How do you assess the landscape, I guess, coming into this week? You know, based off the words of Chairman Warsh, based off the recent data, what's the table set for, you know, what might be surprise, not surprise later on?

Yeah, those are great questions, because, you know, we do have a setup here of potentially somewhat higher inflation again, given what's happening with commodity prices as we speak, you know, the Strait of Hormuz is not solved, the Bab el-Mendab, you know, the Houthis are striking as well, as well towards this infrastructure damages overnight.

It sets up this week of, like, tension for, you know, the CPI being hotter, and therefore the Fed debate getting even hotter, because as we now see, Kevin Walsh, chairman, siding somewhat with a majority within the Fed that seems to be leaning towards a hike.

But on the other side, we had a bit of surprising speech last week by somewhat denouncing the risk of inflation against the president who puts out like, well, I want rates simply to go lower or else.

Right.

So it just set up this week for kind of a tough week ahead.

Kevin, meaning like we're going to probably see some pressure on the stock market as we're heading into PPI and CPI to get that confirmation.

So Ben, how can they digest this data, not seem tone deaf, but also maybe deal with maybe square peg, round hole kind of tools?

What level on the yen are you watching right now? And what's the potential impact on US markets if we continue to see the yen decline, specifically the Treasury markets?

Yeah, I think, Frank, we're right here.

There's 155 level.

I was actually looking at that, and then looking back at August of 2024 when we, when we were at that level too, and then we got that so-called yen carry trade unwind that sort of played through the, you know, the Nikkei and, and, uh, and other, uh, Asian markets and then came back to our market.

I think this time, Frank, it's, it is indeed by the Treasury market because yields were a little bit lower today, but not much against this yen move, which was quite strong.

You know, it was like almost down 2% against the dollar and emerging markets.

But it does speak to that people are looking at this Bank of Japan likely to raise rates a little faster against the backdrop of a Fed still uncertain if they will or will not raise rates.

Any thoughts on this?

But I don't think the market's going to react to that

anyway.

Unlikely, I mean, unless he's surprised, obviously, but he's definitely, as you're right, he's not in the camp of the policy signal that Bernanke or Powell or even Yellen has done in the past, or Draghi, when they use this platform to signal policy, which was an important signal at that time that they said it, he doesn't have a reason actually to signal anything.

Even if those yields are higher and what the treasury is doing, he wants to stay far away from that anyway.

So he's not going to signal anything that there's anything material to signal about, right? There's an economy that has not accelerating inflation, growth is really good, and employment, as you say, is low.

So the mandate is relatively imbalanced with some restriction here on housing.

So what is he really going to say? The speech is going to open with the economy as a description of the economy, perhaps, which you could pluck a little bit from it.

Gold

What exactly does this interventionist Treasury have to do with the future stability of the interest rate market?

Well, they could affect it, no question.

You know, if you're gonna deploy this whole balance at the, this checking account of the Treasury at the Fed, then it's 935 billion or so.

If you were to actually buy with that amount all these long-term bonds, even though you have to fund it with other debt, but that's a lot of money, right? So it could affect interest rates.

Whether they actually will do that is to be seen.

You know, you see Druckenmiller coming out with some criticism this morning.

There's other people s- are skeptical, and I do think that they pay attention to it, like you can only affect interest rates so much, right? It ultimately, it's, it's the markets, it's the economy that drives interest rates in one direction or the other, and the market's so large in Treasuries, 22 trillion.

How much does potentially using a near $1 trillion Treasury slush fund to kind of juice that particular trade help matters or hurt matters? Is it really the bazooka that Hank Paulson had during the financial crisis?

Ben, how much geopolitical risk is being priced into this right now when you look at how markets are responding?

Well, it was a muted response, Ryan, interestingly, because you don't...

You talk about, you know, sanctions that target, like, dig- digital assets and gold and aviation and shipping even, and obviously oil, and the oil markets were actually trading down, you know, 'cause technically sanctions like this should keep Iranian barrels off the market, and Iran produces a lot of oil.

So it was interesting how the oil markets responded negatively, I guess because it impacts China, and therefore it impacts demand for oil, right, and therefore lower oil prices.

