The federal government has many levers

and enormous amounts of influences on

all asset prices. And so if they want

something done, they can do it even

without the Federal Reserve. I have no

idea what Trump wants. I'm simply saying

that this is a potential option and that

would put downward pressure on mortgage

rates.

>> Would you agree with Jay Powell that the

subpoena against the Fed is a quote

pretext?

>> No, obviously. Right. Obviously.

>> Okay. Everyone knows that.

Today's episode is brought to you by the

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their using AI to enhance international

equity returns later in the show. For

now, let's get into it. I am joined once

again by Joseph Wang of fedgu.com.

Joseph, I want to start with a, you

know, slightly wonkier topic, which is

mortgage easing. The levers that the

White House can pull in order to ease

mortgage credit without having to do

interest rates. You've actually been

writing about this for a long time at

fedguy.com and I've been reading your

work and it was like okay this is

theoretical Joseph is talking about how

that this theoretically could work

through the various channels but it

seems like the current head of the FHFA

Bill Py is I don't know if he's reading

fedgu.com or he's he's taken it to the

next level. What's going on here and how

substantial could this be?

>> Well, first off Jack, thanks for

inviting me. It's a pleasure to be here

and you're right, Bill Bolty is a very

creative person. and he's been thinking

about ways to try to carry out the

president's goal of having lower

mortgage rates. Now, normally when we

think about mortgage rates, we think

about the Fed first and foremost, right?

Maybe the the Fed were to cut rates.

Maybe that could feed through to lower

mortgages. But so, there's a lot of

things that there are other tools that u

the government, the federal government

could do to have lower mortgage rates.

Now, Bill Py memorably noted that uh the

GSC's Fanny May and Freddy Mack, they

could actually just start to buy

mortgages outright, increase their

holdings of mortgages, and that could,

for example, just by kind of like a

basic supply and demand way, you have

more people buying mortgages, prices of

mortgages go up, yields go lower, right?

That spread between mortgages and

treasuries narrows a bit, and that could

have an impact on mortgage rates. Now,

when he made that announcement, you saw

the mortgage market immediately react

and you had a knee-jerk reaction where I

believe the 30-year mortgage rate

actually went down with a with a five

handle. I think a lot of that has

retraced, but that's just a glimpse of

what they could do. Now, when we're

thinking about the GSC's, I think it's

important to have some historical

context here. Now right now Fanny May

and Freddy Mack they held I think

together a few hundred billion in

mortgages but before the great financial

crisis these guys together held about

1.5 trillion in mortgages. They were

basically engaging in a huge carry trade

where they would issue debt. They would

issue agency debentures and that would

trade say you know it's not wasn't

mostly short-term it was mostly

medium-term and then take the proceeds

of that and just buy a whole bunch of

mortgage mortgages. So that was

extremely profitable for them and

everything worked really well until

obviously the housing market turned and

then those mortgages uh there was

investments soured and then they went

bust and they were rescued by by the

federal government. However, I'm just

saying this to give you context to know

that in the past these agencies have

held a lot of mortgages and it's there's

no reason why they couldn't do it again.

Now, at the moment, how big they can get

is constrained by an agreement they have

with the government, with the Treasury,

and the FHFA, their regulator. But

these, of course, are all people who are

work for the White House. And so, you

could easily have a scenario where they

do actually go and kind of take this to

to another level. So, that is one tool

they can have. There are other tools as

well, though. For example, another GSC

that's not as well known is the Federal

Home Loan Bank system. And the federal

home loan banks together have a balance

sheet about say I think it's about 1.1.2

trillion. They are known as the lender

of next last resort. So what the federal

home loan banks do was that they provide

secure loans to commercial banks. And

usually well these these loans are

provided at a rate that is below market.

And in the past decade, what we've seen

is that whenever commercial banks have

liquidity problems, they would just rush

and borrow from the federal home loan

banks instead of borrowing from from the

discount window since there's no stigma

when you borrow from the federal home

loan bank. We saw that during the

Silicon Valley crisis, right? We saw a

huge surge in borrowings from the

federal home loan banks to the

commercial banks. So one other toolkit

they could have is they could widen

access to federal home loan bank

financing to uh the mortgage rates. Now

a little bit more historical context.

The whole point of the federal home bank

system is actually to support the

housing market. So in the beginning they

thought that hey if we had a government

agency that can buy provide cheap loans

to banks against mortgage collateral

maybe that will facilitate uh lending

that will help uh support the housing

market

and that that is indeed what they do

now. But they're not the only lend banks

aren't the only lender in the housing

market. Of course you also have uh these

mortgage rates whose whole business is

to borrow short and repo and buy and buy

mortgage back securities. These guys,

it's been a topic of discussion for some

time, would like to have access to the

federal home loan bank system because

that's way a way for them to get cheap

financing and so that they can go and

boost their profits. But of course, by

doing that, of course, it also

encourages them to go and buy more

mortgages, which of course would put

downward pressure on on mortgage rates.

