Welcome to Trader Talk and I'm Kenny

Pulcari and joining me today is Steve

Sausnik who's chief uh strategist at

Interactive Brokers and Adam Shapiro

who's managing uh editor at a Invest.

Gentlemen, thank you very much for

joining. There is a lot going on. So,

why don't we just get into it? Let's

start with what's happening in the bond

market because I think that's driving a

lot of the action and I think it's going

to continue to drive the action. So,

give me a sense on where you think we're

going with that and what's happening.

>> Well, I mean, I I agree with you. The

bond market, you know, stock traders

like to pretend they don't pay attention

to the bond market, but you have no

choice because that's really the big

flows of funds. Stocks are stocks are

important, but the money's flowing in

and out of the bond and currency markets

and the and the current and those two

markets are very tightly intertwined.

Well, my take is I was away last week.

I'm sort of stunned at how the market

reacted but not so stunned at how the

market didn't react in some ways to the

latest intervention by the Treasury

Department by by doing what they

basically a version of the Fed's old

operation twist which is you know by buy

long-term sell you know to using

short-term paper that was a part of QE

monetary expansion and so part one of my

question

>> if I had Bess if we had Bessant in the

room would be um are you and Worsh at

odds because Worsh's odds of are

basically anti-expansionary ballot QE,

that kind of thing. And this is

completely going against it. Well, Worsh

will get to say his piece on Friday at

Jackson Hole. So,

>> yeah, but I'm not sure. Do you think

Worsh is even going to talk about it on

Friday? He's in the camp that less is

better. You know, he doesn't want to

paint himself into a corner.

>> He may not say anything about it. He has

his chance to talk about it, but you're

right. He he probably will keep I'm

guessing if there I don't know what the

prediction markets are on the length of

the speech, but you know, but [laughter]

I'm taking the

>> You could bet on anything. taking the

under. But the second part is, and I

this occurred to me, sorry a little bit.

I went kaying in the Bay of Fundy and

the tide, it's famous for the tides.

>> When you're going out against the tides,

you're paddling like a maniac. Because

if you don't paddle furiously, you're

being brought back on the way back in.

Basically, just use the paddle as a

rudder cuz it's just carrying you if

you're going with the tide. What Bessant

is doing is fighting the tides here.

Yeah,

>> the tides are very strong and unless

there's a change in the moon for lack of

a better word. But so if you're

intervening in the yen, but the J Bank

of Japan and the or the federal

government in Japan isn't doing anything

fundamental to change why people are

moving out of Japanese uh current assets

or well they're buying stocks but moving

out of Japanese bonds and the yen or

unless either the Treasury or the Fed or

the you know someone else or the

Congress does something to change the

monetary tides in the in the US the

taxation we're just paddling really hard

to stay in place. So, I'm going to

answer your question. Yeah, go ahead.

From what I call the lite, I'm going to

translate

>> the lite.

>> For 20 years, when I was a correspondent

and I first met you when I was at Fox

and then here at Yahoo,

>> we talked about the coming debt load

>> and a poorer America and a weaker

dollar. And that day is now upon us. And

so what freaks me out about what's

happening in the bond market right now

is are the 340 million of us who are

citizens of the United States, are we

prepared for a higher inflationary uh

experience because that's what a weaker

dollar is going to bring about and what

Mr. Bessant's doing isn't really going

to stop that. That's right. And and in

fact on Wednesday when they announced it

because you weren't here but you saw the

market the market thought it was great,

right? But then Thursday they there was

this change of this almost this come to

Jesus meeting, right? where they

thought, well, maybe this isn't such a

good idea. Um, and then again on Friday,

although the market rallied, bonds

rallied as well, yields went up as well

on Friday, yet the market still rallied,

which was a little bit confusing to me,

but I think some I think the algos

thought that we' got to an over

shortterm oversold position, something,

right?

>> Um,

>> but look, 10 years are still trading at

4.7172%.

Uh, and not likely coming down and the

Fed hasn't done a thing, right? Right.

The Fed funds rate is still 3 and a

half, 375,

>> right? And yet 10 year and 30 year keeps

marching higher. And so this idea that

Besson can control the long end I think

is very very uh illconceived. Yeah. And

and to me it's the opposite of what he

did when he worked for Soros which was

literally you know literally that was

the the Soros trade when they broke the

pound or whatever you want to call it

broke the bank of England. It was it was

that the Bank of England ultimately you

without doing something fundamental a

central bank can't

>> can't stop this, right? Or a Treasury

Department can't stop it. And so this is

this is the the exact opposite. And I

and I and that's where I'm a little

concerned. And and if the if one of the

goals is to make housing more

affordable,

>> it's not really working. And you're now

tariffing the lumber that's used to

build houses. So

>> rates are inching higher, not lower.

