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Our Currency, Your Problem
Episode 292 • 4th July 2025 • The Jacob Shapiro Podcast • Jacob Shapiro
00:00:00 01:09:44

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Jacob and Rob Larity dive deep into U.S. interest rate dynamics, focusing on Jerome Powell, Trump’s criticism of the Fed, and the potential political and market-driven forces affecting rate decisions. They explore Fed mechanics, historical precedent for presidential interference, and potential appointments like Scott Bessent. They also examine the inflationary impact of trade policy, tariff theatrics, and global economic slowdown signals. The episode concludes with Rob’s investment outlook—bearish on bonds, cautious on equities, and optimistic about international and niche small-cap opportunities.

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Timestamps:

(00:00) - Introduction

(00:13) - Discussion on Interest Rates and Political Interference

(01:29) - Casual Conversation and Personal Updates

(02:54) - Focus on Jerome Powell and Fed Criticism

(09:54) - Mechanics of the Federal Reserve System

(14:55) - Historical Context and Presidential Influence on the Fed

(25:35) - Scott Bessant's Role and Potential Impact

(33:58) - Critique of Janet Yellen's Bond Strategy

(35:02) - Challenges of Managing National Debt

(35:40) - Market Reactions and Yield Predictions

(39:49) - Impact of Tariffs and Trade Deals

(44:26) - Inflation and Economic Indicators

(57:15) - Investment Strategies in Current Market

(01:08:28) - Concluding Thoughts and Recommendations

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Jacob Shapiro Site: jacobshapiro.com

Jacob Shapiro LinkedIn: linkedin.com/in/jacob-l-s-a9337416

Jacob Twitter: x.com/JacobShap

Jacob Shapiro Substack: jashap.substack.com/subscribe

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The Jacob Shapiro Show is produced and edited by Audiographies LLC. More information at audiographies.com

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Jacob Shapiro is a speaker, consultant, author, and researcher covering global politics and affairs, economics, markets, technology, history, and culture. He speaks to audiences of all sizes around the world, helps global multinationals make strategic decisions about political risks and opportunities, and works directly with investors to grow and protect their assets in today’s volatile global environment. His insights help audiences across industries like finance, agriculture, and energy make sense of the world.

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This podcast uses the following third-party services for analysis:

Podtrac - https://analytics.podtrac.com/privacy-policy-gdrp

Transcripts

Jacob Shapiro:

Hello, listeners.

Jacob Shapiro:

Welcome to another episode of the Jacob Shapiro podcast.

Jacob Shapiro:

Um, this podcast got a little wonky.

Jacob Shapiro:

Uh, it's Rob, coming on for our biweekly chats.

Jacob Shapiro:

Uh, president Trump has been talking a lot about interest rates and even more

Jacob Shapiro:

about j Jerome Powell, calling him a stupid person, a bad person pushing

Jacob Shapiro:

for him to reduce interest rates, and he's, he gets to replace Powell.

Jacob Shapiro:

Um, the, the new Fed chair will be in place by next May.

Jacob Shapiro:

So I wanted to start here and ask Rob a simple question, which

Jacob Shapiro:

is, which way are interest rates going based on all these things?

Jacob Shapiro:

And is this an exceptional level of political interference or not?

Jacob Shapiro:

And of course, Rob, in classic faction, like, said, okay, well we gotta

Jacob Shapiro:

talk about all these other things if we're gonna answer that question.

Jacob Shapiro:

So our goal in this podcast was to try and talk about, okay,

Jacob Shapiro:

what's happening at the Fed?

Jacob Shapiro:

What's happening with Jerome Powell?

Jacob Shapiro:

What's happening with interest rates?

Jacob Shapiro:

And we try and tie it in the end to something very, very specific.

Jacob Shapiro:

'cause I think sometimes, like, you know, the podcast is super interesting

Jacob Shapiro:

and we always wanna be interesting and entertaining, but we also want

Jacob Shapiro:

to be somewhat functional and useful.

Jacob Shapiro:

So at the end we try and take a step back and say, okay, in our, in our

Jacob Shapiro:

lives, what we're doing in our day jobs, how are we translating this?

Jacob Shapiro:

And so if that's useful, great.

Jacob Shapiro:

If you wanna talk about anything you heard on the podcast.

Jacob Shapiro:

You can email me at jacob@jacobshapiro.com.

Jacob Shapiro:

Um, otherwise, uh, yeah, that's just about it.

Jacob Shapiro:

If you like the wonk, get ready for it.

Jacob Shapiro:

Uh, if the wonk scares you away, hey, I've been told that my voice

Jacob Shapiro:

is pleasant to fall asleep too, so, you know, it's a multipurpose tool.

Jacob Shapiro:

Cheers, and see you out.

Jacob Shapiro:

All right, listeners, here we are.

Jacob Shapiro:

Uh, I'm feeling refreshed compared to where I was, uh, last time we spoke.

Jacob Shapiro:

Rob, I hope you're feeling good.

Rob Larity:

Uh, it was about 102 degrees Fahrenheit here yesterday, but other than

Rob Larity:

that, uh, things are, things are good.

Jacob Shapiro:

I saw that.

Jacob Shapiro:

Uh, I, I can't say I'm that sym, but you know, I can't say I'm that

Jacob Shapiro:

sympathetic, but I'm also in New Orleans, so I'm literally just

Jacob Shapiro:

walking from, you know, icebox room to icebox room in the air conditioning.

Jacob Shapiro:

Um, but yeah, it's, it's no fun.

Rob Larity:

It's no fun and there's no air conditioning, but you'd be

Rob Larity:

surprised how old buildings seem to.

Rob Larity:

Especially old stone buildings seem to retain their

Jacob Shapiro:

coolness pretty darn well, actually.

Jacob Shapiro:

Oh no, that, that's true.

Jacob Shapiro:

Like we used to build, like, you know, people used to build houses

Jacob Shapiro:

to accommodate like the weather.

Jacob Shapiro:

Like our, our house in New Orleans was theoretically built in the eight, in 1853.

Jacob Shapiro:

Um, and probably when it was designed it was really good, but then like people

Jacob Shapiro:

came in and did all sorts of other stuff.

Jacob Shapiro:

So now you need Central air to like, cool it off.

Jacob Shapiro:

But like, we've forgotten all those things and, and you know,

Jacob Shapiro:

air, air conditioning is a great, it's, it's one of those things.

Jacob Shapiro:

I was joking actually with some of our friends on a call yesterday, like, uh, you

Jacob Shapiro:

know, I jack it down to 66 every night.

Jacob Shapiro:

I'm spoiled.

Jacob Shapiro:

I can't sleep unless I'm literally freezing under the covers right now.

Jacob Shapiro:

So anyway, but you, you guys are not here to listen to me

Jacob Shapiro:

talk about my sleep habits.

Jacob Shapiro:

Um, Iran, Israel war over, uh, out of the news cycle has

Jacob Shapiro:

nothing to do with anything.

Jacob Shapiro:

Who knows what's next?

Jacob Shapiro:

Is it gonna be tariffs?

Jacob Shapiro:

Is it gonna be another war?

Jacob Shapiro:

Is it gonna be something else?

Jacob Shapiro:

Um, Rob and I wanted to zero in, I. Though on something that I know is

Jacob Shapiro:

near and dear to your heart, Rob.

Jacob Shapiro:

'cause uh, it's been a tough couple of months to be Jerome Powell.

Jacob Shapiro:

He's sort of getting, it's not quite the fauci treatment, but we're starting

Jacob Shapiro:

to get there with how much flack he is taking, um, from President Trump.

Jacob Shapiro:

President Trump sent him a handwritten note, uh, with a bunch of World

Jacob Shapiro:

Central Bank rates, uh, printed out.

Jacob Shapiro:

And I mean, his, his, uh, his handwriting is so strange, but here I'm just

Jacob Shapiro:

gonna read it for the listeners.

Jacob Shapiro:

Jerome, you are as usual, too late.

Jacob Shapiro:

You have cost the United States a fortune and continue to do so.

Jacob Shapiro:

You should lower the rate by a lot, hundreds of billions of dollars being

Jacob Shapiro:

lost, no inflation, Donald J. Trump, and then an arrow saying, you know, United

Jacob Shapiro:

States has 4.5%, uh, interest rates.

Jacob Shapiro:

He, he wants it to be around where Switzerland and Cambodia

Jacob Shapiro:

are between 0.25% and 0.45%.

Jacob Shapiro:

Um, I'm sorry, is there, I just

Rob Larity:

say Switzerland and Cambodia.

Jacob Shapiro:

Yeah, that's, those are the, those are the two lows.

Rob Larity:

Those are the, those are the bookends of stability.

Rob Larity:

He's looking to, uh, to emulate.

Rob Larity:

I gotcha.

Jacob Shapiro:

Well, I should say his bookends, uh, those are the first two.

Jacob Shapiro:

His bookends are Switzerland and Thailand, and then in the sandwiches, Cambodia,

Jacob Shapiro:

Japan, Denmark, and the Seychelles.

Jacob Shapiro:

Uh, so there's, if we're, if we're being accurate, but I think your

Jacob Shapiro:

point, um, is still the same.

Jacob Shapiro:

Uh, it's much nicer than what President Trump has said recently to Powell.

Jacob Shapiro:

He has called him in public, a fool, a numb skull, and a stupid person.

Jacob Shapiro:

Those were all direct quotes from the president of the United States.

Jacob Shapiro:

Um, he is railing against, um, the Fed for basically costing Americans

Jacob Shapiro:

lots of money, everything else.

Jacob Shapiro:

And so the reason I wanted to talk about this is because, um, you

Jacob Shapiro:

know, Trump lo loved to, to go after fed chairs even before, uh, he was

Jacob Shapiro:

president and he advocated the exact opposite of his current position.

Jacob Shapiro:

Like he's willing to go all over the place.

Jacob Shapiro:

Um, but he's also threatened.

Jacob Shapiro:

A, to get rid of Powell, which seems to me to be pretty impossible.

Jacob Shapiro:

He would've probably done it already if he could have.

Jacob Shapiro:

And B, he has said no.

Jacob Shapiro:

Well, the next Fed chair who I get to appoint in a couple of months, like

Jacob Shapiro:

they are gonna be different and they are gonna cut rates and I'm gonna

Jacob Shapiro:

pick someone who is gonna cut rates.

Jacob Shapiro:

And I had a couple different questions I wanted to throw at you, Rob.

Jacob Shapiro:

I wanted to talk about whether this is unprecedented or whether

Jacob Shapiro:

it's normal for this level of con.

Jacob Shapiro:

Split between a Fed chair and the president.

Jacob Shapiro:

I wanted to talk about the, you know, the fed board of governors because this is not

Jacob Shapiro:

just the fed chair waves a magic wand and gets to do something with interest rates.

Jacob Shapiro:

So I think there's a sort of more complex conversation to have there.

Jacob Shapiro:

Um, and then there's just the fact that we're having the conversation,

Jacob Shapiro:

which from a market sentiment perspective, is gonna move things.

Jacob Shapiro:

Um, but I thought maybe we should start at just the highest level

Jacob Shapiro:

and put ourselves on the spot.

Jacob Shapiro:

Because the real question is, you know, we're sitting here July

Jacob Shapiro:

2nd, we're recording, we'll get this out in the next day or two.

