Steve Sosnick: The Macro Read — Bonds, the Fed, Equities, and Where Crypto Fits

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[00:00:00]we can be decentralized and organized at the same time. Right? We can have a system that is support decentralized set of like Near is actually whenever people join Near, they were like, "Holy [ __ ] I didn't realize there's so many things."

[00:00:14]Like we have, you know, dozens of companies working together at all times.

[00:00:17]Like you go to our Slack, there's like 20 Slack Connects, you know, that you typically join by default. Right?

[00:00:23]Because we actually have lots of different companies working together in close coordination. When we did have we had a hack as well on Near, it was Rhea.

[00:00:32]We had five different companies effectively working together. They tracked down exactly who did it. They had all the forensic evidence and effectively returned all the money.

[00:00:41]Right? And it was done because all these teams can come together whenever there's a need and figure out how to work together. And so and that that is like I see the function of leadership and and I mean not perfect, obviously. There's a lot to improve, but that is a function of leadership of both, you know, the kind of spokesperson and then vision setter of the ecosystem, right? Which is Vitalik in Ethereum and like this is not going to change. And the foundation as a as a supporting function, like it doesn't need to go and do the actual day-to-day even sales function, but they need to organize and and set the framework for that. So So I mean we we we have a long history with Ethereum because we actually pitched in 2018 to build these two to Ethereum Foundation.

[00:01:29]Because I actually like if we could just build these two, make it work, we would go back to AI in like 2020. Uh and uh because that was like the whole thing.

[00:01:39]We're like, "We needed a blockchain for our Near AI stuff." And we're like looked around, we didn't find anything that would actually match our needs, right? Scalable, easy to use, kind of abstracted.

[00:01:52]Um and so we're like, "All right, well, Ethereum is, you know, was talking about sharding back then, was talking about web assembly, was talking about, you know, faster slot time, was talking about better user experience. We're like, cool.

[00:02:05]>> You don't hear that very much in uh uh >> No.

[00:02:07]>> Ethereum land these days.

[00:02:09]>> Uh and so, we're like, cool. We can just build all that. We have a team, you know, we're VC funded. We just need an upside. That was the thing. It's like, hey, we need a way >> Whoa. Whoa. Whoa. Whoa. Sorry. I'm going to stop you right there.

[00:02:21]>> [laughter] >> I don't know if you're familiar with the concept of communism, >> [laughter] >> but we're not paying [ __ ] You can You can build out the two, but we will not pay you a red cent, my friend.

[00:02:36]>> And so, that that was kind of where where that conversation went. Um and and so, and to be clear, like I've I've I've pitched I've pitched this idea multiple times. So, like before launching mainnet, I pitched it again because like, hey, look, we've built it now. Right? We had mainnet, we had sharding, we had web assembly.

[00:02:53]>> all of that situation.

[00:02:54]>> traction. Let's figure out like, what what this could look like. We do have VCs. We need to pay them money. I have a team that, you know, wants upside. They worked, you know, 24/7 effectively for >> Why would you have VCs? What were you thinking?

[00:03:07]>> I know.

[00:03:08]>> I feel like we've heard this before, and they tried it out with Smosh, and like kind of [ __ ] the bed. And now they're just like, let's just go back to what we know, which is like, infinite gardening and uh funding longevity research, and like doing a bunch of [ __ ] stuff that nobody in the world gives a [ __ ] about other than Vitalik and his little cabal. I'm just going to say it. Like, the EF is completely out of touch. So, I mean, now that I've dunked on them a little bit, like I can also say that like, at least they're acknowledging that other organizations are going to have to step in, but then it becomes a question of whether or not they're actually going to like cede those reins to any other organization that is more competent and more in touch than they are.

[00:03:48]Uh because they they just aren't.

[00:03:49]They're like funding hippos in Asia and all that and like you know, it's just that's just stupid. Nobody cares about that. Like it doesn't matter. Like like we're like Ethereum is no longer a startup. It's now a mature and robust ecosystem and like you know, you can't really like take the same liberties that we did 6 years ago, 10 years ago. Like it's just completely different. There's like billions, trillions of dollars on the line here and like people's livelihoods are dependent on that. They're like people with families. They're like my entire career has been on Ethereum. If it goes to [ __ ] I mean what am I going to do?

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[00:09:21]>> And so, and so I think like so there's like fundamentally to me there's few things. One is I don't think decentralization needs to mean disorganization.

[00:09:31]And so, this is something I've told my team over and over again. We can be decentralized and organized at the same time.

[00:09:39]Right? We can have a system that is support a decentralized set of like NEAR is actually whenever people join NEAR, they were like, "Holy [ __ ] I didn't realize there's so many things." Like we have, you know, dozens of companies working together at all times. Like you go to our Slack, there's like 20 Slack Connects, you know, that you effectively join by default. Right? Because we actually have lots of different companies working together in close coordination. When we did have we had a hack as well on NEAR, it was REA. We had five different companies effectively working together. They tracked down exactly who did it. They had all the forensic evidence and effectively returned all the money. Right? And it was done because all those teams can come together whenever there's a need and figure out how to work together. And so and that that is like I see the function of leadership and and I mean, not perfect, obviously. There's a lot to improve, but that is a function of leadership of both, you know, the kind of spokesperson and then vision setter of the ecosystem, right? Which is >> Hi everyone. Welcome to another episode of Bits N' [music] Bips the interview.

