The Steaks are High

You thought I had a typo there. Psyche!

However, unserious times call for unserious headlines.

Yesterday was momentous. We have switched to a new regime and I don’t think we’re going back for a long time.

Financial repression is a tried-and-true emerging market playbook and has been run by some of the all-time exemplars of government mismanagement and bankruptcy, including:

• Argentina;

• Bangladesh;

• Bolivia;

• Brazil;

• Chile;

• Ecuador;

• Egypt;

• Ghana;

• Greece;

• Hungary;

• Iran;

• Kenya;

• Malaysia;

• Mexico;

• Morocco;

• Nigeria;

• Pakistan;

• Peru;

• Russia;

• Sri Lanka;

• Turkey;

• Uruguay;

• Venezuela;

• Vietnam; and,

• Zimbabwe.

As I wrote yesterday, it’s usually only run by developed economies during or immediately after a major war.

The announced yield curve control (buying long-dated bonds to suppress their yields and issuing short-dated paper to pay for it) is just debt monetization, which is just money printing. (As I’ve explained to you before, these guys went to the best schools, and they are super smart.)

Let me give you a glimpse of the Ghost of Financial Repression Future, because it is all on offer. The financial repression playbook has many elements, including:

• Inflation Target Drift: (the target used to be two percent, but it’s been over that for more than five years, they will shift it up to three percent and then run it at four, then shift it to four percent and run it at five…);

• Directed Credit: banks, pensions, insurance companies, and others will be told by the government where to lend/invest (commie Trump is already doing this by seizing the means of production investing in/guaranteeing loans for private companies - if you’re fine with this but want to blow up New York City Hall because Mamdani wants to make $3.00 bus fares free, you need to check in somewhere);

• Liquidity Requirements: requiring the holding of U.S. Treasuries by investment funds, banks, and other institutions. This is already happening with money market funds, which were required to hold at least 10 percent of their assets in U.S. Treasuries after the Global Financial Crisis;

• Deposit Rate Ceilings: limits on the rates paid to retail depositors. This keeps banks and the government profitable by having them pay below-market rates to investors;

• Capital Controls: foreign asset restrictions, FX restrictions, repatriation rules (forcing the return of capital from abroad). All this forces assets into the below-market rates on offer from the U.S. government;

• Restrictions on Alternative Stores of Value: limits/taxes on foreign currency, gold, offshore accounts, and (GASP!) crypto - and if you think they can’t get your crypto you may be right, but wait until you are sued by the IRS for tax evasion (a court where you are presumed to be guilty) and they serve you with a new 100 item document request every week for a year. You’ll be selling all your crypto to pay your legal team… so problem solved!);

• Financial Transaction Taxes: selective taxes/restrictions to prevent the reallocation of your assets out of flaming U.S. Treasuries/depreciating dollars and into hard money like gold and (in theory) crypto;

• Wage and Price Controls: yes, this would be a return to Nixon’s Economic Stabilization Act of 1970, but it’s in the cards. When the dollar loses value, things become more expensive (remember, the U.S. doesn’t make anything anymore) so they’ll just cap the prices of everything. (The new version of Rumsfeld/Cheney will literally set the price of your breakfast cereal, like they did in the 1970s. Oh, and wages get controlled as well - you ready for that?) Need I remind you that these people went to the best schools?

I’m sorry to be the bearer of bad news.

It’s not just that it won’t work; it’s that it already hasn’t worked. Let’s look at the evidence, provided by the markets.

The U.S. government sold Euro for Yen and then the Yen went right back to declining (USDJPY up means Yen down). Then yield curve control was announced yesterday… and now the Yen is back to declining.

USDJPY is going to 200.

The yield on the 10-year Japanese Government Bond was completely unaffected by the Yen intervention. It had a one-day fall from the yield curve control announcement.

Like the bag of winds given to Odysseus by Aeolus, the yields have been let loose, and they’re not going back in the bag.

Yields fell on the long end of the curve after the U.S. Treasury Department announcement yesterday morning, but the 10-year (green line) is now higher than it was, and the 30-year (orange line) is within a few basis points of where it was. The 2-year yield (white line) rose immediately.

They couldn’t even control yields for a full day.

This all has the feel of a Liz Truss moment, where investors lose faith in a government and its bond market.

If yields continue to rise, I sense an intermeeting rate hike by Warsh could be in the works. (And would actually start to solve the problem.)

However, Trump thinks the bond market “is a very unfair system” and that rates should go down. I understand why he thinks that. His creditors were very unfair to him over his business career… they always wanted to be paid back.

Thus Warsh is handcuffed.

Tartot subscribers know the investment implications of all this.

Separately, I finally found a fantastic AI explainer that breaks it all down in about three minutes. It is a must-watch.