Jacob Shapiro:

Um, you know, where are interest rates going to be down in six to 12 months?

Jacob Shapiro:

And are they going to be down because of pressure from the White House?

Jacob Shapiro:

Um, or are they gonna be down because of the market?

Jacob Shapiro:

Or do you think they're like gonna be sort of steady because like

Jacob Shapiro:

that's the trillion dollar question.

Jacob Shapiro:

And then maybe we can back into some of the nerdy stuff about the Fed.

Jacob Shapiro:

And I expect that you're gonna stick up for your boy Jerome.

Jacob Shapiro:

'cause you said very nice things about him and he's really getting, like, he's

Jacob Shapiro:

really taking it on the chin unfairly.

Rob Larity:

I love Jerome.

Rob Larity:

I, I would stand up for you, Jerome, against Donald Trump.

Rob Larity:

If you need me, I'm in your corner.

Rob Larity:

Uh, where do

Jacob Shapiro:

you want to begin with that series of questions?

Jacob Shapiro:

What do you think I wanna begin with?

Jacob Shapiro:

Do you think, like on December 31st or whenever Jerome's, uh, you know, term

Jacob Shapiro:

ends, um, like do you think interest rates are going lower from here?

Jacob Shapiro:

Like do you think by the end of the year or by this time next year,

Jacob Shapiro:

the United States will be closer to Denmark and Switzerland in that list?

Jacob Shapiro:

Um, or not?

Rob Larity:

Um, this is another one of those things where really having clear

Rob Larity:

definitions is so key because lower by how much over what time period.

Rob Larity:

Like we're talking about a very complex system of yield curve and doing lots of

Rob Larity:

different things in different places.

Rob Larity:

If you just want to talk about the short end of the curve, I mean the.

Rob Larity:

The consensus is that there's going to be meaningful rate cuts

Rob Larity:

in the coming six to eight months.

Rob Larity:

Um, I think it's hard to ignore that consensus.

Rob Larity:

I would fade that consensus a little bit.

Rob Larity:

And that's sort of my view, just looking at what's happening with the macro.

Rob Larity:

Like there is a macro slowdown happening and I don't wanna talk about macro

Rob Larity:

'cause this is, this is a different kind of conversation, but just, just

Rob Larity:

to put a pin in that like mm-hmm.

Rob Larity:

The macro is slowing noticeably and all else equal, that is likely to provide some

Rob Larity:

scope for at least one or two rate cuts.

Rob Larity:

It's, you know, how that plays out is hard to, to see the, the thing

Rob Larity:

that really matters that people care about is what is the sort of

Rob Larity:

longer term, average level of rates.

Rob Larity:

Mm-hmm.

Rob Larity:

And that is the important thing.

Rob Larity:

And, and the takeaway there, I think pretty clearly.

Rob Larity:

I have a pretty, you know, good amount of conviction on this thesis

Rob Larity:

is that the average level of rates is going to average significantly higher

Rob Larity:

than it did in the pre COVID period.

Rob Larity:

Um, that we're heading out of a fundamentally deflationary environment,

Rob Larity:

which has been really in place since the telecom bubble of 2001, 2002, and that

Rob Larity:

that environment has changed and now we're entering a period where the, the

Rob Larity:

biggest constraints on the economy is not sopping up excess capacity, excess

Rob Larity:

demand, or excess supply, excuse me, at the margin, it's about overcoming

Rob Larity:

bottlenecks and shortages and supply side constraints, whether it be labor

Rob Larity:

or supply chain or all these things.

Rob Larity:

All of that suggests, and especially if you look at immigration, demographics,

Rob Larity:

labor force participation rates, blah, blah, blah, blah, blah, like

Rob Larity:

there's just no way We're going back to the rate situation of 2018.

Rob Larity:

Uh, of, of Trump first term.

Rob Larity:

Um, that seems pretty clear.

Rob Larity:

So if that was, is what Trump is hoping for, that is likely

Rob Larity:

to be very much disappointed.

Jacob Shapiro:

Yeah.

Jacob Shapiro:

I mean, you know, if, if you take him at his word in this letter, like us interest

Jacob Shapiro:

rates are 4.5% and he wants them down, let's give him the benefit of the doubt.

Jacob Shapiro:

Let's take the highest rate on his, uh, you know, where they

Jacob Shapiro:

should be Thailand at 1.75%.

Jacob Shapiro:

I mean, that's what, 300, like 300 a, 300 B like cut.

Jacob Shapiro:

Like, is that like, that's not something that happens unless

Jacob Shapiro:

like the sky is falling right.

Rob Larity:

Yeah, there's, there's not gonna be a 300 basis point cut.

Rob Larity:

Like, I'll just, that, uh, like, I'll just say that flat out.

Rob Larity:

Um, and over the next

Jacob Shapiro:

12 months, they're not gonna cut it.

Jacob Shapiro:

Like, uh, you know, to that point, like, I, I guess they can't even do

Jacob Shapiro:

that because like, like the new Fed chair is gonna take over in May, and

Jacob Shapiro:

you would think that you'd have to have somebody in there at least pushing that

Jacob Shapiro:

if you were gonna get anywhere there.

Jacob Shapiro:

But like, you're basically saying like, yes, you might get some cuts over the

Jacob Shapiro:

next eight to 12 months, but that they'll probably be like 25 basis point cuts,

Jacob Shapiro:

like, probably nothing bigger than that.

Jacob Shapiro:

Right.

Jacob Shapiro:

Is that what you're saying?

Rob Larity:

Well, I think this is opening up into the bigger and more interesting

Rob Larity:

conversation, which is a, how is the economy fundamentally setting up?

Rob Larity:

Mm-hmm.

Rob Larity:

Which we started talking about.

Rob Larity:

But then B, what is the Federal Reserve mechanism?

Rob Larity:

Like, how do the personalities interact?

Rob Larity:

How does that institution work?

Rob Larity:

You know, how has that worked historically?

Rob Larity:

How is it different now or not different now?

Rob Larity:

And the short version of the answer is I don't think it's fundamentally different

Rob Larity:

from what we've seen in the past.

Rob Larity:

So we can talk about that.

Rob Larity:

Um, but that's gonna be what answers that big question.

Rob Larity:

It's, it's, uh, it's a, it's understanding what are the parameters of this model

Rob Larity:

that we're building and then people can sort of make their own decisions,

Rob Larity:

rather than me saying, oh yeah, this is not gonna happen or it is gonna happen.

Rob Larity:

Um, 'cause there's a lot of moving parts, you know, the economy being

Rob Larity:

the one that's the hardest to gauge.

Rob Larity:

Like, where are we gonna be 12 months from now?

Rob Larity:

I don't know.

Rob Larity:

Like, I could look at what's happening right now.

Rob Larity:

I could see the different sort of shifting gears moving in different directions.

Rob Larity:

Like right now it looks like we're having a meaningful slowdown,

Rob Larity:

but not some massive depression.

Rob Larity:

Um, or massive, you know, really severe recession that

Rob Larity:

that's just not on the horizon.

Rob Larity:

Um, things can change, but that's the status quo right now.

Rob Larity:

So, um, anyway, it's worth getting into each of those moving

Rob Larity:

parts and talking about them.

Rob Larity:

'cause that's really what's gonna dictate the big picture stuff here.

Jacob Shapiro:

Okay, well let's start with the mechanics and then let's

Jacob Shapiro:

start about the economy and see if we can't land the plane from there.

Jacob Shapiro:

Um, so let's talk about the mechanics first of all.

Jacob Shapiro:

So it's not the Fed share who sets interest rates?

Jacob Shapiro:

You know, those who are market fluent who listen to this podcast will know

Jacob Shapiro:

that, but a good chunk of you are not.

Jacob Shapiro:

So let's talk a little bit just, you know, very black and white, um,

Jacob Shapiro:

who actually sets interest rates.

Jacob Shapiro:

Um, Rob, do you want to sort of lay it out very simply?

Jacob Shapiro:

Um, I know you've done the background on this, so I'll let you go into the details.

Jacob Shapiro:

Alright.

Jacob Shapiro:

Um, well do double check me 'cause this is not my wheelhouse here.

Jacob Shapiro:

But, so my understanding here is that there is the Federal open Market

Jacob Shapiro:

committee, which consists of 12 members.

Jacob Shapiro:

Um, it's the seven members of the board of Governors of the, um, federal

Jacob Shapiro:

Reserve System, along with five regional fed presidents who were then

Jacob Shapiro:

selected by their own boards and there 12 regional fed presidents overall.

Jacob Shapiro:

So they, they.

Jacob Shapiro:

Rotate in and out, um, each year of this open market

Jacob Shapiro:

committee as voters in general.

Jacob Shapiro:

Now the Fed chair is one of these members, so he's sort of a first, um,

Jacob Shapiro:

he or she is a first among equals.

Jacob Shapiro:

Um, and based on what I've been able to understand, the Fed chair has a lot of,

Jacob Shapiro:

um, role in building consensus and in convincing other people and trying to

Jacob Shapiro:

tell them, you know, this is the strategy, this is where we need to move forward.

Jacob Shapiro:

But it's not like the fed chair can just say, Hey, you

Jacob Shapiro:

11 others, like I am the king.

Jacob Shapiro:

You have to do what I'm saying.

Jacob Shapiro:

We're all, uh, gonna vote sort of in general.

Jacob Shapiro:

And the way that the math breaks down right now is that there are only two

Jacob Shapiro:

people on the federal open market committees, 12 voters who have shifted

Jacob Shapiro:

towards possibly cutting rates soon.

Jacob Shapiro:

Uh, my understanding is also that President Trump.

Jacob Shapiro:

Has basically appointed those two people.

Jacob Shapiro:

Those are his two appointees.

Jacob Shapiro:

He'll have one more appointment to make coming up in January.

Jacob Shapiro:

Then he's gotta pick his Fed chair replacement.

Jacob Shapiro:

So theoretically he could get to four, maybe you could get maybe

Jacob Shapiro:

to five appointments by the end of his term presidential term.

Jacob Shapiro:

But realistically speaking, we're talking by next May four out of

Jacob Shapiro:

the 12 being people who would be loyal to President Trump.

Jacob Shapiro:

That's not nothing, especially if you're dealing with a consensus making

Jacob Shapiro:

body and one where political pressure can move the needle meaningfully.

Jacob Shapiro:

But it's not like President Trump is gonna replace your own Powell

Jacob Shapiro:

and the next day, like the Fed chair is gonna do whatever he's wanting.

Jacob Shapiro:

He is gonna have to build consensus.

Jacob Shapiro:

And then as, as you said, like all of these governors are watching

Jacob Shapiro:

the economy and they're making decisions, um, sort of based on that.

Jacob Shapiro:

Did, did I do a good job that, that, that that was the simplest

Jacob Shapiro:

way I could explain it to myself?

Rob Larity:

Yeah, I, I think that's totally right.

Rob Larity:

I think another way to, to approach.

Rob Larity:

The yeshu is to point out that America does not have a central bank.

Rob Larity:

Like it's easy to forget that you say, oh, the Fed, the Fed, the

Rob Larity:

Fed, you, you're picturing like this building with all these people

Rob Larity:

on their, like that's the bank.

Rob Larity:

No, there is no, there's a, a network of banks and the New York Fed is sort of

Rob Larity:

the first among equals and they're the ones that actually implement, you know,

Rob Larity:

primarily the policies that are enacted.

