I mean, we're in a financial... I mean, so if you didn't know anything else and you saw these announcements over the last month, you would say, are we in a financial crisis? That is a crisis, David. I think this is seat belt time. But why are they doing that? You know what? Why on... there's only so much balance sheet and competition with treasuries and corporates that are out there that now we're going to securitize those assets?
It's Monday, August 24th, and Treasury Secretary Scott Bessent just made a bombshell announcement. Apparently, the Treasury is sitting on nearly $1 trillion for bond buybacks. And according to Bessent this morning, we learned that the Treasury is ready to spend it. Two senior officials told CNBC that $950 billion of the Treasury General Account is considered to be available to fund bond buybacks. And this comes after last week's announcement to double bond buybacks, which sent yields lower for only one day. Our next guest says we're already in a financial crisis because the government won't take drastic measures for intervention unless a crisis is happening now already or looming. They just won't tell us straight to our faces. So on the announcement, the 10-year yield fell four basis points while the 30-year dropped 4.5 basis points. Gold is up more than 1% on a weaker dollar and safe haven demand. And Bitcoin jumped 3%, extending its week-long rally and is just shy of $80,000 as we film right now. Since August 19th, the day the Treasury first made its surprise bond buyback announcement, Bitcoin is up 25%, the largest move this year. However, the S&P 500 is down, led by a sell-off in semiconductor stocks. This video is sponsored by Kalshi, the largest prediction market in the United States. Unlike a sports book, you're trading peer-to-peer on real world events, from economic data to political outcomes, and the price moves based on public opinion, not a house. Go to the link in the description down below or scan the QR code here and use my code LIN. And new users can get $25 when they trade $25. Kalshi is CFTC approved and available in all 50 states, including California and Texas. More on that later, but right now there's a trade for how high the 10-year Treasury yield can get by the end of the year. Traders are placing a 27% chance that it will get above 5%. If you agree with those odds and you place $50 down, that $50 can potentially yield a payout of $150 if you're right. So, Danny Moses is our next guest. He returns to the show. He's the host of the On the Tape podcast and author of What Are We Doing? Substack. During the events leading up to the 2008 financial crisis, he worked at FrontPoint Partners. Danny and his colleagues were featured in Michael Lewis's book, The Big Short, and the Hollywood blockbuster of the same name. So, the question is, the big question is today, can markets survive whatever financial crisis the government is trying to prevent right now? Danny, welcome back.
Thanks for having me, David. Great to be here. Before we talk about today's announcement and what Scott Bessent wants to do with the Treasury General Account, let's talk about why they're doing any of this to begin with. Apparently, the Treasury has decided it's drawing a line in the sand right below 5% at the 10-year. Now, this isn't a number we haven't seen before in history. And in fact, the 10-year briefly went to 5% in 2023. But the question is why are they so concerned now that they are willing to use $1 trillion or up to $1 trillion if needed, because that's what's available in the Treasury General Account, to intervene and backstop bond sales and stop the long end of the curve from going up even further. Why 5%?