[00:11:41]My name is Steve Ehrlich. I am the head of research at Sharplink and also your host for today. We've got another terrific episode, but before we begin, uh just a quick disclaimer. Nothing that you hear on the show should be construed as investment or financial advice. For full disclosures, please see unchainedcrypto.com/bitsnbips.

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[00:12:36]>> All right, welcome back. So, today I have Steve Sosnick, the chief strategist at Interactive Brokers and a repeat guest on the show. Act- actually, Steve, I think you were my first guest on on this show.

[00:12:48]So, yeah, so really thrilled to have you back. You're one of the best people I I know when it comes to reading the tape and understanding the dynamics between um TradFi, crypto, how macro forces are colliding with geopolitical uncertainty, etc. And we've got a lot to talk about today. Uh as we are uh as we're sitting down, uh there's renewed tension over the in Iran, Strait of Hormuz, um skirmishes going on between US and and Iran. Uh the Fed's preferred um inflation indicator is the highest in years.

[00:13:21]Gold is dropping, equities are up, uh yields are teetering, so a lot to unpack. Uh thrilled to have you with us.

[00:13:28]>> It's a pleasure to be here once again, Steve. This is it's I always enjoy our discussions and looking forward to this one.

[00:13:35]>> I appreciate that. So, let's dive right in. Uh I kind of set the stage here, but equities are still like near near all-time highs. I mean, how do you make sense of all this?

[00:13:46]>> Well, there's a few things going on and you know, they're not they're they're working in concert. I will say um to some extent um we can we can thank good earnings and that's always in my mind the best reason for a stock market to rally is uh the fact that in this past earning season, we've seen a sig- you know, a decent number of I would even say significant number of uh of EPS beats and more importantly positive guidance. To the case in some you know, in some situations, you know, in in let's say semiconductor memory stocks, um the guidance has been extreme.

[00:14:25]Um we can argue whether some of that guidance has been um extrapolated maybe a bit more maybe maybe a bit further into the future than it than it ought to be.

[00:14:36]Uh but we will I will stipulate that that there is a solid base behind um this rally.

[00:14:45]But, the magnitude of it we can question and you know, to a certain extent what we've what we've noted over the past few weeks, let's say since the end of March, is what I've been calling the ratchet effect about news from the Persian Gulf.

[00:15:01]And that by that I mean, we seem to rally on each positive story about some sort of resolution to the situation, something that might reopen the strait.

[00:15:14]And so far as we're taping this, yeah, there was another good there was another positive story this morning coming out of Axios.

[00:15:23]But for the for the most part basically we're 0 for however many there been. I'm not sure I lose count of how many there been. But and while oil and bonds tend to give back their decline well yields give back their declines and bond and oil futures give back their declines when the stories don't come to pass stocks haven't really given back anything. So that's why I call it like a ratchet. You know you >> move in one direction. One direction, yeah.

[00:15:52]>> And so that's been a big factor and you know what I'm wrestling with right now as we're as we're speaking is stocks are reacting positively. I literally stepped off the desk to go to the bathroom and boom we went from up you know down to up very sharp. I'm like what happened? Had to be a good story. We had a good story.

[00:16:10]But they're not ripping ahead even though this is one of the more detailed and more substantial stories that we've gotten. So I do have to wonder how much of this either A is priced into the market or B is basically traders exhaustion and saying you know another one of these stories.

[00:16:27]They're not mutually exclusive but how how we the market interprets them can lead to very different outcomes because if if it's largely priced in you have to wonder if it's a sell the news type of event. If the market's not reaction just because they're simply tired of of reacting to these that does leave room for further upside.

[00:16:46]So that that's a huge unknown right now.

[00:16:49]>> Yeah it's it's hard to tell because I mean people like to think of good things happening and at this point in time I get the sense from people I talk to that worst case scenario is that things stay ossified where they are right now.

[00:17:04]I don't see much appetite from the US side to to really renew hostilities in any um any major form despite what President Trump says from from time to time and as much as he claims to not care about the electoral calendar, that is something that I'm sure is on to on top of mind for him. Uh so maybe we're at worst case scenario and this is where it's at. But I've read and I'm sure you have too.

[00:17:31]We may not have felt the full pain of oil prices if the street doesn't reopen yet. I mean $5 a gallon gas plus etc. Could have a could have a damaging effect. We have to kind of see how that's going to fit. But I I think within everything you're saying and this is not a secret. AI stocks, semiconductor stocks, they're doing the heavy lifting here.

[00:17:49]They are producing solid earnings as you said, which is a big departure from maybe like the like the dot com boom of 20 plus years ago when a lot of it was just based on on hype and hope. But these companies aren't profitable.

[00:18:01]They're extremely in debt. And there's still a lot of just faith. A lot of this upswing is based on faith that they're going to continue to deliver. And I found it really telling a couple weeks ago when Nvidia had another good quarter. I think they beat earnings for like a beat earnings expectations for the 14th or 15th quarter in a row. And the stock I think I think it went down a little bit despite I I had a terrific despite a terrific quarter. So there's a lot of hopium here, too. How do you weigh that?

[00:18:31]>> Well, when it when it comes to earnings, let's say in something like Nvidia, you know, the bar has been raised so high, right? You know, so you know, to sort of think of like the the pole vaulter, you know, who's who's got the bar raised up already.

