Deep Dive
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What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world.
My guest in this episode is Mark Spindell, the co-founder and chief investment officer of Potomac River Capital, a discretionary global macro advisor focused on understanding and monetizing government policies, especially those of central banks and finance ministries. Mark was at our recent Genius Dinner in Washington, D.C., where the theme of the discussion revolved around the Trump administration's economic and national security policies and their implications for investors.
Building on that foundation, we spend the first hour evaluating Trump's first 100 days in office, assessing his policy objectives and his effectiveness in turning those policies into tangible economic and political victories for his administration.
We discussed the potential for tariff-induced supply chain disruptions, price increases, higher borrowing costs, lower asset prices, and a decline in the relative value of the U.S. dollar, driven by a broader rejection of the United States' role as the primary proponent of free trade and as the chief advocate for and guarantor of the post-Bretton Woods international monetary and trading order.
In the second hour, Mark and I focus on the investment implications that stem from these insights and what a more accurate understanding of government policy and its effect on markets means for equity and bond performance, the role of alternative safe assets like gold, and how to position yourself and your portfolio for an investment environment where government policy plays a much bigger role in determining market outcomes than anything we have seen in at least a generation.
If you want access to all of this conversation, go to hiddenforces.io slash subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now.
If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you.
Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this exceptionally detailed, informative, and valuable conversation with my guest, Mark Spindell.
Mark Spindell, welcome to Hidden Forces. Dimitri, it's a pleasure to be here. Nice to see you again. It's great having you on, Mark. So you're dialing in from DC, right? I am indeed.
Hence the name Potomac River Capital. Potomac River Capital. The river is right outside the office here and kind of was where I spent a lot of time rowing, kind of thinking about markets, thinking about asset management, and thinking about the intersection of policy, politics, and economics. So I'm super excited to speak with you today, Mark. You and I had a chance to get to know each other recently at one of our Hidden Forces dinners, the one in D.C.,
which was focused on Trump's, the Trump administration's economic and national security policies, which is something that we're going to talk about today. Before we start, just tell me a little bit about you and given our audience's sense of your background, what you do and how you got into it.
So, long career in asset management, almost the entirety of my 35 years in markets has been managing assets on behalf of others, institutions, insurance companies, sovereign wealth funds and central banks and kind of long-term funds for future generations. I was part of a team at Solomon Brothers in the late '80s, last major investment bank to decide to compete with its clients and form an asset management division.
had started working under Henry Kaufman, a legend in central bank research, and kind of built the fixed income research division at Salomon. And we wanted to transfer a lot of that sort of in-house knowledge that was applied to the firm's proprietary capital and the firm's sort of sales and trading force and sort of do it in a much more relationship-driven asset management enterprise, but still very much in the Salomon spirit.
So really that's the kind of foundational DNA I kind of use to think about markets, central bank policy, sort of impact of macro variables, inflation, growth. We wound up with some success convincing U.S. pension funds, kind of corporate and kind of public pension funds to think about diversifying their assets.
Those global fixed income mandates wound up kind of headquartering in London. So moved to London really where I became a PM and a risk taker, really thinking about ways to sort of design investment management mandates on behalf of all sorts of institutions. And I think...
That versatility has really carried me kind of throughout my asset management career. Solomon ran into a series of mergers in the mid '90s. There was a lift out. We went to work for ABN AMRO. So went from a US investment bank to a major European commercial bank with broad global reach.
I'm always amazed that a small country like Holland at the time produced the largest bank in the world by assets. Also ironic, both Salomon Brothers and ABN AMRO were major financial institutions, neither of which exist anymore. In both practices, we had built up strong relationships with official institutions and central banks, as I said, sovereign wealth funds, reserve fund management. And we took a
a really kind of Solomon-esque and kind of very broad approach to the mandate. So even though we may have been managing very conservative money, we tended to think of markets in a sort of orthogonal way. We'd take directional positions, but we'd look at yield curve strategies. We'd look at relationships between rates and effects. We'd look at spreads. This was early days of European, intra-European government spread trading. So we'd kind of look at spreads of Italy and
Spanish bonds against Germany, for example, early days of EMU. So the basket trades were very much in vogue. So there were lots of ways to express views about relative macro decisions, relative value type trades, you know, as this market was really coming of age. Age
ABN Amro and Salomon Brothers, as I said, had kind of strong relationships with official institutions. So while I was asset manager and PM on their behalf, I was also thinking about their policy decisions. Back in the day, World Bank was a client and they had asked me sort of late 90s whether I would consider coming on board to manage assets internally. I had been an external advisor for them. And so it was a really neat way to move inside one of these official institutions and
Sort of moved to Washington from London, became the CIO for their venture capital business, the International Finance Corporation, and spent 10 years as a world banker building an internal asset management team. As I said, I had been an external advisor and part of the MO was to bring those assets back in house.
