00:00All right, Jackson Hole is next week, and as we get there, it's getting increasingly important.
00:04Of course, it was already important, given the fact that Kevin Warsh didn't have exactly rave
00:09reviews after his first FOMC meeting. And now there is a question of Treasury Secretary Scott
00:14Bessent really turning up the heat. Will he be attending?
00:17Right about that. I do not know. Do we know that Warsh is attending?
00:22Well, I don't know, actually. I don't even know if he's giving a speech, right? And there's a
00:25good chance that if he does give a speech, it's not going to be a sort of forward policy speech.
00:30It's going to be something about Fed communication style, similar to what he delivered at that July
00:36presser. So I don't know. But it is just a really weird time, as you say, because like already,
00:42look, we have inflation going warmer than expected. We have rates rising at the long end, generally.
00:48Then we have this meeting where you don't really say very much. And then we had the Treasury
00:52intervention that lasted about five minutes. I think Scott Bessent just misses trading.
00:57Well, clearly, he is running the world's biggest hedge fund, except without the same kind of
01:01leverage that he might have otherwise run. There is a question, though, about Fed Chair Kevin Warsh,
01:06who I do think is going to be giving a speech. He did say he was going to be there
01:09and giving a
01:09speech, but said right now it's a blank sheet of paper. So unclear whether it's actually going to
01:14deliver something. My key question is, how much will he lean against what Bessent has said and try to say,
01:20look, that actually might make conditions more accommodative should they come in on some level?
01:25Right. So this is the crazy thing that's emerging now. There's this weird implicit tension between
01:30what the Fed's doing under Warsh and Scott Bessent. So Warsh gave the whole speech where he wants markets
01:35to be more independent of the central bank. He wants markets to be the ball. Don't just focus on what
01:39the Fed is doing. He also said that part of the reason he didn't have to raise rates that month
01:44was
01:44because long bond yields were rising and that had an impact on financial conditions. And now here we
01:51have the Treasury operating at essentially cross currents to what the Fed seems to be trying to
01:56achieve. Meanwhile, you also have the Trump administration, which is also sort of muddying
02:00the mix with the Iran war, boosting inflation, everything. Everyone seems to be going off doing
02:05their own thing. I think there'll be OBE. They'll be overcome by events. It's a long ways away from the
02:10speech, you know, five, six, seven, eight, nine days. And it's an international meeting. It's
02:16if U.S. is supposed to speak, what will the Bank of Japan say? How will Europe respond to the
02:23comedy
02:23we've seen the last two days? I mean, it's a great point, given the fact that ultimately the idea that
02:28long end yields have been rising is not just a U.S. problem to the way that people are saying,
02:32OK,
02:32this is a credibility issue. This is the Fed that has lost the plot. This is a global issue. And
02:37to me,
02:38that is one of the biggest questions going into this meeting. What is established as the main
02:42driver of yields going higher? Is it inflation expectations? Nah, break-even rates, not so much.
02:47Is it AI-related debt issuance? Maybe. Is it just this question that we've moved from a regime where
02:52everybody was saving and putting money in markets rather than investing in things has shifted and
02:57been turned on its head? These are the questions to me. Well, you could see it really simply in the
03:01term premium, right, which Joe doesn't believe in, so he can't be part of this particular discussion.
03:06But term premium, it's the extra compensation that investors demand to hold U.S. debt. And it's been
03:11going up. And if you look at the rise in real rates recently, it's mostly been coming from that
03:15term premium. You can debate what exactly is driving that. But at a simple level, I think it's, you know,
03:20more debt and more reluctant buyers for that debt. And then I think the other thing, to your point,
03:26like, you know, this global nature, it's like what? We have some major structural inflationary
03:32drivers that are fairly new in recent history. This drive towards resource nationalism that no one
03:39was talking about 10 years ago, where, like, every random country wants to have its own tungsten mind.
