Tactical Short 2nd Quarter 2025 Recap

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David: Good afternoon. This is David McAlvany. Thank you for participating in our second quarter 2025 recap conference call titled “Terminal Phase Whipsaw.” As always, thank you to our valued account holders. We so greatly value our client relationships. 

Today, we will review performance. Doug will go through market commentary. We’ll end with Q&A. And most of the questions have been submitted ahead of time. If there’s something that you would like for us to comment on, you can certainly send a further question to Te*@******ny.com. It’s Te*@******ny.com, or you can schedule a call with myself or Doug and we’d be happy to visit with you offline.

With first time listeners on today’s call, we’ll begin with some general information for those unfamiliar with Tactical Short. And more detailed information is available at mwealthm.com/TacticalShort. 

The objective of Tactical Short is to provide a professionally managed product that reduces overall risk in a client’s total investment portfolio, while also providing downside protection in a global market backdrop with extraordinary uncertainty and extreme risk. The strategy is designed for separately managed accounts. It is investor friendly with full transparency, flexibility, reasonable fees, and no lockups. Shorting entails a unique set of risks. We’re set apart by our analytical framework and our uncompromising focus on identifying and managing risk.

Our Tactical Short strategy began and ended the quarter with short exposure targeted at 82%, focused on the challenging backdrop for managing short exposure. A short in the S&P 500 ETF, the SPY, remains the default position for high-risk environments.

Here’s the update on performance. Tactical Short accounts after fees returned a negative 8.56% during Q2. The S&P 500 returned a positive 10.94%. So for the quarter, Tactical Short accounts lost 78% versus the 82% target at 78% of the inverse of the S&P 500’s positive return. As for one year performance, Tactical Short after fees returned a negative 10.52% versus the 15.14% return for the S&P-500, the Tactical Short losing 69.5% of the S&P-500’s positive return.

We regularly track Tactical Short performance versus three actively managed short fund competitors. First, the Grizzly Short Fund, which returned negative 7.12% during Q2. Over the last year, Grizzly returned a negative 9.19%. Ranger Equity Bear Fund returned a negative 5.05% for the quarter with a negative 11.41% as a one -year return. And Federated Prudent Bear Fund returned a negative 10.25% during Q2 and negative 9.21% for one year.

Tactical Short underperformed the actively managed bear funds for the quarter on average by 109 basis points. Tactical Short underperformed over the past year by an average of 58 basis points. Tactical Short has significantly outperformed each of the bear funds since inception from April 7th, 2017, its inception, through the end of June. Tactical Short outperformed each of the three competitors by an average of 1,733 basis points or 17.33 percentage points.

There are also the passive short index products, the ProShares S&P 500 ETF, which returned a -10.03% for the quarter and a negative 8.88% over the past year. The Rydex Inverse S&P 500 Fund returned a negative 10.13% during Q2 and negative 8.78% for one year. And then there’s also the PIMCO StocksPLUS Short Fund with a second quarter return of negative 10.29% and a one-year return of negative 6.97%.

Doug, over to you.

Doug: Thanks David. Good afternoon. Thank you for being with us today. Before diving into this wacky environment, let’s start with performance. It was one of those extremely challenging quarters. Early April market instability appeared serious.

The period began with acute market weakness following April 2nd Liberation Day tariff pronouncements. The S&P 500 suffered a two-session 10.5% plunge, the worst sell-off since March 2020. The banks sank 15.8% and the broker dealers lost 13.3% in two days. It was virtual credit market panic. Indicative of a major tightening of conditions, risk premiums spiked. High yield spreads to Treasuries widened the most since March 2020, with high yield CDS prices spiking the most since June 2020. The junk bond market seized up as Bloomberg referred to “One of the darkest weeks for US leveraged loans this decade.”

At the time I thought it likely that the bubble had been pierced. That an aggressive tariff regime, prospects for destabilizing trade wars, along with other administration policies, were likely a catalyst to end a protracted period of terminal phase excess. For a few tumultuous days, markets feared faith in the Trump put had been misplaced. Responding to intensifying market instability, the President announced a 90-day tariff pause. The S&P 500 posted a stunning 9.5% one-day advance, while the semiconductors spiked 18.7% and the broker dealers jumped 10.3%. The Goldman Sachs Short Index surged 12.5% that day.

Fear abruptly returned to greed. The Trump put was real and could be counted on as a predictable complement to the Fed put. TACO—Trump always chickens out—took markets by storm. Bloomberg ran the headline, “Retail Investors Who’ve Only Known Bull Markets are Buying the Dip.” Reporting on the retail dip buying phenomenon, the Financial Times quoted a trading firm executive, “Plops and drops will occur, but the dip buying belief has become a new religion.”

The past few months have been telling. In the throes of terminal phase excess, it’s a thin line between bubble deflation and invigorated bubble inflation. In managing Tactical Short’s exposure, I have prioritized beta management in the avoidance of negative surprises. We have neither shorted individual company stocks nor purchased put options. I have anticipated wild volatility and quite challenging quarters. What I clearly did not expect was that this environment and such excess would persist year after year.

Q2 performance was disappointing, though it could have been worse. The Goldman Sachs Most Short Index surged 23.3% during the quarter. The semiconductors were up 30%. Indicative of wild speculative excess, the ARK Innovation ETF returned 48%. We out-performed the Prudent Bear Fund by 169 basis points during the quarter. This was despite Tactical Short’s disadvantage of not receiving a cash return on proceeds from short sales as the funds do.

We outperformed all the passive bear ETF products. Our underperformance during the quarter versus our three closest competitors was essentially the approximate 100 basis points quarterly return they received on their short sale proceeds. As for one-year returns, Tactical Short underperformed by 58 basis points as our competitors benefited from an approximate 400 basis point annual return on short proceeds.

In a sign of the times, a search for short-only hedge fund performance came up empty. The strategy had vanished from industry performance tabulations. Here’s a data point underscoring the recent challenge on the short side.

From the April 9th intraday low to last Thursday’s intraday high, the Goldman Sachs Short Index rallied 71%. That which does not destroy a bubble only makes it stronger. Yet another brutal short squeeze. Another example of why we have avoided shorting individual company stocks. Last week, the meme stock phenomenon returned with a vengeance. Krispy Kreme, Opendoor, GoPro, Rocket Mortgage, Kohl’s, and a bunch of other stocks with suspect fundamentals enjoyed ridiculous gains. And there’s nothing like a big short squeeze to feed speculative impulse, with the major indices running to all-time highs.

Renewed meme stock attention elicited interesting analysis. Professor Peter Atwater, who studies retail investors, made an interesting point. He said, “We’ve normalized memeing. There’s a [gap in audio]. The most aggressive traders have already moved on to riskier frontiers, digital tokens, leveraged ETFs, and prediction markets.” Additionally, Bloomberg, “Customary warnings about speculative excess fell on deaf ears. What once felt seismic now feels like a normal part of daily trading. Another episode in a US financial system where bursts of retail speculation are routine, expected, and largely unremarkable.”

We are witnessing important late cycle dynamics. Bubble terminal phase excess is characterized by a wholesale disregard for risk. After all, over a long cycle, it is the aggressive risk-takers in the markets, throughout finance, within corporate America, and all about the economy that have the most to show for their efforts. They have come to confidently dominate positions of power and influence. If you’re not a risk-taker, you’re a loser. These days, risk aversion has been virtually eradicated. I have delved into this analysis in previous calls. There is nothing comparable to today’s terminal phase excess other than the late-1920s bubble blowoff. And it seems rather obvious, at least to me, that today’s excess may greatly exceed anything from the fateful Roaring Twenties culmination.

When analyzing bubbles, there’s always underlying sources of credit fuel to identify. Today, key sources of exorbitant credit expansion are readily apparent. In a defining feature of the current global government finance bubble cycle, US system credit growth is dominated by an ongoing historic expansion of federal debt, perceived money-like credit instruments that essentially enjoy insatiable demand.

The federal deficit is expected to again approach 2 trillion this year, or 6.5% of GDP. Importantly, ongoing massive deficit spending supports system incomes, business earnings, asset prices, and economic activity generally. It’s also worth noting that state and local bond issuance is on pace to surpass last year’s record 500 billion. Corporate debt issuance is on near record pace, with forecasts of 1.4 trillion of investment grade bond sales, double digits ahead of 2024 growth. Despite the April shutdown, high yield issuance is approaching 200 billion ahead of last year’s pace. Meanwhile, there are consequential sources of system credit that fly under the radar of conventional analysis.

It’s worth underscoring the ongoing historic expansion of speculative credit, the primary source of destabilizing market liquidity overabundance. Repos—repurchase agreements—they are the key source of financing for leveraged holdings of Treasuries, agency debt, and MBS securities. It is the principle mechanism of financing today’s massive Wall Street and hedge fund securities portfolios. Estimates have the repo market funding over 1 trillion of highly levered Treasury basis trades, one of many levered so-called carry trades that now permeate the entire credit system.

