have a supply shock, when you have a supply side change, interest rates don't do anything. But if you don't raise interest rates, that inflation will make its way through the system. But if you raise interest rates, then you're going to put downward pressure on growth and maybe create a recession which has geopolitical consequences. So you're kind of pushed into this corner that everyone has everyone has been so naive over the years to say like, well, like let's not intervene in other places in the world. Let's just let China do their things. We believe in free markets, everything like that. Yeah. Everyone believes in free markets until the bigger bully comes over and takes your lunch, >> right? And everyone's been so naive for so many years and just said like, "Oh, well, let's just see what happens. Let's just do this and do this and do this."
And like that works until you realize that like your like adversary has like set up this entire scenario where like you only have one choice. And countries are doing that on a global scale every single year. Like they have strategic plans where they're implementing things, right? and they're trying to actively push back on different other countries.
And I just think it's it's so naive for people to think about, you know, like, oh, well, we shouldn't intervene in other countries because like that is not the American way or it's not this or that. It's like that's fine if you want to believe that. It has a consequence, right? Like every every single thing is going to have a tradeoff and you can't just ignore the trade-off. So I I think we're now in the point where we're getting pushed into a corner and the question is what trade-off are you going to accept.
>> So I think that that will be going back to this slide right here. This is going to be the entire point of understanding this regime of where we at with the currency, where are we at with the Fed's decision, where are we at with the long end rates. If you get those and again I'll send this slide out to everyone after uh this stream and I'll have another report connected to it for paid subscribers.
That's going to be the most important thing to understand. And you know mapping that as it relates to equity prices and the risk curve is going to be the key thing which is why I always talk about my entire goal is mapping the macro regime so I'm on the right side of it and finding a few large asymmetric bets and home run trades. So, that's kind of where I'm at right now and where I'm trying to to find things. I know we have a lot of questions in the comment section. I want to kind of cover some of these, but uh you know, James, any kind of initial things that come up that, you know, make you kind of like question or think differently about these types of changes?
No, I I I'm just super interested to see how this like I don't know twomonth kind of transitionary phase or there's going to be a lot of it's going to be a lot of conferences, a lot of questions, a lot of chirping. Uh I want to see how it all plays out. And you know, for now, I just think, like I mentioned, I think the market remains in control. I think we move forward and I I'm pretty like constructive myself. Um, >> totally.
>> And we'll see how it goes. And we'll be here to we'll be here to monitor the situation. Is this >> I like it. I like it. All right. First question. Coin versus PER. Thoughts? So, here's what I would say. These are Whoops. uncorrelated positions in my view because coin primarily has all of its volume and cash flows leveraged to volume in crypto and directionality crypto price. Per the entire point about HIP 3 and Hyperlid is that it has its price action levered to volume taking place in a disruptive financial asset that is connected to traditional markets 247 trading perpetual access to leverage and things like that. So, I think it's two totally different I I think they're connected, but they're not really Oh, they're just they're not two different expressions of the same idea. They're not. They're not like two different expressions of like crypto. They're two fundamentally different ideas.
And, you know, Coinbase is obviously connected to crypto. I think PER is and and Hyperlquid specifically is going to be a lot more disruptive than people think. Um, and that's not being priced by the market right now.
I think also real quick on that, I think regulation is going to matter a bit versus those because they're just so >> like one is like the disruptive force that's not allowed in the US and then one is like the kingmade um biggest >> poster child massive uh custody like um so I think regulation is going to matter for the the comps there for sure. Still wild that Coinbase is below the IPO price. I remember I remember the Coinbase IPO coming out and you're just like, "Oh yeah, that's gonna set a top."
>> That was that was crazy. That was up at what 400 or so. Like >> Yeah.
>> Yeah.
>> What What also when was that though?
That was like early right at the end of this the quote unquote cycle, right?
>> April 2021. So >> Okay. Well, not so much the end then, but >> I mean, you know, Bitcoin's outperformed, right? Like, it's it's pretty wild. Uh, it go it goes to to show kind of what what's happening a little bit. It's it's pretty interesting, though. But I I do think here, you know, this is actually I this is a good point to cover because at the time, I don't know if people remember, but this was like such a massive deal at the time, the Coinbase IPO, and you can see, you know, Coinbase IPO, right? Then you have like the second one just basically set the tops. By the way, if you overlay a chart of real interest rates on this, it moves perfect lock step, which is why you want to understand real interest rates so much right now. But just think about these IPOs that are happening.
