Reaction To Today's Federal Reserve Rate Cut + End of QT | Axel Merk
Summary
Fed Policy: The Fed cut rates 25 bps and signaled QT will end in December, while Powell emphasized a December cut is not a done deal; markets cooled on the remarks.
Liquidity & Markets: Despite signs of funding stress and widening credit spreads, overall liquidity remains ample, which complicates the notion of “tight” financial conditions.
Gold: Extensive discussion highlighted strong structural drivers, returning speculators, and lack of retail frenzy; volatility is elevated and position sizing and risk tolerance are key.
Gold Miners: Gold mining equities have surged alongside bullion, with commentary on ETF flows and the sensitivity of miners to gold price moves; this remains a high-volatility opportunity set.
Precious Metals: Broader precious metals dynamics, including silver’s sensitivity and central-bank buying, were covered, with an ongoing reassessment of the 60/40 allocation favoring metals over bonds.
US Treasuries: The Fed’s shift to replace MBS with Treasuries is seen as only marginal for yields versus heavy new supply; long-term rates may hinge more on policy credibility and the next Fed chair.
Stablecoins: Framed as money-market-like bridges tied to Treasuries, stablecoins face regulatory scrutiny but are not an independent liquidity source; issuers benefit from current rate structures.
No Specific Tickers: No individual public company was pitched or discussed in sufficient depth for a stock-specific recommendation.
Transcript
And we should be live. Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Tagert, welcoming you here for one of our uh now regular uh live reaction videos to the today's Federal Reserve uh announcement and latest FOMC release and Jerome Powell presser. I am joined as usual by uh just fund manager extraordinaire and Fed watcher Axel Murk. Axel, how are you? >> Great to be with you. Always good when I talk to you and all fired up from uh [laughter] from the summary of the debating club that matters to all of us. >> Yeah. Well, you're very kind. Um we're both a bit of under the gun here time-wise, so we'll try to get as much packed into the hour as we can. Um all right, folks. So, just very quickly, in case you didn't hear the news yet, uh the Federal Reserve cut interest rates by another 25 basis points. As expected, um I would say as largely expected, the Fed also announced that it would be ending quantitative tightening, otherwise known as QT. Uh that would start on December 1st. Um so, I think that's the real big headlines. Uh there were two dissenters on the rate cut decision. um sounds like on either side. One wanting 50 basis point cuts. I'm I'm going to bet that's Mirren or Moran. Um and uh and then one wanted no cuts. Um and uh you know I I did get a chance this time, Axel, to I I've been recording all day, but I did get to actually listen to Pal's comments and listen to maybe the first half of the Q&A with the journalists. But before we get into the details of that, what are you taking away from this? Well, you missed the good part if you missed the second half. >> Oh, really? Oh, well, there we go. >> There we go. I don't know whether you left before or after when he said that a December rate cut is far from a done deal. >> I did get that one. >> Yes, exactly. And then the the kicker, there were a few kickers, but the the one I I I thought was uh I don't know, hilarious or whatever it is, where he said, "Hey, I'm just telling you what's happening in the room in the meeting." Um, [laughter] so it wasn't that he had that in mind that the December rate cut is um is is not a given. But just to take a step back this summer, we heard the got these famous dot plots where where the FMC members give their projection and the way it is done is rather than saying over the next several months, it's group by calendar year. So you actually see in September what the intentions are of the members through the end of the year because there only two meetings left by the time they they do this or maybe three and and so there's clearly a divergent camp. There are the folks who say yep we should cut and the other ones say no maybe we should be there or even hike. And that's because as Mr. how aptly says we got inflation risk to the upside and employment risk to the downside. And one thing if one listens carefully and wants to be a cynic, he says, okay, we'll do to support maximum sustainable employment. And then he didn't say, oh, we'll keep inflation low. No, no, he'll said he'll keep inflation expectations anchored. And the reason I mentioned the word everyone wants to be a cynic, that basically means you get away with anything as long as you don't lose the credibility of the Fed, which means you might as well cut rates. And of course, you can flip this on its head and say, um, well, maybe maybe they should be pursuing sound monetary policy to foster anchored inflation expectations rather than kind of pushing things in a way that you might get away with things, >> right? Um and so yes, so clearly and we obviously had a descent in each direction this time around. Um which means it appears to be that the folks who say well maybe not so fast, maybe not so much, maybe we should take a break that we're getting a lot of air time at that in that meeting. >> Yeah. So okay. So yeah, pal. Um so when pressed on the Now of course the Fed doesn't have all the data it normally has, right? because of the government shutdown but but when pressed pal >> because then they would be perfect in the decision-m yes >> right yeah exactly but pal said hey look we we got a lot of other data sources that you know kind of give us a general sense of where we are and he said you know the labor market seems to be continuing to cool but in an orderly fashion nothing super uh concerning there um like it's not like it's getting worse you worsening at a at a fast pace Um so uh you know the the the tight rope as you said that the Fed is walking right now is he said the the um risks risks to inflation to the upside but the risks to the labor market are to the downside. By downside he means you know continued weakening there. So he's like look we got to kind of walk this tight rope. He he did to your point he did go out of his way. um you know he said look I I always say you know I always say look we're not going to tell you what we're going to do with rate cuts uh at the next meeting because we're going to look at the data but he said I'm going a step beyond that here and I am telling you that it is definitely not something that people should just take as a fat comple another rate cut so it was interesting that he did go that far and I think that's why the markets are kind of have sort of softened while the Fed's been doing Q&A um metals have come down. Um, Bitcoin's come down, markets have cool have cooled from their initial reaction. So, you know, maybe this is people saying, "Oh, maybe we're, you know, we get a discount now. The fact that maybe we might not get the the right cut that we were counting on." >> Yeah. So, December meeting as we speak is now 67% chance of a rate cut whereas before it was uh pretty much a given. So, and that that will change and we'll we'll see. Those are what shouldn't be considered these to be overly precise, but but trends move in that. The one thing you said is um yes, we there's a weakening labor market and he used that as quote unquote proof that the Federal Reserve is still in a tightening bias. And I paused when I heard that because I don't actually think that is correct. Um, when you have a slowing economy and let that be part of being a tight monetary environment and you start lowering rates, let's say you lower rates aggressively. Let's say you lower them to zero. The labor market may still continue to ease because there is I was once taught a long invariable rate um reaction >> to Fed action and if and just because you cut rates there's no guarantee the economy is going to recover. So it's an I don't know whether you can kind of have a direct proof because that digital tit and the reason I say that is we clearly I mean we today as we talk we had the first $5 trillion company um this morning um happening and uh there are clearly some AI stocks that have been on fire >> um quoteunquote everything is up I mean not exactly but a lot of things have been up is that really a tight environment and and the part. I'm sure we're going to get it to it. They're going to going to phase out in December the um the shrinking of the balance sheet, but he used the argument he gave is that there are some issues in the funding market and that's again proof >> that conditions financial conditions are tight and that is completely wrong in my view. Yes, finan the what that proves is that paying interest on reserves with a broad brush has significant shortcomings because the I mean the just for context for those who who are not kind of nerds to look into these sort of things the Federal Reserve used to intervene in the Treasury market to keep rates where they're supposed to be by buying and selling Treasury securities and uh and participants would kind of would bid for it and and and and get their funding in the overnight market done and the Fed said, "Ah, it's all too complicated. We'll just pay interest on the reserves and everybody is happy." The the theory of that works there. There's various problems with it. One of them is political because the Fed is literally paying billions to banks for doing nothing, >> right, >> for parking money with them. But more importantly, there is such an array of regulatory frameworks that affects different participants in these markets that the the the funding environment is a tad different in the different players. And rather than allowing the market to fine-tune that, there's this broad brush paying interest on reserves. And what you end up doing is you're pinging providing a funding environment for the weakest of those players. Um so that there is no tension. But it means almost by definition that you have very generous funding for certainly for the average um if not for the vast majority of participants. >> Right? >> So I'm wondering and and of course let's think about it. the this entire framework was introduced after the financial crisis and ever since the financial crisis the problem had been oh my god inflation isn't high enough growth isn't high enough and so finally we're in an advanced stage where for better or worse right we had a bout of inflation we have an economy that appears to want to grow in some directions um you got to wonder whether they have the right framework to control where the economy is supposed to be Because with the current framework, there is no more this thing that you have required an excess reserves. There there's ample reserves. This economy can grow if it wants to grow. And and so the the Fed has kind of boxed itself in. But you tell me whether we have a tight environment with reaching record highs in different parts of the markets and whatnot. Um with being ample funding available for anything that has II in the name. Worst journal had a story that there was a 10 billion valuation for a private company and all they appear to be doing is um have people record voices for chat GBT and they're getting a cut off that I mean it's great for them but I am questioning whether this funding environment is really so tight if that sort of stuff happens. Yeah, as you know, Axel, we just had the thoughtful money following conference and we had Michael Howell present there and you know his big focus is liquidity and while he does think in terms of the grand liquidity cycle that that'll be peaking by the end of the year, beginning of next year, he does not see, you know, um a a receding of liquidity yet. Um and I think he would agree with you that hey this does not seem like you know a very tight environment >> and and neither we do [clears throat] we we don't I don't I I wasn't part of that presentation but um we have our own liquidity monitors and and no liquidity is not tight. >> Yeah. So you know what's interesting about this and you you just gave a note to it but I I had a note here to really get into it with you is um we are starting to see early signs of stress in the credit markets. Right. you know, we're we're starting to see more usage of the Fed's um uh o overnight uh repo market. Um we're um we're starting to see credit spreads start to to at least show some life again. They're not just, you know, tabletop flat anymore. Um we have seen some of these cockroach companies, you know, all of a sudden roll over and and die. [snorts] Um and you know to your point like we're seeing that when liquidity seems pretty ample, right? Um so uh it it kind of begs the question, you know, stock market at all high, all-time highs, liquidity ample, like these are the good times. And yet we're starting to see stress, you know, not terrible stresses yet, but initial signs of stress such such that the Fed may say, "Hey, you know what? we got to, you know, uh, change change tac next month. So, anyways, it's just it's it's um to me that's just one of the the things about here that just sort of s is sounding a um a sour note, which is just like, wow, should we really be starting to see signs of stress when things are still, you know, as as awesome as they apparently are? Well, one example I like to give is that it is different this time. Yes. The reason why I actually believe that what is different is that the Fed every cycle we seem to be going through is ever more micromanaging the economy. And indeed Ben Bernanki wrote a book book during the during COVID where he considers that a feature rather than a bug that they can manage the business cycle. And the the example that I think everybody remembers is the after the failure of Silicon Valley Bank. Um it suddenly occurred to the regulators that banks have been mismanaging interest rate risk. And uh the Fed said, "Oh, never mind. We'll throw your lifeline and everybody's going to live happily ever after." And that was a big reason why this recession that everybody said is going to happen. Never came because when you kind of put out every fire that comes, we live another day. But it that doesn't change the fact of course that this economy has been very very extended and uh and so you talk about cockroaches falling over dead right that's the sort of stuff that that that should be happening at this stage um I mean you can argue that of course yes um expansions don't die of old age yes there will be something else that does it but we we also have consumers that are weakening