The Podcast of the Lotus Eaters

00:00:00.000 Hello and welcome

00:00:28.860 to Brokonomics. Now, what have we got today? Well, we got the labour budget. Got the labour

00:00:34.840 budget. That was yesterday from my point of view or late last week if you're watching this on the

00:00:40.240 Tuesday that it goes out. Not a great budget. I suppose in some ways it could have been worse

00:00:49.160 although she did a lot of the damage with the rumours and all the rest of the stuff that she

00:00:53.260 put out. So we need to talk about that. I'm also quite conscious of the fact that some of you may

00:00:59.440 have been a bit nervous because you probably detected, well, I'm a bit Bitcoin positive.

00:01:05.480 And this year has not worked out the way that perhaps we hoped it would. I mean, it's still gone

00:01:11.320 up very nicely over the course of the couple of years. Remember, I was really sort of pushing to

00:01:16.800 buy Bitcoin when it was at 16,000 and now it's at 90,000. But it did have a pullback. I think

00:01:23.180 it went up to 125 as an all-time high and then it pulled all the way back to 80 recently.

00:01:28.840 And naturally, a lot of people are wondering, does that mean it's all over? So let's first off talk

00:01:33.620 about that, what's going on in the liquidity cycle, because I talked about that so much.

00:01:39.600 Then we talk about labour budget. And then we can talk about, well, my view on a lot of this stuff

00:01:48.160 is that if something cannot go on forever, then it will end. And this country and the way it is

00:01:55.440 spending on welfare and benefit is simply unsustainable. You can't rely on borrowing

00:02:04.020 money forever from the bond market when it is perfectly obvious to them that they're not going

00:02:09.640 to get their money back. Something is going to give. And I don't know exactly when it's going to

00:02:14.600 give, but I do need to lay out what that looks like, how it might play out, and tagging that onto

00:02:22.320 the back of the budget stuff is probably the way to go. So I'll try and not make this unnecessarily

00:02:28.540 long, but there's a good few things to cover there. So let's start with a liquidity update,

00:02:33.840 because everything feels a bit slow and sluggish at the moment. But what has been happening

00:02:40.360 recently? Well, it turns out that if you shut off the world's biggest spending state for several

00:02:47.300 months, the US, biggest spending state in all of human history, if you turn that off, it has an

00:02:53.640 effect on liquidity. So we've had the US shutdown and the whole fiscal standoff between the various

00:03:02.160 sort of limbs of government there. And what it's basically meant is that the current account for

00:03:07.800 the US, the Treasury General account, that's nudging a trillion dollars have been sat in that.

00:03:14.340 And that is well above the level that this government current account is supposed to have. A lot of money

00:03:20.420 has been jammed up in that. That can now start flowing out because, of course, the US government

00:03:24.960 has reopened. At the same time, over this period where that money's been getting accumulated,

00:03:31.720 not washing into markets and, well, washing into the economy as a whole, which will then go into

00:03:37.100 markets, we've had the Federal Reserve has been doing quantitative tightening at a rate of about

00:03:43.120 just under 100 billion a month. Quite significant. So over a trillion a year has been drained from

00:03:51.540 markets through this. The only mitigating factor is something that we talked about before, the

00:03:57.000 reverse repo facility. So basically an overnight lending facility that's facilitated by the Treasury.

00:04:06.780 Money has been drained out of that. But because of the effects we've already talked about and because

00:04:13.460 of Treasury hoarding so much in the TGA, that hasn't really sort of made its way out to banks and

00:04:17.900 therefore into liquidity as a whole. Now, the result of this is over the past few months is that

00:04:24.240 everybody has been rather short of dollars. You know, Treasuries and, you know, Big Tech and Bitcoin

00:04:32.580 have been the things that you needed to sell because they're liquid and especially Treasuries and Bitcoin,

00:04:40.060 they're very liquid. So if you need dollars, well, you cash those in to get you over this sort of liquidity

00:04:46.520 squeeze. But now the mechanics of this has flipped. So the US government has reopened.