[00:18:45]It's very hard for the pole vaulter to clear it.

[00:18:48]And I think that's what happens to some extent when you have an Nvidia situation where everybody everybody expects them to be better than expected. And to a certain extent with Nvidia, you do also have to ask the question where where is where might fresh money be coming into into Nvidia? Is there anyone Is there anyone who is not familiar with the story already? Is there anyone who's left to invest in it in a major way other than sort of general inflows of the market? So, I I think in that situation, you know, it's it's more of a victim of its own success than it is anything else.

[00:19:25]And so, you know, and so to some extent you take it case by case. And but you do raise the point there's two huge vulnerabilities to this rally. Neither of which has raised their heads yet, but number one is all you really need is for to to to really create a terrible situation is for someone like Alphabet or Microsoft or someone else to say, "You know what?

[00:19:50]We've spent a lot of money here. We're not going to You know what? We're not going to continually throw more money at this situation. We're We're going to We're going to try to sit tight with what we have and see if that see if those investments pay off." That happens, you know, that you'll just hear like a big screeching of the brakes and that that could be problematic. The second parallel that I bring in here, and you did raise sort of the dot-com era parallel, is um I'm going to throw some names at you and tell me if these sound familiar. Uh Global Crossing, Lucent, uh Northern Telecom, um you know, Cisco, but Cisco's still around. These were the But these were the companies in in those days every The race was to build bandwidth. We needed bandwidth to support the internet. And I will stipulate that bandwidth proved necessary. I'll also stipulate that even the wildest expectations for how um life-changing the internet was going to be came true.

[00:20:50]>> Mhm.

[00:20:50]>> Yet, many of the companies I've rattled off, and I haven't even rattled I haven't finished rattling, you know, there's WorldCom, there's MCI, there there's a whole bunch of these companies.

[00:20:59]Um They They fell by the wayside.

[00:21:03]Why? Because they spent and invested wildly putting in this bandwidth, but it it wasn't necessary immediately and it took a long time for it to pay off and there was a lot of misallocated capital.

[00:21:17]Um, and I do feel that that is something that we have to be um, cognizant of because no company wants to be left behind in this AI gold rush.

[00:21:29]And certainly the pick the the manufacturers of the picks and shovels have been the big beneficiaries of this.

[00:21:35]>> Yeah.

[00:21:35]>> Uh, that metaphorically speaking. Um, but um, you do have to, you know, at some point they're not all going to be winners. It it it's just not going to happen. They they it's physically impossible, but yet you can't risk not taking your best shot because if you don't take your shot, what it's the Wayne Gretzky theory, right? You miss on all the shots you don't take. So, everybody's got to take the shot.

[00:22:01]Everybody's got to spend a lot of money.

[00:22:03]Some will spend it wisely, some will not, and there will also be competitors that arise that we haven't really that that either we haven't thought of or or honestly don't exist yet. Remember, neither neither Google nor Meta, Facebook, um, existed during the internet bubble. They're post internet bubble.

[00:22:23]>> Yeah.

[00:22:23]>> So, there it's it's a much more fluid situation and I think it's a little risky for the market to just sort of declare victory.

[00:22:31]Um, otherwise, if that were true, we'd be searching, you know, we'd be connecting via AOL and searching on Yahoo and um, you know, and and and and things would be very different in our use of the internet. So, these are the parallels, but you know, history doesn't repeat, but yeah, there's certain elements that are rhyming.

[00:22:50]>> Although, I do certainly miss my AOL Instant Messenger. That was a that was >> [laughter] >> that was a a lot of fun back when I was in college. Um, what I guess two more quick ones before we move on.

[00:23:01]Uh, talked about how a lot of this uh, the AI companies are doing the heavy lifting when it comes to to the S&P 500, Nasdaq 100, etc. I'm sure it's not lost on you that the equal weighted S&P is flat basically since February and we're wondering if and when we're going to see a broader a broadening of of these gains.

[00:23:20]Goldman had an interesting report yesterday more or less saying that there's like historically elevated levels of short interest on some of the more cyclical stocks. And if they get drawn up, that could lead to just force buying pressure that could broaden out these gains at least for a little while and and that could sort of reverberate through the whole market. Do you have a Do you have a view on that?

[00:23:43]>> I I I haven't seen the Goldman report directly. I I am familiar with it from from your commentary and and and from other reporting.

[00:23:52]Um Yes, it's it's plausible. If you have if you have a big Sorry, the doorbell just rang. If you have a >> That's what we have.

[00:24:00]>> If you have a big If you have a big um you know, short interest in in stocks in specific sectors, it does leave them quite susceptible.

[00:24:09]Not knowing the specifics, you know, are these stocks being shorted, you know, something like a I don't know. Is it you know, is it a Walmart which you know, which by the way Walmart and Nvidia traded at the same PE prior to their earnings?

[00:24:24]Despite one having much higher growth or is it I don't know. So, let me just stipulate and say yes, heavy short interest is a risk. But the the flip side to that of course is margin debt as a percentage of the stock market cap capitalization is also at a record peak. So, you know, on one side you've got you know, you've got the the dry powder of short covering. On the other hand, you've got sort of a record reliance on borrowed money to to you know, to to facilitate the market's gains. It's it's a very fluid situation and that I think and and and yet we don't really see people displaying any real risk aversion.

[00:25:06]>> Yeah.

