Market Discipline: A Tour Around the Globe with Rene Aninao
Summary
Federal Reserve: Extensive discussion on restoring central bank independence under a Kevin Warsh-led Fed, including a potential new Fed–Treasury accord and balance sheet normalization to reassert market discipline.
Defense Spending: The case for a $1.5T U.S. defense budget (near 5% of GDP) was weighed against fiscal constraints and rising debt service, with implications for Aerospace & Defense exposure.
Geopolitical Risk: A multi-front deterrence strategy (Venezuela, Iran, Russia, China) underscores simultaneous threat dynamics and the market’s role in constraining policy choices.
China & Semiconductors: China’s internal brittleness and Taiwan deterrence via sanctions/markets were highlighted, alongside ongoing chip flows, strategic decoupling, and the importance of the Semiconductors ecosystem.
AI Infrastructure: Generative AI’s massive capex cycle (hyperscalers, data centers, model developers like OpenAI) raises TBTF-style moral hazard and potential implicit government backstops if revenues lag spend.
Productivity Boom: Early signs of a 2.5–3% productivity upswing from AI were noted, but concentration in a few tech platforms could blunt supply-side benefits and competitiveness.
Energy Markets: The shale revolution’s added supply was cited as a strategic stabilizer, illustrating how market-driven energy advances can mitigate geopolitical shocks and inflation.
Transcript
Capital Record, where we defend free enterprise and capital markets because we believe in the dignity of the human person. Hello and welcome to David Bonson's Capital Record, brought to you by National Review, where today we are going to do something that we only did, I believe, twice all of last year, uh, which was bring a guest on. Uh, many of you right now are thinking, "Thank God I'm going to hear less of David's voice today." But that is only the second reason you can thank God right now because the first is that the other voice you'll be hearing is our very popular longtime guest and one of my dearest friends Renee Anana Corbu who is going to spend the next hour with us just literally talking about uh geopolitics the market the Fed and the macroeconomic things that are most on Renee and mine's mind. uh he has been on Capitol Record every year since we started the podcast. Renee does not do a lot of media and appearances like this. So, it's an honor to have him, but it's also an honor just to be able to have this discussion and let you all the listeners of Capital Record partake as Renee and I wrap together a little bit with with all that said, Renee, welcome back to Capital Record. >> David, it's great to be here. Great to be home. As I always say, it's a historic day actually. It's the four-y year anniversary of of the war in Ukraine, which I think is my fourth year running this, I think. Right. >> Uh yeah, I think you're right. >> So, you know, good day to be here. >> Well, and and there's certainly been an awful lot uh since the war in Ukraine that uh has given us opportunity to talk on on what it means for the world stage and so forth. you know, we um began talking at the beginning of the year about getting you on and uh when I first sort of reached out and said, "We got to make this happen," it was a day or two after President Trump's successful mission to out Maduro in Venezuela. And yet since then you could argue that not a week has gone by without significant matters of um that warrant discussion uh both globally and and even within kind of US uh domestic policy in the interest of trying our best I don't think you and I are going to do a very good job but in the interest of trying our best to stay focused why don't I just sort of start us >> with what has been one of the larger domestic issues that has happened so far today, which was President Trump's long awaited announcement of his choice to be the successor of the chair position at the Federal Reserve. Uh Kevin Walsh, somebody both you and I know and both you and I predicted would get the nod. And >> I think we were the only two. >> Yeah. For for a while, for a while we were. >> And and yet I will say I'm a person who says, "Don't tell me what you believe. Show me your portfolio." And I I never did go place a bet on Koshi or Polymath. So perhaps I uh I I I would have had more credibility, but I I was on record on uh television and in writing a full year ago predicting he would. And I think you and I have gone back to 2017 hoping >> that Walsh would end up on the Fed. Let let's start with that, Renee. Why would why do you like why are you happy about Kevin Walsh being selected? I mean, look, I think there's a few points to really think about of why this nomination was so important. I always like to start with that it really reveals something about the president's reaction function, which is that he knows implicitly that he has to submit himself to market discipline. And you know that's a very I think out of consensus view but it's very clear when you look at what the president does um the one place where he submits is to the markets. And I think that was just a very interesting point to kind of start out with that I think leading up to the nomination, historic nomination on January 30th, there was this longunning narrative that the president wanted a psychopant in there because he wanted lower rates and he wanted to um let's call it, you know, twist the Fed into what he wanted them to do. And I think that he intuitits always that um the market will not reward him for that and if he's subjected to market discipline actually it's going to be worse for him. So he knew that that nomination was different and it was special and it was important and he picked the best person for the job which um I think is obviously Chairman Wars. I think the other thing that's really important about the worst nomination is that you tell me David, but over the last several months, maybe even years, there has been this concern that the central bank was losing its independence and that that had major implications for US markets, the US place in the world, the US dollar. Um, and I think that now has been put at least to rest that that is no longer a question anymore that the central bank has has and is going to restore its credibility. So, you know, when you think about what that means, maybe we should talk about this in more detail is what an agenda what the agenda what the worsh agenda is. Well, so let's let's get to the WASH agenda, but let's let's start with the connectivity that you're positing between market discipline and WH's selection. Is it about WH's selection that reinforces market discipline or is it about the rejection of the other sicopantic candidates? >> I think it's both. It's a great question. Um, but the fact that he chose to not nominate one and chose the very adult in the room, let's call it establishment choice. I think speaks to the point that I always try to make which is that the markets are always the final arbiter and every head of state that stays ahead of state for a long time always has to submit to market discipline. I mean you and I kind of laugh about that on uh you know the infamous liberation day April 2nd last year. I think it took a total of seven entire days and maybe 40 basis points higher in the long end for the president to submit to market discipline. F >> five business days, four market days. >> Yeah, there you go. >> Four and a half if you count the intraday. But yes, I mean that that was a pretty powerful reinforcement. You you've done a lot of work, Renee, reinforcing this even in bigger picture issues. You could argue that the Clinton Rubin Greenspan trifecta was entirely uh governed by market discipline throughout their their longer term reign. It wasn't as dramatic of a moment. I mean, you could look at long-term capital or whatnot. But there there are various examples of this, but when you say all states end up having to submit, is it true in third world countries or is it not true in third world countries and that's why they're third world countries? I think it's exactly like what you said in the latter is that the reason that they are third world countries is because they choose not to submit to market discipline. That's why Venezuela is what it is. That's why Russia is what it is. That's why most of the emerging market complex is still emerging because they have not embraced the capitalist system. And obviously that's the the title of your podcast, right? The capital record. And um you and I talk about this. I mean this is a theological point that markets are God's will here on earth. >> I know that sounds very almost hyperbolic to say in this environment that we live in but uh I think you know I believe it very much and and history bears >> well by by the way we should interrupt because I I would love to take for granted that the listeners of Capital Record all know what we mean. It is the point of the podcast, but it's also very susceptible to people just flat out bearing false witness about what you said. You didn't say markets are God's will here on earth in the sense that God wants every market transaction to be a successful one for both parties or that there will never be downside to risk only right tail outcomes. that what you said was markets and markets properly understood are is you're making a comment about human freedom and human exchange and human relationship of exchange that that is God's will and that that is uh non-impoverishing and it is promotional of flourishing and that is God's will on earth >> and it's ultimately about the creation narrative that you talk about right that that is our our our calling here on earth um is to create and that is what markets enable us to do. So um and when we when we do those towards uh let's call it the aims of of of other humans then we're rewarded for that and when we conduct ourselves in in markets in ways that are exploited then exploitive then we are uh punished for that quite frankly. So with with market discipline applied to the political sphere and now we're not talking about head of state in Venezuela who doesn't honor it and makes his country poor because of it but uh a situation like like America um we have a long precedent of presidents going against um market principles right we have precedents of presidents that want greater central planning greater interventions greater imperial discretionary authority how how do you distinguish between market discipline in those extreme moments like post liberation day and market discipline where on on the margins they use New Deal or Great Society or DoddFrank to to push the envelope of anti-market state intervention. I mean, look, I think that's one of the it's a great segue to one of the pieces that we wrote um I think earlier in the year at the end of last year, and we called it no MOS, which was that the markets had told the United States it's over, no more on the fiscal irresponsibility. And let me run through this just super quickly because I think it's interesting and important. you know, when the Federal Reserve started to lower rates in September of 2024, um, shortly before the election, by the way, right, we saw 175 basis points of interest rate cuts. And despite those cuts, the 10-year yield was higher today than it was in September of 24. the 30-year yield higher term premia higher. Um, and so >> for those who want to nitpick it, that has been true. It may just recently have moved, but yeah, understood. >> Well, what's interesting also on a side note is that when the yield started to come down was after what I call the worsh restoration at the central bank, right? Yeah. which is that when markets finally start to see that responsible decision making um is being made, then they will reward that with lower with lower yields. But here's where I think maybe we can think about connecting it to geopolitics and the US's place in the world. You know, there's been this, I think, focus in the new Trump administration about that we are going to focus only on the Western Hemisphere. Uh maybe arguably even at the expense of of other regions like the Middle East or even Asia that we needed to recalibrate our force posture all around the world. And I have this chart um where it shows that US defense spending is now lower than the debt service cost. So we spend more on servicing our debt than we do on the national defense and underwriting the global security environment. And I think that is a outgrowth of to your point David I think almost you know 354 years of refusing to abide by market discipline. So here's the example. Think about 1991 up through 911. US debt to GDP was around 3540%. And after the Cold War and the peace dividend, I'll argue that much like the Europeans that are much derided for squandering their peace dividend on social programs. >> Yeah. >> The United States did the same. >> Sure. >> Because we squandered it on housing. We squandered it on bank bailouts. We squandered it on buying votes during the pandemic. Right. such that now I think that what what the markets have taught us and told us is that this whole idea about focusing on western hemisphere is not necessarily just a discrete policy choice. It is the markets imposing discipline on us by telling us that you will not be able to project power globally simultaneously around the world until your fiscal house is in order because you cannot afford it. you've gone from 35% debt to GDP to 125% debt to to GDP and it's only supposed to get worse. So you can't afford to spend as much on defense, right? So I think that's you know probably and I will say this you know we mentioned to the clients that this is I think the most important note that we ever wrote is that even you know the almighty superpower United States still has to submit to market discipline and that there are real consequences when it does not. So with Fed uh wi with the Fed independence issue, um you and I are in agreement that a Kevin Hasset appointment would have undermined Fed independence uh both in market perception that and uh very likely in the administration of policy. I won't speak for you on this one. I will say my reasons for saying that is simply that I don't know what else to think. In light of 35 years of Hasset's record, 34 of them being decidedly one way in terms of most issues of public importance and then the 35th year being so different. It just calls into question the resolve and the willingness to um adhere to various uh principles and ideological commitments that that what you would expect. Um if I'm wrong about that, if Hasset would have gotten the the job and come in and been an independent central bank head, then then I'd be happy. But it's certainly a plausible belief he would not have been based on the way a published author advocate of