2008: Insights into the Economy, Markets, the Everything Bubble and Income Investing: The Outlook for Credit Spreads in 2023 with David Hay

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I just.

Want to say thanks to you because I would never been able to retire if I hadn't got hooked on to you 10 years ago. And I really owe this to you that I've met my goal, you know, to retire early and not work for the man and kind of be my own boss and, and I would never been able to do that had I not. I guess I was a little discouraged 10 years ago, but hooking onto your podcast and learning from what you were teaching has made this all possible.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's an successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to episode 20082008 and greetings from Budapest, Hungary, where I just got here a couple of days ago and finished Yacht week in Greece. And I tell you, that was a great time, sharing a boat with a few of our collective members and friends and we all got along great.

It was just a wonderful time and.

You know, you could really test a.

Friendship in close quarters like that on, on a yacht that just gets smaller and smaller as the days go by.

But we had a great time and a lot of fun and here I just met with my mother who came down to meet me so we could go on a river cruise for the next week and then mom will be going home and I'll be meeting up with some other friends to do another Mediterranean cruise and that'll be fun too. So kind of traveling around here, having some time in between these water oriented activities on boats and ships, ships and yachts and all that kind of stuff. Anyway, today we have a great episode and a macro outlook on the economy with a financial advisor who is part of a big research firm that you'll.

Hear about here in just a moment.

But you know, the more I look at what's going on in the market, the more I really, really believe my prior statements about what is going to happen when the Fed pivots. And the Fed must pivot, unless they just have a death wish for the economy. They just have to pivot. We have a market of extremely low inventory.

We have builder stocks that have recovered and builders that are much more optimistic.

Because hey, they're the only ones that have any inventory as people just won't put their houses on the market because.

They don't want to give up those.

Incredibly low mortgage rates. And what we're going to see when this pivot happens is we are going to see lower rates and increased housing affordability coming into a market of extremely low inventory. Those two combinations are a recipe to light the market on fire. Again. Again, we are not investors that are really that interested in appreciation. The capital appreciation is not our game. Our game is about yield, right? But if the appreciation comes, that's a nice bonus and we can spend it as well as the next investor.

So that's kind of the market we're in.

And it's really going to be interesting to see and to kind of watch and to say I told you so to all of the people who didn't have the guts to make decisions, who didn't have the foresight to to see.

How the market would turn around, to.

Those who just missed out again and again and again.

And I gotta tell you, the vast.

Majority of our investors, they get it. They're buying properties, they're doing great. They are also taking more control into their hands by doing the hybrid self management approach that we teach and recommend. Our Empowered Investor Pro Zoom meeting will be all about that here on Tuesday. We are going to have a great meeting with a special guest that has come back to really take a deep, deep dive onto self management.

So if you're not a pro member yet, be sure to check that out. Reach out through Jason hartman.com or empoweredinvestor.com or talk to your investment counselor and.

They can help you with that. But let's go ahead and take a dive into this macroeconomic outlook with a good financial advisor here with a lot.

Of research data to share.

So that's what we'll do today and the next time I talk to you, I will probably be coming to you from.

I don't know the itinerary exactly. I gotta look at it again.

But I think Vienna, one of my.

Very favorite European cities, just a beautiful, beautiful place.

So let's get into that interview with.

A macro outlook on the economy here we go.

It is my pleasure to welcome David Hay to the show. He is the co chief investment officer with Evergreen Gavcal. And we're going to talk about some.

Deep insights into the economy, markets and income investing.

David, welcome. How are you?

Thanks, Jason. Great. Great to be with you. Thank you.

Good to have you. Where are you located?

Right now I'm sitting at Liberty Lake, Washington, right by the Idaho border, not far from beautiful Lake Coeur d'. Alene.

Excellent. Good stuff. Well, give us your firm's overview. I mean, you work for one of the largest macro investing research firms, I guess, in the world. So we'd love to get some insights as to what's going on in the macro environment.

Sure. And just to be clear, that's our partner firm, GovCal, but we're the money management side of it. We deal with a lot of individuals, high net worth individuals, and a lot of people who are interested in generating cash flow off their investments. That's really our specialty. It's not our only thing, but that's kind of our main strength is generating income that people can live on.