was the CIO ultimately became the deputy treasurer and was responsible for about $15 billion in assets. At a time of EM crisis, we had just been through the Russian crisis, sort of burgeoning sort of challenges in the EM. And all of a sudden, our reserves portfolio became the most profitable part of the institution.
and underscored for me kind of some of the dynamism and risk management and correlation sort of aspects to kind of running a major balance sheet. I was privileged to be chosen by my colleagues to represent them on the World Bank's pension fund. So I became a fiduciary and trustee for a fairly large defined benefit plan in addition to my day job. And that just sort of continued to expand my asset management career.
skills and kind of broad asset allocation responsibilities. We were sort of a major DB plan. We had allocations to a range of alternatives. We were sort of early investors in private equity hedge funds. I had been a hedge fund manager at Solomon Brothers. So, you know, sort of very clear in kind of how the sort of risk management dynamics worked in that regard.
After a decade there, just prior to the financial crisis, was a time when the street was really looking for new hedge fund talent and was interested in finding ways to seed and grow new asset managers and new hedge funds. A small team that worked with me and I left the World Bank to start Potomac River Capital. That was 2007, so auspicious timing in that regard. But
Having been in Washington at that point for a decade, I thought the sort of political force on markets was a little underrepresented in the sort of New York, Greenwich, London hedge fund community. And the timing, as auspicious as it was, right into the real kind of wood chipper of the financial crisis
I like to point out DC went from being this financial backwater to being the financial capital of the world and kind of being here, literally the closest hedge fund to the Federal Reserve, to the White House, to the Capitol, I thought gave us a literal good perspective on the influence of these major sort of influencers.
as James Grant likes to say, the sort of arsonist and the firefighter as the sort of dual mandate. And that was a challenge that I undertook for a dozen years. We grew the business to near a billion dollars in assets. And the first time in most of our professional careers, the Congress decided to open the Federal Reserve Act, reopen the Federal Reserve Act,
And that became ultimately an important academic thesis for Professor Sarah Binder at GW and I as we kind of set about trying to understand the constraints and limits and challenges of the Federal Reserve and a cycle that I think we've come back to many times since then, which is a economic and financial crisis.
blame on the part of politicians, reforming these institutions, and then ultimately empowering them to essentially deflect blame from those elected officials. We'll come back to that, Dimitri, I'm sure, in our discussion. But it's important because after a dozen years of running Potomac River as a hands-on
registered advisor and hedge fund. VIX was at six in 2017. Professor Binder and I had been writing a series of papers and Princeton University approached us with the idea of converting some of this real sort of academic political science into a book. We took the challenge. I wound down the firm. 12 years is a long, long time in sort of hedge fund
dog years. And I sort of refashioned myself to a proto-academic. We wrote the book, The Myth of Independence. It came out in 2017. Really seemed like an anodyne topic, interested mainly to political science academics and a handful of Fed watchers.
And that, of course, was the beginning of season one, Trump's presidency. A year later, he threatened to fire Jay Powell. And all of a sudden, political pressure, presidential pressure on the Federal Reserve really brought our book into sharp relief. And so it was an exciting time to be
a academic analyst and having worked very closely with probably the best congressional political scientist in the US, Sarah and I just really set about kind of thinking about these things. The history of the Fed, as I'm sure we'll talk about, had mostly been left to economists
And I think bringing the political science perspective and history into the equation has for me really just continued to emphasize how I think politics influence and are influenced by these kinds of financial markets and financial decisions.
I did that really through COVID when a friend of mine on the city council in the District of Columbia approached me, the head of the DC Retirement Board, the municipal pension plan that looks after the retirement pensions of 25,000 teachers, cops, and firefighters here in the nation's capital, asked me to become the CIO for this municipal pension plan.