Exactly. So this is completely

I I this you know it it's it's it's you

know they're trying to do some on the

interest rate side but on the on the

fiscal side you're literally making

building a house

>> right more expensive

>> substantially more expensive

>> right I I was I'm just curious because

the the counter to this for years and

years was always that the majority of US

debt is owned by American citizens or by

the US government.

Why should that not bring anybody any

comfort? Because the interest payment is

now a trillion dollars a year, right? Is

that the the very simple reason is it

doesn't matter who owns it that it

crowds out the ability to spend.

>> It it does and that and I think that's a

and I think that's a bigger issue that

the stock that the stock market is not

focusing on. One of the re see there

there's two reasons why I think the

yield curve at the long end is is is

doing what it's doing. There's one of

two plausible explanations. One of which

is we're, you know, market sort of

thinks we're grease or it's a or it's a

worse. It's it's what you were talking

about the day of reckoning and we're in

big big trouble. You're not seeing

credit default swaps

>> reflect that. They're ticking up, but

they're not they're not at like panic

get me out of here type of levels. You

know, this we're we're turning into to

Greece 2010. We're not seeing that. What

we are seeing though is the monet you

know there was this big tailwind to the

stock market right you know we we had

low interest rates low inflation

>> for way too long

>> for our yes but there and and companies

were buying back shares so and and you

had priv and because of low rates you

had private equity or other merger M&A

activity removing shares from the from

the equation

>> right

>> that's all flipped on its head now right

>> the companies that were buying back

shares are now having to go borrow

billions if not trillions of dollars

that's competing with the government.

They're not buying back shares to the

same degree. If they are buying back

shares, it's just to keep their it's

just basically on the treadmill to keep

the flo the float there. And private

equity is kind of hamstrung because they

can't borrow the kind of money. And

believe me, a lot of them are looking

for exits. Plus, you have SpaceX,

Anthropic, Open AI, etc. So, to me, that

doesn't mean that we're, you know, we're

crashing tomorrow, but that big tailwind

has is turned. David Bonson has a new

book out. It's called Profit from the

Profit. It's about dividend growth

strategy. But he pointed out because I

got to speak to him.

>> He was saying, "Look, everyone keeps

expecting the day of reckoning a big to

He said, "No, it's a slow motion train

wreck and we're already in it, right?

>> And it will happen slowly and it will

continue to happen." And and what we

heard again for the last 20 years is we

can our our economy will grow our way

out of this. The problem is our economy

is only growing what about 2% a year.

And that's not sufficient to

>> No, especially when the when the economy

is not growing faster than the rate at

which they're spending. Yes.

>> And the and the rate at which we we have

to pay back, right? Because now we're

paying back at it. You know, I I I I I

think about when when Janet Yellen was

Treasury Secretary and rates were zero

and long-term rates were 1.8%. And she

could have refinanced so much long-term

money at 1.8% but didn't do it. That was

that was a ridiculously missed

opportunity.

>> Completely. But

>> can someone explain why she thought that

was a why she missed that was glaring in

the face?

>> Well, I mean, yeah. I mean, you you had

a you had a generational historic low

level of interest rates, right?

>> And and people just wanted that. Sold.

We're traders. Sold, right? Feed the

ducks while they're quacking,

>> right? Um I don't it was a massive

missed opportunity especially now when

you think about you know now we're

paying you know for 30 of your money

five and a quarter and likely going

higher and then you've got all this

corporate you know demand coming to the

market plus you have you know increased

treasury issuance is only going to more

supply is only going to cause bond price

to go lower and yields go higher because

they're going to start demanding higher

yields

>> and so if we're focused on the AI trade

which understandably we are I'm not I'm

not but these are the they they're

competing with the federal government

for funds

>> 100% And that's, you know, ultimately

it's got to come from somewhere. And if

now you have, you know, if it's harder

to if the m look, if if demand and

supply, right? I mean, if if the demand

for funds is outstripping is

outstripping, that means the price goes

up and and effectively that's the cost

that's the cost of money goes up.

>> Well, the price means the yield will go

up.

>> Yes. Yeah. Yeah. Interesting. Because

bond prices will decline, but yields

will go up.