[00:25:06]>> That that gets a bit that's that's a bit tricky.

[00:25:09]>> Yeah, nobody wants to be the one that missed out. Okay, one more question on equities and then we're going to move on to a few other sectors. Last week I had another good friend of mine, Noelle Acheson, who's a crypto macro analyst on the show and and she made an interesting point that historically big IPOs have coincided with sort of market tops and and that can be very hard to sometimes predict, but that's what we've seen in the past. We have three big IPOs coming up focused on AI.

[00:25:41]SpaceX is likely going to be the biggest in in history and then obviously OpenAI and Anthropic. I'm not going to ask you to kind of get into the nuances between the various deals and and kind of break that down. Plenty of time for that and as we kind of get closer, but I wanted to get your read on just the idea of whether or not some of these IPOs could signify market tops. One, this is a crypto show, one IPO that I know, I guess it wasn't technically an IPO, it was a direct listing, but one example that will resonate very well with this audience is Coinbase when it went public in April 2021. That was a local top during COVID and Bitcoin and the market traded down for months thereafter. So, what are your thoughts on that?

[00:26:29]>> Yeah, again, without getting into the specifics, let me just say broadly there given the reported size of some of these listings um that's a lot of money that's a lot of money for the market to absorb.

[00:26:46]>> Mhm.

[00:26:46]>> You know, one of the positive factors, like a big underlying scenario factor is that um there's been generally a favorable supply demand relationship in equities, meaning that um some combination of buybacks and private equity activity have have tended to reduce the amount of stock outstanding.

[00:27:14]So, you know, less supply, more demand or even equal demand, that that that that provides a lift. That that's a positive for stock prices.

[00:27:24]This this wave of IPOs threatens to put that into retrograde at least for the short term.

[00:27:32]>> Yeah.

[00:27:32]>> Right? You know, if we're talking about somewhere between 75 and a hundred billion dollars as has been reported in in new in new stock coming onto the marketplace, um that could certainly be um a bit of a a bit of a negative for, you know, for stocks on a supply demand basis, uh particularly where in some cases you have um you know, some of these stocks um you know, which which are not necessarily particularly profitable, at least from the early reads we've gotten with, you know, at least from the early >> putting things generously. It's got to be fair.

[00:28:08]>> That's that's going to be a problem.

[00:28:09]This can be a big problem.

[00:28:10]>> Yeah.

[00:28:11]And it's it's funny, too.

[00:28:13]This is coinciding I think the framing is really interesting, but it's also coinciding at a point time where there's a money in the system. I I want to make sure I get these notes right, but I think a hundred twenty billion dollars went into money market funds this month. Repo rates actually fell below the bottom of the Fed's target range, which again speaks to just a lot of cash switching around.

[00:28:35]Uh do you think that that's a little extra dry powder that might provide a cushion or is this just like un- uncorrelated data points that that aren't that related to each other.

[00:28:51]>> Yes and no. I mean, you know, obviously the the money the more money sloshing around is a good thing. Um, whether or not why it's sloshing around in money market funds is could be two different things. Is is it because people are um, concerned about their finances and and and that's that's the money they need to keep they need to keep out of in a place where they can find it. Uh, which to certain, you know, which when one of the the economic statistics that came out this morning was um, was that uh, personal income was personal income growth was zero.

[00:29:26]>> Yeah.

[00:29:27]>> Uh, which meaning that people are are losing purchasing power.

[00:29:31]Uh, so, you know, to some extent consumers have not have not been acting all that well. You know, again, Walmart we saw go down.

[00:29:39]Today Dollar Tree is zooming. What does that tell you about consumer mindset?

[00:29:43]Now, if you believe in the K-shaped economy thing, if if that if that money if that money into money markets is coming from people who have disposable income to invest, that mitigates against the supply-demand discussion that we were talking about. But it's it's very tricky to parse out. I I I'm always a bit um, I don't know, reticent to sort of say, "Oh, this you know, to use the cash on the sidelines argument." Because sometimes that cash is is there and it's not it's not leaving.

[00:30:11]>> Okay.

[00:30:12]All right. Well, that's a good point.

[00:30:13]And since we talked about new data that came out, let's just briefly talk about inflation.

[00:30:19]Uh, so, PCI headline was I think 3.8% in April.

[00:30:24]Um, core was with 3.3% the highest in years.

[00:30:28]It was a little bit I think below analyst expectations, but but still historically high.

[00:30:34]Um, what is your read on on all of this and its associated impact on consumer behavior? I know spending went up, but I think it was just like a tenth of a percentage point, so so so relatively small. And um just staying on the like our last train of thought, what does that mean for the the psyche of the consumer and and the investor? And like you said, it might depend on what income bracket you um you currently reside in.

[00:31:01]>> I I mean, you know, we got a little bit of a surprise last week in that the um the Conference Board Consumer Sentiment Survey was was um was a a positive surprise, although the Michigan numbers that have been coming out just are sequentially worse worse and worse or for the lack of you know, to coin a phrase, I guess. Um the the the the the the the And when you can dig into the Michigan numbers, well, because they break it down pretty um effectively, yes, there's a partisan aspect to them.

[00:31:32]Uh um You know, Democrats feel worse than than Republicans, but independents are pretty feeling pretty crappy, too. Um and they've had some graphics in there that um indicate that affordability is really a big big issue for people. Things are You know, one of the things about even when inflation is moderating, it's telling you the prices are going up, just not as quickly. They're not coming down.