So there's a whole lot of things that

the GSSE system can do to try to get

mortgage rates lower. So, I wouldn't say

that the I wouldn't say that

uh the Fed is the only game in town. Of

course, the administration has floated

other proposals like allowing people to

take money out of their 401k to buy a

house. It seems like the president

doesn't like that. So, this is a very

creative administration. So, I I think

that with the willing with the

willingness there, we can definitely see

lower mortgage rates going forward. So

the the housing market in in the United

States is weak. Volumes are low. Prices

are still high and interest rates,

mortgage rates where they are if you

want to borrow now are way higher than

most people who borrowed money in the

past. So there's a lot of lock in.

People are just, you know, trapped in

these these in these golden cages. And

if you're not a homeowner, it's very

tough to get access to that. The

president wants to improve the housing

market. You know, one way is for housing

prices to go down. It appears that the

president does not like that solution at

all. You know, he he made several

comments over the over the past few

weeks. So, Joseph, so there there's

another channel through which the

President Trump can stimulate the US

housing market, the GSSE, government

sponsored enterprises, which is includes

Fanny May, Freddy Mack, and then also

the federal home loan banks. Both of

which are directed by the FHFA, the

Federal Housing Finance Agency, the

director of whom is now Bill Pulsey,

appointed by Trump, who he shares a last

name. He's from the PY family which is a

major homebuilder in America. So on the

on the Fanny May and Freddy Mack that we

can put up a chart for for our viewers

from from you showing their their

mortgage portfolio used to be huge

before the crisis then they got cut down

in size. Now their cap is at 450 billion

but their actual assets that they have

was way lower than that. So I'm just

like looking at the data. So you know in

February and January of last year like

this is just Fanny May. Fanny May owned

in February 77 billion and now they at

the end of the year they owned 123

billion. So they already had been

expanding their portfolios and the same

I know is true of Freddy Mack.

>> That's not as these guys are so

creative, right? They there's so many

levers they can pull. And this this Py

guy, holy it's like

insane. Like I I've been reading like

news articles about how he gets his

plans on pro to to the president. He

just kind of shows up some cool gimmicky

stuff and you know president just like

oh this looks cool let's do it right. So

he's a he's really good at

self-promoting. He's very ambitious

person.

>> So

>> he's a very active poster on X that is

for sure and I know just I remember from

a book that when Roosevelt FDR like got

us off the gold standard he weakened the

price of gold. He had this agricultural

specialist who also was an economist and

he came in through the side door in the

White House and they just literally

devalued the dollar against gold and to

increase the price of gold at a whim and

you know it was like $36.7

and it was like oh FDR Mr. Mr. President

why do you do seven cents and he's like

it's a lucky number. So yeah there is

history of just you know ideas being

kind of made up on the spot.

>> Yeah. Well, no. I mean, it was a it was

an idea that actually worked, right? You

saw mortgages react to that. I think

they've given that all back. But, you

know, back in the day before uh the

great financial crisis, these GSC's,

they hold together like 1.5 trillion in

mortgages, like they they delivered

obviously, but if you really wanted to

start that up, you could you could buy a

lot of mortgages. To what degree is this

just natural seasonality or if because

of the housing market the the GSC's are

absorbing more supply or is do you think

the you know is Bill Py actively buying

in order to stimulate the housing market

you know with the blessing or perhaps

direction of presidents of president of

the United States?

>> Well the president tweeted out that he's

going to direct the GSC's to buy an

extra 200 billion. Now, if you like he

mentioned that they have a cap and if

you look at that in context, he's

basically directing Bill Py to allow the

GSC's to buy mortgages up to the cap.

Now, if to keep in mind that cap is not

really fixed in stone. It's something

that they the GSC's agreed with with the

Treasury and with the regular FHFA. So,

there's no reason why that cap couldn't

be lifted. So I I think that is a

potential way to get mortgage rates

lower. Like you mentioned, Jack, if you

look at the past, the GSC's have held

trillion dollar plus mortgage portfolios

prior to the great financial crisis. So

there's a lot of potential

juice there.

>> Yeah, the the mortgage portfolios were

small over the past year. They've

expanded and they're now at roughly 250

billion. The cap's at 450 as you said.

So again, President Trump saying buy 200

billion. It's just filling up to the cap

and then the cap itself could be lifted.

Joseph, I want to talk about just the

federal home loan bank thing. So, yeah,

they're called advances. The Federal

Home Loan B bank advances, you know,

makes short-term loans to the banks and

that spiked during 2023. All these banks

needed liquidity and then it's gone

down, which is actually a good thing.

So, are you saying that right now FHLBs,

they can't make these advances to the

mortgage rates, but you think that Trump

wants them to and that's going to

increase mortgage liquidity? So then the

the

>> So, no, I have no idea what Trump wants.

I'm simply saying that this is a

potential option and that would increase

demand for mortgages. So, that that

would demand mortgages is going to put

downward pressure on mortgage rates. I'm

just offering you a menu of options that

could be done. I don't know what they

would do. I would just highlight that

the federal government has many levers

and enormous amounts of influences on

all basically all all asset prices. And

so if they want something done, they can

do it even without the Federal Reserve.

>> And so uh PY of FHFA director PY has

been talking specifically about the GSSE

thing. Trump tweeted and you posted on

Truth Social about

I'm instructing them to buy 200 billion.

That's the Fanny and Freddy your thing.

I know you've been writing about FHL lbs

maybe, you know, making advances to the

the mortgage rates. Is that coming from

you or have you seen you know in the

administration whether it's Trump,

Trump's people or Bill Py, are they

talking about that as well?

