Lead-Lag Live

Joseph Wang on Federal Reserve Politics, Rate Cut Implications, and Trump's Dollar Strategy

• Michael A. Gayed, CFA

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Ever wondered how Federal Reserve policies are shaping the markets and economy? Join us as we welcome Joseph Wang, former senior trader at the Federal Reserve's open markets desk and author of "Central Banking 101." Joseph brings an unparalleled perspective to our discussion, shedding light on the Fed's increasing market interventions and its growing tendency to prioritize low unemployment over inflation control. You'll gain unique insights into the political dynamics within the Federal Reserve, including its apparent bias towards the Democratic Party and the political motivations behind calls for rate cuts.

We also tackle the intricate effects of rate cuts on various sectors, such as REITs and RMBS REITs, distinguishing between cuts spurred by economic downturns and those driven by declining inflation. Joseph provides an expert analysis of the banking sector's health, especially focusing on the challenges faced by regional banks and potential risks from commercial real estate. The conversation broadens to encompass the global rate-cutting cycle, exploring the actions of other central banks like the ECB and the Bank of Canada and their implications for the Fed and global monetary policy.

Looking ahead to the 2024 presidential election, we delve into how a potential Trump administration could influence US currency policy, particularly in terms of favoring a weaker dollar to boost exports. Joseph offers intriguing market indicators, including Taiwan's stock market and its impact on the tech sector, alongside classic Trump trades like immigration and tax cuts. We also highlight gold as an attractive investment, driven by global geopolitical tensions and US fiscal policies. This episode is packed with valuable insights on monetary policy, economic trends, and investment strategies you won't want to miss.

 Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.


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Speaker 1:

My name is Michael Guyatt, publisher of the Lead Lagrime Report. Joining me for the rough hour is Mr Joseph Wang, the Fed guy himself. Joseph, a lot of people have seen you and know of you, but for those who don't know about your background, do a quick recap on who you are, what you've done throughout your career, and is it kind of like the matrix, where you're like the 12th iteration of Neo? Is that why, on the Fed?

Speaker 2:

side. Well, first of all, michael, thanks so much for inviting me. It's a pleasure to be here. So, as my moniker suggests that, I used to work at the Fed before I started my own business as writing commentary for the markets, I was a senior trader on the open markets desk.

Speaker 2:

What that is? It's the Fed's trading desk. So, as we all know, the Fed is very active in markets, does a whole lot of things like QE, like repo, like FX swaps and so forth, and it also pays close attention to just everyday goings of in the markets. So when you're on the open markets desk, what you do is you execute trades on behalf of the Fed, but you also study markets. So when you're there, you are able to talk to a whole range of market participants from foreign central banks, commercial banks, hedge funds, government agencies basically everyone is willing to talk to you and you have access to tremendous amounts of data. So it's a really good way to kind of have a peek behind the curtain to see how the markets worked.

Speaker 2:

And so I was there for a few years learning about things, and then I figured that I would do something myself, and, of course, on my way here to where I am now I also have a bestselling book on Amazon called Central Banking 101. That describes the things that I learned and, of course, in a past life I was actually a lawyer and that is how I began my career, but of course I don't like talking about that. I hope to generate goodwill.

Speaker 1:

Since you wrote that sort of book on Fed inner workings, I am curious, because you interact a lot of people, both sophisticated and novice investors. What do you think is the commonality in terms of what people get wrong about how the Federal Reserve responds to shocks to the economy?

Speaker 2:

So first off, I love to be clear that the Fed is comprised of people and that changes over time. Who sits on the FOMC of course colors how the FOMC perceives the world and how they make their trade-off between, let's say, full employment and price stability. Now, over the past let's say decade, I'd say the FOMC has tended to be more and more dovish, more and more afraid of high unemployment rather than inflation. The way that I see this is that the Fed has been willing to be more and more active and intervening in the markets. For example, if you ask anyone pre-2008, pre-great financial crises, what do you think about the Fed going in and being active in the corporate bond market? What do you think about the Fed trying to lend to small and medium-sized businesses or support the bad business decisions of commercial banks? I think back then they would say no, the Fed shouldn't be doing that. But fast forward to where we are today recently in 2020, we have the corporate credit facility, we have the mainstream lending facility.