Well, let's back up a little bit and I've talked about Bank of Japan a lot and it only matters every so often, you know, with the yen weakening to where it has been. So, if you go back to kind of Camp David several weeks ago where Bessent on a notepad had 'Buy Japanese yen' visible, sight that might have been planted, not sure. The yen being weak is a problem obviously for Japan but the reason that prevents a bigger problem for us is they are the largest foreign holder of US treasuries, around $1.2 trillion, and they have been selling because they would need to sell that obviously to finance themselves. So that's kind of back up to kind of where this kind of started. If you go to the last Fed meeting at the end of July when we didn't raise rates and leading up maybe a couple weeks before we thought we were, then leading into it 30% chance we weren't. Remember, Bank of Japan always follows us 24 to 36 hours later, right? They should have raised rates. They didn't. So, Waller was put in a bind that if he raised rates and Bank of Japan didn't, the yen would only get weaker. And again, self-fulfilling that US Treasury yields might move higher. So, now you have inflation, you have Bank of Japan as a seller of all this stuff. What does Bessent need to do? Yield curve control. Call it whatever you want. It's yield curve control. But let's talk about the two things that he's done in the last several weeks. One is the joint operation, obviously access to repo facilities in the US. So the Bank of Japan doesn't need to sell treasuries and we can basically use US dollars over there. Okay, that's fine. That didn't work. That kind of faded quickly. So now the TGA, which you just opened with and referred to. What is that? That's our checking account for the United States, right? Normally it runs between, I don't know, 500 and 700 billion. It fills with tax receipts. If you want to use it for that, I don't think they're going to use a trillion dollars to kind of do that to enhance this unlimited Draghi program of at least double in treasury market operations to go buy longer-dated US treasuries. Okay, we've thrown a lot at this thing and so far it hasn't mattered. But how do you replenish the TGA, David? You issue T-bills or you issue bonds. So all you're doing is borrowing, you know, spending short term. You're going to have to refill it at some point. Just like the SPR, you drain the Strategic Petroleum Reserve. Oil, you're going to have to fill it up at some point. So, we're using all these mechanisms, right, to cap oil prices, to cap inflation, which in turn should cap yields. So, it's all kind of the same thing. The problem I'm seeing right now is we just crossed 40 trillion in US debt, running a deficit of over six and a half percent. Like, these numbers are finally starting to matter. So these bazookas that they want to bring out are less and less effective because of the circular nature of how they're going to finance it. So long-winded answer, but there's a lot at play here. And it's not just as simple, I think, as he's going to use the TGA. I'm not saying you tried to make it simple. I'm saying that it's just there's a lot more behind that, you know, and whether they actually do it, you know, we'll, you know, we'll see.
So, the last time the US government officially used yield curve control was during World War II when they had to issue war bonds to finance the war and they couldn't have that happen if yields went up too much and so they implemented yield curve control. I'm just theorizing here. Perhaps they're preparing for something similar. I'm not saying we're in World War II. I'm just saying perhaps they're getting ready to issue more debt to finance the ongoing Iran war and they need to bring down the long end of the curve. Does that make sense?
Yeah. Look what we did at quantitative easing 1, 2, 3, four times. That's really what, you know, they're going to tell you this is not quantitative easing. What we did late last year is not quantitative easing. But at the end of the day, you can have a Fed's balance sheet kind of remain stable, although we've seen it actually increase recently. But yeah, they're going to do whatever they need to do. I mean, he gave basically the Mario Draghi 'do whatever it takes' speech when he says, 'We'll come back into Japan and do more if we have to. We're going to do at least double of the two billion in Treasury operations beginning September 9th.' After two weeks prior, they'd already issued the quarterly financing plan. They added this, right? So, it's a lot of wordsmithing going on in order to jawbone these rates down. The problem, David, is what happens if it doesn't work and what is really driving yields higher? Is it inflation and real rates? Is it the ability to finance ourselves? Do people finally care about our debt and our deficit? You know, so there's a lot in there. So, it feels like we're finally paying the price for 2008 when we never really cleared the decks, so to speak, and created this issue that we have today.
I want to come back to 2008, because like I said, you were on the right side of the trade back then. Now, today's announcement, it seems like Scott Bessent is just doubling down and he's committed to making this market signal. What I mean by that is last week, you recall on the 19th, last Wednesday or Thursday, Wednesday, the initial announcement took markets by surprise, yields went down a lot, but then the next day yields went back up and so there was skepticism around whether or not the operation would be effective. And then Scott Bessent went back on CNBC and said, 'Look, we're going to go above $4 billion per operation if needed.' And then yields went back down a little bit. Then it went back up again. And so now today on Monday, this article from CNBC: since surprise announcement, bonds have retreated from an initial rally, sending yields higher in part because of skepticism voiced by many market analysts about how effective the operation would be and whether the Treasury's resources were too limited. So now that prompted him to, I guess, say that Treasury could use near $1 trillion in its general account to help fund its recently announced plans to purchase bonds, government bonds, according to two senior Treasury officials. Well, this is a very strong signal, but as you know, maybe it still won't be enough. The Treasury market is what, a 32 trillion market, and so ultimately they need a lot more firepower than even this is what people are saying. What's your read on the signaling and whether or not they have enough firepower?
