What Happens Once Tariffs Destroy Economy (Uncut) 02-14-2025

Lyn Alden: What Happens Once Tariffs Destroy Economy

We’re going to break down today’s CPI number that came out on Wednesday. Lynn Alden, founder of Lynn Alden Investment Strategies, here to break down what today’s report means for monetary policy, economic growth, asset classes, including gold, bitcoin, stocks, bonds. We’ll cover it all.

Lynn, great to have you back. Very important data to cover today. A lot of moving parts in the macroeconomic sphere, so it’s good to have you back.

Thank you for being here. Happy to be here. Thanks for having me.

A lot of ground to cover, especially regarding trade wars, but we’ll talk about that in just a minute. U.S. consumer price inflation increased at the fastest pace in nearly one and a half years. In January, CPI rose the most.

Harder-than-expected inflation report by the BLS on Wednesday was likely partly due to businesses raising prices at the start of the year, evident in a record surge in the cost of prescription medication and an increase in motor vehicle insurance, according to Reuters. So, increased by 0.5% in January. Core CPI advanced 3.3% on the year.

Headline 3% on the year. So, your initial reaction to this particular report. And by the way, the markets are rather muted in reaction.

Not a huge move either way. Bitcoin’s up 2%. The Nasdaq’s kind of flat.

The S&P is kind of flat. The dollar did move a little bit initially, but closed the trading session kind of flat. So, not a huge surprise for the markets, although it was harder than expected.

Did it beat your expectations? Yeah, this came in mildly above expectations. I don’t try to do month-by-month estimates. I let the economists that all focus on that do that.

The market, as you point out, the initial reaction is dollar up, other assets down. And then as we kind of move through the day, people kind of realize, well, this is kind of just noise in the grand scheme of things. It’s one month.

I think it shows that we still have sticky inflation. I mean, my view for a while has been inflation pressures are pretty significant. And this is showing that it’s still an issue.

I mean, some of this is still left over from prior money printing. So, it takes time for an increase in money supply to work its way through all sorts of prices. And then if cars go up in price quickly, which is what happened, then things like car insurance and stuff like that can go up with a lag.

So, that’s still working its way through the system. And then two, we’re still running like 7% of GDP deficits, fiscal deficits. And that’s all else being equal, at least, an inflationary force.

So, even with energy prices fairly range-bound and a lot of things more controlled than they were a few years ago, this just shows kind of the nature of the problem. And the fact that we’re still in 2025 talking about above-target inflation, I think, is telling. Let’s take a look at how the markets may be responding to inflation expectations.

So, here we have the iShare TIPS bond ETF. I’m just going to share my screen here now, Lynn. This is a measure of inflation expectations.

Let’s just take a look from six months. Inflation expectations have been trending down relative to where it was last year. In line with your expectations and your forecast, Lynn, where are we headed in terms of inflation? I think we’re probably going to be range-bound for a little while.

There are outlier events— Oh, sorry. What’s range-bound? 2% to 3%, 3% to 4%? Yeah, 2% to 3% and change, I would say, or 2% and change to 3% and change, basically mildly above target. I think we’re still going to see probably a cooling and shelter inflation.

That’s still ongoing. But then we’re not really getting reductions in energy prices anymore. And there’s these other categories where prices are still going through the system.

So, I think we’re probably still going to end 2025 above their target. And that, all of us being equal, Powell’s recent comments were on the hawkish side, which is to say there’s no rush to cut rates, there’s no rush to go back to balance sheet increases or to cease balance sheet reduction anytime soon. So, this gives the Fed a little bit more hawkishness in their narrative, at least until we get maybe a couple of soft prints.

You mentioned to me offline that the Federal Reserve perhaps is not center stage when it comes to a macro narrative, at least for 2025. What do you mean by that? I think I know what you mean, but I’ll let you explain. What is a more dominant driving force for macro developments and asset class movements? Yeah, so fiscal dominance is a really important thing.

So, the size of the fiscal deposits, as well as any other actions by the executive branch, such as tariffs and that kind of thing. Those are, in my view, the bigger headlines to be focusing on, whereas 25 or 50 basis points is less relevant for most investors than I think the consensus would say. In a period of structural monetary dominance, the Fed and the overall banking system plays a really big role.

But in the current period, they mainly help with liquidity, put out fires. We’re seeing a lot of the money creation happen around the banking system. So, instead of rapid bank lending causing this inflation, it’s generally large fiscal deficits.