What is, though, important here is that what Scott Bessent, the Treasury Secretary, says, like anyone who does not follow these sanctions will be off the dollar system, which means the, the code for the Swift, which is a global, you know, let's say dollar payment system.

And that's, you know, significant if, if that, if countries are being thrown off that because that could cause disruption in, in dollar flow, so to speak.

Also, the, the demand for Treasuries could actually decline.

What do you make of the market action here? Are investors getting a bit nervous, the usual pre-earnings jitters, or is there a real fear that NVIDIA's not going to perform and that could tank the whole market?

He is the CIO and founder of FedWatch Advisors.

Well, it was a muted response, Ryan, interestingly, because you don't-- you talk about, you know, sanctions that target like dig- digital assets and gold and aviation and shipping even, and obviously oil, and the oil markets were actually trading down, you know, 'cause technically sanctions like this should keep Iranian barrels off the market, and Iran produces a lot of oil.

So it was interesting how the oil markets responded negatively, I guess because it impacts China and therefore it impacts demand for oil, right, and therefore lower oil prices.

What is, though, important here is that what Scott Bessent, the Treasury Secretary, says, like anyone who does not follow these sanctions will be off the dollar system, which means the, the code for the Swift, which is a global, you know, let's say dollar payment system.

And that's, you know, significant if, if that-- if countries are being thrown off that because that could cause disruption in, in dollar flow, so to speak.

Also, the, the demand for treasuries could actually decline.

A lot of countries use Swift system to purchase treasuries and transmit them, you know, across their banks and things like that.

Ben, how much geopolitical risk is being priced into this right now when you look at how markets are responding?

Well, it was a muted response, Ryan, interestingly, because you don't...

You talk about, you know, sanctions that target, like d- digital assets and gold and aviation and shipping even, and obviously oil, and the oil markets were actually trading down, you know, 'cause technically sanctions like this should keep Iranian barrels off the market, and Iran produces a lot of oil.

So it was interesting how the oil markets responded negatively, I guess because it impacts China, and therefore it impacts demand for oil, right, and therefore lower oil prices.

What is, though, important here is that what Scott Bessent, the Treasury Secretary, says, like anyone who does not follow these sanctions will be off the dollar system, which means the, the code for the Swift, which is a global, you know, let's say dollar payment system.

And that's, you know, significant if, if that, if countries are being thrown off that because that could cause disruption in, in dollar flow, so to speak.

Also, the, the demand for Treasuries could actually decline.

What do you make of his latest announcement, his latest signals? Can the government actually force borrowing costs down with his latest plan?

So what does this really strange reaction tell you about the expectations across the broader AI semi- semiconductor trade in this current environment?

Hi, Jenny.

Um, yeah, I think this is once again an example of where, first of all, sell the fact that you're getting actually very strong earnings here, and people maybe, you know, reacting there, but I guess taking up some of the chips off the table in this particular name.

But if you step back and look at the semiconductor industry, then, you know, we- we're on the course here of having more supply coming to market, more chips with more competition.

And I learned from this particular earnings, uh, release from this company, Applied Materials, that they actually had a bit of a weaker, um, China revenue, and it was a little bit of a miss there.

And maybe that's part of the story here that, you know, as we know with CM- CXMT, if I say it correctly, the Chinese, you know, say equivalent of this, this kind of company, they're gonna come out with chips that are like a fraction from what the cost is that we're currently charging to NVIDIA and anyone else out there that has to buy these chips.

So I think this plays a role, Jenny, that we're getting more supply, more pricing competition, and that affects companies like this, like Applied Materials.

Is that phase kind of over for many of these companies?

Where do you see it going from here without real policy shifts from the BOJ? Yeah,

it could drift a bit weaker again to the dollar.

We came off the low somewhere like 156 and change.

155 is a really key support level, so we didn't break that.

And we're now at 157 and change.

So it could drift towards the 160 level, just below from where they intervened.

But that is sort of your typical trading pattern after an intervention, especially if it's an intervention that, although it was large, was almost $60 billion in total estimation, and then coordinated this case, it's still not a commitment to bring the yen or make the yen stronger more persistently.

the China's renminbi even?