>> No, no, they they they're not. I think

it's something worth talking about. The

more actually so the rates have been

hoping for this for some time. the

interest groups for them have been

insurance companies actually used to be

able to borrow from the Hobbies but they

got kicked out and I'm sure they hope

they could come back as well. So again,

everyone wants to borrow, everyone wants

cheap loans, right? So you always have

these interest groups over the years

trying to trying to access this, but

now I think you have maybe a different

industrial policy. So it's it's

something that they could think about.

Joseph, do you think that in a year from

now we will say, oh, mortgage rates are

so low are so much lower, access to

housing is increased and prices are, you

know, flat to up because because of this

stimulus and we can trace it to Bill Py

buying buying all the all the things we

talked about like do do you think that's

going to happen? How are you assessing

the the probabilities there?

>> Housing is a complicated question. And I

think rates is one way to help it. But

if you listen to what the home builders

are saying, they're saying that well,

we're already offering rate buy downs

and if you go and buy a new construction

home, you can get a rate with a

fiveando, sometimes even a fourando. So

it seems like if you the problem with

housing, know lower rates would

definitely lower mortgage rates would

definitely help, but there's there are

other concerns as well. I think if you

look at consumer sentiment, it seems

like a lot of people are concerned about

their jobs and so because they have

uncertainty about the their employment,

I think that's becoming a increasing

deterrent for them to carrying to buying

a home and having that this big

obligation, right? You don't want to get

a mortgage and then suddenly lose your

job. So I think I think that's going to

be a bigger deterrent going forward. So

you think even if the they buy the even

if the GSC's buy 200 billion up to 450

billion even if the cap is extended

there's the suddenly Fanny and Freddy

have a trillion dollar portfolio and the

federal home loan banks are lending to

mortgage rates as you said even then you

still think the housing market would be

under pressure.

>> No it definitely helps. mortgage rates

helps, but like I mentioned, if you

listen to the home builders, they are

already offering sizable rate buyowns,

but then they're not seeing demand pick

up as much as they they'd like. So, that

tells you that it's not just about rates

at the moment. It's also about, I think,

job insecurity, which is what we see in

the labor market consumer survey. So, we

need lower rates and we also need

employees to feel more comfortable in

their jobs to have I I guess u more

employment growth. Tell me about the

slowdown you see in the labor market and

why does the Federal Reserve say that

they think the labor market is in

balance because the unemployment rate is

still low and actually declined over the

past month?

>> Well, we're in this really difficult

place when it comes to the labor market

because we also have these demographic

shifts. Now during the Biden years there

was enormous increase in illegal

immigration and that kind of change that

kind of made it difficult to to know

just just what is a sustainable monthly

job creation number cuz part of it is

that you have increasing supply of

labor. Now fast forward to now the Trump

administration has closed the border

illegal immigration is really low and so

your population isn't growing as much.

So it makes it difficult for the Fed to

know just what is the correct break even

number of jobs we need to create each

month. So the labor supply dynamic is

shifting makes it hard to understand but

demand is also pretty soft as well and

part of that really could be due to AI.

When I was reading earnings reports from

companies like big banks they're all

mentioning that they are quite positive

on growth in their business but they

also mentioned they're cutting people.

And this past week of course we also

have a big announcement about Amazon

cutting people. So there there is a real

I think really a real sense that AI is

replacing some people and reducing

demand for labor and these changing

supply and demand demand dynamics make

it really difficult to judge to to see

whether or not the labor market is is

doing well or not. So like you mentioned

our job growth numbers are lower than

they have in the past few years but

maybe that's normal in current

conditions. The unemployment rate has

been trending higher, but historically

speaking, it it's still not that high.

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Now, back to the show. And what did you

think of the Fed meeting in January

where POW Powell was pretty hawkish and

said that he's not as concerned about

the labor market as as he was over the

past few months. Why

>> Powell was a bit more upbeat about the

market about the state of the economy?

And if you're up more beat about the

state of the economy, that suggests to

the markets that, you know, maybe we we

don't have to cut rates as much. And so

you could perceive it to be a little bit

hawkish. But I I didn't see a big market

move from what PA was saying. I think PA

is basically his term as chair is going

to be up soon and the market is moving

beyond him to try to focus on who the

next Fed chair is. I think that's going

to be a lot more consequential for the

trajectory of monetary policy. Now in

addition to that, I think the second

most consequential thing is what Paul is

going to do after his chairmanship ends.

Now he is currently Fed chair and his

Fed chair term expires in May. However,

he doesn't have to leave the Fed after

his Fed chair term expires. He becomes a

regular Fed governor and he could still

and that term expires, not for a few

years. So, if he wants, he could just

continue to stay at the Fed, basically

be a shadow Fed chair and exercise

influence on Fed decisions. Historically

speaking, when a Fed chair's term ends,

usually that person resigns from the Fed

and the president gets to appoint

someone else to replace him. That's not

always the case. And Powell doesn't have

to resign if he doesn't want to. So,

everyone is I think I'm focused on

whether or not he decides to resign,

giving President Trump another seat on

the board to fill, increasing his

influence over the Fed, or whether or

not Powell just stays there and I guess

protects institution as he sees fed. So

Powell's uh term as the chair of the

Federal Reserve expires in May of this

year, but his term as a member of the

board of governors doesn't expire until

January in 2028. So most of the time the

Fed chair leaves and they leave the

board entirely, but Powell could stay

on. Why do you say that he would be a

shadow Fed chair and not just another

board of governor who's, you know, one

of the of the 12 votes?