And so, while things like balance sheet size matter, other policies matter, things that they could do around, say, SLR exemptions, basically changing the nature of the regulations around how easy it is for banks to hold treasuries. All of these are – it’s not that they’re irrelevant. They do affect liquidity, and therefore, they can affect asset prices.

They can affect the structure of the banking system. I just think the far bigger things that outweigh those, especially rates, like especially 50 basis points rates in either direction, is greatly outweighed by, do the deficits stay as big as they are, or do they get meaningfully lower? And what does tariff policy look like three months, six months, 12 months, 18 months from now? Those are way more important in my view. Before we continue with the video, let me tell you about a serious problem affecting millions of people worldwide, data breaches.

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Take back your privacy today. Well, let’s just talk about some recent developments and how impactful they may or may not be for the markets going forward, and then finally, we’ll get your market outlook on stocks, bonds, Bitcoin, and gold. I think these are the four major asset classes that my audience would like your outlook on, Lynn.

First of all, the introduction of a sovereign wealth fund for the US hasn’t been implemented yet. It’s been announced as a possibility. What could possibly go in this fund is a speculation that everybody has right now.

Would it have any impact on the markets whatsoever? Well, so it’s interesting. Most countries with large sovereign wealth funds relative to their GDP have current account surpluses. That’s basically where they accumulate this excess value that they want to stick somewhere.

It’s pretty interesting to do it from the perspective of a twin deficit nation. Even some fairly large numbers like a couple hundred billion dollars would be small as a percentage of GDP. So I think there’s a lot of narrative around it, but that the potential effects are relatively muted.

Obviously, for relatively small assets like Bitcoin, a $2 trillion asset, more or less, any action to acquire a meaningful amount of Bitcoin would be relevant for the market. They’ve also talked about putting strategic interest in there, which I don’t think that’s great, but it’s an option that they have. We’ll see to what extent it’s just done through executive action or that it’s done more kind of thoroughly through legislative action that is then signed into law by the president.

On average, I take the under on what these things will look like, meaning that I wouldn’t be shocked if we have in the years ahead a fairly large sovereign wealth fund. But my base case is that probably the actions there will be smaller than maybe many participants expect. We have to kind of monitor that how we go.

Tariffs. I know trade war, broad topic. There’s been retaliatory measures made by China against U.S. tariffs.

There’s been talk of U.S. implementing broad-based tariffs on other countries. Trump has rescinded that last week. However, he’s now talking about specific industries in Canada, for example, that will be tariffed, which is kind of similar to what he did in Trump 1.0. What’s different this time? I think so far what’s different this time is that they’re coming in harder.

So in the prior Trump administration, the officials around him were mixed between fairly like establishment types and then like his kind of anti-establishment types. And there was a lot of turmoil and kind of like rotation in the administration. This time, they’re coming in with a much more collectively anti-establishment set of views that are generally more in alignment and really hitting the ground harder and faster than last time and seemingly willing to take bigger actions.

So obviously, the Doge thing has been pretty impactful as well as the tariff policy. The initial shock at all of like 25% tariffs on like some of the U.S.’s closest allies was interesting, but then were quickly walked back with some kind of like optical concessions and things like that. That’s kind of one of the biggest variables to watch because this is one of the most challenging things that I think the Trump administration is going to go through is the fundamental nature of the trade deficits.

So they made that a priority in the first term. They didn’t really make a dent in them. And it’s partially because it’s actually a really, really hard problem.

And so the U.S. as the global reserve currency is something they explicitly want to maintain and even take steps to increase the dominance of. But the fact that the dollar is the world reserve currency plays a big role in creating those trade deficits, because what it does is there’s all this extra demand for dollars and dollar-diamond assets. So it boosts Americans’ import power, and then it makes our export competitiveness for low-margin things less competitive.

And so it kind of forces open this trade deficit, which is how the world gets supplied with dollars in order to keep using the dollar as the global reserve currency. If they had a dollar shortage, they’d have to start selling dollar-diamond assets and unwinding a lot of that position. So the fact that the Trump administration wants to reduce the trade deficit, which is a noble goal.

I mean, the deindustrialization has been an issue. It’s caused all sorts of political issues, economic issues, structural imbalances. But when they want to approach that while fully preserving the current status quo of the dollar, it’s just a really hard combination to do.

So I think that these – we’re going to go through a period of turbulence, and I would question at the end of the four years how meaningfully it reduces the trade deficit. I would generally, on average, take the under, meaning that I think that we won’t have as big of a change in the trade deficit as maybe some of the bulls think. But depending on certain policies, I could change my view on that.