Bear with me a bit here as I highlight some important detail. From Q1 Z.1 report, we know broker dealer assets expanded an incredible 490 billion worth 37% annualized to 2.76 trillion, the strongest quarterly growth since Q1 2007. How did Wall Street finance this remarkable balance sheet expansion? Repo liabilities ballooned 361 billion, or 62% annualized during Q1 to 2.7 trillion, the high since Q3 2008. Repo liabilities inflated about 1.1 trillion, or 67% over 10 quarters. Total system repo assets surged 717 billion, or 41% annualized during Q1 to a record 7.78 trillion. One-year growth of 1.1 trillion compares to peak mortgage finance bubbles, 2007’s 655 billion expansion. System repo assets ballooned 2.97 trillion, or 62% over 21 quarters.

Q2 Z.1 data won’t be available until September, but we do have recently reported Q2 bank and broker data that suggests an unrelenting historic expansion of speculative finance. At JPMorgan, total assets surged 195 billion, or 18% annualized to a record 4.55 trillion during the quarter. The asset fed funds sold and repos jumped 41 billion, or 38% annualized, with first half growth of 176 billion, or 120% annualized.

On the liability side, short-term borrowings and repos surged 86 billion, or 46% annualized annualized. Bank of America posted a total asset growth of 92 billion, or 11% annualized to a record 3.44 trillion. The asset fed funds sold in repos posted growth of 24 billion, or 29% annualized. Short-term borrowings and repos surged 32 billion, or 24% annualized.

Balance sheet detail is not yet available, but exceptionally strong earnings reports from Goldman Sachs and Morgan Stanley were indicative of overheated securities finance.

It goes unrecognized that the expansion of repo borrowings generates additional marketplace liquidity. As a proxy for this new age monetary onslaught, look to money market funds, the holders of trillions of repos. Money funds expanded 921 billion, or 15% year-over-year, having recently surpassed 7 trillion. It is one of history’s most consequential yet somehow disregarded monetary inflations. Money fund assets have [gap in audio] trillion, over 50% in just the past 32 quarters.

I’ll highlight another key source of system credit. One that suffers from a notable lack of transparency. It’s a sector that has become an instrumental funding source while demonstrating distinct bubble dynamics. I’m referring to the private credit boom. It makes no appearance in quarterly Z.1 reports and it’s not even clear the Fed includes private credit in system credit growth and financial flow data. I have issues with private credit, and serious concerns as this credit expands exponentially in blow-off fashion. For one, it is chiefly subprime corporate credit focusing on lower-rated entities willing to borrow at high yields. As I’ve discussed in the past, no lending business enjoys near-term accounting profit potential like lending aggressively to high-risk borrowers. This space is inherently prone to bubble dynamics.

As long financial conditions remain loose in credit readily available, most negative cash flow enterprises will remain current on their obligations. They simply borrow to satisfy ongoing cash flow debt service requirements. But this structure suffers inherent fragilities and credit cycle vulnerabilities. When finance inevitably tightens and borrowers lose access to new borrowings, credit problems pile up quickly. The prospect of loss scares lenders, who back away from the marketplace, leading to the painful credit cycle downside. The mortgage finance bubble illuminated subprime lending’s propensity for boom and bust dynamics.

Well, private credit was at the cusp in April. Leveraged loan prices were under major pressure as high risk lending markets seized up. It’s no coincidence that AI and technology stocks are in freefall. The Mag 7 index was clobbered 12% in just two sessions. From the April 2nd close to April 7th intraday lows, NVIDIA collapsed almost 19% and the semiconductors sank 17%. Private credit has become an indispensable funding source for the historic AI investment boom.

Again, we can’t overstate private credit’s significance. I strongly argue that this high risk lending boom has become fundamental to terminal phase excess, and there are critical idiosyncratic characteristics to note. Most of the high risk loans in this sector are neither priced in the marketplace nor traded. Risk-embracing speculators and investors are attracted to high yielding products that operate outside the vagaries of volatile markets.

In April, with junk bond and leverage loan prices under intense pressure, private credit investors did not face mark-to-market portfolio losses. These days, private credit risk expands exponentially with overheated late cycle growth of increasingly risky loans. Insurance companies have leaned on private credit for the high yielding instruments underpinning booming annuities businesses. Now there’s a push to open private credit access directly to retail investors through closed in funds, ETFs and 401(k) investment vehicles. In my nomenclature, private credit demonstrates powerful inflationary biases. This bubble is inflating rapidly in a self-reinforcing speculative dynamic.

Recovering swiftly after Trump’s tariff pause, leveraged lending and private credit booms have only gained momentum. Here’s a crazy number. The past week’s 120 billion pushed July leveraged loans to a monthly record 218 billion. The majority were refinancings, but it’s still indicative of overheated demand for high risk credit. It’s worth adding that a booming junk bond market powered the strongest July issuance since 2021. Again, not coincidentally, as leveraged loans, junk bonds, and private credit booms powered ahead stronger than ever, NVIDIA, Microsoft, MetaSystems, along with the major technology indices recovered to new all time highs. An already historic AI arms race has further intensified. Case in point is Mark Zuckerberg in Meta. Meta is currently seeking 29 billion of private funding for AI data centers, with plans to spend over 70 billion on data center build-outs this year. Zuckerberg enticed a leading AI executive from Apple with a $200 million compensation package. A Wall Street analyst stated that Meta could spend 20 billion on compensation for the quarter to build out its AI team. The company took a 49% stake in startup Scale AI for almost 15 billion.

Microsoft, Meta, Google, and Amazon are projected to spend a staggering 320 billion this year on CapEx. Incredible AI-related growth is expected to continue for years. Goldman Sachs forecasts AI investment will surpass 1 trillion over the next few years, and that excludes the massive investment expenditures necessary to ensure sufficient electricity to power hundreds of colossal data centers. Training large language models consumes enormous amounts of power, while the standard ChatGPT query is said to consume more than 10 times that of a Google search. According to Goldman, roughly 720 billion will need to be spent on grid upgrades over the next five years. JPMorgan refers to a 7 trillion race to scale AI data centers, with power infrastructure requiring up to 500 billion. The International Energy Agency projects electricity demand from data centers worldwide is set to more than double by 2030. Just yesterday I read of a planned data center in Cheyenne that will consume more power than all the households in Wyoming.

A deeply ingrained perception of endless liquidity and creative availability is a defining feature of terminal phases. Speculative credit is self-reinforcing. When a hedge fund borrows in the repo market to purchase Treasuries or other government securities, this additional liquidity creation is unleashed into the marketplace. Liquidity that fuels inflating asset prices and only more credit-expanding levered speculation.

The current terminal phase is uniquely dangerous. On the one hand, unprecedented leverage in perceived money-like Treasuries has created trillions of marketplace liquidity, feeding myriad speculative bubbles. On the other hand, the AI arms race is a historic borrowing and spending black hole. Thus far, the two have dovetailed with phenomenal results. As long as growth and leverage speculation is uninterrupted, bullish perceptions of endless money to finance the AI build-out will remain ironclad. But this brotherhood between the bubble and leveraged speculation and the AI mania is replete with latent fragilities. Disregarded of course, but April’s market convulsion forewarned that deleveraging and bursting speculative bubbles come with dire consequences for the AI arms race.

[Unclear] provided another critical warning, extraordinary vulnerability lurks below the Treasury market surface, fragility that rapidly reverberated across markets, especially in the high-flying and overowned technology sector. Treasury yields spiked 50 basis points during the week of April 11th, an extraordinary development. Global markets were hit with intense instability, yet the standard safe haven demand for Treasuries and the dollar was completely missing in action. Market talk was of hedge fund basis trade unwinds, along with fears of China Treasury liquidations. Stocks were faltering, but it was the yippee bond market that forced the President’s tariff retreat. Stocks, Treasuries, corporate bonds, and derivatives reversed sharply.

There are important terminal phase dynamics that don’t get the attention they deserve. Terminal phases are characterized by an exponential rise in systemic risk. On the stock side, inflating prices detach from deteriorating fundamental prospects while surging market prices stoke industry investment booms that further inflate corporate earnings. In credit, there’s a surge in the quantity of increasingly unsound loans, as I mentioned with private credit. Here you can also think Treasury, speculative leverage and subprime leverage loans.

A historic surge in risk hedging is one manifestation of this increase in systemic risk. In the stock market, players are ready to buy put options and derivative hedges that offer protection against a market downturn while hedge fund operators and others will boost short selling. Bond speculators and investors are ready to use derivatives to protect against Treasury losses while shorting liquid Treasuries to hedge corporate credit, mortgage securities, munis, and myriad structured products. This creates latent instability.