Again, this for some reason this is just baffles everyone of why this is taking place.
But AI was literally not a thing in 2021 and now it's the main thing driving markets. And people are like, well, liquidity expanding, so why isn't crypto going up? It's like, well, because clearly there's another captain in charge, right? Like there's clearly more change happening in AI than in crypto, right? And so you shouldn't expect crypto to be the leader in a lot of these things unless you say, well, let me find the specific disruptive point, right? Like hyperlquid has created a lot more disruption than Bitcoin right now.
And that's likely to continue in the future, which is why I like Hyperlid over Bitcoin. But during this period of time, you had the main asset which was Bitcoin and crypto, you know, rallying the most and then you had IPOs set tops.
Right now, people know that a lot more now. So, people are more informed. But as we're moving into these SpaceX IPOs, Anthropic IPO, OpenAI IPO, all those are going to be important to watch to see how the market digests them, especially because they're the largest IPOs in human history, right? right? Like SpaceX is going to be the largest, you know, but I think everyone to to everyone knows that too, right? So, it's this a little bit of a cat-and- mouse game of like that's why I look at this and I'm saying, well, where are we at with macro liquidity? Because that's going to be more important than like this single IPO event that everyone already kind of knows about and they they think they're going to sell the news on it.
>> Dude, gun to my head, I I feel like that chart pattern on the left there is going to be what happens. like we're gonna have this situation where these few companies IPO, it's going to be the biggest thing in finance. They're gonna and at the end there's going to be like this chart to the left like before the IPO happens of Bitcoin kind of looks like a lot of the um AI charts now, right? at the an if you guys go look at like anthropic IP it's like up only just to like insane insane trillion plus valuations or whatever I could see a little like kurfuffle happening off the IPOs then a massive run with kind of coupled with what we've been talking about and then the [ __ ] rug pulls and and real interest rates start to you know go up and like and then we see a like you look back in a year and it looks kind of like that double kind of double pump.
>> Yeah.
>> Right.
Any any comments you want to share about the Bitcoin conference, James?
>> Uh, I would say right now it's only been industry day. Today will be the big the big takeaway. I'm going to go see like the Sailor keynote. I'm going to go hang out there and get the vibes. But the vibe that I've seen so far is that I thought I was going to be walking into a stable coin conference, right? Um, but what I really have walked into so far is an energy conference. the I would say 60% of the floor it seems is miners uh just like personal miners, large miners, the clean sparks, the these a lot of companies I've never heard of, but that happens every year. Um not a lot of stable coin stuff, uh wallets, things like that. And the vibes are whatever, right? It's not a dead conference, but it's not like last year.
It's somewhere in the middle. So, kind of exactly like you would expect the price to be, right? Uh, but there's no retail here, that's for sure. It's it's purely people in >> in the space that are either kind of believers and just want to be here or just working for companies in the space.
>> It's like uh it's like that Jane Street guy that's like, "Oh, Bitcoin volatility. Yeah, we'll we'll we'll take care of that. We'll >> we'll tame Bitcoin." Oh, man. That that clip lives rentree in my head for sure.
I love it. I love it. All right, next question. Everyone, if you have any questions, throw them in the comments section. Uh, and we're going to cover all of them right now. Again, if you're on Twitter, then uh, you know, please retweet this. And then, uh, again, if you're here in the comment section, questions are free call options, right?
Like only positive things can happen and there's like zero downside. And on top of that, if you guys share anything just about, well, here's what I'm doing. I'm, you know, a day trader doing X, Y, and Z. I'm a swing trader. I'm focused on these assets. If you guys talk about that, then we have a better idea of what you guys want us to cover. And also, if we have any thoughts on something, because I'm reading stuff all day, we probably talk about 10% of all the stuff I go over on a stream in a day, um, of all the stuff that I read and model and go through. So, there's always, you know, good things to talk about. On the OpenAI comments, missing revenue. You know, here's the thing that I think about. Number one, uh, none of the OpenAI comments have been moving the price of Oracle. So on the upside or downside and the entire point is that yes, OpenAI is critical for Oracle. It's also critical for the entire Mag 7 complex. Like they're all crossc collateralized now. So that's one.