But that’s my view at the current time. Are there any trade war developments that may actually negatively impact the markets, in other words, present a headwind, a tail risk that could present a major headwind? Well, yeah. If you implement large tariffs and then be – especially if you get in counter tariffs, that’s basically a big global tax increase.

And if you don’t meaningfully get through major tax reductions – so the Trump administration has talked about reducing income taxes, corporate taxes, locking in some of the prior taxes, that kind of thing. But at least at the current time, generally tariffs are coming first. We don’t yet fully know what the other legislation is going to be.

So risk is if you jack up tariffs and then other countries jack up tariffs and then there’s not huge tax reduction elsewhere, then it’s a really big tax increase. And that can increase the odds of recession or makes business planning a lot harder. If you’re someone handling all these international contracts and you don’t know if specific industry or your specific country is going to be affected, everything is kind of in limbo for the next couple of months in any given area.

It just increases frictions and planning complexity, which can get in the way of – kind of like how they want to decrease regulations to make things more efficient. Well, on the other side of the coin, a period of uncertainty is a period of inefficiency in a way. So that’s just like an ongoing risk in the space.

I wonder how much of this trade war narrative is just a red herring. I’ll let you comment on that. And what I mean by that is perhaps Trump and his allies or adversaries are implementing tariffs on industries that could be substituted by domestic companies anyway.

In other words, we don’t need to buy certain goods from other countries. We could just buy them. So it’s not really hurting broad-based industries overall.

I’ll let the audience comment on this if you’re import-export business, whether or not you’re actually worried about tariffs. But what do you think, Lenin? Is this actually going to impact the broader economy? I think that the biggest question is how hard they’re going to push on it because I think they absolutely could impact the economy. If you did very large tariffs kind of across the board, let’s say hypothetically, you just put 20% or more tariffs on everything or things like that, that’s a pretty meaningful tax increase.

And most – like any one thing could be changed pretty easily, domestic versus international. But when you’re moving entire supply chains, so all the electronics that are made in China and all these other things made in other countries, a lot of them are energy-intensive things to be doing. A lot of them are toxic, the rare earth metals and things like that.

A lot of these are slow-moving things that have various complexities and time to reshore. And then they come with a cost because they’re not here for a reason. It’s generally because they’re more expensive to make them here.

And so, by moving them here, either because of tariffs or otherwise, you’re generally bringing them into a higher-cost jurisdiction, which then competes with the administration’s goal of reducing inflation. Now, there’s other levers they could pull for reducing inflation, like decreasing the regulatory burden, making sure energy is flowing well, that kind of stuff. So, it’s not to say that those are impossible, but they are somewhat in conflict because tariffs are effectively a tax increase.

And then even if you dodge the tariffs by bringing things more domestic at scale, not just like one thing here or there, but actually at scale, like moving hundreds of billions of annual production of things more domestically, we have the highest healthcare costs in the world. So, any sort of manufacturing worker, you’re basically, as an employer, you’re paying some of the highest healthcare costs in the world for them and various other frictions and costs. So, there is not really a free lunch with some of this, even though I think some of the priorities make sense.

Let’s link this back to inflation, which is what we started our conversation on, Lyn. This is the BLS inflation chart. I bring this up because in the prior Trump administration, the CPI did not dramatically, or changes in CPI, the inflation rate did not dramatically go up when Trump implemented select tariffs in his first administration, notwithstanding COVID, which was an anomaly.

But anyway, the question here is whether or not tariffs are inflationary. This is the question that everyone’s been asking. I don’t think I’ve had a chance to ask this to you since the new year.

So, I’d like to get your take on this. So, I think at small levels, tariffs are not that inflationary. So, the tariffs we saw in the prior Trump administration were not that large in a macro sense.

They were more strategic, and they didn’t really make a dent in the trade deficit for that reason. It was kind of like a small solution, therefore, not impactful for most of either benefits or downsides. It did, however, make China a lot more self-sufficient.

They had more incentives to get out of the property bubble business and more in the industrial production business, even more than they already were. So, there’s been a lot of changes in China around this. Some of those came with costs.

I mean, they kind of went through a purposeful recession or real estate balance sheet recession, focus on other areas, try to shore up some of these weaknesses. If you put really huge tariff taxes on a broad number of things, not just targeting one country or a couple of different industries, but if you just put up massive tariff walls and you’re trying to relocate a couple trillion dollars worth of an industrial base, that is friction. That takes time.