Sure. So the macro environment seems to be shaping up to be a pretty tumultuous year. The first half has been. The rest probably will be too, I'm thinking. What is your outlook?

Well, it's, I guess for the income side of things. The overarching theme is that I believe we're on the cusp of another major credit spread expansion. And I'm going to define that. I know that a lot of people have no clue what credit spreads are, but they are incredibly important for the financial markets and for the economy. So basically the credit spread is the difference between what a government bond pays and what a corporate bond pays. So that yield gap is a credit spread, you know, which in the business is just known as a spread. So credit spreads widened significantly last year, which is one of the reasons, along with rising interest rates, that markets struggled as much as they did in 2022. As you may know, for balanced portfolios, which is most investors, you know, a mix of stocks and bonds, it was the worst year since 1871. It was a disaster.

I did not know it was that bad.

It was that bad. Yeah, because people got hit. I mean, typically in a bear market for stocks, the bonds hold in there even go up because interest rates often go down. But you have rising interest rates, you have rising credit spreads, expanding credit spreads. And that clobbered both the stock and bond side of the portfolios. Now this year, actually it started kind of summer of Last year, credit spreads began narrowing, and you also had kind of a peak of interest rates in interest rates toward the end of last year. So with rates coming down a bit and credit spreads narrowing, it was a, you know, kind of a conducive situation to a rally, which we got. My concern is that at this point, credit spreads have narrowed significantly, but are widening again. And there's several factors which I think are going to cause another material expansion of credit spreads. Rising bankruptcies, for one. Credit standards, lending standards in the banking industry becoming extremely tight. So you've got to get a banking crisis. Let's, you know, we already have.

So when you say rising bankruptcies, you're. You're referring probably mostly to corporate bankruptcies.

Corporate bankruptcies. Right, right. And that's what that affects credit spreads. And, and particularly when the banks get into the mode that they're in right now, which is very much of a hunker down, almost a fetal position, because they're, you know, they're suffering huge losses, ironically, on their government bond portfolios. It was really the government bond portfolios that blew up on SVP and Signature bank and, and First Republic. So when the banks get very cautious, you know, that means that they're not going to be very willing to lend money. And that the parallel with that and rising credit spreads is a very tight one, that correlation. So is that.

Just make sure. I want to make sure people catch the point of why the credit spread issue is important. David, is that why?

Yes, because when credit spreads widen, it means that not. And especially if you get this one two punch of rising interest rates along with rising credit spreads, it puts downward pressure on almost everything. Bonds go down, stocks go down, the cost of capital for corporate America goes up. It's just a wicked combination. And you just have to look, go back and look at what happened in 0809 during the financial crisis where he had spreads that blew out to the widest levels that were since the early 1930s during the darkest days of the Depression. So that, you know, that was obviously complete chaos in the financial markets. That was happening back in March of 2020 with COVID when credit spreads exploded and, you know, the world was shutting down. Of course, there were a lot of fears that companies wouldn't be able to, you know, pay their debts. And so it created a situation that caused the Fed to actually intervene and buy corporate bonds. The first time in history the Fed had actually stepped in and bought corporate bonds. But that's what triggered the massive rally in March of 2023. I'm sorry, 2020 during COVID even when the world was locking down. So that just shows you the power of credit spreads. I mean, they actually overwhelmed all the negativity caused by the COVID shutdowns. And yet you talk to most investors and they go, what are credit spreads?

Yeah.

And most of the time they're relatively, you know, pass or they're benign. They're.

They're not typically, they're not a significant spread. Right.

Most of the time it's relatively normal, kind of stays within a calm band. But right now, we're in a position where we could really see him spike out again. And the good news, for people that are prepared and realize what's going on, it's a great buying opportunity because once the, once the pain of the spread widening has played out, you get great yields. And if you went back to 0809, those were the best you could have gotten yields of over 20% on junk bonds back in 08 09.

But did those junk bonds end up defaulting?

A lot of most of them don't. Some of them do. But it was actually the junk bond market. If you bought junk bonds in 2008, you would have outperformed the stock market over the next two years, even though the stock market went straight up. So the reality is most junk bonds don't default, especially the higher grade junk bonds. But you'll be able to get very good yields even with investment grade corporates coming up. If I'm right about the spread widening happened. So we had ACT one of that last year. I think we're gonna have ACT two of it this year, especially in the second half.