[00:31:55]>> It's a common misperception. I >> Very common misperception. I think that's where a lot of people really feel I I I think that's a big messaging problem. Um it was a big messaging problem for Biden when he was seeking re-election, and it's going to be a big messaging problem for the Republicans as in the the midterms, because people hear inflation is coming down, and they think, "Why I go to the store? Nothing's cheaper.

[00:32:22]Everything's more expensive."

[00:32:23]>> Yeah, that's right.

[00:32:23]>> That's literally what they're telling you. They're just telling you it's not it's it's not getting bad as quickly as it was.

[00:32:29]>> It reminds me of a similar misperception in crypto, where people say Bitcoin is is uh like deflationary. It it's not. It it's inflationary. It just It issuance rate decreases, but but it's not deflationary. The supply is still going up and it will go up for another 114 years or so. But please continue.

[00:32:48]>> Just more slowly. But that's But that's the same It's It's the same misperception. And I think the problem you have from a political and socio-economic point of view is the people who are least likely to understand that nuance are the ones in many cases feeling it the hardest because one of the other things in the consumer sentiment surveys is how miserable you are tends to correlate inversely with how educated you are.

[00:33:19]Not Not 100%, but you know, there are statistics that show people with you know, with lower levels of education feel worse about affordability than people with higher levels of education.

[00:33:32]But not exclusively. [clears throat] And everybody I think feels miserable about it. So, we have to work through this. And the situation in the Persian Gulf is doing nothing to help affordability or inflation expectations.

[00:33:47]And so, yes, the PCE number this morning on a monthly basis going on the core PCE, which is the Fed's preferred target going up 0.2 as opposed to 0.3 was indeed a good data point. But what we saw was that we didn't really see much of a rally based on that. We saw stocks come off their lows a little bit, but before the Axios story, stocks were still They stocks still had a minus sign in front of them. When I When I'm talking about broad indices. So, it's Obviously, we want positive inflation news.

[00:34:24]But the problem is the law as you alluded to earlier, the longer the situation in the Gulf persists, Uh, the the worse the aspects are and we're also seeing inflation and thing you know you're seeing it in other commodities like copper which is that's a direct result of the data center build out. So a lot of a lot of moving parts few of them moving in the right direction for affordable for affordability for consumers.

[00:34:52]>> Got you. And and just one quick note I probably should have done this earlier but this Axios story that you're referencing I just have it up here basically says that negotiators on both sides reached an agreement on I guess a 60-day um MOU to extend the ceasefire appears to leave a lot of the big nitty-gritty details um for another day's negotiations but I guess it is welcome news especially since there have been fights fighting going on the last couple days around launched I believe a ballistic missile at Kuwait and nobody wants to see a return to to all of that so I can understand why people are are relieved I guess for lack of a better term but but as you said in the very beginning Steve we've seen this many times before and nothing is nothing is done until it's it's done so we'll just kind of have to see what happens. Uh we have to go to break but I do want to just ask you one more quick question before we do so Kevin Warsh became Fed chair he's finishing up his first week as Fed chair and he's got a lot of pressures to face him he wants a president that wants lower rates but it certainly seems that that's off the table at least for now and and perhaps at the next meeting I guess next month his primary goal would be to maybe prevent rate hikes. I mean what do you what do you what are your initial thoughts with with Warsh coming in at this particular time?

[00:36:18]>> You wanted a quick question.

[00:36:20]>> [laughter] >> We how about how about how about this let let's let's take a break and then we'll come back and answer your question.

[00:36:26]>> Yeah that that requires a little more nuanced answer. So, yes, we're up against the break, it would be better to come back on that one. Thank you.

[00:36:33]>> All right, we'll be right back.

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[00:38:18]>> All right, we're back. Didn't mean to leave all of you in suspense, but uh floor is yours to just kind of give your your two cents on Kevin Warsh and what he's walking into.

[00:38:26]>> Yeah, you know, the the Kevin Warsh situation, as with anything Fed related, is is is not the easiest thing to parse, especially against the backdrop of price pressures emanating from the Gulf.

[00:38:39]You know, think about where we were just, you know, in February and before before the the missiles started flying.

[00:38:47]Uh we were the markets were pricing in um two full rate cuts by December with a 50% chance for a third. Give or take, you know, that that that that extra rate cut chance, you know, sort of fluctuated between 35% and 65%. So, let's call it two and a half rate cuts priced in.

[00:39:05]So, that would be about 62 basis points.

[00:39:08]2 * 2 * 25 is 50 plus another half, 62 and a half basis points.

[00:39:14]We've now uh flipped. When I looked earlier this morning, uh we were talking about call it a 70% chance for a rate cut for a rate hike by December.

[00:39:26]Um with a full with a rate cut fully priced in for March of 2026.

[00:39:31]So, when you look toward the end of the year, you know, with with 62 and a half before and call it another 18, there there's, you know, roughly 80 basis points and change at the front end of the curve. That's monstrous. And and yet some and yet stocks are up. You you could stocks can rally when rate cut hopes fade, but that's what the if they're rallying because the economy is so strong.