>> Sorry, I meant Yeah. Cost of money

meaning higher interest rates.

>> That's right. Because it's backwards,

right? But um uh uh do you think we're

in the danger zone yet in terms of

yield, long-term yield, 10 year and

30-year yield?

>> Not yet. But [snorts]

>> no, we're not there yet. I mean, the

danger zone would be

>> What's the danger zone for you?

>> Uh somewhere in the mid-5s is

>> for the 10 year.

>> For the 10 year. Yeah. Okay.

>> Um because we've been in 10ear rates

like this in the past. The problem is

once you get up there is this continuing

need to refinance and everyone who's

coming to market isn't going to be able

to do it. So once you get above the 5%

uh yield, then you're going to see

bankruptcies and defaults and then you

get a cascading effect.

>> Well, what I think is interesting and

there was I saw a stat on it this

morning, the tenure and the 30-year, you

know, 4.7 or 5.3% and Fed funds is still

at three three and a half, right? The

last time I think um um

this happened when when the tenure was

ticking at 4.7 4.8 Fed funds were closer

to 4 and a.5%.

>> Mhm.

>> Right. And so there's a disconnect there

and that's what I mean. The Fed doesn't

have to do anything. Kevin Walsh could

just sit there and do nothing because

the bond market is is going to price

>> the bond market is doing a certain

amount of work.

>> It's going to bring about the recession.

The Paul Vulkar recession when we had

interest rates higher. I mean, remember

Paul Vulkar, I mean, he because it was

such a disaster, but you know, he put

the country into a two-year very ugly

recession.

>> Yeah. But look at the outcome.

>> But I think I think in that one that was

that was financial chemotherapy. I think

he had to I think he doubt I think he

had to do that.

>> We were only kids when that happened.

[laughter]

And we had we we had what what 20 year

because of what Paul Vulker did and

because I I remember the stories on the

television about people losing their

jobs and it was a horrific time for the

country and most people you know today

don't even remember

>> 25 year of a massive bull market

absolutely from 82 to really 2000 right

when when they came out in the summer

there of 82 and he announced that they

were cutting rates by 10% rates at the

time were 20% so he was cutting it by

two percentage points which was massive

and then it just set the tone for lower

trades to come.

>> That's what made me a trader. I was a

summer intern at LF Rothschild, which no

longer exists in August of 1982.

>> Yeah.

>> And people were talking about putting

money in CDs at 20%.

>> Right. Cuz why would why wouldn't you?

>> And then just boom. And being being

there and I I I was like, why at that

point I wasn't really working on the

trading floor, but I happened to be

spending a bunch of time there

>> and I was just like, holy crap, this is

the coolest place. I'm going to ask you

a question because you Ella Fruild is

like a name from the past. Whatever

happened to Alchild?

>> They went out. They they died in the

crash. They they basically crash uh 87

87 they basically they they they made a

lot of money. There were tech bankers

which was a which was a a very good

thing. I think like Underberg Tobin

would have emerged with like brought

Intel public like that kind of thing.

Yeah. Um, but they they made a lot of

money in Risk Aarb and 87 blew up a lot

of those bets and they they went out.

>> I hadn't heard that name in a long time

since you just said it. Yeah.

>> Anyway, okay, listen. We could talk

about this for the whole podcast, but

let's talk about now come some of the

noise, right? The financial noise that's

in the market and what are investors,

you know, supposed to do or not do. What

what how do they eliminate what you know

you might consider noise I don't

consider noise but yeah how do you

>> so let's let's look at the the the noise

headline that has been blaring since

Friday and we talked about it before

this Ray Dalio saying sell everything go

to gold okay so I'm I think I'm watching

the Fisher ads you know you know I'd

rather go to hell than sell an annuity

um [laughter]

>> the bottom the bottom line is that the

the the media frenzy

>> Yeah

>> remember that Drudge Report

Yahoo Finance, um, Fox Business, MS Now,

they don't exist unless they get your

attention. And you get your attention by

by unfortunately the thing that makes

people most afraid, right?

>> So, if you sold everything on Ray

Dalio's, right, you know, advice, okay?

You know, and you can go to gold. Gold

is today, as we're talking around 4,700.

Yeah. Um, a month ago was at 4,000. Gold

goes up, gold goes down, gold, you know,

so

>> just be very careful. But the way to get

rid of it is what does your own

experience tell you? Look, I've been a

terrible stock investor my whole life.

What worked for me was index funds

actually. And people say that's crazy,

right?