This whole kind of modern period, like they call it the past 30 years, we’ve had a bigger than average gap between money supply growth and price inflation of consumer goods. Part of that is because we’ve had globalization. NAFTA opened a lot of things, as well as the whole fall of the Soviet Union, the opening of China.

Basically, we took all these pools of labor resources, connected them with Western capital, and kind of spread supply chains to the cheapest cost production. There were losers to that. If you were industrially focused in the US, you were generally a loser of that whole trade.

Consumers, on average, were winners. Wall Street was a big winner. Government’s a big winner.

Basically, this was a structural disinflationary force that we’re now, for pretty good reasons, talking about unwinding. It’s always important to then be aware of the other side of that, which is, say, if we are purposely trying to get companies to make things in higher cost jurisdictions, that generally comes with frictions. Now, there’s different types of inflation.

One is, in order to have a sustained increase in prices across the board, you generally need money supply growth. That’s kind of the core of what inflation is. Other things come down to where is the share of margins and capital coming from.

In recent years, recent decades, really, in the United States, there’s been more share of the economy going toward corporations and corporate margins and less toward labor wages because now labor has to compete globally when before they didn’t really have to as much. That’s been generally negative for wages, really good for corporate profit margins. As you try to pull some of that back, it could be good for wages, which I think a lot of people would be in favor of.

Generally speaking, someone’s paying that cost. Consumers are paying that cost. Company profit margins are potentially paying that cost.

It depends on the specific tariff, the specific size, substitution options. Generally speaking, you’re either taxing stuff that stays foreign, which is higher prices, or you relocate to a higher cost area, which has benefits, but then generally comes with higher prices. There is potentially inflationary effects, but only if this is done at scale, not specific industries or little small tariff wars, largely not that inflationary.

For equities markets, I think a lot of equities investors are wondering whether our rates are going to go lower, the cost of capital is going to be lower, and thus we’ll see higher valuations. First of all, before we even get there, do the stock markets need lower interest rates for a continued bull rally? Is that even a relevant discussion in 2025? They don’t need lower rates. It depends what else is happening.

The cost of capital is a major input for valuation, but right now, for example, Costco is trading at 60 times earnings, despite rates being historically high still for the modern investor timeframe. Clearly, it’s not like a one-to-one correlation where higher rates means lower asset valuations. There’s even certain environments, and you’d normally see in emerging markets, which is that higher rates can actually fuel higher asset prices because you blow out the deficit even more.

I would actually relate things like money supply growth to asset prices more than rates per se. I think the current environment is kind of a mix for asset prices. On one hand, the high rates are increasing the deficit because all that interest expense is flowing out to a private entities and foreign entities that own that debt and able to spend that interest, either accumulating more assets or going out and accumulating goods and services.

That’s generally inflationary for asset prices, but the higher rates do put headwinds against how much you can reasonably pay for equities because when you start to pay really super high silly valuations and you actually do have a pretty significant hurdle rate to clear in terms of the capital, it keeps some of the lid on that. I think some of those really high valuation equities are at risk if we stay higher for longer. Let’s just get your outlook then, your favorite asset class for 2025.

Probably Bitcoin if we’re talking sheer return potential, but I think there are a lot of really cheap equities both in the US and internationally. Some of these policies could be better for them than we think. If you generally have on average sticky high inflation, some degree of deregulation, Trump putting pressure that he wants lower interest rates, and just in general, this ongoing fiscal environment, I think probably US banks are going to do better than expected.

It’s not a very liked asset class. I think emerging markets are interesting right now. Basically, very under allocated.

Nobody really wants them. The last thing people want to buy in a trade war is international stuff, but some of those are actually not that affected in my view. I still think amid equities, there’s still a lot of opportunity out there.

When people see the expensive US market, they’ll look at market cap to GDP or the CAPE ratio. That’s a collection of thousands of stocks. There’s actually plenty of areas that are trading at very normal valuations and that in my view, still offer better return potential than bonds.

Speaking of Bitcoin, you made this tweet here. I would propose that this is in large part to liquidity, fiscal deficits and liquidity conditions in general increased their scope and importance post COVID, the emergence of fiscal dominance. This is correlations before and after COVID to the S&P 500 Bitcoin.

Not so correlated with stock markets before COVID, more correlated with afterward. Your explanation is that there is global liquidity that pushes up both assets and down both assets in the same direction. It’s not so much that Bitcoin is following stocks.