Okay, so before you go on, I just want to point out that that period you mentioned where the stock market like crazy, of course, was only after the stock market went down like crazy. So we have to keep that in perspective because literally nobody is timing that perfectly, those entry and exit points.

Right.

And, you know, I'm sure you're not a believer in market timing, but feel free to disagree with me if you are.

No, I agree market timing is pretty impossible, but I do think that there are times when the odds are skewed in your favor and when they're skewed against you. And we, we believe very firmly that in 2021, early 2022, the odds were very negative for most risk assets because you had very low interest rates, you had accelerating inflation, you had very high valuations, you had tremendous speculation and what I called the cops. The crazy overpriced stocks, all those profitless Technology companies that were trading at, you know, 50 times sales, not just earnings. And of course, that stuff just got absolutely nuked last year. But we've had kind of a, you know, had a rally back on a lot of that. I think we're going through kind of an echo bubble, frankly, after the biggest bubble of all time blew in 2021, early 2022, in fact, I wrote a book called Bubble 3.0, basically making the case that first bubble was tech in the late 90s. The second bubble was the housing bubble of the 2003, 2007 era, which led to the Great Recession, the global financial crisis. And then bubble 3.0 was pretty much the bubble in everything. It was absolute mass insanity. And I think we're still only part way through the payback from that. Just extreme and reckless speculation.

Right. And I blame the Fed for a lot of that. So you're saying the everything bubble has only partially popped then?

Correct.

Right. What else is left? Tell us what your outlook is.

Well, I think commercial real estate is going through the early stages of a very severe shakeout. And I think office, and when I was saying this a few months ago was a little more controversial. At this point, it's become less controversial. But office buildings are down 25%. I mean, that's a big hit. 70% of commercial.

A lot worse than that in some places.

I mean, in some places, it depends.

The famous San Francisco sale of the Wells Fargo building, right?

Yeah. And I saw that the, the old Huntington Hotel on Knob Hill sold for just a fraction of what it had been worth before. And I think one of your colleagues prior show was talking about how they had a friend that bought an office building in Houston for 25 cents on the dollar. Right. There's going to be a lot of those stories. I mean, there's a lot of leverage, of course, involved with commercial real estate and the valuations got excessive. And with office, you really, you know, fighting bad fundamentals for the most part with, you know, the work from home, obviously. But a lot of these big cities where they're losing, I think you get. Somebody was describing it as the donut where the core urban areas are becoming hollowed out. But it's a mess. But that's just one example. You know, I think there's going to be a lot more damage done in crypto, even though crypto has been a disaster for most people over the last year. But you get these powerful rallies and it sucks people back in. It's just amazing how they come back in, even though you Know, you just, it's hard to pick up a paper without reading about or you know, watch online at the latest crypto blow up. And yet they keep coming back for more.

Yeah, well, you know, everybody wants free, instant, effortless money, right?

Absolutely. Yeah, that's so true.

We might as well just have another tulip bubble. Yeah. Okay, so of those corporate bankruptcies that you see increasing a lot, can you slice that up for us and tell us, you know, what companies, what sectors are having those big bankruptcy impacts? On the corporate side, of course we talked about office properties and the tech companies have been laying people off, but that just seems to be an adjustment, frankly. Those companies were overstaffed and massively overfunded. So that, that's just dysfunctional. It's kind of like talking about wework back in the heyday. Totally dysfunctional company. What are your thoughts about that? Can you, can you dice up those corporate bankruptcies at all?