free trade has changed his views based on the notion of um inflation numbers that were X during a Democrat administration being inflationary and then numbers that are higher than X now being disinflationary. We just have a s a sickopantic run that's going about 12 months that honestly I've never seen. Um, you could say, well, Pete Navaro is sickantic, but Pete Navaro came in as a sickopant. >> That's right. >> He came in without credibility. He's not a serious person. Um, Hassid was a very serious person. Someone I held in high regard and spoken with them many times. I'm far more disappointed in the trajectory I've seen with that Kevin than than any of the other people in the economic team of Trump 2.0. Wsh, on the other hand, has not been in the economic team of Trump 2.0, you know, which much like governors that run for president is an advantage, senators often have a federal legislation vote that can come back to haunt them. Famously, Hillary Clinton voting for the Iraq war haunted her when she ran for the Democratic nomination for president. It's one of the main reasons that until an exception like an Obama and a Biden um and I don't think the Republicans have had an exception in a billion years that senators have had a very hard time getting elected president that we've we've largely gone with governors. Maybe they have more executive experience and talent, but also they've avoided federal votes. Had Walsh been there, would he have been a dissenting vote in 2022? I'm not talking about 20. Okay, I'm being gracious enough to give PAL a pass for the zero bound in 2020. I'm not convinced there is a central banker who wouldn't have done that based on the Fed Treasury accord that you taught me about. that was hardly implicit at that time between Minutuchin and Pal predecessor uh with with Paulson Berneni that in those times of extreme six standard deviation left tail risk events Fed and Treasury get on speed dial and they coordinate and then they basically um intervene heavily and my view is that they shouldn't, but that if they're going to not do it, they have to tell everyone they're not. And when risk parody blew up in March of 2020, the moral hazard was such that they had spent 30 years telling these people they were going to, so they needed to. A lot of people don't like that view, but I think it's your view. Tell me first of all, if we're tracking so far, >> I totally agree. I mean, look, I think the great part about a chairman warsled Fed is that he's been very consistent since actually since he was on the board in 2006 was that he was always very in favor of powerful forceful measures by the central bank in times of crisis. This goes back to Walter Bagghot, right? This is lender of last resort. um type of central bank activity. The difference is that when the crisis subsides then you need to go back to normal operating procedures so that markets can do what they do on price discovery and the allocation account that process >> I I want to give listeners a a quick uh intervention here because what Rene is saying is very important what he's talking about is nothing more than extreme polic policy at an extreme moment then moving to normalization. >> Yeah. where what Ben Berneni and Japan and Draghi and I could go on and on have done is say no we can't go back to normal because the intervention is now so baked in that it will create another problem if we do and that um essentially it uh it allows for a codification of normalizing emergency activity in in the administration of monetary policy. What you're saying, Rene, is that Walsh has never bought into that, that he has been a consistent emergency for emergencies, but no emergency for non-emergencies. That's absolutely correct. And when you look at chairman Worsh's record in 2011 when he stepped down, the reason he stepped down was because of this expansion of the balance sheet where QE was no longer an emergency measure but was becoming a permanent instrument of monetary policy and what effect did that have? There are always tradeoffs in policy as um David you've pointed out. The question is which cost is greater and there are obviously cost to normalization of policy. But the flip side of that is that if you continue where emergency measures become normalized then what ultimately happens is that you begin to monetize the fiscal large s and that there is no market discipline. you start to truncate the market discipline on the fiscal policy makers. And so it's no coincidence that you know starting with this large expansion of the balance sheet that that tracks with um the expansion in debt to GDP. And what has that done is that that has created a tremendous misallocation of capital and where the price discovery process has been impaired because the central bank and the government has such a large footprint in the market. So I think that's where the real big regime change is coming in central banking is that the footprint of the central bank and the government is going to be rightsized and that that capital that is essentially trapped in reserves um inside the Federal Reserve will be unleashed into banks and the private sector. So, let's talk a little bit without getting too wonky about uh about how he'll do that and then we can move into some global and and geopolitical affairs. Is um uh do you believe he's going to come in and revert to a shock and awe quantitative tightening? Do you believe he's instead going to do a quasi operation twist with the duration profile of the Fed's balance sheet or something else? What what would the means be of reducing the footprint via the balance sheet for WASH without being hyperdisruptive to markets? Look, I think the most important thing to remember is that there needs to be and is going to be, I think, a new demarcation of the roles of fiscal policy and monetary policy. And in all likelihood, that is going to be codified and articulated in a new Fed Treasury accord. And hopefully that Fed Treasury Accord can be signed by trilaterally by the Federal Reserve, the Treasury Secretary and even the President of the United States. Right? And without getting into too much technical stuff, right? The main idea is that over time over time the Treasury and the Fed are going to work together to reduce the size of the Fed's balance sheet and reduce the footprint of the Fed in markets such that the Fed only intervenes when crisis necessitates. So is that um market manipulation to coordinate it with treasury or when the balance sheet is essentially composed of largely you know treasury securities is is that the only way to do it? Um, in other words, by coordinating, um, what what what you're referring to is, uh, becoming a direct buyer or seller, uh, enabling the Fed the Treasury to meet its, uh, liquidity needs and allowing that to uh, simultaneously accommodate uh, Fed objectives with reduction of footprint. Is that coordination an intervention or is it a means to an end? >> I think ultimately look it's that you don't want the Federal Reserve to be buying duration out in the long end and to start uh trying to mess around with um yields that they can't control and that they don't control. So ultimately it means just over time getting back more to basics where the Fed's balance sheet is full more of bills and short duration coupons rather than 10 year 20 years 30-year bonds and mortgage back securities. And that's going to take a process and that's going to take a type of what we call duration transformation in the markets. I think you called it kind of like a reverse operation twist, right? Um but that's a process that's going to be I think very um tightly managed and and signaled um without shocks to the market. And I think that the market will respond positively to that. Um because it will ultimately, when you think about it, um impose fiscal discipline because if the Fed is no longer buying long-term debt, then um there's going to have to be a choice made by the fiscal authorities on what they should do. And quite frankly, if more of the treasury issuance is in the front end, then actually, you know, this is somewhat of a philosophical point, but I do believe it that as the issuer of the global reserve currency, you should submit more of your fiscal issuance in the front end because it submits you to market discipline consistently, right? Um, and the market gets a consistent negotiation on and a vote on what you're spending the money on and why, right? And that is the privilege that the reserve currency issuer has versus other emerging market countries that have to fund uh longer and more expensive. Well, and also other developed market countries that maybe don't have that uh in that prohibition that emerging market countries do, but also just do not have the economic growth, the trading um footprint, the military respectability, any number of circumstances that keep them from being a candidate for that um privileged status. >> Yeah, I totally agree. So look, I think that's, you know, one of the I think major market implications of this is something for us to think about here going forward is the president has been very clear on his request for the next fiscal year on the defense budget. And he says, look, he he wants $1.5 trillion of military spending. Well, that's quite frankly 5% of GDP or close to it, which is in line with the H commitment of NATO that everyone agreed to last year. So that's a big number. It's an extra 600 billion or so from the current defense spending levels. And so the question is, how is the president going to finance that? And can he make the case for it? That we need it and we need to spend it and that much like Reagan in the 1980s that came in as a fiscal hawk but needed to increase defense spending remember on SDI and Star Wars um as deterrence against the Soviet Union then the president's going to have to make the case for that. I think maybe he'll start to make the case for that this evening at the State of the Union and then ultimately so have a negotiation with Chairman Worsh, right? Um on uh where this issuance is and how much he's going to be able to get through. So what what do you think I'm about to say? the comparison of Reagan SDI and the the desire to ramp up defense spending um as a percentage of GDP but also in just absolute dollar terms in the 80s to prevail in the cold war versus right now to prevail in a in a number of different uh global threats into the future. Um what is the key difference versus the 80s? You said it earlier. What was our debt to GDP then? >> Yeah, it was I think under 50 somewhere in >> it was under under 50. Um it's it's over a hundred now counting just the public debt not counting intergovernmental debt. Do you think that the challenge is not the m making the case for the legitimacy of our a robust military in the in uh what has become a very complicated world and that the challenge is not even the mechanics as to how to finance it with with debt financing. Do you think the challenge is that our mandatory spending as a percentage of federal budget outlays and the size of our social safety net has gotten to a size that we no longer have the luxury of having a military of that size? I think that that's absolutely correct. And so, you know, the president is ultimately going to have to make the case to the markets that, you know, quite frankly, um, will you give us one more round to try and see if if we can get this done? And, you know, the adversaries, I think, know this. This is why they are when you look across the landscape from Putin to Iran to Venezuela to even the Chinese, they know the position where the United States is right now and they know the vulnerability and they know that the vulnerability is in the markets. And so I think this is why the president is very intent on trying to reestablish deterrence because you've got this financial vulnerability out here, right? And so you have to start doing a lot of other things in the military domain to try to reestablish and restore deterrence and to make it more of a safe world that's you know safe for capex and US companies and all of the things that bring inflation down and increase real living standards and all the great virtuous cycle that we talked about in the late 80s and early 90s. >> That's where I think the challenge is today. So the um the $ one and a half trillion dollar military budget is uh in the context of a world with an increasingly um robust China, a increasingly uncertain Russia, um the issues within our own hemisphere, obviously the constant uh tensions in the Middle East, whether they be Iran right now or um another uh terror uh block uh uh another day various uprisings in Pakistan or Afghanistan or or or uh Syria, you have kind of a permanent instability. And I'm wondering right now, not not what you think in five or 10 years or what we could talk about has been the case the last five or 10, but as we're sitting here right now, what is the what is the biggest global threat that that you see between those various options? Let's just call it Russia, China, Venezuela, uh, Middle East. >> Look, I mean, it's a hard question to answer because I think it's all of them working in concert together. M >> Bridge Colby um the under secretary of defense for policy made a speech in Munich a couple of weeks ago where he said that we now have to take into account that the adversaries in concert or opportunistically might simultaneously seek opportunistic aggression. So, you know, let's maybe think about all the ones that you listed and just kind of take them in order from Venezuela to Iran to Ukraine to China. So, we obviously had a very historic moment January 3rd this year with the Maduro exfiltration, probably the one of the most complex military operations in history conducted seamlessly. And what was the point of that? The speaks to the earlier point that I was trying to make, which is that you needed to reestablish deterrence. Everyone thinks that this is about regime change in Venezuela. It's not about regime change. The shaveistas are still there. The regime is still there. There's one guy that's two people that are gone and those people arguably weren't running the country anymore. But it's that you needed to demonstrate to the world that the US military particularly in the wake of the Afghanistan withdrawal could still execute very complex missions um as a form of deterrence and deterrence signal. So there's I think another dimension of Venezuela which is that in theory the Trump administration is betting that they can get this new regime to act more in aligned with US interests. And how are they going to do that? They're going to do that with an oil embargo. That's why you have the Armada in the Caribbean. Right? So I think that is the blueprint when you think about with Iran. Now today it's the same