>> Because Powell is is an influential

person. people on the board have worked

with him for a number of years. They

respect him and and they like him. So

his views are going to carry weight and

if you have a new Federer coming in that

Fed share is not going to know have that

same rapport with the rest of the

members at the Fed and maybe that person

will be perceived as a Trump guy. So in

that sense Paul will continue to have a

lot of influence on how board members

vote and behave. How are you assessing

the odds that Powell stays versus leave?

What's what's your read based off his

quite cryptic answers? You know, anytime

he's asked about this, he says, you

know, it's not my place to call it,

basically.

>> Well,

I think the president would be very

upset if Powell doesn't leave. So, I

think what's happening is that they're

trying to build a case, a plan B to get

him out if he doesn't leave. Now, in

order for a president to remove a Fed

governor, he needs cause and no one

knows what cause is because this has

basically never happened. And the

Supreme Court again is in the process of

looking at this. President Trump is

trying to get Governor Cook removed uh

for allegations of of misbehavior with

her mortgages. And so maybe the Supreme

Court will give us clarity as to what

constitutes cause. Now usually usually

there's great difference to the

president for in these matters but of

course you can make the case that the

fed is a special institution. Now recall

just a couple weeks ago that there was I

guess a criminal indictment or some some

allegations about Cher Powell uh and the

Fed as an institution. Now you know you

could think of that as trying to create

cause. Now, if they were able to have

some kind of investigation or indictment

against the chair, maybe that that makes

it a little bit easier to argue for

cause. So, this is something that is

just again, we don't know how this is

going to turn out. It's just creating

arguments to try to have a little bit

more

leverage when it comes to negotiating

with with POW whether or not he stays or

not. So, I I don't know what's going to

happen. My just my judgment is that the

president, especially this president, is

particularly influential because he has

the support of a lot of Republicans in

Congress, not the ones that are about to

retire, but Republicans more generally.

So, I think he's his will is probably

going to prevail. So, my best guess is

that Chair Powell will leave the Fed in

May and Trump will get to appoint

someone else. I I believe the Federal

Reserve received subpoenas in late late

December, early January and then the J.

Powell himself, you know, made a

statement and shared on social media,

you know, the the statement heard around

the world, which the Fed, you know,

Powell almost never does in which he

called I I I assume I don't know, but I

I assume that the inquiry President

Trump and the Justice Department is FBI

is saying is that President J. Powell

lied to Congress about certain things

with the Federal Reserve, perhaps

specifically with the renovation of the

Federal Reserve, which had gotten quite

pricey as as many renovations are now in

the in the building industry because of

inflation.

So I I want to know your thoughts on

this and also I take your point that co

no one knows what cause means because a

Fed chair has never really been you know

removed for cause but you know might I

propose to you and what do you think

about this of like reasonable people

kind of know what cause means so you

know if you're you know Joseph you were

the Fed chair and you were using the

your influence to profit from your

personal trading account I would

consider that to be cause if you If you

made a mistake, as the Federal Reserve

did during 2020, 2021, of not cutting

interest rates, of keeping policy too

tight or too loose, if you made that

mistake just because mistakes happen, I

would view that as not being caused. I

feel like I I would say that you, you

know, the Federal Reserve renovating a

building and surprise surprise, an

extremely important institutional

building in Washington DC is expensive

to renovate. Like, I would not consider

that to be fair cause. You know, I'm not

a lawyer. Would you agree with me? And

do you would you agree with Jay Powell

that the subpoena against the Fed is a

quote pretext? You know, basically if

they if they didn't get him on this,

they'd get him on a parking ticket if

they could. You know, you you know what

I'm saying?

>> Yeah. Obviously, right? Obviously.

>> Okay. Everyone knows that.

>> You know, an interesting thing is that

Japal was asked whether or not the Fed

had responded to the subpoenas. He

didn't actually mention that. And I

think that I've also saw a headline that

the Fed hasn't responded. So, you know,

being defiant like that, I think it

it only creates more problems for for

the Fed going forward. So, yeah, we'll

just see what the Supreme Court says. I

mean, the Supreme Court, the Supreme

Court has been pretty differential to

the executive, right? There are other

cases where I I believe the president

would like to remove people from the FTC

commission and so forth. And it's also

an interpretation of just how expanded

executive power is. Do you believe in a

theory of unitary executive? Does the

president get to get to just kind of

appoint people that he wants? After all,

he won the election and whether or not

you want to carve something out for the

Federal Reserve because you believe that

it's a particularly important

institution to to not be influenced by

the executive. Do you think that the

administration's attempts to influence

the Federal Reserve by going after Lisa

Cook, you know, going after Powell, do

you think that's part of the reason why

gold and silver are rallying like crazy

because there's a a lack of confidence

in the independence of the Federal

Reserve?