Rob Larity:

But the Fed board is sort of like the meeting of the five

Rob Larity:

families and the Godfather.

Rob Larity:

Mm-hmm.

Rob Larity:

Like there is no, there is no central thing.

Rob Larity:

It is a federation of decentralized, uh, independent institutions.

Rob Larity:

So if you had a central bank, it'd be much easier to be like,

Rob Larity:

Hey, click, let's reduce rates.

Rob Larity:

'cause we replaced the guy or the woman who's in charge of the Central

Rob Larity:

bank and the Federal Reserve system is, is really quite unique in that

Rob Larity:

it does not work like that at all.

Rob Larity:

Um, so yeah, that's, that's the

Jacob Shapiro:

key thing.

Jacob Shapiro:

You, you hit the nail on the head.

Jacob Shapiro:

Yeah.

Jacob Shapiro:

So that's the mechanics of it.

Jacob Shapiro:

And then here, here's where I was really gonna lean on you,

Jacob Shapiro:

which is, is this unprecedented?

Jacob Shapiro:

Because like, it seems to me that there has been conflict in the past between

Jacob Shapiro:

fed chairs and president, like the president's, the, the historical example

Jacob Shapiro:

that was easiest to pull from was Richard Nixon clashing with, um, his Fed share,

Jacob Shapiro:

whose name just went out of my mind, but I'm sure you'll, you'll help me.

Jacob Shapiro:

Um, Chesney, yeah, there you go.

Jacob Shapiro:

Because he was trying to keep rates, uh, low ahead of the election and was dealing

Jacob Shapiro:

with high inflation and things like that.

Jacob Shapiro:

Um, but it does, well, I don't know, like is it different?

Jacob Shapiro:

Um, and this is actually a question about Trump in general.

Jacob Shapiro:

Is the pressure that he's putting on the system different than any

Jacob Shapiro:

other like US president has done?

Jacob Shapiro:

Because all US presidents like appoint their loyalists, um, you

Jacob Shapiro:

know, since Andrew Jackson, like it's to the victor goes the spoils and

Jacob Shapiro:

putting people in positions of power.

Jacob Shapiro:

Um, but President Trump also does seem to have a real.

Jacob Shapiro:

Uh, at least one of the differences in his second term versus his first term is

Jacob Shapiro:

he's not really brooking disagreement.

Jacob Shapiro:

Like there's no James Mattis or Rex Tillerson or HR McMaster among his

Jacob Shapiro:

selections, he's picking people who toe the line and people who don't toe

Jacob Shapiro:

the line very quickly find themselves no longer, uh, in the administration.

Jacob Shapiro:

Um, and so, you know, that's obviously his cabinet picks and things like that,

Jacob Shapiro:

but you can feel him trying to push the same way or trying to treat the,

Jacob Shapiro:

the open market committee the same way that he's treating his cabinet.

Jacob Shapiro:

And maybe that won't work or not, but at least from where you're sitting, if

Jacob Shapiro:

we're putting on, you know, the sober glasses is, is he pushing the boundaries?

Jacob Shapiro:

Is he just like, is he in unprecedented territory, he's just really aggressive

Jacob Shapiro:

about it and he's got a, a core style?

Jacob Shapiro:

Or is he doing something that is meaningfully different?

Rob Larity:

It's a really interesting question because it gets to, um,

Rob Larity:

it gets to sort of one of the key like aspects of this institution and,

Rob Larity:

and the short version is my answer is gonna be, no, it's not fundamentally

Rob Larity:

different from what we've seen.

Rob Larity:

Actually many times in the past, and we can talk about that.

Rob Larity:

Um, I think the style is different.

Rob Larity:

I mean, it's Donald Trump after all, but in an administration that has killed so

Rob Larity:

many sort of sacred things and, you know, broken boundaries in all senses of the

Rob Larity:

word, this is not breaking boundaries.

Rob Larity:

And I think part of the reason for that is because the Fed is such a, an

Rob Larity:

obvious target for, um, the legislative branch and the executive branch.

Rob Larity:

Like this is something that's come up many times in the past.

Rob Larity:

It's something that's built deliberately into the Fed's structure to resist this

Rob Larity:

and to try to maintain its independence.

Rob Larity:

So what he's doing right now is not really fundamentally different

Rob Larity:

from what Richard Nixon did.

Rob Larity:

Um, you know, even, even more so I think a, a more blatant example

Rob Larity:

would be, um, one of my, uh, my least favorite presidents, uh, Harry Truman.

Rob Larity:

Um, you know, during the, the very famous period during the, the Korean War when the

Rob Larity:

1951 Fed, uh, act was updated to really formalize the role of the Fed after he

Rob Larity:

basically tried to do what Trump is doing.

Rob Larity:

And, um, and you know, that's a very fascinating story in itself,

Rob Larity:

but it's not unprecedented to try to do this sort of interference.

Rob Larity:

I think the thing to watch for that will be interesting is if he tries to go in

Rob Larity:

an sort of extra legal way to interfere because all of these barriers are that you

Rob Larity:

just described or placed in front of him.

Rob Larity:

Like he really can't force anything.

Rob Larity:

The Fed is gonna do what it wants to do, what it thinks is right.

Rob Larity:

And even if you put in sort of.

Rob Larity:

People who lean dovish, when you're in that committee environment, it's very

Rob Larity:

difficult if the data is obviously pointing, you know, north and you're

Rob Larity:

saying, oh yeah, south, south, south.

Rob Larity:

Like those are very smart people.

Rob Larity:

You're in a, you're in a room, you know, hashing it out.

Rob Larity:

It's not so easy to just appoint your lackies and have them do

Rob Larity:

exactly what you wanna do, you know, irrespective of what the reality is.

Rob Larity:

And that's what has been shown in the past.

Rob Larity:

Like, uh, Truman appointed his lackey, so to speak, who turned

Rob Larity:

out to not listen to him at all.

Rob Larity:

And actually, very famously, like years later, Truman saw, uh, it

Rob Larity:

was actually William McChesney Martin who later clashed with, with

Rob Larity:

Nixon, but he saw Chesney McChesney Martin on the streets of New York.

Rob Larity:

And reportedly he just saw him and said, traitor.

Rob Larity:

So, you know, there's a lot of drama and stuff like that in the past.

Rob Larity:

So it's not coming out of left field, this sort of thing.

Jacob Shapiro:

Yeah.

Jacob Shapiro:

Um.

Jacob Shapiro:

And, and what about, and so I've seen a couple, or when I was reading about this,

Jacob Shapiro:

and obviously you've studied the, the Federal Reserve system longer than I have.

Jacob Shapiro:

There was some disagreement about the role of the Fed chair, or at least when I was

Jacob Shapiro:

doing reading, like some people, or at least some folks that I were reading, was

Jacob Shapiro:

saying, you know what, like this is more.

Jacob Shapiro:

Of a consensus building committee.

Jacob Shapiro:

They're gonna be driven by market data, they're gonna be

Jacob Shapiro:

driven by all these other things.

Jacob Shapiro:

They're insulated from politics.

Jacob Shapiro:

And then there was another camp that was sort of like, well actually the fed

Jacob Shapiro:

chairs usually gets what he or she wants.

Jacob Shapiro:

Now, sometimes they can't, like there was one example that was quoted about

Jacob Shapiro:

Alan Greenspan changing his vote at a meeting after he ended up in the

Jacob Shapiro:

minority, because he didn't want to have the chair going against what

Jacob Shapiro:

the rest of the committee decided.

Jacob Shapiro:

But the, the greater point being that the chair does have a significant

Jacob Shapiro:

capacity to influence the decision making of other people on the committee.

Jacob Shapiro:

And I'm wondering what that tipping balance point is.

Jacob Shapiro:

'cause if you already have two Trump appointees, you're gonna get

Jacob Shapiro:

a third and then you get a chair.

Jacob Shapiro:

And if you get a chair who's coming in there, you know,

Jacob Shapiro:

saying, Hey, we gotta cut rates.

Jacob Shapiro:

We gotta cut rates, we gotta cut rates, we're gonna cut rates and spends all of

Jacob Shapiro:

their energy like muscling and trying to convince them and massaging data and.

Jacob Shapiro:

We've already seen from this administration, by the way, they're

Jacob Shapiro:

not, they're not afraid to play fast and loose with data and to strip things

Jacob Shapiro:

out of CPIs and to put things in.

Jacob Shapiro:

Like, um, so if we're thinking just about the role of the Fed chair, like

Jacob Shapiro:

where, what's the right way to gauge the importance of the Fed Chair, um,

Jacob Shapiro:

decision that Trump is gonna make?

Rob Larity:

I think you have to, you have to widen the scope of that, and you have

Rob Larity:

to talk about the mandate of the Fed, and then within that mandate, the decision

Rob Larity:

making structure of the committee.

Rob Larity:

Right.

Rob Larity:

Because just to set, like the historical stage here.

Jacob Shapiro:

Mm-hmm.

Rob Larity:

Originally, the Fed's mandate was not what it is today.

Rob Larity:

Like the Fed's mandate today is to balance, you know, the purchasing

Rob Larity:

power of the dollar IE, you know, beat inflation and unemployment.

Rob Larity:

That's really only been the case since this series of events in 1951.

Rob Larity:

Prior to that, the Fed was really put in place to sort of lubricate the functioning

Rob Larity:

of capitalism because we had all of these crises, the 1907 panic, you know,

Rob Larity:

like the economy was so immature at that point, like money would get super

Rob Larity:

tight like right before the harvest.

Rob Larity:

Like that's how, you know, old school things were.

Rob Larity:

And then as World War II was the thing that really changed everything and that

Rob Larity:

series of events where, you know, the question of pegging rates or not and

Rob Larity:

what constitutes like an emergency that you have to throw long-term thinking

Rob Larity:

out of the window in order to meet, you know, in Truman saying, well, the Korean

Rob Larity:

War, this is an existential crisis.

Rob Larity:

We need to peg rates.

Rob Larity:

You're not doing your patriotic duty, blah, blah, blah, blah, blah.

Rob Larity:

Um, that's what led to the, the sort of solidification of the current

Rob Larity:

mandate, which is that balance between inflation and unemployment.

Rob Larity:

So that's the mandate and that's what everyone knows, like

Rob Larity:

that's ingrained in their DNA.

Rob Larity:

All of these people who are on the board.

Rob Larity:

And then within that you have like, I mean, anyone who's been on a

Rob Larity:

committee or some academic committee like these are a bunch of nerds.

Rob Larity:

They're a bunch of like banky, they're like, it is not

Rob Larity:

really like bankers anymore.

Rob Larity:

It's like economic, academic nerds mostly who take up these positions.

Rob Larity:

So, you know, just picture Princeton University and how some

Rob Larity:

committee would work on Princeton.

Rob Larity:

Yes, the chairman of the committee has a lot of influence and they're

Rob Larity:

sort of leading the conversation and they can shift things in one

Rob Larity:

direction or another like clearly.

Rob Larity:

But at the same time, it's really hard in an environment like that where

Rob Larity:

these people like this is their life.

Rob Larity:

They're not politicians, they're not elected.

Rob Larity:

Like this is the apex of their career to, to do this job.

Rob Larity:

It's very hard to get them to like just fall in line and be like, well, you

Rob Larity:

know, black is white and white is black.

Rob Larity:

Like meaning an interpretation of the numbers in front of them.