not broadly in all measures but in auto loans which is a um which is kind of a canary in the coal mine and and just then on auto loans why that is particularly sensitive maybe is during COVID when everybody in quotes got subsidy the FICO scores improved and so people were able to get more credit than they might have otherwise um and apparently They splurge on cars and other things, but because their budgets are stretched, they're buying used cars that are ever older, which means you have maintenance costs, insurance rates have gone up. And so, it's just very very expensive to to own a car. And um I certainly see it in in in our household. I I presume you do and most of the viewers as well that insurance, maintenance of stuff, all that stuff has exploded in cost. >> Mh. >> And uh I'm in a lucky situation that I can afford it, but I um I trust not everybody is right. And and so you got to have some cuts somewhere. And at the same time the economic measures are ever more influenced by by the top spenders um because the the bottom portion kind of they are just trying to get by and they they buy the basic necessities and there isn't as much variability in a recession in that. So, so let me just interject for a second because that was the last question that I I got to in the Q&A where um I don't know if they asked him about it directly or if Pal just brought it up, but they were talking about the K-shaped economy. and pal said, "Yeah, we're we're we're familiar with this whole thing of the the K-shaped economy and and we from what we hear when we talk to corporate executives, it seems to be a real thing where the bottom half of the economy is of of society is is struggling right now, but the the more affluent top half of the K is out there spending and and they're kind of keeping things on average." Okay. Right. But Pal and Pal concluded by saying but you know we think there's something there there and then he moved on to the next question and I'm thinking like >> yeah well >> are you kidding me like a huge reason why we have this K-shaped economy is because of policies that you guys have been pursuing. >> Yes. Well there there are two things to it right on the one hand yes the pushing inflation increases the wealth gap. Low interest rates push up home prices make them less affordable. Um, at the other end of the spectrum, >> well, but just to be clear, low interest rates raise all asset prices, meaning those who have assets do great >> if you have assets. Yes. >> If you have assets. Yeah. Which not which which the minority has. Yeah. >> Exactly. But at the other end of the spectrum, it is not the Fed's job to deal with income distribution. And I'm not saying that's why they should have been doing these things, but it is not appropriate for him to say, "Oh, yeah, we'll do policy to kind of" and he he used to do that very actively. Has done much less of that in the current political environment. >> And I totally agree with that. But you got to be cognizant then when your policy does exacerbate it, right? It's not not his job to manage it, but it's not his job to make it worse either. And of course, I mean, one one of the Fed candidates we we have been talking about on with you extensively is Kevin Walsh, >> who has been an an a critic of this, not just recently when he's becoming the potential next Fed chair as a candidate for it, >> but has very very actively talked about this over the years. So he is one of the few credible voices of that who might go on the Fed and and says Fed needs to get out of all this business. Um and so it's needs to be credible. And I had the good fortune I actually met both Kevin's both Fed candidates, both Kevin Walsh and Kevin Hasset at a at a conference the other day and the conversations are all offline, so I can't talk about those specifically, but they didn't really say anything they don't say in public, but um it was interesting to see the the two candidates there at the same time. and and Kevin Walsh has kind of really honed in on this message about how the current Fed has kind of failed in its mandate and there needs to be some deeper reform and and we haven't talked much about right we don't have all these data right now but there's really much more to than the data there's a communication strategy there there is the Fed balance sheet there's all kinds of stuff where the Federal Reserve has done things that they shouldn't be in the Fed needs to get out of politics and needs to focus on its job and needs to be credible in its job. Um and and especially when you have kind of you're towards the end of your tenure, credibility and leadership matters. But I allege that Powell has never had intellectual leadership, right? It's always been this debating club. And now we see a revolt happening, right? People dissenting on both ends. Um and he says, "Well, maybe the the rate cut I want to have in December is not going to happen." And by the way, it depends on how you look at this market whether you think it's more supply issue or more demand issue. It's presumably both. But Paul says he is in a demand camp and therefore he wants to cut rates. I'm not putting too many words in his mouth because he pretty much said as much. Um but there clearly others at the Fed who are who are concerned about taking rates too low at the current stage with inflation as high as it is. >> Yeah. And so just let's talk about inflation for a second. Um so Pal said that um inflation is kind of it's bifurcated right now where he says we're now seeing goods inflation and and [clears throat] interesting because goods had been deflating for a good chunk of the past year and a half or so. But he said you know goods are inflating and he said that's due to tariffs and he said services are disinflating which you know is this horses has shifted because for much of the past year and a half it was services that were continuing to to inflate while goods were deflating but the services market is bigger and so therefore that was pulling um it was net inflationary. So, um, I I guess just to take a pause here for a second, but Axel, what do you think, as best you can tell right now from the the inflationary data that we know of, is it more likely to continue disinflating from here um because of disinflation and services um or will tariffs be more and more felt and might that actually take the the lead horse here? >> Um, well, the short answer is we truly don't know. Um and part of it is because not the data just so messed up but economic activity as well. When you hear from the executive that terrorists are on, terrorists are off, terrorists on terror off, the the one thing you're going to do is you're going to try to control what you can control, which is you're going to contain your cost and you might want to move up your purchases. And so we we see a lot of anecdotal evidence that people are doing now still purchases that they might otherwise only do in the springtime to to get the inventory in because you you just don't know what the policy is going to be. At >> the same time, we see all these layoffs happening >> and people blame AI and AI almost certainly is a contributing factor. >> But I think fundamentally it is that companies with everything that's happening say, well, we don't know what the future's going to look like, right? They they don't know more than you I do and we look at this stuff quite intently and so they say well the one thing we can do is I think we can do with 10% less of our workforce let's cut our cost to be ready for whatever might be coming >> right we can air on the side of conservatism >> yeah and and so if you play this through the rational development is that at some point you will have bought everything you want to buy and you're going to have to slump at some point But it that's just the theory. In practice, a lot of other things. I mean, we haven't talked about deregulation. I mean, the the current administration is throwing a lot of weight at deregulating things. And when you go into rebuilding infrastructure and and reshoring, a lot of these things take a while. And so, but at the same time, when we hear headlines, oh, this country is going to invest these many billions, these many billions. Well, is it just a headline and no follow-up or will there be follow-up? And and so how that exactly plays out remains to be seen. Um what we can see is that the low-end consumer is weaker. Um the high-end consumer may well be quite dependent on asset prices. And so if you're going to tell me that the stock market is going to up 20% over the year, we'll probably have an expansion. If you tell me the stock market is going to get out down 20% over the next year, we may well have a recession. >> So, I'm just curious on that point. It's looking like we're going to have our third back-to-back year of double digit returns in the stock market. >> Well, I don't uh I don't know. It's depending on which market you're in, but we have 29th of October. We don't have the 31st of December. Let's talk at noon [laughter] on the 31st of December. But but let's just assume I mean let's just assume that we're hovering around S&P 7,000 by the end of the year. >> How likely is it we'll have a fourth year of powerful returns in >> the only thing we know is that usually what we think is the most important thing for the following year is not the most important thing right uh all this procrastination is almost certainly wrong. So it is the unknown unknown that's going to get us even either on the positive side or on the negative side as uh as you know and many the audience know right we manage over three billion in gold and gold mining uh obviously have been a tremendous year >> oh my god is it three billion now [laughter] >> it's amazing what 40% increase in gold will do for you >> it depends on the day you talk to but we we hit three and a half billion um just before the selloff and And it's uh it's yeah it was two billion in the springtime and about one and a half billion about 13 14 months ago. >> Yeah. >> And so that just shows you the sort of environment that that's that's happening. And uh we do physical gold. We also do the gold miners. The gold miners obviously have been somewhat on fire. And by the way, I'm not giving investment advice here just to to make that clear. I'm just mentioning those things to to give you an indication that these market dynamics have been quite extraordinary. Now, historically when we do very well, the rest of the market doesn't um and I I joke when like when I want to splurge and buy a car or this or that, historically when the price of gold is is very high, I have much more negotiating power um because other buyers are are not there. Whereas currently there is some weakness there and and especially now like next week there's going to be an election and some people are worried not that it's going to make a huge difference but that usually gives a little bit of a vacuum. Um but for for the most part the traditional equity investor is doing is doing quite well and the Paul was asked whether he's concerned about the stock market and of course he gave the only right answer is the Fed's job is not to manage asset prices but the Fed's job is to to think about credit conditions and the framework that he applied to this meeting is not particularly impressive um and uh by saying that oh yeah well in the funding market interest of reserve you might have to stop QT and that's proof that conditions are tight type of thing. That's and of course he knows other metrics as well but it it does matter what he communicates because the market will look at what sort of bias he has and uh but he said as much right he has an easing bias but the rest of his team doesn't so he may or may not be able to push through a cut next time. >> Okay. All right. Um [sighs] well let's see here folks. Uh this is live so I will be taking questions from the live chat. So as you have questions for Axel um feel free to ask them there. Um you mentioned you you mentioned you met both Kevin Worsh and Kevin Hastard. Um as an FYI Axel Judy Shelton um was participating in our conference as well and I asked her you know who would you like to see? >> And and I've talked to her in the past before and I know she she >> pardon me. Well, but but I know she thinks very highly of Kevin Worsh, but she said, "I really like Hastard." Um, and I'm curious, um, you and I have talked more about Worsh than than Hastard. Do you have anything to say to the audience here about your your perceptions of of Hastard and what he cares about? >> Yeah. So, Hasset, um, >> sorry, Hasset. Um well again I I can't talk about the specific conversations I I had with them but uh they the all the folks who are the final round candidates have have a very good set of qualifications kind of just based on on paper but they're very very different. Um and the reason why I've been talking up Kevin Walsh is because he's the real deal in terms of reform within the system. Mhm. >> Um obviously I mean Judy showed that she has some great ideas but they're not going to get implemented. Um and indeed her nomination appeal, right? Kevin Walsh having been a Fed governor and has talked about he resigned. He was part of of of helping um get the economy through the financial crisis. Um but he also said he's only okay with QE as an extremely short-term measure and then he resigned as a Fed governor out of protest that it continued. Um so he said this is only an extreme emergency. Um and you cannot have that that the Fed buys bonds and so he's been ve and he's been very consistent also on on communication strategy. We've been talking about you can't do forward guidance and so forth. And so he wants to do a deep structure reform on on the Fed within the confines of the existing law. >> Mhm. >> Um and so he has a bit of a reputation of being hawkish but in the current environment he by the way his view is that um the way to get through the debt that we have is through a productivity boost. Um but the most important thing is that the Fed is credible. Um and he has a bunch of ideas to do that. Um the other Kevin Kevin Hasset he's obviously um head of the um head of the council of of national economic council and the the risk is that the market perceives that as a political choice and perception matters right he he he may be perfectly qualified >> and uh and personality wise he's different but a very pleasant person pleasant doesn't make you good fetcher necessarily, but the perception may be that he is going to be pursuing the government's agenda. >> That he's a he's a a Trump puppet. Yeah, >> exactly. And even though he is his own