thing. You have this similar armada being now shipped over to the Middle East. And when you look at the force posture and all the military assets that are in the region, they're not there for a ground operation. They're not there to snatch the Ayatollah and bring them to the Southern District. They are there I think to tell the supreme leader either you step down the hard way or we can take you out and in the hopes that similar to Venezuela the IRGC regime that you know runs let's call it 25 40% of Iranian GDP and controls the economy will be more incented to align with US and regional interests economically And quite frankly, what's the what's the leverage? Not just all the kinetic, but again, all the oil embargo. So, we'll have to see. And why is the president starting with Venezuela and starting with Iran? I always use the example that the president likes to enforce deterrence by using non or enforce deterrence against non-uclear states to work up to deterring the nuclear states like Putin. So if you can demonstrate to Putin that, hey, we took out Maduro, we took out the Supreme Leader, you might be next, then he can achieve a couple things. Number one is to finally hopefully bring Putin to the negotiating table and bring the Ukraine conflict to a close. >> Do you think Do you think he's done that yet? Do you think he's made any progress in doing that yet? Do you understand why skeptics think that he's made no progress in getting Putin to the negotiating table? >> I mean, look, there has been, I think, relative progress to 2024. You actually now have, I think it's almost five meetings now between the Russians, the Ukrainians, and the Americans at the negotiating table. During the Biden administration, there was none of that. So, there is some progress. There has been progress on the Ukraine side where the Ukrainians have quite frankly received a security guarantee from the United States. And so the question is what is it going to take to get Putin to sign on the line that is dotted? And ultimately you have to convince him that the cost of continuing is going to be greater than the cost of signing the deal. And look, I mean, we're still far away from that because there's some arguments to be made that Putin still thinks that he can wait out Trump or wait out the United States and test our resolve. And so I think these operations against Venezuela, against Iran are ways of playing cognitive warfare with Putin. And so I think we're going to have to see um here in the next coming weeks if they work. So I think kind of that speaks to the final big challenges is is with the PRC and China. I'll say this because there's a you know we could have a whole separate podcast on China and USChina relations and all that but I think you can ultimately boil it down to the following is um there's been a lot that has happened in China since co and I will argue that the things that you have seen um particularly all the crackdowns and purges not just across you know, the Communist Party, but particularly in the military and the PLA, is that those are signs of weakness and signs of increasing brittleleness inside of the Chinese system >> economically, politically, and culturally. >> Okay. All the above. >> I think all of the above. You know, there was a great um there was a great Substack that young man from China wrote where he articulated that all of the developments that you have seen in China today that those are all very recent phenomena. They are things that you know all the great infrastructure and the consumption and the advances in technology as late as the mid 90s. I mean made the example that Chinese gangs were still running the streets in Shanghai. And if you talk to people that were there in 1992 after the wall fell and the Soviet Union collapsed was that there was nothing modern in China and it was still mostly mauist type of you know kind of propaganda that you could still see on the street. So why am I telling you that? I'm telling you that because I think that the Chinese people do not want to go regressive and retrograde back to the 80s and 90s of the postmau era. But if Xiinping and his cohort continue along this trajectory, I think it's very clear that that is where they're going to go. And I think that that outcome when collectively the Chinese people realize that that they will not sustain that they will demand different leadership much like they did in the Soviet Union. And so maybe this is the last point to make on this and you know I always encourage our colleagues in the department of defense and across the US government and the inner agency to think about that there's a world in 20 2035 20 240 call it a post Trump post she postin post Ayatollah world and we need to think about what that world looks like and so I know today we're in this very doom and gloom kind of sell America narrative in markets and I think that's part of price discovery mechanism today but I think when you kind of look out the landscape depending on the decisions that we make then I think things could look very differently than how they feel today. You know, Renee, we talked about market discipline and what it how it has constrained President Trump, whether he likes it or not, particularly in the more obvious example of post liberation day. And we've talked about the underlying principles of market discipline as almost this sort of sovereign reality that exists whether one believes it or not. Much like gravity, you don't have to believe in gravity to die when you fall off of a building, right? um is is China and particularly Xi subject to market discipline when it comes to their interest in Taiwan and their intentions in Taiwan um as it pertains to China's economic objective of having a stable currency of having a stable bond market and having those things um facilitate their ability to expand trade with other trading partners in uh other Asian countries and European countries in particular. I is uh market discipline keeping China from becoming more imperialistic with Taiwan. >> I think that is the constraint. I think that's the reason that they haven't done it yet. That's the reason that there has been no blockade um around Taiwan. And I think a lot of defense people and other policy makers in Washington don't like to articulate it this way, but the deterrence against invading or annexing Taiwan is not our aircraft carrier out there. It's about day one, day two of what happens after that. Because quite frankly, the example and norms that we set with Russia post the invasion of Ukraine, if you were to just take that same slate of actions and then conduct them against China, clearly that would have an impact against the United States. I want to be clear about there would be pain in the United States, but there would be far greater pain on the mainland in China if that slate of Putin style sanctions were to happen against the PRC in the wake of an invasion or a blockade or some kind of um use of force. So look, I think part of also what the president is doing in this ongoing negotiation with the Chinese is to continue to sell them the much vaunted and valuable chips that they need to obiate the need to invade Taiwan because it's been decided that we're going to compete not on chip access but on end use and applications and ultimately the capital allocation process that you could argue is more efficient in the United States than it is at John. Who do you think has gotten the best of whom since liberation day on US China trade discussions? Um my reading of the landscape is that uh China is receiving more chips than uh they were before. That we are continuing to receive the critical minerals that we were before. that they are marginally paying higher uh that US importers are paying higher for Chinese exports um with the exception of some of the major categories like iPhone components for example. Um and yet when all said and done, Secretary Besson himself said last week it was never about decoupling. This comes after declaration after declaration a year ago from various new right economic actors that we needed to decouple. Who's who's who's got the upper hand here a year later? >> Look, I think what has been the answer was Jensen Wong. You you right. Um ultimately the Chinese have done something that was very I think positive on their part or for them is that they have been able to establish a certain type of deterrence against the United States and that there is now this economic mad mad being mutually assured destruction that let's call it truncated or stopped the escalatory economic cycle between the two countries. So I think that's in the near term may be very positive for China because the assaults from the Trump one to the Biden administration to you know through liberation day last year were having real impacts on the Chinese economy and I think that's very clear. longer out. I do wonder right if this has um set the foundation and the seeds for a strategic defeat because um at the end of the day the west is building an anti-China coalition and they are over time delinking certain strategic supply chains right that >> semiconductors >> and a whole slew of other I think other kind of strategic industries as well that um but with semis that's less China specific and more Taiwan right >> yeah but well I mean look the Chinese are trying to develop their own chip sector as well >> sure >> so I think there's a point there about trade integration >> that our nationalists are supportive of China developing their own chip infrastructure, right? Isn't that the way it works? >> Oh, explain. Well, I always am a little pokered when na people in the US who identify as nationalists and say we should have our own critical infrastructure capability around semiconductors and and you can say yes we we should that that seems to make sense and then and then those people say China's trying to create their own infrastructure for semiconductors and then they are opposed to it or want to disrupt it or view it as an act of aggression. And I'm trying to figure out what nationalism means, I guess. >> Oh, look, I think ultimately um this idea about protectionism >> Yeah. >> has already been proven to be a folly. A folly because it doesn't work, which is one view, and or a folly because it was never even the actual intent here, which which is another. I I'll be honest with you. I because I don't want anyone to think I'm setting up my own friend here for a trick question. That's not what I'm doing and I'm not doing it for listeners either. I would argue that protectionism is a failed idea. But I would also argue that it isn't at all clear to me that anything we've done over the last year was intended to be protectionist. >> The rhetoric started in 2015 and 16 protectionist. It borrowed from protectionism at different times in the campaign of 24 and at various speeches that let's say like a Navaro might have given in 25. But the um and I did a whole capital record about this probably more than once actually that the the liberation day issue really didn't end up seeming to me to have anything to do with protectionism. So, do you mean it that they undermined it by their own execution or just simply the protectionism proved to be a facious idea? I have a question for you because I think you're touching on something very important. So, what do you think the intent of liberation day was? So my answer where I'm not being a critic of what happened where I'm describing what happened is I don't believe President Trump had a coherent objective that with various rhetorical contributions from the commerce secretary Lutnik from uh the CIA myron from the NEC Hasset from Pete Navaro from Steve Bannon from you know the the kind wide array of influences. JD Vance, by the way, being perhaps a more serious one, and his probably being more protectionist. My own view is that President Trump's consistent intellectual strand here, if I could be so complimentary, is that he believes that the US is getting taken advantage of. And Liberation Day was his way of saying we're going to do something that narrows the spread of how other countries are doing better than we are. >> Let's see the um identifying the formula for liberation day tariffs to the amount of trade deficit. It's the you know connects to that. >> I think here's let me interject something because I think you've touched on something very important. And let's talk about the president and the intent of the administration on what liberation day was really ultimately about even though they will never articulate it this way. So I have this thing called pool shark theory >> like a billard's player and it's very simple. It's that a pool shark cannot actually do differential equations on a chalkboard. But if you get him in a pool hall on a Saturday night with a thousand dollars on the line, he knows how to do differential equations and actually he does them better than the mathematician because he's doing them with his body under pressure. So it speaks to a certain kind of intuition or you know chairman WH talks about this all the time that Pani's paradox which is that we know more than we can explain. And so I will give the president something that I think is very important which is that he's a very intuitive guy and I will say maybe mostly only intuition. And so what does he know as a former real estate developer that is very um acute on balance sheets which is that when he looks at the US balance sheet and the US fiscal position and he said it numerous times that we've got $35 trillion in debt and we can never pay this back. Now he knows ultimately that we have to raise revenues but he doesn't want to raise revenues on a fiscal consolidation. So he tried some other things. The first thing was doge remember didn't work. The second was then liberation day and the tariffs didn't work. So what do you got now? And I think this kind of leads back to where we started is this is one of the main reasons why he did nominate chairman Wars to the to the chairman of the Federal Reserve is because deep inside he knows that the central bank was the one that was enabling all this fiscal large and that if he can put chairman Wars in the seat that will without much fanfare put a lid on the spending bring long end yields down, raise revenues through a supply side productivity stance of monetary policy, um, which will at least hopefully give the United States the chance to avoid bankruptcy in chapter 11, which he has been in numerous times. So, I know that is a very kind of roundabout way of explaining what liberation day to them was about, but I think that was a very interesting um way that we got there. So you you believe that the president consciously thought that Liberation Day was a way of generating revenue to ease our debt burden. >> I do think that he thought