>> But so I know when I'm thinking, "Oh,

that stock looks really interesting."

I'm like, "Back up there a second."

Adam, right?

>> You always blow it when it comes to this

kind of stuff.

>> So you should follow your own experience

and you should trust your gut, but then

you should get outside opinion to

challenge what you're thinking,

>> right? Well, I think you should always

get outside. I think, you know, if you

want to do it yourself, you have to have

someplace to kind of do some checks and

balances, right?

>> No. And and I think that's important.

You know, I do think though, um, just

keep in mind past performance is no

guarantee of future success. And and and

I'm not saying that as a boilerplate my

compliance guy over my shoulder thing.

>> Um, I think what's gone on that I think

people have to appreciate is buying the

dip has worked for what 15 years

straight pretty much. you know, not

necessarily every trade, every tick, but

it it and it's very ingrained in

people's psyche.

>> And unfortunately, you and I have the

scars to prove that it doesn't always

work all the time. And I think the more

people are convinced of that, that it

will work, the more dangerous it becomes

>> for when it doesn't uh that. But I can't

tell you when it won't work. I mean, we

we we laid out the whole bond market

thing. Maybe that's a problem. Maybe

that's the time it doesn't work. I don't

know when, but just don't do don't do

stuff reflect. I guess my my comment

there would be don't do stuff

reflexively just because it's worked

before.

>> Right. Okay. I hear you. So, let's talk

about gold because you and I had a good

conversation just about gold because it

has gone from four it was stuck in that

4,4200 range for, you know, a good eight

or nine weeks. Now, it has busted out,

right? It's it's bust I had 4,500 as a

target if it when it broke out. Well, we

blasted up and through that. I think

we're trading at 4670 today. Um, but I

think that's more of a fear trade.

>> Well, so the fear, right, there are a

lot of I was going to say as part of

this is I would consider buying gold

right now if you want to move like 15%

like Dalia was saying, right,

>> into gold. But here's you need to know

when you're going to exit. And what we

were talking about was part of the fear

trade is what's going on with these

markets, the midterm elections, and what

are the outcome of that, right? you

know, you you might want to hold on to

gold or sell gold after the outcome of

the midterms depending on who's going to

truly be in power and what's going to

happen with what we were talking about

earlier, the monetary policy of this

country and how that's going to

contribute to the issue with bonds. If

it works out in a certain way, you may

want to hold on to gold,

>> right?

>> So, it's a short-term play,

>> right? Okay. So, because you toss this

in there, so let's just let's just toss

it in there.

Do you think the outcome of the midterm

elections, if it goes where the

Democrats take both the House and the

Senate, that it becomes more of a

a frightening situation? Um, if the

Democrats get the Senate and the House,

>> yeah,

>> uh, I don't think anything gets done.

And in the past, that used to be a

ticket to Wall Street. This was good.

But I'm not sure it is a ticket to Wall

Street because what they have to get

done is what we were talking about

earlier is there needs to be a

bipartisan address of what we're doing

with spending. How you going to save

social security? Look, when we talk

about the country's monetary problems,

60% of it is I don't like the term

entitlement because we paid into it.

>> It's not we're not entitled to it. We

paid into it. It's ours,

>> right?

>> But then what we talked about too is

most of us are going to get more back

than we paid in. So how is that because

we're living because we are living

longer which is part of the reason we're

going to get more back

>> but they've got to address it and it's

the majority of spending in the country.

>> There are two fundamental issues that

have to be addressed in my mind. Number

one is the idea of entitlement. I mean

it's a social security is a transfer

tax. Medicare is a it's a transfer from

people who are working to people who are

not working or in some cases still are

working but but paid in and and do feel

entitled to this. I've been paying into

social security for

>> I don't feel I don't feel entitled like

you said I paid in you paid in you paid

in it's my money

>> except it hasn't been a pension plan

like my 401k I'm entitled to my 401k

what I put in

>> come after that too

>> yes but what but what I put into Yeah.

But what I put into my 401k

is is is is mine is yours.

>> Capital and labor are taxed very

differently. And I think that without

having really been being discussed in

those words is what's driving a lot of

the appeal of democratic socialism

>> is because there's this feeling that you

know look we're investors. If we hold on

for a year we get taxed 20%. So should

we should should we tax all investment

as income? I'm I'm I'm not I don't have

my answer but my point being that that

there are arguments for why taxation

should be more prog I'm not necessarily

espousing these things but there but

these are

>> espouse go ahead

>> but the no because I you know I can I

only go so you know I'm not going to

basically said please raise my taxes by

a huge amount or or or or cut out the

capital gains rate but fundamentally

this it's a it's going to be cut it's a

class issue because the people who

because the vast majority of people in

the country make get taxed at a higher

rate than the people who make their

money at the high at the highest end of

the income scale or the highest end of

the wealth scale because they're getting

getting taxed at getting t capital gains

get taxed less and besides all the

various ways around it you know using

you know borrowing against shares etc.

