What the Fed AND Treasury JUST Said at G20 | Prepare.

Evan Walsh just left a hint for us at the G20 and Scott Besson just talked. In this video, we're going to break down what we think is going on with the economy, where their heads are, what's going on with Iran, the Bank of Japan, and GDP in America, and and really what's happening with bonds, the yield curves, and do we actually think the Fed is going to raise rates in September, September 16th? Uh why don't we start with that one? So, I'm going to layer this pretty simply. I do not believe that the Federal Reserve is going to raise interest rates on September 16th. Besson actually gave us a little bit of a hint as to why he thinks that is also unlikely, which actually aligns with what we heard from Mr. Myin last week. If you don't remember last week, Myron told us that he expects that if you raise rates now, you won't actually see the impact of that rate increase for 18 months. That's the monetary, you know, long and variable lags that typically is associated with the Federal Reserve. Which, in other words, Myron goes on to say, why why would we raise rates now if the reasons were raising rates, such as an oil shock or a tariff shock now, might not actually still be a shock in 18 months or a supply shock, right? Those are the three big things driving inflation now. uh oil prices up due to the geopolitical concerns, bond yields up because of the geopolitical concerns and oil, they kind of amplify each other. Uh then you've got the tariff shock concerns and then of course supply chain shortages in uh power infrastructure, turbines like natural gas turbines we've been talking about with Elon Musk or uh something as simple as memory chips. All of these things potentially not going to be here in 18 months. Although that then kind of borrows from the transitory mindset which uh if you continue to get these persistent inflationary shocks at what point does transitory just become shock after shock and therefore permanent inflation. The myron take though was somewhat amplified by Bessant today at the G20 in an interview with Sarah Eisen. Besson essentially said hey you usually don't raise interest rates in a supply shock unless you see second or third third order effects. and he says so far we have not and are not seeing those second uh and third order effects and then he goes on to say you know basically how the last CPI report was better than expected blah blah blah when I look at the forecast expectations for CPI we've got our first estimates out current forecast for CPI are4% on headline two% on core CPI this is for the 911 release of the CPI data that'll be out at 5:30 in the morning and then uh CPI core year-over-year at 2.4. Neither of those core reads, if we came in on expectations, in my opinion, are that aggressive to justify rate hikes. Markets right now are pricing in a 66% chance of rate hikes by September 16th. I actually think as we get, you know, stable job numbers, ADP, BLS expected to be around 50,000 this week, that'll come out Wednesday morning and Friday morning. As long as we get plus or minus 50,000, we could sort of ignore the labor market stabilizing after that slowdown and uh or after the boom we saw and then the subsequent slowdown getting some stability here. Uh but if we get close to these estimates, that's not screaming it's not a screaming bad. If we meet expectations or beat these expectations, I don't think we're setting up for a rate hike. In fairness, we only have seven estimates right now. So that's the average uh with that bell curve really leaning towards 0.2 two right now uh for the month-over-month core. Now, Bessant then suggests, hey, beyond what's going on with the odds of us not seeing a rate hike in the United States, uh Bessant doubles down on this idea that China actually agrees with us, that Iran shouldn't have a nuke, that Iran has to be held to the standards of they've got to give up their nuclear program, they've got to give up their highlyenly enriched uranium, they've got to open the straight, and they've got to stop aiding proxies. Unfortunately, that commentary a little bit cuts in the opposite direction because it kind of sets this President Trump administrative policy that we're still in an environment of pressuring Iran to get these components even though Donald Trump has quietly been walking back those goals and suggesting, well, we only want the straight open, you know, we'll just we'll ignore the nuclear program. We'll worry about that in the future. There's been talk about just totally ignoring the nuclear program and focusing only on getting the straight open again. Uh and so, you know, Besson kind of reactivating this a little bit, which in my opinion contributed at least somewhat, although this has been rising all morning since the market's been open. Somewhat contributed to this 10-year yield popping. 