Speaker 2:

It really seems like the Fed is really just afraid of having any uptick in unemployment and so they're willing to be very active in the markets at sometimes at the cost of high inflation, which we've seen the past couple of years right. Let's not forget that even as home prices were surging 20% year over year, the Fed was still buying hundreds of billions of dollars of MBS. Their balance of risk is always towards having lower employment, even if that means having a bit higher than inflation. So what I think people miss is that the Fed is not really nefarious. They're just kind of people trying to do the best job that they perceive. It's just that over time their reaction function. I think it has changed.

Speaker 1:

That point about them being people is important because, from a people perspective, people are biased and I remember in a conversation we had maybe a year or so ago, you had mentioned that from your perspective, it seems like the people inside the Federal Reserve tend to be a little bit more blue biased and red biased politically.

Speaker 2:

I think that's kind of an understatement. I think that's kind of an understatement. I think it's important. In the US, if you make a political donation, it shows up at a federal website, it's registered, so you can either go to the official FFI federal elections website or you can go to Open Secrets, which compiles this data for you, and it will show you that basically every single person who works at the Fed donates to the Democratic Party. It's like over 90%. So that is consistent with my experience at the New York Fed. It is heavily, heavily left-leaning, and so I think that also contributes to some of the shift that I've been talking about.

Speaker 2:

I think the thinking is that more left-leaning people have especially sensitive to a rise in unemployment. Now, on that vein, though, we can also see very clearly that what former Fed officials have said, now today, former New York Fed President Bill Dudley is on the wire saying that you know the Fed, they have to cut rates ASAP. On the wire saying that you know the Fed, they have to cut rates ASAP. The same Bill Dudley now remember. This guy was the former president of the New York Fed, which is the third most important position in the entire Federal Reserve System In 2019, he actually wrote an op-ed in Bloomberg openly suggesting that the Fed should try to run policy to sway the election against Trump because Trump's such a bad person and that he's got no threat to institutions and so forth. So obviously these are very, very left-leaning actors who have a lot of power, and that colors how they perceive the world and how they conduct policy.

Speaker 1:

So it sounds to me like you would agree that the Fed cutting rates would be political. I saw that headline that Trump put out saying the Fed better not cut rates before the election and the market seems to be betting on it.

Speaker 2:

No. So to be clear, I think there's a good case to be made for cutting rates and personally I think we will cut rates three times this year. Not next week, obviously, but again when you're looking at this problem, I wouldn't say so. Like Bill Dudley openly says that Fed should do this for the reasons of the election. Okay, I can't read anyone's mind, so I don't know if people on the FOMC actually think that way. But again, it's not so much of a bias towards this candidate or the other. It's that they share the same worldview, very, very sensitive to unemployment, and that colors how they shape policy. Now. Unemployment rate has been steadily ticking higher over the past several months, so it's not unreasonable to try to adjust policy to be less restrictive Now, in the back of their minds. If they think that would also help their preferred candidate, I don't know. But again, like you mentioned, michael, they're people, so I imagine that also plays a part, even if they don't say it out loud.

Speaker 1:

Let's talk about reasons for why the Fed should cut rates, because it still seems like the inflation picture is a little bit mixed and if oil were to have another move higher, then presumably inflation expectations, because they're correlated to oil, would also move higher. So where are we in terms of the cycle?

Speaker 2:

Inflation is actually really close to target. So we have different measures of inflation, right. We have CPI measures consumer prices we have PPI measures producers' prices, that is to say prices paid by businesses and we have PCE, which is the Fed's preferred measure. Pce is just another measure of consumer prices. Now PCE right now is printing at 2.6% year over year. Now the Fed's target is 2%. Pce is 2.6%. It's not that far away. So I think inflation has come down significantly.

Speaker 2:

Whether or not it's going to be able to go to 2% and stay there is another question. I think that's quite difficult given the fiscal situation. We have very large fiscal deficits and that puts upward pressure on inflation. But just looking at it from the Fed's perspective, if let's say 2.6% just a little bit above 2% target, and at the same time unemployment rate has been rising several months now about 4.1% well you know what should interest rates be? Should it be at 5.5% multi-decade highs? I think it doesn't make sense for it to be that high. And they don't either, which is why they've been telling you for some time that they're going to cut rates this year. How much the market has been pretty volatile on this. In the beginning of the year the market was saying seven cuts. More recently it was one cut. Now it's two and a half cuts. I personally think we'll get three cuts starting in September.