If many within the marketplace move to offload risk as they began to do in April, markets quickly turn illiquid and prone to dislocation. However—and this is especially pertinent—these outsized bearish hedges and derivatives create rocket fuel for market reversals and rallies. The president’s retreat triggered precisely this dynamic—a big whipsaw. Derivative operators that were one day selling stocks and Treasuries to hedge market protection they had sold were the next day aggressively covering shorts and buying securities to rebalance their derivative exposures. Markets that had turned illiquid on the downside abruptly reversed course and turned liquidity challenged to the upside.

There’s nothing like a big short squeeze to really get the market speculative impulses humming. When markets start to run, the great FOMO takes on a life of its own. And this fear of missing out is such a powerful terminal phase dynamic. Paraphrasing the great economist Charles Kindleberger, “Nothing causes more angst than watching your neighbor get rich.” Especially late in the cycle, this dynamic applies to the crowds of retail traders, option speculators, hedge fund operators, mutual fund managers, and institutional investors.

I’ve discussed the important role short squeezes play. Also critical in speculative dynamics these days is the so-called gamma squeeze, where those that have sold call options are forced during rallies to aggressively purchase stocks and ETFs to hedge contracts that have gone in the money. And with virtually everyone having grown so comfortable with risk-taking, leverage, and derivatives, FOMO has never toted today’s level of firepower. Market structure has evolved to the point of ensuring wild downside and upside volatility, and we saw this dynamic play out spectacularly with Q2’s terminal phase whipsaw.

I haven’t been surprised by market instability and volatility. The analytical case for Treasury and dollar vulnerability has been validated. In general, I subscribe to the view of a powerful late cycle propensity for crazy markets: expect the unexpected. I certainly appreciated that market structure created a potential for a market recovery after April’s risk-off. Where I’ve been wrong is the belief that a vulnerable Treasury market would remain calm in the face of such dramatic financial conditions loosening and resurgent risk-on speculative bubbles.

Treasuries—bonds globally—are extraordinarily vulnerable. Risks are multifaceted. Let’s start with supply. It’s now massive fiscal deficits as far as the eye can see. The latest projections from the CBO have the Big Beautiful Bill adding 3.4 trillion over the next decade to already egregious deficits. It is now likely that deficits have entered the perilous out-of-control phase. It’s worth noting that ten-year Treasury yields are today about 80 basis points higher than when the Fed began its hundred basis point rate reduction last September. We saw in April the potential for Treasury yields to rise even as risk markets buckled and economic prospects dimmed. It is today reasonable to contemplate scenarios where annual deficits approach 10% of GDP. Meanwhile, the AI mania ensures massive and unending borrowing requirements for years to come. There is also the unappreciated dynamic with ever-increasing numbers of negative cash flow enterprises and a bubble economy structure defined by enormous high-risk borrowing requirements.

Treasuries are vulnerable to what I believe are now deeply rooted inflationary pressures throughout the economy. I know the Federal Reserve and Wall Street forecasts call for inflation to retreat nicely to the Fed’s 2% target, but it has been above target now for over four years. Once having established a foothold, inflation has historically proven uncooperative. Important factors significantly increased the likelihood of upside inflationary surprises. There are the massive government deficits already mentioned, which are the ballast for ongoing elevated total system credit growth. I also believe that accelerating climate change represents greater inflationary risks than policymakers than analysts are willing to admit. Rising food prices are only the most obvious.

Expensive recovery and rebuilding efforts—and I’m thinking here of Hurricane Helene and Milton along with the devastating L.A. fires. More recently, there were the catastrophic floods in Texas and elsewhere. According to the National Center for Environmental Information, there were 27 confirmed weather disaster events last year with losses exceeding 1 trillion. The 1980 to 2024 inflation-adjusted annual average is nine. L.A. fire damage and economic loss estimates exceed 250 billion. I expect climate-related damages and rebuilding costs to continue to inflate, underpinning prices for materials and many things including labor. And while conditions are notably uneven, labor markets remain generally tight.

With a 4.1% unemployment rate and inklings of tightening. I’m assuming wage pressures will surprise to the upside. From my analytical perspective, the economy was demonstrating notable inflationary impulses even before the administration’s new policies. There is the push to deport illegal immigrants, which is already causing labor issues in agriculture, construction, and myriad industries. The administration now has the financial resources and is gearing up for millions of deportations. Inflationary consequences will not be insignificant.

Tariffs are in the process of raising prices for so many things, and I don’t buy the wishful thinking that tariffs only create a one-time price impact and thus are noninflationary. For one, the new tariff regime is hitting in a backdrop of already elevated prices and inflation expectations. Companies will likely space price increases over time rather than to slam consumers with full tariff increases all at once. Similarly, international exporters will initially eat some of the tariffs. What’s more, the dollar’s 9% year-to-date devaluation will translate into even higher prices for many imports.

The University of Michigan consumer survey has one-year inflation expectations at 4.4%. It’s worth noting that the market’s gauge of inflation expectations, the five-year breakeven rate, recently traded to 2.54%, a high since April 3rd. Loosened financial conditions over recent months can be expected to underpin both economic activity and price pressures. I question how long the bond market will disregard these dynamics. I think in terms of the bond vigilantes regrouping and plotting their next attack. Three key markets seem to be in the vigilantes’ crosshairs. It was the U.K. gilts market back in the fall of 2022 that seemed to mark the end of the vigilantes’ lengthy hiatus. Gilt yields last week traded at 4.67%, the high since May.

Japanese ten-year JGB yields close Friday trading at 1.60%—the high back to pre-great financial crisis July 2008—as long bond yields surpass 3%. Japan’s CPI has been running above 3% since last November. Year over year food inflation surpassed 7% last month. The results from Sunday’s parliamentary election confirm that the scourge of inflation is delivering harmful effects to Japan’s traditionally cohesive and stable society. The ruling LDP party lost its majority in the upper house, placing it in a minority position in both houses for the first time since 1955. Japan’s rising right-wing nationalist party boosts its seat in the upper house from one to 15. I’ll quote Bloomberg.

“Since World War II, Japan has built a reputation as a global safe haven for investors, in part due to a consensus-driven political system helmed by one of the world’s most successful big-tent parties. Now the center is unraveling, testing much of what has held true about the nation for decades.”

Approaching 240% of GDP, the sustainability of Japan’s government debt is a serious, likely pressing, issue. Political pressure is mounting to assist those most hurt by inflation, and with a policy rate of only 0.5%, pressure is building on the Bank of Japan to accelerate the pace of policy normalization to counter rising prices. The BOJ faces a critical predicament. Rate increases necessary to contain inflation risk triggering a bond market crisis. Literally decades of misguided policies, including near zero rates and reckless debt monetization, are coming home to roost.

In last week’s CBB I used the quip, “What happens in Tokyo doesn’t stay in Tokyo.” For many years, Japan has operated as a critical epicenter for global speculative finance. Trillions abandoned zero Japanese rates to partake in higher yielding instruments including Treasuries, U.S. corporate credit and structured finance, European periphery bonds, emerging market debt and beyond.

For 30 years, the Japanese financial system has provided virtually costless borrowings to the global leveraged speculating community for the financing of so-called yen carry trades all over the world. It’s been one year since the yen carry deleveraging near blow-up, another market warning too easily dismissed.

The timing of these kinds of things is impossible to predict, but elements are falling into place that raise the odds of global bond market instability. When JGB yields surged in January to a then fourteen-year high of 1.24% ten-year Treasury yields spiked to 4.80 after retreating yield surged together in May and then pulled back in unison into early July. Treasury and JGB yields are both higher this month, though Treasury yields have yet to follow JGBs to multi-year highs. I’ll also note the recent tight correlations between Treasury bond and U.K. Gilt yields.

There’s a natural ebb and flow, a greed and fear dynamic that cycles through markets. Unparalleled speculation and derivatives trading along with other market structure issues have the recent risk-on, risk-off dynamic operating on steroids. The next deleveraging episode is the proverbial when and not if. All the craziness materializing since April only exacerbates system fragility. Financial conditions are too loose, and loose is especially dangerous during this most extended terminal phase. Upside inflation surprises are a serious risk. The administration’s focus on the ten-year Treasury yield is by design.

Treasury Secretary Scott Bessent operated in the hedge fund universe for over three decades. The deep pocket hedge fund industry got their man to head the Treasury Department, and Bessent is keenly aware of the huge basis trade, and speculative leverage more generally. These days, especially post-April market instability, the Trump put is grounded in faith that Secretary Bessent will sprint to the Oval Office when necessary and the president will listen. It’s the secretary that explained ramifications for April’s yippie bond market. It is Bessent who is on top of the administration’s arsenal of measures to promote lower long-term Treasury yields. More recently, it is the Treasury Secretary explaining the market realities of forcing Chair Powell’s early exit.

Curiously, Treasury futures position did not indicate a meaningful reduction in basis trade leverage back in April, and I’ve been surprised how willing the speculator community has been in holding firm with heavy leverage in the face of such elevated uncertainty. I suspect basis trade and other leveraged positions have essentially become too massive to liquidate, key hedge funds too big to fail. This dynamic worked to contain April’s leverage unwind. It also heightens risks of highly disorderly future deleveragings. According to the Financial Times, hedge funds ended 2024 with U.S. government bond holdings at 3.4 trillion, having roughly doubled since the beginning of 2023.