person and will do his own thing, that perception is a risk. And then you you have other candidates like Michelle Bowman um who is a Trump appointee but on the on the Fed governor board very qualified or Chris Waller for that matter. I mean Chris Waller who has been in the news a lot. Chris Waller has a very good instinct historically speaking. He is warned about the inflation and then he's been willing to do U-turn. He's willing to adjust. Um, but if we get him, I am certain we will have the same conversations as we're having now because he is so much of a team player that he is not going to change the way that the Fed operates, right? He also likes to talk do forward guidance a little bit. He may be setting an appropriate interest rate. I have no doubt about that. But he will he will be somebody who's not going to change structurally what the Fed is doing. Which means he's going to continue or the Fed is going to continue to be the punching bag of the administration and all the criticism that's there is not going to go away. Um maybe in the short term if he rates cuts rates faster, right? And so all these people can do the job. um within that framework, Kevin Walsh is the one who kind of says reform. We need to reform, but we need prudent way. And I happen to agree with those the big picture issues that he's talking about. >> You know what's interesting is the other person who talks a lot about the need for reform at the Fed is Treasury Secretary Scott Besson, who was kind of leading the uh the talent hunt for Pal's replacement. Um, do you think Worsh has an inside track as a result? >> Well, they they all know each other. They're all buddies, right? I mean, say that they they get pass it of course as well, right? Um, and Bess of course is a candidate as well. He says he's not, but who knows? Similarly, he might be considered a political choice, right? If if he gets it and there's no need for him to get it, then they might as well use Kevin Asset um rather than than Besset. I think that's uh from the administration's point of view, I think that's the um that's the smarter choice. But it's a um the By the way, Hasset is the one guy who's not a billionaire in that clan. Um [laughter] and so he is he has a normal income and a normal normal savings. So he's the most normal of of the of the of the very top contenders. Um and so that um in the Trump world that might matter, might make a difference. I don't know. >> Well, you know, it's so interesting too in in in the world in which we're we're entering. You know, it's almost like there's an appeal for somebody to be so wealthy that they they don't have to tow a line because their job depends on it. You know, I'm I'm not for a government of the oligarchs by any stretch, but I think that's some of the appeal that people have for the Trumps and Bessants and Musks of the world that they're like, "Hey, these guys are able just to do what they feel is the right thing to do." >> And they're outspoken, right? And they do it because I mean, obviously they have an agenda and obviously half the country plus miners will disagree with whatever they're saying. Um but but yes, they're motivated and they can afford to to serve and it's >> Yeah. Well, well, and and importantly on the flip side, you know, people are seeing folks like Bernani and Yellen go from having just been kind of academics who made, you know, a livable salary to all of a sudden getting, you know, board seats at Citadel and getting paid, you know, a million dollars a speech. And so there's a sense that like if you're if you're not independently wealthy and you're sitting in one of these government positions of of power that you're getting influenced by these deep pockets who are promising you riches after your tenure is over. >> Yes. Although I mean there are plenty I have to criticize about both young and banani. I don't think they used their jobs as kind of as jumping boards to to with the intent to get rich and so forth. um you see that in other corners and that risk is of course there in government in general. Um but um they both um also today they're not abusing their their situation and so forth. in their defense. Um but but yes, it does it does if if they're independently wealthy that um then you say, well, why why are they doing this? and uh and those who are favorably inclined say well they just do it because they they have a calling and uh and to the and just kind of broader context I I have gotten to know several of the the Fed presidents over the years some of the governors and whatnot and they're all serving with the best of intentions I mean we are here criticizing what they do but they have their framework and I I've said many times right the the road to hell is paved with good intentions And that's the um and ultimately monetary policy is hostage of fiscal policy. I mean you talk about independence and how that's good and whatnot but when when the fiscal situation is not sustainable at the latest with draggy we learned the central bank will do whatever it takes and so that's that's where we are and that's what needs to be fixed right the but again right Kevin Walsh says QE enticed the government to spend lavishly when you when you push push interest rates down to zero and buy up all the debt that the government issues. You're telling them deficits don't matter. And so again, it's monetary policy plays a crucial role. It's ultimately politicians that make the decisions. But why shouldn't politicians use the Fed to spend more money if that bazooka is at their disposal? And so if the Fed wants to have independence, it goes both ways. The Fed needs to behave. and the Bernani Fed, the Yelen Fed that the Powell Fed has not behaved. They have drawn politics more and and the problem is they don't get it right. A simple thing as paying interest on the reserves is is is not a good wise political choice. >> It's distortive. Yeah. Um so, uh let me ask you this. So, you know, a lot of people are prognosticating on the direction of bond yields next year. And of course the Fed is bringing down the short end of the curve or likely to and folks are hoping that that will then transmit to the longer end of the curve. But one thing that is interesting and I'm curious to hear your thoughts on this is you know the Fed has largely been the Fed was the marginal buyer of US Treasury debt from 2009 to 2022. Right? And then they stepped out of that market. Um, and you know, yields went up. Not not necessarily for that reason, but you know, because inflation, everything else as well. Um, and the Fed has been buying some treasuries uh because it's been managing the decline of its balance sheet, right? And so if on any given period more treasuries roll off than it wants to to stay on its pace, it has to buy some, right? But now it's ending QT and it's now saying, "Look, we're going to let the mortgage debt, the mortgage back securities roll off and we're going to replace them because we're fixing the balance sheet here now at whatever it is, 6 and a half trillion or whatever, right? So the Fed is actually going to be buying materially more Treasury debt than it has been for the past couple years just to keep the balance sheet flat. How much of a difference is that going to make to to yields? Well, the good news is that they're going to reduce their mortgage exposure. Um, I have never been a fan of that. The Fed's central bank's job is monetary policy. Buying mortgage back security is credit policy because you are is fiscal policy because you are allocating money to the mortgage sector. That that is not the Fed's job. And so, it's a step in the right direction. Um, ultimately what will drive things is the next Fed share. how credible the next Fed share will be. And that's where we'll see um we'll see very quickly if let's assume Hasset is going to get it. Um will the bonds sell off or not? If they sell off then it'll be seen as a political play. If they um if it's Kevin Walsh, he blames the power Fed for rates being as high as they are. um saying their own projections suggest that they are not that the the FMC has given up on 2% inflation and he points out that 3% inflation is not 1% higher but 50% higher and he says that's no good and so um the question is whether he can kind of he could give that sort of credibility as to where we need to be. Um there's of course the theory that the the long-term rates are kind of a combination of what the long shorter term rates are over the long run. Um but there's a premium that that's implicit in that. And uh one thing I I have indicated as part of the rates reason the rates are higher is because of tariffs. But if you and because tariffs don't just influence the flow of goods, they influence the the flow of currency. And if we're gonna have all these trade deals, maybe we'll see some smoothing in that. So that could get longer term rates to go lower. So there's there's a lot of ways this can go. It could go in a direction. I mean, it can only go up or down or be stable, but it the the driver I think it does matter of where we'll be. >> Okay. So I get all that answer. I'm just going to ask my question again. um which is with the Fed stepping now more into buying treasuries um how material a factor is that likely to be at just this replacement rate is is it is it marginal or is it pretty material? It's it's marginal only because there's so much supply coming on the market there. There is so much more debt that's going to be issued, so much more and so forth and and so yes, it it it does have it does have an impact, but it's a >> Okay. But until unless the Fed decides it wants to expand its balance sheet by buying treasuries, you think it's marginal. >> Yeah. Yes. And and and for what it's worth, right, all this discussion only matters as long as there's confidence in the Fed. If for whatever reason confidence were lost in the Fed, the Fed isn't big enough um because these the the credit markets are just so huge that this bazooka the Fed has is powerful but it's not omnipotent. Right? There there is and and and I'm not suggesting we lose confidence in the Fed, but you can look at metrics in the credit markets of what the assessment is of the market. I mean, we can be credible of Fed policy, but ultimately, as long as they have the bazooka and as long as the Fed believes and people believe they'll do the right thing, ultimately um the the markets will be contained. But but yes, um these nuances do matter. They matter for mortgages. Um they matter for risk spreads. They matter for all kinds of things. >> Okay, great. All right, I'm going to start getting to um folks's questions here. These are not going to be in any particular order, Axel. Um, this first one though I know has been or variants of it have been getting asked a lot on this channel. Um, I don't know if gold is returning back down to the low 3000s, but the general question is is do we just see a blowoff top in gold and you know pretty much is the run over and isn't only down from here. >> So I don't have a crystal ball. Um, I can give you a few answers. The first answer I'll give you is that historically speculators are integral part of the gold investor. For several years, the speculator was absent and that reduced volatility. The speculator is back and that's a good reason or big reason why the volatility has come back with a vengeance. If you can't stomach the volatility, then you might not want to be in gold or at least not as exposed to gold as you are right now. Um, so that's one answer. The second answer is in the runup to gold. The one thing I did not see was a retail frenzy, which is historically associated with the top retail investors were selling their coins, talking to wholesalers. They're not ordering from the mint um because there's no demand because the the dealers that the coin dealers have enough supply that they get from their customers. And so that is historically at least not a sign of a top. If you look at the gold mining ETFs, um they've had outflows, not been huge. Um on the on the physical ETF side, both in those outflows, but nothing that's historically consistent with a market top. Now on the price action, clearly we we went through the roof, right? And even a very substantial pullback would be very consistent with that. And so that's why I can't give a prediction where it's going to be. The underlying drivers are still there. Um but the the the other thing is um we we're kind of having the end of the month, right? If you are a investment advisor, invest in behalf of clients. Oh, you might as well take some profits and rebalance and and and many I one thing I've seen many institutions have been part of that runup with one way I like to phrase it is the fringe views of the gold bucks are moving more mainstream and because the the the gold market is fairly small it has a disproportionate impact and and and one thing we see is that people that have historically had a 6040 allocation 60% stocks 40% bonds are re-evaluating what they do with the bond portion And obviously it's not all stuffed into bonds and gold is not a bond and recent volatility might give some people second thoughts on that. But that doesn't mean they like bonds and and because these things about deficits being unsustainable. That's not a secret these days. I mean and so the question is only what people are going to do about it and and gold disproportionately benefits from that. >> Yeah. C can I ask you on that? So again at our conference a week ago uh Andy Sheckman, CEO of Miles Franklin, a big uh precious metals gold dealer, in fact a thoughtful money's uh officially endorsed precious metals provider. Um he went through a bunch of quotes, recent quotes from like big Wall Street brands like Morgan Stanley, Bank of America, Goldman Sachs, Jeff. Uh he also mentioned Jeff Goodlock and then soon after he had made this dis he had had this uh discussion with me. Uh I heard Ray Dallio say something very similar and they were basically all saying hey bonds don't seem to have a great future ahead of them over the next decade and there's lots of reasons to be looking at gold. So why not put 15% 20% 25% of your portfolio in gold and take that from the traditional 40% that was bonds. Now you know it would be gargantuan if if that actually happened. But even if singledigit percentages of of capital move from the bond market to the gold market, it would still have a huge impact on price just given the imbalance in size between the two. At least in my opinion. Do you think we will see a continued shift of capital from bonds to precious metals? >> We will see a continued shift out of bonds