that at least he was going to try it. >> Would would someone who's concerned with that talk about spending every now and then? >> Yeah. You know, but the question is on the president's spending, they're not really that serious. What did he put in? Tax on tips and you know stuff that is small uh potatoes in the budget, >> right? But what did he The question is what did he cut? >> Zero because he you know would like every good politician wants to try the easy way out. >> But you brought you brought up the precedent of him being a real estate developer for four or five decades. I think that's a very fair analogy presidentially that I never saw him as a real estate developer be concerned with that side of the ledger. It was it was if there was any way of addressing excessive leverage, it was in getting better terms from his lender. It was on the borrowing side. Never constricting the borrowing. Never even really increasing the income side, right? it was just simply uh trying to generate leverage with the uh lenders so that he had the upper hand. And the the national picture doesn't seem to create a very good analogy. Um my my you know I I think that but on the other hand he also couldn't print money right to issue new debt >> um in the private sector either. But I I guess the the analogy I'm making is that I don't think he cares about excessive leverage and then when a borrower is in trouble, he views it as the lender's problem. >> Well, it's interesting because now the lender's problem is his problem, right? So that's where we've come full circle on it and I think he's ultimately had to take in the lessons and the market discipline, which is that you're going to have to grow your way out. >> And you can grow your way out through a mix. has given him that lesson so far that the um that from 22 to 24 when he was out of office the yield curve moved up 200 basis points 300 400 basis points. What what has given him the lesson that um you know they've had no trouble with any issuance? >> Yeah. the um look across the entire curve both in in in terms of term premia but even just at the short end we're it's not a particularly expensive cost of capital um what is what would what would give him market discipline I think I think you could allude to things that foreshadow it or that threaten and maybe behind closed doors Secretary Bessant tells him this is going to happen if you do this or don't do this. But I'm not I'm not sure I see it yet that the president's worried about being uh constrained by US fiscal our guess. Look, I think um maybe let's just conjecture here that maybe the president is more long run focused and strategic in his thinking than we think and he actually has more of a idea about what the legacy is and I don't think that he wants to be the president that presides it's known in history as presiding over you know the demolition of of US markets because the what I call the Ken Griffin moment, right? which is that there is a day when we wake up where the bond vigilantes say no moss and we've gotten glimpses of that um here in the last year that I think ultimately between the mix of the supply side uh measures the chairman wars nomination and ultimately trying to pay down the debt and increase tax revenues kind of by hook or by crook. book, right? I think speak to that. >> So with the um the the question about China um is President Trump art of the dealing, President Xi, or does he want his uh uh approval? Um and then same question with Putin, >> with the Chinese with Xiinping. Here's how I think that the president thinks about it is I'm not convinced that the president is a China hawk per se. I think that's very clear. I think that ultimately again and this is something that I think the president gets to very intuitively only which is that what you want from the Chinese is a change in their behavior not necessarily a change in the regime. and the change in the behavior is that quite frankly you're going to play by the rules and we're going to rebalance the relationship and that is the real objective even though sometimes it's not always articulated that way. Um, but what's the point of that? Because ultimately, I think over time that, and this is very important, if you can get the Chinese Communist Party to abide and behave by marketsbased principles was that over time, um, that becomes incompatible with an authoritarian regime. And again, that's the power of markets. With Putin, I think it's also very similar. Look, I mean, I think a lot in media like to talk about that the president um admires Putin. Look, there's been no president that has been more hawkish against Putin than Trump. We have to give him credit for that. Could he continue to be more hawkish? Yes. I think the reason that he's not is because he's spooked by the nuclear weapons. But that's not just a fault of Trump. President Biden and all presidents kind of before him have been very spooked by that. But I think what the president is trying to do with Putin is to, let's call it, rope a doope him or trick him into coming to the negotiating table on some quote unquote deal that he can sell back home as a win because he knows the very poor standing and position that Putin is at home and that if he can convince them to just leave the battlefield and go home, the Russian people will take care. And look, if there's a if there's an argument for why the Ukraine conflict will continue to escalate, it is that Putin also knows this because there is arguably no dacha that Putin can go back home to, right? And so he has to take this to the last full measure of devotion. And and I think that very grave decision is is what weighs over the president. And I think we why he's trying these other measures in Venezuela and Iran to try to solve that very intractable Putin problem. >> So Renee, we've uh we've kind of gone around the globe a little here. Uh we the president in the by the time people are listening to this, the State of the Union will have been delivered. We he he may uh refer to Iran tonight. I don't think he's going to tell the country what he plans to do, but we know the Iran issue lingers. you've had some just profound observations and and thoughts I think on both Putin uh Xi and China um the the overall objectives wi with Venezuela and and what they meant in terms of a bigger picture and then obviously we've discussed WASH the Fed and and the subject of market discipline. There's one last thing we'll close up with, which may very well be the biggest issue for investors in the US, which may very well be the biggest issue for domestic economic policy right now, and that is open AI. You you you have a note in your in your notes to me. Um, we already discussed the one and a half trillion dollar defense budget and you put one and a half trillion dollar defense budget versus bail out open AI and of course nobody uh is aware that there's a bailout going on for Open AI right now because there isn't. They continue to get paid and they continue to make purchase orders with Nvidia and to raise equity capital in their sort of triparty circular funding model. But what you mean here is that there is this accumulation of capital expenditure commitments that surely has a quasi >> yes >> uh uh governmental backing behind it because if open AI were to collapse with one and a half trillion of expenditures the domino effect here is systemic. Is that what you mean? and tell me how you think about this developing web from data center to the uh hyperscalers to the language model creators in this uh rapidly evolving AI economic story. So let's just start with I think you David in 2008. I think there was there is no greater scholar of the 2008 global financial crisis than than you. >> Thank you very much. We all know that. What did you call that very famously? A crisis of responsibility. Okay. So, it has always been my contention, and we've talked about this for many years now, that the costs of 2008 and the bailouts were not paid 2009, 10, 15, etc. They were actually paid in the pandemic and maybe they're continuing to be paid now. Yeah. So, I say that as background context to make two other points. Number one is that when you think about the AI trade and the whole generative AI theme is that that came in the wake of the war in Ukraine. It's not a coincidence that that was what was um a natural outgrowth. And remember at the time we were also in a very um heated confrontation with the Chinese. So we have now we are now thinking about technology not just as a supply side accelerator but as a component of quote unquote national security and you know national security oftent times is seen as a sec sacrosan thing that anytime you slap a national security sticker on it you can't question it. And so I bring all this back to 2008 because I think what a lot of the founders in the generative AI, let's call it industry have discovered is that the lesson from 2008 is to make sure that you don't become Dick Foley and you want to become Lloyd Blankfine. And how do you do that? You do that with this web of becoming quote too big to fail with an implicit government backing. And in the same way that you know the banking system rightfully in 2008 was so core to US markets and the US economy because of the expanded state footprint over time is that that is I think the strategy of most everyone in the tech sector under this rubric of national security, right? which is that oh well I mean we need government support if indeed the revenues do not match the capex over time. So I will tell you I mean that is a subject that is being discussed across the United States government across the tech sector um currently and I think that maybe might be one of the first challenges for a new Fed chairman is to think about how that might work and to think about what the implications are um of I'm going to call it eroding competitiveness in the technology sector. >> So, I'm gonna have a guest on Capitol Record again next week. >> Nice. >> Uh, two very special guest editions. Um, a gentleman by the name of Tim Estus who is one of the leading experts I think on matters of AI policy in the country and he's going to share a number of things. I'm wondering Renee if I can get you back on later in the year where we do a dedicated discussion of th this AI issue in the context what you're referring to because what what you're doing here is fascinating. you're you're pulling together um the the reality of the AI technology, the evolution in the space, the uh funding model that is evolving quickly and and in a rather troublesome manner, the moral hazard that's forming underneath it, and how a national security pretense can be pretext can be used to rationalize US involvement. and then even the capital markets crisis that such a disruption could create for a central bank. >> Well, let's make kind of maybe two final points on this and I know we've been going for a while, so let's just close on this, right? >> There is a feature of the current tech wave that is indeed transformational. And as chairman wars said actually I think several months ago that in the future we're not going to talk about this as AI. We're just going to talk about it as just how you conduct business. And it is the seeds of a tremendous productivity boom. In fact, you're already seeing it. When you look at the labor market revisions over the last year where there's actually less employment but profits are up. That's the garden variety signal that we're in a productivity boom. And arguably productivity is running at least between 2 and a half to 3% per year. So that is a very positive thing. The irony is that if you then concentrate those uh creative impulses in a handful of companies that are given implicit backing by the government, it stifles competition and actually reduces the positive supply side impact if you were to do it. And I'll mention that this AI doomerism that we have amongst a lot of I'll say secular people that this is just new Tower of Babel stuff right that they spoke about nuclear and nuclear energy like this in the 1960s and 70s and now we needed to restrict it and that it was too dangerous etc etc. And what were the impacts of that is that then the adversaries realized that we were energy constrained and so they did the oil embargo in the 70s and we had inflation etc up until 2005 where the president after 9/11 had to say that we were addicted to oil. Now the great part about capital markets and this is I think the perfect story for capital record which that in 2000 January 2006 the state of the union 22 years ago almost to the day when President Bush said that we were addicted to oil and so we were going to invest in alternative energy sources and technology to wean us off of Middle East oil in the next 15 years. There was a guy named George Mitchell down in Texas that was already working on that problem that the government had claimed that they were there to solve. And 15 years later after that, what did you have? An extra 10 million barrels of oil from the shale, another three and a half million barrels out of Iraq and Tesla. Now, that is far beyond the wildest dreams of any one bureaucrat in the Department of Energy could have ever had in 2006 with a little program, right? And this has strategic stability implications because imagine if on this day four years ago, Putin had invaded Ukraine without the additional supply of 10 million barrels from shale and three million barrels from Iraq and Tesla. he would probably sitting in Paris right now because the oil price would have gone to 200. So this is I think a story that's I think is very important. It's one of my quintessential stories that you've got to get the government out of the way and let the markets do its work because if you let the markets do its work for you, it will reward you in ways beyond your wildest imagination. Renee, we could go on all day, my friend. I um I can't thank you enough for your time, your wisdom, your perspective. Uh we we have like four more hours of things to cover, but we'll do that without a microphone, but with uh Val Chop. >> Yeah, >> 54th in Madison. You know what I'm talking about. >> As always, >> great to see you, brother. Thank you. >> Thanks for everything, Rene. We're uh going to let this thing uh uh close out here. Uh thanks very much for listening to a long discussion between me and Renee. Thank you uh who those who support Capital Record, support this cause and mission and and we look forward to having Renee back on as always and and we will continue doing what we do here which is uh acknowledging market discipline as a god-given constraint in a fallen world. and we uh look forward to what greater access to markets can do for human beings who were made to create wondrous things. Thank you for listening to David Monson's Capital Record.