Um, and I'm wondering how long you think this works for.

Yeah, that is actually an open question because, you know, this is the first time they do coordinated.

And as I looked at the data, there was a big spike in, in, in yen volume on Thursday, but on Friday, the euro volume, which the Treasury traded in, was actually really low or nothing.

So my guess is they're gonna come back with more, Mel.

They're gonna try to push this yen a little lower.

And I gotta note that the yen is hovering just above 155 to the dollar, which is a pretty key technical support from since the 2022 move.

So I think that they're gonna try to break through that, and that could give us a little bit more rally in this yen.

Um, I, I would be concerned about an overly, um, uh, significant move in the yen appreciation.

Is this something that investors should be worried about?

Yeah, they should.

The emergency tariffs that were struck down by the Supreme Court, they're expiring this week.

The administration's coming out with a volley of, of, uh, new, new tariffs, right? And, and under these tariffs, the 338, Section 338, these are permanent tariffs, and only the president or the Congress can reverse this, not the Supreme Court, and they're, they're about, like, an investigation to unfair trade practices.

They're very different than some emergency act was, right, which was the original ones or another one where they look at the trade balances.

You know, if the trade balance is, is of concern, they can do this, put those tariffs on, which can be legally challenging, whereas these tariffs are about, "Well, we did the investigation.

We find that, in this case, Canada did-- was unfair in their trade to the US, and therefore, we use these tariffs." But the problem is, Ryan, that Canada is the second-largest trade partner of the US, larger than, than some of the European countries.

How much concern does that represent for you, considering how there is a huge carry trade behind this cross?

And what are your concerns about reigniting inflation with the uptick in oil prices and gas prices and energy prices that we're seeing?

Well, so we had in the previous report, which was over the month of May to June, a significant decline of energy in that report.

And it brought the inflation on the month-to-month basis to negative, it was like negative 0.3%, which is very encouraging and it was very positively received by markets and it took out the rate of expectation for July.

Now, what we're dealing with now with not only the Strait of Hormuz being again blocked and closed off, but now also the other strait, which is the Bab el-Mandeb Strait, which is an even narrower strait than Hormuz, potentially being closed off too.

We're talking about, once again, now about 30% of oil supply being offline.

So this is going to impact the inflation really significantly again.

So everything that we kind of gained last month in terms of having a bit of disinflation.

Take me through that, Ben.

So how exactly do those upset the markets? They don't seem to be in today's pre-market trade.

Yeah, I think the market's focused on the key four earnings, right? You got Tesla, Google, IBM, and Intel.

That's, I think, a huge focus 'cause of the sell-off that we've had.

But if you take that out, markets should actually be a bit more volatile because these are macro factors driving the outlook, particularly for inflation.

You know, this, this news that's now out also that the second strait may be blocked, you know, that's, that's I think really an important change.

And if you, like you're saying, if we're gonna start do- putting tariffs on our, I would really think our largest trading partner right across the border, people are gonna start pricing in that inflation's not gonna moderate.

It's gonna go higher from here.

Is that a situation right now where there are things that could further bring it down if you take out the f- the effects of the war, the effects of potential tariffs? Is there a threat, I guess, of higher inflation that is not external to the US from that macro basis?

Yeah

...

this, this new model, yes, it's, it's, it's as good as, as Claude or close to him, but not exactly.

It's takes a lot of tokens, right? So it's like shows that there's a fair bit of, like, efficiency there, but it's really, again, back to price.

Like, China's just very good at competing in price in anything.

So whether it's AI, whether it's with BYD cars or it was with, uh, rare earths in the past, that's what China's about.

I think, again, I think that's overhanging the, overshadowing the psychology going into this week, which is a big, important earnings week.

Uh, just explain for me how that's gonna work and, uh, what that means for the timeline of rate cuts.

Yeah.

Yeah, that's right.

And I looked at the positioning in the include features.

I mean, there's a levered shorts there, right? So the same thing as in rates, the levered shorts.

So you get this dynamic of that these shorts will probably be covered at some point that people start bailing from it, right? They played the peak in oil trade.

