Whenever PTJ speaks, I listen. Yesterday, PTJ was kind enough to give an extremely insightful interview on CNBC. I decided to take notes and share the highlights below here.
The interview can be found on CNBC Pro. When it is unlocked for all users, I will update this post with a link. CNBC has posted clips from the interview on their YouTube channel.
PTJ on the Hamas-Israel Conflict:
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Not speaking to the obvious tragedy of unfolding events, PTJ tries to think of this conflict in the context of a much larger geopolitical situation
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We now have 3 possible theaters of geopolitical conflicts
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ME now with Israel-Hamas (potentially Iran, and this is where it gets really bad)
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Ukraine vs Russia
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Potentially a China/Taiwan conflict
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This might be the most threatening and challenging geopolitical environment that PTJ has ever seen. “If you think about it too much, I want my lucky color to be invisible”
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And all of this is happening at the same time that the US fiscal position is the weakest its been since at least WWII, with debt to GDP ratios at 120%+
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The market had a linear response to the Hamas attack on Israel; it was risk off, but it wasn’t extreme. Perhaps the reaction doesn’t fully recognize or appreciate how bad the potential outcomes here are. Maybe the market is incorrectly exhausted of headline risk.
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PTJ is not rushing to buy equity risk/risk assets until there is some further clarity on the Israel – Iran situation (ie. does Israel decide that Iran is directly responsible, etc.) as this is the main risk of escalation in PTJ’s view
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“It is a really challenging time to want to be an investor in US stocks right now”
On The United States:
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The US fiscal position is the weakest its been since at least WWII, with debt to GDP ratios at 120%+, and is going to require a completely different political mentality to rectify. There is a real risk of nuclear conflict, and the fiscal situation at home is just as dire according to PTJ.
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The current fiscal situation is unlike other cataclysmic type events we’ve faced as the nation (pearl harbor, 9/11, covid) in that markets did not see them coming, with the solutions being unclear.
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The fiscal situation we have now is and has been very clear. There are obvious remedies for it (cut spending, increase taxes). And to top it off, within the political sphere, no one is talking about or addressing it.
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According to PTJ, the fiscal situation MUST be the main talking point of the next election.
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Looking back at the last several months we can see a clear picture, with PTJ reflecting on if we will have a Minsky moment in the bond market
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A Minsky Moment is named after economist Hyman Minsky and defines the point in time where the sudden decline in market sentiment inevitably leads to a market crash
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There will be a grinding reality that (with 120%+ debt to GDP) as interest costs continue to increase, there will be a vicious cycle. Higher interest rates cause higher funding costs which cause higher debt issuance which cause more bond liquidations which cause higher rates. This puts us in an untenable fiscal situation.
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In a few short years, all else equal, the interest cost on the debt will exceed defense spending and reach 20% of all tax revenue unless we do something. This has to be the main dialogue for next year’s presidential election.
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The real problem is that the two people who put us in this untenable situation (Trump and Biden) are the two choices for next year’s election. According to PTJ:
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It started with Trump in 2016, who promised to come in and cut spending and cut taxes. Somewhere along the way, they decided to only cut taxes without cutting spending. Trump inherited a 2.9% budget deficit. In 2019 before the COVID pandemic, it was 4.9%. And in 2020 with the pandemic, it ballooned to 14%.
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When Biden was elected, he doubled down on the irresponsible spending habits of his predecessors. “Trump had 2-3 Oreos, I’m going to eat the whole box!”
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Between both of these presidents, we’ve added 20% debt to GDP. Neither one of these candidates will fix the issue. As Einstein said, “We cannot solve our problems with the same thinking we used when we created them.”
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According the PTJ, there will have to be fiscal retrenchment. We are going to have to make sacrifices.
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We need politicians that will tell us the truth and have an honest conversation. At the current 120% debt to GDP ratio, every 1% increase in interest rates increases debt to GDP by an additional 10%.
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US debt policy worked 10+ years ago when interest rates were 0%. All cracks can be papered over when the cost of debt is 0. And the United States indebted itself on 0% debt. Unfortunately, now there is a cost to that debt.
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To stabilize debt to GDP, we will need to find $1Tn in savings. This can only be done with current spending reform while also increasing taxes.
On the Bond Market:
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Probably going into a recession at some point in early 2024. Through supply and demand dynamics and the current trajectory of UST debt issuance, the bond market is going to deliver several MORE rate hikes.
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There is no clearing price for long term debt currently. And these rate hikes will likely tip the US into recession.
On the tense relationship with China (as a large buyer of US Treasuries):
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PTJ analyzes markets through a flow of funds standpoint.
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The US has lost a lot of foreign central bank support. There is likely to be a crowding out effect as the government continues borrowing at 5%.
Positioning in case of recession:
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PTJ is pretty convinced that we are headed towards recession, and provides several of his clear cut recession trades.
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The yield curve gets extremely steep, with term premiums moving to the back end of the curve (30yr, 10yr, 7yr)
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Equity markets typically decline about 12% heading into a recession
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Assets like BTC and Gold look attractive
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