Thus far, the bond market—or more specifically the hedge fund community—has accommodated the administration’s pro-growth, pro-bubble policy regime. I see a tenuous codependency, accommodation that sow the seeds for a contentious breakup. From my analytical framework, today’s mix of loose financial conditions, liquidity overabundance, bubbling stocks, booming credit, massive deficit spending, deregulation, and the administration’s investment push should underpin growth. So long as risk-on and loose conditions hold, inflation risks remain elevated. In recent quarterly calls, I’ve repeated that I hope my analysis is wrong.

At this point, I would welcome developments that refute my view of an ongoing worst-case scenario. Terminal phases are precarious affairs. This is undoubtedly one for the history books,—the confluence of late super-cycle speculative excess, unprecedented leveraged speculation, runaway deficits, a [unclear] private credit lending bubble, a historic AI mania and arms race, a rapidly inflating crypto bubble, and the Trump administration ensures this terminal phase ends badly. So long as conditions remain so loose, I question whether bond vigilantes will remain in hiding. The hedge funds should be nervous, but for now we’re in the feel-good summer doldrums. Be prepared for the return of tumultuous markets this fall, if not sooner. David, back to you.

David: Thanks, Doug. We’ll go to our question-and-answer segment, and I’ll take the first couple and then pass the baton to you. George asks, “Do you believe that stablecoins are an opportunity to further U.S. dollar hegemony and thereby suppress real interest rates enough to forestall the inevitable equity bear market? Or do you believe that instead Donald Trump’s dismissal of Elon and DOGE more than offset any positive impact of stablecoins on funding U.S. debt?”

I think your question’s very insightful. Given that 99% of stablecoin usage references the U.S. dollar, I would agree that its adoption as it exists today supports U.S. dollar hegemony. In light of that, there is an issue, and it is that global adoption is likely to be limited. There is a decidedly anti-dollar trend growing, and the benefits of speed and cost compression begin to erode when you introduce foreign currency settlement, which could be resolved over time but has not been addressed as of yet.

I’m admittedly out of my element with digital assets, and although I tend to read broadly, there are levels of complexity here that go beyond my expertise. So I do want to reference a couple of reports that I think would be helpful. Quote here from Boston Consulting Group. Their paper, “Stablecoins, Five Killer Tests to Gauge Their Potential.” “Beyond liquidity and concentration risks, the proliferation of U.S. dollar-denominated stablecoins also pose a macro financial challenge. The risk of dollarization in emerging markets confronting local currency instability. The widespread availability of dollar-based stablecoins accessible via mobile devices and blockchain networks can erode demand for local currencies in countries with less credible monetary policy or higher inflation. This could undermine the transmission of domestic monetary policy, weaken central bank balance sheets, and exacerbate capital outflows during periods of financial distress. While this would strengthen the role of the U.S. dollar as a global reserve currency, it also risks exporting U.S.monetary policy to jurisdictions that have limited capacity to absorb its shocks. The results would be accelerating financial disintermediation and diminished local currency instruments. Stablecoin adoption expands especially in regions lacking strong payment infrastructure capital controls. This risk becomes increasingly tangible for policy makers.”

I also want to recommend, George, that you look at the Bank of International Settlements Working Paper 905. You’ll see from a central bank’s perspective why central bank digital currencies are preferred to stablecoins offered by private firms. I think the rest of the paper is a little bit dated, but I think it’s always important to balance the regulatory perspective, the central bank policy transmission perspective, and finally, the monopoly benefits that central banks currently enjoy. Balance those things with the enthusiasm which is in the marketplace for the technology. So read the full Boston Consulting Group paper, and I think when you do, you’ll be pretty enthusiastic, all things considered, but I think just to balance that out looking at the BIS paper is great, and I would also encourage you to explore perspective from the Fed.

They wrote a very good paper in 2024 titled “Primary and Secondary Markets for Stablecoins,” and it has a fascinating case study of stablecoin instability during the SVB crisis. If you recall, Silicon Valley Bank, when they went under, there was a large stablecoin position, if I recall correctly from the paper, about $3.3 billion. And as Doug often reminds us, something that functions well under normal circumstances or when liquidity is ample doesn’t always function as well under duress. And I think that’s what I would point out. Spend some time reading the Federal Reserve paper because it illustrates that point that this is a new invention, if you will, or a new modification for how we see money, and it tends to be appealing under the best of circumstances, but we already have case studies of how they perform under duress, and it’s less than encouraging.

The next question is from Gary, and I’ll take this one as well. “I’m 82 years old, still active as a therapist, and what maximum wisdom, how to prepare financially for retirement—cash, gold, silver real estate?” Gary, I’m glad you’re still active as a therapist at 82, that warms my heart. I would say, of the things that you listed, cash yielding north of 4% is not a bad idea. Hedging a cash position, hedging that with precious metals, also not a bad idea. My hope is that when you reference real estate, you’re talking about income-producing real estate, which over time tends to offer a better income stream than cash or short-term Treasuries. That the beauty of combining all those assets is that you have a balance between liquid and illiquid assets, and you’ve minimized risks by balancing between cash and metals. You can certainly make a portfolio mix more complicated, but I’m not sure that you need to. We’ve found some compelling value. We’ve found some growth opportunities in publicly traded hard assets, but given the few data points that you’ve shared, I don’t think it’s necessary for you to pursue those.

I’m happy to discuss a few more details with you offline, and perhaps we could do a short one-on-one consultation. In fact, if anyone would like to set that up, Gary or anyone else, just reach out to at Ted at Te*@******ny.com and we’ll set it up.

The next question is from Alan. Doug, he says, “I’ve been discussing the federal debt with some of my friends. One area where I often am not sure is regarding how this might play out. Below is how I usually talk about it. Can you comment on the likelihood of each, and any major scenario missing below?”

So I’ll give you his three points. “Debt grows for several years more, but no crisis” That’s one. “Two: debt crisis in the next few years due to lack of market interest in Treasuries, interest rates skyrocket to attract buyers, Fed steps in and performs mega QE activity indefinitely”—kind of the inflationary scenario. Then his last scenario as he discusses it with friends. “Number three, debt crisis in the next few years due to a lack of market interest in Treasuries, interest rates skyrocket to attract buyers. Fed does not step in and debt default begins.”

Doug: Okay, so thanks, Alan. The Treasury debt continue to grow over the next several years without a crisis. This scenario is possible, but it’s not one I’d bet on. Sure, federal debt has been expanding nonstop since the 2008 crisis, so why can’t it continue? But that seems to me to be a this time it’s different, debt doesn’t matter assumption. Washington is running 6 to 7% of GDP annual peacetime deficits. Never in the past has such irresponsibility been viewed as sustainable, and Washington clearly lacks a political will to get this under control. As I mentioned earlier, I see deficits have reached— They’ve reached this out of control, unmanageable stage. I don’t think the bond market can simply ignore ramifications for several more years. The bond market will have to impose discipline, and I doubt there are years to wait until this scenario unfolds.

Inflation is an issue. Waning international demand is another important issue. As for your second scenario, I don’t see how the Fed avoids super mega QE. The leveraged hedge fund holds trillions of government debt. The trillion dollar basis trade is said to be 50 to 80 times levered. I think when a system condones federal debt being monetized by leveraged speculators, that’s a deal with the devil there. For one, it makes it too easy for Washington to borrow, too easy for politicians to just keep spending excessively. We’ve witnessed, it’s been a breakdown of market discipline, and I discussed the dynamic whereby all this liquidity created in the repo market from leveraging Treasuries as fueling asset bubbles in the AI mania. Bubbles eventually burst. When they do, there will be only one place for hedge funds and others to look where they can delever their Treasury and agency bond portfolios, and that’s our friendly Federal Reserve there. So I would view your third scenario, where the Fed sits back and watches and doesn’t do anything, as highly unlikely. But perhaps the key issue is, if they can and will do enough, will they be ready to buy trillions of debt securities that will be necessary to stabilize the bond market in the event of a major deleveraging? Well, at least at first, I expect the Fed will be hesitant to open the monetary floodgates. It is likely that inflation will be elevated heading into deleveraging with the Fed reluctant to commence massive debt monetization efforts. And if they begin QE, and Treasuries and the dollar sell off, things could turn messy quickly.

As for inflationary or deflationary outcomes, I just have to wait and see how things develop. There will be many moving parts to the analysis. For now, though, I’ll err, as David and I have for years, we’ll err on the side of anticipating ongoing inflation—likely a worsening inflationary cycle—but I don’t dismiss the deflationary outcome scenario. Deleveraging and bursting bubbles could cause wild price level instabilities, and that’s across assets, consumer producer prices, commodities perhaps, and currency prices. This is a unique credit cycle dominated by levered marketable debt. There’s a lot that could go wrong that would lead to crises of confidence and even credit collapse with deflationary ramifications.