Well, again, jawboning versus what they're actually going to do. They certainly have a lot of firepower, but again, if you're spending money that you're going to later have to replace it with the issuance of more T-bills or bonds to replace it, it's really just a timing issue. And so, when you issue T-bills to buy longer-dated bonds, right, and there's a lot of other stuff, right? You got stablecoins, which we can talk about. They're trying to implement. They lowered the leverage ratios and capital requirements for banks so they can buy. So they're doing everything technical that they can do. The problem is the fundamentals behind it. Right. So again, you're not going to control the deficit anytime soon. To your point with the war spending and all these other entitlement programs is going to happen. You're not going to be able to cut debt anytime soon. So what's the level that people are going to be okay with? Can we get in the right direction? So for now, they have a lot of bonds to issue. A lot are coming up for refinancing. They have to do this. The interest costs alone take out so much of the budget each year. So again, this is just a band-aid on a really severe wound I think that's going on. And of course it can work. It could certainly work in a summer week when there's not a lot of liquidity and so forth. You can jawbone this thing down. But the narrative that they're trying to get across, David, is obviously extremely important. And Bessent knows that. Yellen knew it several years ago when she started to kind of do this Operation Twist. We missed the window maybe on issuing 100-year bonds and all that stuff. But again, the global, it's not just us. It's, you know, debt to GDP in Japan is north of 2x. We're 1.3x. It's not a pretty picture around the world. And so again, I focus on what's the most important thing. And what Fitch said a couple weeks ago when they reaffirmed the US at A+, there was 100 negatives. There was one positive. The one positive, and obviously if they downgrade the US, they would be kicked out, lose their business license. We all know how that would go. But the only positive was that the dollar is still the world's reserve currency at 58%. But that was much higher before. And we can get into the gold conversation and how gold is slowly eroding that. But that's kind of where all this is kind of going. So if you want to do what they're doing, David, you got to weaken the dollar. And if you weaken the dollar, okay, you're going to inflate everything. Our only way is to inflate everything out, including debt out of the way. So, pick your poison here because it's a witch's brew, so to speak.
So, if the Treasury does this, does that mean the Fed no longer needs to worry about the interest rate, the Fed funds rate? In other words, Kevin Warsh, we know, probably doesn't want to raise the Fed funds rate. However, his colleagues at the FOMC, three dissents last time, could be more again if inflation doesn't cool off. And so the question is whether or not the Fed's monetary policy has been altered because of the Treasury's decisions.
So we wrote a piece on our Substack. It was actually on our Friday Night Dirty, our podcast, Follow the Yellow Brick Road, which obviously is gold. We portrayed Bessent as the wizard in the Wizard of Oz, which when you finally get there you realize there's just a person behind the curtain doing stuff, and Warsh is kind of the lion that has been stripped or has no courage. So, he can't raise rates. Now, as a matter of fact, a lot of people think the next move is going to be a cut. How can you finance to purchase all these long-term dated treasuries with T-bills if you start to raise rates, right? That's going to be a real problem. So, he's kind of in a bind there. So again, Bank of Japan, what we've seen recently is the odds for Bank of Japan to raise rates there, which again their meetings are a day or two after ours in September, is 88 to 90%. Because we can't raise rates before Japan does or the yen again, all this stuff just unwinds. So again, they're playing this delicate game and this delicate balance with currencies, with bonds globally. And so again, it's a lot of wordsmithing. And so I think Warsh is stuck now and I do think this. So we have Jackson Hole this week, right?
So he's going to speak on Friday.
I think you're going to see him overly hawkish. This is my prediction, right? And because it's meaningless. He can talk a big game because David, they need to be hawkish so that the longer end of the curve, that people believe you could control inflation because that's what's going to move out on the longer end. So you're really in this catch-22 here. And then when they have the meeting in mid-September, he won't raise rates. So I think you're going to have this hawkish sentiment on Friday that actually might provide relief. I know that sounds a little bit counterintuitive to the long run of the bond market and then the reality will be we'll come back from Labor Day and realize that the odds of a Fed rate hike are basically 10%.