Market Discipline: A Tour Around the Globe with Rene Aninao
Summary
Transcript
Capital Record, where we defend free enterprise and capital markets because we believe in the dignity of the human person. Hello and welcome to David Bonson's Capital Record, brought to you by National Review, where today we are going to do something that we only did, I believe, twice all of last year, uh, which was bring a guest on. Uh, many of you right now are thinking, "Thank God I'm going to hear less of David's voice today." But that is only the second reason you can thank God right now because the first is that the other voice you'll be hearing is our very popular longtime guest and one of my dearest friends Renee Anana Corbu who is going to spend the next hour with us just literally talking about uh geopolitics the market the Fed and the macroeconomic things that are most on Renee and mine's mind. uh he has been on Capitol Record every year since we started the podcast. Renee does not do a lot of media and appearances like this. So, it's an honor to have him, but it's also an honor just to be able to have this discussion and let you all the listeners of Capital Record partake as Renee and I wrap together a little bit with with all that said, Renee, welcome back to Capital Record. >> David, it's great to be here. Great to be home. As I always say, it's a historic day actually. It's the four-y year anniversary of of the war in Ukraine, which I think is my fourth year running this, I think. Right. >> Uh yeah, I think you're right. >> So, you know, good day to be here. >> Well, and and there's certainly been an awful lot uh since the war in Ukraine that uh has given us opportunity to talk on on what it means for the world stage and so forth. you know, we um began talking at the beginning of the year about getting you on and uh when I first sort of reached out and said, "We got to make this happen," it was a day or two after President Trump's successful mission to out Maduro in Venezuela. And yet since then you could argue that not a week has gone by without significant matters of um that warrant discussion uh both globally and and even within kind of US uh domestic policy in the interest of trying our best I don't think you and I are going to do a very good job but in the interest of trying our best to stay focused why don't I just sort of start us >> with what has been one of the larger domestic issues that has happened so far today, which was President Trump's long awaited announcement of his choice to be the successor of the chair position at the Federal Reserve. Uh Kevin Walsh, somebody both you and I know and both you and I predicted would get the nod. And >> I think we were the only two. >> Yeah. For for a while, for a while we were. >> And and yet I will say I'm a person who says, "Don't tell me what you believe. Show me your portfolio." And I I never did go place a bet on Koshi or Polymath. So perhaps I uh I I I would have had more credibility, but I I was on record on uh television and in writing a full year ago predicting he would. And I think you and I have gone back to 2017 hoping >> that Walsh would end up on the Fed. Let let's start with that, Renee. Why would why do you like why are you happy about Kevin Walsh being selected? I mean, look, I think there's a few points to really think about of why this nomination was so important. I always like to start with that it really reveals something about the president's reaction function, which is that he knows implicitly that he has to submit himself to market discipline. And you know that's a very I think out of consensus view but it's very clear when you look at what the president does um the one place where he submits is to the markets. And I think that was just a very interesting point to kind of start out with that I think leading up to the nomination, historic nomination on January 30th, there was this longunning narrative that the president wanted a psychopant in there because he wanted lower rates and he wanted to um let's call it, you know, twist the Fed into what he wanted them to do. And I think that he intuitits always that um the market will not reward him for that and if he's subjected to market discipline actually it's going to be worse for him. So he knew that that nomination was different and it was special and it was important and he picked the best person for the job which um I think is obviously Chairman Wars. I think the other thing that's really important about the worst nomination is that you tell me David, but over the last several months, maybe even years, there has been this concern that the central bank was losing its independence and that that had major implications for US markets, the US place in the world, the US dollar. Um, and I think that now has been put at least to rest that that is no longer a question anymore that the central bank has has and is going to restore its credibility. So, you know, when you think about what that means, maybe we should talk about this in more detail is what an agenda what the agenda what the worsh agenda is. Well, so let's let's get to the WASH agenda, but let's let's start with the connectivity that you're positing between market discipline and WH's selection. Is it about WH's selection that reinforces market discipline or is it about the rejection of the other sicopantic candidates? >> I think it's both. It's a great question. Um, but the fact that he chose to not nominate one and chose the very adult in the room, let's call it establishment choice. I think speaks to the point that I always try to make which is that the markets are always the final arbiter and every head of state that stays ahead of state for a long time always has to submit to market discipline. I mean you and I kind of laugh about that on uh you know the infamous liberation day April 2nd last year. I think it took a total of seven entire days and maybe 40 basis points higher in the long end for the president to submit to market discipline. F >> five business days, four market days. >> Yeah, there you go. >> Four and a half if you count the intraday. But yes, I mean that that was a pretty powerful reinforcement. You you've done a lot of work, Renee, reinforcing this even in bigger picture issues. You could argue that the Clinton Rubin Greenspan trifecta was entirely uh governed by market discipline throughout their their longer term reign. It wasn't as dramatic of a moment. I mean, you could look at long-term capital or whatnot. But there there are various examples of this, but when you say all states end up having to submit, is it true in third world countries or is it not true in third world countries and that's why they're third world countries? I think it's exactly like what you said in the latter is that the reason that they are third world countries is because they choose not to submit to market discipline. That's why Venezuela is what it is. That's why Russia is what it is. That's why most of the emerging market complex is still emerging because they have not embraced the capitalist system. And obviously that's the the title of your podcast, right? The capital record. And um you and I talk about this. I mean this is a theological point that markets are God's will here on earth. >> I know that sounds very almost hyperbolic to say in this environment that we live in but uh I think you know I believe it very much and and history bears >> well by by the way we should interrupt because I I would love to take for granted that the listeners of Capital Record all know what we mean. It is the point of the podcast, but it's also very susceptible to people just flat out bearing false witness about what you said. You didn't say markets are God's will here on earth in the sense that God wants every market transaction to be a successful one for both parties or that there will never be downside to risk only right tail outcomes. that what you said was markets and markets properly understood are is you're making a comment about human freedom and human exchange and human relationship of exchange that that is God's will and that that is uh non-impoverishing and it is promotional of flourishing and that is God's will on earth >> and it's ultimately about the creation narrative that you talk about right that that is our our our calling here on earth um is to create and that is what markets enable us to do. So um and when we when we do those towards uh let's call it the aims of of of other humans then we're rewarded for that and when we conduct ourselves in in markets in ways that are exploited then exploitive then we are uh punished for that quite frankly. So with with market discipline applied to the political sphere and now we're not talking about head of state in Venezuela who doesn't honor it and makes his country poor because of it but uh a situation like like America um we have a long precedent of presidents going against um market principles right we have precedents of presidents that want greater central planning greater interventions greater imperial discretionary authority how how do you distinguish between market discipline in those extreme moments like post liberation day and market discipline where on on the margins they use New Deal or Great Society or DoddFrank to to push the envelope of anti-market state intervention. I mean, look, I think that's one of the it's a great segue to one of the pieces that we wrote um I think earlier in the year at the end of last year, and we called it no MOS, which was that the markets had told the United States it's over, no more on the fiscal irresponsibility. And let me run through this just super quickly because I think it's interesting and important. you know, when the Federal Reserve started to lower rates in September of 2024, um, shortly before the election, by the way, right, we saw 175 basis points of interest rate cuts. And despite those cuts, the 10-year yield was higher today than it was in September of 24. the 30-year yield higher term premia higher. Um, and so >> for those who want to nitpick it, that has been true. It may just recently have moved, but yeah, understood. >> Well, what's interesting also on a side note is that when the yield started to come down was after what I call the worsh restoration at the central bank, right? Yeah. which is that when markets finally start to see that responsible decision making um is being made, then they will reward that with lower with lower yields. But here's where I think maybe we can think about connecting it to geopolitics and the US's place in the world. You know, there's been this, I think, focus in the new Trump administration about that we are going to focus only on the Western Hemisphere. Uh maybe arguably even at the expense of of other regions like the Middle East or even Asia that we needed to recalibrate our force posture all around the world. And I have this chart um where it shows that US defense spending is now lower than the debt service cost. So we spend more on servicing our debt than we do on the national defense and underwriting the global security environment. And I think that is a outgrowth of to your point David I think almost you know 354 years of refusing to abide by market discipline. So here's the example. Think about 1991 up through 911. US debt to GDP was around 3540%. And after the Cold War and the peace dividend, I'll argue that much like the Europeans that are much derided for squandering their peace dividend on social programs. >> Yeah. >> The United States did the same. >> Sure. >> Because we squandered it on housing. We squandered it on bank bailouts. We squandered it on buying votes during the pandemic. Right. such that now I think that what what the markets have taught us and told us is that this whole idea about focusing on western hemisphere is not necessarily just a discrete policy choice. It is the markets imposing discipline on us by telling us that you will not be able to project power globally simultaneously around the world until your fiscal house is in order because you cannot afford it. you've gone from 35% debt to GDP to 125% debt to to GDP and it's only supposed to get worse. So you can't afford to spend as much on defense, right? So I think that's you know probably and I will say this you know we mentioned to the clients that this is I think the most important note that we ever wrote is that even you know the almighty superpower United States still has to submit to market discipline and that there are real consequences when it does not. So with Fed uh wi with the Fed independence issue, um you and I are in agreement that a Kevin Hasset appointment would have undermined Fed independence uh both in market perception that and uh very likely in the administration of policy. I won't speak for you on this one. I will say my reasons for saying that is simply that I don't know what else to think. In light of 35 years of Hasset's record, 34 of them being decidedly one way in terms of most issues of public importance and then the 35th year being so different. It just calls into question the resolve and the willingness to um adhere to various uh principles and ideological commitments that that what you would expect. Um if I'm wrong about that, if Hasset would have gotten the the job and come in and been an independent central bank head, then then I'd be happy. But it's certainly a plausible belief he would not have been based on the way a published author advocate of free trade has changed his views based on the notion of um inflation numbers that were X during a Democrat administration being inflationary and then numbers that are higher than X now being disinflationary. We just have a s a sickopantic run that's going about 12 months that honestly I've never seen. Um, you could say, well, Pete Navaro is sickantic, but Pete Navaro came in as a sickopant. >> That's right. >> He came in without credibility. He's not a serious person. Um, Hassid was a very serious person. Someone I held in high regard and spoken with them many times. I'm far more disappointed in the trajectory I've seen with that Kevin than than any of the other people in the economic team of Trump 2.0. Wsh, on the other hand, has not been in the economic team of Trump 2.0, you know, which much like governors that run for president is an advantage, senators often have a federal legislation vote that can come back to haunt them. Famously, Hillary Clinton voting for the Iraq war haunted her when she ran for the Democratic