>> So, I think we have to keep in mind that

every market has different market

participants, right? So if you look at

so one one way that you could look at

quote unquote confidence is you could

look at inflation implied by break evens

right and if you look at tips you'll see

that inflation expectations are very

well anchored. So if you were thinking

that my gosh the Federal Reserve is not

going to be independent and that's

really bad and we would have you know

some kind of disaster you'd expect to

see that in that market but you don't

see anything like that and Cha was asked

about that at the press conference but

again the people who traffic in in gold

despite my observation over the past few

decade tend to be particularly sensitive

about the central bank or fiscal policy

and so forth. So maybe they are

particularly sensitive as to what's

happening with the Fed, possibility that

monetary policy in the US become less

independent and maybe that's driving

them to increase their purchases. So I

think there's definitely some of that

there. But I'd also note that, you know,

you have a lot of other things going on

in the world as well. For example, the

dollar has been weakening a lot and you

would expect a weaker dollar. You'd have

higher gold prices. We'd also I'd also

note that looking across the world, we

have heightened geopolitical tensions.

Not too long ago, the United States

government extracted Maduro and

Venezuela. Right now, they're moving

assets into the Middle East. There's

discussion that there might be strikes

on Iran. That is the reason historically

speaking for people to buy gold. And one

last very important thing that I'd like

to keep in mind is that I think there's

some change in the composition of market

participants now. So there's a lot of

people I think mostly retail that that

basically buying momentum and so we saw

them appear in 2020s buying calls

squeezing out NFTts meme coins doll

coins and so forth those guys are still

around and I think they gold and silver

are attracting some of those flows as

well. So I think there's a lot of things

driving gold. I personally don't

actually think confidence in the dollar

is is a big story or even that

important.

>> Confidence in the dollar or confidence

in the Federal Reserve.

>> Uh in the Federal Reserve.

>> Okay. Okay. Okay.

>> Well well they're kind of linked though,

right? So people oftenimes people who

talk about confidence in the dollar.

Think of it as thinking of think of

independent central banking as a pillar

to that.

>> When Jay Powell leaves, what's the

Federal Reserve going to look like? who

Trump appoints. Tell us who the

candidates are and the various

scenarios. What's different about the

the Federal Reserve with a Rick Reer

running it versus a Kevin Walsh running

it versus the Jay pal we have now?

>> Well, well, the president has told you

one thing that I really like about

Trump, he's just so open. He's like, you

want to be a Fed share, you got to

promise you you're going to cut rates.

So, we got we got to see that. But

outside of that though, well, first I'll

note that it's not the guys who who are

going to be FER nominees, potential Fed

chair. They're not saying that I'm going

to cut rates because the president told

me, right? There's a actually a

reasonable sounding story that they'll

make and that is to say that the labor

market is weakening, which we, as we

discussed earlier, Jack, it does seem

like job. Okay, so what they would say

is that the trend of the unemployment

rate is higher, moving higher, and so we

want to get ahead of that. Again, that's

part of the rationale that we had a cut

in December. And the other rationale

they would say is that we have a huge

productivity boom, which is actually

true according to the data as long as

it's not revived. So last year we have

very strong GDP growth and at the same

time very low job growth. So the

implication of that of course is that uh

we have more productivity. every

employee is becoming more productive and

if you have a big productivity boom it's

an argument for lower rates because you

know basically

every you're producing more the supply

side is increasing and that's going to

put downward pressure on inflation so

that's that's the I guess the standard

Trump monomy line you hear that from

Kevin Walsh you also hear that from Rick

Breer now aside from that though these

two have very different views on on

monetary policy Now Kevin Hos as we all

know is long long long longtime hawk.

Now his hawkishness seems to be stem

from his view of of how the economy

works. Kevin Walsh is thinks of himself

as a monetrist and what that means is he

thinks the quantity of money has a has a

big impact on on inflation. This was a

very this is intuitively appealing and

very common throughout the past few

decades. The Fed actually officially was

pretty had had that perspective during

the the 70s and ' 80s. In fact, at one

point in time, very briefly, the Fed

went to targeting the money supply. But

what we've learned since then is that

this doesn't work. And so people

abandoned that. Back then, the Fed had

M2, M3, M, and even M4. Basically,

everyone was trying to track the money

supply because everyone perceived that

be the driver of inflation. And then

that didn't work. So, it was abandoned.

the monitors people had a kind of a

revival after the great financial crisis

because at that time the Fed was doing

quantitative easing had all these people

on TV saying that we're going to have

hyperinflation gold's prices were

soaring and at that time Kevin Wwood

also was also worried about inflation

right because he's a monetrist he's

thinking oh my god you're printing all

this money inflation is is going to

skyrocket but of course once again the

monetrists were proven to be totally

wrong right for for a decade the Fed had

trouble meeting their inflation target.

So that perspective intuitively

appealing but just has been persistently

wrong over and over again for many

decades. But you know it people have

it's really hard to update mental

models, right? You receive them when

you're in school or through life or

something like that and over times it

becomes hard to update. So Kevin Walsh

apparently still holds this model and so

he's all about shrieking the Fed's

balance sheet. Now, this is actually a

perspective shared by people in the

Trump administration as well. Scott

Bessett shares the same thing, Nikki

Bowman, Governor Moran, they all share

the same thing. He wants to shrink the

Fed's balance sheet. Now, I think we all

know that's going to be quite risk

negative, but that's what he wants to

do.

