#18 - Douglas of MMT Macro Trader Returns!

Unknown: 0:16

The content of this podcast is for informational purposes only and should not be construed as financial or investment advice. The views and opinions expressed in this podcast are those of the hosts and their guests. They do not necessarily reflect a position of any associated employers or organizations. Hello,

Adam Rice: 0:32

everybody, we've had a bit of a hiatus. But we do have some exciting news to announce. We have Doug from MMT macro trader joining the podcast today, which we are hoping to make a more regular occurrence in the future. If you're not familiar with Doug's work, he goes by MMT macro trader on Twitter and also on YouTube, and is very like minded with Ryan and myself. And long story short, we've decided to kind of join forces and collaborate on a bunch of different projects, which we're excited to announce more formally in the future. But what we have in mind is, you know, more regular podcasts, a newsletter, video updates, and an actual dedicated applied MMT website where we'll, you know, blog will send out newsletters will have interactive data dashboards with MMT relevant information. So you can consider this a soft launch of the new applied MMT. Doug, is there anything you want to add there?

Douglas Padgett: 1:33

Yeah, thanks for having me on. It's been exciting to work with, with you and Ryan, over the last few weeks. And as we kind of think through some, some new ways to bring MMT applied applied MMT style, research and analysis to the masses. One of the things is we've been talking since we last since I was last on the podcast here is there is a lot of good MMT stuff out there. Obviously everything Warren Mosler has ever written is gospel. And it's great, you can learn from it. But I know because I want it and it doesn't exist. There is a there is an empty void of really, again, what we just call applied MMT research where it's it's functional MMT macro economic analysis, there are some people out to do it, that are close to that vision of what that is, but it's definitely not under the umbrella of MMT. And I think that there is a desire out there for just truly Hey, how do I look at the macro economy? Whether you're an investor or not? How do I look at the macro economy and understand it through the MMT lens? When someone throw some data point at me? What am I make of this when someone says there's a treasury auction failure? Probably talked about that a little while? What do I what do I make of that? Right? You know, how do I understand this. And while there is a lot of more kind of political leaning MMT content that's out there. Oftentimes, it just the the explanation for the macro economy for MMT. From that that crowd is just well, the government can pay for it. Let's talk politics, right. And that's an important, that's an important aspect. But I think we all want more. And we want to be you know, platinum, and T wants to be the platform that offers that for those of you who are like, hey, that's great. Government can pay for it. What does it mean? Now? How do we how do we understand the macro economy through the lens of MMT. And I really think to get back to Warren Mosers original vision for what MMT was all about. That's what I'm most excited about is is MMT explains how the world functions. And not just that it can function that way, but how it functions. And we want to kind of bring that, bring that on. So yeah, thanks for having me back on and hopefully soon, we'll we'll make the make the announcement official, unless some cool stuff to share for everybody, or to everybody. Yeah,

Adam Rice: 3:52

for sure. And now Ryan and I are both super excited. Ryan, is there anything you want to you want to add?

Ryan Benincasa: 3:58

Uh, no, I think no, it's all it's all very exciting. Douglas has some, some amazing work, you know, with some large language models, and it's, it's fascinating stuff. It's a it's a illuminating way, specifically to look at financial markets. And yeah, so I'm, I'm very excited. You know, to, to explore into some of these into some of these topics.

Adam Rice: 4:33

Awesome. Cool. So with that, let's kick off today's episode. I guess we can start with the q3 GDP print, which came in at 4.9%. everyone's surprise, we're not in a recession yet.

Douglas Padgett: 4:51

So this is some of the stuff is you're just gonna have to help me out. 4.9 That's pretty high. Right?

Adam Rice: 4:59

That's pretty good. That's pretty good as they might mean it's

Douglas Padgett: 5:01

like close to a recession, but still very far away, right?

Adam Rice: 5:06

I wouldn't say so. Well,

Douglas Padgett: 5:09

let's see this coming. Ryan, can you tell me if anyone saw this coming? I

Ryan Benincasa: 5:13

know, as I recall, as I I recall there was 100% odds of recession for 2023. Yeah, that's what I thought is what the is what I was reading. Only only basically the three of us. And, you know, a handful of other people were were calling, you know, that, that we were not only not that's the other thing, it's not just that we didn't have a recession is that this economy is ostensibly booming. Right.

Adam Rice: 5:52

The recession,

Ryan Benincasa: 5:53

I mean, I remember, I remember when, when, when Trump was elected, you know, as big is big thing and Larry Kudlow, like the big thing was, Oh, we're gonna hit 3%. We're gonna hit 3% GDP. You know, that's our target. And it's like, first of all, you know, they never hit 3% GDP for a full year. So it's like, we're all these were all the Wall Street tough guys like saying, Hey, you didn't hit your numbers. But, but secondly, it's like, just that gives some perspective over, you know, 3% was considered a really aspirational goal. And they never hit those numbers. And we, and, and Biden just hit that, you know, almost double. It's just a complete. It's a complete joke that, you know, people were so, so convinced that we would have a recession this year, because of the rate hikes. And here we are, and we just printed almost 5% GDP. So

Adam Rice: 7:05

did what what was the best quarterly growth in the Trump era?