Rob Larity:

Like when the examples you're talking about like with Greenspan

Rob Larity:

or like where a Fed chairman has been able to really kind of shift

Rob Larity:

things in one direction or another.

Rob Larity:

It's been sort of like things are open to interpretation.

Rob Larity:

Like just take Arthur Burns like perfect example.

Rob Larity:

He was the fed chair throughout, uh, the majority of the 1970s.

Rob Larity:

He was Nixon's guy, so Nixon brought him in and famously

Rob Larity:

everyone shits on Arthur Burns.

Rob Larity:

Like, oh, you know, he was a dove and he caused this inflation.

Rob Larity:

But it wasn't like that.

Rob Larity:

Everyone understood, oh, this is Nixon's man, he's gonna cut

Rob Larity:

rates 'cause Nixon wants it.

Rob Larity:

Like Arthur Burns had a very compelling like mechanism and understanding

Rob Larity:

of why he thought raising rates wouldn't have been productive.

Rob Larity:

And how that was really important.

Rob Larity:

Like the economy was just had to run hot 'cause all the baby boomers

Rob Larity:

were entering the workforce.

Rob Larity:

You know, you had just shortages of energy, just things that like

Rob Larity:

interest rates couldn't fix.

Rob Larity:

And his view at the time, which I think has been sort of justified

Rob Larity:

in hindsight by a lot of people was that, you know, this is probably

Rob Larity:

the right level of interest rates.

Rob Larity:

Like we just can't do anything about this inflation and this is the optimal level.

Rob Larity:

So what I'm saying is like, that was a valid argument.

Rob Larity:

That was his view of like a very complicated matter and he just

Rob Larity:

happened to fall on like, you know, one side of the argument versus

Rob Larity:

other people on the other side.

Rob Larity:

Whereas like what you're describing, you can't just come in and just bludge in your

Rob Larity:

way with no good argument to be like, well let's cut interest rates 300 basis points.

Rob Larity:

Why?

Rob Larity:

Well, you know, room full of nerds with charts.

Rob Larity:

Uh, 'cause I think we should do it.

Rob Larity:

You know, like that's a, it sounds easier in, in theory

Rob Larity:

than it would be in practice.

Jacob Shapiro:

Yeah.

Jacob Shapiro:

Okay.

Jacob Shapiro:

Well, sort of last question maybe on, on mechanics, and this starts

Jacob Shapiro:

to give way into, um, the politics that we're talking about here.

Jacob Shapiro:

You know, Scott Bessant, another fellow that you like, who I

Jacob Shapiro:

confess I'm less impressed with.

Jacob Shapiro:

Um, uh, currently the Secretary of the Treasury.

Jacob Shapiro:

Um.

Jacob Shapiro:

He has also been publicly criticizing the Fed chair.

Jacob Shapiro:

So I wanted to ask, first of all, is it normal for that to happen?

Jacob Shapiro:

And then Besson is also being floated as one of the names that will replace

Jacob Shapiro:

Jerome Powell and Besson has been fairly open about like he's happy

Jacob Shapiro:

to serve wherever Trump wants him, which to me says, yeah, I'll do that

Jacob Shapiro:

job if you want me to do that job.

Jacob Shapiro:

He'd probably like that job better than the job that he's in.

Jacob Shapiro:

I'll, I'll quote him just last week, he said, federal Reserve policymakers

Jacob Shapiro:

seem a little frozen at the wheel with regard to deciding on rates.

Jacob Shapiro:

My worry here is that having fallen down on the American people in 2022,

Jacob Shapiro:

that's a big comment right there.

Jacob Shapiro:

The Feds now looking at their feet rather than looking ahead.

Jacob Shapiro:

We have seen no inflation from tariffs and nothing is more transitory

Jacob Shapiro:

than import levies with regard to their impact on consumer prices.

Jacob Shapiro:

Um.

Jacob Shapiro:

What is Bessant doing?

Jacob Shapiro:

Does he, does he want the job?

Jacob Shapiro:

Do you think that he would be the person with the gravitas to come in and shift

Jacob Shapiro:

the committee towards what Trump wants?

Jacob Shapiro:

Because he will speak their language rather than sending them, you know,

Jacob Shapiro:

large printouts of paper written with Sharpie on top of them.

Jacob Shapiro:

Um, and is it normal for the treasury to pile on here and for

Jacob Shapiro:

all these different like, cabinet levels to go after the Fed chair?

Jacob Shapiro:

In that sense, and I, I think it's also a pregnant question

Jacob Shapiro:

because, um, you know, you, you mentioned that these are all nerds.

Jacob Shapiro:

If somebody is gumming up the works and if Trump knows that, you can

Jacob Shapiro:

imagine a scenario in which he makes life miserable for those nerds until

Jacob Shapiro:

they step down and he gets to a point someone else, like these are people who

Jacob Shapiro:

probably don't wanna be in the limelight.

Jacob Shapiro:

And President Trump has shown that he can put you in the limelight, uh,

Jacob Shapiro:

if he wants to, and Jerome maybe can handle it, but I'm not sure that all

Jacob Shapiro:

these others could handle it if the eye of Sauron like turned on them.

Jacob Shapiro:

Um, but anyway, that, that, you can take that if you want, but it was

Jacob Shapiro:

really the bestin part and how Bestin is working into this that I wanted to.

Jacob Shapiro:

Get your take on

Rob Larity:

Beson reminds me, I, I told you I was reading that biography

Rob Larity:

of Johan la uh, you know, Mao's right hand man and Beson reminds me of

Rob Larity:

Johan Lai a lot in that I think he is fundamentally an extremely impressive

Rob Larity:

and fundamentally good person who's in a position where he has to say

Rob Larity:

terrible things for political reasons, otherwise he's gonna be sacrificed.

Rob Larity:

So that's, that's my sense of best and, and why he says stupid.

Rob Larity:

Shit.

Rob Larity:

Like I can understand how he's justifying in his own mind

Rob Larity:

the stupid shit that he says.

Rob Larity:

'cause like sort of if he twist it, it makes sense using like macro logic.

Rob Larity:

But, you know, just to, just to throw that out there in terms

Rob Larity:

of him and, and his incentives.

Rob Larity:

I'm sure he would love to have either discuss.

Rob Larity:

Well, and I just,

Jacob Shapiro:

I just wanna underscore in that metaphor, that

Jacob Shapiro:

means Trump is Mao for those of you listening, like I just wanna Yes.

Jacob Shapiro:

Highlight that

Rob Larity:

temperamental, uh, you know, all that stuff.

Rob Larity:

Um, so how, you know, uh, does the Treasury and and the Fed

Rob Larity:

have a history of butting heads?

Rob Larity:

Absolutely.

Rob Larity:

I mean, the Treasury historically has been the mouthpiece for the

Rob Larity:

executive branch in browbeat the Fed and getting its point across.

Rob Larity:

I mean, going back to your Nixon example, like John Connolly.

Rob Larity:

Is it John Connolly?

Rob Larity:

Uh, dude from Texas.

Rob Larity:

Yeah.

Rob Larity:

I mean he was, he was very the guy who said, it's our currency, but

Rob Larity:

it's your problem very famously.

Rob Larity:

Um, I mean he, he is the exemplar of this sort of long line of treasury

Rob Larity:

secretaries who are just like bulldozers for the executive branch,

Rob Larity:

um, when it comes to monetary policy.

Rob Larity:

So it's definitely not an outlier, uh, in that regard.

Rob Larity:

Um, I think Besson would probably take that job yearly if he thinks that there's

Rob Larity:

not much interesting stuff he can do from a treasury standpoint, which I think he's

Rob Larity:

probably recognizing like a lot of the things that he may have been hoping he

Rob Larity:

could have done are not, are not gonna happen because he is dealing with mal.

Rob Larity:

Um, so yeah, I, I think he could very well be nominated.

Rob Larity:

I think he would probably do what he thinks is best 'cause he would

Rob Larity:

be somewhat insulated and look to create his legacy that way.

Rob Larity:

Um.

Rob Larity:

Which would be like, you know, dovish leaning, but traditionally

Rob Larity:

like standard monetary policy.

Rob Larity:

And, and to get to the point about the 2022, looking at your feet, like

Rob Larity:

this is a really important, um, nerd topic to dive into very briefly.

Rob Larity:

One of the key like critiques of the Fed historically was that

Rob Larity:

they were too backward looking.

Rob Larity:

That they, you know, like every committee that they were chickens and they wouldn't

Rob Larity:

act until it was obvious what was happening until you saw the whites of

Rob Larity:

their eyes, so to speak, on, on the data.

Rob Larity:

And naturally that caused major issues.

Rob Larity:

Like in 2007, Bernanke famously, you know, going on and on about, oh,

Rob Larity:

inflation is the problem, not deep, like, and missing obviously some major

Rob Larity:

changes happening underneath the service.

Rob Larity:

Um, Powell, you know, similarly, like they've had to deal with this quite a bit.

Rob Larity:

In terms of when you have these shifts, when do you actually, do you

Rob Larity:

anticipate what's going to happen?

Rob Larity:

But then you have this super complex system, how do you

Rob Larity:

know what's gonna happen?

Rob Larity:

It's really hard to say, and the Fed has been actively trying to be

Rob Larity:

more forward looking a little bit in terms of how it sets monetary policy

Rob Larity:

based on what's likely to happen.

Rob Larity:

What, like what, what's changing at the second derivative rather than,

Rob Larity:

you know, the first derivative.

Jacob Shapiro:

Mm-hmm.

Rob Larity:

So that's really what Besson is getting at, is he's saying like,

Rob Larity:

okay, you know, in 2022 you should have known and started jacking up rates, you

Rob Larity:

know, sooner in order to head off the inflation that was so problematic and

Rob Larity:

now you're making the opposite mistake.

Rob Larity:

Um, which maybe they are.

Rob Larity:

Maybe things are collapsing or slowing much faster than, than it appears.

Rob Larity:

It doesn't seem likely, but that's the argument he's trying to make.

Rob Larity:

It's a self-serving argument.

Rob Larity:

'cause the Fed should be.

Rob Larity:

Being more forward-looking and that's what, what they're doing right now.

Rob Larity:

But it's very easy if you're looking for an excuse to bash them to say,

Rob Larity:

Hey, you know, CPI today is under 3%.

Rob Larity:

What are you doing?

Rob Larity:

Why are rates, you know, over 4% still?

Jacob Shapiro:

Um, well, and and he was also very critical of then

Jacob Shapiro:

Treasury Secretary Janet Yellen for relying more on short-term treasuries

Jacob Shapiro:

during that same time period.

Jacob Shapiro:

And he's done the same thing, but obviously interest rates are higher.

Jacob Shapiro:

Um, but it seems like he wants to ramp up sales of longer term securities because,

Jacob Shapiro:

you know, I, I asked you point blank at the start and you correctly deflected,

Jacob Shapiro:

and we went into a longer thing, but somebody asked Vasin where he sees 10

Jacob Shapiro:

year yields by year end, and he said, oh, well, it depends on many things.

Jacob Shapiro:

Inflation will come down and the whole curve in parallel can shift down.

Jacob Shapiro:

And he is also said, you know, if he was the Fed chair, that he would

Jacob Shapiro:

do what President Trump wants.

Jacob Shapiro:

So he's very clearly like telegraphing to you that he thinks

Jacob Shapiro:

inflation is going to go down.