That's that's interesting based on where

inflation is 2.7% around there the the

unemployment rate is you know do you

think that the forward interest rate

markets of the one-year rate the

two-year rate of pricing where interest

rates are going to be in 2027 2028 do

you think that they roughly have it

right that it will be in the low 3s or

you know if if we get Rick Reer in there

could we go to the twos could we go to

the ones what's what's your rate outlook

shaped by the the inflation in the labor

market but everything we've been talking

about as well.

>> So I think the market has is going to is

going to be definitely wrong because

when the market tries to p price out the

expected path of f policy it's basically

what the market thinks that the data

will be in the coming months and also

how the fed will react to it. Now the

Fed is changing in its composition and

so the market is definitely going to be

wrong on how the Fed reacts. So I have I

think that the the the market is

actually too hawkish. So I I think that

the president is going to get his way to

try to have more influence over the Fed.

So I I would say that we would have four

cuts this this year, maybe three or four

cuts. So I would say we could go down to

like 2 and a half to 75 this year. So I

think the market is too hawkish in not

fully appreciating how much influence uh

a president can have on monetary policy.

And yeah, so I I think that's in my

perspective the biggest mispricing there

in the market right now.

>> That's very interesting that you think

you're more doubbish. You think the

Fed's going to cut more than the market

is implying for a long time when you and

I have been interviewing over the years.

You've said that the the cuts priced

into the curve in 2022 and 23 in the

forward market were premature and you

ended up of course being right about

that. What rationale do you think the

new Fed chair is going to give to

justify cutting interest rates? You

referenced the productivity boom when I

interviewed Fed Governor Myin in

November. He mentioned that he has this

framework. However, from his own

numbers, if I remember correctly, the

the the fact that the neutral rate

should be lower because productivity is

higher is the amount of basis points

that you get from that is not huge

compared to, you know, if inflation

comes in at 50 basis points higher, all

that productivity boom is kind of kind

of wiped away. So, you know, if

inflation's at 3%, are these

mathematical, you know, quite

econometric equations going to be

powerful enough to to justify cutting?

>> Well, come on, guy, Jack. All this

econometric stuff is nonsense, right?

So, I think everyone who who works in

this knows it's nonsense. It's it's

basically propaganda used to justify

what whatever you want to do, right? So,

you can make an argument easily. You

could have Ray cuts. What would you do?

Well, you could well well, you know,

labor market is weakening. We got to get

ahead of this. You know, inflation is

transitory because a lot of it is just

goods, right? And goods we know that

largely passed through and so it's going

to come down. Or you could say that, you

know, we're super restrictive right now,

right? We are, you know, the neutral

rate is really low. And so, you know, we

got to, you know, cut rates a little bit

to be less restrictive. The stuff is

just arguments people make. I think uh

what we've seen over the past few months

is that president has been squeezing

governors, squeezing the Fed share and

when it comes to Fed presence they they

have even less political influence.

though I I I do think that we are

transitioning from a from a independent

central bank kind of model to something

that's more industrial policy- liked

maybe like Japan in the 1980s when they

were growing rapidly maybe like how

China is today where there's going to be

more coordination between how fiscal

policy and monetary policy work. So I

think that's the broader trend. So I I

don't really I think the particular

arguments are are really just going to

be justifications. That is a really good

point. And you know, I've been using the

word inelastic a lot to talk about like

silver supply. But when it comes to

arguments to justify interest rate cuts,

yeah, I think arguments are extremely

elastic, particularly in this case.

Joseph, I I want to introduce an idea

that I've kind of been having. I want to

kind of just throw it at you which is

you are of course aware that many

mainstream publications and journalists

and diplomats are the the commentary on

the current president you know Trump

administration is he to put it mildly

you know he is rocking the boat he is

flouting international norms he's making

foreign diplomats foreign you know

people uncomfortable and as a result

that is going to what is kind of drive

this sell the US do uh sell the

trade. Uh

>> yeah,

>> you know that that we saw that argument

come in play in April last year with

with the tariff drama. And I'm just

thinking, you know, what are the odds

that five years from now people will

look back and say, can you believe that

people thought that, you know, because

President Trump said a few things that

made people uncomfortable that people

like allocated outside of US markets?