Ryan Benincasa: 7:12

So that's a good at, it's not easy to answer, because, basically pre COVID that, yeah, they hit some quarters at like, three, three and change, but they never strung together, like a full year or full four quarters at at that rate.

Adam Rice: 7:31

Was there? Was there a big jump after the tax cuts?

Ryan Benincasa: 7:37

I believe so. Yeah. Yeah. I think so. I think yeah, the, I mean, I could have, I could pull up the numbers if you want. The other thing is, like, these numbers are all annualized. So so the, so you know, the GDP number for, you know, the second quarter of 2020. Was, was horrible. And then it was amazing in the third quarter, whatever, like, like, you know, accounting for, you know, all the stimulus and everything. So. But no, I just remember that being like such a, you know, everyone talks about, you know, how great that economy was, and I'm sitting there thinking, they never even hit this 3% target. So how could it be that great, even even pre COVID, even before all the job losses that we experienced, you know, before the pandemic, so? No, it's just amazing. How, I mean, you'll get people on Twitter saying, we're in a recession, they've been saying since July 22, that we've been in the recession, that, that the numbers are gonna get revised down to reflect that we're having that we're in a recession. It's like, okay, I mean, I mean, GDP pretty big. I mean, we've so we've grow 8%, cumulatively since the second quarter of 2022. So that was so an eight point at least, revision, you know, because we would have to, we'd have to show obviously, negative growth, for it to actually be a recession. So it's just it's just, it's just comical, but thankfully, you know, if you've been listening to the applied MMT podcast, or if you've been listening to Douglas and B's us live stream on YouTube, or if you're, if you've been a subscriber to Douglas Patreon. You know, you would you would already have known that you're already familiar with all this so, so there's no reason for us to other than take our little victory lap. You know, we're, we're not telling our audience anything that they don't already know.

Adam Rice: 10:02

Do you guys happen to know offhand or not offhand? Just like what the underlying drivers were for GDP growth this past quarter.

Ryan Benincasa: 10:13

I do not have that info. I did not know that offhand.

Douglas Padgett: 10:19

What part of the calculation of GDP actually I suspect,

Ryan Benincasa: 10:23

I suspect imports were strong. Yeah. Because I think, yeah, but but but I'd have to, but I'd have to look. Okay.

Adam Rice: 10:39

Doug, anything you want to touch on when it comes to the surprise GDP print?

Douglas Padgett: 10:43

Yeah, I don't I don't track GDP all that closely. I mean, it's no surprise to me that we're doing better than expected at this point, just because that interest income and, you know, Gabby's more market focused, but I'll tell you, it's what's wild to me. And, and again, it's just such a validation from the, for the entire school of thought that is empty. You know, at the end of December, I put out my 2023, you know, here's what I think is gonna happen thread right, as argument was really simple. You're about to print a billion or trillion plus of interest income, additional from the year prior, we're coming off a major reset both fiscal and the banking cycle, that massive transfer from the government sector to the private sector, in terms of interest income, is going to not only support the banking cycle, but it's also going to support I'll be progressively the private sector as well, the consumer, ultimately, and you just don't see recessions when government spending is firing higher. And I think what's most telling is what, you know, when I'll get my little battles on the interwebs, and I point out, you know, hey, look, you know, only MMT was, was calling this well, everyone knew this was gonna hit, you know, everyone knew that the government was going to stimulate all this money. Well, no one did. I mean, no one, no one did. And it's such a validation that not only did we say that we'd be better off now than what was expected. We also explained exactly how it was going to happen, and everyone can now look back and they're starting to connect the dots, holy crap, there's this extra trillion dollars. Plus that wasn't there last year, that is there this year. This had to be, you know, this had to be the reason. And and so at least they're connecting the first dot, but there's still two or three dots away from connecting the whole picture in terms of why rates, higher rates are not actually constricted, right? In other words, no, you're not going to get a big collapse with higher rates, as long as, as long as the public debt to GDP is relatively high. And we you know, we're there because you're just gonna you're giving the bank's free income not only on their on their treasuries, we'll talk about that in a second, but also, on the reserves. Now to in the in the post great financial crisis era. Their balance sheets are great right now. And all we're seeing across the board is, is the capacity for the consumer to consume I was I saw, I'm a big Disney fan, as some of you guys know, I love love the Disney parks and want the company to do well. And I was seeing an overview of their financials. And the Disney the department, the overarching department, which includes the parks and the cruise ships that that stuff was up 13%, year over year, revenue. 13%. Okay, Disney parks, and cruises only go if people have only grow 13%. If people have lots of money to spend, right, like people go and see movies, when they're broke. They go on $5,000 vacations when they are feeling flush with cash, people are going on $5,000 vacations, I'm not seeing from a more political aspect that the high rates aren't regressive. But in terms of understanding markets and understanding where we're at, clearly, this additional interest income is finding its way to the consumer trickling down for whatever mechanism was in place to allow it to happen. It's happening. And we're seeing it and I know, Ryan, you've you've ran across this with the banks and that sort of thing. It just continues to play out the way that we would have anticipated. And the fact that yeah, not only were we able to understand the additional interest income would be there, but that we're not going to have some banking crisis with higher interest rates, because that pads the balance sheets of the banks and makes the consumer gives the consumer higher income to adjust for that now higher cost of money. Right. Yeah, I

Ryan Benincasa: 14:36

mean, the you know, that Boomer grandmas, you know, wanting to take their kid to Disney World, and they're getting basically free income from the government to do so right now. I mean, that shouldn't be really complicated. Yeah. I also want correction, something I said before, I think, well, I said before, imports were strong I what I meant to say is exports, because in terms of GDP calculations, higher exports, adds to GDP. And we can get kind of tripped up with that sometimes because obviously, in real terms imports are a benefit exports are a cost. But in you know, when when calculating GDP, it's it's, it's, it's considered the reverse. So yeah, just want to make sure I clear the record on that.