nomination for president. It's one of the main reasons that until an exception like an Obama and a Biden um and I don't think the Republicans have had an exception in a billion years that senators have had a very hard time getting elected president that we've we've largely gone with governors. Maybe they have more executive experience and talent, but also they've avoided federal votes. Had Walsh been there, would he have been a dissenting vote in 2022? I'm not talking about 20. Okay, I'm being gracious enough to give PAL a pass for the zero bound in 2020. I'm not convinced there is a central banker who wouldn't have done that based on the Fed Treasury accord that you taught me about. that was hardly implicit at that time between Minutuchin and Pal predecessor uh with with Paulson Berneni that in those times of extreme six standard deviation left tail risk events Fed and Treasury get on speed dial and they coordinate and then they basically um intervene heavily and my view is that they shouldn't, but that if they're going to not do it, they have to tell everyone they're not. And when risk parody blew up in March of 2020, the moral hazard was such that they had spent 30 years telling these people they were going to, so they needed to. A lot of people don't like that view, but I think it's your view. Tell me first of all, if we're tracking so far, >> I totally agree. I mean, look, I think the great part about a chairman warsled Fed is that he's been very consistent since actually since he was on the board in 2006 was that he was always very in favor of powerful forceful measures by the central bank in times of crisis. This goes back to Walter Bagghot, right? This is lender of last resort. um type of central bank activity. The difference is that when the crisis subsides then you need to go back to normal operating procedures so that markets can do what they do on price discovery and the allocation account that process >> I I want to give listeners a a quick uh intervention here because what Rene is saying is very important what he's talking about is nothing more than extreme polic policy at an extreme moment then moving to normalization. >> Yeah. where what Ben Berneni and Japan and Draghi and I could go on and on have done is say no we can't go back to normal because the intervention is now so baked in that it will create another problem if we do and that um essentially it uh it allows for a codification of normalizing emergency activity in in the administration of monetary policy. What you're saying, Rene, is that Walsh has never bought into that, that he has been a consistent emergency for emergencies, but no emergency for non-emergencies. That's absolutely correct. And when you look at chairman Worsh's record in 2011 when he stepped down, the reason he stepped down was because of this expansion of the balance sheet where QE was no longer an emergency measure but was becoming a permanent instrument of monetary policy and what effect did that have? There are always tradeoffs in policy as um David you've pointed out. The question is which cost is greater and there are obviously cost to normalization of policy. But the flip side of that is that if you continue where emergency measures become normalized then what ultimately happens is that you begin to monetize the fiscal large s and that there is no market discipline. you start to truncate the market discipline on the fiscal policy makers. And so it's no coincidence that you know starting with this large expansion of the balance sheet that that tracks with um the expansion in debt to GDP. And what has that done is that that has created a tremendous misallocation of capital and where the price discovery process has been impaired because the central bank and the government has such a large footprint in the market. So I think that's where the real big regime change is coming in central banking is that the footprint of the central bank and the government is going to be rightsized and that that capital that is essentially trapped in reserves um inside the Federal Reserve will be unleashed into banks and the private sector. So, let's talk a little bit without getting too wonky about uh about how he'll do that and then we can move into some global and and geopolitical affairs. Is um uh do you believe he's going to come in and revert to a shock and awe quantitative tightening? Do you believe he's instead going to do a quasi operation twist with the duration profile of the Fed's balance sheet or something else? What what would the means be of reducing the footprint via the balance sheet for WASH without being hyperdisruptive to markets? Look, I think the most important thing to remember is that there needs to be and is going to be, I think, a new demarcation of the roles of fiscal policy and monetary policy. And in all likelihood, that is going to be codified and articulated in a new Fed Treasury accord. And hopefully that Fed Treasury Accord can be signed by trilaterally by the Federal Reserve, the Treasury Secretary and even the President of the United States. Right? And without getting into too much technical stuff, right? The main idea is that over time over time the Treasury and the Fed are going to work together to reduce the size of the Fed's balance sheet and reduce the footprint of the Fed in markets such that the Fed only intervenes when crisis necessitates. So is that um market manipulation to coordinate it with treasury or when the balance sheet is essentially composed of largely you know treasury securities is is that the only way to do it? Um, in other words, by coordinating, um, what what what you're referring to is, uh, becoming a direct buyer or seller, uh, enabling the Fed the Treasury to meet its, uh, liquidity needs and allowing that to uh, simultaneously accommodate uh, Fed objectives with reduction of footprint. Is that coordination an intervention or is it a means to an end? >> I think ultimately look it's that you don't want the Federal Reserve to be buying duration out in the long end and to start uh trying to mess around with um yields that they can't control and that they don't control. So ultimately it means just over time getting back more to basics where the Fed's balance sheet is full more of bills and short duration coupons rather than 10 year 20 years 30-year bonds and mortgage back securities. And that's going to take a process and that's going to take a type of what we call duration transformation in the markets. I think you called it kind of like a reverse operation twist, right? Um but that's a process that's going to be I think very um tightly managed and and signaled um without shocks to the market. And I think that the market will respond positively to that. Um because it will ultimately, when you think about it, um impose fiscal discipline because if the Fed is no longer buying long-term debt, then um there's going to have to be a choice made by the fiscal authorities on what they should do. And quite frankly, if more of the treasury issuance is in the front end, then actually, you know, this is somewhat of a philosophical point, but I do believe it that as the issuer of the global reserve currency, you should submit more of your fiscal issuance in the front end because it submits you to market discipline consistently, right? Um, and the market gets a consistent negotiation on and a vote on what you're spending the money on and why, right? And that is the privilege that the reserve currency issuer has versus other emerging market countries that have to fund uh longer and more expensive. Well, and also other developed market countries that maybe don't have that uh in that prohibition that emerging market countries do, but also just do not have the economic growth, the trading um footprint, the military respectability, any number of circumstances that keep them from being a candidate for that um privileged status. >> Yeah, I totally agree. So look, I think that's, you know, one of the I think major market implications of this is something for us to think about here going forward is the president has been very clear on his request for the next fiscal year on the defense budget. And he says, look, he he wants $1.5 trillion of military spending. Well, that's quite frankly 5% of GDP or close to it, which is in line with the H commitment of NATO that everyone agreed to last year. So that's a big number. It's an extra 600 billion or so from the current defense spending levels. And so the question is, how is the president going to finance that? And can he make the case for it? That we need it and we need to spend it and that much like Reagan in the 1980s that came in as a fiscal hawk but needed to increase defense spending remember on SDI and Star Wars um as deterrence against the Soviet Union then the president's going to have to make the case for that. I think maybe he'll start to make the case for that this evening at the State of the Union and then ultimately so have a negotiation with Chairman Worsh, right? Um on uh where this issuance is and how much he's going to be able to get through. So what what do you think I'm about to say? the comparison of Reagan SDI and the the desire to ramp up defense spending um as a percentage of GDP but also in just absolute dollar terms in the 80s to prevail in the cold war versus right now to prevail in a in a number of different uh global threats into the future. Um what is the key difference versus the 80s? You said it earlier. What was our debt to GDP then? >> Yeah, it was I think under 50 somewhere in >> it was under under 50. Um it's it's over a hundred now counting just the public debt not counting intergovernmental debt. Do you think that the challenge is not the m making the case for the legitimacy of our a robust military in the in uh what has become a very complicated world and that the challenge is not even the mechanics as to how to finance it with with debt financing. Do you think the challenge is that our mandatory spending as a percentage of federal budget outlays and the size of our social safety net has gotten to a size that we no longer have the luxury of having a military of that size? I think that that's absolutely correct. And so, you know, the president is ultimately going to have to make the case to the markets that, you know, quite frankly, um, will you give us one more round to try and see if if we can get this done? And, you know, the adversaries, I think, know this. This is why they are when you look across the landscape from Putin to Iran to Venezuela to even the Chinese, they know the position where the United States is right now and they know the vulnerability and they know that the vulnerability is in the markets. And so I think this is why the president is very intent on trying to reestablish deterrence because you've got this financial vulnerability out here, right? And so you have to start doing a lot of other things in the military domain to try to reestablish and restore deterrence and to make it more of a safe world that's you know safe for capex and US companies and all of the things that bring inflation down and increase real living standards and all the great virtuous cycle that we talked about in the late 80s and early 90s. >> That's where I think the challenge is today. So the um the $ one and a half trillion dollar military budget is uh in the context of a world with an increasingly um robust China, a increasingly uncertain Russia, um the issues within our own hemisphere, obviously the constant uh tensions in the Middle East, whether they be Iran right now or um another uh terror uh block uh uh another day various uprisings in Pakistan or Afghanistan or or or uh Syria, you have kind of a permanent instability. And I'm wondering right now, not not what you think in five or 10 years or what we could talk about has been the case the last five or 10, but as we're sitting here right now, what is the what is the biggest global threat that that you see between those various options? Let's just call it Russia, China, Venezuela, uh, Middle East. >> Look, I mean, it's a hard question to answer because I think it's all of them working in concert together. M >> Bridge Colby um the under secretary of defense for policy made a speech in Munich a couple of weeks ago where he said that we now have to take into account that the adversaries in concert or opportunistically might simultaneously seek opportunistic aggression. So, you know, let's maybe think about all the ones that you listed and just kind of take them in order from Venezuela to Iran to Ukraine to China. So, we obviously had a very historic moment January 3rd this year with the Maduro exfiltration, probably the one of the most complex military operations in history conducted seamlessly. And what was the point of that? The speaks to the earlier point that I was trying to make, which is that you needed to reestablish deterrence. Everyone thinks that this is about regime change in Venezuela. It's not about regime change. The shaveistas are still there. The regime is still there. There's one guy that's two people that are gone and those people arguably weren't running the country anymore. But it's that you needed to demonstrate to the world that the US military particularly in the wake of the Afghanistan withdrawal could still execute very complex missions um as a form of deterrence and deterrence signal. So there's I think another dimension of Venezuela which is that in theory the Trump administration is betting that they can get this new regime to act more in aligned with US interests. And how are they going to do that? They're going to do that with an oil embargo. That's why you have the Armada in the Caribbean. Right? So I think that is the blueprint when you think about with Iran. Now today it's the same thing. You have this similar armada being now shipped over to the Middle East. And when you look at the force posture and all the military assets that are in the region, they're not there for a ground operation. They're not there to snatch the Ayatollah and bring them to the Southern District. They are there I think to tell the supreme leader either you step down the hard way or we can take you out and in the hopes that similar to Venezuela the IRGC regime that you know runs let's call it 25 40% of Iranian GDP and controls the economy will be more incented to align with US and regional interests economically And quite frankly, what's the what's the leverage? Not just all the kinetic, but