When I think key the various scenarios, I expect the dollar to play a key role in inflationary and deflationary outcomes. I could see the dollar getting in some serious trouble, which would support the inflationary scenario. At the same time, the dollar has such unsound competitors. Other currencies could get in even bigger trouble. So I’m trying to keep an open mind and not thinking too far ahead. And thank you very much for your question.

David: Doug, I’ll just add to that. And sometimes these conversations will include the example of Japan. Look, Japan’s had their debt to GDP numbers north of 200%. I think you mentioned in your comments 247%, something like that. And look, the Japanese have not had a crisis. We shouldn’t really be worried. And I think what that leaves out, just looking at the quantity of debt is the interest that you’re paying on it because they’ve had a zero interest rate policy for several decades and that has allowed them to increase the quantity without necessarily having to pay a high price for it. And where you see the needle moving dramatically in the United States is that our interest expense is on the rise.

If you look at interest expense compared to our tax revenues, just a few years ago, it was 6%. So interest compared to tax revenues was about 6%. Most recently it’s 19%. If we finish this year and rates are not lowered, we’ll have roughly 1.25 trillion in interest expense, which is, in a rosy scenario of revenues of 5.6 trillion, roughly 22% of all tax revenue will be going to paying the single line item: interest. So where it comes unglued is with rates moving higher and the Fed not being in control of their destiny. The Bank of Japan has largely capped rates, and there’s number of other factors which you could explore that have helped the Japanese keep interest rates at that low level, but this is why we’ve reached threshold levels. It’s not necessarily the quantity of debt. Oh, 38 trillion, that’s the key. It was the straw that broke the camel’s back instead of 37 trillion.

Now, I don’t think it’s the quantity. I think it’s the price that we have to pay on that debt, and that’s what is very disturbing. We still have a lot of debt to roll over between here and the end of the year, which will continue to ratchet up our average interest costs.

Doug: Excellent point, David. I’ll just add briefly. I’ve never liked the US-Japan comparison. For one, Japan, big current account trade surpluses, a big saving society, and they were able to get through a couple of years, a couple of decades of bubble deflation and they still had a strong currency. And so it’s very different situation I think we’ll confront.

David: Next question comes from Leslie. “I would like to know if it’s possible to grow your way out of significant debt or does the debt itself need to be addressed by just paying it down bit by bit? I personally have not seen a person or an organization grow their way out of debt, but perhaps I’m wrong.”

Doug: That’s a good question, Leslie, but it’s a complex one. This subject matter is near and dear to my little analytical heart. I’ve been carefully studying debt and inflation dynamics for 35 years. I’ve watched in utter amazement while inflationary growth has allowed debt to just keep growing and growing. At this point, it is accepted as fact that debt issues require a higher inflation rate and stronger growth dynamics. And reflationary policymaking worked its magic in the ’90s, again in the early 2000s. During the great financial crisis, and again during the pandemic.

Central bankers and the markets believe they’ve got it all figured out. Theoretically, one could argue that it is definitely possible to inflate away excessive debt, but such thinking is more from a traditional system with inflationary bank lending and central bank money printing. The problem these days is that our system, our entire credit system, it’s dominated by market-based credit and speculative bubbles. Inflationary policymaking in today’s system, it just leads to greater speculative leverage non-sustainable bubbles.

And my analytical framework is quite clear on this. The reflationary policymaking employed after each bubble over recent decades only worked to inflate bigger and more systemic bubbles. The ’90s bubble inflated into a formidable tech dot-com bubble and then the enormous mortgage finance bubble, and finally to the ongoing government finance bubble, history’s greatest bubble. And I’ll argue passionately that you can’t grow your way out of bubble problems. Inflating the next bigger bubble only ensures more problematic financial, economic, social, and political crises. We are not these days growing our way out of excessive debt. We’re instead inflating bubbles that will eventually burst with devastating consequences.

With today’s super bubble inflating at the very heart of global finance, with sovereign debt, central bank credit, this round of inflationary growth risk a crisis of confidence in the most trusted financial instruments.

I don’t see another future bigger bubble waiting in the wings for post-government finance bubble reflation, and I certainly wouldn’t extrapolate the recent decade growth trajectory when the current bubble deflates. Our debt will become a huge pressing problem, and the fallacy of growing your way out will finally be exposed. Paying down a little debt doesn’t help when the overarching issue is a historic bubble. And thank you very much for your question.

David: If I could add to that, Doug, it seems like when you mentioned the ’90s bubble, you’re talking about an asset class-specific bubble—technology. Then we move to stretching to a broader geography with the housing and mortgage finance bubble because it’s the financialization of US housing and the distribution of those financialized products via the MBS and ABS market globally. But the difference when you talk about the government finance bubble, you’re not just talking about US Treasuries. This is a global government finance bubble. So the nature and the scope of this is far broader than anything we’ve ever seen before, and it raises some interesting questions as to what the implications are.

Doug: Well said, David. Thank you.

David: Tom asks, “I’m sure we agree collapse of Ponzi finance is inevitable. Yet, is economic depression likewise inevitable or could hasty resurrection of an RFC-like institution Reconstruction Finance Corp, along the lines of the FDR administration, what he implemented, expanding the mission beyond Hoover’s pure bank recapitalization efforts following the crash of 1929 and directly financing production and infrastructure-related investments. Those things mitigate economic damage of leveraged speculation’s inevitable severe chastening.” He puts it differently, this way. He says, “if I could put my question another way, is the Fed a proven failure in light of the fact that it was sold to Congress in 1913 as a means of ending financial panics and economic depressions, a task it appears doomed to fail achieving once again?” I’ll take a shot at this and then maybe—

Doug: If you want me to start, David, it’s your preference. I’m sure you can articulate better than me, but—

David: Well, fill in the gaps. One possible alternative to, in this current era versus what we experienced in the 1930s, is what Austrian economists have described as a crack-up boom, as coined by Ludwig von Mises. It’s what happens when people lose faith in a currency. They rush to spend it as fast as possible, prices skyrocket uncontrollably. And of course that can include assets, not just consumer prices. We have today a different construct than the 1930s. Faith has been transferred from the inherent value of gold backing our currency under the gold standard to the management ability of PhD economists. And so when you think about a possible alternative, it ties to faith in the managers of the system should that faith enter a crisis period—a crisis of confidence in the system’s managers. The penchant for liquidating bad debts among those managers, I tend to think, pales in comparison to the temptation to inflate those debts away, given the system manager’s penchant for control.

You play out the deflationary scenario and it’s an outcome where central bankers have no hold of the reins. So this is among the possible outcomes. I don’t think it precludes fiscal initiatives like we saw in the 1930s, used to manage unemployment and economic growth. You had the CCC, the WPA, PWA, the TVA, I forget what they called it for agriculture, but business recovery, social welfare, all of these things formed the backbones of FDR’s economic recovery efforts.

DC tends to grow during crisis and we’ve seen that historically. It doesn’t shrink. There is a book that you need to order. This is in that must-read category, Crisis and Leviathan by Robert Higgs. He was a Commentary guest probably 10 years ago. Definitely you can find it in the archives if you want a Cliffs Notes version. But the idea that they would shrink back and do nothing, going back to Alan’s question of, would the Fed just stand by? I don’t think any government organization is going to just stand by and see what happens next. Interventionism is the patterned behavior, but there is that possibility if there’s a lack of confidence in our current day money mandarins that we have something of a—again, it’s just a possibility—crack-up boom. Your thoughts, Doug?

Doug: Yeah, it’s never easy to follow you, David. You did such a good job. I fully expect Washington, and this is consistent. You just said as much. I expect Washington to mobilize all resources to try to stabilize the financial system and economy in the event of a serious crisis. I see economic depression as likely unavoidable, but hopefully it’s nothing of the extremes of the Great Depression. How much depends on whether the Fed, Treasury, and Congress can thwart financial collapse. And when one looks at the amount of debt, speculative leverage, and asset bubble excess, avoiding collapse, it’s not a given. It’s not a given.

You make a great point about the Fed’s origin, faith in the new Federal Reserve as guarantor of financial stability, that was instrumental in roaring twenties excess. It was just part of the market perceptions of risk. Our era had its own new Federal Reserve, a new age central bank with open-ended QE that would resolve financial panics and avoid economic depressions. The parallels between the two periods—market faith in the Fed, speculative leverage and bubbles, deeply ingrained market optimism in the face of deep structural maladjustment—these are troubling to say the least.

As for Fed independence, our central bank has made a series of epic mistakes that severely undermined its independence. The Fed today answers to market bubbles. They’re trapped. The Fed accommodated massive fiscal deficits, and we’re now seeing, predictably, the days of the Fed remaining—they’re having difficulty remaining independent in the face of political forces. So thank you for your question.

David: Yeah. Tom’s follow-up question is Fed independence, actually Chimera, and I think you’re looking at sort of the expanded list of mandates, and they do take on that sort of savior of the markets unofficial mandate.