on an overallocation. And gold is but one of the beneficiaries. I phrase it that way is because if you take central banks, they want to get less dependent on the dollar, but it doesn't mean they stuff all the money into gold, but some of that will go into gold, right? Um, and so, and you're talking to somebody who's who's biased in this because I do have kind of on the the higher end of that in in in my gold exposure. I think for investors, the way I like to frame it and and as you know, I can't give specific invest advice, but I like to look at these things in terms of risk. Can you afford to be in this asset or that asset? And the more cash flow you can generate through your job notably um the more freedom you have to take on risk and as a reminder right it's it's good to have that discussion after a a significant [snorts] kind of sell off in gold talk about significant selloff and and we're at over 3900 on the on the spot price >> um the >> but volatility is something that in the abstract people don't get but people do experience it when it then comes right and so if anybody listening lost sleep over any investment during the recent bout of volatility it means you might have too much allocated to it applies to gold as too much as as to anything else um if you can afford to have a lot of gold by all means be my guest and and have a lot of gold right the other thing is of course the one thing I like to say is you don't need to have the ideal investment strategy, but having a strategy is super helpful because if you don't have any strategy, you're you're bound to lose money, >> right? You're just you're just going blind. Yeah. >> Yeah. But but stress test your strategy. And that imply even when you have much more gold than a typical investor has, um stress test that. Are you comfortable with that? If if price of gold were to plunge, would you be okay with that? Um and uh and while you and I may be thinking that that the price of gold is going to go higher, there's no guarantee that that will happen, right? I mean this these markets go both ways and especially if you're a silver investor. Um while that has of course had a fantastic run, um anybody who has invested in silver long run knows how gut-wrenching that can be. >> Yeah, you have you've got scars if you've been investing in it over a fiveyear period. All right. Um okay, I'm going to keep coming back to these questions. Um, Axel, who has been shortselling paper gold and how much longer can they get away with it before it fails? >> Well, there are plenty of industrial users and other users that that short it um say the the gold bug always thinks that they're special. Every paper market has a derivatives market and uh and there will be short sellers for all kinds of reasons if only to provide liquidity and this and that. I think the the the last bit here before it fails. I think one of the noteworthy things is in this in this spike in volatility is that these markets were behaving orderly. Um, let's keep in mind that there is an underlying physical market and I've talked to some vault managers in recent weeks and they all say that they have been working extremely hard because in the springtime precious metals went to to to the US and now it's been shipped back. Um, they [laughter] I I can't say that they they hate silver, but silver is just volumewise so much more for for the same value. That is just an incredible amount of work. But those markets have been functioning, right? Um, and so it's a we always like to say, "Oh my god, where are these short sellers? When are they going to fail?" Anything with the derivative markets is going to have some challenges at some point. Um, but these markets have been very very orderly in in in this volatility and and and they're not going to go away. I mean, if it makes you happy to talk badly about the short sellers, go for it. But but there are there are legitimate reasons why some people short it. >> Well, sure. I mean, if you're a producer, it's a hedge, right? So, >> yeah. Yeah. So, it's and and of course, many of the the producers these days, if they are not required by their bank, they the investors don't like the hedges and so they may not be, but but yes, there are there are reasons to hedge and some people do it and and then some people just like to provide liquidity and and edge their way in other ways. >> Okay. All right. Um, I'm just going to let you know, Axel, we got four or five minutes left, just given our time constraints. So, feel free to give just short answers to these and we can >> we can let you riff longer on them next time if you feel like it's too unfair. This question is a little loaded. Um, how does the destruction of the dollar play into the crypto market? But then he specifies it by saying in the sense that stable coins are taking over where the dollar dies. Um, I guess I just let you say whatever you want to say about stable coins. >> Stable coins, I mean to the extent they're tied to treasuries, they are tied at the hip and so it's not like it's an added avenue for liquidity. It is uh fantastic news I think for the crypto market to have that bridge of the the stable coins. A lot is happening on the regulatory side. Um the the other part of that on the destruction of the dollar um the yes there is an incentive to de to diversify out of the dollar but there has not been a run of the dollar. We would see far more stress in the market. So, and the the other side of that is that the runup we've seen in precious metals, we have seen without a debasement trade trade in earnest. This may be the beginning of it. And and I I we we talked earlier about all asset prices up. Um this feels like the beginning of inflation is the beginning of the debasement trade. The beginning feels good because everything is doing somewhat okay. It's the advanced stages that we we should be concerned about. >> Yeah. But um there's a lot of skepticism in some reg some regulators regulators about the the stable coins. I don't share them. Um some I I attended a seminar the other day and some academic said, "Oh, this is when banks were able to issue private money. I look at it much more like money market funds. Um and money market funds are in that sense a private form of money and they work perfectly fine. It doesn't mean that they aren't issued and they aren't growing pains by all means. But uh but part of the restriction on paying interest um on many of these stable coins just means that the folks who issue them are making an absolute boatload of money right now. >> Yeah. And that's actually a good way to I mean I'm not an expert on stable coins but the way in which they are currently sort of envisioned to come in and be big incremental new buyers of treasuries. It is like a money market fund right it's it's basically a pool of capital that is allowed to invest in treasuries and that's about it right and and there will be growing pains and maybe there will even be a blow up but I don't think that's going to threaten the financial system or be the end of the dollar for that matter the other way around either. >> Okay. Hey a question on that. You've probably seen the same chart I have that that shows that, you know, or showed about two weeks ago that for the first time in decades, um, foreign central banks held more in gold than they did in US treasuries. Right. Now, that that was a market value weighted >> in dollar terms. In dollar terms, not in ounces, I don't think. >> Right. Right. No. So, it was it was in market val dollar market value terms. Right. >> And so, people have said, "Oh, well, look at that. that that's proof that foreign central banks have stopped buying uh treasuries and and they've they've just they're now pre preferring gold. And I I I think what I've learned is that that chart in particular very driven by the price appreciation in gold, right? And if you look at the ounces bought by world central banks over the past several years, yes, they are increasing but but not that much. Um, so this this this narrative of foreign central banks are dumping treasuries and only going to gold. It's really it's overblown. It's that's being a bit histic. Correct. >> Central banks for the most part are patient buyers, but they're also noteworthy not very price sensitive buyers, right? Once they have made up their mind, they'll do it. >> They come in. And so I think it's a very important component. But anybody who jumps to conclusions is it's mostly just feeding your own narrative. and and and of course I have my own confirmation bias as well when I look at these things but I like to keep an open mind in these things and I just consider them but one of the factors it's a very important factor. >> Yeah. Okay. Similar thing here. Um Johnny asks how can gold go down when the US is collapsing and he he puts a little crazy emoticon there so maybe it's a little tongue and cheek >> tended boom people use leverage and uh when you de lever anything can go down. Now that said, when you have a riskoff environment, often the dollar actually rallies because there's it's a short squeeze. So when emerging markets borrow US dollars, it's a short on the dollar. And when when you have a quote unquote collapse, um that would be a short squeeze on the dollar. Um so but but yes, it can be because in an over liquidation, it can go down. It's usually the and that would be a deflationary environment. It's just that central banks are not going to let it happen. And so it's in that follow-up move that when when precious metals historically benefit. >> Yeah. And I say this as a gold holder and a gold fan, but um you know, no asset goes up in a straight line unbroken. Um any asset can appreciate in price faster uh than either fundamentals can demand or the market can absorb. And so there will always be pullbacks after um you know an asset just runs too far too fast, right? Um secondly, you know, be careful tying this to you a US is collapsing narrative, right? I mean go gold gold can go up under kind of you know the US can still be here in 100 years and gold could still go up for very valid reasons right now. But if if your gold trade is predicated on the US is going to, you know, fail as a country in the next 5 years and the dollar is going to lose world currency status and no one's going to want to own our currency or hold our treasuries. That is a really big ask and I think the odds of that are quite low and that this to n to Axel's point, you just got to be careful about some of these narratives that are swinging around there. Look, again, I'm a gold fan. I I I do own gold to protect against future um depreciation in purchasing power of the currency, but it's for me it's not predicated on the US becoming a failed state in two years. >> Yes. And on that note, just before we wrap up, the Roman Empire took them hundreds of years of decline, right? And and so just keep that in mind that when things are quote unquote bad from one's perspective, it doesn't mean there is an end tomorrow. And what my my framework is that sand has been thrown into this machinery called exorbitant privilege. It's not like a kill switch and trade does that because you're blocking the flow of goods which means the flow of currency is there. The and people say oh the dollar can't stop being the reserve currency because there's no alternative. My view is there's going to be increased fragmentation. There's no winner in that. There's only losers in that. Um, and the the final thing to say is if there were a more extreme scenario, which I certainly don't rule out, keep in mind that policy makers will change the rules of the game. >> Exactly. >> So, you might have the perfect answer and then the rules change and uh and so just be aware of that and let's say um and and obviously we don't know exactly what that's going to be, but we and the finally policy makers are superb can kickers. um they can kick the can down the road and the US with its death of resources is probably a better can kicker than many other countries. >> Yeah. Maybe almost every other and Brent Johnson talks about this a lot which is um look you know uh there's just so many cards the US has left to play that it hasn't. Um, and you always have to ask yourself too, like who, okay, so if if the US isn't if it's going to get supplanted by whom, right? You look around right now, there's not a lot of great alternatives. But I I try to remind people of of the Star Wars trilogy series, right? You had the first you had a New Hope where they they blew up the Death Star. Then what happened, right? The Empire struck back, right? It's it's not just going to roll over. The US is just not going to give up. There's a lot of things it can do to protect its extraordinary privilege, and it will want to. So again, just be mindful of all this. And again, I say this as somebody who thinks in the long arc, fiat currency, including the dollar, is going to lose its purchasing power. There's lots of great reasons to buy this stuff. Just be very careful about putting all your chips on a very low tail event happening very soon. With that, Axel, um I know I got to let you go. Um real quick, for folks that want to follow you and your work in between now and the next time you come here, where should they go? >> American.com is our corporate website and a free newsletter. We have some our gold and gold mining products. You can link from there. I can't discuss them here. Um Axamemer is my Twitter handle where I talk about monetary policy and all kinds of interesting things. >> All right. Fantastic. And if you want to get some help from a professional financial adviser in navigating these uh the road ahead here uh marketwise, uh feel free to talk to one of the firms that thoughtful endorses. to do that. You can just fill out that very short form there at thoughtfulmoney.com. And since we've talked so much about gold, if you would like to better understand the options for buying and storing gold and silver, uh, feel free to read our free guide at thoughtfulmoney.com/gold. Axel, my friend, thanks so much for doing this. Folks, uh, if you enjoyed this, please let Axel know in the live chat or if you're watching the replay in the comments section below. And if you want us to keep doing this in the future, let us know that because we always want to keep doing more of what you want to see us do and less of what you don't want to see us do. But Axel, my friend, this is such a privilege. Thanks so much for continuing to share your thoughts every FOMC release with this audience. >> It's it's great. Thanks. Yeah. Thank you. >> All right. And everybody else, thanks so much for watching.
