The Podcast of the Lotus Eaters

00:00:00.000 Hello and welcome to Brokonomics. Now, in this episode, I wanted to do a bit of a market

00:00:28.640 update. I haven't done one of those for a while, but things have been weird. So it is worth covering

00:00:34.540 what's going on. Now, everything that I sort of spelt out in the previous Brokonomics, I still

00:00:40.020 stand by that. I still think the liquidity is ultimately the driver of everything. And I still

00:00:44.900 think that's coming because, well, there's 8 trillion of debt that needs to get rolled over.

00:00:49.320 And, you know, how else are they going to do it? I mean, are they going to suddenly discover

00:00:53.680 prudent government spending and, you know, austerity and debt reduction going into

00:01:00.120 the US midterms? I would consider that somewhat unlikely. But nevertheless, the market patterns

00:01:07.400 have been just outright weird and is worth covering. So markets are just behaving in a way that just

00:01:14.580 does confuse everybody. You know, crypto hasn't rallied in the same way that other assets have.

00:01:20.980 Bitcoin is below the $121,000 late 2025 high. And it's bouncing around instead of setting new

00:01:32.320 records. But at the same time, precious metals like silver and gold have been extremely volatile

00:01:40.020 with, you know, these sharp surges upwards, followed by these quite deep pullbacks. Actually, I'm glad I

00:01:47.200 timed that right on the silver brokernomics I did recently. You know, I think it was at 121 on the

00:01:52.920 day that I recorded that. And I said, look, I do believe in the underlying message, but there is

00:01:57.620 going to be a hell of a lot of volatility here and expect to pull back. And about three days after I

00:02:02.760 filmed that, it did. And I think it pulled back down to, well, whatever the sort of the interim low

00:02:08.760 that it hit, like in the high 70s. So, you know, stuff is odd because certain assets are responding

00:02:17.720 to this picture very differently to how other assets are. And you might well want to know what's

00:02:24.500 going on, as would I, to be honest. It's kind of not the case anymore that we don't get to do the

00:02:31.240 sort of Warren Buffett thing anymore. Warren Buffett made an enormous amount of money by buying good

00:02:36.860 companies and then waiting and then selling them when they got high, which is a strategy that can

00:02:44.280 work now. And I think that's basically what I'm doing these days. But the interim volatility is

00:02:51.200 significantly high. You don't look at your portfolio and think, oh, I made two to 3% this year. All I

00:02:57.460 need to do is just wait 50 years and I'll be, you know, a decamillionaire. Now you can get much

00:03:03.760 faster returns, but the cost of that is very significant volatility. And volatility to the

00:03:11.520 point where you feel like you've made a stupid mistake and you've got it all wrong and you're 1.00

00:03:17.380 blowing your life savings and panic, panic, you need to sell, run away. And actually that might not 0.99

00:03:24.060 even be wrong because the reason you might be saving, I mean, your time horizon, your risk profile

00:03:28.620 is different from mine. And that's why I'm always kind of shying away from giving anything too specific

00:03:32.620 rather than a way to think about this. But actually you might be saving for a house deposit

00:03:37.140 or something in your life that means you actually need the money at the time. And so it might well be

00:03:44.940 the case for a lot of you, the profile of the old Warren Buffett years, the sort of 60s and 70s and

00:03:51.660 80s of just buying good stuff and watch it tick up, you know, not by a huge amount, but by a predictable

00:03:57.820 amount and it compounds over turn over time would be fantastic for you. And maybe you can still do

00:04:04.520 that with some companies if you're prepared to accept, you know, the low returns, even though

00:04:09.980 those good companies are still going to be buffeted around by the whole liquidity cycle thing going on.

00:04:14.180 But I prefer to play at the faster end of this stuff. But it does mean periods of head scratching

00:04:21.380 volatility and market disconnects. And, you know, I think it is liquidity. I think it's always going

00:04:30.480 to be liquidity. And, you know, something like Bitcoin, it does sit pretty far out on the risk

00:04:36.480 curve. And so when there is any sort of liquidity retrenchment or it pulls back for a period, it does

00:04:45.420 get hit and quite hard. And also, of course, there was the big structural break in, well, 1010, October

00:04:54.100 of last year, a big sort of liquidation event in the crypto markets. And that takes time to heal. So I don't

00:05:01.560 think that the issue is that, you know, the cycle is dead, nor do I think it's that liquidity hasn't shown

00:05:06.640 up. I think it's that price patterns are showing a lot of uncertainty as to where to allocate and when.