If you’re looking at the kind of Fed independence— I think back in time to Arthur Burns, and sort of a 50-, 60-year view of Fed independence, there’s been people who have caved to political pressure and have not remained politically independent. And certainly the criticism has been laid at Powell’s feet that he hasn’t been politically independent. I would say I don’t think that’s the case. Fed members can express a political bias, yes, but that’s not exactly the same as losing policy independence. And so to date, I would argue that independence is largely intact unless you’re talking about what you’re talking about, Doug. Again, harder to make a case for independence if you’re looking at the Fed’s relationship to Wall Street, they seem to occasionally adopt the third mandate of market smoothing, beyond the price stability and employment mandates.

The next question, from Chris. “Is gold or silver a better short term six to 12 month investment strategy?” Investment strategies have particular objectives, and so I would say that silver would be the winner if growth is the objective. And gold I would say remains the best for stability and asset preservation. So again, over a six to 12 month period, gold for stability and asset preservation, silver for growth.

Gary asks, is it wise to invest in classic cars or trucks? And I’ll tell you right now, that’s not my area. I would think, just looking at the extremes in wealth today, I would think that the safest place to play in collectible cars is in the seven and eight figure price range, where money collectors still have money—even in a depression. Anything that requires a middle-class or upper middle-class audience, I would say, is at high risk. So I think it depends on where you’re playing, and I think you’ve got to play at the very deepest end of the pool for that to make sense. But those are my two cents, and they’re not worth much. Again, not my area. I can change spark plugs. Beyond that, I don’t know much about cars.

Next question. David asks, “is there a chance we might have to pay tariffs on gold or silver held in the Vaulted program with the deteriorating global economy conditions, especially in the UK and Canada? Could governments in these countries confiscate gold or silver held in these countries?”

So for those of you who don’t know what Vaulted is, 2018, we started a FinTech solution where you can own gold or silver, kind of a do-it-yourself solution for saving in ounces. We partnered with the Royal Canadian Mint and HSBC, which is why the focus is on the UK, HSBC London, and the Royal Canadian Mint there in Ottawa. So far, those assets have been exempted, coins and bars specifically. So to date, we have no issues in terms of tariffs, and I’m not concerned about confiscation of those assets. These are assets which are critical to central banking and a conveyance of stability and control. It is really unique to see the laundry list of things that have had tariffs thrown on them, with Canada in particular, and gold and silver specifically line item listed. Sorry about that, my microphone likes to go out on occasion. Yeah, they just stand out as assets that have been exempted.

Here’s the good news. Even if they were included, you can de-allocate from the program taking product in kind stateside and avoid any complications with tariffs that would apply to something that is currently positioned overseas, whether it’s kilo bars in Canada or a thousand ounce bars in the UK. So even if they emerge, there’s a workaround there. Now, if you insist on having your particular bar, your particular serial number shipped via FedEx, yep, you would in that case have to pay the tariff. What I’m saying is just don’t do that. Swap it out for a kilo bar stateside and we can deliver it no problem. Or you can have it de-allocated in another form, one ounce coins or what have you.

And by the way, there is a novel feature with the Vaulted program is that if you’re taking an in-kind delivery in another form, that is not a taxable event going from the kilo bar to other things because of what we’ve set up as what is called a prepaid forward contract. That gives you the ability to take delivery of the contract in the form that you prefer without triggering a 1099 event as you move from one product to the next. So I think there’s no reason to be concerned there, but if you check on the Vaulted website, if there are changes, we will note them on the website and give you the proper steps to take to address them. Of course, we’re always available to answer questions directly as well.

The next question from Thomas, “my primary interest is an interest rate directional setup for the year. I generally focus exclusively on analyzing real money and account use of algos to buy or sell markets.”

Doug: David, I’ll give it a shot. To say interest rate that the outlook is cloudy, that’s an understatement, and thank you for your question, Thomas. As you know, there are two key focuses. One would be the policy, the Fed rate, and then market yields. And those two may or may not move in unison. We’ve been used to them moving in unison, that’s no longer— We can’t take that for granted. That’s the Fed policy. The intention is certainly to moderate interest rates, get them lower over time. The market today is forecasting 100 basis points of rate reduction over the next year. Two different scenarios could significantly impact the course of rate changes. While dismissed by the markets, upside inflation surprises could keep the Fed on hold or perhaps even pressure the Fed to boost rates. I wouldn’t be shocked.

On the other hand, a bout of market instability deleveraging, tightened financial conditions, that would likely impel the Fed to speed up rate cuts. During April’s upheaval, the rates market quickly priced in a more aggressive Fed easing cycle. As I mentioned earlier, we’ve seen this extraordinary development where the Fed aggressively slashes rates by a hundred basis points, yet bond yields rose. So it is unclear whether the market’s expected 100 basis points of cuts over the next year will be well-received in the bond market. We saw in April that Treasury yields could actually spike in the event of deleveraging, which throws into question the whole safe haven status of Treasuries. So I would argue we’re in uncharted territory, and I’ll call them, we make our guesses for rates and market yields over the next year. Thank you for your question.

David: I don’t have much to add to that. If we do see lower rates, I think you could also see a lower US dollar moving in lockstep, and that could pressure the long end of the curve. But to your point, to say it’s cloudy, I think that’s accurate. Could go either way. Making a major call on rates is tough. Higher rates can’t be ruled out. Lower rates can’t be ruled out. Thomas, my comments are going to be less helpful than Doug’s.

Daniel asks, “please share your position on gold and silver values for six months and 12 months. Also, update of BRICS gold-backed currency becoming a reality.” A quick summary. Silver broke out over the $34 level, and it could consolidate back to the breakout levels, but I think the bias is to the upside over the next six to 12 months from a technical perspective. I like gold. I think gold has upside. As the western investor returns to the metals market, I think you will see a disproportionate move in silver relative to gold, again silver outperforming. The benefit that gold has is a massive price-insensitive buyer in the form of central banks. And so that is something to keep in mind, and it’s one of the reasons why we always balance a metals portfolio between the two. Still favoring gold, the metal for all seasons.

More than the BRICS alternative currency, you have a real-time effort to shift invoice settlement in global trade to a more diverse list of currencies. That—if you combine that with the reserve asset managers adding gold as a way of diversifying away from the dollar—I think these are more significant trends than the BRICS trying to create a new reserve currency or an alternative.

Maybe the Chinese introduce some kind of gold backing for the RMB, but a coordinated currency effort amongst the BRICS is a lower probability. They don’t need it. What they want is more foreign currency transactions and trade settlement that accurately reflect a country’s global contribution to GDP. And they don’t like what we have in the US. Our share of trade invoices that are priced in US dollars is still two to three hundred percent higher than our total contribution to global GDP. They can equalize that by direct trade settlement in their own currencies with net settlement happening in gold.

So another reason why reserves are on the rise amongst emerging market central banks is again so that they can handle that net settlement in gold. So these are the trends that I think are more important. It sounds sexy to be talking about the BRICS, so the gold-backed currency and things of this nature, all they need is to figure out the foreign currency transactions, the efficiencies and cost reductions to be able to invoice directly and not use the dollar as the means. And that is happening.

Russell asks, “this may not be applicable to this review. Can McAlvany suggest companies to invest in that we as investors can take advantage of in the upcoming groundswell of rare earth mining and procurements?” And I would say that, to a degree, that is what we do in our hard asset strategies. We don’t have a huge emphasis on rare earth metals. That’s only because the margins just aren’t there. If you look at the companies digging in the dirt, these are fairly common elements. They’re not in high concentrations in very many parts of the world, and to mine them is for micro margins. What we do focus on, we have critical base metals, energy, host of other natural resources, along with precious metals miners. So if that broader approach to hard assets is of interest, certainly there are, amongst some of the larger producers, they have exposure to rare earths.

But again, as a standalone business, they’ve been sort of garbage businesses. Even though they’re catching the headlines and they are critical, the businesses themselves don’t really have adequate margins to give us a “margin of safety” as we’re helping allocate resources for investors. But it’s worth a conversation with our team if you’re interested.

Stephen asks, “Doug, was there collusion between big banks and major investment firms to rig the big market dip rapid rebound in April? I noticed that all of their market investment teams had record revenues for the second quarter. They attributed this to ‘market volatility.’ If this was not rigged, they should have had losses rather than record gains, right?”

Doug: Well, thank you for your question, Stephen. Is there collusion? Are markets rigged? This tends to be a discussion topic in the conspiracy theory circles of which I try to maintain a healthy distance. That said, I tend to see collusion and rigging as typical characteristics of major speculative bubbles. Today, the major financial players are so enormous that they play pivotal roles in underpinning the great bull market. And what I am calling a rig is essentially collusion between the dominant market operators to support the markets, and it works until it doesn’t.