That, again, built on these asset allocation experiences I had sitting on the board of trustees of the World Bank's pension fund. I think it really resonated with my sort of approach to thinking more long-term in terms of investment decisions.
I often describe the hedge fund world as having to throw strikes on every pitch. That gets exhausting after a dozen years of Potomac River and many years prior to that versus building a championship team and doing it on behalf of the District of Columbia and its three unions. More importantly, I think, was the sort of complexity and interdependence
of an executive branch, the mayor's office here, the legislative branch, our city council, and of course the unions, all of whom were represented on the board of trustees, as well as the CFO for the district who has a dotted line reporting to Congress, making the district one of the most unique
governance structures of any municipality, state or city in the US. And that interdependence and the importance, obviously, to employers and employees in any city with a strong emphasis on kind of a broad asset allocation spectrum.
I did that and had promised to do it for a year. I did it for exactly 365 days. And it's an important timing because I think it was really at the kind of early stages of COVID when reliance on the Federal Reserve, which had really built on its lender of last resort, provisions of liquidity, sort of market dynamic provisions,
you know, just flooded the runway with runway foam, doing extraordinary things that, you know, we might never have considered. Buying high yield bonds, buying municipal debt, obviously sort of ramping up almost an infinite approach to QE and brought the markets back. So I happened to kind of arrive at the DCRB at a time when markets were under severe stress, had a small team who had been there many years who, you know, were, you know,
really important colleagues in kind of building up and strengthening the pension fund. It's important to point out it's one of three municipal pension funds in the United States that's overfunded. So we didn't have what I know to be and continue to think about, which is an underfunded pension crisis. I think it's kind of one of the most underreported challenges that we're going to face in the future are these sort of unfunded promises we've made to public employee and unions in the U.S.,
And at the time, a sort of friend of mine and colleagues were in the process of a fairly large LBO, a liquidity event on behalf of a very wealthy family. And I had left the DCRB to become the CIO and stand up a significant family office in the US, one of the largest new family offices in the last 25 years. Based in Chicago, was commuting to Chicago to help run this office.
significant inflow of capital at a time when lots of people were looking for capital because the markets had just started to roll over in 2021. And standing up an office from scratch,
really just continues to supplement my sort of long career in asset management of building and managing asset management enterprises on behalf of, in this case, a high net worth family. But building the team, building high performance teams, putting an asset allocation and investment process in place, front, middle, and back office. And in this case, there wasn't a huge reliance on raising money. We had a significant pool of capital from the family sale. And I did that for three years, really with
strong learning in the taxable investment perspective. Most of the money I'd managed up until that point was offshore or sort of taxes were not a consideration. And those three years really impressed upon me at a time, I think now, where sort of understanding your after-tax returns and strategies that one can use to kind of mitigate potential tax consequences has just
sort of continued to add to my versatility as an investment advisor. The family was also sensitive to fees, as all investors should be. And one of the things we were doing sort of really resonated with my early days at Potomac, which was investing in asset managers themselves, looking at economics to share with GPs. We did a number of fund ones. Investing in newer managers became really a way that we could share in the economics
if anything, get paid even to have the family's capital managed. And so that was really just building again on this experience, in this case, on behalf of others. And I continue to do that. With the scale that we were managing, it was sometimes challenging to do smaller deals. And I thought there was a real need to have someone with my asset management background and experience sort of work with these smaller managers. I wound up leaving the family office really to concentrate on this business. So
So Potomac River exists today not as a sort of manager of third-party assets, but really as product development and advisor to an asset management community. More importantly, I think work I'm doing today in the product development category has sort of wound up as a ETF developer. I think the last beachhead for my background, but very important for
for the multi-trillion dollar asset management business has been thinking about retail products and giving retail investors access to low-cost ways to express a variety of views. And with a colleague of mine and sort of co-conspirator in the inflation space all the way back to those early days, we've developed a retail way for investors to capture the upside potential of inflation, owning CPI-linked assets.
separating them from typical risks that come with inflation-linked assets, whether it's real yields, property prices, or commodity risk. And for me, it's been a real education working with colleagues of mine who I've known for a long time, who know the ETF space quite well, but being able to inject these decades of experience into a really interesting and important wrapper for retail and even, I think, institutional investors have begun to look at this space. And here we are.