Adam Rice: 15:37

I also I want to highlight something that I think is kind of gotten lost. Just in the conversation. I more broadly, I do think that at least on Twitter, people are becoming more open to the idea that rate hikes are stimulating the economy. But definitely one thing I want to call out is that, you know, a couple of years ago when when Mosler or I you know, I even asked this question to Scott full Weiler and like a web q&a He did. I think around the time the Fed was considering starting rate hikes. I asked, I asked for a while or point blank, I said, you know, I know Warren Mosler makes the argument that raising rates can can stimulate the economy. And I was like, Do you have a particular stance on this? And he said, and I've heard Mosler says as well, he said that just like rate hikes or you know, rate cuts, the effect is indeterminant. And I think that's a good way to put it. It's not necessarily going to stimulate the economy. But you have to look at like this is the case with MMT. And all situations, it's like you have to look at what is the debt to GDP ratio, for example, you know, what is the regulatory structure of banks in a given country, and then do the analysis from there, and it's just it's never as simple as a rate hikes are going to, you know, slow inflation or slow demand or a rate hikes are going to stimulate inflation stimulate demand, it's you really have to look at it on a case by case basis. And and that's why I think, I think saying something like read the effects of rate hikes are indeterminant is a good way to put it. I don't think there's a universal this or that here, where the relationship is just like, you know, this happens when you cut rates, this happens when you hike rates. The MMT point is that we have to look at the whole picture to understand what the effect of rate hikes will

Douglas Padgett: 17:26

be. Very well. It's a really good point. Yeah, that's a good point. Yeah. If the if the dollar was backed by gold, and we issued all of our treasuries to borrow all the money out of the economy, and dodginess, you know, being a great indiginous Li and we were promising that gold higher rates are going to have a different impact than in the in the situation that we currently find ourselves in, right? In this in this in this country. So yeah, yeah, no, that's a good point. Higher rates aren't necessarily always in every situation going to produce the outcome that we've seen. But given the outcome that we were in, or given the situation that we were in 2022, when the rate hikes started, the the obvious, the obvious play there was we're going to print a lot of money and give it to rich people and let the bottom half fight for it. And as it turned out, the rich people want to buy stuff still.

Adam Rice: 18:16

Right. Right. And, yeah, it's like you look at some effects, you look at the effects it's had, it certainly hasn't helped with housing costs. Like they expected. It's what it's done is it's kind of frozen the housing market. So people don't want to sell because they'd have to get a higher interest rate mortgage, if they were to move. And the houses that are on them on the market, a lot of them are being sold in all cash offers. So you know, it's just, it's a great illustration of, of what, what I said earlier, which is that the effects of radon sorry, that's indeterminant, like you don't know, it very, very much depends on the situation.

Ryan Benincasa: 19:00

Well, that was and that was Warren's point when we had, you know, the interview with him, where he just like, look, you know, the, if you look at the institutional structure of, you know, savings and loans, institutions from the 80s it's understandable why they all blew up. Back then, but but we have a completely different regulatory and institutional structure with with our financial system than we did then. You know, I think what he said was, you know, the funds rate was, had been around 5%. And, you know, they slap on, you know, three points, do mortgage and yeah, it was like the you know, and go play golf by 3pm or whatever it was called. And, and then you know, Volcker hiked rates, and all of a sudden, all of those all those institutions were underwater, and that, that really sort of, you know, blew up the entire the entire system, the entire economy. We don't really have that same sort of, you know, the, the, the banks are much, much better capitalize today. And then they were and we have a much much, there's a lot more that goes into regulating the financial system today, you know, versus what was going on in the 80s. Because we've learned, you know, from from these from these mistakes. Now, obviously, you get one off situations like, what happened with SVB, although we've made the case on this show that that was more so a function of, of a frenzy and people, you know, depositors bailing on on on the institution rather than, you know, something that that was inevitable. But, you know, the fact remains that that with debt to GDP 120%, you know, and with interest paid on reserves, you're really sort of turbo charge, the interest income effect, and that has been a huge contributor to the positive economic growth that we see. I mean, look, it's easy to go back to the Cholesky levy profit equations, right. Higher government spending means higher profits and higher profits means, you know, more employment and capital spending, it's really not, it's not really that complicated.