Is that how I’m supposed to read this? Yeah. That chart shows that Bitcoin and S&P 500 did not have significant correlation prior to the whole COVID stimulus. Then ever since then, they’ve generally been in a structurally higher period of correlation.

There are a number of other assets that their correlations have changed. Stocks and bonds correlations have changed. Stocks and gold have somewhat changed.

In general, I’d say the argument is that the denominator is playing a bigger role here than average. During the first couple of years of that period, we had a 40% broad money supply growth in two years, which is huge. Then you had a rapid change in interest rates.

Then you had like in 2022, the Fed was reducing their balance sheet and the Treasury was also not really offsetting that. Then in 2023 and 2024, we’ve had this kind of Treasury change where they’ve issued a ton of T-bills. They’ve pulled money out of reverse repos.

Anything that affects liquidity or the denominator of what we’re pricing all of this in matters more than it did in 2019 and before. It’s not that those things didn’t matter before, but basically anything that kind of has a correlation with liquidity is going to be correlated with other things that have correlated with liquidity in an environment where liquidity changes are bigger than in prior eras. When we say liquidity, is it the Fed’s balance sheet? Is it commercial lending? Is it money supply? What are we referring to exactly? So there are a bunch of different ways to measure it.

My favorite is the simplest one, which is global dollars denominated M2. So global broad money supply denominated in dollars. It’s not perfect, but it’s reproducible, which I think it’s really useful.

There are proprietary ones that are also great. I mean, Michael Howell of Cross Border Capital, he’s kind of like the liquidity guru, tons of great analysis there. So I think there’s multiple reasonable ways to define liquidity.

But basically what you’re looking at is domestically speaking, is broad money supply growth happening or not? And where are the sources of it coming from? Is it from bank lending or is it from fiscal deficits? Those are kind of the two main sources. And then two, what does the international situation look like? Because if the dollar gets really strong, then all the dollar indebted entities around the world get generally squeezed because their liabilities are hardening relative to their cash flows. On the other hand, if the dollar eases, generally speaking, that’s like easing their liabilities compared to their cash flows.

And so some combination of the quantity of money, and then also specifically the dollar in relation to other currencies and the way to kind of put that together, the composite is to say, what is global broad money when you then translate into dollars? Because then you can map out the various magnitudes of those things. So if the dollar is strengthening, but the money supply is going up rapidly in a bunch of countries, then maybe that second factor is a bigger positive component than the strong dollar. So you kind of put those together and see what is the general direction.

And we’ve generally been in, you know, 2022 was really negative for liquidity. So, you know, 2020 and 2021 were like super across the board, amazing for liquidity. Then 2022, really negative for liquidity.

And then 2023 and 2024 were like recovering from that negative liquidity environment and still good enough liquidity to be pretty good for attractive assets. And so far that seems to be the case in 2025 as well. And basically these things are moving around more and therefore any asset that’s correlated with liquidity is going to be more correlated with other assets that have that similar component, because liquidity is just such a big factor in this kind of post-COVID or fiscal dominant environment.

So here then is the M2 money supply for the U.S. I know it’s not global liquidity, but I’m just using the U.S. as a proxy. We have here rising M2 and M2 here is denominated as M1 plus savings deposits, small denomination time deposits, balances and retail money, market funds, et cetera, et cetera, rising. So correlation with risk assets like Bitcoin, of course we see here, but the question is whether or not A, this correlation is likely to hold and if it does, the direction of the money supply, is this expected to increase? By the way, can you just clarify for us, this has nothing to do with the Fed’s balance sheet, right? That has only partially to do with the Fed’s balance sheet.

So when they do QE or QT with non-bank entities, that does affect broad money supply. So some of that reduction there in 2022 was related to the Fed doing quantitative tightening and their ongoing quantitative tightening is also somewhat suppressing current M2 growth, but there by no means the only variable. Other variables include things like how much are banks lending, including the U.S. physical deficit and are banks buying it or are non-banks buying it.

Those are all factors that determine this. And so you’ll generally see a lot of assets were correlated with that over this period. Now, it’s not to say that that correlation exists strongly in every environment.

So on that chart, for example, it’s a smooth upward trajectory all through the 2010s in terms of money supply. And yet we know there were some pretty big bumps along the road of things that were happening in that time. Like when Powell was hiking rates back in 2017 and then ran into liquidity issues and corporate credit and then got more dovish, there were other factors impacting that.

Also the 1990s had very low money supply growth. And of course, that was a very good time for U.S. equities. That was like the peak bullishness, peak demographics, pretty high monetary velocity.