Jacob Shapiro:

Um, that, and that either he or somebody else will be pushing

Jacob Shapiro:

for the Fed to lower interest rates, um, by the end of the year.

Jacob Shapiro:

And obviously he's gonna use, and then he wants to use that when

Jacob Shapiro:

interest rates are low, I guess to.

Jacob Shapiro:

Restructure American debt and to try and make it more affordable like that

Jacob Shapiro:

seems to be like the top secret plan.

Jacob Shapiro:

But, um, I don't know like how top secret is it if I'm here in my

Jacob Shapiro:

flamingo shirt talking to you about it.

Jacob Shapiro:

Like, that seems like lining up an awful lot of things that are gonna

Jacob Shapiro:

go correctly for him to do it.

Jacob Shapiro:

But it goes back to the question about whether Donald Trump is someone different,

Jacob Shapiro:

because it does seem to me that like he would have some, like he, he has the

Jacob Shapiro:

potential to put someone in a position of power who will say, yes sir, we

Jacob Shapiro:

will make the data say what you want it to say in order to do this thing.

Jacob Shapiro:

Um, you know, uh, Besant has even talked about how, you know, he doesn't agree

Jacob Shapiro:

with the criteria that the Fed is using to make decisions about interest rates.

Jacob Shapiro:

So theoretically, if he was the Fed chair, he would change the

Jacob Shapiro:

criteria or he could try to push like different criteria and use that.

Jacob Shapiro:

Um, going forward.

Jacob Shapiro:

I don't know, how do you respond to that?

Rob Larity:

Um, on the latter point, what he says now and what he would actually do

Rob Larity:

are, there are two very different things.

Rob Larity:

Um, so I think you just have to put that aside.

Rob Larity:

Uh, for the hypothetical, um, I think he's right about Janet Yellen.

Rob Larity:

It's funny, I was looking at a list of all the, uh, all the bonds that are

Rob Larity:

trading at the lowest prices relative to par, uh, just the other day.

Rob Larity:

And the worst performing bonds are all of these super long term like

Rob Larity:

50 year bonds that mostly sovereigns but also companies like Apple.

Rob Larity:

And, and that released, you know, about 10 years ago when rates

Rob Larity:

were absolutely in the floor.

Rob Larity:

And they've gotten clobbered since then, obviously.

Rob Larity:

But that was a really smart time to be issuing 50 year debt.

Rob Larity:

Like maybe, maybe we should have been doing more of that.

Rob Larity:

And I think that's a very valid criticism of Janet Yellen.

Rob Larity:

'cause they were reduced the term.

Rob Larity:

Term, you know, the weighted average term of the debt during that period.

Rob Larity:

And that was, that was not very smart.

Rob Larity:

Um, so, or at least in hindsight, which is always 2020.

Rob Larity:

But, um, the, the long term yield thing is, is really important.

Rob Larity:

And I think Beson has a really impossible job, uh, which is why maybe he's looking

Rob Larity:

to leave it, which is the, the quantum of debt is just too high now, right?

Rob Larity:

So we're at like 120% of GDP and we're not in a deflationary environment anymore,

Rob Larity:

which means the natural interest rate is gonna converge on some higher level.

Rob Larity:

So we've talked about, you know, ticking time bomb and all the, you

Rob Larity:

know, the percentage of government revenues that are now going toward

Rob Larity:

interest expense and blah, blah, blah.

Rob Larity:

So you don't have many options here to get out of that.

Rob Larity:

And what I think Besson is hoping is that he can take advantage of the periods when

Rob Larity:

you have cyclical slowdowns and, and very possibly, like if you look at the 10 year

Rob Larity:

yield right now as we talk, it's 4.29%.

Rob Larity:

It has just kind of gone sideways for an extended period of time

Rob Larity:

here and it's sort of coiling in this narrower, narrower band.

Rob Larity:

So all of this shit is going on in the background and the 10 year yield is

Rob Larity:

just sort of like going into its corner and just looking around and saying,

Rob Larity:

ah, like which way am I gonna go here?

Rob Larity:

And I think it'll tell us a lot which way it breaks outta that band.

Rob Larity:

One potential scenario, which I think is probably the more likely

Rob Larity:

one in the short term, is that it falls below that band 'cause we're

Rob Larity:

entering a real macro slowdown.

Rob Larity:

I think that's probably like, even if you just look at what's going on in

Rob Larity:

the inventory cycle right now, like we just had a really weird whipsaw

Rob Larity:

period with all the tariffs and there was a huge pull forward of demand.

Rob Larity:

And you can see in the data now people are buying things that are subject

Rob Larity:

to tariffs and the stuff that's not subject to tariffs, they're not buying.

Rob Larity:

And the sales of those are getting the crap kicked outta them.

Rob Larity:

Like airlines, hotels, services, things like that.

Rob Larity:

Um, all of that suggests that we're, we're gonna have a bit of a hangover here.

Rob Larity:

Uh, and an inventory puke out after the build that we just had

Rob Larity:

that could bring yields below and break that, that narrow band.

Rob Larity:

And in that case, I think Besson would be looking to say, Hey,

Rob Larity:

you know, yields are now 3.5%.

Rob Larity:

Let's issue some 10 year debt.

Rob Larity:

Let's issue some 20 year debt.

Rob Larity:

Um.

Rob Larity:

That I think is his plan is to sort of slowly term it out when you

Rob Larity:

get those opportunities, hopefully increase growth opportunities or

Rob Larity:

growth, you know, potential long term.

Rob Larity:

And then you sort of grow your way out through nominal price growth, wall,

Rob Larity:

avoiding sort of any big refinancing walls by, by terming that, that out.

Rob Larity:

But like you really need everything to work perfectly to work.

Rob Larity:

And, and the problem is 10 year yields are really, really smart.

Rob Larity:

Um, I know I'm referring to an inanimate object here, but they're super smart

Rob Larity:

as James Carville, you know, would say.

Rob Larity:

And, um, so much of this is about expectations and credibility and a lot

Rob Larity:

of the, a lot of the things that Trump is talking about and best is sort of

Rob Larity:

echoing like, oh, we should be lowering rates because then like quite possibly

Rob Larity:

that could increase the 10 year yields.

Rob Larity:

You know, if it's viewed as being inflationary in the short term and sort

Rob Larity:

of a sign of just, you know, institutional deterioration, you know, like we've been

Rob Larity:

talking about, um, because it wouldn't have the credibility that it would be

Rob Larity:

that would remain, and this is going back not to talk too much about in 1951,

Rob Larity:

but that was the crux of the issue in 1951, was Truman was like, well, why

Rob Larity:

don't you just peg 10 year yields so that we can just spend whatever we want?

Rob Larity:

And the issue was like no one expected that it was credible

Rob Larity:

that that would be maintained.

Rob Larity:

So like everyone is gaming it, unless you believe that that's

Rob Larity:

gonna happen forever, why would you buy, why would you buy bonds?

Rob Larity:

You know what I mean?

Rob Larity:

Like, you have to have the credibility.

Rob Larity:

And this is getting to Bernanke dealt with this on the other side

Rob Larity:

where he needed the credibility of like, Hey guys, I'm gonna be super

Rob Larity:

irresponsible with monetary policy.

Rob Larity:

You better go cause some inflation.

Rob Larity:

And like that was a real struggle because people knew.

Rob Larity:

Yeah.

Rob Larity:

You know, he's not gonna actually do a helicopter drop of money.

Rob Larity:

Like, that's just not gonna happen.

Rob Larity:

So I'm, I'm sort of rambling here, but my point is like, it's very, very difficult

Rob Larity:

to take this complex system that's self-referential and forward-looking and,

Rob Larity:

and use like one tool to be like, oh yeah, let's just lower rates along the board.

Rob Larity:

Like the unintended, unintended consequences are always gonna

Rob Larity:

outweigh whatever, like, linear thing you try to do by poking

Rob Larity:

the system in one specific place.

Jacob Shapiro:

Okay, that makes sense.

Jacob Shapiro:

And I think before we get back to the, the bigger question of interest

Jacob Shapiro:

rates, I think we also need to talk about inflation and trade then.

Jacob Shapiro:

'cause based on what you're just talking, I think that's

Jacob Shapiro:

gonna be a major factor in this.

Jacob Shapiro:

Um.

Jacob Shapiro:

Yeah, July 9th is when a lot of the liberation day tariffs

Jacob Shapiro:

are supposed to go back on.

Jacob Shapiro:

You can feel the media cycle turning away from that Israel

Jacob Shapiro:

Iran war back to nonstop tariffs.

Jacob Shapiro:

Um, last week you had, uh, president Trump saying that a deal was signed with China.

Jacob Shapiro:

Doesn't seem to be so much a deal.

Jacob Shapiro:

It's a framework according to China's Ministry of Commerce, uh,

Jacob Shapiro:

that literally says China will.

Jacob Shapiro:

I mean, like what it says is that China will review and approve export

Jacob Shapiro:

applications of control items.

Jacob Shapiro:

Uh, that means like rare earths and magnets and things like

Jacob Shapiro:

that in accordance with the law.

Jacob Shapiro:

But basically it's a quid pro quo.

Jacob Shapiro:

China's not gonna limit exports of rare earths and special magnets,

Jacob Shapiro:

and the United States will cancel some of their restrictive measures,

Jacob Shapiro:

uh, recently taken against China.

Jacob Shapiro:

That's it.

Jacob Shapiro:

And that's like basically all the detail that we have right now.

Jacob Shapiro:

And we're getting a flurry of these sorts of things like Trump tweeted, or truth,

Jacob Shapiro:

or whatever the heck we're supposed to call it this morning, that the United

Jacob Shapiro:

States had a trade deal with Vietnam.

Jacob Shapiro:

And that instead of a 46% tariff rate announced on Liberation Day,

Jacob Shapiro:

it would be a 20% tariff rate and a 40% levy on anything that was a

Jacob Shapiro:

trans shipment from a third country.

Jacob Shapiro:

Um.

Jacob Shapiro:

There has been a lot of smoke, um, about a potential US India trade deal.

Jacob Shapiro:

Um, and this is one I've been trying to follow closely 'cause I didn't think

Jacob Shapiro:

that negotiations would go particularly well because of how frustrated India

Jacob Shapiro:

is with the United States after the United States intervened and the

Jacob Shapiro:

Pakistan India skirmish and basically it was taking credit for using tariffs

Jacob Shapiro:

to reach some kind of agreement.

Jacob Shapiro:

The Indian government has been very blunt about how things did not go the

Jacob Shapiro:

way that the US says that they have gone.

Jacob Shapiro:

Uh, but at the same time, like Indian Press said, you know,

Jacob Shapiro:

Indian negotiators stayed over in Washington at the end of last weekend.

Jacob Shapiro:

There's a deal that's coming.

Jacob Shapiro:

There's still some hangups on us agricultural access to the Indian market.

Jacob Shapiro:

That's something that farmers are really, really gonna want.

Jacob Shapiro:

Something that India really doesn't wanna give, um, some other concessions.

Jacob Shapiro:

Um.

Jacob Shapiro:

That are also sort of gumming things up, but maybe you're gonna

Jacob Shapiro:

get some kind of deal announced.

Jacob Shapiro:

I would just note that Japan, uh, continues to double down.