[00:39:55]I would argue this is not a rate you know, the the these rate expectations have have moved not because of a of you know, a wildly stronger economic picture, but what we have seen instead is prior to in February, you know, January, February, we were concerned about a slowdown in the labor economy. Remember the Fed's dual mandate, full employment and stable prices. So, there was a there was you know there there was a genuine debate of you know inflation is coming down, maybe not to the level that the Fed wants it, but if the if the labor market requires cuts, which side of the dual mandate will the Fed err towards? And the consensus was that they would err toward cutting rates to help out the to help out the labor economy and say, "You know what? We're we're good enough on prices." Well, that mentality has flipped pretty much 180°.

[00:40:53]The last few labor reports have been solid enough to to to take a lot of that labor market worry off the table. Um that's not necessarily cold comfort for you know new graduates who are having trouble finding jobs or some people who feel they've been displaced by AI.

[00:41:12]By all means, you know, I'm not saying that this is a a super robust labor market, but again, when you're talking about 4.3, 4.4% unemployment, you're also saying that 95.6% of the people who want a job have a job.

[00:41:28]So, you flipped on labor and now you've flipped on price pressures because you know, clearly the situation in the Gulf has has raised energy price pressures and and is starting to leak back into the core to a certain extent as well.

[00:41:42]So, now the question is, do we stay stable or do or do they have to or do they have to raise? And at the last meeting, we had four dissents. One was Dr. Myron who dissented in favor of lower rates. I think he was, you know, in his short relatively short tenure as Fed governor, I think he was 100% dissenting in favor of lower rates.

[00:42:04]Um That that that was his prerogative, but his his seat was because Chairman Powell didn't leave because of the legal issues.

[00:42:14]Uh Kevin Warsh took Dr. Myron's seat.

[00:42:18]The other three dissents came from various Fed FOMC members who were who were advocating to remove the easing bias from the Fed's statement.

[00:42:29]Um which the market has sort of done for them. Um last Thursday evening Christopher Waller who had been one of the more dovish members of the Fed some might argue is because he wanted the job that Kevin Warsh got. Others might just argue that, you know, hey when the facts change my so those so those my opinions.

[00:42:49]I I will not editorialise further on that. He came out He came out basically saying he wants the easing bias removed as well.

[00:42:58]Um and what what Kevin Warsh is going to have to deal with here and what markets are going to have to reckon with is a he's one when it comes to setting policy he's one of 12.

[00:43:11]>> Yeah.

[00:43:11]>> And it's not clear that it's not clear that there is a consensus by any means to start cutting rates immediately. Um the other question that you have which is sort of a broader question which is we're not going to get an answer to for for a little bit is um that he he's a known quantity in the fact fact that he's been a Fed he's been on the FOMC before. He was a Fed governor.

[00:43:36]But he was one of the more hawkish members at the time.

[00:43:39]>> Yeah. That's >> And so which Kevin Warsh do we get? Is it Is it the relatively hawkish member who, you know, in some ways you know, voted against a lot of the monetary stimulus that it that occurred in the wake of the global financial crisis? Or is it someone who told the president you know, what he wanted to hear and that I'm at going to advocate for lower rates. One of the ways he's going to try to do that is I I to change the benchmark. I think he wants to use a trimmed inflation measure rather than core PCE uh because that would smooth out some of the some of the uh higher price influences. Um but you know, he's going to have to convince a room full of skeptics at this point. And also remember, markets have a eerie way of throwing real world tests at new Fed chairs. They don't happen very often, so it's not like a statistically significant thing, but if you look back um a few of them have gotten real world tests early in their um tenure.

[00:44:39]And we will learn soon enough how he handles it, uh but it is it it's not smooth sailing. Um you know, it's going to be he's got he's got some difficult he's got some difficult things to navigate, particularly when it comes to um deriving a consensus from what appears to be a fairly skeptical uh committee right now.

[00:44:59]>> Yeah. Something we we talked about last week, too. I mean, sort of trying to uh What's the word I'm looking for? Like like like trying to make sense of like the the two the Dr. Jekyll Mr. Hyde, the hawkish dovish Kevin Warsh. And uh um one of the things that stood out to me during some of his confirmation hearings was kind of pointing out how he wants the Fed to move away from like I I guess something more akin to fiscal policy and just focus on monetary rates. And that's sort of how he's trying to thread the needle with that. And uh I I uh I mean, just given the light of all the QE during the great financial crisis and the trillions of dollars added into the economy during COVID, I mean, the ratchet effect you mentioned, the Fed balance sheet has just been going up and up and up. And every time it seems they try to reduce it, something happens that forces them to either pause those or have it go up. So, we'll have to see.

[00:45:47]All right, let's um let's turn to crypto. Uh we have about 10 minutes left, and I want to get your thoughts on what's happening cuz it it's pretty fascinating. As we're talking right now, I think Bitcoin is back up above 73,000.

[00:45:58]ETH is is right around 2,000. Um these are both up I guess a couple of, maybe uh uh, 100 bips, something like that from from lows earlier today uh, before that Axios story came out and, um, and there were real fears about, uh, renewed renewed fighting.

[00:46:15]So, but enthusiasm for crypto is still, I I think it's it's muted from what I can tell. Uh, I mean, implied volatility just hit a 9-month low for Bitcoin.

[00:46:26]Uh, we're not seeing a lot I'm not seeing a lot of positioning for, um, for sort of like convex movements one way or another and I'd love to get your thoughts on what you're seeing.