Douglas Padgett: 21:40

No, it's not. So I got a I got a question. We didn't, we didn't have this on the to discuss list. But is, I'm throwing this as a complete curveball to you guys. But in your mind, is there anything that is out there right now, that is an institutional structure that is not being built and kind of sound and a sound economic basis? That could be something like a great financial crisis? Or could be something like the 80s Blow up that we saw? Is there anything out there that people don't have their eye on that, that might end up creating a sort of weakness? A free illness that, that people should be keeping an eye on? You know, I

Adam Rice: 22:24

was worried about crypto for a little bit, you know, in the potential for like, systemic risk with crypto. But I don't I don't think based on what I've seen, I don't think it's big enough.

Douglas Padgett: 22:35

Yep.

Adam Rice: 22:36

You know, I don't I really don't think it's like a large enough piece of the economy to cause substantial risk. I do think it should be regulated and eliminated. But I don't I don't think crypto right now is poses a big risk to

Douglas Padgett: 22:52

the economy tight enough into the financial structure to cause the sort to cause the sort of systemic risk. Yeah, yeah, it is. Yeah, we were talking the other day. And I think it was you pointed out? No, no, it was it was Ryan that pointed out that, you know, we had in, like, 2000 10s, mid 2000 10s, you know, a bunch of oil companies just completely get obliterated and fall off the map, just just massive, massive losses in the oil space. And then we had SVB, and a bunch of small banks just completely blow up, right. And we've had crypto completely blow up. And for all intensive purposes, fall off the map. We've had these major events. And yet, the main economic engine, the finance sector, continues to churn effectively unabated, right. And so I think, not not that I'm pro fed, not that I'm pro Treasury in the way that they're currently ran, and their stated aims and goals for what they're trying to do, obviously, I want to change that. But they've clearly figured out how to how to not let any given component be the linchpin for the financial sector at this point. And, to their credit, they've done a great job of letting a lot of a lot of really bad things happen, but not not bring down the entire US economy for a decade, the way the great financial crisis did. Let's not

Ryan Benincasa: 24:17

forget the Fed bought junk bonds and 2020. Yeah, and this whole thing with like, what was it called the not the bank, the term bank term funding program, I think beat TTFB where they basically guaranteed you know, basically, these banks could pledge their treasury securities as collateral for loans from the feather. I think that the fhlb too, but I'm not I'm not exactly sure and essentially, get 100 cents on the dollar. So, so, you know, it takes that that duration risk out of the, the, you know, out of the bank's hands. Now, what happened with for example, SVB and with and with first republic All right, is First Republic had a very, very safe loan book in terms of in terms of credit risk, I think I think they reported something like, like six basis points of credit losses in 20 years or something like that. So, so these are these were, you know, jumbo mortgages have done with very, very safe borrowers with, you know, high, or excuse me with with low with low loan to value ratios, and just in general, like really safe credits. And the problem was that occupied so much of their balance sheet of the asset side of their balance sheet, they could they didn't have they couldn't, the Fed wouldn't accept those mortgages as collateral for loans so that they could so that they could fund the outflows. And essentially, they ran out of liquidity. So they had to get like a $70 billion line of credit from from JP Morgan, because JP Morgan was sort of like, Yeah, I mean, these are money good, like, sure what, but but but, you know, it wasn't enough to sort of STEM the massive outflows that, that they're experiencing from their depositors, because of the fear that that that set in, that probably would have been different. If, you know, during that, you know, their first quarterly earnings call, whatever, you know, they reported their liquidity. And it became clear that, you know, they had sufficient liquidity to meet depositor outflows. The fact that they didn't have the liquidity is, is just a result of the Feds collateral schedule. Now, what Warren pointed out to us, which is fascinating, and it's such a good point, is that the FDIC will guarantee the deposits that are supported by by these loans, you know, assuming that the deposit is, is, you know, under the 250,000 limit, but but the Fed will well, you know, lend against them, which is just like completely, it's, like, doesn't make any sense. So on the one hand, the federal government's yet says these are money, good. And then on the other hand, it says they're not, it's just, like, completely arbitrary and just shows weakness in the, you know, the regulatory structure. You know, that that that still plagues, you know, the banking system?

Adam Rice: 27:58

Right, on that note, do you see, do you see any imminent risks or potential risks?

Ryan Benincasa: 28:03

Um, I kind of agree with Warren, what's his? What's his line? There's no financial crisis? That's, you know, that can't be what's that Mosers law or something, there's no financial crisis that's large enough, that can't be solved with enough fiscal stimulus

Adam Rice: 28:21

with a sufficient fiscal adjustment, I think.