Speaker 1:

I would think the question of how many times the Fed cuts will be a function of how deep a correction in equity markets could get if we're entering that sort of more classic volatility period. This is something that's kind of obviously near and dear to me, but I am curious just to hear your thoughts, independent of my own views. Do you think the cutting cycle results in investors fleeing back into long duration treasuries in that volatility that could be coming, or is that flight to safety trade dead and gold ends up being the preferred asset class for those looking for safety?

Speaker 2:

So I'm very bullish on gold. I have no position in bonds, so this is how I think of it. So if you listen to the market commentary, they'll tell you that rate cuts are bearish Usually when you have your first cut, that's when the equity market doesn't do well. I think that misunderstands how this works in a very fundamental way. Now, it depends on why you get rate cuts. Now, in the past, what we've consistently seen for the most part, you get rate cuts when the economy is not doing well. So the economy is not doing well.

Speaker 2:

Fed cuts rates. Or maybe you have a disaster right, like March 2020, you have the pandemic, you have the great financial crises in 2008. So the Fed cuts rates. Now it's not the rate cut that makes stocks go down, it's the change in other conditions. But the Fed can also cut rates for other reasons as well, not because the economy is not doing well, but simply because inflation is coming down. We're making progress on inflation. I think that's what's happening right now. They're going to cut not because the economy is doing poorly, it's not. If you look at GDP now, it's still comfortably above trend. It looks like it's forecasting 2.7% today. It's just that inflation is coming down and I think that's a whole different ballgame and that when rate cuts come, I think it would actually continue to be positive for the market.

Speaker 1:

I assume there are going to be some sectors where it's more positive than how it affects other sectors, and my mind goes to financials regional banks, which have been a little bit on fire the last several weeks, at least on a relative basis, against tech. There's a post here from Britt Burden on YouTube. I'm going to share it. How do you feel about the over-levered banks factoring derivatives, of sorts? How do you feel about the over-levered banks factoring derivatives, of sorts? But where are we in terms of the health of the banking sector itself, and how do rate cuts impact the likelihood that these stocks actually keep pushing higher after the hemorrhage that's occurred since the regional bank crisis of last?

Speaker 2:

year. So rate cuts are going to help some levered entities that borrow short, I think, notably. Let's say you are a REIT, for example, let's say today we have Blackstone's commercial REIT doing not well because they cut their dividend. Yeah, these entities are highly levered when you cut REITs, so it will help them. Something I think that I like personally are the RMBS REITs, the MREITs like Analeigh or AGNCY. So those things are basically they borrow short in the repo market. Their funding is tied to the overnight rate, but then they've been buying longer-dated mortgages and the mortgage rate has been widening, so that seems like they will benefit from rate cuts directly.

Speaker 2:

When you come to the banking system, though, I'm not worried about it at all, not even a little bit. So I think we will have to be very careful about fighting the last war In 2008,. We did have a banking crisis. Fast forward to today Again, we had severe tests of our banking system in 2020. Tremendous, tremendous volatility in the financial markets, and they all did very well.

Speaker 2:

Now there have been tremendous amounts of changes in regulation going forward. The entire landscape for banks has just changed so much. For example, when you have tremendous QE, you're stuffing the banks with a lot of extra cash. It's really hard for them to have liquidity problems and when they do, because of very poor management, as we saw in the case of Silicon Valley Bank. You saw the Fed come out and roll out these brand new facilities. They're going to do whatever it takes again to not rock the boat. So banking system I think that's kind of a boring place actually to be. They've been regulated so severely that they are basically utilities. So I think that's not an interesting place to be If you want exposure to credit. Actually, I think these private lenders they are probably what you would think of as banks of the past and you would get better return there.

Speaker 1:

It's funny to see the comments from people here's one saying he's not worried in like a shocking type of way. I think a lot of people are you can argue just slightly worried about commercial real estate impacting some of these banks. Still, do you think that's priced in at this point, this sort of concern of an ongoing commercial real estate recession crisis?

Speaker 2:

Now, commercial real estate is a really broad category. It includes things that are doing very well like, say, data centers, and it includes things that are not doing as well, specifically, office spaces in downtown big cities and the commercial and, let's say, the retail that depends on those people who work in offices. Now, that segment is not doing well and we have some banks that have larger concentrations to that segment. But banks you know, we got over 4,000 banks. If you have 4,000 of anything, they're going to have different niches, different business models, different regions, and they're going to have different degrees of sophistication, and some of them are not going to do well.