again, all the oil embargo. So, we'll have to see. And why is the president starting with Venezuela and starting with Iran? I always use the example that the president likes to enforce deterrence by using non or enforce deterrence against non-uclear states to work up to deterring the nuclear states like Putin. So if you can demonstrate to Putin that, hey, we took out Maduro, we took out the Supreme Leader, you might be next, then he can achieve a couple things. Number one is to finally hopefully bring Putin to the negotiating table and bring the Ukraine conflict to a close. >> Do you think Do you think he's done that yet? Do you think he's made any progress in doing that yet? Do you understand why skeptics think that he's made no progress in getting Putin to the negotiating table? >> I mean, look, there has been, I think, relative progress to 2024. You actually now have, I think it's almost five meetings now between the Russians, the Ukrainians, and the Americans at the negotiating table. During the Biden administration, there was none of that. So, there is some progress. There has been progress on the Ukraine side where the Ukrainians have quite frankly received a security guarantee from the United States. And so the question is what is it going to take to get Putin to sign on the line that is dotted? And ultimately you have to convince him that the cost of continuing is going to be greater than the cost of signing the deal. And look, I mean, we're still far away from that because there's some arguments to be made that Putin still thinks that he can wait out Trump or wait out the United States and test our resolve. And so I think these operations against Venezuela, against Iran are ways of playing cognitive warfare with Putin. And so I think we're going to have to see um here in the next coming weeks if they work. So I think kind of that speaks to the final big challenges is is with the PRC and China. I'll say this because there's a you know we could have a whole separate podcast on China and USChina relations and all that but I think you can ultimately boil it down to the following is um there's been a lot that has happened in China since co and I will argue that the things that you have seen um particularly all the crackdowns and purges not just across you know, the Communist Party, but particularly in the military and the PLA, is that those are signs of weakness and signs of increasing brittleleness inside of the Chinese system >> economically, politically, and culturally. >> Okay. All the above. >> I think all of the above. You know, there was a great um there was a great Substack that young man from China wrote where he articulated that all of the developments that you have seen in China today that those are all very recent phenomena. They are things that you know all the great infrastructure and the consumption and the advances in technology as late as the mid 90s. I mean made the example that Chinese gangs were still running the streets in Shanghai. And if you talk to people that were there in 1992 after the wall fell and the Soviet Union collapsed was that there was nothing modern in China and it was still mostly mauist type of you know kind of propaganda that you could still see on the street. So why am I telling you that? I'm telling you that because I think that the Chinese people do not want to go regressive and retrograde back to the 80s and 90s of the postmau era. But if Xiinping and his cohort continue along this trajectory, I think it's very clear that that is where they're going to go. And I think that that outcome when collectively the Chinese people realize that that they will not sustain that they will demand different leadership much like they did in the Soviet Union. And so maybe this is the last point to make on this and you know I always encourage our colleagues in the department of defense and across the US government and the inner agency to think about that there's a world in 20 2035 20 240 call it a post Trump post she postin post Ayatollah world and we need to think about what that world looks like and so I know today we're in this very doom and gloom kind of sell America narrative in markets and I think that's part of price discovery mechanism today but I think when you kind of look out the landscape depending on the decisions that we make then I think things could look very differently than how they feel today. You know, Renee, we talked about market discipline and what it how it has constrained President Trump, whether he likes it or not, particularly in the more obvious example of post liberation day. And we've talked about the underlying principles of market discipline as almost this sort of sovereign reality that exists whether one believes it or not. Much like gravity, you don't have to believe in gravity to die when you fall off of a building, right? um is is China and particularly Xi subject to market discipline when it comes to their interest in Taiwan and their intentions in Taiwan um as it pertains to China's economic objective of having a stable currency of having a stable bond market and having those things um facilitate their ability to expand trade with other trading partners in uh other Asian countries and European countries in particular. I is uh market discipline keeping China from becoming more imperialistic with Taiwan. >> I think that is the constraint. I think that's the reason that they haven't done it yet. That's the reason that there has been no blockade um around Taiwan. And I think a lot of defense people and other policy makers in Washington don't like to articulate it this way, but the deterrence against invading or annexing Taiwan is not our aircraft carrier out there. It's about day one, day two of what happens after that. Because quite frankly, the example and norms that we set with Russia post the invasion of Ukraine, if you were to just take that same slate of actions and then conduct them against China, clearly that would have an impact against the United States. I want to be clear about there would be pain in the United States, but there would be far greater pain on the mainland in China if that slate of Putin style sanctions were to happen against the PRC in the wake of an invasion or a blockade or some kind of um use of force. So look, I think part of also what the president is doing in this ongoing negotiation with the Chinese is to continue to sell them the much vaunted and valuable chips that they need to obiate the need to invade Taiwan because it's been decided that we're going to compete not on chip access but on end use and applications and ultimately the capital allocation process that you could argue is more efficient in the United States than it is at John. Who do you think has gotten the best of whom since liberation day on US China trade discussions? Um my reading of the landscape is that uh China is receiving more chips than uh they were before. That we are continuing to receive the critical minerals that we were before. that they are marginally paying higher uh that US importers are paying higher for Chinese exports um with the exception of some of the major categories like iPhone components for example. Um and yet when all said and done, Secretary Besson himself said last week it was never about decoupling. This comes after declaration after declaration a year ago from various new right economic actors that we needed to decouple. Who's who's who's got the upper hand here a year later? >> Look, I think what has been the answer was Jensen Wong. You you right. Um ultimately the Chinese have done something that was very I think positive on their part or for them is that they have been able to establish a certain type of deterrence against the United States and that there is now this economic mad mad being mutually assured destruction that let's call it truncated or stopped the escalatory economic cycle between the two countries. So I think that's in the near term may be very positive for China because the assaults from the Trump one to the Biden administration to you know through liberation day last year were having real impacts on the Chinese economy and I think that's very clear. longer out. I do wonder right if this has um set the foundation and the seeds for a strategic defeat because um at the end of the day the west is building an anti-China coalition and they are over time delinking certain strategic supply chains right that >> semiconductors >> and a whole slew of other I think other kind of strategic industries as well that um but with semis that's less China specific and more Taiwan right >> yeah but well I mean look the Chinese are trying to develop their own chip sector as well >> sure >> so I think there's a point there about trade integration >> that our nationalists are supportive of China developing their own chip infrastructure, right? Isn't that the way it works? >> Oh, explain. Well, I always am a little pokered when na people in the US who identify as nationalists and say we should have our own critical infrastructure capability around semiconductors and and you can say yes we we should that that seems to make sense and then and then those people say China's trying to create their own infrastructure for semiconductors and then they are opposed to it or want to disrupt it or view it as an act of aggression. And I'm trying to figure out what nationalism means, I guess. >> Oh, look, I think ultimately um this idea about protectionism >> Yeah. >> has already been proven to be a folly. A folly because it doesn't work, which is one view, and or a folly because it was never even the actual intent here, which which is another. I I'll be honest with you. I because I don't want anyone to think I'm setting up my own friend here for a trick question. That's not what I'm doing and I'm not doing it for listeners either. I would argue that protectionism is a failed idea. But I would also argue that it isn't at all clear to me that anything we've done over the last year was intended to be protectionist. >> The rhetoric started in 2015 and 16 protectionist. It borrowed from protectionism at different times in the campaign of 24 and at various speeches that let's say like a Navaro might have given in 25. But the um and I did a whole capital record about this probably more than once actually that the the liberation day issue really didn't end up seeming to me to have anything to do with protectionism. So, do you mean it that they undermined it by their own execution or just simply the protectionism proved to be a facious idea? I have a question for you because I think you're touching on something very important. So, what do you think the intent of liberation day was? So my answer where I'm not being a critic of what happened where I'm describing what happened is I don't believe President Trump had a coherent objective that with various rhetorical contributions from the commerce secretary Lutnik from uh the CIA myron from the NEC Hasset from Pete Navaro from Steve Bannon from you know the the kind wide array of influences. JD Vance, by the way, being perhaps a more serious one, and his probably being more protectionist. My own view is that President Trump's consistent intellectual strand here, if I could be so complimentary, is that he believes that the US is getting taken advantage of. And Liberation Day was his way of saying we're going to do something that narrows the spread of how other countries are doing better than we are. >> Let's see the um identifying the formula for liberation day tariffs to the amount of trade deficit. It's the you know connects to that. >> I think here's let me interject something because I think you've touched on something very important. And let's talk about the president and the intent of the administration on what liberation day was really ultimately about even though they will never articulate it this way. So I have this thing called pool shark theory >> like a billard's player and it's very simple. It's that a pool shark cannot actually do differential equations on a chalkboard. But if you get him in a pool hall on a Saturday night with a thousand dollars on the line, he knows how to do differential equations and actually he does them better than the mathematician because he's doing them with his body under pressure. So it speaks to a certain kind of intuition or you know chairman WH talks about this all the time that Pani's paradox which is that we know more than we can explain. And so I will give the president something that I think is very important which is that he's a very intuitive guy and I will say maybe mostly only intuition. And so what does he know as a former real estate developer that is very um acute on balance sheets which is that when he looks at the US balance sheet and the US fiscal position and he said it numerous times that we've got $35 trillion in debt and we can never pay this back. Now he knows ultimately that we have to raise revenues but he doesn't want to raise revenues on a fiscal consolidation. So he tried some other things. The first thing was doge remember didn't work. The second was then liberation day and the tariffs didn't work. So what do you got now? And I think this kind of leads back to where we started is this is one of the main reasons why he did nominate chairman Wars to the to the chairman of the Federal Reserve is because deep inside he knows that the central bank was the one that was enabling all this fiscal large and that if he can put chairman Wars in the seat that will without much fanfare put a lid on the spending bring long end yields down, raise revenues through a supply side productivity stance of monetary policy, um, which will at least hopefully give the United States the chance to avoid bankruptcy in chapter 11, which he has been in numerous times. So, I know that is a very kind of roundabout way of explaining what liberation day to them was about, but I think that was a very interesting um way that we got there. So you you believe that the president consciously thought that Liberation Day was a way of generating revenue to ease our debt burden. >> I do think that he thought that at least he was going to try it. >> Would would someone who's concerned with that talk about spending every now and then? >> Yeah. You know, but the question is on the president's spending, they're not really that serious. What did he put in? Tax on tips and you know stuff that is small uh potatoes in the budget, >> right? But what did