Jacob Shapiro:

Um, like Japan, uh, Japanese Prime Minister Shakiba said that he was

Jacob Shapiro:

gonna protect his national interest and trade negotiations, that Japan is

Jacob Shapiro:

different from these other countries because, quote, we are the largest

Jacob Shapiro:

investor in the United States end quote.

Jacob Shapiro:

Um, this is something that you've brought up in general.

Jacob Shapiro:

So I think like the, the table's being set for a real showdown between

Jacob Shapiro:

Japan and the United States going forward, with the point being we're

Jacob Shapiro:

about to get a flurry of deals.

Jacob Shapiro:

And I'm curious, number one, how real you think those deals are.

Jacob Shapiro:

Because my base cases, these are, this is lipstick on the pig.

Jacob Shapiro:

These are not meaningfully different deals to the extent, even if this

Jacob Shapiro:

Vietnam deal is real and who knows if it's real, it hasn't been announced

Jacob Shapiro:

by the United States or Vietnam, like Trump is tweeting about it.

Jacob Shapiro:

Like I don't exactly know how to measure like the reality of it.

Jacob Shapiro:

And it's still saying, okay, well you, you went from 40 plus percent to 20%.

Jacob Shapiro:

You're still gonna tax the trans shipments at 40% and it's the trans

Jacob Shapiro:

shipments that have kept things probably relatively stable here

Jacob Shapiro:

over the last couple of months.

Jacob Shapiro:

If you look at Chinese exports to your trans shipment com, uh, countries like

Jacob Shapiro:

Vietnam and Thailand and Indonesia, Malaysia, they're through the roof.

Jacob Shapiro:

'cause trade is like water.

Jacob Shapiro:

Unless you literally block every single hole, it will find the

Jacob Shapiro:

market that it needs to go around.

Jacob Shapiro:

Another example of this is look at German exports to the

Jacob Shapiro:

stands like your Kirstan and.

Jacob Shapiro:

You know, Kazakhstan and things like that.

Jacob Shapiro:

It's not like the Russians have given up on buying BMWs and Mercedes.

Jacob Shapiro:

They just can't buy them direct from the Germans, so they're going to Kyrgyzstan

Jacob Shapiro:

or wherever else and buying them.

Jacob Shapiro:

Not trying to drive by, you know, uh, assault the Kyrgyzstan government there.

Jacob Shapiro:

But like, that's, that's just how trade works.

Jacob Shapiro:

Um, so to my, to my mind, these are superficial deals, but maybe there's

Jacob Shapiro:

gonna be some sense of normalcy or complacency in the market.

Jacob Shapiro:

And then this gets to the inflation question too, because the last CPI,

Jacob Shapiro:

you know, even though this data is now a little bit compromised, like

Jacob Shapiro:

the Bureau of Labor Statistics has talked about how they're having to

Jacob Shapiro:

strip out some indicators because they don't have staff to keep track

Jacob Shapiro:

of everything that they used to.

Jacob Shapiro:

Like, that's like screaming in the back of my mind.

Jacob Shapiro:

Um, but you know, CPI is.

Jacob Shapiro:

Let, let's call it stable.

Jacob Shapiro:

I mean it was like up a little bit, but it was up 0.1% in May.

Jacob Shapiro:

Um, if you look at the breakdown, it's still energy that's driving things

Jacob Shapiro:

downwards because energy prices are so down, it's bringing the whole thing down.

Jacob Shapiro:

It would be a lot higher if you sort of stripped out energy

Jacob Shapiro:

probably more to your three or 4%.

Jacob Shapiro:

So before we get into where interest rates are going, like do you, where do you think

Jacob Shapiro:

trade and tariffs are gonna land on this and where do you think inflation is going?

Jacob Shapiro:

Because Scott Bessant very clearly says, no, inflation's gonna go down.

Jacob Shapiro:

And that's what's going to buttress the argument against interest rates.

Jacob Shapiro:

So where are you sitting right now based on what you're seeing?

Jacob Shapiro:

This also gets into the macro picture that you're looking at.

Rob Larity:

Yeah, I mean, there's a lot in there.

Rob Larity:

Um, let's start with the inflation and then we'll back into the trade deals.

Rob Larity:

Um, so.

Rob Larity:

There's a few different factors going on.

Rob Larity:

Inflation, like you're right, energy is a huge component

Rob Larity:

of what's going on right now.

Rob Larity:

Food prices have been going down again, I don't know if

Rob Larity:

anyone's seen the price of corn.

Rob Larity:

Um, it's not looking pretty.

Rob Larity:

Um, so all of those things have been, have been contributing.

Rob Larity:

Um, the biggest driver of inflation is housing.

Rob Larity:

And housing inflation is still significantly positive after

Rob Larity:

being, you know, through the roof over the last few years.

Rob Larity:

Like, um, owner equivalent rent is how they calculate housing.

Rob Larity:

That's the biggest component of the total CPI bucket.

Rob Larity:

And that's basically a proxy for house prices, so everyone

Rob Larity:

knows what those are doing.

Rob Larity:

So, you know,

Rob Larity:

obviously what's happened in the last few years is that housing inflation

Rob Larity:

just jumped significantly and now it's just like it's still high and

Rob Larity:

it's slowing because ironically, the rise of long-term interest rates and

Rob Larity:

mortgage rates is doing its work.

Rob Larity:

So you're having a major demand degradation because people just

Rob Larity:

can't, can't get mortgages at the rates that they need to flip out

Rob Larity:

of existing homes into new homes.

Rob Larity:

So anyway, that's, that's all kind of down the rabbit hole of housing.

Rob Larity:

But suffice to say, like the cyclical factors of inflation

Rob Larity:

have been not very bad.

Rob Larity:

So inflation looks okay.

Rob Larity:

And then getting to the whole, like cycle.

Rob Larity:

Cycle versus average.

Rob Larity:

Um, yeah, I think besson is probably right.

Rob Larity:

Like all things considered inflation is going to kind of clunk around

Rob Larity:

where it is right now unless something drastically changes.

Rob Larity:

His argument, specifically on the tariffs is a fatuous one, and I'll explain it.

Rob Larity:

So what he says is when he is saying this comment to, uh, Powell and, and

Rob Larity:

things like that, first of all, we have no data on what happens with.

Rob Larity:

Major tariffs because as we mentioned before, the only other

Rob Larity:

time this has happened has been in the teeth of the Great Depression.

Rob Larity:

So, you know, throw that data out, it's not worth anything.

Rob Larity:

Um, what best's argument is, is he's saying, well, tariffs don't

Rob Larity:

cause inflation because you get shifts in what people spend.

Rob Larity:

So if you consider like the US households as one, you know, simplified household,

Rob Larity:

and they have a hundred dollars in wages that they're gonna spend, if the price

Rob Larity:

of eggs goes up, you know, 50%, then you're gonna just buy fewer eggs and

Rob Larity:

you're going to, and, and, uh, you're gonna shift your spending to other things.

Rob Larity:

So his point is like the to that a hundred dollars doesn't change.

Rob Larity:

So unless the a hundred dollars goes up, you're not gonna have

Rob Larity:

aggregate inflation from tariffs.

Rob Larity:

You're just gonna have people shift from one bucket to the next.

Rob Larity:

Does that, does that make sense?

Rob Larity:

That's a kind of complicated, I don't think I explained it super well.

Jacob Shapiro:

Um, it's hard to explain.

Jacob Shapiro:

Well, because it's, I mean, it's sory, but yes, I, I understand what you're saying.

Rob Larity:

It's sory, but it's saying like, okay, the price of eggs goes up

Rob Larity:

50%, but because people need eggs, the price of cars is gonna go down 20%.

Rob Larity:

'cause they're, they're taking the car money and putting it into eggs.

Rob Larity:

So up 50%, down 20% and then inflation doesn't change.

Rob Larity:

'cause the a hundred dollars is still the same.

Rob Larity:

That's, that's the argument.

Rob Larity:

Um, and that's really stupid because it ignores the fact that prices

Rob Larity:

don't just go down very easily.

Rob Larity:

So like, if consumers stop, like if demand weakens for some set of goods,

Rob Larity:

like imported goods, um, the price of those doesn't go down like businesses,

Rob Larity:

like we've talked about this when we talked about macro recently.

Rob Larity:

Businesses have been sort of.

Rob Larity:

Creaming, uh, the crop here because they're getting really high margins.

Rob Larity:

'cause they've been very slow to ratchet prices down in accordance

Rob Larity:

with like the normalization.

Rob Larity:

So the point is like the price of cars doesn't go down 25%.

Rob Larity:

Um, to use the example like the car dealerships are gonna sit

Rob Larity:

there and just not sell the car rather than cut the price 25%.

Rob Larity:

And when you're measuring inflation, it doesn't matter how

Rob Larity:

many cars you're selling, it's what is the price of the car.

Rob Larity:

Right.

Rob Larity:

So that's, that's just to explain why Besson is saying that it's

Rob Larity:

a fatuous argument, it's a self-serving, serving argument.

Rob Larity:

He knows better, but it's the most convincing argument he can think

Rob Larity:

of that tariffs are a good idea.

Rob Larity:

Right.

Jacob Shapiro:

Well, can, can I push back, well, not even push back for a second.

Jacob Shapiro:

Help me understand why Nikkei then is reporting, or at least reported

Jacob Shapiro:

last week, that export prices for Japanese vehicles bound for the United

Jacob Shapiro:

States fell 20% per unit year on year.

Jacob Shapiro:

So what, what, what is the 'cause that sounds like actually, yeah,

Jacob Shapiro:

like the car prices can fall 20%.

Jacob Shapiro:

And I mean maybe that's also different 'cause Japanese companies are thinking

Jacob Shapiro:

about the yen and they're thinking about tariffs and things like that.

Jacob Shapiro:

But there's at least like the export prices of those vehicles seem to be down.

Rob Larity:

It's really different when you talk about

Rob Larity:

wholesale versus retail markets.

Rob Larity:

So when was the last time you went to a car dealer and like, the price

Rob Larity:

of a car was down 20% from a year ago when you last looked at it?

Rob Larity:

Like, not on amo.

Rob Larity:

Like, you know what I mean?

Rob Larity:

Just like, so, um, you know, obviously, and cars are a little more flexible than

Rob Larity:

other things, but, you know, toothpaste, like whatever, whatever you wanna look

Rob Larity:

at, it just, it's much more stable at the retail level, even as things kind of tend

Rob Larity:

to shift around within the supply chain.

Rob Larity:

Mm-hmm.

Rob Larity:

Um, so, so yeah, it's, uh, that's, I, I think all we need

Rob Larity:

to say about his argument there.

Rob Larity:

The, the trade thing is a really important one and like we could talk

Rob Larity:

about each of these individual things and why India's pissed off and why

Rob Larity:

the Japanese are really pissed off.

Rob Larity:

'cause they've been playing along with the United States for 75 years and,

Rob Larity:

you know, uh, justifiably think that they're, uh, that they're due some special

Rob Larity:

consideration which they're not getting.

Rob Larity:

Um, you know, I think the only observation I would make is really kind of a higher

Rob Larity:

level one that tries to connect them, which is when you look at where the United

Rob Larity:

States has had success in striking these trade deals in the past, it's been part of

Rob Larity:

a broader package, a broader vision, which is like all of these countries relative to

Rob Larity:

the US have more protectionist tendencies.