Ryan Benincasa: 28:25

And I think there's an element of truth to that. And I think, you know, what we've seen with, you know, these crypto blow ups, all these, these specs have blown up, you know, these banks that have blown up, and yet the economy prints close to 5% GDP, it's, you know, it's just sort of, you know, there's definitely, I think other weaknesses, that, you know, have to keep an eye out on, for example. You know, private credit is really hard asset class right now. You know, it's basically think of, you know, leveraged bank loans, or even junk bonds that are that are basically being done in completely illiquid, private vehicles, you know, that, that there's a lot of money that's flowing to that. So, you know, you could potentially see that having some sort of negative overhang at some point. Commercial real estate is there's is there's definitely a lot of stress and outright distress that's happening. You know, particularly in the in the office sector, and so, you know, that that, that still has to sort of shake itself out but but as far as anything systemic, I mean, it it doesn't really I do agree that that the Fed has sort of fear that I think there's more they could do. I think for example, if the FDIC just came out and outright guaranteed all deposits at banks and and did away with you know, a You know, the bank wannabes, like the the money market funds and the and the, and the crypto frauds and stuff, I think that would do a lot to help with financial stability. And, you know, Morgan Rick's has made the point makes the point in his book, The money problem that that essentially all these really deep, you know, recessions that that take a long time to recover from happen following a financial crisis. So that happened in in the US in a way, and also the Great Depression. It happened in in Japan, Japan, you know, people talk about the last decades or whatever, but Japan basically had a big boom in the early 90s. And the bust, and things were okay, it was on the rebound. And then they had kind of a smaller scale financial crisis in terms of like a classic sort of bank run on the on, you know, the, their shadow banking system in the, in the late 90s. And that was what, what led to this sort of, you know, long slow recovery, that, that, that they've experienced in Japan. And so I, you know, to the extent that you could mix, both, you know, Mosers, you know, fiscal adjustments and, and, you know, restructure, you know, the banking system in terms of the, you know, having fairly guaranteed deposit funding and stuff, I think both of those would be would be helpful for minimizing economic risks.

Adam Rice: 32:02

And then you always have to consider the Minsky, the Minsky saying is that stability breeds instability?

Ryan Benincasa: 32:07

Right, right. Right, exactly.

Adam Rice: 32:10

So you never know, like, as long as things are stable, it seems that risk eventually builds somewhere. But I think it's important for our policymakers to remember that, you know, to remember most there's law, which is that a sufficient fiscal adjustment can get us out of out of any, any kind of financial credit, exactly.

Douglas Padgett: 32:31

It is, it is just interesting to see what's playing out, too. I really thought after the COVID period, that the government was going to figure it out, even even the most staunch fiscal hawks that are out there, we're going to figure it out, like, Okay, we shut down half the economy, like 25% unemployment, because of this COVID thing, and effectively had no real consequence from that. economically. Right. I mean, great financial crisis happened in 2008. We were still feeling it by 2011. Right. Like, I mean, it was we were far outside of the the effects of the great financial crisis, we're light years away from the immediate effects of the post COVID period, obviously, we had the, the inflationary period, but everyone still has a job. You know, we still have a vibrant, there's not a lost generation, the way the millennials were entering the workforce in 2009. and couldn't find I mean, that's just strawberries are more expensive than, you know, my wife would like, but that's not like the end of the you know, it's not the end of the world. I mean, again, I don't want to downplay is a lot of pain and suffering out there. But I mean, you know, clearly based on the fact that everyone's going on a Disney cruise, that there's still a lot of opportunity for, for prosperity out there. So I would have thought that the government was like, Yeah, you know what, like, the even if let's just even say the, the post COVID policy decisions were the direct and only cause of inflation, that's not what the case was. But let's just even say it was, it was far better than the alternative, which was what played out during the great financial crisis. And yet, here we are, the new Speaker of the House, and everyone is all on board for cutting government spending back to zero. So to me, I mean, if there's a big risk, that could be immediately around the corner, that's it. I do think my sleeper case, my sleeper case. Now, none of this happens as long as the fiscal flow, which is the fiscal flow is what is true liquidity as long as that as long as that pipe is open, they weren't good to go, right? That when that pipe closes, and that freezes over, and the flow is not there, then we got some issues, because that's when the Minsky, the Minsky dynamics can start to take over, that's when all of a sudden the bank flows really start kicking in to make up for the lack of that fiscal flow. That's when we need to be worried that there's a crisis emerging or beginning to grow underneath the surface of a robust economy. But one thing that is brewing and whenever that does happen, that is still concerning to me, is this fact that we have, and this is an institutional structure sort of thing that everyone just now knows that the way To invest is passive buy and hold spy, you know, 7030, whatever, right? Whatever that is that they're doing you buy, you do the boggle head thing. And that's just the Bogle head thing. And that's just how you invest. And I, is it. Cole? Is that his name? Who's done last name the Artemis guy who's done a lot of research on this that just shows that eventually if every eat up there if there's no true price discovery mechanism was it Mike Green that did that? Okay. So there's a few people have kind of brought up that point. That is the one thing that's kind of bubbling underneath the surface of, of what is continues to be robust growth, that does give me a bit of a pause for concern, I don't think it becomes an issue until we reach that point where we run a surplus for a few quarters in real terms, and and allow the Minsky dynamics to build up into that instability moment, I think it's at that point that maybe the true structural weakness get it gets exposed. But that would be my one thing that I'm like, I don't know how this ends, kind of like, you know, it might have been difficult 2005 To really understand how packaging together a bunch of mortgage backed securities, out of the books of banks is going to play out like you don't know what the break looks like, in its totality. Intel, the government turns off the spigot, and then you find out exactly what it looks like, and how deep and how far it went. And I think I think we're, I think, you know that we might find out that it maybe wasn't the best idea for everyone to become a passive investor in the spy, when the government spigot finally gets turned off. And we see ourselves in a situation where it's actually drawing net financial assets out of the private sector into the public sector. What's that? What's that actually going to look like? When the dynamics play out? So yeah, that'd be my that'd be my answer to my own question in terms of what to worry about into the future. I

Adam Rice: 37:20

do wonder, though, and like it is, you know, the whole, like, government mail malpractice, if you want to call it that, of, you know, this idea that like cutting spending somehow beneficial for everyone. That does worry me. But at the same time, you know, I think about how, number one, most of the spending is just like on autopilot already. And it's not up to legislators to decide. Everything, you know, the huge line items are just kind of like on autopilot in number two. And I think BG made this point on one of your streams at one point. You know, like who like, Who are their real constituents? Like, are they really willing to look at, you know, whoever it is? Big defense contractor and be like, Nope, there's no money left.