Well, I think you can't really say by sector. I guess I would say in general the areas where money has been flooding in are the ones that are more at risk. But I think you just have to look balance sheet by balance sheet. There are some companies that are in, you know, highly cyclical industries, but they've got very strong balance sheets, you know, like a Nucor Steel Dynamics. And so they're not gonna, they might have a major profit decline, but they're not going to go bankrupt. But when you see, you know, triple C rated credits, and ironically the triple C rated junk bond slice of that market held up better than investment grade last year and this year it's up 6%. I mean, still down from the beginning of 2022. But it's been one of the better performers, almost the best. And yet, you know, those are the junkiest junk bonds, except for the ones that are already in default. So I'd be very, very leery of triple C rated bonds right now. I think even the, the bank loans and a lot of those are very, you know, dodgy credits are questionable as well. And they're adjustable rates, so the interest rates are going up. So these companies were really, they were having a hard time staying in business with low interest rates, with much higher interest rates, they're really at risk. So that would be an area I'd be very leery of right now. So if you're going to be in junk bonds, I'd be in the double B, the high grade and, and be looking for the ones that are upgrade candidates. But I think we're going into a recession and you know, frankly, if we are, if I'm right about that, and in the recent data, my partner Louis Goff, who's been believing the opposite of that as we talked last night, he admitted that a lot of this economic data that's been coming out these last few weeks has been pretty alarming. The trucking industry, for example, which is a great leading indicator, has just fallen apart. But that's been a huge debate. I mean, if you listen to Jay Powell, he said, don't worry, we're going to have a soft landing. Janet Yellen saying we're going to have a soft landing. I think they're wrong.

You know, Jackson, one that kept telling us inflation was transitory too. So I don't think we anymore.

Exactly.

But you know, that begs the question, what is the Fed going to do? I mean, look, they raise the rates, things break, banks fail. Real estate industry freaks out. Of course, the stock market freaks out. I mean, they have to pivot. Right. I'm amazed that they've been this aggressive.

Well, it's a good point. But you know, when you look at where let's say the equivalent of fed funds rate are in some of these emerging markets like Brazil and Mexico, I mean, we're not even up to the official inflation rate. They're way, way above it. Interest rates in Brazil are 13%, 13, 3/4%. The inflation rate's barely over 5. I mean, that's, that's like a Paul Volcker real interest rate.

Right.

So we really don't.

That that's what makes the US so special as an investment market because, you know, we get away with murder having the reserve currency and the largest economy and the largest military. Right. So the US is just always in such a better position than everybody else. We still have negative interest rates. And then if you look at real inflation, we have very negative interest rates. So, you know, that's a really good point that you mentioned. So Brazil, what's the delta there between. I guess those are government rates, Right. Their version of Treasuries and they're.

Well, their version of the Fed funds rate, their official policy rate. So that's about 8 points over inflation. I mean, that is a serious number.

There's some other good examples like that besides Brazil.

Yeah, well, Mexico is not quite as extreme, but pretty close. I mean, it's 11 and a quarter policy rate versus 5.3 on inflation in Brazil. I said 5. It's actually 4.15 is their latest inflation print. So it's even a bigger spread. So, yeah, that's Just in term, in general, true of the emerging markets is they have serious, real interest rates. They raised before the Fed, and they raised a lot more than the Fed. And in general, I would say that most emerging markets are following what we. The kind of monetary and fiscal policies we used to do when we were healthier, before we went crazy in this country. So that's one reason.

Why the way. When did we go crazy? What is that, 1971? Or is it Greenspan era or what, what, what, what era is that?

Well, I would say that the nuttiness really unfolded over the period, you know, kind of after 2001. 2002 is kind of. This is where I think these bubbles are such an important thing, because the. After the tech bubble blew up, the Fed was under a lot of pressure from people like Paul Krugman to create another bubble because they thought the economy couldn't recover on its own. Even though at that time we had been running big budget surpluses. We were in tremendous financial shape at the beginning of this century. Slash, millennium. Millennium. But then the Fed did what Krugman and Paul McCully to a lesser extent, wanted them to do, which was to create a bubble in housing. So they kept interest rates at great, great Depression levels in the early part of this century, and the housing market just went nuts. And then you got all that crazy lending, all those subprime mortgages and the CDOs that were subprime, that were somehow rated AAA. Right.

And the same loan being packaged and pooled into multiple pools and sold multiple times when it wasn't even really there. You know, I mean, it's unbelievable the number of scams that happened in the background on Wall Street. I mean, it's. It's pretty simple to understand the mortgage meltdown component of it and the, you know, the dumb lending standards, but it's much more nuanced and much more difficult to understand what was going on with the collateralization and the sales of these pools of assets on Wall Street. So, yeah, it was, you know, it's just a huge, huge scam, unfortunately.

But that blew. When that blew up, then that triggered the Fed to think, okay, now we have to do all these quantitative easings, which were supposed to be temporary, Right. Q was only going to last for, you know, while the crisis was underway. But, you know, then you went.