Number two is I think it's going to be about you know Oracle is in the capital stack where sorry open eye is the capital stack where Oracle can benefit even if they're you know needing to raise more capital at a lower valuation right so Oracle is set up to benefit in a lot of different ways and I just think you know Larry Ellison has structured his bet very well and I love that everyone's getting bearish Oracle right now they think it's going to collapse which is all price I mean I shared a chart of the credit default swap for Oracle. It's already pricing default. Like what what are we doing, guys? Like you really want to bet against Larry Ellison like that? Like doesn't sound like a great idea.
Um >> All right.
>> What you want too? Like I mean not to be like like just some blind bull or whatever, but like these are the things I like to see if the conviction is still there. you you kind of want to see more and more people just not believe in something as the price goes up. I mean it's kind of the dream situation. Yeah.
Shows you like real time positioning basically.
>> Yeah. I think that uh let's see here couple other questions.
How do you see real rates affecting gold the next one to three months? What I would say is that I believe uh you know we'll need to see how we trade through the this this uh FOMC meeting. You know we're pulling back a little bit today.
I'm not super worried right now because we're still especially for gold were above these highs where we had this capitulation right here. So I want to see us trade through FOMC some hedges unwind a little bit more weakness in the dollar and you know again this is you know crude up on the day gold down it's not surprising equities are kind of pulling back a little bit as we clear through FOMC we had some hedges unwind that's what I'll be watching to see if we can make a bottom if we can't then I'll probably be a lot less aggressive on gold and wait for another driver to the upside um do I want to short gold probably not doesn't sound like a great idea here for me Um, other good question here. In your view, what are the odds of a 2020 mistake by the Fed where they will need to catch up uh to inflation?
Honestly, I would say it's a coin flip right now. I think it's very possible.
Um, but we're waiting for that. So, I don't know yet, but my view is that like they're already flirting with that. How they play that out in the next, you know, a little bit of time will be really key to watch.
What uh are you scalping trading a certain percentage of your oracle and per position? Um here's what I say. I'm not going to uh we're not going to talk about me scalping or trading around a position just because uh in a core position like that just because I think it's going to confuse people at the end of the day. um my core positions from a from the long side from a bullish perspective is per an oracle and I have a core position in that that I haven't sold. Um if you are an individual who feels like they have an edge in managing your exposure through that I don't think there's anything wrong with managing the exposure to the core position. That will be 100% on you. I am not going to share the any trades that I do or don't make in that sense just because I think it would be very confusing for people who don't know how to think through managing exposure. But what I will say is the position that I have in both of those um I haven't sold a single share. So that's still the core position I have in my core portfolio. So that's how I would respond to that question. James, any any kind of thing you want to expand on that?
>> Not really. I think I think that's a good point because if you were to mention any scalping around it or taking the other side of a long, it's just going to make people be like, wait, you you're flipping your, you know, it it's it's unnecessary. So, I think this goes back to just, hey, have your own plan.
Figure out like, hey, if you want to trim your position because it becomes too overweight or something on the way up, cool. If you want to add to it, cool. If you want to get out of some, cool. Like it's all I mean, that's where you got to start just claiming your own responsibility on this.
>> Yeah. And I mean, I'll say that like my entire goal, this is actually funny.
This is the first thing that Paul Tudtor Jones said in the interview just released.
You make money by holding your winners and by riding a trend. And that's my entire point with PER right now is that, you know, I haven't sold any shares in PER. I've just held. And so my entire goal is how do I hold the position in per so that I, you know, am able to compound over time. And so that's my entire goal is like most people it they don't have the confidence or awareness or market color to hold a winner or add to a winner, right? And take the volatility. My entire goal is to be a pig and ride my winner. That's that's the entire point. I remember there's this like great quote by this guy named Charlie D and he said, you know, you're a real good trader when you can add to a winner.
>> I'm just like, man, that's so good because everyone, you know, once you get something, you don't want to add. you were just like, "Oh, I I it's it's not safe. I don't want to add or anything like that." I'm I'm doing that so much more now, right? Well, I'll get on sides a little bit and then now I know I have a little bit of a cushion and I add more exposure because I know I'm a little bit on sides and I have a little bit more of a cushion and I want more exposure to add to my winner. Um, especially when I have a lot of conviction in something.