Speaker 2:

That's what you would expect with 4,000 of anything. Does it mean it's going to be systemic? Are not going to do well. That's what you would expect with 4,000 of anything. Does it mean it's going to be systemic? Is it going to be contagion? I don't think so. Listen, this is something that people have been talking about for a couple years. Right, if you have a couple year head start and you have the Fed breathing down your neck, you're going to be able to make deals, rollover, things like that.

Speaker 1:

So I don't worry about this at all. Let's talk about things that you do worry about and talk about risks from a maybe more global perspective that the Fed would need to respond to after the fact. Any thoughts on what's going on as far as monetary policy changes with the ECB, with what's going on in China and how that might complicate things potentially for Powell?

Speaker 2:

So what we are seeing is a start of a global rate cutting cycle. So we got the ECB moving today, with the Bank of Canada moved for a second time, and soon the Fed will move as well. So what I'm wondering is if you have a saying so, on the way up, when everyone was hiking together, they were all, like you know, synchronated rate hiking cycle. That's going to be extra hawkish because everyone is hiking at the same time. Now my question is if everyone is cutting at the same time, is that extra accommodative? Are we really just going to continue to melt up and I think there's a good possibility of that?

Speaker 2:

Again, everyone is moving towards rate cutting cycles. Economy so far seems fine and at the same time, more importantly, fiscal spending continues to be very, very loose. So in that context, I think it's very difficult for the equities to go anything but up Again, not going to be in a straight line, but I think that that's a trend Again, not going to be in a straight line, but I think that's a tread If we're in a more coordinated cutting cycle.

Speaker 1:

The question then becomes how do relative interest rate differentials impact currencies? Obviously I'm curious to hear your thoughts on the direction of the dollar, because we went through the fastest rate hike cycle in history. Dollar obviously a big beneficiary, and yet it seems like even with rate cuts, the dollar still wants to keep on going higher. Maybe this time will be different. So how does currency factor into all this.

Speaker 2:

So, currency I think that's a really hard question right now and I'll tell you why. So, first off, like you mentioned, the dollar, interest rates have been high and that's been strengthening the dollar but at the same time, though, going forward. What do you think about the relative growth strength of the US vis-a-vis these other countries like, say, china, say Europe, say Canada, and so forth? The US continues to perform better than these other countries. Again, we have an economy that's both growing in people through migration, but also a lot of technology. At the same time, those other countries not so much.

Speaker 2:

Now, I think the picture for currency is not going to be shaped by, let's say, interest rate, different tools and so forth. It's going to be shaped by the outcome of the presidential election, because President Trump has been very open that he thinks it's okay to depreciate the dollar in order to boost US exports. Vice presidential candidate JD Vance has also been very open that you know this dollar stuff, reserve currency, maybe it's not that important. Maybe if we could have a cheaper dollar, we could boost exports and create jobs for Americans. Now in the US, currency policy is squarely within the purview of the US Treasury, that is to say, the White House, who controls the Treasury. So if they wanted to, they could definitely depreciate the dollar going forward. Depreciate the dollar going forward. So even if, let's say, dollar interest rates remain higher relative to other countries, if you have a White House who is openly trying to depreciate the dollar, they definitely can.

Speaker 2:

We've done it before. In the 1980s, we had something called the Plaza Accord, where the White House basically went over across the world and said that if you don't depreciate, if you don't strengthen your currency against ours, we're going to put tariffs on you, and in Japan's case, they did. So this is something that they can definitely do. Tons of other things they can do as well. I personally think that if Trump were president again and he just tweeted saying that you know USDJPY, it should be 100. I think we would get there, at least very close to there. It would have a big impact. So I think the future of the dollar depends on the 2024 presidential election.

Speaker 1:

Let's talk about things you're tracking that might give you a sense of where the market itself is betting as far as who might win. I've noted before in writings that in general, when you have a Democrat in office, the tech sector tends to do better than when you have a Republican in office, and when I look at this post that you had shared the other day on the screen, here's an example of, I think, one way of trying to see what the market itself may be betting on as far as who wins. This shows a chart of Taiwan's market, taiwan's stock market selling off after comments last week suggesting Taiwan should pay for US defense, coming from Trump making that statement. What parts of the investable landscape are you looking at, as maybe tells separate from polling, as far as what the market thinks is going to happen with who wins?