And now, you know, when you're talking about this, you're talking about like, 2008 now, right?

Yes.

Okay.

Yeah, they started QE in late 2008, but then they continued it. They did QE2, QE3, you know what sound like the ocean liners.

Yeah, it sounds like Elizabeth.

Exactly. And then they did the unofficial QE4 in September 2019. Ten years later, they were still doing QE. That's when the repo market went into convulsions. So they were back at printing basically 100 billion a month at that. You know, all fake money. And then of course, Covid happens. And then the government, the fiscal side and the monetary side both went into hyperdrive. So the Fed was not only printing trillions, the Fed, the government, was sending it out to people and people spent it. And he mentioned earlier that the silliness of the inflation was transitory. And I was writing at the time, this is, this is going to lead to a lot of inflation. And I had been basically a bond market bull for 40 years. When Volcker came in, I believe he meant business. He was going to get inflationary control. But by the summer of 2020, when all that fake money was coursing through the system and the 10 year treasury got down to a half a percent yield, it was like, this is nuts. Interest rates have to go up and the rest is history.

Yeah, right, okay, interesting. So your outlook on inflation now going forward, I assume you believe there will be significant additional inflation or no?

Well, yes, but I do think it's, you know, inflation is cyclical. I think this decade is a lot like the 1970s. And even in the 1970s you had periods where inflation cooled off fairly dramatically, usually around recessions and when commodity prices came down. I think we have that scenario playing out right now. Commodity prices in many cases have already come down significantly. Even oil, even natural gas. Natural gas fell from 10 to 2, although it's bounced a little bit. So the Fed's kind of lucky right now. They've got some of this cooling and I think rents are going to cool off a bit too. But I think it's temporary, just like it was temporary in the 1970s when there were those periodic inflation contractions. I think the structural drivers of inflation are very enduring. And one of the ones, I think I coined this phrase, greenflation. I think this great green energy transition is inherently inflationary. We're moving from much more dense sources of energy to less dense and less reliable sources of energy. And they're very expensive.

Oh yeah.

And just, you know, this idea that the amount of copper that we're going to need, the amount of lithium we're going to need, the amount of cobalt we're going to need, it's just astronaut there's just not enough of those resources in the world to be able to do this great green energy transition. So prices are going to have to go up exponentially in some cases. And so that's one issue. But I also think that this deglobalization that's going on is a legitimate theme. I mean you look at Applied Materials, what they're doing with this, this plant and they get put in Silicon Valley, which you know, typically they wouldn't do, or Taiwan Semiconductor bringing facilities to the US from lower cost venues, it's.

That makes the products more expensive, but it does make for more U S jobs.

So it does. And I think that's. We're probably going to see unemployment lower this decade than we typically did in the past. We're going to see inflation higher.

So it's going to be, you know, I think nominal incomes are going to look pretty strong like they have looked pretty strong for the last few years now in real terms. And even if you use official inflation, you were saying kind of implying that real inflation is even higher, I certainly agreed with that a couple of years ago, I think that's less true today. But regardless that's a factor. And just the fact that the Fed has become such a politicized institution and I think that's very inflationary.

That's a good point. It wasn't supposed to be political, but it's very political nowadays. And everything you mentioned all those inflationary pressures, I couldn't agree more. But add to that the housing component and look at the fact that we have a major housing shortage in this country. We've made it virtually impossible to build affordable housing. And when you look at the CPI and you look at real inflation, housing is just a giant part of that cost. It just seems like we're going to really be continuing sadly to hollow out the middle class and people with normal jobs that don't get real inflation adjusted COLA increases, they're just going to fall behind. The standard of living is just going to keep declining.

I think, I think you're right and frankly the situation we're going through right now is going to make it worse because interest rates are high, at least compared to what we're used to with 7% type of mortgages. And mortgage rates have gone back up and affordability is terrible. So home builders really don't want to build and yet you still have the need because there has been this under building as a result of that housing bubble that we talked about earlier where there was a glut of new homes For a while. So, yes, it's a problem. And of course you get zoning laws which are tough and permitting process is very onerous.

It's.

Yeah, I think that's going to be another inflation driver. I think you're right about that.