Reaction To Today's Federal Reserve Rate Cut + End of QT | Axel Merk
Summary
Transcript
And we should be live. Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Tagert, welcoming you here for one of our uh now regular uh live reaction videos to the today's Federal Reserve uh announcement and latest FOMC release and Jerome Powell presser. I am joined as usual by uh just fund manager extraordinaire and Fed watcher Axel Murk. Axel, how are you? >> Great to be with you. Always good when I talk to you and all fired up from uh [laughter] from the summary of the debating club that matters to all of us. >> Yeah. Well, you're very kind. Um we're both a bit of under the gun here time-wise, so we'll try to get as much packed into the hour as we can. Um all right, folks. So, just very quickly, in case you didn't hear the news yet, uh the Federal Reserve cut interest rates by another 25 basis points. As expected, um I would say as largely expected, the Fed also announced that it would be ending quantitative tightening, otherwise known as QT. Uh that would start on December 1st. Um so, I think that's the real big headlines. Uh there were two dissenters on the rate cut decision. um sounds like on either side. One wanting 50 basis point cuts. I'm I'm going to bet that's Mirren or Moran. Um and uh and then one wanted no cuts. Um and uh you know I I did get a chance this time, Axel, to I I've been recording all day, but I did get to actually listen to Pal's comments and listen to maybe the first half of the Q&A with the journalists. But before we get into the details of that, what are you taking away from this? Well, you missed the good part if you missed the second half. >> Oh, really? Oh, well, there we go. >> There we go. I don't know whether you left before or after when he said that a December rate cut is far from a done deal. >> I did get that one. >> Yes, exactly. And then the the kicker, there were a few kickers, but the the one I I I thought was uh I don't know, hilarious or whatever it is, where he said, "Hey, I'm just telling you what's happening in the room in the meeting." Um, [laughter] so it wasn't that he had that in mind that the December rate cut is um is is not a given. But just to take a step back this summer, we heard the got these famous dot plots where where the FMC members give their projection and the way it is done is rather than saying over the next several months, it's group by calendar year. So you actually see in September what the intentions are of the members through the end of the year because there only two meetings left by the time they they do this or maybe three and and so there's clearly a divergent camp. There are the folks who say yep we should cut and the other ones say no maybe we should be there or even hike. And that's because as Mr. how aptly says we got inflation risk to the upside and employment risk to the downside. And one thing if one listens carefully and wants to be a cynic, he says, okay, we'll do to support maximum sustainable employment. And then he didn't say, oh, we'll keep inflation low. No, no, he'll said he'll keep inflation expectations anchored. And the reason I mentioned the word everyone wants to be a cynic, that basically means you get away with anything as long as you don't lose the credibility of the Fed, which means you might as well cut rates. And of course, you can flip this on its head and say, um, well, maybe maybe they should be pursuing sound monetary policy to foster anchored inflation expectations rather than kind of pushing things in a way that you might get away with things, >> right? Um and so yes, so clearly and we obviously had a descent in each direction this time around. Um which means it appears to be that the folks who say well maybe not so fast, maybe not so much, maybe we should take a break that we're getting a lot of air time at that in that meeting. >> Yeah. So okay. So yeah, pal. Um so when pressed on the Now of course the Fed doesn't have all the data it normally has, right? because of the government shutdown but but when pressed pal >> because then they would be perfect in the decision-m yes >> right yeah exactly but pal said hey look we we got a lot of other data sources that you know kind of give us a general sense of where we are and he said you know the labor market seems to be continuing to cool but in an orderly fashion nothing super uh concerning there um like it's not like it's getting worse you worsening at a at a fast pace Um so uh you know the the the tight rope as you said that the Fed is walking right now is he said the the um risks risks to inflation to the upside but the risks to the labor market are to the downside. By downside he means you know continued weakening there. So he's like look we got to kind of walk this tight rope. He he did to your point he did go out of his way. um you know he said look I I always say you know I always say look we're not going to tell you what we're going to do with rate cuts uh at the next meeting because we're going to look at the data but he said I'm going a step beyond that here and I am telling you that it is definitely not something that people should just take as a fat comple another rate cut so it was interesting that he did go that far and I think that's why the markets are kind of have sort of softened while the Fed's been doing Q&A um metals have come down. Um, Bitcoin's come down, markets have cool have cooled from their initial reaction. So, you know, maybe this is people saying, "Oh, maybe we're, you know, we get a discount now. The fact that maybe we might not get the the right cut that we were counting on." >> Yeah. So, December meeting as we speak is now 67% chance of a rate cut whereas before it was uh pretty much a given. So, and that that will change and we'll we'll see. Those are what shouldn't be considered these to be overly precise, but but trends move in that. The one thing you said is um yes, we there's a weakening labor market and he used that as quote unquote proof that the Federal Reserve is still in a tightening bias. And I paused when I heard that because I don't actually think that is correct. Um, when you have a slowing economy and let that be part of being a tight monetary environment and you start lowering rates, let's say you lower rates aggressively. Let's say you lower them to zero. The labor market may still continue to ease because there is I was once taught a long invariable rate um reaction >> to Fed action and if and just because you cut rates there's no guarantee the economy is going to recover. So it's an I don't know whether you can kind of have a direct proof because that digital tit and the reason I say that is we clearly I mean we today as we talk we had the first $5 trillion company um this morning um happening and uh there are clearly some AI stocks that have been on fire >> um quoteunquote everything is up I mean not exactly but a lot of things have been up is that really a tight environment and and the part. I'm sure we're going to get it to it. They're going to going to phase out in December the um the shrinking of the balance sheet, but he used the argument he gave is that there are some issues in the funding market and that's again proof >> that conditions financial conditions are tight and that is completely wrong in my view. Yes, finan the what that proves is that paying interest on reserves with a broad brush has significant shortcomings because the I mean the just for context for those who who are not kind of nerds to look into these sort of things the Federal Reserve used to intervene in the Treasury market to keep rates where they're supposed to be by buying and selling Treasury securities and uh and participants would kind of would bid for it and and and and get their funding in the overnight market done and the Fed said, "Ah, it's all too complicated. We'll just pay interest on the reserves and everybody is happy." The the theory of that works there. There's various problems with it. One of them is political because the Fed is literally paying billions to banks for doing nothing, >> right, >> for parking money with them. But more importantly, there is such an array of regulatory frameworks that affects different participants in these markets that the the the funding environment is a tad different in the different players. And rather than allowing the market to fine-tune that, there's this broad brush paying interest on reserves. And what you end up doing is you're pinging providing a funding environment for the weakest of those players. Um so that there is no tension. But it means almost by definition that you have very generous funding for certainly for the average um if not for the vast majority of participants. >> Right? >> So I'm wondering and and of course let's think about it. the this entire framework was introduced after the financial crisis and ever since the financial crisis the problem had been oh my god inflation isn't high enough growth isn't high enough and so finally we're in an advanced stage where for better or worse right we had a bout of inflation we have an economy that appears to want to grow in some directions um you got to wonder whether they have the right framework to control where the economy is supposed to be Because with the current framework, there is no more this thing that you have required an excess reserves. There there's ample reserves. This economy can grow if it wants to grow. And and so the the Fed has kind of boxed itself in. But you tell me whether we have a tight environment with reaching record highs in different parts of the markets and whatnot. Um with being ample funding available for anything that has II in the name. Worst journal had a story that there was a 10 billion valuation for a private company and all they appear to be doing is um have people record voices for chat GBT and they're getting a cut off that I mean it's great for them but I am questioning whether this funding environment is really so tight if that sort of stuff happens. Yeah, as you know, Axel, we just had the thoughtful money following conference and we had Michael Howell present there and you know his big focus is liquidity and while he does think in terms of the grand liquidity cycle that that'll be peaking by the end of the year, beginning of next year, he does not see, you know, um a a receding of liquidity yet. Um and I think he would agree with you that hey this does not seem like you know a very tight environment >> and and neither we do [clears throat] we we don't I don't I I wasn't part of that presentation but um we have our own liquidity monitors and and no liquidity is not tight. >> Yeah. So you know what's interesting about this and you you just gave a note to it but I I had a note here to really get into it with you is um we are starting to see early signs of stress in the credit markets. Right. you know, we're we're starting to see more usage of the Fed's um uh o overnight uh repo market. Um we're um we're starting to see credit spreads start to to at least show some life again. They're not just, you know, tabletop flat anymore. Um we have seen some of these cockroach companies, you know, all of a sudden roll over and and die. [snorts] Um and you know to your point like we're seeing that when liquidity seems pretty ample, right? Um so uh it it kind of begs the question, you know, stock market at all high, all-time highs, liquidity ample, like these are the good times. And yet we're starting to see stress, you know, not terrible stresses yet, but initial signs of stress such such that the Fed may say, "Hey, you know what? we got to, you know, uh, change change tac next month. So, anyways, it's just it's it's um to me that's just one of the the things about here that just sort of s is sounding a um a sour note, which is just like, wow, should we really be starting to see signs of stress when things are still, you know, as as awesome as they apparently are? Well, one example I like to give is that it is different this time. Yes. The reason why I actually believe that what is different is that the Fed every cycle we seem to be going through is ever more micromanaging the economy. And indeed Ben Bernanki wrote a book book during the during COVID where he considers that a feature rather than a bug that they can manage the business cycle. And the the example that I think everybody remembers is the after the failure of Silicon Valley Bank. Um it suddenly occurred to the regulators that banks have been mismanaging interest rate risk. And uh the Fed said, "Oh, never mind. We'll throw your lifeline and everybody's going to live happily ever after." And that was a big reason why this recession that everybody said is going to happen. Never came because when you kind of put out every fire that comes, we live another day. But it that doesn't change the fact of course that this economy has been very very extended and uh and so you talk about cockroaches falling over dead right that's the sort of stuff that that that should be happening at this stage um I mean you can argue that of course yes um expansions don't die of old age yes there will be something else that does it but we we also have consumers that are weakening not broadly in all measures but in auto loans which is a um which is kind of a canary in the coal mine and and just then on auto loans why that is particularly sensitive maybe is during COVID when everybody in quotes got subsidy the FICO scores improved and so people were able to get more credit than they might have otherwise um and apparently They splurge on cars and other things, but because their budgets are stretched, they're buying used cars that are ever older, which means you have maintenance costs, insurance rates have gone up. And so, it's just very very expensive to to own a car. And um I certainly see it in in in our household. I I presume you do and most of the viewers as well that insurance, maintenance of stuff, all that stuff has exploded in cost. >> Mh. >> And uh I'm in a lucky situation that I can afford it, but I um I trust not everybody is right. And and so you got to have some cuts somewhere. And at the same time the economic measures are ever more influenced by by the top spenders um because the the bottom portion kind of they are just trying to get by