he The question is what did he cut? >> Zero because he you know would like every good politician wants to try the easy way out. >> But you brought you brought up the precedent of him being a real estate developer for four or five decades. I think that's a very fair analogy presidentially that I never saw him as a real estate developer be concerned with that side of the ledger. It was it was if there was any way of addressing excessive leverage, it was in getting better terms from his lender. It was on the borrowing side. Never constricting the borrowing. Never even really increasing the income side, right? it was just simply uh trying to generate leverage with the uh lenders so that he had the upper hand. And the the national picture doesn't seem to create a very good analogy. Um my my you know I I think that but on the other hand he also couldn't print money right to issue new debt >> um in the private sector either. But I I guess the the analogy I'm making is that I don't think he cares about excessive leverage and then when a borrower is in trouble, he views it as the lender's problem. >> Well, it's interesting because now the lender's problem is his problem, right? So that's where we've come full circle on it and I think he's ultimately had to take in the lessons and the market discipline, which is that you're going to have to grow your way out. >> And you can grow your way out through a mix. has given him that lesson so far that the um that from 22 to 24 when he was out of office the yield curve moved up 200 basis points 300 400 basis points. What what has given him the lesson that um you know they've had no trouble with any issuance? >> Yeah. the um look across the entire curve both in in in terms of term premia but even just at the short end we're it's not a particularly expensive cost of capital um what is what would what would give him market discipline I think I think you could allude to things that foreshadow it or that threaten and maybe behind closed doors Secretary Bessant tells him this is going to happen if you do this or don't do this. But I'm not I'm not sure I see it yet that the president's worried about being uh constrained by US fiscal our guess. Look, I think um maybe let's just conjecture here that maybe the president is more long run focused and strategic in his thinking than we think and he actually has more of a idea about what the legacy is and I don't think that he wants to be the president that presides it's known in history as presiding over you know the demolition of of US markets because the what I call the Ken Griffin moment, right? which is that there is a day when we wake up where the bond vigilantes say no moss and we've gotten glimpses of that um here in the last year that I think ultimately between the mix of the supply side uh measures the chairman wars nomination and ultimately trying to pay down the debt and increase tax revenues kind of by hook or by crook. book, right? I think speak to that. >> So with the um the the question about China um is President Trump art of the dealing, President Xi, or does he want his uh uh approval? Um and then same question with Putin, >> with the Chinese with Xiinping. Here's how I think that the president thinks about it is I'm not convinced that the president is a China hawk per se. I think that's very clear. I think that ultimately again and this is something that I think the president gets to very intuitively only which is that what you want from the Chinese is a change in their behavior not necessarily a change in the regime. and the change in the behavior is that quite frankly you're going to play by the rules and we're going to rebalance the relationship and that is the real objective even though sometimes it's not always articulated that way. Um, but what's the point of that? Because ultimately, I think over time that, and this is very important, if you can get the Chinese Communist Party to abide and behave by marketsbased principles was that over time, um, that becomes incompatible with an authoritarian regime. And again, that's the power of markets. With Putin, I think it's also very similar. Look, I mean, I think a lot in media like to talk about that the president um admires Putin. Look, there's been no president that has been more hawkish against Putin than Trump. We have to give him credit for that. Could he continue to be more hawkish? Yes. I think the reason that he's not is because he's spooked by the nuclear weapons. But that's not just a fault of Trump. President Biden and all presidents kind of before him have been very spooked by that. But I think what the president is trying to do with Putin is to, let's call it, rope a doope him or trick him into coming to the negotiating table on some quote unquote deal that he can sell back home as a win because he knows the very poor standing and position that Putin is at home and that if he can convince them to just leave the battlefield and go home, the Russian people will take care. And look, if there's a if there's an argument for why the Ukraine conflict will continue to escalate, it is that Putin also knows this because there is arguably no dacha that Putin can go back home to, right? And so he has to take this to the last full measure of devotion. And and I think that very grave decision is is what weighs over the president. And I think we why he's trying these other measures in Venezuela and Iran to try to solve that very intractable Putin problem. >> So Renee, we've uh we've kind of gone around the globe a little here. Uh we the president in the by the time people are listening to this, the State of the Union will have been delivered. We he he may uh refer to Iran tonight. I don't think he's going to tell the country what he plans to do, but we know the Iran issue lingers. you've had some just profound observations and and thoughts I think on both Putin uh Xi and China um the the overall objectives wi with Venezuela and and what they meant in terms of a bigger picture and then obviously we've discussed WASH the Fed and and the subject of market discipline. There's one last thing we'll close up with, which may very well be the biggest issue for investors in the US, which may very well be the biggest issue for domestic economic policy right now, and that is open AI. You you you have a note in your in your notes to me. Um, we already discussed the one and a half trillion dollar defense budget and you put one and a half trillion dollar defense budget versus bail out open AI and of course nobody uh is aware that there's a bailout going on for Open AI right now because there isn't. They continue to get paid and they continue to make purchase orders with Nvidia and to raise equity capital in their sort of triparty circular funding model. But what you mean here is that there is this accumulation of capital expenditure commitments that surely has a quasi >> yes >> uh uh governmental backing behind it because if open AI were to collapse with one and a half trillion of expenditures the domino effect here is systemic. Is that what you mean? and tell me how you think about this developing web from data center to the uh hyperscalers to the language model creators in this uh rapidly evolving AI economic story. So let's just start with I think you David in 2008. I think there was there is no greater scholar of the 2008 global financial crisis than than you. >> Thank you very much. We all know that. What did you call that very famously? A crisis of responsibility. Okay. So, it has always been my contention, and we've talked about this for many years now, that the costs of 2008 and the bailouts were not paid 2009, 10, 15, etc. They were actually paid in the pandemic and maybe they're continuing to be paid now. Yeah. So, I say that as background context to make two other points. Number one is that when you think about the AI trade and the whole generative AI theme is that that came in the wake of the war in Ukraine. It's not a coincidence that that was what was um a natural outgrowth. And remember at the time we were also in a very um heated confrontation with the Chinese. So we have now we are now thinking about technology not just as a supply side accelerator but as a component of quote unquote national security and you know national security oftent times is seen as a sec sacrosan thing that anytime you slap a national security sticker on it you can't question it. And so I bring all this back to 2008 because I think what a lot of the founders in the generative AI, let's call it industry have discovered is that the lesson from 2008 is to make sure that you don't become Dick Foley and you want to become Lloyd Blankfine. And how do you do that? You do that with this web of becoming quote too big to fail with an implicit government backing. And in the same way that you know the banking system rightfully in 2008 was so core to US markets and the US economy because of the expanded state footprint over time is that that is I think the strategy of most everyone in the tech sector under this rubric of national security, right? which is that oh well I mean we need government support if indeed the revenues do not match the capex over time. So I will tell you I mean that is a subject that is being discussed across the United States government across the tech sector um currently and I think that maybe might be one of the first challenges for a new Fed chairman is to think about how that might work and to think about what the implications are um of I'm going to call it eroding competitiveness in the technology sector. >> So, I'm gonna have a guest on Capitol Record again next week. >> Nice. >> Uh, two very special guest editions. Um, a gentleman by the name of Tim Estus who is one of the leading experts I think on matters of AI policy in the country and he's going to share a number of things. I'm wondering Renee if I can get you back on later in the year where we do a dedicated discussion of th this AI issue in the context what you're referring to because what what you're doing here is fascinating. you're you're pulling together um the the reality of the AI technology, the evolution in the space, the uh funding model that is evolving quickly and and in a rather troublesome manner, the moral hazard that's forming underneath it, and how a national security pretense can be pretext can be used to rationalize US involvement. and then even the capital markets crisis that such a disruption could create for a central bank. >> Well, let's make kind of maybe two final points on this and I know we've been going for a while, so let's just close on this, right? >> There is a feature of the current tech wave that is indeed transformational. And as chairman wars said actually I think several months ago that in the future we're not going to talk about this as AI. We're just going to talk about it as just how you conduct business. And it is the seeds of a tremendous productivity boom. In fact, you're already seeing it. When you look at the labor market revisions over the last year where there's actually less employment but profits are up. That's the garden variety signal that we're in a productivity boom. And arguably productivity is running at least between 2 and a half to 3% per year. So that is a very positive thing. The irony is that if you then concentrate those uh creative impulses in a handful of companies that are given implicit backing by the government, it stifles competition and actually reduces the positive supply side impact if you were to do it. And I'll mention that this AI doomerism that we have amongst a lot of I'll say secular people that this is just new Tower of Babel stuff right that they spoke about nuclear and nuclear energy like this in the 1960s and 70s and now we needed to restrict it and that it was too dangerous etc etc. And what were the impacts of that is that then the adversaries realized that we were energy constrained and so they did the oil embargo in the 70s and we had inflation etc up until 2005 where the president after 9/11 had to say that we were addicted to oil. Now the great part about capital markets and this is I think the perfect story for capital record which that in 2000 January 2006 the state of the union 22 years ago almost to the day when President Bush said that we were addicted to oil and so we were going to invest in alternative energy sources and technology to wean us off of Middle East oil in the next 15 years. There was a guy named George Mitchell down in Texas that was already working on that problem that the government had claimed that they were there to solve. And 15 years later after that, what did you have? An extra 10 million barrels of oil from the shale, another three and a half million barrels out of Iraq and Tesla. Now, that is far beyond the wildest dreams of any one bureaucrat in the Department of Energy could have ever had in 2006 with a little program, right? And this has strategic stability implications because imagine if on this day four years ago, Putin had invaded Ukraine without the additional supply of 10 million barrels from shale and three million barrels from Iraq and Tesla. he would probably sitting in Paris right now because the oil price would have gone to 200. So this is I think a story that's I think is very important. It's one of my quintessential stories that you've got to get the government out of the way and let the markets do its work because if you let the markets do its work for you, it will reward you in ways beyond your wildest imagination. Renee, we could go on all day, my friend. I um I can't thank you enough for your time, your wisdom, your perspective. Uh we we have like four more hours of things to cover, but we'll do that without a microphone, but with uh Val Chop. >> Yeah, >> 54th in Madison. You know what I'm talking about. >> As always, >> great to see you, brother. Thank you. >> Thanks for everything, Rene. We're uh going to let this thing uh uh close out here. Uh thanks very much for listening to a long discussion between me and Renee. Thank you uh who those who support Capital Record, support this cause and mission and and we look forward to having Renee back on as always and and we will continue doing what we do here which is uh acknowledging market discipline as a god-given constraint in a fallen world. and we uh look forward to what greater access to markets can do for human beings who were made to create wondrous things. Thank you for listening to David Monson's Capital Record.