Rob Larity:

It's really important to remember, like the US is on the technological frontier.

Rob Larity:

The country at the technological frontier wants free markets

Rob Larity:

because they're the best.

Rob Larity:

They make, they make stuff the the best on average.

Rob Larity:

So they want to have access to sell their stuff wherever they can.

Rob Larity:

And that was the case with Britain.

Rob Larity:

It's the case with us, like relative to everyone else, it's

Rob Larity:

always the least protectionist.

Rob Larity:

So you're going naturally to other nations that are more protectionist,

Rob Larity:

India, Japan, like, you know, obviously we all know this, not to mention

Rob Larity:

like Vietnam, like these places.

Rob Larity:

I mean, industrial policy is, is the playbook.

Rob Larity:

Um, and you're trying to convince them to basically give that up.

Rob Larity:

And in the past where you had this as part of the vision of like, you do this, you're

Rob Larity:

joining the, the international order, this is the, the global sweep of history.

Rob Larity:

This is, this is how you're gonna get rich.

Rob Larity:

You're gonna join the west.

Rob Larity:

Like yes, you're gonna piss off local interest groups, local

Rob Larity:

powers who don't want this.

Rob Larity:

But in the end you're gonna have more wealth and more power from doing this.

Rob Larity:

And then you're gonna be able to buy them off and you know, and that sort of thing.

Rob Larity:

Now, like when you look at all these individual cases, I think that's a,

Rob Larity:

the common thread that I see is like that whole vision has been crapped upon

Rob Larity:

and it doesn't really exist anymore.

Rob Larity:

And these are being pitched as like, bully deals, like, do

Rob Larity:

this or we're gonna hurt you.

Rob Larity:

And that is just, it's just tough sledding.

Rob Larity:

It's a tough pitch to make in these nations that have been, you know,

Rob Larity:

following the, uh, sort of industrial policy playbook for a long time.

Rob Larity:

Like a country like Japan, deeply, deeply suspicious of outsiders.

Rob Larity:

How many like Japan has relative to other similar nations, has the lowest

Rob Larity:

amount of inward FDI of any of them.

Rob Larity:

They do not want Americans in Japan.

Rob Larity:

They do not want American products.

Rob Larity:

They do not want American, you know, investment in the

Rob Larity:

country that is in their DNA.

Rob Larity:

And it's very similar to, you know, in a lot of places.

Rob Larity:

So.

Rob Larity:

I think lipstick on the pig is, is one way to put it, another way to put it is

Rob Larity:

just like, it's too late to, to try to salvage anything meaningful from this.

Rob Larity:

Like even if these things happen, they will be done in a half-hearted and, and,

Rob Larity:

you know, probably not followed way, um, just to get Trump off your back or,

Rob Larity:

or view this as a transactional thing to buy time or kick hand down the road.

Rob Larity:

It's fundamentally different from the sorts of things that we saw even 10

Rob Larity:

years ago where you were looking at like, hey, the TPP, this is, you know,

Rob Larity:

whatever example you wanna look at.

Rob Larity:

But that at least had the rhetoric of loftier things and, and this doesn't.

Jacob Shapiro:

Do you think that means ultimately that all of this trade mellow

Jacob Shapiro:

drama will not impact inflation that much?

Jacob Shapiro:

Precisely because it's just gonna be about making deals to placate the bully

Jacob Shapiro:

and things will continue to work as they were before, which is like, there

Jacob Shapiro:

was, I. A couple week period there where it looked like the US and China

Jacob Shapiro:

were really gonna have a breakdown.

Jacob Shapiro:

And you saw it in shipping and maritime transport and things like that.

Jacob Shapiro:

But like things have gotten mostly back to normal.

Jacob Shapiro:

We haven't seen a huge, um, like spike in prices to Bea's point.

Jacob Shapiro:

So do you think that, I guess the question I'm zeroing in on is, is the meaningless

Jacob Shapiro:

of the deals themselves going to prevent any kind of sharp spike in inflation?

Jacob Shapiro:

So they'll take credit for deals, but things will basically work

Jacob Shapiro:

the way that they have before.

Jacob Shapiro:

And so prices won't do much in the long term.

Jacob Shapiro:

Some of these countries that you're talking about will be deeply suspicious

Jacob Shapiro:

of the United States and look for alternatives, but they're not gonna

Jacob Shapiro:

do that today because they don't want to commit economic suicide.

Jacob Shapiro:

Um, so, you know, Japan has some leverage that maybe other countries

Jacob Shapiro:

don't have, but most of these countries, whether they're Canada or

Jacob Shapiro:

China, even, like, are going to do the things in order to keep things going.

Jacob Shapiro:

Like, does the party keep going or like, do you think, 'cause you

Jacob Shapiro:

know, when we're going back to liberation day, if you, if you apply

Jacob Shapiro:

the Liberation day tariffs for real.

Jacob Shapiro:

If.

Jacob Shapiro:

Like, I would think that you would get an extremely sharp spike in inflation

Jacob Shapiro:

that would not be transitory because it would take lots of money and lots of time

Jacob Shapiro:

to produce these things in the markets that you wanna produce them in now.

Jacob Shapiro:

So I, I think that's what you're saying, right?

Jacob Shapiro:

Like the, that the deals are meaningless and therefore they're actually

Jacob Shapiro:

probably won't, that be, won't be that big of an impact on inflation.

Jacob Shapiro:

Is that the right conclusion to draw?

Rob Larity:

Yeah, I mean, we're starting from a status quo of

Rob Larity:

like nothing's really happened.

Rob Larity:

Like we've had tariffs on Canada and Mexico, like those did happen.

Rob Larity:

Most of the other stuff didn't really happen and we're just dealing

Rob Larity:

with the consequences of people anticipating they were going to happen.

Rob Larity:

So you, we had a ton of pull forward demand in the inventory

Rob Larity:

cycle, like going up and down, like choppy sea is like just crazy.

Rob Larity:

Like you look at the charts of how these things, like economic

Rob Larity:

data doesn't move this way absent some crazy external factor.

Rob Larity:

Um, so yeah, I think I. Definitely if he were to implement these Liberation day

Rob Larity:

tariffs, it would be a big, big deal.

Rob Larity:

Like there's no, no question about that.

Rob Larity:

Especially if the economy were just like, like in the past when you've had

Rob Larity:

this, oftentimes it's come when like growth is really slowing or there's other

Rob Larity:

factors kind of dragging down inflation.

Rob Larity:

And the tariffs haven't been that big.

Rob Larity:

Like I think it creates some complacency around how big of a deal this is.

Rob Larity:

'cause it does, things don't adjust.

Rob Larity:

And for the reasons that I mentioned, like they do have an impact contrary

Rob Larity:

to what Besson is trying to say.

Rob Larity:

Um, so whether that happens or not, I mean that's, that's really a political

Rob Larity:

analysis that's in, that's in your wheelhouse, um, striking of these deals.

Rob Larity:

Like going back to essentially like a status quo thing or like, do you

Rob Larity:

get slightly lower tariffs from some of these key trading partners?

Rob Larity:

Like I. It doesn't really matter honestly, like in the end, inflation isn't driven

Rob Larity:

primarily by tariffs, which is why this is such a weird series of events.

Rob Larity:

'cause we're not used to thinking that much about tariffs.

Rob Larity:

They don't really matter that much.

Rob Larity:

Like they matter for, you know, longer term business fundamentals

Rob Larity:

and market share and stuff.

Rob Larity:

But absent some weird shock like inflation is driven by other things and tariffs

Rob Larity:

like are kind of a, their own separate world in terms of what you're analyzing.

Rob Larity:

So I don't think it's gonna have a meaningful impact on inflation if

Rob Larity:

they do strike some kind of deals with some, you know, some symbolic

Rob Larity:

reductions in tariffs or whatever.

Jacob Shapiro:

Okay.

Jacob Shapiro:

All right.

Jacob Shapiro:

So we've gotten nerdy on the fed, we've gotten nerdy on trade.

Jacob Shapiro:

Why don't we land the plane here and get back to where we started,

Jacob Shapiro:

um, which is interest rates.

Jacob Shapiro:

And I know that, you know, it has to be how much and over

Jacob Shapiro:

time and things like that.

Jacob Shapiro:

But let's, like make it, um, let's make it a little bit more concrete

Jacob Shapiro:

maybe, or, or tell push back if this is not a good scenario to consider.

Jacob Shapiro:

But if you look at, say, US equities, let's just look at the Dow Jones like we

Jacob Shapiro:

are back where we were on, around November 27th, so shortly after the election we're

Jacob Shapiro:

around where we were on January 27th.

Jacob Shapiro:

Um, sort of same levels for US equities.

Jacob Shapiro:

You had a sharp drop after the liberation day tariffs.

Jacob Shapiro:

But you know, if, if you're just looking at the year, year to date so far, like

Jacob Shapiro:

not a whole heck of a lot has happened.

Jacob Shapiro:

Bottom line, market levels.

Jacob Shapiro:

Um.

Jacob Shapiro:

If you're advising someone, or, and obviously this is not investment

Jacob Shapiro:

advice, you should consult a professional, blah, blah, blah.

Jacob Shapiro:

Or you can talk to us if you want to.

Jacob Shapiro:

All those like things in in mind, like if you see like US equity sitting, where

Jacob Shapiro:

they're sitting, which is riding pretty high, uh, and you've got, you know, Trump

Jacob Shapiro:

saying cut rates and best saying the deals are coming and everything is fine, and

Jacob Shapiro:

we just blew up Iran's nuclear program.

Jacob Shapiro:

Like they're, they're selling this big positive thing.

Jacob Shapiro:

Um, do you keep riding that train?

Jacob Shapiro:

Or if interest rates are gonna go down in an eight, 12 month period, um, is now

Jacob Shapiro:

the time to say, ah, like maybe bonds, like maybe bonds Maybe now is your time

Jacob Shapiro:

because if interest rates are gonna come down from here, you can lock and yield.

Jacob Shapiro:

Like maybe things go up from there.

Jacob Shapiro:

Or like, do you stay away from that sort of tactical decision?

Rob Larity:

I don't see any scenario in which anyone should buy bonds.

Rob Larity:

That's a pretty blanket statement.

Rob Larity:

We don't own any bonds for our clients, uh, except for

Rob Larity:

some very specific situations.

Rob Larity:

But bonds have become the lifeblood of almost every investment portfolio.

Rob Larity:

The fame 60 40, that's a terrible idea no matter what happens.

Rob Larity:

Like that's, that's my kind of big view on, on bonds,

Rob Larity:

uh, risk assets and equities.

Rob Larity:

Um, you know, I've been pretty consistent in saying that this is not a good time

Rob Larity:

to be aggressive in owning risk assets.

Rob Larity:

I don't think that's a particularly shocking or, or crazy thing for people

Rob Larity:

who are listening to, to, uh, to, to, to get, um, you know, there's a

Rob Larity:

lot of different factors into that.

Rob Larity:

Um, one of which is just we've been in a multi-year, very, very strong bull market

Rob Larity:

that, um, essentially started with COVID and, and the stimulus that came out of

Rob Larity:

COVID, just really letting loose that coincided with the ai, uh, investment.

Rob Larity:

Boom.

Rob Larity:

You had a, a double, double whammy and we're still sort

Rob Larity:

of riding the fumes of that.