Also, real quick on Purr, I think just just to remind people if they haven't really refreshed themselves, like go go watch some of the the stuff that Flo has put out there on the original reasons as to why he's in that, right? Like some people I think forget that it is a treasury company that can trade at a premium, right? And we haven't even seen that expressed because hype has just been generally speaking a stable coin if you want. Like, yeah, sure, it's marched up. it's done. Okay. But there is a a point here where PER is the one vehicle that large size institutionally can get exposure. And if hype goes on a run, don't forget that PERS premium can trade uh way above what Hyperlid's performance is. And you know, when you're getting into like trimming positions or managing positions or whatever, MNAV is a certain thing you want to kind of like learn about and and think about when it comes to like paying a premium or not paying a premium for something, right? That's something I learned from like the Bitcoin Treasury stuff. So, I don't know. You just just keep that in the back of your mind as the potential there.
>> Yeah. If you go to February 11th, I laid out the entire thesis, my entire progression. You know, I think this is the thing. I mean, I'm I'll always kind of retweet stuff here and there, but you know, I'm not going to go back and read these reports for you, right? Because that's your job, right? Like, if you want to go through, if you're following me all in real time and you're developing the knowledge over time, then you'll get it. But if you're just coming on to the scene, you probably need to get your context. And you can't expect, you know, you know, really amazing insights if you don't put in the work to get your own context, right? It's like expecting an LLM. It's kind of funny like context windows and LLMs are just teaching everyone now like oh I don't have the context I need to like re reapply the context. It's like yeah welcome to life bro like this is how it works. Uh so go through here there's an entire fair value indicator in this section as well. So you can go through and say what's fair value uh for that.
Here's what I would say. If we get hype to 150 bucks and then we have this massive premium in MNAV, like a five or a six premium in MNAV, which by the way, like for Micro Strategy, you know, we didn't have something that far off when we were front running the Bitcoin ETFs, right? So, you know, again, there are, you know, very specific things that I'd be watching for to say, "Oh, well, maybe it would want to shift my position a little bit or be a little less aggressive or something like that."
We're nowhere near that right now.
>> Yeah.
>> Nowhere near it. So, >> I'll give you one example real quick of that. Uh during that craziness in the Bitcoin treasury companies in Japan, the one like avenue for people like institutions to get access to Bitcoin treasury companies was investing in Metaplanet, MTPLF I believe it was called, right? And this thing traded up to like a 12xmnav, right? which like to give you an idea is like people were essentially paying 12 times the price of the bitcoin on their balance sheet to get access to bitcoin you know so like this is kind of the similar idea here in which uh the people here don't have the access to the hype token I mean yeah you c you can go buy it on your like Robin Hood account or whatever but you know people throwing a couple hundred million at this institutionally um they have like one option and hype D is uh I I believe kind of more of like a DeFi native uh quiet small market cap thing comparatively. though, >> right?
>> You got other examples just give ideas to what's possible.
>> Totally. I think people need to understand how different this treasury company is compared to other treasury companies and how different it is actually to Bitcoin and the Bitcoin frontunning ETFs, right? like when Bitcoin was being frontr run or when bit here here's the thing that people totally I think this was a totally wrong narrative is that when we were having all these ETFs come into the space for Bitcoin everyone's like oh we're going to have institutional adoption it's like everyone in the United States that's an institution could have already bought Bitcoin like all they had to do is just go to Coinbase institutional and go to their institutional desk and say hey we want this exposure buy it for us today and Coinbase the Coinbase institutional desk would just say, "Good, we got it. Wire us the money and we'll clear it at this price." It was so easy to get access.
Right now, because of the regulatory back, I mean, you could still own Bitcoin. It was legal. Right now, because of the entire situation with Hyperlid being banned in the United States, no institution wants to tr touch it. Like, how do you think Jane Street or any of these other market makers feel when they're saying like, "Oh, we want to make markets on Hyperlquid, but uh that would be illegal. So, we can't even touch the token. Maybe we should hedge our risk by buying PER and then we'll come into the market later after it gets added to the United States, which, you know, everything is already setting up, right? Like they're already, you know, uh, Trade XYZ already signed a deal with S&P, Coinbase already added hype to their thing, right? like you have all these things set up for retail and there's not even any VC money to frontr run it. So like you know you could have had all these institutions say like oh well we can't frontr run it but we can just buy into some of the VC deal for it so we have our our risk hedged but they can't even do that. You don't have the VC unlock that plagues like so many other >> there's none of that. And I I people just don't understand that because they're so crippled by I mean I can't tell you how many people I said I had tell me no. I mean everyone always says that the coin is going to deviate from Bitcoin and it never does. And I'm just like wait a second how can why would you ever believe that? Why would you ever believe that in the first place that something would deviate from Bitcoin if it's in the ecosystem and crosscolateralize with it? and then you see HIP 3 come out and say this is going to change the crossc collateralization framework.