and they they buy the basic necessities and there isn't as much variability in a recession in that. So, so let me just interject for a second because that was the last question that I I got to in the Q&A where um I don't know if they asked him about it directly or if Pal just brought it up, but they were talking about the K-shaped economy. and pal said, "Yeah, we're we're we're familiar with this whole thing of the the K-shaped economy and and we from what we hear when we talk to corporate executives, it seems to be a real thing where the bottom half of the economy is of of society is is struggling right now, but the the more affluent top half of the K is out there spending and and they're kind of keeping things on average." Okay. Right. But Pal and Pal concluded by saying but you know we think there's something there there and then he moved on to the next question and I'm thinking like >> yeah well >> are you kidding me like a huge reason why we have this K-shaped economy is because of policies that you guys have been pursuing. >> Yes. Well there there are two things to it right on the one hand yes the pushing inflation increases the wealth gap. Low interest rates push up home prices make them less affordable. Um, at the other end of the spectrum, >> well, but just to be clear, low interest rates raise all asset prices, meaning those who have assets do great >> if you have assets. Yes. >> If you have assets. Yeah. Which not which which the minority has. Yeah. >> Exactly. But at the other end of the spectrum, it is not the Fed's job to deal with income distribution. And I'm not saying that's why they should have been doing these things, but it is not appropriate for him to say, "Oh, yeah, we'll do policy to kind of" and he he used to do that very actively. Has done much less of that in the current political environment. >> And I totally agree with that. But you got to be cognizant then when your policy does exacerbate it, right? It's not not his job to manage it, but it's not his job to make it worse either. And of course, I mean, one one of the Fed candidates we we have been talking about on with you extensively is Kevin Walsh, >> who has been an an a critic of this, not just recently when he's becoming the potential next Fed chair as a candidate for it, >> but has very very actively talked about this over the years. So he is one of the few credible voices of that who might go on the Fed and and says Fed needs to get out of all this business. Um and so it's needs to be credible. And I had the good fortune I actually met both Kevin's both Fed candidates, both Kevin Walsh and Kevin Hasset at a at a conference the other day and the conversations are all offline, so I can't talk about those specifically, but they didn't really say anything they don't say in public, but um it was interesting to see the the two candidates there at the same time. and and Kevin Walsh has kind of really honed in on this message about how the current Fed has kind of failed in its mandate and there needs to be some deeper reform and and we haven't talked much about right we don't have all these data right now but there's really much more to than the data there's a communication strategy there there is the Fed balance sheet there's all kinds of stuff where the Federal Reserve has done things that they shouldn't be in the Fed needs to get out of politics and needs to focus on its job and needs to be credible in its job. Um and and especially when you have kind of you're towards the end of your tenure, credibility and leadership matters. But I allege that Powell has never had intellectual leadership, right? It's always been this debating club. And now we see a revolt happening, right? People dissenting on both ends. Um and he says, "Well, maybe the the rate cut I want to have in December is not going to happen." And by the way, it depends on how you look at this market whether you think it's more supply issue or more demand issue. It's presumably both. But Paul says he is in a demand camp and therefore he wants to cut rates. I'm not putting too many words in his mouth because he pretty much said as much. Um but there clearly others at the Fed who are who are concerned about taking rates too low at the current stage with inflation as high as it is. >> Yeah. And so just let's talk about inflation for a second. Um so Pal said that um inflation is kind of it's bifurcated right now where he says we're now seeing goods inflation and and [clears throat] interesting because goods had been deflating for a good chunk of the past year and a half or so. But he said you know goods are inflating and he said that's due to tariffs and he said services are disinflating which you know is this horses has shifted because for much of the past year and a half it was services that were continuing to to inflate while goods were deflating but the services market is bigger and so therefore that was pulling um it was net inflationary. So, um, I I guess just to take a pause here for a second, but Axel, what do you think, as best you can tell right now from the the inflationary data that we know of, is it more likely to continue disinflating from here um because of disinflation and services um or will tariffs be more and more felt and might that actually take the the lead horse here? >> Um, well, the short answer is we truly don't know. Um and part of it is because not the data just so messed up but economic activity as well. When you hear from the executive that terrorists are on, terrorists are off, terrorists on terror off, the the one thing you're going to do is you're going to try to control what you can control, which is you're going to contain your cost and you might want to move up your purchases. And so we we see a lot of anecdotal evidence that people are doing now still purchases that they might otherwise only do in the springtime to to get the inventory in because you you just don't know what the policy is going to be. At >> the same time, we see all these layoffs happening >> and people blame AI and AI almost certainly is a contributing factor. >> But I think fundamentally it is that companies with everything that's happening say, well, we don't know what the future's going to look like, right? They they don't know more than you I do and we look at this stuff quite intently and so they say well the one thing we can do is I think we can do with 10% less of our workforce let's cut our cost to be ready for whatever might be coming >> right we can air on the side of conservatism >> yeah and and so if you play this through the rational development is that at some point you will have bought everything you want to buy and you're going to have to slump at some point But it that's just the theory. In practice, a lot of other things. I mean, we haven't talked about deregulation. I mean, the the current administration is throwing a lot of weight at deregulating things. And when you go into rebuilding infrastructure and and reshoring, a lot of these things take a while. And so, but at the same time, when we hear headlines, oh, this country is going to invest these many billions, these many billions. Well, is it just a headline and no follow-up or will there be follow-up? And and so how that exactly plays out remains to be seen. Um what we can see is that the low-end consumer is weaker. Um the high-end consumer may well be quite dependent on asset prices. And so if you're going to tell me that the stock market is going to up 20% over the year, we'll probably have an expansion. If you tell me the stock market is going to get out down 20% over the next year, we may well have a recession. >> So, I'm just curious on that point. It's looking like we're going to have our third back-to-back year of double digit returns in the stock market. >> Well, I don't uh I don't know. It's depending on which market you're in, but we have 29th of October. We don't have the 31st of December. Let's talk at noon [laughter] on the 31st of December. But but let's just assume I mean let's just assume that we're hovering around S&P 7,000 by the end of the year. >> How likely is it we'll have a fourth year of powerful returns in >> the only thing we know is that usually what we think is the most important thing for the following year is not the most important thing right uh all this procrastination is almost certainly wrong. So it is the unknown unknown that's going to get us even either on the positive side or on the negative side as uh as you know and many the audience know right we manage over three billion in gold and gold mining uh obviously have been a tremendous year >> oh my god is it three billion now [laughter] >> it's amazing what 40% increase in gold will do for you >> it depends on the day you talk to but we we hit three and a half billion um just before the selloff and And it's uh it's yeah it was two billion in the springtime and about one and a half billion about 13 14 months ago. >> Yeah. >> And so that just shows you the sort of environment that that's that's happening. And uh we do physical gold. We also do the gold miners. The gold miners obviously have been somewhat on fire. And by the way, I'm not giving investment advice here just to to make that clear. I'm just mentioning those things to to give you an indication that these market dynamics have been quite extraordinary. Now, historically when we do very well, the rest of the market doesn't um and I I joke when like when I want to splurge and buy a car or this or that, historically when the price of gold is is very high, I have much more negotiating power um because other buyers are are not there. Whereas currently there is some weakness there and and especially now like next week there's going to be an election and some people are worried not that it's going to make a huge difference but that usually gives a little bit of a vacuum. Um but for for the most part the traditional equity investor is doing is doing quite well and the Paul was asked whether he's concerned about the stock market and of course he gave the only right answer is the Fed's job is not to manage asset prices but the Fed's job is to to think about credit conditions and the framework that he applied to this meeting is not particularly impressive um and uh by saying that oh yeah well in the funding market interest of reserve you might have to stop QT and that's proof that conditions are tight type of thing. That's and of course he knows other metrics as well but it it does matter what he communicates because the market will look at what sort of bias he has and uh but he said as much right he has an easing bias but the rest of his team doesn't so he may or may not be able to push through a cut next time. >> Okay. All right. Um [sighs] well let's see here folks. Uh this is live so I will be taking questions from the live chat. So as you have questions for Axel um feel free to ask them there. Um you mentioned you you mentioned you met both Kevin Worsh and Kevin Hastard. Um as an FYI Axel Judy Shelton um was participating in our conference as well and I asked her you know who would you like to see? >> And and I've talked to her in the past before and I know she she >> pardon me. Well, but but I know she thinks very highly of Kevin Worsh, but she said, "I really like Hastard." Um, and I'm curious, um, you and I have talked more about Worsh than than Hastard. Do you have anything to say to the audience here about your your perceptions of of Hastard and what he cares about? >> Yeah. So, Hasset, um, >> sorry, Hasset. Um well again I I can't talk about the specific conversations I I had with them but uh they the all the folks who are the final round candidates have have a very good set of qualifications kind of just based on on paper but they're very very different. Um and the reason why I've been talking up Kevin Walsh is because he's the real deal in terms of reform within the system. Mhm. >> Um obviously I mean Judy showed that she has some great ideas but they're not going to get implemented. Um and indeed her nomination appeal, right? Kevin Walsh having been a Fed governor and has talked about he resigned. He was part of of of helping um get the economy through the financial crisis. Um but he also said he's only okay with QE as an extremely short-term measure and then he resigned as a Fed governor out of protest that it continued. Um so he said this is only an extreme emergency. Um and you cannot have that that the Fed buys bonds and so he's been ve and he's been very consistent also on on communication strategy. We've been talking about you can't do forward guidance and so forth. And so he wants to do a deep structure reform on on the Fed within the confines of the existing law. >> Mhm. >> Um and so he has a bit of a reputation of being hawkish but in the current environment he by the way his view is that um the way to get through the debt that we have is through a productivity boost. Um but the most important thing is that the Fed is credible. Um and he has a bunch of ideas to do that. Um the other Kevin Kevin Hasset he's obviously um head of the um head of the council of of national economic council and the the risk is that the market perceives that as a political choice and perception matters right he he he may be perfectly qualified >> and uh and personality wise he's different but a very pleasant person pleasant doesn't make you good fetcher necessarily, but the perception may be that he is going to be pursuing the government's agenda. >> That he's a he's a a Trump puppet. Yeah, >> exactly. And even though he is his own person and will do his own thing, that perception is a risk. And then you you have other candidates like Michelle Bowman um who is a Trump appointee but on the on the Fed governor board very qualified or Chris Waller for that matter. I mean Chris Waller who has been in the news a lot. Chris Waller has a very good instinct historically speaking. He is warned about the inflation and then he's been willing to do U-turn. He's willing to adjust. Um, but if we get him, I am certain we will have the same conversations as we're having now because he is so much of a team player that he is not going to change the way that the Fed operates, right? He also likes to talk do forward guidance a little bit. He may be setting an