Ryan Benincasa: 38:06

You know what I mean?

Douglas Padgett: 38:07

Yeah. Yeah.

Adam Rice: 38:08

So I wonder like, I think the rhetoric is there, because for whatever reason, you know, people have come to believe that the United States is spending irresponsibly. But I don't think in practice.

Ryan Benincasa: 38:22

I don't know. I totally irresponsible when they're not the recipients. Yeah. Yeah,

Adam Rice: 38:30

exactly. Yeah, I don't know. I feel like that's always a risk. And then, then oil is always a risk. You know,

Ryan Benincasa: 38:38

oil is big risk. Yeah.

Douglas Padgett: 38:41

By oil being a big risk if it gets high enough, fast enough. Yeah,

Adam Rice: 38:46

yeah, kind of, it's just, it's like, what what Mosler says it's just like, you know, it's either a tax cut or a tax hike on the US consumer.

Ryan Benincasa: 38:55

Yeah, I think that's probably that's probably the the biggest risk to the economy is oil. I also think, you know, to the extent that mean, I know that we've been on here hammering about, you know, how the rate hikes have supported the economy and add net financial assets to you know, the private sector, and that then supports, you know, flows into you know, securities markets. I do think there is something to be said about, and we actually tweeted that, that, you know, the pain trade for rates was high on the long end was higher. And you know, since then I think TLT is down like, like 10 points or something like that. You know, other people may, you know, somewhat like I Bill Ackman made similar call about, you know, the, you know, he was short, the long and treasuries or something, but, and a lot of people have that in the finance, we have that view. The problem is, they don't like it's all predicated on this idea of fear. School sustainability or whatever, which is just complete and total nonsense, right? I mean, there's a view that well, first of all, first of all, we have the largest deficits as a percent of GDP ever in 2020 2021. And, you know, in in, in late 2021, I think the tenure hit an all time, low in terms of yield, I think I think it hit like 25 basis points or something like that. And then a year later, we had the largest dollar fiscal tightening of all time, right, the budget deficit was a trillion dollars less in 2022, than in 2021. And the yield on the tenure, like 8x, I think it ended at like, 4% or something. So you have this, this example where Oh, you know, really high deficits, but the rate was low, and then you cut the deficit and rate shot up, it's just like, completely. You know, it's completely backwards to what everyone says. And now all of a sudden, in 2023, we've had, you know, the deficit has expanded again, and rates have continued to, to grind higher, particularly on the long end. And people are like, you see, it's all this, you know, spending and fiscal unsustainability that's causing rates to go higher. It's like, Well, why didn't that happen in 2020, and 2021, when when the deficit was even higher as a percent of GDP? It's, it's just like, completely crazy. And, and cherry picking and, and, you know, to the extent that maybe historically, you know, you know, there was a maybe a correlation between higher deficits and, and higher rates. But But even if that is the case, I'm not really sure this but even if it is, the reason that that happens is because the higher rates add to the deficit, it's not the other way around. It's not the high deficit that makes the rates go higher. It's, it's the higher rates that cause deficits to go higher. And, you know, we recently I think it was Nathan tank just tweeted out something about it said that, what's that guy? J. W. Who writes for forbearance, sometimes he's a JW. Mason, I think he's a an economist. Based in New York, I forget, I forget where I think he's a he's a, he's like a professor or something. And thanks, John. Jay, for Oh, John J. Okay. Got it. Yeah. So he was like, Yeah, you know, there's all this talk about, you know, the Reagan deficits from the 80s. And how, you know, we had, you know, he, you know, cut taxes and increased defense spending? Well, the reality is, if you, if you just just look at the fiscal policy from tax cuts, and an increase in defense spending, the the impact on the budget deficit was basically de minimis, the deficit would have looked the exact same as it had in the 1970s. The only difference is that they hiked rates, and so the interest spending was a lot was a lot higher. And that's what caused the deficits to expand under Reagan. And that's also why you had the start of this massive bull market and economic growth in the 1980s is because the deficits were, were higher, and it wasn't because of tax cuts. It was because of increasing spending, because the government, the US government is a net payer of interest into the economy. So again, it's just people have it completely backwards. And they say, oh, you know, the higher deficit means it's the, you know, the Treasury, no one's gonna, no one's gonna buy the treasuries debt anymore, they're gonna have to pay a much higher rate. It's just, it's just complete, complete craziness.

Adam Rice: 44:36

So Ryan, I'm on that topic. Do you want to tell us a little bit about the quote unquote, failed Treasury auction yesterday? Sure.