Speaker 2:

So in this particular story. So the Taiwan stock market index is heavily weighted towards chips. So, like Taiwan semiconductor right, and at that time Trump was, you know, kind of expressing some ambivalence to US commitment to the defense of Taiwan. Well, that's obviously not good for companies in Taiwan and at the moment, of course, looking at the NASDAQ, a lot of the rally is driven by chips and AI-related plays, which of course, is a derivative of chips. So if you have Taiwan semiconductors impacting Taiwan chip stuff, that's going to reverberate to the NASDAQ, which of course drags down the other major indexes. So that probably has something to it, but a lot of it may be just an excuse. After all, we've run so quickly, so so much. We were due for some kind of pullback.

Speaker 2:

Now the classic Trump trades, I think, are actually more about reflation. Now Trump, famously, is about looking at the stock market, wanting it to go higher lower interest rates, weaker dollar and more tax cuts. You add that together you're going to have a more inflationary economy. Now, in addition to that, trump, one of his signature policies is, of course, to have a controlled border or enforce immigration law according to what it is on the books. So that is also going to limit labor supply. One of the big stories over the past two years that has put downward pressure on American wages is just that there's been tremendous, tremendous amounts of migration, mostly illegal, from the southern border. Now, if you stop that again, american wages are probably not going to have as much downward pressure. So again, if you have strong fiscal policy, limited labor supply growth, you're going to have a more inflationary economy, and that is to say that long-dated rates go higher.

Speaker 2:

So big Trump trade, of course, is a steeper curve. Trump exercises influence and makes sure the Fed doesn't make rates too high. So, short end, not that high, and then you do more inflationary policies. Longer dated rates go up a bit. So that's classic Trump trade steepener. Other trades again. Prison complex worked very well in 2016,. Seems to be getting some life again. Again, you have these chip stocks as well. So again, all this is, to be very clear, speculative. At the moment, sometimes politicians says one thing and when he gets into office he has other priorities, he encounters other constraints and he's not able to do all the things that he wanted to do. But from my vantage point, so far, these are the oh, of course, with your dollar are the macro themes for Trump trades.

Speaker 1:

There's another one I want to show which just earlier, before we went live, I put out in my classic form. I said the end-bottomed NVIDIA topped Few. Understand this, unless you understand the carry trade, and you had put a post out on July 11th.

Speaker 2:

Were there many.

Speaker 1:

Funding their AI trades in yen. Now I know it sounds crazy, but the carry trade's a real thing. It is, it is. I've been early and wrong in thinking the reverse carry trade would happen at the end of last year, with everyone on that. But now the yen is starting to move and it does seem like it's coinciding with the sell-off in tech. So let's think through that. I mean, is there a possibility here that a lot of this tech momentum is just? The carry trade is not so much fundamentally driven and as quickly as the AI mania occurred, it could very quickly go the other way. If the yen were to continue, it's move higher.

Speaker 2:

So there are definitely a lot of people who fund their trades in Japanese yen. So let's think about how that would have been the past couple of years. You borrow in yen. You're buying AI stuff. Ai stock goes to the moon, yen depreciates double play. You are making bank Fantastic trade. Everyone knows about it, everyone piles in. So you saw AI trades go to the moon. You saw the yen depreciate significantly a breach in 160.

Speaker 2:

So when you have a lot of leverage in some place, it creates vulnerabilities, and now we're seeing that vulnerability. There's a lot of people seemingly getting stopped out. So if you get stopped out on the inside and you got to close the other sides as well, so I think that's causing a bit of the volatility Now that actually, when I look at that, so again, structurally speaking, the yen should be weaker, right? So I mean rates so much lower than the US and so forth. So I think of this as kind of more of a correction towards what was getting extended and nothing moves in a straight line. We could take two steps forward, one step back, and so forth. So just as during that post, we saw a lot of this yen strength retrace, we saw the AI trades went down, went back up again. So I think of this more as a correction going forward rather than some permanent shift in the trade.

Speaker 1:

Yeah, and I don't disagree. To be clear, my whole thesis is that because there's such a large short position on the yen, there's a risk of a squeeze which creates a momentary structural disruption. Right, right, just from what? Which is the credit event? At least that I've been again, I still think it's out there. But that does tie into another post which I think is worth exploring. Foreign investors have been the marginal buyer of longer-dated treasuries, purchasing an amount comparable to the issuance. I think the concern is, if Japan is going to try to push the yen higher temporarily, they would do so by having to sell treasuries, or at least not be the marginal buyer of treasuries. How does the demand from the foreign side of things on treasuries? How does that play into forex volatility in general?