[00:46:38]>> Yeah, I mean, crypto has been crypto, to a certain extent, the simplest answer would be crypto's been dull compared to tech stocks. You know, I I I think I think to a certain extent there's a there's a, you know, if you had to draw a Venn diagram between, you know, crypto crypto enthusiasts and tech investing enthusiasts, tech traders, um, there's probably a pretty big overlap between those between those two circles.

[00:47:07]Um, and so, you know, and and and momentum-based trading or momentum-based investing has been a huge feature of recent markets.

[00:47:18]Mhm. And so, quite frankly, compare if if you're look, you know, if you're looking at your portfolio and saying, "Okay, my crypto's eh, it's not doing much. Um, you know, and and and tried to rally, let's call it from 65, I'll use Bitcoin, from 65 to 80 and that didn't really pan out and meanwhile, you know, I I bought I bought, uh, you know, Micron My Micron Technologies and that's up however many zillion percent.

[00:47:48]Um, where am I going to want to go with it?

[00:47:51]Um, and I think that that's a big that's a big issue. I also do think that looking down the road um if I were going to you know, look for excess liquidity um to invest in some of the IPOs that we discussed earlier again, I would think that the that many of the people who would be thinking about investing in those IPOs um at least from the individual side, not from the institutional side, um would would be people who might view their crypto positions as something that they could sell to buy those IPOs. Not advocating for it, but I think these are these are pressures that I think crypto is facing um it it you know, also now the other feature is um you know, let's go back to the digital gold argument um which you know, we could that's a whole other topic for debate, but um real gold, the yellow stuff, isn't exactly ripping ahead either because it these are it it for the most part, unless you're doing some you know, relatively sophisticated stuff with with crypto um these are non-interest bearing assets and interest interest rates have as we just discussed have gone up substantially. And so when you have a situation where um you know, where nominal rates and and you know, the money market rates that you were referring to have increased substantially um and you're holding a non-interest bearing set of assets um that's not that's not necessarily a favorable backdrop. Uh you know, so I think that's kind of why um we've seen crypto sort of get a little left behind. Um they're they're it it it's it's not the sexy flavor of the month right now.

[00:49:47]>> Yeah.

[00:49:47]>> Tech stocks are and and and I I it's suffering as a result of it.

[00:49:52]>> Yeah, it's making me think of of a couple of different uh I I guess a couple of different things. It it it it's an interesting juxtaposition and we're going back to some of the AI-related IPOs that are coming down the pike in the next few months, etc. And then you think about I mean one of my former employers, Kraken, it's reportedly they've delayed their own IPO. I think Ledger is another one that's that's delayed it. Uh citing I think like market conditions.

[00:50:19]Uh Granted, there's different market conditions for for SpaceX and OpenAI and Anthropic, but you could also make the argument um that they're almost they're so big and they're almost immune to any market conditions at at this point right now and because there's going to be so much demand. So it's um it's interesting there. And then um I mean billions of dollars in outflows from from crypto ETFs and I I think I saw something might have been the FT today. I'm forgetting the ticker, but um I think it was like one like hyper-focused AI ETF like Micron and like only like two or three other stocks. Um beat Fidelity, be one of Fidelity's like crypto-related ETFs um to like over $10 billion.

[00:50:58]>> D- D-RAM, which is the Roundhill Memory ETF.

[00:51:02]Um depending how you measure it, it either it either became the the the the most successful IP ETF launch in history out surpassing IBIT or or you know, or or was neck and neck. It it depends how you measure it. It depends how you measure it. The bottom line is um you know, crypto got that was a huge boom for crypto. I mean you had sort of the perfect storm uh between um easy accessibility via ETFs um and um and an administration that essentially was outwardly touting the benefits of crypto. That that was as good of a scenario as you can come up with. The downside of that ETF adoption is I I think I termed it as, you know, normies own crypto now, too.

[00:51:56]Um and it hit me when I was invited to speak at a crypto conference here in Connecticut. And I looked around the room and I was around the average age. I thought I was going to be like, you know, grandpa going in going in there and it was and it was a lot of people um who'd gotten into crypto via the ETFs. But the the good thing at the time was that led to huge inflows and obviously price increases.

[00:52:22]>> Yeah.

[00:52:23]>> news now is to a certain extent they're crypto tourists. Um they they can then say, "You know what? I bought, you know, I bought you know, insert name of crypto ET ET ETF or ET, you know, ETP here. Um I bought this. It did well for a while and now it's not or I bought it at the highs and it kind of I I I mistimed it completely. Um you know, let me move to some let me move to something else, you know, that if if these people if if if it was bought by performance chasers in the first place um it's going to be sold by performance chasers as something else outperforms it and that's not that's not me taking a view one way or the other on crypto as a long-term investment, but that's just that I I do think that is a very important consideration. You you can't discount you can't dismiss the importance of money flow. And for better or worse um you know, the the the the the huge success of of crypto ETFs was such a boon on the way up. Uh but now this is the, you know, the the the the flip side of that trade.

[00:53:33]I'm not attributing it specifically to that, but it it to many investors now it's one more sector among their speculative momentum based um investments. I also think by the way of the popularity of some uh companies like IREN and NBIS, which have largely changed from uh they basically changed their business model from data centers, you know, from from uh from Bitcoin mining to AI data centers.

[00:54:03]>> Yeah.