Ryan Benincasa: 44:44

And let me just preface this by saying I I've never myself participated in any institutional capacity at a at a you know, a primary auction or or anything else so so I don't want to give the impression that that, you know, some sort of inside baseball on the saying, but, but let me just read really quick what, what Barron's had to say about it. So Um, here's barons A, this was posted this morning. So the Treasury's auction of 30 year bonds on Thursday, went about as badly as it could, indicating investors are reluctant to own long dated government securities. At the auction of government debt that matures in three years, investors were awarded 4.769% in yield a 0.051 percentage point higher than the yield in pre option trading. The difference between the two year yields, called a tail indicated a week auction where the US government had to entice investors with a premium over the market to buy their debt. primary dealers who buy up supply not taken by investors had to accept 24.7% of the debt on offer more than doubled at 12%. Average for the past year. So let's just back up for a sec. So I people, people who work in finance are probably familiar with the term basis point. So a basis point is 1/100 of a percent. Okay, so something is that, you know, four and a half percent versus 4.51%. That difference that one is, is equal to one basis point. Okay, what we're talking about here, where they mentioned, tails, that's a 10th of a basis point. We're talking about, like five, Ed's have a basis point. Is primary auction in this failed auction, versus where they're trading pre auction? It's such a joke. So So, okay, primary dealers had to take down, you know, almost a quarter of the offering. It's like, yeah, that's the whole point. That's why we have primary dealers to they have to make competitive bids and offerings in primary markets, and so that the, like, it's just outrageous to say this is a failure, no one wanted to buy the debt. So the dealers had to come in and take it down. It's like, yeah, that's, that's, that's how the system is designed. And get and guess who? Who do you think, you know, created the whole primary dealer system in the first place. I like, like, it's all all these, it's all by design by the government. Right? You can't, you know, the Fed approves the, you know, who is it and is not a primary dealer. Just like the, the Office of the Comptroller of the Currency, the OCC, which is a Department of the Treasury, you know, has to give a license to do banking, ie handout, banking charters, like, there, this is this is all this is all, like, created, this market is created by the US government. So this idea that like this was somehow like a failure is just completely absurd. I would also just like to point out, so I'm looking at the, the results from the, you know, the Treasury's website, it says in the footnotes here. The where's the bid to cover ratio was equal to two 2.24. That basically that what that means is that for every, for every dollar that the Treasury was issuing, there are$2.24. Of of, you know, competing, competing to purchase that that security, so it's like, two of the two and a quarter times. oversubscribed? I mean, it's just, it's just completely outrageous to characterize this as some sort of like, you know, his hysteria and failure. And, and, and, and that, you know, the, the government, you know, it's like this huge risks that we're in, you know, we're gonna know who's gonna buy our debt. I mean, the Wall Street Journal itself, actually, I think we tweeted this out. A writer for The Wall Street Journal literally wrote that, that, you know, Treasury, you know, deficits add to the savings out of then channeled to purchase financial assets. And I thought, oh my gosh, that's amazing that the Wall Street Journal is acknowledging this Right. Because, you know, it's not just us wearing you know, tinfoil hats over here. It's it's actually somewhat mainstream now that people are starting to recognize this. Yep. Yep.

Adam Rice: 50:30

Was that that was the article that quoted Mosler was not? Did it quote Moser? There was a recent article that quoted Mosler and, and John Carney from Breitbart.

Ryan Benincasa: 50:42

Oh, from Oh, no, no, that's a different now. This was from the woods. This was from the Wall Street Journal.

Adam Rice: 50:49

Oh, no, this I think I think there was a Wall Street Journal article that quoted Mosler and Kearney.

Ryan Benincasa: 50:55

Oh, really? Yeah, I'm pretty sure I must have missed that, then.