10-year yield now sitting up here at 4.76. And the 210 curve is steepening again after the flattening we saw last week. Basically the 2-year is stable. So no change on the expectation of of you know rate hikes uh or not. And the 10year is rising. The 10-year usually rises when we expect that the economy is growing or spending more and faster than expected. One of the reasons we might be seeing this uh in addition to some of the disinflationary impeties, we'll we'll talk about that in just a moment. Uh but one of the reasons we might be seeing this is because if we jump on over here to the GDP now forecast, we could see a 4.6% estimate for third quarter GDP. We are now 2 months into the third quarter. So we have a lot of data coming, you know, already out from July indicating that GDP is rising in this direction. And there was a period of time at the beginning when we started getting the data that GDP was actually estimated to be above five even above 6%. And that's where what's interesting about what Kevin Worsh hinted at this morning in his sort of his opening remarks is this idea that hey are we moving from this uh global savings glut into a global spending glut? uh his version of that was investment, you know, boom is what he said rather than investor uh spending glut. I translated to spending glut because basically I think what they're saying is hey if you look at individuals we had a bit of a higher savings rate than what we've seen postcoid and currently between 2023 and 2025. Some of that excess savings may now be getting spent and that's why we're seeing such a low savings rate right now. This is the personal savings rate over time. But it's not just corporations spending more or individuals spending more relative to their income. It's also corporations spending a lot more. And we know this is true. I mean, we look at the money that's being raised by companies like uh uh you know SpaceX, they're probably going to have to raise 4 to 500 uh probably somewhere around $400 billion over the next few years to get to their intend to 10 gigawatts of uh artificial intelligence infrastructure buildout. There's a lot of this spending pressure that helps drive GDP in a circular nature which suggests we we're not really imminently close to some kind of recession or collapse. Right? One thing that I do think is also aiding the sort of worsh argument on uh you know do we really need to cut rates or sorry hike rates imminently now especially if that's not going to affect markets for 18 months in my opinion comes down to that token layer and the commoditization layer. Now we've talked about this before I call it the AI profit layer. Uh and really what it is is this idea that you've got a few different levels here. You've got infrastructure which is your uh chip buildout. Uh and then you've got the token factories, the actual you know models that are generating the tokens which are built on the infrastructure. And then you actually have the value enablers. These are really your software companies which have seen a short squeeze recently. Still very bullish on software by the way even though we've seen this aggressive move up already through short squeeze on some of these software plays. Uh, and Andrew Bailey's comments on cyber security risks, I think, enhance those software plays. I personally think a lot of these are still relatively inexpensive. Small note on that. Bank of England chief warns of AI security riskthreatening financial security. This is the uh Andrew Bailey, the um chairperson of the Bank of England, and he writes a letter uh every so often, and his letter that was just published before the G20. uh he writes this letter twice a year argues that AI could change the math of cyber attacks so fundamentally that it puts the entire global financial system at risk not just the individual company that ends up getting breached that Frontier AI's impact on cyber risk is the most pressing near-term threat given especially the small number of dominant cloud and technology providers uh that there are and that this could end up shaking the entire financial system as a whole. uh and then of course he talks also about leverage and so actually both of these relate to what we're talking about with Besson here. So first these value enablers cyber security is a huge beneficiary of the value enabler uh cycle but there's also a big deflationary force in this just a quick check of markets uh crowd strike and the cyber markets up 3.75% after that letter and I think that's the example of these value providers winning um enablers winning cyber security is in this bucket right here as would be like a salesforce or pounder but This section right here really commoditizes. And so while you could have some areas see more spend like cyber, I expect that infrastructure and token generators and the frontier labs really commoditize, especially with the Chinese openway models. And this actually feeds into the argument for the Federal Reserve that we could see more spending here, but it'll end up spend seeing spending on uh a commoditizing infrastructure that actually just makes providing value cheaper. So this is a massive disinflationary argument here and Besset himself argued that there are a lot of disinflationary forces in the market. Now I think this is exactly what he's referring to and so sort of doubling down on why are we going to hike rates in September. Now, interestingly, that is all actually bullish for the market. Even though the market is really struggling right now to well, the Q's at least are really struggling to hold on to 7:15. Uh, which was in our alpha report as well this morning that this was a critical test. And, you know, here we are sitting again. Uh, we made the argument, don't go bullish unless 10 minutes go by where we actually hold 7:15. And as you can see, we have not had a single 10-minute period where we have held 7:15. reject, reject, reject over and over and over again. All of that said, you know, that might make me sound bearish. I actually am not. I sit at a 7.1 on the bare bull scale. And