PREVIEW： Brokenomics ｜ Labour's Doomsday Budget
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Summary
In this episode of Brokonomics, I discuss the impact of the US Budget and the shutdown, the impact on liquidity and the outlook for Bitcoin, Treasuries and Bitcoin. I also discuss the potential impact on the Fed's quantitative tightening and the impact it could have on the US economy.
Transcript
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to Brokonomics. Now, what have we got today? Well, we got the labour budget. Got the labour
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budget. That was yesterday from my point of view or late last week if you're watching this on the
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Tuesday that it goes out. Not a great budget. I suppose in some ways it could have been worse
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although she did a lot of the damage with the rumours and all the rest of the stuff that she
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put out. So we need to talk about that. I'm also quite conscious of the fact that some of you may
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have been a bit nervous because you probably detected, well, I'm a bit Bitcoin positive.
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And this year has not worked out the way that perhaps we hoped it would. I mean, it's still gone
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up very nicely over the course of the couple of years. Remember, I was really sort of pushing to
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buy Bitcoin when it was at 16,000 and now it's at 90,000. But it did have a pullback. I think
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it went up to 125 as an all-time high and then it pulled all the way back to 80 recently.
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And naturally, a lot of people are wondering, does that mean it's all over? So let's first off talk
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about that, what's going on in the liquidity cycle, because I talked about that so much.
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Then we talk about labour budget. And then we can talk about, well, my view on a lot of this stuff
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is that if something cannot go on forever, then it will end. And this country and the way it is
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spending on welfare and benefit is simply unsustainable. You can't rely on borrowing
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money forever from the bond market when it is perfectly obvious to them that they're not going
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to get their money back. Something is going to give. And I don't know exactly when it's going to
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give, but I do need to lay out what that looks like, how it might play out, and tagging that onto
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the back of the budget stuff is probably the way to go. So I'll try and not make this unnecessarily
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long, but there's a good few things to cover there. So let's start with a liquidity update,
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because everything feels a bit slow and sluggish at the moment. But what has been happening
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recently? Well, it turns out that if you shut off the world's biggest spending state for several
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months, the US, biggest spending state in all of human history, if you turn that off, it has an
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effect on liquidity. So we've had the US shutdown and the whole fiscal standoff between the various
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sort of limbs of government there. And what it's basically meant is that the current account for
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the US, the Treasury General account, that's nudging a trillion dollars have been sat in that.
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And that is well above the level that this government current account is supposed to have. A lot of money
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has been jammed up in that. That can now start flowing out because, of course, the US government
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has reopened. At the same time, over this period where that money's been getting accumulated,
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not washing into markets and, well, washing into the economy as a whole, which will then go into
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markets, we've had the Federal Reserve has been doing quantitative tightening at a rate of about
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just under 100 billion a month. Quite significant. So over a trillion a year has been drained from
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markets through this. The only mitigating factor is something that we talked about before, the
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reverse repo facility. So basically an overnight lending facility that's facilitated by the Treasury.
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Money has been drained out of that. But because of the effects we've already talked about and because
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of Treasury hoarding so much in the TGA, that hasn't really sort of made its way out to banks and
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therefore into liquidity as a whole. Now, the result of this is over the past few months is that
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everybody has been rather short of dollars. You know, Treasuries and, you know, Big Tech and Bitcoin
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have been the things that you needed to sell because they're liquid and especially Treasuries and Bitcoin,
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they're very liquid. So if you need dollars, well, you cash those in to get you over this sort of liquidity
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squeeze. But now the mechanics of this has flipped. So the US government has reopened.
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That means the TGA is going to come down. Every federal payment, salary, contract, benefit, you know,
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that's new liquidity going out into the market. So that's I mean, that's easily going to be 350 billion
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over the next quarter or two at most, probably more than that. The Fed is slowing that quantitative
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tightening that I talked about. And actually, once they start signalling that they're winding it down,
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historically, it's never more than a year before it flips into quantitative easing.
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So we can likely expect that as well. And in addition, there's been some updates to banking
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regulations. So basically, relief on Treasuries. So they can hold extra capital so they can lend and
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trade more, you know, it reclassifies some things. Now, you've got to overlay that with the fact that
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it's a election year in the US when fiscal taps always get turned on, always do an election year.
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China is quietly reflating its local government bonds. And it's extend on pretend on property,
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which makes up a huge mark, a huge part of its market. Japan is still running yield curve control,
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which is a permanent liquidity drip. And of course, Japan is a is a huge market. So a second
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no, actually, it's probably not the second largest economy anymore. That's probably China now. But
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you know, it's the third. And Europe is using the defence and green to basically justify bigger
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deficits. Now, of course, that won't work out well for Europe. But the point is that they're adding
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liquidity in. So you've got these three big blocks that are easing whether they admit it or not.