00:05:14.500 And that's kind of what I want to get into with this one. So, I mean, let's have a look at what

00:05:18.600 the data is actually saying. You will remember that on plenty of previous occasions, I've talked

00:05:23.760 about these purchasing manager index, which is a really good way of seeing what's going on in the

00:05:30.720 economy. So apparently firms have these people called purchasing managers, and apparently their

00:05:35.220 job is to buy stuff. And for whatever reason, I mean, apply in the comments, if you are a purchasing

00:05:42.580 manager and you actually understand the world, I just understand that the metric is good.

00:05:46.680 When purchasing managers start buying stuff, it is a very reliable indicator that the economic

00:05:53.380 cycle is turning up because those firms are expanding and they're doing stuff. Anyway, so

00:05:58.500 the, and these purchasing managing, purchasing managers indexes that I like to talk about, there's

00:06:05.120 one that kind of sits over them called the ISM, which is a sort of a combining of various of

00:06:13.620 them. And that is kind of like the key benchmark for where we start the business cycle. Now that

00:06:20.800 has risen to 52.6. Now anything over 50 shows business expansion. So it is good. It clearly shows that

00:06:33.260 we are in a state of expansion again. Services PMIs are actually even a little bit stronger, you know,

00:06:43.640 53.8 I remember looking at. That's continued steady growth. What else have we got? Silver. I mean,

00:06:52.980 that's swung around violently. So yeah, what did it hit? Like I said, it hit something like 120

00:06:57.320 followed by these sharp declines. Bitcoin, which as you know, is a bit of a favorite of mine.

00:07:03.580 It's been range bound. It's substantially lower than it was pre-1010, pre-October of last year.

00:07:12.280 And it's subject to these sort of constant volatilities and liquidations and so on.

00:07:17.580 So look, starting to bring this together, you're getting mixed signals. Parts of the economy are

00:07:21.820 moving at different speed. Manufacturing is improving. And the cyclical sectors are beginning

00:07:29.480 to expand. What do I mean by cyclical sectors? Commodities are early. Logistic firms supplying

00:07:39.620 components, they're early in the cycle. As I come to talk to you later, gold is early in the cycle.

00:07:46.520 Things like insurance are quite late in the cycle. So if you can map where different sectors are,

00:07:52.280 you are seeing those bits that are early on the cycle, the cyclicals, starting to do quite well.

00:07:59.540 Service is holding up. Metals pricing is getting extreme. Markets are pricing,

00:08:04.580 you know, uncertainty over growth, really. So look, when liquidity tightens or becomes ambiguous

00:08:13.680 and it is not sending clear message, assets that rely on those capital flows, such as Bitcoin and

00:08:20.640 crypto, they're going to lag even if the sort of broader macro indicators are actually looking

00:08:26.840 quite interesting. So it's more of a liquidity signal puzzle rather than a broken market regime.

00:08:34.560 The macro data, the PMIs and the ISM, they're showing early expansion. While risk assets, they're still

00:08:41.280 delayed. Precious metals, they often lead as liquidity proxies. In fact, I think if you take

00:08:49.280 if you take the chart of gold and you just shift it back in time by about six months, something like

00:08:56.980 that, it pretty much mirrors Bitcoin's chart. It just leads. It's ahead of it. So I think the

00:09:08.500 indicators are there and they're looking good. So I've not seen anything that makes me worry, but

00:09:12.760 some of you may and therefore it is important to address. I don't even think that the current

00:09:18.280 market conditions are necessarily contradictory. What we're seeing is a sequencing effect.

00:09:25.120 So, you know, macro data can expand and tighten and expand before liquidity actually flows into

00:09:32.400 risk assets. And that lag is what is making everything look really weird at the moment.

00:09:39.040 So debt roll over. Let's come back to that because it is so important to all of us.

00:09:43.800 Governments, especially in the US and Western, well, actually every Western government, to

00:09:48.980 be honest, they've got a huge amount of debt that must be refinanced this year.

00:09:53.860 They've got older bonds issued to fund government spending at whatever point they're issued.