the reason I sit at a 7.1 is, frankly, because I believe in the disinflationary forces coming for artificial intelligence. The leveraging that we're seeing is a risk factor and it will create a glorious blow up at some point in the future. But in the near term, that leverage buildout we're seeing is really just driving GDP. And this is why Kevin Walsh is talking about uh this, hey, we're getting into an investment boom cycle. All of those things are bullish. So, let's kind of just draw that out for a moment because I know there are a lot of concepts that we talked about uh in this segment here. And so I think if we put all these together, we see uh the leveraging which is a long-term risk and but it's a near-term GDP boost, right? So you've got leverage, you've got cyber risk, you have uh disinflation from uh AI productivity on AI productivity. You have uh an increase of spend and a decrease in savings. Uh and then uh you have this sort of uh expectation that rate hikes lag. hikes lag. Uh and then you have uh CPI, you know, inflation is problematic, especially because of oil, but but core CPI, you can make the argument that core CPI is somewhat stable. So when you put all of these together, what you really have is leverage in the short term is bullish. cyber risk, bullish cyber spending, bullish spending, uh disinflationary AI, uh you know, productivity over the long term. That is bullish more spending for corporations. In fact, I'll give you an example, and honestly, this is uh this is like one of our I probably shouldn't, but I'll I'll I'll do it. I'll do it cuz you're here. I love you. Um, there was a little note in the uh SAP earnings call that we went through in the course member live stream this morning and I thought this note was was so perfect for exactly what is happening in the economy right now. I did also mention that there is a risk that this is is you know related to my own personal confirmation biases but look at this. In the last 12 months indeed we still invested in new job profiles in research and development data scientists, data engineers. We invested into full stack developers for industry AI, but we will now continuously heavily slow down hiring for other profiles because now that AI productivity is kicking in and indeed the highest token consumption in research and development, we see productivity gains on average of 30%. So there is no need anymore now to hire additional people. Indeed, like this is actually incredible because what what you're saying with SAP as as a perfect example to what we're talking about here is you kind of spend first and then you see the disinflation. So you spend first on hiring more people and then you start reaping the benefits. I mean like a year ago uh probably maybe 14 months ago okay 14 months ago my startup reinvest didn't have you know a team of like 10 software developers that has only started within the last 14 months and so you know there's this boom of of of hiring but now we have this wonderful team that works really hard on enhancing these these products that we have uh and and so you kind of see it's Like now you kind of get into sort of the reap the benefit stage where it's like ah yeah you know we could sell our you know homes product or the upcoming terminal product or uh you know or or alpha membership or whatever with greater ease because our products are just getting better and better and better. And so I think that perfectly relates to SAP and I think it perfectly relates to what you're seeing here where yes there has been less saving uh s or lower savings and and there has been more spending but that's actually a boost to GDP and that's exactly what we're seeing in the Atlanta Fed GDP estimates. Uh hikes are we also know we've saw the commentary about lagging and core CPI is relatively stable. the expectations are is going to be stable as well for the September 11th CPI report. So I put all of this together, all of this actually just boosts uh not just GDP, it's not just up on GDP, but it's also up on earnings and uh that's what we have been seeing for corporations. I think that has a good shot of continuing you know are we generating you know the mother of all bubbles maybe but I don't think the uh downside risk is super imminent at least with the level of spending and leveraging that is still happening right now and there's still a lot of investment to be made I personally think uh cyber and software companies those value providers are still going to be the place you know that ends up making money over the next decade these the value enabler level that's where the real dollar is uh in my opinion uh so whether that's you know palanteer or salesforce and in it a UiPath and axon cyber crowd strike you know whatever right whatever floats your boat that's exciting but so my base case is no rate hike in September add to this the sort of political aspect of do we really think war you know Trump's new puppet is going to hike rates September nomber 16th. No. And I think when that becomes apparent, you could actually see the market move bullish between now and then. So, I'm optimistic about that. >> Why not advertise these things that you told us here? I feel like nobody else knows about this. >> We'll we'll try a little advertising and see how it goes. >> Congratulations, man. You have done so much. People love you. People look up to you. >> Kevin Praath there, financial analyst and YouTuber. Meet Kevin. Always great to get your take.