00:04:52.700 That means the TGA is going to come down. Every federal payment, salary, contract, benefit, you know,

00:05:00.360 that's new liquidity going out into the market. So that's I mean, that's easily going to be 350 billion

00:05:06.540 over the next quarter or two at most, probably more than that. The Fed is slowing that quantitative

00:05:13.440 tightening that I talked about. And actually, once they start signalling that they're winding it down,

00:05:21.280 historically, it's never more than a year before it flips into quantitative easing.

00:05:25.920 So we can likely expect that as well. And in addition, there's been some updates to banking

00:05:32.180 regulations. So basically, relief on Treasuries. So they can hold extra capital so they can lend and

00:05:40.320 trade more, you know, it reclassifies some things. Now, you've got to overlay that with the fact that

00:05:46.020 it's a election year in the US when fiscal taps always get turned on, always do an election year.

00:05:52.820 China is quietly reflating its local government bonds. And it's extend on pretend on property,

00:06:00.800 which makes up a huge mark, a huge part of its market. Japan is still running yield curve control,

00:06:08.400 which is a permanent liquidity drip. And of course, Japan is a is a huge market. So a second

00:06:13.040 no, actually, it's probably not the second largest economy anymore. That's probably China now. But

00:06:16.560 you know, it's the third. And Europe is using the defence and green to basically justify bigger

00:06:27.440 deficits. Now, of course, that won't work out well for Europe. But the point is that they're adding

00:06:31.280 liquidity in. So you've got these three big blocks that are easing whether they admit it or not.

00:06:39.920 And so when we look at, you know, what's happening here is the move that we have had in risk assets,

00:06:46.080 particularly crypto and tech stocks, which is, you know, I prefer, we've had, you know, liquidity

00:06:51.200 tightening, we've had the markets puking, we've had policy makers blinking. But now the liquidity

00:06:59.200 flood should be turned back on. And to put this kind of recent dip that we've had in perspective,

00:07:05.120 it's just kind of the cost that you need to pay for volatility. And I love this high volatility stuff

00:07:10.640 because basically, as long as I'm patient and I don't freak out and I hold my nerve,

00:07:14.880 I get significantly higher returns in the high volatility stuff. You know, if investing in

00:07:23.920 tech stocks and crypto were easy and just gave you a small, regular monthly, you know, if the line

00:07:32.240 just went up in a smooth line, and you never got pullbacks, then everybody would do it, capital

00:07:38.240 would flood into it, and then the returns wouldn't be there. The reason you're getting these high returns

00:07:43.120 on these type of positions is because they're absolutely bloody terrifying. And you have to

00:07:49.120 be able to stomach, you know, well, what we've had here, like a whatever it is, like a 30% pullback.

00:07:56.400 And most people cannot stomach that sort of move. And therefore, they don't get into the trade,

00:08:01.680 which basically leaves open for those of us who are willing to take a longer time horizon and tolerate

00:08:08.480 a lot of volatility. Well, we can achieve superior returns in doing so. To give you some historic

00:08:16.560 comparisons for this. So in 2011, global equities fell, you know, 32% during their, what was supposed

00:08:27.200 to be their easing cycle, their bull market period, picked up again. In 2016, you know,

00:08:34.960 they dropped 28%. And that was before coordinated easing kicked in from the Fed and the ECB and the

00:08:42.240 People's Bank of China, the PBOC. In 2020, relatively recent memory, markets crashed 34%

00:08:52.080 before the $5 trillion in pandemic stimulus. And in, you know, just very recently, in 24,

00:09:00.960 you know, we've seen a 29% pullback in going into that market, whatever it was last November or,

00:09:09.360 yeah, it's probably about last November. So look, the issue is, this type of volatility is not unusual

00:09:19.360 and you forget about it after you've been through it. And that's why it's useful to remind ourselves of

00:09:25.280 times when this has happened before. But when you're going through it, it is terrifying. And I

00:09:31.040 quite understand if a few of you have got a bit, you know, a bit bloody nervous about it.

00:09:35.760 But look at where we are. The TGA is falling, the US is current account, that's coming down.