So the economy is doing a lot of work with that money. And so it’s not to say that that is the only variable that matters across time, but that especially in an environment where fiscal is running hot, so loose fiscal policy, generally stimulatory fiscal policy, but then tightening Fed policy, when those things change relative to each other and they’re both relatively big factors, that makes a big difference. So in 2022, both the Treasury and the Fed were generally draining liquidity.

That’s why that was such an awful year for pretty much every asset. And then we started to see the Treasury offset some of the Fed stuff after that. And so at least in this environment, I do think various measures of broad money supply and adjacent types of things are actually pretty likely to remain correlated with asset prices.

What happens if, let’s say, the Fed initiates, not initiates, but accelerates tapering? Would that have an adverse effect on monetary growth? Would that have a negative effect on M2? And ultimately, would that drag down risk assets? All of us being equal, that’d be tighter monetary policy at a time when there’s not really as many offsets anymore. So yes, I would think that’d be negative for asset prices. If anything, they’re going to go in the other direction.

So they’ve already tapered. They already decreased the rate that they let Treasuries mature off their balance sheet. So they slowed down their quantitative tightening.

Probably the next step is to slow it down more or stop it altogether, which we might see by the end of this year. And over the past couple of years, we’ve had the $2 trillion reverse repo facility drain back into the system and offset their quantitative tightening. That’s now down to like $100 billion, so that can’t happen again.

And so there’s not that many other sources of liquidity. So yeah, if the Fed got super aggressive with balance sheet reduction, I think we probably would see some challenges in the Treasury market. And then that would then bleed into other markets.

And we probably would see a backpedaling by some of these entities, mainly the Fed. Understood. Okay.

Any other major drivers of the Bitcoin price that you see that could be on the horizon that we need to follow? In other words, any fundamental events that are Bitcoin specific? For example, the actual implementation of a Bitcoin strategic reserve. I don’t know if that’s going to have an impact. I’ll let you comment on that.

But things that have nothing to do with global liquidity and or other market movements for equities that may be correlated with Bitcoin. Yeah, anything that increases regulatory certainty is helpful. So I personally speak to a lot of large corporate entities or banks, and they’ve made it clear that the recent kind of like the combination of the spot Bitcoin ETF being allowed, and then also the Trump victory just increased their confidence that they have a pretty long window now of the sort of tail risk concerns some of those had, have been reduced.

So if that was someone’s hang up for not buying, now they can buy. And I think that’s why we’ve seen liquidity has not really gotten much better since the election. But certainly the regulatory outlook for the space has gotten better.

And so that’s why I think we’ve seen a pretty rational price increase. If the U.S. does a really big Bitcoin purchase, that’s obviously generally good for Bitcoin. You know, they just do a small purchase, or they kind of keep the coins already have, then maybe that’s not a big factor.

But if they do some of the more aggressive ones, that could be big. If other central banks or other sovereign wealth funds decide to accumulate meaningful position, that matters. There’s a little bit of a spreading of corporations buying Bitcoin.

And so to the extent that accelerates or decelerates, that’s really meaningful for price. So there are tons of non-liquidity things like they’re kind of more cultural or regulatory things that can happen. And then the other thing I look at is mainly like just on-chain valuation metrics to look for problem areas.

My favorite metric is market capitalization compared to on-chain cost basis. And right now that’s pretty middling. So it’s not as high as it historically has been during major market tops.

That’s not to say that every cycle has to be the same. They could certainly change. But most of those like types of kind of fundamental valuation indicators or like kind of euphoria indicators are still not really flashing red.

And a couple times they’ve kind of flashed like yellow, but they’re not really been flashing red, which is another set of things that kind of gives me confidence for the next 18 months or so. Okay. Gold is approaching $3,000.

We’re talking today on the 12th of February. $29.24 is the latest price on my screen. It’s only a, you know, eye flash away from the elusive $3,000 market.

That hasn’t happened yet, Lynn. So walk us through the narrative for precious metals. Why gold in particular has been rallying and what you see next.

Right. So, I mean, it’s been positive to see this consolidation kind of work its way out. I probably thought the consolidation would last a little longer.

I’m glad it’s not because I’m long gold. Generally speaking, we’ve seen a little bit of rotation in buying. So before it was mainly foreign central banks and people in China and elsewhere buying.

Now I think we’re seeing a little bit more North American purchases that are supporting it. And a main difference between gold and silver is a lot of large entities like central banks buy gold, whereas they don’t really buy silver. In addition, generally speaking, if someone is into like hard money and precious metals, gold is the low volatility one.