So going back to my first question, suppose nobody intervenes. Suppose the bond vigilantes have their way and the yields keep going up. Let's say the 10-year Treasury yield goes to 6%, perhaps even higher. At what point do we start to see credit stress?
Oh, I mean 6% in that period of time, it depends on how long it would take, is a massive move. That means something has gone haywire. A failed auction, right? That means something like that has occurred. So S&P is down a lot if 10-year yields go to 6% kind of in a straight line. Make no mistake, because something has gone wrong. I don't see that happening. I don't think you can trade the markets in that way. I think we need to be rational and if the base case, if your overview has to be that the US is going to be okay in the long run, we'll figure this thing out, even though I don't think we will, because how do you invest in anything in a financialized economy if you know that rates are going to move that high? And especially when you're reliant on the issuance of corporate debt to fund the number one contributor to GDP, right, which I know we're going to get into kind of capex on this AI trade. So that's, David, if it's 6%, you're going to be doing 22 podcasts a day and you're going to have, all right, here we go. Markets in crisis. Markets in crisis. So yeah. No, that would be, we will know well before then. We'll know it, you know. So anyway,
Yeah, the Treasury General Account, mostly funded through tax revenue, also auctioning treasuries. If you had to explain to the average American why some of their tax dollars are now being put on the line for buying back treasuries and government bonds when they could be used to build other things and pay, I don't know, social welfare or whatever the case may be. What would your reason be? In other words, why is the government using our money to do this?
Well, interest costs would go down. So, you could make the argument that they're just buying principal to save on interest in the long run. So, you could make that argument, but you know, it's a major issue. We do it anyway. I mean, tax receipts come in. We've been doing it with QE. We're printing money. We're doing all this stuff. So, it's just a different way to kind of skin a cat, right? It's just, again, it's how you portray it and it's the narrative that's kind of created. So that to me, you can explain that in a way. We've been explaining things away since 2008. So again, it doesn't matter how it comes in, where it goes out. We kind of know what we're running, a $2 trillion deficit, debt over 40 trillion. We need to keep interest costs low and we'll do anything we can to get there.
So bottom line, you don't think the 10-year is going to go much higher than four and a half or 5%? There's only a 27% chance on Kalshi prediction market that it's going above 5% by the end of the year.
I mean it could, but you asked me a question if we go to 6%. And my reaction was 6% is a whole other level. So we could certainly go to 5%. But again, it's what gets us to those levels. And so the problem now, David, is that we just shot a bazooka and a couple cannons. I'm sure there's still more that we can do, which will be literally formal QE if we had to do it. And we still aren't getting these yields under control. And so here's the problem. If the economy slows and the Fed has an excuse to cut, the negative of that is something happened, right? AI capex might have gone down. So if we're talking about what does it mean to the S&P 500, are we talking about what it means to the balance sheet of the United States? There's a lot of things that are occurring here, but one kind of leads to the other, right? The high-end consumers have been benefiting from asset prices in real estate, you know, including real estate having gone up. If they start to get hit, that's going to have a follow-on on the K-shaped economy and the top of the K comes down. So, there are so many factors at work here. It could easily hit 5%. You know, could be for 20 minutes, it could be for 20 days. But again, I think we have to impute that number. What caused it to move higher and what does it actually mean to the economy if it happens?
If they do fire a lot more than just a few bazookas and cannons as you say, maybe institute QE, wouldn't that be incredibly bullish for markets? I mean basically whatever they're doing now to intervene is just hands-on bullish for risk assets. Is that right?
I mean, it's inflate the dollar, inflate everything, but look no further than gold. So instead of trying to time the S&P or go long or go short it, just buy gold. I mean, so our first, you know, when they first did the Bank of Japan intervention a few weeks ago, gold was sitting around 4,000 and Porter, Vinny and myself couldn't understand how, hello, this is a form of QE. What are we doing here? And then it took one day reaction and we're up, you know, almost 20% on gold since that moment. And that's not a, and I know you're watching Bitcoin and crypto, same thing was a delayed reaction for maybe other reasons, but at the end of the day, both are basically a play on shorting US dollars or not having faith in the system. But, you know, gold's a, you know, 25, 28 trillion asset here that just moved 20%. That's not a small amount. And so, I think gold is telling you what's really happening here. So instead of trying to say what do you do with the market, I just buy gold because to what you're describing, the only way out of this is to devalue the dollar and that's...