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And so when we look at, you know, what's happening here is the move that we have had in risk assets,
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particularly crypto and tech stocks, which is, you know, I prefer, we've had, you know, liquidity
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tightening, we've had the markets puking, we've had policy makers blinking. But now the liquidity
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flood should be turned back on. And to put this kind of recent dip that we've had in perspective,
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it's just kind of the cost that you need to pay for volatility. And I love this high volatility stuff
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because basically, as long as I'm patient and I don't freak out and I hold my nerve,
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I get significantly higher returns in the high volatility stuff. You know, if investing in
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tech stocks and crypto were easy and just gave you a small, regular monthly, you know, if the line
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just went up in a smooth line, and you never got pullbacks, then everybody would do it, capital
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would flood into it, and then the returns wouldn't be there. The reason you're getting these high returns
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on these type of positions is because they're absolutely bloody terrifying. And you have to
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be able to stomach, you know, well, what we've had here, like a whatever it is, like a 30% pullback.
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And most people cannot stomach that sort of move. And therefore, they don't get into the trade,
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which basically leaves open for those of us who are willing to take a longer time horizon and tolerate
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a lot of volatility. Well, we can achieve superior returns in doing so. To give you some historic
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comparisons for this. So in 2011, global equities fell, you know, 32% during their, what was supposed
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to be their easing cycle, their bull market period, picked up again. In 2016, you know,
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they dropped 28%. And that was before coordinated easing kicked in from the Fed and the ECB and the
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People's Bank of China, the PBOC. In 2020, relatively recent memory, markets crashed 34%
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before the $5 trillion in pandemic stimulus. And in, you know, just very recently, in 24,
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you know, we've seen a 29% pullback in going into that market, whatever it was last November or,
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yeah, it's probably about last November. So look, the issue is, this type of volatility is not unusual
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and you forget about it after you've been through it. And that's why it's useful to remind ourselves of
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times when this has happened before. But when you're going through it, it is terrifying. And I
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quite understand if a few of you have got a bit, you know, a bit bloody nervous about it.
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But look at where we are. The TGA is falling, the US is current account, that's coming down.
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That reverse repo facility, that's going to hit zero. The issuance mix is going to change. So basically,
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I mean, the Fed, but I mean, also other Western governments as well, they're going to be issuing
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more shorter term paper, which basically eases funding conditions. Credit spreads,
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high yields versus Treasury, that's narrowing, that signals confidence is returning to the market.
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And another indicator that's worth looking at is the cross asset volatility. So equity volatility is
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collapsing faster than bond volatility. And what that tells you that it's a risk on market that is
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returning. So when you see all these factors, you know that whatever the headlines are saying,
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liquidity is expanding, which is nice. And especially if you invest like me. And that means
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that, well, basically, gold tends to front run this stuff. For whatever reason, gold tends to sniff
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this stuff out in advance. I'm not sure why that is. My working theory is because central banks know
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in advance what's going to be happening. And their world and basically anyone who's paying extra to
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get inside information from them, you know, brown envelopes, meet you in a pub, tell me what the
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what the bank is bank is really up to, which I'm not suggesting any hedge funds do, but presumably some
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do. For that reason, gold tends to benefit from this in advance. Then you get the sort of when it actually
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kicks in, you get the high tech, sorry, high beta tech stocks, they tend to catch the first bid.
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And Bitcoin and crypto, they're just pure liquidity bets. If you look at
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movements in Bitcoin, charted against movements in liquidity, there was a 90% correlation between the
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two. So I mean, unless the rules of the financial plumbing are reworked substantially, I mean,
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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
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our way down, blah, blah, blah. But in order for that to be true,
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how is all this debt issuance going to be rolled over if not through pumping liquidity into the
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markets and lowering rates and all the rest of it and refinancing the Western debt pile at a lower
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level? I mean, they're clearly not going to cut spending massively. There's no way Labour's going
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to cut spending in the UK. In the US, they had the doge thing and it had a few symbolic victories,
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but I mean, really didn't meaningfully cut spending. Is it really the case over the course
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of the next 12 months that governments are going to massively cut spending or invent some entirely
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new process for rolling over debt? I just don't see it. So I'm not changing my view on any of this
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stuff. I think it is what I just said it was in a couple of Brokernomics ago. I think this cycle
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has just been extended because COVID gave them the opportunity to add an extra year to the cycle.
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I suspect that's what it is. I mean, it's your money. So if you're investing, you do whatever you
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want. But I mean, I'm just completely unfussed really at this point. I think that the tide is
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going to be rising again. So that's enough about liquidity. But what I would say is that
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Warren Buffett has this saying that rising tides lift all boats.
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And I guess that's true. But is it possible Labour have anchored us to the bedrock so much that we're
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just going to end up being submerged in this country? That's my concern. In fact, my biggest
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concern, I mean, to an extent is that the situation in Britain becomes so completely and utterly bloody
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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
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situation and the pound sells off, well, that just makes my dollar denominated assets rise even more.
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So as long as we don't get into the point of open confiscation of British assets or the assets of
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anybody who is in Britain, then actually this just helps me as well. But nevertheless,
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let's get on to talk about Rachel Reeves. If you would like to see the full version of this premium
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