And then they get into either silver, platinum or miners for their higher volatility exposure if they’re bullish on the space. And now with the size of Bitcoin and other cryptocurrencies, that market’s more fractured now. So I would say that Bitcoin has not really competed with gold too much because it’s not really competing with the same types of buyers.

Now around the margins, it has competed, but I would say it’s competed with silver and gold miners more because you’re capturing kind of a hard money enthusiast with high volatility tolerance. That’s a little bit more of a competing market. So I think that the options for higher volatility is a little bit more fragmented.

So I’m not surprised too much to see gold kind of have a bigger breakout than, say, platinum or silver or the miners. And I still think long term this has room to run because central banks around the world can say, I’d like to hold assets that are not seizable unless like we’re literally invaded. And also I think that there’s more and more currencies having problems.

I mean, the euro currency doesn’t look structurally good. We already talked about U.S. fiscal dominance, Canada’s currency, China’s currency. I mean, around the board, gold looks pretty attractive compared to most currencies.

And so it’s not surprising a lot of entities buy it. One argument for gold from a lot of people in the gold community is that the dollar is about to lose relevance, dominance in the global sphere, hedge money as a global reserve currency, et cetera, et cetera. That’s not my question.

My question is whether or not that narrative can be challenged by the adoption, the mass adoption of stable coins. Take a listen to this clip. I want to say additionally, we’re excited about working with both the House and Senate on stable coin legislation.

I know Senator Hagerty introduced a bill today. This stable coins really have the potential to ensure American dollar dominance internationally, to increase the usage of the U.S. dollar digitally as the world’s reserve currency, and in the process, create potentially trillions of dollars of demand for U.S. treasuries, which could lower long-term interest rates. All right.

I guess we’ll stop there, too. Lyn, can you comment on what he just said? Is that the key for dollar dominance, stable coins, that is? I mean, I think that they’re one of the remaining levers that is available, because if you look, generally speaking, foreign central banks on net have not accumulated new treasuries for like 10 years. Now, some foreign non-central bank entities have, but still not at the rate of treasury issuance, so overall foreign percentage of treasury holdings has gone down.

Most of that’s top-down decisions, like China’s central bank deciding it’s no longer an interest to keep accumulating treasuries like we have been. But from a bottom-up perspective, there’s still very strong demand for dollars globally. If you go to the streets in Cairo, people want dollars.

They don’t really want the second best. They want dollars. Same thing for a lot of other markets.

And stable coins are another mechanism for people to get dollar proxies in pretty convenient package on their phone and outside of their local banking system, as long as they’re not in a sanctioned place where even the stable coin issuer itself tries to stop them from using it. Now, I think his number was trillions that he mentioned in that clip. That’s kind of the relevant figure.

So this matters if we get another order of magnitude increase. So stable coins right now are big, but we’re talking like a $200 billion market, which is like a couple months of deficits. And so in order to actually make a dent in US kind of dollar dominance and treasury demand, that number would have to 5X and 10X from here get into the trillions.

But that is a vector where the US can keep pushing dollar dominance. Now, ironically, that comes with cost because we talked about how the trade deficits and dollar dominance are somewhat in opposition. Because if that keeps the dollar artificially strong, that puts ongoing pressure on low margin American manufacturers, all of us being equal.

And so that does create those imbalances. But that is like an ongoing lever they have. As far as it’s common on interest rates, it’s important to note that most stable coins prefer to hold T-bills because they want their asset duration to mostly match their liability duration, which is practically super short.

You can pull money out of stable coins pretty quickly. And so they had to be careful about having too much duration in their mix. And so generally speaking, so far, it’s more of a demand for T-bills than T-bonds.

Okay. So not too much impact on the long end of the curve, even if they buy a lot more treasuries. But let’s… Okay.

So this, of course, assumes that most of the stable coin adoption will happen using collateralized stable coins and not algorithmic stable coins. Correct? Can you comment on that? Yeah. Algorithmic stable coins don’t really increase the demand for dollars or treasuries.

But historically, algorithmic stable coins have come with a lot more risk. They’ve generally blown up. I even wrote ahead of time about the risk of Luna before it blew up.

There are some collateralized stable coins that are possible without just fiat collateralization. But they’re generally up against a very big network effect of collateralized stable coins that have a pretty understandable business model for a lot of people. So on the topic of bonds, then, let’s segue into the bonds.