Huge labor shortage of construction workers. Really no technological disruptor on the horizon that anybody can see. It's certainly not 3D printed homes. That's a lot of hype. It's funny how you see all this stuff on social media and it sounds so great, but then you ask yourself, well, if it made sense, it would be everywhere. I mean, the market would just adopt it so quickly. You know, capitalism is very good at that. That's how you know it's just total hype. I mean, the Fed is in a pretty impossible position right now. But I do think they're going to have to pivot. I think we're going to see mortgage rates settle around five and a half percent, maybe. I don't know exactly when, but they just can't keep the pressure the way they have it. I don't know. Am I wrong? What do you think?

No, I don't think you're wrong. I just think it's. The timing issue is that I don't think they're going to be cutting real soon, but I think when they do start to cut, it could be. My joke is kind of like one of the chefs at Minahanas where they're cutting, cutting, cutting frantically. And you know, typically, if you look at, at least the last couple of cycles, I know the stock market's very excited about when that happens, but typically when the Fed starts cutting, the market keeps going down. I mean, if you look back at, you know, 2000, 2001, 2002, the Fed was cutting interest rates consistently. The market kept going down. The same thing happened in 2007, 2008. So I think you got to be careful what you wish for in that regard, if you're, you know, a permeable in the stock market. So, yes, I think eventually they will get to that point. But I think Powell is very dead set right now on making sure they don't repeat the 1970s mistake of easing too early. So, you know, that's, it's going to be, it's going to be quite an interesting second half of the year. And the thing I'm really worried about is what I call the 4F scenario, a federal fiscal funding fiasco. Because with this debt ceiling thing, I think it's frankly a distraction that we're so focused on, you Know, are we going to get a debt ceiling and a lift, which, you know, this will be, I think the 79th that's happened over the last 50, 60 years. But the bigger issue is how does the government finance itself with this massive amount of debt that they're going to have to issue in the second half of this year, which we're talking trillions, trillions of new debt plus rolling over the existing debt. And federal government's pretty stupid. They didn't extend their maturities when interest rates were low. So it's like 40% of the government's debt comes up over the next couple of years and then we're back to running $2 trillion deficits. If you had seen the latest numbers and the Feds, instead of being a buyer, they're a seller, they're doing qt, the opposite of qe, quantitative tightening. So you have a potential for a real train wreck in the second half of this year in the treasury market. And I think most people are just clueless about that.

What does that train wreck look like? You mean the government's debt gets more and more expensive so treasury rates go up, right?

Yes. What if you had, at least at.

The long end, I mean, it's a train wreck government because they can't afford to service the debt, which is beyond insanity. You know, the position we're in. But it is what it is and they'll always just paper over it by creating more fake money out of thin air.

Well, that's, I think that's the ultimate destination. But they're certainly playing a different game than right now. But I think Druckenmiller, Stan Druckenmiller had a great quote about this that, you know, they, it's like sitting on the pier at Santa Monica and you see a 20 foot wave out there, which is the debt ceiling, you know, battle. And you think that's what you're focused on. But there's a 100 foot tsunami offshore, you know, another 10 miles and that's basically this massive convulsion that's looking, this treasury market's looking at, we could have a failed treasury auction where the bonds don't sell and that would be, that would be almost unprecedented. You know, at a price, you know, they would sell. But then you get in the situation just like you do with companies that are over leveraged. Is that okay, we need to pay a higher rate to attract buyers. But that higher rate we can't afford. So that makes us even more insolvent. You get into a real nasty situation where the only outcome, the only solution is what you just said, where the Fed has to step back in and be the buyer of last resort, which is inherently inflationary. But that's how the US deleveraged after World War II. We had a lot of inflation. We did it much more slowly and that was really a multi decade. Although from 1945 to 1952 we paid the debt down from about 130% of GDP to down to about 70%. And then by the end of the 70s it was 25%, which allowed Volcker to do what he did, but to try to.

Americans had a completely different mentality back then. They weren't so addicted to instant gratification the way they are today. And we were on a gold standard, so we were tethered. Now they can just do anything and it's just all it just every signpost points toward inflationary future, if you ask me. And one of the things you didn't even mention, which is like the next tsunami after the other tsunami you mentioned, which is all the unfunded entitlements and mandates.

Exactly.

It's very.