So you've covered a lot there in your biography, Mark. I'm especially excited to have you on because of your background and knowledge in both the public sector and public institutional finance, like in the World Bank and your time at Columbia's Retirement Board, as well as your role as a practitioner. So there are a lot of areas where we're going to be able to do that. And again, you mentioned a lot of things in your biography, inflation, the prospects of inflation and how to protect yourself against inflation is one, I think, practical thread that we're going to pull on. But before we get into any of that stuff,
Let's just take a step back here. We're recording this on or about Trump's first 100th day in office. What are your thoughts about his performance in these first 100 days? How would you articulate his economic policy objectives as you understand them? And what do you think about the way in which he's going about and his administration is going about trying to achieve them? I tend to look, as we've talked about in the
kind of breadth of my career in the kind of market interdependence with policy and political decisions. And it really has to be sort of noted that in the first hundred days of office, we've seen an enormous spike in market volatility. I think VIX got to, let's say 50, sort of very high level historically for equity market volatility. And that was, you know, really earlier this month, I think of around kind of second week of April.
So not so much what I think for the moment, but the sort of market impression was one of real chaotic decision making. I think there was some dismissal in this season two that Trump might not be so sensitive to market dynamics.
Professor Binder, Sarah and I wrote a paper on season one where we were able to essentially carbon date the timing of his tweets about the Federal Reserve with the level and sort of movement in the S&P. And we found a strong association between market dynamics and his
presidential pressure on the Fed. His pressure led the changes in the S&P or changes in the S&P prompted his tweets? Both. So there was both a causal and a reaction function that we spotted. People wanted to dismiss that this year. In fact, in some of the earliest days, they talked about some pain. There's been a changing rhetoric about the sort of impact of that, particularly tariff chaos.
But to be sure, sort of some chaos in the federal workforce, all issues that he had campaigned on, certainly. But the one that really resonated most with me was a very simple six-word lawn sign that I remember seeing on my way to vote last November, which just said, Kamala high prices, Trump low prices.
And I think it's fair to say that there wasn't a more important theme and reality for voters than the high level of inflation coming out of the Biden administration. Even after the really eye-popping 2022 inflation experience, obviously price levels were still high, and that was very much a –
you know, an important factor in Trump's reelection, his real pledge to lower the rate of inflation, but it even seemed to lower prices. He talked about lower egg prices, lower gasoline prices. And so the-
The sort of rollout, somewhat chaotic rollout of the tariffs, the market dynamics and real rejection of the benefits that Trump saw, to me just also underscored, and we see this in survey after survey of the American consumer, a really sharp rise in inflation anxiety. And this is a topic, Dimitri, that I've come back to again and again in my career. We'll come back to, I hope, in this conversation today. But
even after the 2022 experience, a significant tightening of monetary policy by Jay Powell. Inflation coming down, we are by some metrics back to a near target, not at target and certainly not below target, but near target rate of inflation. We are left still with very high prices. So when you go out to dinner, when you pay rent, when you sort of engage medical care, we're paying an enormous price
And I think people have, and the president has played on this, sort of blurring the lines between inflation, which is the rate of change, and just the high level of prices. You know, I think that point I made about the president's sensitivity to market dynamics, I think did rear its ugly head this month, a week or so after so-called Liberation Day. You know, I clearly hear from the president's rhetoric, a sticking to his guns rhetoric,
But the second confusion for me was really a policy that seemed to do all sorts of things. He obviously sort of talks about the need for revenue. We'll get in, I'm sure, to the tax bill making its way, the budget making its way through Congress extension and making permanent the TCGAA kind of significant sort of tax cuts and spending to the tune of $5 plus trillion. They claim to need revenue from the tariffs.
That to me seems at odds with the second feature of this, which is to try to bring a kind of more manufacturing component of the economy back to the US. It doesn't seem to me that you can do both, make wonderful deals with our trading partners, but also continue to enjoy the high revenues from tariffs. Also, that VIX at six,
And in particular, a significant spike in interest rates. We saw 10-year yields on the 10-year note back up some 60, 65 basis points over the course of a matter of days. And it was really the back of that bond market sell-off, that spike in interest rates, that I think led to a reversal of his
his initial really weird set of tariffs that map. We've seen significant deterioration in the employment picture, for example, in Michigan. And yet there was a sort of large cohort of UAW workers. I remember UAW Brian sort of standing up on the podium cheering. I can make an argument that
rebalancing the economy as the way the president talks about, supporting this cohort of manufacturing and the sort of labor there should result in maybe a sort of political gain. But as we've talked about, I think the heightened inflation anxiety was really complicated and compounded by the tariff decision. I think it's put a lot of pressure on markets and
And when you listen to the Treasury Secretary talk about his goals of achieving 3% growth, of getting our deficit back under control, of producing more oil, he seems maybe one out of three, they're sort of getting the cheaper oil price. And yet, even with lower gasoline prices, we still have a pretty significant spike in inflation anxiety, which I just think speaks to a more macro concern. Yeah.