Let’s segue. The 10-year yield has been dropping pretty much since the beginning of the year. Was the 10-year tracking inflation, economic growth, or both? What’s your outlook for yields? I think it’s a combination of both.

We’ve not really seen an uptick in inflation expectations too much. It’s mainly just that there’s a lot of issuance. There’s reduced appetite for it.

Generally speaking, when you have a strong dollar, you get worse foreign appetite for treasuries because they’re more in currency defense mode. They’re more likely to be shedding assets to defend their currency than they are to print money and increase their reserves. So I think a big factor will be to see what happens later this year with the new Treasury Secretary because he’s been critical of the prior Treasury Secretary for issuing so many T-bills.

And while they have debt ceiling discussions underway, he’s been more inclined to keep that policy in place despite previously criticizing it. But presumably, when they get past the debt ceiling, he’s going to try to term out the debt more, which means all of us being equal, more issuance of duration. So I’m pretty mixed on bonds right here.

I generally think that they’re certainly more tradable than they were. I mean, I’ve been a structural bond bear since at least 2019. And I’m certainly not as bearish on bonds here as I was when they were super low yielding.

But I still see less compelling reasons to own the long end of the curve compared to gold, compared to the middle of the curve, the short end of the curve or tips, unless you specifically have like a six-month trade that you’re bullish on yields for a given period of time. Can you see the Tangier going back up to 5% in the foreseeable future? It’s possible. I think in order to see that happen, you have to see some sort of major event with energy, or we have to do what I said before.

If we see Scott percent really try to term out that debt, we could see that potentially start to happen. And generally speaking, that would probably start to get wobbly for the Treasury market and for other assets. It’s not to say that the exact prior line of yields is the danger zone again, but generally speaking, somewhere around there or a little higher is where I think it would cause some turbulence and probably cause some pro liquidity actions by the Fed or the Treasury.

Am I right to assume just based on your tone that you’re generally more risk on for 2025? I am less risk on than I was for 2024 in the sense that, for example, with the election, a lot of the benefits are assumed, but now we have to potentially deal with the cost, the higher cost of reshoring, the ongoing uncertainty around tariffs. We’re not sure what’s going to happen to some of that. I’m kind of mixed.

I think liquidity looks pretty good overall. The deficits are still big. PMIs, like Purchase Managed Indices, if anything, are rolling back up more recently.

Banks are not really lending well, but they’re not tightening lending standards like they were in, say, 2022, 2023. I think it’s an environment where you do have to be careful about valuations. I think that paying 60 times earnings for Costco is unwise.

It doesn’t mean that it has to change in a year, but if you kind of look back and say, what in this environment was dumb? I think it’d be things like paying 60 times earnings for Costco, but I do think that there’s plenty of opportunity out there in a variety of asset classes. I think we’re probably going to be still kind of running hot in 2025. Last piece of news I want to bring up to you.

Just earlier today, Putin and Trump had a lengthy phone call, apparently, and it seems that Putin has invited Trump to go to Moscow for negotiations that are supposedly going to happen immediately. It hasn’t been confirmed, I don’t think, but that is kind of what was discussed. We agreed to work together very closely, including visiting each other’s nations.

We have also agreed to have our respective teams start negotiations immediately, and we will begin by calling President Zelensky of Ukraine to inform him of the conversation, something which I will be doing right now. How are you reading this situation, potential de-escalation in Ukraine? Forget the politics of talking to Putin before talking to Zelensky, but what does this signal for markets, volatility-wise and certainty-wise? Overall, positive for markets. I think the fact that energy is already way off its highs.

A lot of the Russian energy found its way to market after the initial turbulence, so it matters less than it, say, would matter if it just ended quickly in 2022. But all else being equal, it’s good for supply chain, it’s good for energy, it’s good for things like that. For most investors, this is probably a base case, that Trump has made it clear that in his term he wanted to end that war.

The critics would say that he might be too permissive toward Russia, but either way, from an investor’s standpoint, there’s clearly a greater chance of that ending in the next few months or year, whatever the case may be, which all else being equal, good for markets and takes out some of the energy tail risks that have been in place. Excellent discussion. Thank you for your update as usual.

Where can we follow you? Any new work we should be aware of? I’m at lynnaldin.com. We posted a recent report on fiscal dominance, and people can also check out Broken Money on Amazon or anywhere else they like to buy their books. Yeah, great book, so highly recommend that. Check out the links down below to follow Lynn.

Appreciate your time as always. Good to see you. Thanks for being here.

Thank you. Thanks for having me. Thank you for watching.

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