I was going to actually bring that up because Druckenmiller is estimating those at about 200 trillion present value. 200 trillion. I'm not misspeaking. It's not billion, it's trillion. Dunlop.

Lawrence Cutlikoff has been on the show several times and he estimated that a long time ago at about $220 trillion. But then he, the last time he was on he kind of recanted and he walked that back and he said, no, it's not as bad as I originally thought. You know, it's only maybe 80 trillion or something in that number. I think he's kind of becoming more of a fan of big government, frankly, you know. But I don't know, I don't want to speak for him. That's just my.

Well, Jeff Gundlock, who's brilliant too, he's the, you know, the new king of bonds. He's replaced Bill Gross. He thinks that the numbers around 100, 150 trillion, whatever it is, we can't even pay the 34 trillion we've got right now. So I think the only solution is on a near term basis the Fed's gonna have to step in again with what I call their magical money machine and start buying around, selling every debt. But I think ultimately we're going to have to have a new dollar. I think we're gonna have to have a dollar that's backed by hard assets as the and it could be a two tier dollar, you know, because you mentioned we were on the gold standard until 1971, but Americans couldn't hold gold. It was illegal. It was the foreign central banks that could exchange their dollars for gold. And then they started doing that so aggressively that Nixon had to shut the gold window. So maybe we're going to have to get back to that two tier dollar again, which is actually what China has. They have an internal currency and they have an external currency.

Yeah, that just doesn't seem likely to me. It would require way too much discipline, accounting practices.

That's going to have to change. We can't keep doing what we're doing, obviously. I mean that's what I think is going to come out of this. This is going to be such a disaster that it's going to cause really significant changes to government policy where perhaps we even have a limit on how much debt can go up, you know, like they do in Switzerland. Now I know that you'd say, well gee, us politicians behaving that rationally, that just doesn't seem possible. But if the things get dire enough, I think they'll be forced into that.

See, I agree with you philosophically that that's what we should have. But from a practical standpoint, I think they can just kick this can down the road a long, long time. Like you said, they're going to have to change. We can't keep doing this.

I mean people been saying that kind.

Of stuff for an awfully long time and we just keep blowing up the bubble. How do we know? I mean we don't know because we're all in uncharted territory. How do we know when they can't do it anymore? You know, how do we know? Tell me the tether on But I.

Just think this, the second half of the year has the, has the potential to be that moment. Just like with housing, you know, it was obvious there was a housing bubble, you know, back in even 05. And it just kept inflating, inflating, inflating. And it looked like it could go on forever, but it did get to the point where it was unsustainable. And I think that's what we're looking at in the second half is when you have to come up with all these trillions and the buyers just aren't there. I mean it used to be that the buyers were the central, foreign, central banks. Foreign central banks are now divesting of treasuries. You could say, well how about the domestic banks? Can they step up? Well, Treasuries. They already have too many. It's been a killing though. Their duration is. That's been the main reason we talked about earlier, why they're failing. So they're not going to be big buyers. Well, certainly individuals will be big buyers, but I think they will be at the short end. I think it's the intermediate to long term end of the treasury market that's really going to pay the price of this.

Yeah.

So your, your thesis is that the way the jig is up is the treasury auctions fail.

Now that would be a very extreme example. It could be that just that the, the yields get, you know, you could have. Right now we have an inverted yield curve which is a classic recession signal where the short rates are higher than long rates. If I'm right, we're going to see is that the short rates are going to fall significantly at some point, I don't think right away, as we talked about earlier. And the long rates actually go up because of that, that flood of new debt that has to be financed. And so that yield curve will steepen drastically, but it could actually be kind of a bear steeper, at least at the long end where the short. So the short rates go down, the long rates go up. I just don't see how the math works. I don't think people are really going through and realizing how many trillions of new money have to be raised both in terms of a decline in demand, which is a big part of the calculus, and increasing supply.

Yeah, it's a pretty crazy, perilous situation. No doubt. David, give out your website or whatever you want to share with people.

Sure. Well, I write a newsletter that goes out. It's free. It goes out twice a week. It's. You can get it at Substack, Haymaker, Underscore, Substack. But also Evergreen is the firm that I. That's my day job. It's pretty easy to find us.

Good stuff. David. Hey, thank you for joining us.

Thank you, Jason. Appreciate it very much.

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