Adam Rice: 51:00

I'll post it in the show notes by end up finding it. Yeah. For

Douglas Padgett: 51:04

those of you in the bond world, and those of you who who have to track rates and understand where rates are going, the big takeaway is rates are gonna go wherever the Fed desires them to go. And what we've seen with the flattening of the yield curve over the last few months is just exactly what you would expect that as markets digest and take time to understand what the Fed's longer term plan is actually going to look like the longer end of the curve, essentially, it gets the information transmission to it, to say, Yeah, we're going to now catch up with the short end of the curve. And if the Fed tomorrow decided to drop rates to zero, the curve would obviously and invert. And slowly but surely, it would flatten over time, once again, as the long end catches up to where the, you know, to fully understand what what Fed policy is going to look like from there. So Brian, thanks for the yeah, thanks for the explanation of what took place with the mania that was happening yesterday. But in terms of what action this is, one of these days, I'll build a model to kind of solve this. But rates go where the Fed sets them. The Fed is determining factors or growth, employment and inflation. So if you just track things like I mean, there's a reason why you're going to have the inverse correlation between bonds and stocks. Because the Fed looks at growth and to a certain extent, stocks are a proxy for growth. There's a reason why rates are also going to track things like oil, because oil is a major contributor to to inflation. And there's a reason that rates are going to track the unemployment level because again, that's what they're looking at. And the crazy thing that happened for the first time, and certainly the the post financial financialization of the US economy. And really, since we've been keeping records that the Fed hiked rates during a major contractionary timeframe, which they've never done before. They actually hiked rates. And and so now we found ourselves in a situation where even though we did kind of have a stealth recession, a business cycle recession, we'll call software. Yeah, well, in 2022, I mean, effectively, we had everything play out, that was a recession, we just never had the unemployment kick in, right, which had the unemployment kicked in. And had we had a banking crisis, you know, we're talking a lot different right now, the Fed would have never raised rates and the additional interest income that would have never came in. I mean, it's all because really, we had the inflationary shot from the post COVID period of you know, the war, and then the supply chain still happening that kind of, ironically saved us from a recession, because the Fed would have kept rates at zero, we might have, we might have never got the boost the the the fiscal boost that we needed. But as long as those three things remain intact, I think eventually the Fed is going to say, Yeah, okay, maybe we need to raise rates? Or maybe they maybe they figured it out. I mean, I think that to a certain extent, Powell came out and said, Yeah, we got to try some new things, we got to think about some some things differently. You know, maybe they're realizing they're in a new era, however they want to put it, you know, obviously, they're never gonna say, Well, shit, we got this backwards. But, you know, however they want to put it, maybe they're starting to realize that this lever really doesn't do all that much that they think that they're pulling. But tell it's the case rates are going to track what the Fed tracks and what ultimately makes the Fed make a decision. What I would love to see maybe this is the model is it takes a long time to build and I don't have the you know, all the data to do this yet. But some of you could definitely do is you build a deep learning model that looks at the that looks at essentially a regression model that takes in things like oil and takes in things like unemployment and takes and things like growth, and says, Okay, tell me where the Feds gonna head with this. But the fun thing would be to add in kind of a large language model that also interprets the Fed meetings interprets what each fed member is saying over time to see the the conviction the Fed has based on their own data, right. So I mean, you know, you could if you're the Fed, and you're sitting there and you're like, well, they have been raising rates now for the last six months to a year of the of the last six months to a year and it's not exactly doing what we thought inflation is still a little stickier, yada yada yada and they're coming out and in hinting at the fact that maybe they don't have the conviction that used to in the data and some maybe the data is not as potent is that it used to be right. So so maybe the stretch from maybe the stretch from 2010 to 2019 had a certain correlation that was much more potent, because they had no reason to believe that they were wrong. And they never communicated that they were wrong in the way things work. But now, they're communicating things in a slightly different way, is there something that can be that can be learned there that okay, maybe we are gonna get a pause here at whatever five and a half percent that the Fed funds rate is at for an extended period of time, and maybe this just is going to be, we're going to settle at five and a half. And they're just happy with that, right. And they're content with keeping things sideways for the next for the next five years. And five and a half is the new is the new quarter, quarter percent. That remains a kind of interest. It's an interesting problem to solve. But the good news is, no matter what the Fed says, We're gonna hike rates. And we know that, you know, that ultimately, the monopoly price setter, you'll see the short end rise, and then eventually the long end will catch up, or vice versa. And, and that's gonna be the game from from from the right side of things for the for the foreseeable future.

Ryan Benincasa: 56:25

I think it's, I think it's pretty abundantly clear at this point. And thank you. For all that. Douglas. I think my takeaway from what you were kind of saying there is, like the Fed fancies itself as acting counter-cyclically, but it ostensibly acts pro cyclically. Right,

Douglas Padgett: 56:45

especially right now. Yeah, right. Yes, yes. Yeah, you're right. Right. Right.

Adam Rice: 56:52

Right. Yeah. And that's, that's what I was saying to you guys. The other day, I was I was saying it would be interesting. Well, not interesting. It would be unfortunate. If the Fed, you know, let's say something were to happen in the economy, some sort of exogenous shock, and the Fed cut rates in response and removed all that fiscal support from the economy. And then continued cutting rates into it, thinking that they would they would help the economy recover like that to me. I mean, if you want to talk about big risks, that's, that is a big risk in my mind.

Ryan Benincasa: 57:21

You just described the post global financial crisis period. Yeah, that's true.

Adam Rice: 57:26

That's true. That's true. Which is crazy.

Ryan Benincasa: 57:31

I know it, it really is. It really is pretty wild.

Douglas Padgett: 57:38

Well, I know we're, I know, we're wrapping up. And before we do, guys, I'm super excited. Everyone listening, we're gonna be bringing some really fun stuff. We're working on AI. If you guys follow me on Twitter, you know, I've been, I've been running the victory labs with the deep MMT model that I built, got, if you go look back at things like post I had on like August 17, I think it was you got to see with that model. Trust me, I will be reposting that soon as a little victory lap. But, but some of the models that we're building are just their mind blowingly accurate. And it's if you're into finance, and that sort of thing. It's exciting. And if you just want MMT to win, it's also exciting, because we're doing stuff that just no one else is doing. We are lightyears ahead of everybody else. And I'm excited to continue to continue to grow the team around me and bring on just yeah, just collaborate with other super smart people to really get a to really get an exciting and exciting message, exciting product, exciting content out to everybody. So I'm pumped and glad I ran across the applied NMT podcast and we'll be we'll be bringing some we'll be dropping the news soon and what we have we have a cooking in the kitchen right now so to speak.

Adam Rice: 58:50

Amen. Definitely. Definitely. Amen. Exciting times. Alright, thank you everybody for listening and we will keep you posted as the site progresses.