Again, no conspiracy theories, just what I see as a time-honored speculative market dynamic. In the late twenties, they were called the investment pools and the cabals. And that’s just what happens when markets run amok. And I’ll say, I can only shake my head this morning when reading a Bloomberg article with the headline, “Dumb AI Bots Collude to Rig Markets, Wharton Research Finds.” And I thought I’d read just a key passage from this because it’s so interesting.

It says, “In simulations designed to mimic real world markets, training agents powered by artificial intelligence, formed price-fixing cartels without explicit instruction. Even with relatively simple programming, the bots chose to collude when left to their own devices, raising fresh alarms for market watchdogs.” And to me, this just supports the view that speculative markets, they’re prone to monkey business. The major Wall Street firms had outstanding quarters. Market volatility helps for sure, no doubt. I attribute booming revenues to the major loosening of financial conditions that unfolded throughout the quarter. This ensured robust returns across all the major business lines, trading, derivatives, securities, finance, investment portfolios, investment banking, investment management, M&A, all of it. But it would’ve been a quite different quarter had deleveraging gained momentum in April and conditions tightened. Thank you for your question.

David: Doug, didn’t you also argue that with the kind of trading that we’re seeing in the marketplace today, you could expect revenues to be higher? You’ve got investors whose timeframes for capturing gains are not years, not quarters, not even months, but with the proliferation of zero data expiration options trades and day trades and equities, meme stocks and things of that nature. I mean the volumes are increasing because the timeframes have shrunk, which again, from the standpoint of revenues would be an intriguing boost.

Doug: Yeah, and fair enough. But when we talk about Goldman and Morgan Stanley, look at the volumes, Interactive Brokers and Robinhood and some of the others, so there’s plenty of players out there to split the volume up. What amazes me when I read through and listen to the quarterly conference calls is just the strength across finance, and that’s doing deals, that’s financing portfolios, gains on investment portfolios, the whole thing. And to me, that’s why I look at it and it’s just clear that finance is overheated when I look at these quarterly reports.

David: This is a question that came in to Ted. “Just thanks for your discussion, Doug. To me there seems to be a lot of factors pushing towards what von Mises called a crack-up boom. Since the aftermath of the global financial crisis, policymakers have repeatedly shown, literally every single time, that they will do whatever it takes to reflate and inflate to avoid deflationary outcomes. Why shouldn’t crack-up boom be the base case looking at policy…” I lost my place on the question. Hold on a second. “Looking at policymakers actions and frankly just about every price chart, I think the case can be made that we’re already on that early stage crack-up path. Does it not seem the choice has already been made to inflate at all costs?”

Doug: Excellent question, and I concur. I think the choice has been made. Whether they meant to make the choice or not, the $5 trillion of QE, the pandemic-era QE, that was the start of the crack-up boom from my analytical framework, and they didn’t anticipate it at the time, but that is the liquidity that unleashed bubble excess that has just turned unprecedented. I’ve already pointed these things out. I mean you can go right down the line, tech. When they did $5 trillion of QE for the pandemic, they didn’t anticipate the AI arms race. They didn’t anticipate the basis trade, all the speculative leverage. They didn’t anticipate the huge ballooning of private credit.

They didn’t anticipate any of these things, but that was the choice they made and what that choice was. And they actually started QE before the pandemic because of instability in the repo market back in the late summer, fall of 2019. They made the choice, but what that choice was was accommodating late-cycle, historic—I’ll say super cycle—excesses. So they threw $5 trillion at a system that was already revved up for late-cycle excess, and this is what we got from it. And at this point, I don’t know what they do, but in my framework, again, it is definitely the crack-up boom scenario. And that’s what I said at the end where I would like to see some evidence that this is not the worst case scenario unfolding because it sure in heck looks like it to me.

David: Tim asks, this is kind of back to the stablecoins theme. “What are your thoughts about the latest announcements concerning stablecoin and the US government?” I think I covered it earlier, and I would refer back to those research papers because I think they’re helpful. There are a lot of details to iron out, if you’re thinking about stablecoins and integration with the U.S Treasury market. A lot of details to iron out with the Treasury and the Fed before the announcements can move towards real integration, real change. So you’ve got the White House, which is hot to trot on a number of issues. The White House sees things differently, I think, than the Fed and the Treasury. And ultimately I think central bank digital currencies are going to be more important to what gets delivered than private market solutions. And of course the big hubbub today are your private market solutions.

There’s too much loss of control over Treasury market behavior, too much loss of control over monetary policy transmission, and I don’t think that these are factors that Trump is looking at. I think, this may not be too kind, but I think he’s keen on leaving the office with the opportunity of monetizing the eight years in DC and with the Trump family garnering their share of crypto gains. So what he wants and how he hopes to monetize his experience in DC, I think the Fed and Treasury are a little bit more sober minded. At least that’s what I hope. And so when I see the announcements of the government’s interest in stablecoin this and that, again, I think there’s a lot of details that have to be hashed out with the Treasury market’s consent, the Treasury Department’s consent, the Fed’s consent, and you’ll get that sense when you read through the BIS paper and the Fed paper.

There’s so much complexity here. The one thing that they cannot lose control over is how they actually manage the Treasury market and how they employ monetary policy. They cannot compromise transmission into the economy. And so, again, if you see something materialize over the next five years, likely to be in the form of CBDCs, not the private market, which is what’s being discussed by government, specifically the White House today. So hope I didn’t step on anyone’s toes there. Leslie asks, “Wise counsel for a widowed senior in her early eighties?”

Leslie, I would love to get on the phone and visit with you. Like I mentioned to Gary, a few general comments, and then really it would be helpful to understand the complexity of your unique situation, but in general you minimize risk, you keep healthy cash, T-bill balances, you offset your currency risk with precious metals. These are basics that I think you need to employ, but certainly don’t address all of the details of your unique situation, which I’m happy to engage with. Just let me know.

Let’s see. Nancy asks, “I’m new to investing. May I listen to you in the coming months to learn before investing?”

Doug: Nancy, just thank you so much for your interest in being part of our call today, and I just really hope you come away with a little bit clearer understanding of the current extraordinary environment. As someone new to investing, just read and listen to as much as you can, and it seems like that’s the path you’re on here. My view is that today’s environment, it beckons for caution. Whatever you decide to do, I recommend starting small and seeing how it goes. Every individual has their own circumstances and risk tolerances. Tactical Short is a product that is to be a component helping to offset some of the risk of a larger investment portfolio. I’m not familiar with your situation, but I generally would not recommend it for those new to investing that may not yet have a developed investment portfolio. But again, just thank you for your interest, and I hope we can be a valuable part of your learning experience.

David: Dave asked a question, “What do you think of coal?” And I’ll answer this. There’s a way to read this question which is very simple. Is it good or is it bad from a climate change perspective, from a sustainability perspective, or I could read it very differently. I’ll just give you a little bit of granularity, and maybe that’ll help you understand how I understand it in a broader context.

I think there’s three ways of looking at coal. First, you have to distinguish between metallurgical, met coal and thermal coal, and second, you have to consider the economically viable alternatives to thermal coal, things like natural gas or nuclear. That’s a second category of considerations. And the third is to consider the resource base itself and its abundance. So with coal, I’m going to start with that last point, the discovery of an abundant source of energy. This is really key.

If you think about a potential surprise element in the global economy and the US domestic economy, energy is one of those things that has a very powerful growth element to it. I’m not talking about investing in it so that you can make money, but if you look at coal in particular, it fueled the industrial revolution. It drove a massive industrial growth in the 18th and 19th centuries, and the cost of energy came down so dramatically, productivity increased, so it provided a reliable energy source for factories, transportation systems, steam engines. The availability of that cheap energy source enabled urbanization. It led to the growth of cities, it expanded the labor markets, created millions of jobs, and boosted local, national, and even the global economy, even today it contributes significantly to global GDP growth, particularly in industrialized nations.

And it’s set. That one energy source set the transition to the modern economy and the infrastructure that is developed today. Such is the nature of an energy revolution. And so it is an abundant, cheap source of energy, and because of that it has allowed for massive global economic growth. We wouldn’t have a burgeoning middle-class globally if it were not for cheap and abundant energy, and it began in the 18th and 19th century with coal. It takes me to the second point, economically viable alternatives. Today we have an alternative in the form of natural gas, which is also cheap and abundant, and it’s also a lot cleaner. The US has massive reserves of natural gas, and that will for generations to come provide an economic advantage to the United States if you’re thinking about our economic trajectory and what underscores our stability, if you will. But it’s also worth noting that neither of these are renewable, coal or natural gas.

Nuclear by far is the cheapest and most sustainable form of energy creation, fission, and there is this sort of mysterious, almost metaphysical— If we could crack the code on nuclear fusion, I think we would have a similar leap forward in global economic development and wealth creation like we saw in the 18th and 19th centuries from coal. Topic for another day.