03:43That's a new thing. The AI buildout, it's really taken off of the two years before that. But now
03:50these are, like, over the last two years. But that's fairly new. The decreasing trade freedom
03:57obviously started maybe roughly in the 2016s after the first Trump administration. There are all these
04:02new drivers that when you stack them together, then add in the war, you would just expect, if you knew
04:07nothing else, that these are all sources of upward pressure on prices. The backdrop of this is an
04:13outrageous nominal GDP. We're basically a boom economy, almost. Yeah. You know, like 4%, 5%, some will model
04:20up parts of our economy at 6% nominal. And the what if, to me, is that must pull back
04:26at some point
04:27to a more normal nominal GDP. And I don't think this infrastructure of yield, of finance, of foreign
04:34exchange can handle that pullback and nominal GDP. To me, that's not what people are going to talk
04:42about visibly at Jackson Hole, but that's going to be the backstory. Are you feeling that GDP with an
04:47extra cowboy hat purchase? Yeah, you know, I'm going to go to the million dollar. You already
04:52have the rugged thing going. Yeah, exactly. I'm doing the rugged thing here, but the backdrop is
04:58gorgeous. This photo, folks, you don't know this, but this photo of our backdrop, grandma took that
05:03when she was canoeing out in the big pond there. Actually, I did go canoeing in the pond. Have you
05:08guys ever done that before? No, never gone. It's a lake. It's really good. We usually go for a hike.
05:12But
05:12actually, okay, I have a question for both of you, because you've been going for years now. What do you
05:16think the vibes are going to be like? Because we have a new Fed chair who kind of seems like
05:21he
05:21doesn't really like it when central bankers talk that much. And here we have a whole conference
05:25about policymakers talking, essentially. I think that's an excellent question. And I think that
05:30one notable feature is that you're not going to see as many Fed officials doing as many public
05:35speaking engagements. I also am curious about the vibes, about how many people are actually getting
05:40drinks together versus, you know, kind of coalescing in their little corners. Joe, where are you on this?
05:45And I brought it up with John Melvey today of J.P. Morgan, who his thesis in school years ago
05:52was on
05:52basically the independence of the British financial system. The level of implied dissent
05:58against Warsh at this meeting is unprecedented. It really is. Unprecedented.
06:02It really is unprecedented. I read a book. I forget which one.
06:07My term at the Fed by Larry Myers. Lawrence Meyer. And he talked in there about like the rarity of
06:13dissents in history and how there was a norm where it's like if you have like more than two dissents,
06:20have you lost the board, which was like a thing that people like that was like, oh, it has the
06:24future. I mean, Lisa's just old enough to remember when we judge a central banker by did they have ham
06:30and
06:30cheese or tuna fish in their lunch. That's right. And now we're into this hyper analysis.
06:34But the other thing. Times used to be so simple.
06:36Look, I'm like very interested in these questions of like why are rates going up. I'm very interested
06:41in the meta question of like are we sort of like post the peak of like central bank being
06:46independent, being this key pillar of what a successful economy looks like. But the other
06:51thing that's true is that the only thing that matters is the memory trade right now. Like everything
06:55around the world, you know, the rates go up by 25 basis points. Reels are up at the highest level
07:01since November 2008. No. What is it? There's someone down and sideways. And the answer, Tracy,
07:07I always fall back to watching foreign exchange. And I don't think dollar debasement or weak dollar
07:12even is really going to be discussed here. Maybe it should be. Well, it should be because the weird
07:17thing that's happening now is that we've had real rates going up alongside the dollar getting
07:21acre, which is something that you don't normally see. Right. Like normally, if real rates are going
07:26up, you get more inflows into dollar assets and the dollar appreciates. That hasn't been happening,
07:30which doesn't exactly imply anything flattering for investor appetite.
07:34OK, so U8 is going to play for the home team. What how does the Bank of Japan frame Jackson
07:39Hole
07:40for the troops at home? I mean, I think this sadly says something about the state of the Fed at
07:45the
07:45moment. But like, I think they're going to be watching the Treasury more than Jackson Hole. Right.
07:49So here's a key question. Yes or no. Do you think that we're going to emerge from Jackson Hole
07:53with a clear understanding of the reaction by the Federal Reserve? I'm going to go with a no,
07:59a big no on that. I would certainly go with a big no. But I will also add that in,
08:04you know,
08:0415 years plus of more or less during this job, clarity is a myth. You think you gained it for
08:09like a minute and then there's new questions? I'm going to say yes. We might could get a pain
08:12speech. What do you think? I love it. I think it will be, as you mentioned earlier,
08:17a lot of people that disagree aggressively with the chairman's approach, biting their lip and being
08:23as collegial and silent in policy. The real question, do you go straight from Jackson Hole
08:28to your soiree in Los Angeles? I think there's a one or two week period between Wyoming and California.
08:34Have you seen the Adelaide's Gulfstream? It sits out there just past the United Gate.
08:38It's right. No, no, no. It's right there in our circle there. It's right there in the Bloomberg
08:43Courtyard. Look forward to seeing you all there.
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