Speaker 2:

I think that's a bit so. Like you mentioned, if you are a foreign country and you want to intervene in your FX market, you have to have dollars. Where do you get those dollars? Oftentimes, you have to sell the treasuries you hold in your foreign reserves, so that's an impact. It's really difficult to trace how big that impact is Now. I will say this to your more broader point, though. So over the past few years, foreigners have been buying a lot of treasuries and they also own a lot of US equities. That position has grown very large as a US equity market has appreciated in price.

Speaker 2:

Now one very, very big risk to the markets going forward and I don't think it's going to materialize immediately, but something to think about in the coming months is that if we do have a Trump victory and the dollar does depreciate, a lot of foreigners are going to have to sell, because if you think about it from a foreigner perspective, dollar depreciation is basically guaranteed negative returns. Right, I'm owning these dollars. As dollar depreciates, then that means, in my own foreign currency terms, I'm losing money. So I think a lot of foreigners will have to position and try to get ahead of any depreciation, and that means selling treasuries, selling stocks and repositioning to their own currency or other currencies, or something like that. So I think that, to me, is the biggest risk to the market in the coming months.

Speaker 2:

Again, this is all subjective, of course, we don't know who's going to win in November. We don't know if President Trump will actually carry out this policy, but to me, that, I think, is the clearest risk. That I'm thinking about Geopolitics, of course, but that I just don't know. I read about stuff in the news. Sometimes it's true, sometimes it's fake. I don't really know what's happening there.

Speaker 1:

Yeah, the truth changes every day. I wonder what you think about China maybe complicating the path of things. I have gone on record saying I think China may have bought them, but I'll have to have some egg on to somehow magically re-accelerate after this period of nothingness. Economically that seems like that could be inflationary too, because that'll push at the margin some demand pressure on commodities. How does China factor into global policies?

Speaker 2:

Like you mentioned, I think the big impact of China is that it is world's largest consumer of commodities, Workshop of the world, imports tremendous amounts of iron ore, copper and so forth, consumes a lot of oil and then uses that to make finished products and sells to the West. Now if you have weakness in China, you could have weakness in commodity prices, so that's a disinflation. But again a lot of the source of demand for Chinese goods comes from the West. So again, strong US economy, then you could have more experts in China.

Speaker 2:

Now, beyond that, though, I think it's important to note that China is managed differently from the US. China they have kind of a one party state. The government controls everything, controls the banks, has tremendous influence over everything in the private sector, so I don't think that their entire goal is to maximize economic growth and so forth. They have their longer-term plans. So I wouldn't look at that as a source of tail risk. But whether or not it's going to reaccelerate more fiscal spending there, I think that's a political decision by them and I don't know their politics enough to comment on that.

Speaker 1:

I wonder if you think this big focus by Trump around Bitcoin also maybe changes the landscape a little bit when it comes to the Fed. Any thoughts on that? I know a lot of this could just be for show, but let's say, Trump wins and something he puts in some kind of mandate or edict around Bitcoin and central banks.

Speaker 2:

So Trump is openly embracing Bitcoin. I think Bitcoin when I look at the price of Bitcoin, it seems to track the probability of Trump winning. I think it's actually a very savvy political move, because if you are open to Bitcoin again, you're increasing your voter base and you're getting a lot of donations, a lot of Bitcoin. People have a lot of wealth. I think it's probably. I think it's legitimate.

Speaker 2:

So when I look at the Republican ethos, I think they seem. There's a lot of people there concerned about currency debasement. There are a lot of people there who have a view of government that is, you know, let's give the private sector more freedom to do what they want. So that's all consistent with a position that's being more open to Bitcoin and you know. So I think that that makes sense. One other thing that I'll note is that it looks like, whereas the Biden administration has not been as open as President Trump, they're also allowing things like Bitcoin, cash ETFs, ether ETFs and so forth. So it seems like the trend though more strongly, of course, on the Republican side is to be more open towards crypto.

Speaker 1:

Let's talk about from an investment perspective. You mentioned financials are kind of boring, doesn't excite you? I don't disagree. What does excite you? Meaning like if you're looking at things given your macro view and you've got a perspective on where things are going to be headed, independent of who's president? I mean, where are their new momentum plays or allocations, do you think?