Wasn't weren't they so stupid? Like how

are you assessing that odds or are you

taking this, you know, a little more

seriously? I think that that was a big

risk that that I felt was there last

year when we had that big sell America

trade. I I noted that foreigners have

very very high exposure to US dollar

assets. you know, should they want to

rebalance out of the US that, you know,

just to become a little bit less exposed

to the US, that could have big impacts

on US equity markets. And also, if you

had persistent dollar depreciation from

a far expensure standpoint, you'll be

losing on your currency and that might

make you want to sell. So, you could

have basically a capital flight-like

situation there. Now, in retrospect,

looking at the data, that happened in

April in a big way. But then thereafter

everyone came running back, right? The

the inflows into US equity markets in

particular were very high last year. So

for better or worse, it seems like

foreign investors really like US assets

and that could be because of the AI

stuff. You can't really get AI in Europe

the same way you can get it here. We

have Nvidia, cool stuff. We have, you

know, Microsoft and all that. So the US

does offer things that you can't get

elsewhere in the world. And so that's

going to be continue to be attractive to

to many foreign investors. But I do

think though that they don't have to

have as much exposure as they currently

have and you could easily see some

rebalancing just you know just to maybe

to not have so much risk to dollar

assets given what's happening

geopolitically and that could be quite

negative. Now when I think about again

we talked about confidence in the dollar

and so forth that is not the way that

that can manifest is not so much in the

bond market because rates are going to

be able to be controlled by the central

bank. rates are largely the expected

path of central banks. And obviously

when push comes to shove, we can always

have the Fed come in and actually do

purchases. But the currency though,

that's something that there's a lot less

control over. And so if you do have some

kind of problem, capital flight problem

that would manifest in weaker currency,

which could of course impact the local

currency returns of foreign investors

and maybe lead them to stampede out.

that doesn't seem to be happening right

now, but that is a risk that we should

keep in mind.

>> And I I have a a perception, it's from

your work, it's from also work from the

BIS that yes, there was some modest

capital outflows during April, but for

the rest of the year, the capital

inflows into the US were were very

robust. You you have a chart from that.

However, the the capital came into the

US, bought US assets. It's just that the

hedge ratio increased. So they hedged

out of the dollar back into their home

currency and that on the on the margin

they hedged more. Is the fact that hedge

ratios are increasing is this a big

deal? And also Jay Powell pushed back

against the journalist's excellent

question yesterday about the this BIS

paper about dollar hedging and he seemed

to disagree with the BIS paper. I read

the BIS paper and it I don't know say I

I generally think the BIS paper is is

right but uh you know their data is

right but you know maybe maybe they're

wrong. Who's right the BIS or or the or

Powell?

>> That's a really good question.

>> Yeah. How significant is this dollar

hedge ratio rising?

>> So I think it's significant because like

like like I mentioned I think a really a

reasonable downside scenario is if you

have capital flight not the the bond

market implodes and so forth. That's

never going to happen in a fiat based

system because you have the central bank

there who's going to protect the bond

market. But the currency is something

that you could definitely see

significant depreciation in. And so in a

capital flight scenario, you got people

dollar weakens, foreign investors see

that they're that their equity holdings

are uh losing in local currency terms

and try to sell equities and you know

pull out dollar asset pull dollars out

into their local currency and that kind

of exacerbates and snowballs into

something that that is difficult to

control. Now that is a downside scenario

that that could happen when everyone is

exposed to dollars too much and also you

have the administration doing things

that are maybe dollar negative. Now that

scenario is less likely if all the

foreigners are also properly hedged in

their currency exposure. That means that

when the dollar depreciates they they

have they they're not suffering losses.

So they won't have any need to try to

close out their US

asset exposure.

Right now, like you've mentioned, the

BIS has a a very convincing story that

says that foreigners have actually

increased their hedge ratios. So,

they're protected from dollar

depreciation. You also have a lot of

investment banks that have been

scrummaging around looking at data and

thinking that yeah, you know, some

countries have increased their hedge

ratio. Now, this is going to be really

difficult data to assemble because it's

not it's not all public. I think for

some Scandinavian countries, hedge

ratios have been pretty high. other

countries that I believe Canada is

basically zero and they don't hedge at

all. So it's it's it's hard to say. Now

the BIS is going to have a lot of good

data. The Fed is also going to have a

lot of good data, right? The Fed is a

regulator. So if you hedge something,

you're going to be doing it through a

big bank and the Fed is going to be

talking with all the big banks. They're

even going to have regulatory data on

what the big banks are doing like. So

the Fed is going to have good data on

that. They're going to speak with hedge

funds. They're going to speak with other

central banks. So I think it's a really

interesting conflict here where they

have very two people who have very good

data are just saying the opposite thing

from my perspective when I look at the

FX swap bases you know you would expect

when you have increased hedging for the

FX swap basis to become more negative if

you look at a historical trend you'll

see that you know around year ends or

around crisis you have the FX swap basis

very negative that's because there's a

squeeze by foreigners for dollar funding

so if if everyone really did increase

their hedging I would expect the FX swap

basis to to move more negative, but it

you don't see that at all. So that

pricing to me suggests that Chowo is is

more accurate in its assessment.

>> What is the FX swap basis? You why does

it matter and talk about the levels

you're seeing right now and and what it

indicates? You're saying the FX swap

basis indicates that Powell is right and

that there's not a ton of hedging.

>> Yeah. So the FX swap basis an FX swap is

just a way to to to to get dollars. So

basically what you would do is you would

let's say you are foreign for someone

with foreign currency. Say you have

Japanese yen then you could you know you

can swap that out for dollars and what

you would do is that it's basically a

spot transaction in an FX4. Another way

to think about this is that you would be

paying dollar interest rates on your

dollar loan and in return you'd be

receiving foreign currency interest

rates. You're basically borrowing

dollars with foreign currency

collateral. Now one measure so the

supply and demand for dollars is is not

going to be perfectly in equilibrium.

And so when it's there's more demand for

dollars than say foreign currency, what

you would see is that the FX swap basis

turns negative. And what that means is

that if you are foreigner borrowing

dollars in the FX swap market, you're

going to be basically paying a little

bit more than than you would if it was

in equilibrium. So a negative FX swap

basis what that means is that there's

greater demand for dollar funding

relative to to the supply of dollars in

in the market and right now it's

positive. So it's not saying that at

all.