00:10:00.220 They don't pay them off and they need to issue new bonds in order to replace the old ones that

00:10:06.420 are rolling off. And the more debt there is and the higher the interest rate, the more expensive

00:10:11.660 and harder that becomes for governments. And policymakers don't like to see that. They

00:10:16.900 like to be able to fund their programs cheaply. So they often prefer to keep financial conditions

00:10:23.360 easier so that their cost of servicing the government remains manageable. And it's that debt

00:10:32.880 roll over that drives the debasement, the lowering the value of every particular pound or dollar or

00:10:40.520 Aussie dollar or Canadian dollar or whatever. But the US still has eight trillion of debt that it's

00:10:45.080 got to roll over this year. And basically the system that they always choose debasement over

00:10:51.120 defaults. I mean, they could, I suppose, say, look, we've borrowed too much money. We can't afford to pay

00:10:57.160 it back. We're not paying it back. Immediate financial crisis undermining of the entire system. So they're

00:11:05.140 going to debase it. I just, I mean, from my point of view, this stuff is so elementary and simple, then no one in

00:11:12.700 office is going to be the guy who blows up the system when they can just debase the money supply instead. And

00:11:19.380 that's what they always do. And I just don't see any indication that this time is going to be different.

00:11:26.180 So in other words, the refinancing forces a bias towards looser money, cheaper money, and policies that help the

00:11:35.240 market rather than tighten them. They just can't do it all the time, because then inflation would get out of

00:11:40.460 control. But it looks like the inflation is pretty much under control. And midterms are coming up. So just see

00:11:49.360 so elementary to me what's going to happen next, even if it is choppy on the way there. And thus,

00:11:55.720 I am not concerned at all. I mean, stop the video there if that's satisfying for you. But I just don't

00:12:02.700 see the issue. Well, I do see an issue that getting there is by no means smooth. And it's testing. And it

00:12:09.440 makes you think you've done something terribly wrong. But I'm not sure that that is. But look,

00:12:14.300 the mechanism is government issues a debt. The banks hold and absorb that debt.

00:12:19.360 If markets aren't strong enough, which is what's happening. And when banks expand their balance

00:12:23.440 sheet, because regulators allow them to through various mechanisms, money supply is going to grow,

00:12:29.680 credit grows, more liquidity. And that keeps the long term yields that governments have to pay

00:12:35.460 suppressed, even if nominal interest rates remain higher than you'd think they'd ideally want.

00:12:41.980 Although they probably get that down as well. So the net result is similar to easy money,

00:12:45.440 but it doesn't necessarily require the headline interest rate to get cut. And it doesn't even

00:12:51.160 necessarily require quantitative easing, such as we saw in abundance during the COVID era.

00:12:57.380 They can get there for a number of other means. So the debt rollover is constant. It's structural at

00:13:04.100 this point. It's unavoidable. Even if the macro conditions are mixed, the financing pressure itself

00:13:11.240 creates a built in bias towards these looser conditions. And it's why some risk assets are

00:13:16.900 starting to lift off without there being an obvious stimulus announcement or big headline thing that

00:13:24.800 you can point to to say, yes, that because of that. And then markets take off. I think they're

00:13:29.860 sniffing out what's going on. So liquidity. We should address that after debt. Markets were expecting

00:13:36.320 in the buildup of last year to see more liquidity to support headlines in 2026. But instead, what we

00:13:43.900 actually saw was a temporary liquidity gap. And that happened because various cash flows were pulled

00:13:48.560 out of the system or blocked, not because the demand changed from the government side. And it shows up

00:13:56.180 in risk assets, especially in volatile ones, Bitcoin being the classic example. And so we've had these

00:14:03.240 sort of, you know, air pockets that have developed. You know, there was there was various US government

00:14:07.980 shutdowns, which surprisingly compared to other government shutdowns that I remember in my life

00:14:12.400 were not talked about that much. But it does have a huge effect on liquidity. And so markets weren't

00:14:19.160 necessarily signalling cycle over. They were signalling that liquidity was not present when they were

00:14:25.800 expecting it to be present. And it doesn't lead to a full scale retreat. Neither does it lead to

00:14:30.480 things going up. What it leads to is the stuff that responds to this chopping around quite violently

00:14:37.340 in between while they're trying to figure out what's going on. The Treasury General account,

00:14:42.200 I've mentioned that before, that is being built up. And that's reducing the amount of money in

00:14:47.240 circulation. And that's partly a function of all these government shutdowns that we've had.

00:14:51.000 There's the reverse repo facility I've talked about before. That was previously built up and started

00:15:00.240 to get drained out. And that would normally be very good. But it couldn't quite offset the fact

00:15:04.620 that the US government itself was building up its piggy bank. Yeah, and the prolonged government

00:15:09.100 shutdown in 25, it just disrupted all of these normal flows that should be happening. And so you combine

00:15:15.320 these together and what you kind of get is this liquidity hole or air pocket where the assets

00:15:20.420 that I like would have been responding to more positively. But nevertheless, PMIs are good.