Speaker 2:

I really like gold. I think gold is, is, is doing is. I mean, listen, look at the gold making new, all-time highs. That's one thing. Secondly, we know that in the sovereign space, over the past couple years, more foreign central banks are buying. Now china hasn't been buying for the past two months, but they have been increasing. They have really strong reasons to as well.

Speaker 2:

We know that the US has been open on imposing sanctions on countries that they are not friends with. If you are China, obviously you hold a lot of US dollars, a lot of exposure there, and you are not best friends with the USs. Just from a basic practical self-defense standpoint, you have to diversify a bit. So there's a sovereign bid for gold, not just china, though I imagine there's a whole lot of countries who you know, just not that they're enemies, but you know they. They are not best friends. So I could say india or middle eastern countries and so forth. So they got to be careful now, and so that's going to give a sovereign bid for gold.

Speaker 2:

Thirdly, stepping outside the sovereign space from a private sector investor base. Looking at, we're heading towards global rate cutting cycle and at the same time it's very clear that the US has trouble controlling its fiscal deficits and you can think about I think about this as a sort of debasement, because when you print treasuries you are basically printing more dollars. So I can understand if you would as a private sector investor. You would also think global cutting cycle possibility. A dollar could be depreciated by more gold. So I think there's a lot of tailwinds for gold going forward and it's no surprise to me that it continues to surge.

Speaker 1:

You think a part of that is betting that we're going to see negative real rates again. I mean just given the interest expense and the reality that you can't have positive real rates with government spending like this.

Speaker 2:

So that's going to be a political decision. If you have a more populist government that says my gosh, inflation is so high, I got to give people more money, that's going to solve it right and that is the predictable populist response. And, of course, inflation is so high, people can't afford to buy homes. I know. Let's keep interest rates low. Again, this happens all the time. I think there's a really good chance that in the coming years, whoever's president will try to do something like this Again. This is so predictable, it happens every time and I think it wins votes as well. Free stuff yes, inflation goes higher, but then I get my cheap loan, I get my free money and so forth.

Speaker 1:

So, yeah, I think we could have some sort of negative real rates let's talk about um the book a little bit more um central banking 101. So to your point, um, congratulations. I didn't realize this until I'm looking up as we're chatting real time. You got 4.7 star, 756 ratings, and I'm pretty sure those are not bots, uh, unlike what you see on x. No, no, and we have very real.

Speaker 2:

yeah, we have versions in uh mand, in Portuguese, in Korean and soon Japanese as well. So it's a book that has been very helpful for many people, simply because. So I wrote that book because I realized that all the stuff that I learned in school just wasn't adequate in describing how the system actually worked. So I studied economics and math in college, have a master's degree in financial economics as well, and all this stuff, like you know, big equilibrium models and stuff that that stuff is just not true and not useful in understanding how monetary policy actually works, how the nuts and bolts of the financial system actually works. How does policy impact the real economy? How does hiking overnight rates reverberate throughout the broader financial system? So that was just not taught, and so I figured that I could help fill that gap, to help people understand, just from a practitioner's perspective. It's essentially the book that I wish I had when I was looking at this over a decade ago.

Speaker 1:

I think the cover is a little bit of a spoiler alert. It's just a printer.

Speaker 2:

Yeah, now listen. One big insight that I have is everything you see is just numbers in the database, be it what's in your brokerage account, be it what's in your bank account, be it what the FUD does. At the end of the day, it's just numbers in a database, and because it's numbers in a database, it can easily be changed. What can't be changed, of course, is goods and services. So, ultimately, the constraint to everything that they do in the financial system is inflation.

Speaker 1:

Another post from another person on YouTube Infinite Ponzi scheme. Until it's not, because, to your point, it's just numbers in a database. I mean, is that a fair way of thinking about things? I mean, I think that is a narrative. It's like it is a Ponzi. They're going to keep on inflating and putting on more zeros and there's no real consequences to them, but to lower class, lower middle class. It hurts Absolutely, absolutely, without doubt, every. It hurts.