[00:54:03]>> And computing powers uh you know, also I might say fully fungible, but it's migrated.

[00:54:11]>> Yeah, and uh I didn't mean to interrupt you, but we've done um entire shows on on that trend on that transition. I had um I think John Todaro from from Needham. I don't know if you know him.

[00:54:19]Um he walked me through I mean the economics of that and uh and I mean it makes perfect sense. I mean you're you're you're buying an asset that uh you're you're producing an asset in Bitcoin that uh from their point of view it's not moving up um exponentially anymore. It's getting hash rate keeps going up. It's more competitive. It's more expensive to mine. Or you can go like turn yourself into some sort of like hyperscaler, get a 10-year contract from Google for an ungodly sum of money. Like what are you going to do? I I I certainly get that.

[00:54:50]Uh but it it does it makes me think all of this I understand the points of view you're saying here and again none of this is financial advice, but it does also I think this could have a good a cleansing effect for for Bitcoin. I mean we in crypto in general. We've spoken about um I see it like me like on other guests on the show. Uh there's a lot of other there's a lot more competition for that sort of like highly risk on money. Like there's prediction markets. There's AI stocks. There's there's lots of other places, not just altcoins. And um in certain ways I I think you almost need to have um some more uh you need to have a real sense of purpose when you invest in crypto today because it's not the sexy thing to do. Uh I mean people on this show will know means it's you're um there's a common saying you're not really a crypto person until you've seen your net worth drop by 90% and then have it go up like 300% thereafter.

[00:55:43][laughter] Uh the normies you said they may not have the stomach for it, but it's happened um to me multiple times and and and plenty of long-time listeners. You just once you get through it once like you're like you're you're hardened, but uh it looks really scary on the way down. And I I think sometimes that comes It makes me think of like a uh um like Howard Marks or or Warren Buffett in the sense that like you have to really uh put your money in when everyone else is bearish. I mean Howard Marks did it um in the distressed credit space and and uh he made a fortune fortune out of it.

[00:56:16]Uh BlackRock I mean they launched their ETFs in um I mean they filed for them during a during a crypto winter when uh Gary Gensler was still SEC chair. So I mean it was not a popular thing to do and and they did it um in the against the backdrop of a highly crypto skeptical regulator. So we'll have to just kind of see what what what happens, but uh certainly there's a lot more competition for the money that would just automatically go into crypto. And I think some of those ETF flows that we spoke about uh encapsulates it perfectly.

[00:56:49]Uh so we are just about at time, although I know we probably could have go for another 45 minutes or so. So I just want to ask you um like one or two quick closing questions. We we talked about a lot today uh in inflation, gold. Uh we didn't even get to what's happening with the rising dollar and and the flattening yield curve, um sort of the divergence between equities and um and kind of like like geopolitical uh I guess uh uncertainty. What is like the one thing that you're really going to be watching over the next few weeks?

[00:57:20]>> Um I I think number one i- uh right now is you know, what I alluded to it at the top of the show, is how does the stock market react if we get a peace deal? I mean if we don't, we just sort of model along again and at some point at some point traders get tired of it, but I think the question that the to me the number one question that was that really jumped out at me today is and I don't have I wish I had an easier answer is are we in a you know, are we in a buy the rumor sell the news scenario where is a peace deal gets is a negative or is it just you know, or market or markets not reacting better today because they're sort of skeptical of it, which means they can rally further.

[00:58:04]Those are two very divergent outcomes from the same from the same potential piece of news. And I do I'm of course rooting for something that that that brings that about. Um you know, and I think you know, and and there's a and then I think once we get past this because equity markets particularly are terrible at geopolitical events. Um commodity markets are best and notably at least when I we started the show, oil was not down today on this news. Oil was off its highs but not down. Commodity traders are best, treasury traders are next best, um equity traders are somewhere deep in the back of the pile. Um because you know, the others are are less they're more focused strictly on supply and demand. Um or inflation expectations as opposed to stories. They're less easily distracted.

[00:58:57]Um and so you know, I think that we're going to have to see how that all plays out amidst the backdrop of a flattening yield curve as you mentioned and that again is because that took a big Christopher Waller is the one to to largely thank for that because we've seen the inflation expectations rising and pushing up the short end of the curve but it was pushing up the curve sort of parallel. Uh the Waller talk you know, flipped it a bit because because of if the Fed's going to be more sensitive about inflation expectations, uh that changes the back end of the curve.

[00:59:32]And ultimately, let's see what happens in the midterms.

[00:59:36]Don't forget that we've from an equity point of view, we've had two down markets, two down years in the last 10 or 12. And I forgot the exact, but those were 2022 and 2018.

[00:59:49]Um those were both midterm election years.

[00:59:52]And you have a new Fed chair. So, while we've had a very successful year in equity so far, um I I I think it's not necessarily right to just assume that the path is is ever upward.

[01:00:07]Um and I do get I'm a I'm a little concerned by the lack of vigilance, by the lack of risk um aversion that I'm seeing right now.

[01:00:16]>> Got it. Okay. All right, well, that's a great place to end it. So, um thank you once again for for joining us. Uh Steve, thank you. Everybody for watching and listening. Um that's it from from me and Steve, but don't go anywhere because Lara's up next with Mike Silagadze, and Security Alliance's Isaac Paktar, who are asking whether Manuel Araoz is right that all DeFi is unsafe. Stay with us.