00:15:27.180 It shows that something interesting is going on or starting to build. And it's taking longer than I

00:15:34.440 thought, but it still seems to be happening. And I don't know how they could possibly fund the system

00:15:40.140 at this point if they didn't encourage it to happen. So we've got a pattern, which is strong

00:15:46.000 underlying macro signals, but weak price action. And essentially, it's a sequencing issue. It's real

00:15:53.980 economy indicators are recovering before the liquidity, as you'd expect, actually. And it results

00:16:01.700 in these volatile, weird markets that we're seeing. So the crucial issue here is really time lag. Macro

00:16:07.200 is improving, but not immediately turning into demand return. And these financial markets, they need

00:16:15.660 confidence. They want to see balance sheets repair. They want to see capital available before they can

00:16:22.800 rally sustainably. And in this case, all the data that I'm seeing suggests that economic conditions have

00:16:28.160 improved, but liquidity has not yet been restored in asset markets and given these weird conditions.

00:16:35.060 Also, I should go into that 10-10 October of last year, that weird crypto breakdown. And crypto basically

00:16:43.880 had a bit of a market plumbing issue. It had this sudden cascade of forced sellers. Too many people were

00:16:52.000 using leverage. Too many people just got too excited, got over their skis, leveraged up. And basically, the

00:17:00.500 market was so weighted in one direction that it was vulnerable. And it could be people betting the

00:17:09.600 other way suddenly found that they had a nice big gap underneath to make money in. And whatever the

00:17:16.820 mechanism for triggering it was, whatever market manipulation or hedge fund or whatever prompted it,

00:17:22.280 I don't think we fully understand yet, prices fell, people with over leverage positions started to get wiped out. And then it

00:17:30.820 sort of tumbled in on itself. You effectively had a bit of a flash crash. And the reason I'm using the term flash crash is

00:17:36.700 because I don't know if you remember, but a few years ago, sort of pre-COVID period, there was a, what we call now a flash

00:17:43.780 crash crash in the markets. And this happened to equities. And it was basically the same thing. Equity

00:17:48.820 investors had got overexcited, leveraged up, you know, gone on the bubble, like 10 times, 11 times, 12 times, 1.00

00:17:58.620 something stupid like that, stupidly over leveraged. And the same mechanism, they just got wiped out in this 0.99

00:18:04.220 liquidity event. Now, at that time, people didn't say, oh, equities are over forever, you know, forget

00:18:10.240 equities, you know, company stocks and shares are never going to be a thing again. You know, it's just one of those

00:18:15.280 readjustments that you can't let people get, well, if people get too excited, you make it too easy to take their legs out

00:18:21.760 from them, because they're, they're not on sure footing. So the crypto version of a flash crash kind of needed to happen

00:18:29.040 because it needed to clear out all that hype and leverage. So that basically, the market had a firmer footing to

00:18:38.080 proceed on. And these breaks, they take time to heal. And when there is a big break like that,

00:18:42.880 nobody's bidding. And, you know, it was a, it was definitely a crypto event, but it's not actually

00:18:50.300 fundamentally dissimilar to previous equity flash crashes. I think the concrete data points that we

00:18:55.220 can look at in this is that of the October 10 liquidity event, around 19 billion was wiped out in

00:19:04.320 about 24 hours. And it's the largest liquidation in crypto to date, still negligible when you compare

00:19:11.440 to past flash crashes in inequities, though. And it's the kind of number that leaves very plausibly

00:19:18.700 a multi month hangover. That needs to be worked for you and balance sheets need to be repaired and

00:19:26.400 confidence needs to return and stuff. So the cleanest way to reconcile that, okay, macro should be

00:19:32.320 improving, and the indicators say that it is, with Bitcoin feel suppressed, is that, you know, the

00:19:40.200 broader macro picture, the economic picture is turning, but Bitcoin's internal risk engine,

00:19:47.320 which is leverage and, you know, exchange structure, can delay the response. In other words, the cycle is

00:19:54.940 remaining intact, but the transmission mechanism expressed in crypto prices is temporarily damaged

00:20:03.320 and needs to settle down. Now, financial conditions, I think, are easing, even if it doesn't necessarily

00:20:10.080 feel it from the headline numbers. And when money gets easier, borrowing cost falls, the dollar will

00:20:17.080 weaken, and investors will expect rate cuts, and certain assets move first. Gold is a prime example of

00:20:25.380 this. Gold rises when the dollar falls and yields fall. And that can happen before that translates into

00:20:34.600 crypto. Although I think crypto is expressing the same mechanism, only more so when it comes to that

00:20:41.020 point. So you can get a situation where the metals are screaming, but Bitcoin looks stuck. And that doesn't

00:20:47.800 necessarily mean that Bitcoin is broken. It just means that Bitcoin is late to the party because that's how it

00:20:54.700 behaves. You know, financial conditions lead liquidity, and gold often smells it first and moves first. Effectively,

00:21:05.300 gold is mirroring these financial conditions. But the time offsets are different. Gold smells it.