Speaker 2:

Absolutely, absolutely, without doubt. Every day you are just printing. So again, deficit spending. You are buying goods and services by printing treasuries. Right, just keep printing and printing and printing and deficit fiscal deficit right now expected to be six to 7% basically forever. No one is going to go run an election on the platform of less spending, because you can't get elected that way. The only way you can get elected is if you promise more. So this is basically just doing this borrowing and printing more and more treasuries until you get to the point that the market wisens up. People realize that you know what. This is not sustainable. This is very inflationary. We're going to get paid back with dollars that are worth much less and eventually I think the market will realize that. It blows my mind that it's taking so long, but I think eventually they'll get there.

Speaker 1:

Any plans on doing a second book, perhaps when CBDCs are overage?

Speaker 2:

Let's hope that we never have CBDCs.

Speaker 2:

I think that's very dangerous because it gives a lot of power to a very small amount of people who may or may not make good decisions. One of the things that I've seen over the past few years, let's say during the pandemic did you ever believe that they could just snap their fingers, shut down all your local businesses, leave the big, huge multi-corporation businesses open and shut you in your home? Or, if you're in Canada, did you ever believe that when you have a legitimate protest, the government can actually take away your bank account to make you stop protesting against the government? It so, again, these are things that could be easily done. More easily done if you have a CBDC gives concentrated control to very small amounts of numbers of people who may or may not be accountable to it with their actions. So let's hope we never have a CBDC. I think it's a very dangerous precedent Again. Authoritarian countries like China love it they are already on the frontier of this ruling the South but I think it has no place in a free society.

Speaker 1:

Interesting comment here. Since the dollar isn't backed by gold since the 60s, it's only backed by in quotes in God we trust, which is funny because I'm sure you've seen the same stats as I have around. Faith and religion is not exactly in a bull market in the US. So we have a currency where we say in God, we trust, but people really don't believe in God as much as they used to. Are we in the sort of final throes and this is a very broad question, but in the final throes of sort of the fiat experiment?

Speaker 2:

So I don't think it makes a difference if your money is backed by gold or fiat or anything like that. Now, because let's take a look at history we used to be on the gold standard. Guess what? The political class decided that we don't like the gold standard. We'll just change your mind. So what really makes a currency sound is not what it's backed, what it's printed on. What really makes a currency sound is its governance. How is it managed? And that has to do with how the government is run. Now, if you have a government, that is okay. So have a gold-backed currency but continues to deficit spend, continues to do a source of inflationary things that decrease the value of their currency, then eventually, when the going gets tough, they'll just change their mind, say revalue it or something like that. So it's ultimately about the culture and the politics that supports the value of the currency, not some kind of commodity, because at the end of the day, the guys who manage the currency, they have the guns they have, they have the tanks and they can do what they want.

Speaker 1:

It's funny how people forget about that the one who has the currency control is the one who can actually shoot you. I mean, that's the unfortunate reality.

Speaker 2:

So, again, gold's not going to help. What really helps is having good governance, and that's very difficult, but the good thing is that we rediscover this over the ages, but not until we feel some pain as to well, it was nice having good governance, we should have that again.

Speaker 1:

Joseph, as we start to wrap up here, talk about how people can track you and then what people get from your website, your service at FedGuycom.

Speaker 2:

Sure. So, first off, thanks so much for tuning in. If you're interested in hearing more about me, so I have a YouTube channel. It's called Joseph Wang. Every week, I post updates as to what's happening in the markets. Now, this website here that I have it is my subscriber service. What I do is I teach people about how the market's working, what's happening, and that, I think, is essential to understanding just how to position yourselves as an investor. Now, for example, one of the calls that I've made is that we were going to crash up this entire year based on my understanding of the monetary system and what the central banks are doing, because that is, of course, the largest driver of financial markets, and that's turned out very well. So, having this perspective, this financial plumber perspective, I think is an essential part of any investor's toolkit. So, again, we have a free trial. Take a look. If it's helpful for you, definitely definitely check it out. And, of course, if you post, we have a form and all that and I will reply to your questions in my service.

Speaker 1:

Everybody. Please make sure you check out his website, as well as Central Banking 101. I'm going to actually check it out myself and I'm being serious when I say that I will put it on my to-do list. It only gets longer nowadays. Appreciate you, joseph, appreciate those that watch this live stream. Please make sure you like and share the word, spread the word around this effort that I put out there, because I don't get paid really for it, and I'll see you all in another episode of Lead Lag Live. Thank you, joseph, appreciate it.

Speaker 2:

Thanks Michael, Thanks everyone, Cheers everybody, Thank you.

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Michael A. Gayed, CFA

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