But to the first point, metallurgical versus thermal. Metallurgical coal, we have to have for creating steel. So we will always be digging in the dirt for coal. We have to have at least that form. Thermal is where the critique on dirty energy comes from. It will still be a major factor in energy production because of, number one, its abundance, and number two, its cost. Nearly one-third of total energy creation today still comes from thermal coal, 27%. So again, because of its abundance and its price, you’re going to see coal power plants still being built in China, still being built in India, still being built in emerging markets.

Any emerging market that has access to the product is going to favor it because of its cost structure. If they have access to natural gas or liquid natural gas, there are some advantages there. Natural gas is 45—in some instances as much as 60—percent more efficient than coal. Price is the determining factor as to whether or not a power plant leans one direction or the other. At a high enough natural gas price, coal is preferred, and that’s got to remain the case. So this is something that— You can’t completely divorce yourself from economics. If you want to have a conversation about coal, you have to bring in the economics of coal. It can’t just be the social and environmental impacts and costs, and certainly that’s where the conversation has gone. They’d like to associate added costs, social and environmental costs over a longer period of time, not just what is spent for a ton of the product today.

That’s all well and good, again, topic for another day, but ultimately the initial costs are compelling and will continue to drive demand. Nuclear may well disrupt the energy complex over the next decade. The political winds have changed. Small modular reactor technologies, improving molten salt reactors produce a fraction of the waste of the older, larger reactors. And I think an economic boom will eventually emerge from either a move to nuclear fission or better yet fusion. But that’s still in the category of a pipe dream. But you asked for my thoughts on coal and that’s about all I have. That exhausts my thoughts on coal.

Mike asks, “I have all savings in gold and silver. Should I shift some into equities? I just don’t trust the casino market.” I think to understand whether or not you should be—or to figure out when and how you should be—diversifying out of gold and silver, it’s important to see gold in particular in relationship to other assets. An amazing site I would encourage you to spend some time on is called pricedingold.com. Charles—forgive me, I don’t remember his last name—runs that site and it’s a major public service, just to see how things are priced in gold. I think of diversifying out of gold into stocks. It’s an area that I know well. You create a ratio, as he does on the site, with everything from Steinway pianos to a bushel of wheat to tuition at Yale University, and you can see how priced in gold the cost in real money terms of these particular things, what they cost.

The Dow priced in gold is today about 13 to one. The ratio is 13 to one. If you have all your savings in gold and silver today and you’re considering a shift into equities, I think this is the most critical piece that you can have in mind. At 13 to one, it’s still historically high. It was 18 to one in 1929 at the market peak. It got to one to one by 1932, ’33 at the market trough. It rebounded to, let’s see, 1968 was 28 to one, and then by 1982 it had declined again to one to one, moved higher again to 43 to one. Just giving you some historical context. We’re at 13 to one about five points lower than the market peak in 1929. And I think this ratio resolves itself. It reflects a higher gold price and a lower equity value with a ratio being at five to one, maybe three to one, one to one, and I would say 13 to one, not yet. You don’t move to equities yet.

At five to one, yes, you’re starting the migration from having your savings in gold and silver and you’re moving in the direction of equities. At three to one you must, and at one to one you would be a fool not to. I would just use that ratio as a way of creating a strategy for diversifying back into equities and out of a heavy gold and silver position.

That’s what I’ve got for you. Chris asks, “Is the risk of using GLD and SLV rising?” The simple answer is no. We continue to see investor adoption. There’s nothing structurally that has changed in terms of the basket creation and destruction. We’ve gone through even more cycles of creation and destruction for those baskets. I’m talking specifically about how an ETF manages volume coming in or going out, and through the global financial crisis, through the market downturn in 2022, obviously exacerbated by the Russian invasion of Ukraine where there was a huge surge into gold. We have seen the products perform incredibly well. There have been no hiccups. And so I would say, to date, the risks of using GLD and SLV have not been rising. They’ve proven to be a very robust way of trading the metals. Very different than owning physical metals, but nonetheless, as a trading vehicle, they’ve continued to be reliable.

Gracious. There’s another question and it looks like it’s for me. I feel like I should give you the mic, Doug. I’ll do this question. It relates to tariffs, and if you’ve got some commentary on tariffs and the Big Beautiful Bill, maybe you can chime in. The question specifically, “Gold and silver seemed to be reacting negatively to the tariff successes. Is Trump’s economic strategy becoming more and more accepted as likely to mitigate the debt servicing problem just made worse by the Big Beautiful Bill?” I just clarify something there. I would say gold and silver are not reacting to the tariff successes. They are digesting huge gains. The tariff successes are not the driver of the sideways grind in gold. This is how assets correct after a major price run. They correct either by moving lower or sideways, with time being a critical corrective element. We’re about three and a half months into a sideways correction and the debt servicing problem, going to the second part of that question, the debt servicing problem is only partially offset by tariff revenue.

We’ve got $150 billion in year-to-date tariff revenue. If you annualize it, it’s on track for $255 billion by year-end. And admittedly, any revenue is helpful in offsetting expenses. We have a budget deficit still, according to the Congressional budget office, projected at $1.87 trillion. And so I don’t know that the 255 is going to take a major whack out of that 187. And here’s the bigger issue. We’ve hinted around this and talked about it in relation to other questions. If rates remain the same, if fed funds remain the same and the yield curve stays basically where it’s at, of course Trump is hounding Powell to lower rates for this very reason, but if rates remain the same, the interest expense will move higher from $1 trillion annually to $1.25 trillion by year-end.

And what’s really significant there is we still have $6 trillion of Treasury rollovers remaining of the $9 trillion in Treasuries rolling over this year. So you’re talking about $6 trillion being rolled over at these rates where the average interest cost is currently at about 3.3%. So you’re talking about an increase in the current average rate across all maturities. So yes, the interest expense is moving higher, and as I mentioned, we’re on track to move from $1 trillion to $1.25 trillion. That’s $250 billion compared to the $255 billion potentially coming in from tariff revenue. What I’m getting at is that the interest expense increase may be offset by the tariff revenue, but it doesn’t put a dent in the $1.87 trillion deficit expected.

The Big Beautiful Bill is something that was approved after the Congressional Budget Office estimate of $1.87 trillion for the deficit this year. So we’re talking about the Big Beautiful Bill adding expenses to the $1.87. And so I think the real concern in the rates market is an oversupply of debt obligations, pushing rates higher regardless of Fed policy decisions. If that materializes, you’ve got issues in the bond market and our view is that gold and silver are likely to be outperforming assets in that context. Doug, Big Beautiful Bill, tariffs?

Doug: Yeah, you addressed the issues well, David, and I’ll just add, markets, as I mentioned before, ebb and flow, gold and silver pull back. Part of it I think is related to the dollar rally that we’ve seen, especially the recent rally. The dollar sentiment had turned very bearish, and it was overdue for a bounce, and I think you’re seeing that impact in gold and silver commodity prices. As far as the Big Beautiful Bill and tariff receipts, there’s no free lunch. So the greater the tariff receipts, that’s the more essential— Essentially it’s a tax being paid by consumers with all— There’s consequences there. So that’s my thought on that.

David: Well, going back to an earlier question, and it was from Nancy, “I’m new to investing, may I listen to you in the coming months to learn before investing?” I hope that that is the attitude that we always have because they’re in a sense, as experienced as someone can be, there is so much more still to learn, and getting the right resources in place to be able to continue your education is absolutely critical. So avail yourself of the podcasts I do every Wednesday, avail yourself of Hard Asset Insights. We publish it on Saturday, avail yourself of the Credit Bubble Bulletin, out every Saturday. I mean, these resources are invaluable as you’re trying to figure out the landscape into which you are deploying capital, and if you don’t understand the landscape into which you’re deploying capital, you have no idea the kinds of risks that you are taking. So education is something that is an ongoing thing and because the market dynamics are constantly shifting, Nancy, even someone who is not new to investing still has to be on their toes and pursuing that ongoing education all the time.

So I think education is one of the most empowering things that you can invest in personally. It’s something that you should spend the time to do. We have some resources for you, and they’re all free. We have countless books. I just went through shelves of books that different guests that I’ve had on the Commentary through the years. Make sure that you are curious and continuing to ask questions and continuing to turn over rocks and learn and grow in your understanding.

Doug, I want to thank you for the notes that you put together today. I want to thank you for the disciplined approach that you’ve taken every week to benefit our Tac Short clients. At 7:32 every morning. I have the financial market indicators which are updated, and you let us know. We’ve done over 30 of these quarterly calls. You do your client updates every week. I mean, the amount of discipline that goes into this, I appreciate it and I’m sure our clients and those on the phone today also appreciate the efforts that you put into taking, for lack of a better phrase, taking 10 pounds of mud and putting into a five pound sack. The amount of time and effort that goes into all of your efforts, greatly appreciated.

Doug: Thank you very much, David, and I so appreciate your ongoing efforts and I know so many people out there just love the work that you do. So thank you for everything.

David: Well, until next time, thank you for joining us today and that’ll wrap our quarterly call.

Doug: Good luck everyone. Take care.