00:21:13.700 Financial conditions improve. Bitcoin responds. There is this sort of lag process. In a US 10 year now,

00:21:20.500 so the cost for the US government of borrowing money, it's down a bit now. It's 4.14%,

00:21:27.700 which is high. It's at the low end of normal pre-2008. Post-2008, it is abnormally high. Gold,

00:21:41.500 I checked that this morning. I think that's a bit over 5,000 at the time of recording. Silver,

00:21:48.580 I'm seeing improvement there. I think I saw it at 86 this morning. And Bitcoin is sort of floating

00:21:54.020 around. I think this morning I saw $67,000. And on the other side of things, I saw a Reuters article

00:22:02.940 this morning saying that the dollar had hit a four year low recently. I mean, that wasn't today's

00:22:08.240 article. That was from about a week back. But you are setting expectations of what the whole macro

00:22:14.360 picture looks like at this point. So falling yields, plus weak dollar, looser financial conditions,

00:22:23.300 all of that leads to higher global liquidity, as we talked about many times. Risk assets catch up to

00:22:29.320 that and precious metals front run it. So look, gold and yields are telling you that the price of money

00:22:35.880 is easing. And Bitcoin is telling you that its own structure is still healing. And that's why I don't

00:22:43.120 feel that this mismatch is some sort of great contradiction that needs to be resolved. It's just

00:22:48.160 that sequencing signal. And when that flips, and I believe it will, the move could be quite violent

00:22:55.380 upwards. And we're just in this sort of positioning period of a lot of months of chop in between of

00:23:00.980 that. So the regime shift towards easier money. A lot of the way that money gets easier is not

00:23:08.560 obvious. It's not a big press conference at the central bank or in the White House. You know,

00:23:15.240 from now on money is going to be easier. Sometimes it can be done through quite really boring

00:23:21.680 mechanisms, technical rule chains that allow the system to accommodate more debt and make money

00:23:29.260 flow more easily. And it always sounds a bit, well, either dull or arcane. And the people doing it,

00:23:37.580 they like to use a lot of acronyms. But essentially, what they're doing is they're getting more money

00:23:44.140 into the system that they need there. And they're doing it in a way that can kind of go under the

00:23:49.100 radar. Apart from, well, apart from anyone who's familiar with the system, they understand exactly

00:23:53.800 what's going on, and they start to position accordingly. And, you know, it might not be with

00:23:59.760 screamingly obvious quantitative easing like they did over COVID. But I mean, you're starting to see

00:24:06.920 it with, oh, what's the new one? It's always these bloody acronyms. Bank rule changes. The latest one,

00:24:13.380 I believe, is the ESLR. I could break down the acronym for you. But quite frankly, I would have

00:24:22.740 to check exactly what the hell does that stand for. But the end result is they're making it easier for

00:24:29.500 banks to take more risk and have more money. So rather than dig into all the current list of

00:24:36.760 acronyms, which will bloody change next time anyway. So there's no point learning these sodding 0.99

00:24:41.620 things. The point is they're making it easier for banks to pro more money around and increase

00:24:46.680 liquidity. So I'll just keep it at that level for now. Go and read some Financial Times if you really

00:24:53.040 want to dig into the particulars of how they're doing it. Simple message, they're just pumping

00:24:59.180 more money in. Modern financial systems are broad in ways that the system can ease. So, you know,

00:25:07.160 the central bank balance sheet moves, that's a nice obvious one. Traditional quantitative easing and

00:25:12.280 asset purchases and rate cuts and stuff like that. And we may start to see some of that closer to the

00:25:17.080 midterms. But for now, we don't really need it. But the other mechanism is just balance sheet expansion.

00:25:24.300 So banks, not the central bank, but other banks buying government bonds with various rule changes

00:25:31.760 encourage them to do so. Bank lending increasing and banks leveraging up when the regulations permit.

00:25:39.520 And that's what the ESLR is all about effectively. If you enjoyed that content, and of course you did,

00:25:47.600 because you are a smart person, then why don't you go over to lotuseaters.com where you can watch the

00:25:53.120 whole episode for as little as £5 a month, which really is not much money at all. And you get loads of

00:26:00.720 really good content.

PREVIEW： Brokenomics ｜ Market Update Feb 2026

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