00:09:42.560 That reverse repo facility, that's going to hit zero. The issuance mix is going to change. So basically,

00:09:49.360 I mean, the Fed, but I mean, also other Western governments as well, they're going to be issuing

00:09:53.200 more shorter term paper, which basically eases funding conditions. Credit spreads,

00:10:00.960 high yields versus Treasury, that's narrowing, that signals confidence is returning to the market.

00:10:07.200 And another indicator that's worth looking at is the cross asset volatility. So equity volatility is

00:10:15.120 collapsing faster than bond volatility. And what that tells you that it's a risk on market that is

00:10:21.920 returning. So when you see all these factors, you know that whatever the headlines are saying,

00:10:28.720 liquidity is expanding, which is nice. And especially if you invest like me. And that means

00:10:35.360 that, well, basically, gold tends to front run this stuff. For whatever reason, gold tends to sniff

00:10:41.920 this stuff out in advance. I'm not sure why that is. My working theory is because central banks know

00:10:49.440 in advance what's going to be happening. And their world and basically anyone who's paying extra to

00:10:57.360 get inside information from them, you know, brown envelopes, meet you in a pub, tell me what the

00:11:03.440 what the bank is bank is really up to, which I'm not suggesting any hedge funds do, but presumably some

00:11:08.320 do. For that reason, gold tends to benefit from this in advance. Then you get the sort of when it actually

00:11:16.640 kicks in, you get the high tech, sorry, high beta tech stocks, they tend to catch the first bid.

00:11:24.480 And Bitcoin and crypto, they're just pure liquidity bets. If you look at

00:11:33.040 movements in Bitcoin, charted against movements in liquidity, there was a 90% correlation between the

00:11:41.200 two. So I mean, unless the rules of the financial plumbing are reworked substantially, I mean,

00:11:53.520 yes, it's possible that I've just blown it and I've got it wrong. And the peak was 125K and now we're on

00:12:01.120 our way down, blah, blah, blah. But in order for that to be true,

00:12:04.560 how is all this debt issuance going to be rolled over if not through pumping liquidity into the

00:12:13.600 markets and lowering rates and all the rest of it and refinancing the Western debt pile at a lower

00:12:20.800 level? I mean, they're clearly not going to cut spending massively. There's no way Labour's going

00:12:26.320 to cut spending in the UK. In the US, they had the doge thing and it had a few symbolic victories,

00:12:33.600 but I mean, really didn't meaningfully cut spending. Is it really the case over the course

00:12:38.880 of the next 12 months that governments are going to massively cut spending or invent some entirely

00:12:44.400 new process for rolling over debt? I just don't see it. So I'm not changing my view on any of this

00:12:53.040 stuff. I think it is what I just said it was in a couple of Brokernomics ago. I think this cycle

00:12:59.120 has just been extended because COVID gave them the opportunity to add an extra year to the cycle.

00:13:03.840 I suspect that's what it is. I mean, it's your money. So if you're investing, you do whatever you

00:13:11.520 want. But I mean, I'm just completely unfussed really at this point. I think that the tide is

00:13:18.160 going to be rising again. So that's enough about liquidity. But what I would say is that

00:13:30.560 Warren Buffett has this saying that rising tides lift all boats.

00:13:36.880 And I guess that's true. But is it possible Labour have anchored us to the bedrock so much that we're

00:13:42.800 just going to end up being submerged in this country? That's my concern. In fact, my biggest

00:13:47.840 concern, I mean, to an extent is that the situation in Britain becomes so completely and utterly bloody

00:13:54.800 dire that even if the liquidity cycle does come back, it doesn't help us. However, unless they

00:14:01.760 completely screw us over, I think this helps us as well. Reason being is that if she really crashes the UK 1.00

00:14:12.080 situation and the pound sells off, well, that just makes my dollar denominated assets rise even more.

00:14:19.920 So as long as we don't get into the point of open confiscation of British assets or the assets of

00:14:26.880 anybody who is in Britain, then actually this just helps me as well. But nevertheless,

00:14:33.680 let's get on to talk about Rachel Reeves. If you would like to see the full version of this premium

00:14:39.040 video, please head over to lotuseaters.com and subscribe to gain full access to all of our premium content.

PREVIEW： Brokenomics ｜ Labour's Doomsday Budget

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