They saw, okay, we're normalizing it.

The administration has to move away from this war.

That might be good for the individual stocks, but it might mean something horrible for the ecosystem.

What's your thought on that, Ben?

Yeah, it's, it's, it's a, it's a dai- dicey word, right, as you say.

It's like, you know, y- you know, kind of taboo.

But it, it's, it's actually true that inf- in, you know, whether you have energy shocks or commodity shocks or tariffs for that matter too, they are temporary.

It just pushes up the price and then it tapers off, and I think that's how we can put it in that context.

But what then happens is that, is that shock spilling over into core services in particular and into e- expectations.

And if that's showing that we're going to continue to see a rise in core and a rise in expectations, then it certainly isn't transitory.

Does that concern you at all?

Yeah.

So if that truly is changing, then we're in unprecedented territory in a crisis like that.

Now, I don't believe that Kevin Warsh would let it come to that, actually.

In fact, he said in a Hoover Institute interview last year that QE should not continue on a continuous basis, but in a crisis situation, it was an effective tool.

Okay.

Where that shows up.

Yeah, that's, uh, 30% or more annualized inflation running there.

Weight is not significant, but it has an impact on a lot of services, service PCE, because of all the different products that are linked to this DRAM HBM.

Um, what about appetite do you think to shrink the balance sheet as a way of kind of tightening the screws when it comes to AI investments? I mean, some people have been arguing maybe that's the way to go, but if, you know, housing is so tethered to the long end of the curve as far as, you know, mortgage rates, um, h- how is that likely to be, um, a way to address, uh, tightening, uh, you know, without having to actually hike rates, do you think?

Yeah.

This is a real tightrope question, um, uh, Sam, because think about it, right? Y- the, the balance sheet itself, that's a tool that's a passive tightening tool.

What I mean by that is that they can continue to have the balance sheet to shrink, so not reinvest anything that's maturing on the balance sheet, but the pace of that can be very like month-to-month changing.

Meaning one month there could be more, you know, redeeming securities than the other months.

So in other words, it's not a tool that you can just say turn on and just make it go faster.

You know, you're actually relying on, on the market itself as well as, you know, the, the, the number of securities you have on there to add that tightening in the system.

... been reduced now? Because it doesn't seemingly look like the steps to try to defend the currency are necessarily working in their favor.

But I'm just curious, like, has the dollar got some, uh, room to run?

It could have, uh, Dan.

I, I think the, the, the, the talk in the FX market is that we got dollar-yen at an intervention level, sort of, right? There's a lot of chatter, but it's not happened yet.

And don't know when, but I do think the other, other side of that is this debasement idea that we had earlier this year or last year, that that's maybe getting a little bit out of this because people do perceive the worse Fed to be tighter, more hawkish, and just that itself lifts the dollar.

But then also, if inflation starts to decline, the real interest rate, so the rate accounting for inflation, is a bit rising, which pushes the dollar up also.

And I think lastly is that as this conflict has ended and gas prices start to decline, economy gets a boost.

It's likely the case.

The last time it gave was the summer of '24, I believe, in July, when dollar/yen went from 160 to 153, and we had a huge event here in the equity market.

Before we talk about Warsh as Fed, I wanna get your thoughts on Greenspan, and good morning to you, Ben.

Good morning, Diane.

Sorry I couldn't be with you there, but we'll do it next time again.

Um, well, for me, Green- Greenspan was, uh, legendary because I started working in the year that the Greenspan Put was essentially sort of solidified with the meltdown of Long-Term Capital Management.

And, you know, if you think of that era, Diane, of like when I was a trader at that time, there was actually on a trading floor doing market making, and then hearing Greenspan with his very cryptic way, and you have very little or no guidance from the Fed at all.

Um, you know, if you think of those times, we were really literally trading news in and out and not really paying much attention to anything other than Greenspan, if he would make a testimony or try to speculate on his briefcase with people, as commonly known.

So he, he was, he was amazing actually in that sense.

Um, do you think, uh, the ch- new chair of the Fed, Chairman Warsh, is trying to kind of shift investors towards focusing on the data rather than the communications that come from the Fed?