appropriate interest rate. I have no doubt about that. But he will he will be somebody who's not going to change structurally what the Fed is doing. Which means he's going to continue or the Fed is going to continue to be the punching bag of the administration and all the criticism that's there is not going to go away. Um maybe in the short term if he rates cuts rates faster, right? And so all these people can do the job. um within that framework, Kevin Walsh is the one who kind of says reform. We need to reform, but we need prudent way. And I happen to agree with those the big picture issues that he's talking about. >> You know what's interesting is the other person who talks a lot about the need for reform at the Fed is Treasury Secretary Scott Besson, who was kind of leading the uh the talent hunt for Pal's replacement. Um, do you think Worsh has an inside track as a result? >> Well, they they all know each other. They're all buddies, right? I mean, say that they they get pass it of course as well, right? Um, and Bess of course is a candidate as well. He says he's not, but who knows? Similarly, he might be considered a political choice, right? If if he gets it and there's no need for him to get it, then they might as well use Kevin Asset um rather than than Besset. I think that's uh from the administration's point of view, I think that's the um that's the smarter choice. But it's a um the By the way, Hasset is the one guy who's not a billionaire in that clan. Um [laughter] and so he is he has a normal income and a normal normal savings. So he's the most normal of of the of the of the very top contenders. Um and so that um in the Trump world that might matter, might make a difference. I don't know. >> Well, you know, it's so interesting too in in in the world in which we're we're entering. You know, it's almost like there's an appeal for somebody to be so wealthy that they they don't have to tow a line because their job depends on it. You know, I'm I'm not for a government of the oligarchs by any stretch, but I think that's some of the appeal that people have for the Trumps and Bessants and Musks of the world that they're like, "Hey, these guys are able just to do what they feel is the right thing to do." >> And they're outspoken, right? And they do it because I mean, obviously they have an agenda and obviously half the country plus miners will disagree with whatever they're saying. Um but but yes, they're motivated and they can afford to to serve and it's >> Yeah. Well, well, and and importantly on the flip side, you know, people are seeing folks like Bernani and Yellen go from having just been kind of academics who made, you know, a livable salary to all of a sudden getting, you know, board seats at Citadel and getting paid, you know, a million dollars a speech. And so there's a sense that like if you're if you're not independently wealthy and you're sitting in one of these government positions of of power that you're getting influenced by these deep pockets who are promising you riches after your tenure is over. >> Yes. Although I mean there are plenty I have to criticize about both young and banani. I don't think they used their jobs as kind of as jumping boards to to with the intent to get rich and so forth. um you see that in other corners and that risk is of course there in government in general. Um but um they both um also today they're not abusing their their situation and so forth. in their defense. Um but but yes, it does it does if if they're independently wealthy that um then you say, well, why why are they doing this? and uh and those who are favorably inclined say well they just do it because they they have a calling and uh and to the and just kind of broader context I I have gotten to know several of the the Fed presidents over the years some of the governors and whatnot and they're all serving with the best of intentions I mean we are here criticizing what they do but they have their framework and I I've said many times right the the road to hell is paved with good intentions And that's the um and ultimately monetary policy is hostage of fiscal policy. I mean you talk about independence and how that's good and whatnot but when when the fiscal situation is not sustainable at the latest with draggy we learned the central bank will do whatever it takes and so that's that's where we are and that's what needs to be fixed right the but again right Kevin Walsh says QE enticed the government to spend lavishly when you when you push push interest rates down to zero and buy up all the debt that the government issues. You're telling them deficits don't matter. And so again, it's monetary policy plays a crucial role. It's ultimately politicians that make the decisions. But why shouldn't politicians use the Fed to spend more money if that bazooka is at their disposal? And so if the Fed wants to have independence, it goes both ways. The Fed needs to behave. and the Bernani Fed, the Yelen Fed that the Powell Fed has not behaved. They have drawn politics more and and the problem is they don't get it right. A simple thing as paying interest on the reserves is is is not a good wise political choice. >> It's distortive. Yeah. Um so, uh let me ask you this. So, you know, a lot of people are prognosticating on the direction of bond yields next year. And of course the Fed is bringing down the short end of the curve or likely to and folks are hoping that that will then transmit to the longer end of the curve. But one thing that is interesting and I'm curious to hear your thoughts on this is you know the Fed has largely been the Fed was the marginal buyer of US Treasury debt from 2009 to 2022. Right? And then they stepped out of that market. Um, and you know, yields went up. Not not necessarily for that reason, but you know, because inflation, everything else as well. Um, and the Fed has been buying some treasuries uh because it's been managing the decline of its balance sheet, right? And so if on any given period more treasuries roll off than it wants to to stay on its pace, it has to buy some, right? But now it's ending QT and it's now saying, "Look, we're going to let the mortgage debt, the mortgage back securities roll off and we're going to replace them because we're fixing the balance sheet here now at whatever it is, 6 and a half trillion or whatever, right? So the Fed is actually going to be buying materially more Treasury debt than it has been for the past couple years just to keep the balance sheet flat. How much of a difference is that going to make to to yields? Well, the good news is that they're going to reduce their mortgage exposure. Um, I have never been a fan of that. The Fed's central bank's job is monetary policy. Buying mortgage back security is credit policy because you are is fiscal policy because you are allocating money to the mortgage sector. That that is not the Fed's job. And so, it's a step in the right direction. Um, ultimately what will drive things is the next Fed share. how credible the next Fed share will be. And that's where we'll see um we'll see very quickly if let's assume Hasset is going to get it. Um will the bonds sell off or not? If they sell off then it'll be seen as a political play. If they um if it's Kevin Walsh, he blames the power Fed for rates being as high as they are. um saying their own projections suggest that they are not that the the FMC has given up on 2% inflation and he points out that 3% inflation is not 1% higher but 50% higher and he says that's no good and so um the question is whether he can kind of he could give that sort of credibility as to where we need to be. Um there's of course the theory that the the long-term rates are kind of a combination of what the long shorter term rates are over the long run. Um but there's a premium that that's implicit in that. And uh one thing I I have indicated as part of the rates reason the rates are higher is because of tariffs. But if you and because tariffs don't just influence the flow of goods, they influence the the flow of currency. And if we're gonna have all these trade deals, maybe we'll see some smoothing in that. So that could get longer term rates to go lower. So there's there's a lot of ways this can go. It could go in a direction. I mean, it can only go up or down or be stable, but it the the driver I think it does matter of where we'll be. >> Okay. So I get all that answer. I'm just going to ask my question again. um which is with the Fed stepping now more into buying treasuries um how material a factor is that likely to be at just this replacement rate is is it is it marginal or is it pretty material? It's it's marginal only because there's so much supply coming on the market there. There is so much more debt that's going to be issued, so much more and so forth and and so yes, it it it does have it does have an impact, but it's a >> Okay. But until unless the Fed decides it wants to expand its balance sheet by buying treasuries, you think it's marginal. >> Yeah. Yes. And and and for what it's worth, right, all this discussion only matters as long as there's confidence in the Fed. If for whatever reason confidence were lost in the Fed, the Fed isn't big enough um because these the the credit markets are just so huge that this bazooka the Fed has is powerful but it's not omnipotent. Right? There there is and and and I'm not suggesting we lose confidence in the Fed, but you can look at metrics in the credit markets of what the assessment is of the market. I mean, we can be credible of Fed policy, but ultimately, as long as they have the bazooka and as long as the Fed believes and people believe they'll do the right thing, ultimately um the the markets will be contained. But but yes, um these nuances do matter. They matter for mortgages. Um they matter for risk spreads. They matter for all kinds of things. >> Okay, great. All right, I'm going to start getting to um folks's questions here. These are not going to be in any particular order, Axel. Um, this first one though I know has been or variants of it have been getting asked a lot on this channel. Um, I don't know if gold is returning back down to the low 3000s, but the general question is is do we just see a blowoff top in gold and you know pretty much is the run over and isn't only down from here. >> So I don't have a crystal ball. Um, I can give you a few answers. The first answer I'll give you is that historically speculators are integral part of the gold investor. For several years, the speculator was absent and that reduced volatility. The speculator is back and that's a good reason or big reason why the volatility has come back with a vengeance. If you can't stomach the volatility, then you might not want to be in gold or at least not as exposed to gold as you are right now. Um, so that's one answer. The second answer is in the runup to gold. The one thing I did not see was a retail frenzy, which is historically associated with the top retail investors were selling their coins, talking to wholesalers. They're not ordering from the mint um because there's no demand because the the dealers that the coin dealers have enough supply that they get from their customers. And so that is historically at least not a sign of a top. If you look at the gold mining ETFs, um they've had outflows, not been huge. Um on the on the physical ETF side, both in those outflows, but nothing that's historically consistent with a market top. Now on the price action, clearly we we went through the roof, right? And even a very substantial pullback would be very consistent with that. And so that's why I can't give a prediction where it's going to be. The underlying drivers are still there. Um but the the the other thing is um we we're kind of having the end of the month, right? If you are a investment advisor, invest in behalf of clients. Oh, you might as well take some profits and rebalance and and and many I one thing I've seen many institutions have been part of that runup with one way I like to phrase it is the fringe views of the gold bucks are moving more mainstream and because the the the gold market is fairly small it has a disproportionate impact and and and one thing we see is that people that have historically had a 6040 allocation 60% stocks 40% bonds are re-evaluating what they do with the bond portion And obviously it's not all stuffed into bonds and gold is not a bond and recent volatility might give some people second thoughts on that. But that doesn't mean they like bonds and and because these things about deficits being unsustainable. That's not a secret these days. I mean and so the question is only what people are going to do about it and and gold disproportionately benefits from that. >> Yeah. C can I ask you on that? So again at our conference a week ago uh Andy Sheckman, CEO of Miles Franklin, a big uh precious metals gold dealer, in fact a thoughtful money's uh officially endorsed precious metals provider. Um he went through a bunch of quotes, recent quotes from like big Wall Street brands like Morgan Stanley, Bank of America, Goldman Sachs, Jeff. Uh he also mentioned Jeff Goodlock and then soon after he had made this dis he had had this uh discussion with me. Uh I heard Ray Dallio say something very similar and they were basically all saying hey bonds don't seem to have a great future ahead of them over the next decade and there's lots of reasons to be looking at gold. So why not put 15% 20% 25% of your portfolio in gold and take that from the traditional 40% that was bonds. Now you know it would be gargantuan if if that actually happened. But even if singledigit percentages of of capital move from the bond market to the gold market, it would still have a huge impact on price just given the imbalance in size between the two. At least in my opinion. Do you think we will see a continued shift of capital from bonds to precious metals? >> We will see a continued shift out of bonds on an overallocation. And gold is but one of the beneficiaries. I phrase it that way is because if you take central banks, they want to get less dependent on the dollar, but it doesn't mean they stuff all the money into gold, but some of that will go into gold, right? Um, and so, and you're talking to somebody who's who's biased in this because I do have kind