I'm not going to go I'm not this is I

don't want to turn this into tax time. I

don't want to turn this into like right

pitch pitchforks and and and pitchforks

at the masses thing. But these are

things that that I think are bubbling

under the surface that need um real

discussion and it's not clear to me that

we're going to get that anytime soon

regardless of of of who's in office.

>> Well, okay. I mean, they're floating

this idea of the wealth tax out in

California like a total wealth tax

trying to take add up your wealth every

year and say you owe us 3% or whatever

the number is. But I I don't understand

how that tax actually works because

you got to take every every painting in

your house. You got to take everything

you own and throw it all into a bucket.

>> Is that what is that what they want you

to do?

>> I I certainly don't I have no idea how

they intend to implement this and and it

it it's a silly it's a silly idea

because most of the assets are illquid.

Right. So right, you know, you know,

should should I should I be, you know,

owning a super I don't own a super

yacht, but should but you know, but

that's not that doesn't generate cash

flow. So the so the idea of that is it

I'm not going to espouse that in any

way, shape, or form, but I'm just saying

that these are the discussions that we

have that that that are going to be

forced upon us whether we like it or

not. And I think the and I think that um

just as the you know the the Tea Party

sort of morphed into MAGA and sort of

became mainstream Republican thinking in

a lot of regards I think the Democratic

socialist stuff which is out there to a

lot of people. The the the ideas that

are more appealing get incorporated into

the democratic

>> so to put it into a rat because you know

how I feel about the democratic

socialists. I think that they are

dangerous and a problem. I'm a

capitalist although I do espouse some

you know we talked about earlier I think

it should be mandatory service to the

country whether military for 18y olds

>> but at the end of the day the question

is by the way yeah or or service it

doesn't have to be military but all

18-year-olds but that's another

discussion at the end of the day the

question that we need to ask is what

kind of society do we want

>> what are we willing to do to subsidize

those who are not able to fund

themselves in retirement and should you

were talking about I'm Gen X baby

boomers who are living down at the

villages playing golf. They paid into

the system. But it's very easy to

understand why a 30-year-old watching

the baby boomer who's living really

well. Yeah.

>> Wait a second. Why is the 30-year-old

supporting that if they're not going to

be able to get that at their retirement?

>> Well,

>> those are the questions we have to ask.

>> Okay. But I'm not sure that they're not

going to get it. What makes you think

that they're not going to get

>> Well, we know for a fact that in 2032,

it's 70 cents on the dollar for social

security if we don't do anything.

Demography at some level is destiny and

and the problem is we're getting older

and there's

>> Yeah. So what I mean is there has to be

a there has to be a conversation about

social security. So yeah, we're not

going to solve this the three sitting

here, but these this is this is to to

but to get back to your point about what

happens if if you have a big sea change

in Congress

>> is I we've already been talking past

each other both sides, Democrats and

Republicans

>> just talking past each other lot, you

know, who's going to who's going to

score to this this week's points on

social media. Um there are serious

discussions that have to be addressed.

there are serious underlying causes that

I I think are not well appreciated

um and and not easy to fix and and not

necessarily desirable to fix all the

way. So the root the root of your

question or the is as a citizen of the

United States

>> what are you willing to do no we are not

asked a lot we ask a lot of the people

who are in the military but that's it

who has skin in the game and as citizens

what is our requirement to guarantee you

know the checks and balances not only on

government but on the on the society as

a whole. we are talking past each other,

but there have been moments in our

history where and not too long ago,

Simpson BS could have addressed these

issues and that was bipartisan, right?

Didn't get out of committee. And there's

actually, as we're speaking right now, I

uh I forget who the Republican is, but

with Elizabeth Warren, they're they're

trying to address the Social Security

issue. So, the question becomes with the

midterms, if you have the Democrats

controlling both houses, do you kill the

bipartisan effort to address the

entitlement spending?

>> Yeah. Thank you very much for another

very exciting conversation. I could have

done this for another hour and a half,

just so you know. Until the next time,

take good care.