Look, it seems like gold is taking its gloves off, so to speak. So it went from 4,000 to 4,700 basically in a span of three weeks. Now right after the onset of the Iran war, which was late February, this is early January. So late February you can see that the multi-month trend for gold has been down as interest rates started to rise on the back of higher inflation concerns among other things. And so investors and markets, financial institutions have lowered their gold forecast for the year because of higher interest rates. Now that cap is off, or at least we have a cap, sorry, we have a cap on interest rates apparently. And so it looks like gold is retracing 5,000, its pre-war level, assuming the interest rates do not go higher. Is that a fair assumption to make, Danny?
I think real rates is where gold has issues, right? And so to your point, so let's go back to kind of the end of last year and to your point, the beginning of this year in 2026. I think gold kind of got a little bit ahead of itself. A lot of momentum traders came in, retail came in, sent it to 5,500, kind of last in first out, started selling. It didn't work and it became, to your point, a technical trade that kind of violently moved here. We've now kind of reset and I think we've now even, you know, 30 years ago, 40 years ago, oh, in a war gold works because of all the macro uncertainty in the world. But gold's working now because I think what we're describing, that QE may be our only way out of this, devaluing the dollar may be our only way out of this, and that there are so many geopolitical and macro concerns out there and the dollar losing its reserve status and central banks, sovereigns have been buying up gold. And during the war, Russia was forced to maybe pledge some gold. Turkey, Poland, all these, you know, they had bought gold in central banks. It became a net seller briefly, but I think that's now reversed course. And so I just think gold is a buy on every single dip. And we've been talking about gold since, you know, 2009, 2010 when we first kind of saw these programs come into place in the US government and then Europe and the ECB, how they're going to get out of their mess in 2010 and 11. And so gold kind of started then and I see nothing to think that it's going to slow anytime soon. So you can express that obviously, you know, with an ETF or the miners, and I know you know a lot of the miners up there in Canada. So there's different ways to play it and silver as well. I mean, look at the chart on silver. So it's not far behind.
All right. This is an interesting trade. What will Kevin Warsh say during Jackson Hole? Right up at about the top, 63% chance independence is going to be brought up and the 2008 financial crisis at 51%. It's kind of high for me, but do you see any reason for why he would bring up a financial crisis during Jackson Hole?
Well, it's not a Fed meeting, so it's more open. I think the theme is financial innovation and engineering or something like that. And right, maybe someone will talk about, hey, during the 2008 financial crisis, what did we do to get... so it may not be the, you know, the context of those words may be something more innocent in terms of that. So whenever I see something like that and obviously I, you know, I talk about Kalshi, I trade Kalshi a lot. It says why is that there? And I think that's why it's there. It's probably because it's the subject of the week there. Again, I think he's going to be a little bit hawkish. So, I haven't gone through all those mentions. But I'll go through those and make my own assessments for this week's On The Tape for sure.
So, but it seems like the government is making a more concerted effort to prevent another financial crisis right now. Is that fair to say?
I mean, we're in a financial crisis. I mean, so I say that tongue in cheek. Think about what Bessent is doing. If you didn't know anything else and you saw these announcements over the last month, you would say, 'Are we in a financial crisis?' You just intervened in Japan, okay? Why? Right? You're doing everything you can to convince the world that US Treasury bonds are going to have a large participant. US buying back off the run. That is a crisis, David. I mean, so we are in, again, don't call it that, they'll call it that when they look back, you know, months from now, but these aren't things that happen in normal times. And so we just have become so numb and have gotten so used to the TALF, the TARP, the PPIP, QE 1, 2, 3, 4, the moral hazard that's been created in the last 20 years is, you cannot even, you cannot underestimate that. So I just think we're numb to it. This is a crisis of a, you know, again I say that it's not a global financial crisis but there are things happening around the globe, crisis is happening in each various pockets.