>> So pal could be right bas could be

wrong.

>> It's possible.

>> Joseph how are you you know h how are

you thinking about various assets right

now? There's bonds there's stocks US

stocks foreign stocks there's gold and

silver. what what when you scan the

asset universe what are your thoughts

>> so I think that broadly speaking there's

a lot of tailwinds in the US economy

right now it doesn't mean that US asset

US equity markets will do well but

there's I think three pretty strong

tailwinds one is that we potentially do

have a productivity boom of course the

data could revised or maybe it's not

even accurate but at the moment the data

as we see it implies a big productivity

boom obviously good for US economy you

also I noticed that you have a huge

credit boom as well last Last year

commercial banks made say 750 billion in

new loans. In contrast the the prior

year it was about I think 350 and the

year before that was also around 350 as

well. So we had a sudden surge in credit

creation from commercial banks. That's a

lot of cash going through the economy.

The second thing is that policy is very

stimulative right. So we have potential

tax refunds from from the OBBA this

year. maybe I think I've seen estimates

of about 100 billion and you also have

all this increased depreciation and what

that means is that you're basically

frontloading your after tax income so

you pay a little bit less tax this year

and a little bit less a little bit more

tax later on but you're frontloading

your your cash flows and that's going to

be simulative and of course I believe

that we're going to get more rate cuts

in the market pricing in so that's all

quite bullish for the US economy that

doesn't necessarily mean that be good

for for stocks Although I think it does

I I think it it is a good tailwind. But

one thing to keep in mind is that you

know there is some potential that I

think we are in a AI overvaluation if

not bubble and in case that melts away

that's going to be bad for the major

major indexes since the major indexes

are very tech heavy

>> and so you you got me all bowled up

Joseph in that in your your first answer

but what uh is your reason to to be

bearish you o AI AI overvaluation. now.

Well, yeah, I think the AI that's kind

of a a big thing, right? You have all

these people. Oh, I think AI is really

helpful. I use it every day. I actually

it's replaced search for me. That being

said, AI is very expensive for the

companies to offer and it's not really

clear how they're going to recoup that.

And again, AI is becoming increasingly

commoditized as well. I use Gemini, I

use I use Gro and so forth and I don't

really pay them anything. So, I'm

benefiting. I think many companies are

benefiting. companies don't seem to be

making money off of this. So there is

some potential for this to be good for

the rest of the economy. So everyone

else, but not good for the A companies

simply because they I can't recoup the

costs and the costs are very large

building these data centers, buying GPUs

and so forth. So I think that could

happen maybe this year, right? We

already see some of the AI trade has

resurged the past few weeks, but today

as we're recording, you can see

Microsoft is not doing very well after

their earnings announcement. So, we'll

see.

Again, there's always that tail risk

though of a capital ethics crisis,

capital flight, so forth. That would be

bad for the all US assets as well. Good

for gold.

>> Do you think AI is in a bubble? AI is

the AI companies are in a bubble but AI

is useful and it's going to be make a

lot of I think knowledge workers more

productive like podcasters and

newsletter writers for example.

>> What is going to pop the bubble? Is it

going to be the companies stop spending

and then the stocks go down or is it the

stocks go down first and then the

companies stop spending and you know do

you have any idea of what what could

catalyze this bubble to stop inflating?

I think one thing it could be just so

for example looking at Nvidia you could

have competition from the other big 10

companies with competing products right

that they could use their own chips

instead of buying from Nvidia you could

also have competition from abroad maybe

you have further investments in these

Chinese AI models one big difference

between Chinese models and US models

that Chinese models are open source

they're free and so as they get better

know that's direct competition for a lot

of the model builders is in the US as

well. So I think those are a couple

potential paths, but it's always

difficult to say. A lot of bubbles are

ultimately emotional. They're driven by

leverage and they're driven by, you

know, maybe incorrect perceptions of the

future.

>> And what's your level of confidence on

that it's a bubble and that stocks

correct, you know, this year, next year?

>> I have I have no confidence at all. I

have no idea. These are emotional

things. It's like looking at silver or

gold.

>> When is it going to end? I I I don't

know.

>> That's That's true. Um

>> What do you think it's going to end,

Jack?

>> I think it's got a little ways to go.

>> All right. All right.

>> Joseph, tell us about the work you're

doing at fedguy.com

as well as what else you're looking

forward to this year. Oh,

>> yeah. So, we write a weekly newsletter

at fguy.com talking about what's

happening in macro. I also have a

YouTube channel called Joseph Wayne.

Right now I'm actually working on the

second version or the updated version of

central banking 101. Between then and

now it's been five years. So I have a

lot of charts update. I'm also adding

new sections. A lot of things have

happened. We have treasury buybacks for

example. We have you know just all all

sorts of things increase increasing just

the coverage what happened after for

example Silicon Valley Bank and so

forth. So it's meant to be a more

complete and up-to-date version of

central banking 101. So I I expect it to

be maybe in a out in a month or two.

>> Wa that's very exciting. I will

definitely be getting a copy and people

should should do that as well. We'll

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