So there's actually a fundamental constraint that will change it. So I I don't know it's just it's so clear in my mind you know again maybe I'm wrong.
Maybe I I shift positioning or something like that because the thesis changes or something like that. The thesis hasn't changed at all. I'm just so bullish and I'm holding position I have because I think it's going much higher. So there you go.
All right. you don't. And real quick, if you don't have the HypeUSDBTC chart, too, like you can see over time that Hyperlid is >> is outperforming. So, that's something I have on my watch list as well. It's one of those things that's just like broken off the top there every time. And I'm just like, there's a chance that that kind of just moonshots >> 325%. Yeah.
>> Scoreboard.
>> I like it. I like it. All right. Uh couple other questions. How does crude affect real interest rates? Crude impacts inflation expectations which is an input into real interest rates. So if you just ask chatbt about that and map that relationship, you can do that. Um how would the market price if Walsh says he's cutting rates and simultaneously shrinking the balance sheet, which would be a take the textbook be bullish and bearish at the same time. What would probably happen is you would want to be long ZT and also long the dollar.
That's my mindset. Uh you would probably want to be it would depend on where again this would actually depend on where real interest rates go. So is he doing this into inflation or disinflation? Right? So that's the key qualifier. But my base bias is getting long ZT for more cuts getting priced and then getting long the dollar because you're having the quantity of money in the system kind of contract a little bit. Uh all right. SpaceX is being fasttracked into the NASDAQ. Shouldn't that reduce the ch chance for a rugpole?
So there's a couple things here. Number one is they're trying to get SpaceX added to the index I think on day one or something like that, which is wild because if they get it added to the S&P on like day one, they're actually trying to change some of the actual like structure of the S&P for this because it's the first time we've had a trillion dollar market cap um thing released, but they don't want to do that because well, they're trying to get Elon's trying to get that done, which no one's really talked about, which would just like give it passive flows immediately. So, um, we'll see how that plays out. I don't really know. It just depends on, you know, how that connects to people dumping their shares as well. So, um, when you say capitals move out the risk curve due to lower short-end rates, which capital? Hedge funds? And if the front end is less attractive, why not rotate into long duration bonds?
Great question. Um, several things. number one uh what what capital is rotating out the risk curve. What you have to recognize there's a lot of different players in markets and it's not just the quant funds and the players. It's just a mechanical element of the system especially in the United States because what happens is let's just talk about hedge funds and we'll talk about advisors, institutions, all of these different things and then and then you know the fact that we have the most sophisticated banking system in the world right now. Hedge funds if you underperform the index you can get fired. So, a hedge fund, they're incentivized to take risk. And if they underperform, they lose their job. And if they outperform, they keep their job.
And it's kind of one of those things where it's like, well, if I if I lose money, I'll lose my job. If I underperform, I'll lose my job. So, the only thing I can do is outperform. So, I might as well swing for the fences and try to outperform because even if I lose money, I'm going to lose my job either way. That's hedge funds, right? And so hedge funds are a key input into that.
The other thing is just the amount of capital and the quantity of money in the system because when you increase the quantity of money in the system in the same way that if you have inflation, I mean just think about this. If you have inflation in the underlying economy and you don't raise your prices, you're like basically losing money. It's like it's like a mechanical thing, right? If you if you run a food store or whatever it might be, inflation is running hot everywhere and you don't raise your prices. You're basically giving away free money. The same mechanism exists in US financial markets given all the players that exist. Not just hedge funds, you have institutions, financial advisors, you have active traders, you have the entire banking system that has a liquidity transmission mechanism. So if you go on to like the Fed website uh search liquidity transmission and see how liquidity transmits in financial markets uh it's very important to understand I think it's something that people don't really get because everyone has kind of been trained on this entire intuition that well it's kind of funny people like value investing was all about well Mr. market has no clue what they're he's doing. So, uh if we're overvalued, it's just the market being wrong. And if we're undervalued, it's the market being wrong and whatever that might be. People have just shifted their mindset into well, now it's all about sentiment. And I think there's an element of like truth for that for like retail flows, but mechanically in the system when you have real rates fall every single that that systematically and mechanically increases the amount of leverage you have available. Especially for like all of like you have to recognize that like any major institution the way that they leverage up they don't have like a brokerage account, right?
Like well they have a brokerage account.