So when, when we talk about the UK, why should global investors be paying such close attention?

I think, Morgan, that what happened in 2022 was the sudden wake up of, like, how bond vigilantes came to the surface and looked at the UK saying, like, "You're just timing your spending the wrong way.

Like, you're, you're throwing all this gas on the fire, and this economy's not ready for that." And suddenly they had this eruption, and that was quite unique at that moment in time.

Now, let's face it that the UK bond market is really different than ours because it's just very fragmented and controlled, I think, mostly by the pensions and there's a lot of underlying derivatives there at work that caused that explosion.

But nonetheless, the market reacted in this physical, let's call fissure, like this, this, this tension that suddenly appeared that markets wanted to have an risk premium.

And that's in place today, as Steve just said, like UK yields have never converged back towards European yields or U- US yields because people realize that whomever's gonna be next prime minister is gonna face the same problems as Liz Truss.

You're gonna have to do something about this fiscal spending against labor market reform is basically the issue, and it s- seems to be a real tension against this really illiquid bond market that gets quickly fire, for that matter.

So how does that factor into all of this?

Can you explain the difference in how, let's say, interest rate cuts versus hikes versus adjustments on the balance sheet, how that affects asset prices typically? Because I think that is often confused on what each side of that does.

Yeah, that's true because a standard interest rate cut means that you're getting interest rates lower across the board in the financial system.

Where it shows up first is in mortgage rates.

It tends to affect that sector first, so the housing market gets a bit of a boost.

But when you think of this balance sheet, which is an accounting entity, you actually think about the Fed owns treasuries and mortgages and it let that portfolio shrink, let it roll off.

But on the other side of that, you have what they call bank reserves, which is basically money in the system.

I call it high power money.

Are you looking at anything or are you concerned about anything in the political calendar from an investment standpoint?

Is there enough money to absorb that kind of demand? Or are we going to have to see rotation out of other places to find, I guess, the money for these?

I think the latter, I think the rotation trade is where you really want to pay attention to because you could say like, look, maybe it is this Mach 7 rotation, right, a bit away from the Mach 7 into a name like Entropic, or Entropic gets included into the Mach 7.

And that sort of trading against what you're saying, the amount of supply of equity, how it can be absorbed, there's plenty of capital out there.

There's $8 trillion in money market funds.

There's tons of other liquidity on the sidelines.

I think it's not that much of an issue, but it's I think more the relative value that we're looking at.

So, you know, right now, Entropic is, for example, priced at 25 times sales.

Are these companies going to be able to maintain their market position from what you can tell down the line or is it one of those situations where other mega cap firms catch up in R&D or this technology becomes more ubiquitous as time goes on?

What do you think?

Yeah, that's I think exactly right, Brian.

I think we're getting to a stage where people feel really pressured to buy these stocks as they go higher and higher.

And although, you know, these may be the best performing stocks in the market currently, 'cause given their incredible return, I mean, the risk that you're taking here currently at these levels, say you buy 5% of this stock and it does draw down and that could be a pretty big burn in your portfolio.

So I've been telling my clients saying like, "If you really like this Micron team, and it could become a larger company than it is right now, you don't wanna buy 5%.

You buy half a percent and then let it draw down and then add to that, to that weakness as, as it goes down because this is just too steep of a, of a climb." It's like to your paraphrasing, Brian, the Rocky theme right in 1985.

He goes all the way up to the mountain, right, and screams, "Drago," and I think that's, that's kind of where this Micron stock is heading, and that's when he has to climb down 'cause he's out of breath.

[laughs] Ben, what about you?

What do you say about the CPI report?

Yeah, Nicola, good morning.

It was definitely a report where there's several pages in the report, starting at page nine, where you can see the year-on-year change across a lot of categories, and it's just exploding now.

Like, you can really see from the previous month how the year-on-year is changing from, let's say, flat to up to 5%, 10%, 20% of some of these categories, whether it's food, services, or energy.

So the inflation is rippling through.

So it's amazing how markets are responding.

They're down on stocks and yields a bit up, but it's nothing like dramatic, I guess, to keep looking at the aggregate headline and, OK, it wasn't too bad.

Friday.