of on the the higher end of that in in in my gold exposure. I think for investors, the way I like to frame it and and as you know, I can't give specific invest advice, but I like to look at these things in terms of risk. Can you afford to be in this asset or that asset? And the more cash flow you can generate through your job notably um the more freedom you have to take on risk and as a reminder right it's it's good to have that discussion after a a significant [snorts] kind of sell off in gold talk about significant selloff and and we're at over 3900 on the on the spot price >> um the >> but volatility is something that in the abstract people don't get but people do experience it when it then comes right and so if anybody listening lost sleep over any investment during the recent bout of volatility it means you might have too much allocated to it applies to gold as too much as as to anything else um if you can afford to have a lot of gold by all means be my guest and and have a lot of gold right the other thing is of course the one thing I like to say is you don't need to have the ideal investment strategy, but having a strategy is super helpful because if you don't have any strategy, you're you're bound to lose money, >> right? You're just you're just going blind. Yeah. >> Yeah. But but stress test your strategy. And that imply even when you have much more gold than a typical investor has, um stress test that. Are you comfortable with that? If if price of gold were to plunge, would you be okay with that? Um and uh and while you and I may be thinking that that the price of gold is going to go higher, there's no guarantee that that will happen, right? I mean this these markets go both ways and especially if you're a silver investor. Um while that has of course had a fantastic run, um anybody who has invested in silver long run knows how gut-wrenching that can be. >> Yeah, you have you've got scars if you've been investing in it over a fiveyear period. All right. Um okay, I'm going to keep coming back to these questions. Um, Axel, who has been shortselling paper gold and how much longer can they get away with it before it fails? >> Well, there are plenty of industrial users and other users that that short it um say the the gold bug always thinks that they're special. Every paper market has a derivatives market and uh and there will be short sellers for all kinds of reasons if only to provide liquidity and this and that. I think the the the last bit here before it fails. I think one of the noteworthy things is in this in this spike in volatility is that these markets were behaving orderly. Um, let's keep in mind that there is an underlying physical market and I've talked to some vault managers in recent weeks and they all say that they have been working extremely hard because in the springtime precious metals went to to to the US and now it's been shipped back. Um, they [laughter] I I can't say that they they hate silver, but silver is just volumewise so much more for for the same value. That is just an incredible amount of work. But those markets have been functioning, right? Um, and so it's a we always like to say, "Oh my god, where are these short sellers? When are they going to fail?" Anything with the derivative markets is going to have some challenges at some point. Um, but these markets have been very very orderly in in in this volatility and and and they're not going to go away. I mean, if it makes you happy to talk badly about the short sellers, go for it. But but there are there are legitimate reasons why some people short it. >> Well, sure. I mean, if you're a producer, it's a hedge, right? So, >> yeah. Yeah. So, it's and and of course, many of the the producers these days, if they are not required by their bank, they the investors don't like the hedges and so they may not be, but but yes, there are there are reasons to hedge and some people do it and and then some people just like to provide liquidity and and edge their way in other ways. >> Okay. All right. Um, I'm just going to let you know, Axel, we got four or five minutes left, just given our time constraints. So, feel free to give just short answers to these and we can >> we can let you riff longer on them next time if you feel like it's too unfair. This question is a little loaded. Um, how does the destruction of the dollar play into the crypto market? But then he specifies it by saying in the sense that stable coins are taking over where the dollar dies. Um, I guess I just let you say whatever you want to say about stable coins. >> Stable coins, I mean to the extent they're tied to treasuries, they are tied at the hip and so it's not like it's an added avenue for liquidity. It is uh fantastic news I think for the crypto market to have that bridge of the the stable coins. A lot is happening on the regulatory side. Um the the other part of that on the destruction of the dollar um the yes there is an incentive to de to diversify out of the dollar but there has not been a run of the dollar. We would see far more stress in the market. So, and the the other side of that is that the runup we've seen in precious metals, we have seen without a debasement trade trade in earnest. This may be the beginning of it. And and I I we we talked earlier about all asset prices up. Um this feels like the beginning of inflation is the beginning of the debasement trade. The beginning feels good because everything is doing somewhat okay. It's the advanced stages that we we should be concerned about. >> Yeah. But um there's a lot of skepticism in some reg some regulators regulators about the the stable coins. I don't share them. Um some I I attended a seminar the other day and some academic said, "Oh, this is when banks were able to issue private money. I look at it much more like money market funds. Um and money market funds are in that sense a private form of money and they work perfectly fine. It doesn't mean that they aren't issued and they aren't growing pains by all means. But uh but part of the restriction on paying interest um on many of these stable coins just means that the folks who issue them are making an absolute boatload of money right now. >> Yeah. And that's actually a good way to I mean I'm not an expert on stable coins but the way in which they are currently sort of envisioned to come in and be big incremental new buyers of treasuries. It is like a money market fund right it's it's basically a pool of capital that is allowed to invest in treasuries and that's about it right and and there will be growing pains and maybe there will even be a blow up but I don't think that's going to threaten the financial system or be the end of the dollar for that matter the other way around either. >> Okay. Hey a question on that. You've probably seen the same chart I have that that shows that, you know, or showed about two weeks ago that for the first time in decades, um, foreign central banks held more in gold than they did in US treasuries. Right. Now, that that was a market value weighted >> in dollar terms. In dollar terms, not in ounces, I don't think. >> Right. Right. No. So, it was it was in market val dollar market value terms. Right. >> And so, people have said, "Oh, well, look at that. that that's proof that foreign central banks have stopped buying uh treasuries and and they've they've just they're now pre preferring gold. And I I I think what I've learned is that that chart in particular very driven by the price appreciation in gold, right? And if you look at the ounces bought by world central banks over the past several years, yes, they are increasing but but not that much. Um, so this this this narrative of foreign central banks are dumping treasuries and only going to gold. It's really it's overblown. It's that's being a bit histic. Correct. >> Central banks for the most part are patient buyers, but they're also noteworthy not very price sensitive buyers, right? Once they have made up their mind, they'll do it. >> They come in. And so I think it's a very important component. But anybody who jumps to conclusions is it's mostly just feeding your own narrative. and and and of course I have my own confirmation bias as well when I look at these things but I like to keep an open mind in these things and I just consider them but one of the factors it's a very important factor. >> Yeah. Okay. Similar thing here. Um Johnny asks how can gold go down when the US is collapsing and he he puts a little crazy emoticon there so maybe it's a little tongue and cheek >> tended boom people use leverage and uh when you de lever anything can go down. Now that said, when you have a riskoff environment, often the dollar actually rallies because there's it's a short squeeze. So when emerging markets borrow US dollars, it's a short on the dollar. And when when you have a quote unquote collapse, um that would be a short squeeze on the dollar. Um so but but yes, it can be because in an over liquidation, it can go down. It's usually the and that would be a deflationary environment. It's just that central banks are not going to let it happen. And so it's in that follow-up move that when when precious metals historically benefit. >> Yeah. And I say this as a gold holder and a gold fan, but um you know, no asset goes up in a straight line unbroken. Um any asset can appreciate in price faster uh than either fundamentals can demand or the market can absorb. And so there will always be pullbacks after um you know an asset just runs too far too fast, right? Um secondly, you know, be careful tying this to you a US is collapsing narrative, right? I mean go gold gold can go up under kind of you know the US can still be here in 100 years and gold could still go up for very valid reasons right now. But if if your gold trade is predicated on the US is going to, you know, fail as a country in the next 5 years and the dollar is going to lose world currency status and no one's going to want to own our currency or hold our treasuries. That is a really big ask and I think the odds of that are quite low and that this to n to Axel's point, you just got to be careful about some of these narratives that are swinging around there. Look, again, I'm a gold fan. I I I do own gold to protect against future um depreciation in purchasing power of the currency, but it's for me it's not predicated on the US becoming a failed state in two years. >> Yes. And on that note, just before we wrap up, the Roman Empire took them hundreds of years of decline, right? And and so just keep that in mind that when things are quote unquote bad from one's perspective, it doesn't mean there is an end tomorrow. And what my my framework is that sand has been thrown into this machinery called exorbitant privilege. It's not like a kill switch and trade does that because you're blocking the flow of goods which means the flow of currency is there. The and people say oh the dollar can't stop being the reserve currency because there's no alternative. My view is there's going to be increased fragmentation. There's no winner in that. There's only losers in that. Um, and the the final thing to say is if there were a more extreme scenario, which I certainly don't rule out, keep in mind that policy makers will change the rules of the game. >> Exactly. >> So, you might have the perfect answer and then the rules change and uh and so just be aware of that and let's say um and and obviously we don't know exactly what that's going to be, but we and the finally policy makers are superb can kickers. um they can kick the can down the road and the US with its death of resources is probably a better can kicker than many other countries. >> Yeah. Maybe almost every other and Brent Johnson talks about this a lot which is um look you know uh there's just so many cards the US has left to play that it hasn't. Um, and you always have to ask yourself too, like who, okay, so if if the US isn't if it's going to get supplanted by whom, right? You look around right now, there's not a lot of great alternatives. But I I try to remind people of of the Star Wars trilogy series, right? You had the first you had a New Hope where they they blew up the Death Star. Then what happened, right? The Empire struck back, right? It's it's not just going to roll over. The US is just not going to give up. There's a lot of things it can do to protect its extraordinary privilege, and it will want to. So again, just be mindful of all this. And again, I say this as somebody who thinks in the long arc, fiat currency, including the dollar, is going to lose its purchasing power. There's lots of great reasons to buy this stuff. Just be very careful about putting all your chips on a very low tail event happening very soon. With that, Axel, um I know I got to let you go. Um real quick, for folks that want to follow you and your work in between now and the next time you come here, where should they go? >> American.com is our corporate website and a free newsletter. We have some our gold and gold mining products. You can link from there. I can't discuss them here. Um Axamemer is my Twitter handle where I talk about monetary policy and all kinds of interesting things. >> All right. Fantastic. And if you want to get some help from a professional financial adviser in navigating these uh the road ahead here uh marketwise, uh feel free to talk to one of the firms that thoughtful endorses. to do that. You can just fill out that very short form there at thoughtfulmoney.com. And since we've talked so much about gold, if you would like to better understand the options for buying and storing gold and silver, uh, feel free to read our free guide at thoughtfulmoney.com/gold. Axel, my friend, thanks so much for doing this. Folks, uh, if you enjoyed this, please let Axel know in the live chat or if you're watching the replay in the comments section below. And if you want us to keep doing this in the future, let us know that because we always want to keep doing more of what you want to see us do and less of what you don't want to see us do. But Axel, my friend, this is such a privilege. Thanks so much for continuing to share your thoughts every FOMC release with this audience. >> It's it's great. Thanks. Yeah. Thank you. >> All right. And everybody else, thanks so much for watching.