They don't have a brokerage account like you and I do where you're just saying like, "Oh, well, I'm paying margin or maybe I'm using futures or perks or something like that." Like they they have a totally different way to get access to leverage that's directly impacted by the quantity of money in the system. And you have to remember like commercial banks, same deal, right? So the the entire question is why does capital move out the risk curve? It's very mechanical for how the system functions in the first place. So I would go through those resources I mentioned and kind of spend some time thinking about that. Um, I've also done a ton of stuff on the substack. So, if you go to the Substack, go to uh the section right here, all the free educational primers. Um, just read through all these educational primers right here and all the books. And if you go through all the books, especially the price of time, that's a great book. Um, and then all these fixed income books. I mean, just so important if you're trying to understand that.
All right, couple other questions.
Um, let's see.
I I don't have really a view on this.
I'm not, you know, trading the the the swaps on Brent or anything like that.
Um, I'm sure, you know, in the derivatives, you know, I'm not going to really comment on this in on the derivatives market. What I will say is that any forwards or swaps or stuff like that, they don't send as much of a signal as people think. I I think they're important to watch, especially if you're trading positioning because there's can be a risk premium embedded, but I just think, you know, maybe with a little bit of variance, you know, the actual crude price, crude calendars, and implied V are going to send you the majority of the signals that you need.
Um, this is like the same thing with swaps for any other market. Um, there's going to be a risk premium or something like that in it. Um, I don't I don't understand the question 100%. Maybe you can kind of expand on it, but I I think overall there there's not some it's it's going to depend. There's a lot of qualifications in the crude market, especially with where we're pricing crude and like which east coast, west coast, all this other stuff. So, how do you see a trade within the AI crypto combo narrative? Well, I think if Agentic Trading blows up on Hyperlid, which I think is the place where it explodes, you're going to have a lot more capital flow there. So, that's my view. Uh what is your view on MSTR preferred specifically STRK that has the common convert option compared to getting income exposure via the bond market?
Um I am not interested in touching any cash flowing product that Micro Strategy comes out with. Not interested at all.
Um, yeah. I don't know what else to say on that. I don't know if you have any thoughts, James. I just don't I I'm I am very wary on the cash flow side. Um, in how they're structuring their capital stack. Um, and I'm specifically cautious in how they're communicating it to people as if it's a novel concept when it's not. So, that's what I would say about that.
James, anything to add?
>> I'll leave I'll leave it be. MSTR is gonna MSTR. Yeah.
>> All right. Do you prefer Kevin Walsh than Powell? Obviously, I think Worsh is going to be a GOAT there. Um, you're very bullish on Hyperlquid. How do you think it can realistically get?
Do you see it expanding into assets like bonds? And do you plan to open your vault? Good question. I cannot confirm or deny if well no I can deny but I'm not going to confirm. I'm not going to actually say anything about being on hyperlquid at all. What I do think is that on hyperlquid if they add interest rates and more FX then it could tap into this entire Euro dollar market and I think that will be a key thing for it. I think they need to add bonds and interest rates more. Um when do I plan to open a vault? Well, I can't open a vault because that's not legal in the United States. If it was legal in the United States, then I would consider it.
But we're not right there. All right.
>> I got to run soon.
>> All right. Well, I think that's that's the majority of the questions and I think we covered a lot in this session.
So, um, everyone, thanks for joining the live stream. I'll lay out all of the slide deck on the website, capital flowsarche.com. Um, and again, you know, this regime change that we're in with Powell, it's going to be very interesting. All of these slide decks that I went through, um, if you want to go through them, again, they'll be laid out on the website. And the final thought I would leave you with is the most important thing that you can understand in this period of time is how the Fed's action as it's going to shift with Worsh with interest rates versus the balance sheet is going to impact the currency and long- end interest rates.
If you can get that framework, you'll be on the right side of the macro regime as we move into the next couple of months.
James, thanks for coming on. Again, everyone, you have all of James' content on his YouTube channel as well, James Rosenthal, and you can follow him on Twitter and then all the research I have is capital flows.com.
James, final thought as you are venturing out into Vegas in the the Bitcoin ecosystem?
No, I'll let you know if there's anything interesting. Um, just here for the vibes. See what'll see what'll happen. But yeah, good good stuff. I think that was really a productive session. And if you guys are showing up every day, keep doing it.
>> I like it. All right, sounds good.
Everyone, thanks for joining. We'll catch you guys later.
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