Rob Larity:

Um, that said, if you look at, uh, you know, I'm just repeating myself,

Rob Larity:

but if you look the story that has not changed, the average US stock,

Rob Larity:

the small cap, the micro cap, the speculative, crappy crap that has never

Rob Larity:

recovered the 2021 bubble heights.

Rob Larity:

So what we're seeing right now is you're seeing yes, like very, very aggressive

Rob Larity:

risk, risk taking, but it's very narrow.

Rob Larity:

It's very skewed towards the largest companies, some of which are just

Rob Larity:

crazy trading net crazy valuations.

Rob Larity:

So we're sort of seeing a, a very like nifty 50 kind of experience, which is

Rob Larity:

exactly what you saw in the late sixties.

Rob Larity:

And I hate historical comparisons 'cause it's always very different.

Rob Larity:

It is, you know, it rhymes more than usual in this case because

Rob Larity:

then you had, you know, these large cap quality companies that were

Rob Larity:

trading at 40, 50 times earnings.

Rob Larity:

And the view was, well, these are great companies.

Rob Larity:

They're never gonna go away.

Rob Larity:

Like, you just wanna own them forever.

Rob Larity:

You know?

Rob Larity:

And if you look back, that was the, uh, the xeroxes of,

Rob Larity:

of the worlds at that time.

Rob Larity:

And now it's, you know, Costco trading at whatever crazy, like it

Rob Larity:

trades at like 50 times earnings.

Rob Larity:

Um, so, you know, very similar there.

Rob Larity:

And that's just not something, if you have a time horizon beyond six months, like

Rob Larity:

that's not a risk you wanna underwrite with your wealth or your capital.

Rob Larity:

Like, full stop.

Rob Larity:

Um,

Jacob Shapiro:

yeah, go ahead.

Jacob Shapiro:

Just why, why, so, I, I just wanna play devil's advocate, like if interest rates

Jacob Shapiro:

are gonna come down, why not buy bonds?

Rob Larity:

Interest rates may come down briefly, but.

Rob Larity:

If I'm right that the average level of rates is going to remain higher

Rob Larity:

and ratchet higher over time.

Rob Larity:

Um, between that and any potential, you know, us dollar losses, IE inflation,

Rob Larity:

you know, happening like we've, we've just had a 40 year bull market in bonds.

Rob Larity:

Now is not the time to go out and buy, buy bonds.

Rob Larity:

Like everything points to the risks being pointed in, in the opposite direction.

Rob Larity:

So yeah, I mean bond bond yields like, maybe the 10 year yield

Rob Larity:

is 3.3% 12 months from now.

Rob Larity:

That's totally valid scenario.

Rob Larity:

And yes, you could have a brief moment in the sun for bonds, but you know, as we, as

Rob Larity:

we said, I think last time we talked like that guy who's like, it's a bull market.

Rob Larity:

It's a bull market.

Rob Larity:

Like if you ask me about bonds, probably for the next 15 years,

Rob Larity:

I'm gonna say it's a bear market.

Rob Larity:

It's a bear market.

Rob Larity:

Like I'm not trying to be too cute about.

Rob Larity:

Timing these little dips, you're just trying to catch the big trends.

Jacob Shapiro:

What

Rob Larity:

would make

Jacob Shapiro:

you think you're wrong?

Jacob Shapiro:

Like what would falsify your thesis?

Rob Larity:

A big fundamental shift in sort of the gears of policymaking, the

Rob Larity:

way that politics appears to be working.

Rob Larity:

Some signal that we, you know, the party's over, we've had enough, like there's a

Rob Larity:

shift toward true fiscal rectitude and conservatism that would, you know, that is

Rob Larity:

not like, Hey, let's grow out of the debt by having very high nominal GBT growth.

Rob Larity:

IE high inflation.

Rob Larity:

That's not good for bonds.

Rob Larity:

Um, it would have to really be a, like taking the Titanic is heading

Rob Larity:

at full speed in one direction.

Rob Larity:

It would require the Titanic to slam on the brakes and do a true like 90

Rob Larity:

degree turn in, in policy and macro terms right now to turn around and

Rob Larity:

say, okay, you know, this is a real.

Rob Larity:

This is real buying opportunity for bonds.

Rob Larity:

I mean, the last generational buying opportunity for bonds, just as a reminder,

Rob Larity:

was after 30 years of accelerating inflation and bond yields at 80 or 18%.

Jacob Shapiro:

Hmm.

Rob Larity:

Like, that was then enough, is enough moment.

Rob Larity:

That was a a point when I know like people forget, but think people thought

Rob Larity:

that like it was the end of the world.

Rob Larity:

People thought the US was collapsing.

Rob Larity:

Like this was, you know, New York looked like, uh, uh, mad Max.

Rob Larity:

And I mean, that's a good time to buy, to buy bonds when you have Paul

Rob Larity:

Volcker coming in and saying enough, you know, we are not at that point.

Jacob Shapiro:

No.

Jacob Shapiro:

We, we, we have Elon Musk, uh, posting pictures of Pinocchio and Republican

Jacob Shapiro:

congressmen and being sad that they didn't, that, uh, that he believed Trump.

Jacob Shapiro:

Um, okay.

Jacob Shapiro:

Well then last question then.

Jacob Shapiro:

I mean, I. So bonds bad, uh, not a good time for risk, uh, assets

Jacob Shapiro:

and, you know, market very narrow.

Jacob Shapiro:

Uh, and I know this is a theme that we've come back to over

Jacob Shapiro:

and over, but where is safety?

Jacob Shapiro:

Like, where do you hang out?

Jacob Shapiro:

Like while you're in this particular moment?

Jacob Shapiro:

Is it, I mean, gold is also extremely elevated.

Jacob Shapiro:

Is it go from here, Bitcoin pretty high.

Jacob Shapiro:

Uh, like, like so where, where do you, where do you find space in the market

Jacob Shapiro:

as you're trying to figure this out?

Rob Larity:

I wouldn't frame it as safety 'cause it's always opportunity.

Rob Larity:

It's just opportunity in different ways.

Rob Larity:

And the two areas that I, I see the biggest opportunity right now

Rob Larity:

are thinking about international assets and foreign assets.

Rob Larity:

Like that is a major, major secular trend that is, appears to be just starting.

Rob Larity:

So those are still super cheap.

Rob Larity:

You know, d like you can look almost anywhere.

Rob Larity:

And we've talked about this, so I won't go through all the specifics,

Rob Larity:

but that is a major trend that if you, you know, our managing

Rob Larity:

assets, like you should be thinking.

Rob Larity:

Carefully about this 'cause that if, if we're right, this is gonna be like

Rob Larity:

20, 20 years, like this could be a very long trend because the trend

Rob Larity:

before it has, it's been 20 years since international outperformed us.

Rob Larity:

Like it's easy to forget, but that's, it's like 2005 that, that's was the, like, the

Rob Larity:

last time that that happened sustainably.

Rob Larity:

Mm-hmm.

Rob Larity:

Um, so that would be a big thing, you know, looking for, you know, we've talked

Rob Larity:

about resilience, resilient currencies, finding these freak islands in the

Rob Larity:

stream that are operating on a different logic because of historical circumstance

Rob Larity:

and, you know, places like Singapore and Switzerland, which, you know, are

Rob Larity:

kind of core to what, what we're doing.

Rob Larity:

I think there's, you know, the opportunity there and, and it's offensive as well

Rob Larity:

as defensive because it's offensive.

Rob Larity:

'cause you're, you're making money in dollar terms by shifting

Rob Larity:

into those hard currency areas.

Rob Larity:

Then like really as we move out into the risk spectrum of things, like the

Rob Larity:

big opportunities are in some of that smaller cap underappreciated stuff

Rob Larity:

that's gotten puked up in the last few years, or is deeply out of favor.

Rob Larity:

And there's plenty of that.

Rob Larity:

Like there's, there's very few opportunities in large cap US stocks.

Rob Larity:

Like they are just very expensive almost across the board.

Rob Larity:

But if you look in the smaller areas of the spectrum, um, and I don't

Rob Larity:

wanna, you know, talk our book or be, uh, be accused of, uh, of, of

Rob Larity:

pitching our wares or whatever, but.

Rob Larity:

There are areas of technology, there are areas of sort of capital goods,

Rob Larity:

of biotech related, um, companies that are just so bombed out and cheap.

Rob Larity:

You know, I've talked publicly about solar, like look at what's going on

Rob Larity:

with the big beau, beautiful Bill.

Rob Larity:

Solar companies are absolutely, you know, whipsawing back and

Rob Larity:

forth on these political things.

Rob Larity:

It doesn't matter.

Rob Larity:

Solar, the horse has left the left the barn.

Rob Larity:

Solar is economic.

Rob Larity:

It's going to grow exponentially.

Rob Larity:

You look at companies like Enphase, which has 25% operating margins, has

Rob Larity:

generated cashflow the whole way down in like the worst environment ever.

Rob Larity:

Like, their sales are down like 50% or more.

Rob Larity:

'cause you had like, I mean I won't get into all this solar stuff, but

Rob Larity:

needless to say, solar has been a very difficult place for the last two years.

Rob Larity:

Um, like some of these companies are just like.

Rob Larity:

Those are the things where the opportunities are the things that

Rob Larity:

are not sexy, they're not in favor.

Rob Larity:

Um, they've, they've gotten whacked from 2021 and sort of are, are living

Rob Larity:

off in the wasteland and no one's paying attention to them right now.

Rob Larity:

Like if you're looking to be aggressive in terms of spending your time and

Rob Larity:

identifying, you know, um, growth investments for the long term, like

Rob Larity:

those are the profile of companies that, that we're spending most of our time on.

Jacob Shapiro:

Okay.

Jacob Shapiro:

Anything else you wanna tell the listeners, Rob, before we get outta here?

Jacob Shapiro:

I think this was a good one.

Jacob Shapiro:

I.

Rob Larity:

No,

Jacob Shapiro:

I think I've, I've talked a lot, so I don't want to,

Jacob Shapiro:

uh, overstay my welcome this week.

Jacob Shapiro:

And you didn't even make an Oliver Oliver Cromwell reference, so it's coming.

Jacob Shapiro:

It's coming.

Jacob Shapiro:

I know.

Jacob Shapiro:

Thank you so much for listening to the Jacob Shapiro podcast.

Jacob Shapiro:

Uh, this show is produced and edited by Jacob Mian, and it's

Jacob Shapiro:

in, in many ways, the Jacob Show.

Jacob Shapiro:

Um, if you enjoyed today's episode, please don't forget to

Jacob Shapiro:

subscribe, rate or leave a review.

Jacob Shapiro:

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Jacob Shapiro:

us also share with a friend.

Jacob Shapiro:

If you're interested in learning more about hiring me to speak at your

Jacob Shapiro:

event, or if you wanna learn more about the wealth management services

Jacob Shapiro:

that, uh, I offer through bespoke or cognitive investments, you can find

Jacob Shapiro:

more information@jacobshapiro.com.

Jacob Shapiro:

You can also write to me directly at jacob@jacobshapiro.com.

Jacob Shapiro:

I'm also on, on X for now at the handle.

Jacob Shapiro:

Jacob Shap.

Jacob Shapiro:

That's Jacob, SHAP.

Jacob Shapiro:

No DATs dashes or anything else, but I'm not hard to find.

Jacob Shapiro:

Um, see you out there.

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