So I wouldn't necessarily expect your average voter, and in this case, your average Trump voter, to have a working theory for why tariffs would be disinflationary. Because I did hear this theory thrown out or this expectation expressed by Trump supporters ahead of his election that Trump was going to get prices lower, that the tariffs were going to raise revenue, they were going to be disinflationary, or that they weren't going to be inflationary.
But it seems that the administration themselves had a theory in this regard. And the only sort of thing I can think of is that they thought that the rest of the world was going to offset the tariffs by engaging in currency devaluations. So they would continue to pay, they would basically pay the tariff. That would be a source of income for the treasury.
but that there wouldn't be any kind of loss or gain and competitiveness in either direction. And there was mainly a sort of revenue tool. Was that sort of how they were thinking about it from what you understand that it was not going to be inflationary because it was going to be offset through foreign exchange markets and therefore the actual objective of the tariff was not necessarily to re-industrialize, but actually just to raise revenue?
So, it doesn't matter what I was thinking about it or what you were thinking about it. We can go back and listen to Scott Besson's confirmation hearing where he was asked directly on this topic. And he really downplayed the inflationary impacts that you're touching on.
by saying specifically that he thought there would be an appreciation of the dollar. I think he talked about a 4% to 6% appreciation as a sort of way in which- He should have known better than to give such a specific number. You know, I don't want to kind of get inside the Treasury Secretary's kind of thought process, but it was a part of the confirmation hearing that really resonated with me for exactly the kind of point you're making, which is,
very easy benchmark to gauge. Keep in mind, a few weeks into the job, he also talked about getting the yield on the 10-year note rate down, obviously something he has to do with an enormous debt refunding. There was a lot of talk by chair of the Council of Economic Advisors, Stephen Myron, and Treasury Secretary Besant about the funding strategy of his predecessor, Janet Yellen. Right. There was a lot of focus on this issue in some
100-year bonds to write the duration ship in Treasury because Yellen had been issuing so many bills. Absolutely. We were actually more glued to the quarterly refunding announcement than we were to the nonfarm payrolls report for a period of time. And well, we should be at this level of debt only to say that they have a lot of bonds to sell. The fiscal challenges were sort of apparent in the election and sort of another bone of contention that Trump raised with
with his opponent and obviously President Biden at the time. But, you know, someone who's managed a global macro hedge fund as Besant has, you know, just sort of spoke in variables that I think those of us in the macro space kind of find very important, you know, a appreciation of the dollar with a percentage point claim, a sort of level of yields on the 10-year note. And, you know, those of us who've traded these instruments, sort of easy to look at.
Two things I will sort of comment on because, as you said, it is the 100th day in office in season two. And a chart that has been kind of going around today is the significant depreciation of the dollar. So forget the 4% to 6%.
accuracy that Besant looked for, we've actually had a 10% depreciation of the dollar. And I think there's all sorts of reasons for that, among the most important of which is a divestment of US assets, equity and bonds by foreigners. So they're bringing money back home. And I think we're seeing that both at the official institutional level, but also at the private sector level.
Second thing is there was an announcement this morning that came under a lot of criticism by the president, which was Amazon was going to – is claiming that they're going to put a line on your receipt when you check out online, which shows the impact of the tariff.
And I sort of drew a red circle around this as this will both make the inflationary impact of the tariffs quite obvious, but also seemed like because of the kind of president's frustration with this, he didn't want people to sort of be shown that his favorite word in the dictionary, I think he kind of loves the word tariffs, sort of hearkening back obviously to William McKinley, maybe the last sort of president that had such a fondness for
Listeners can't see your reaction, but I can see you shaking your head, Dimitri, and I've been shaking my head as well. Now,
Because they are taxes. And once we get through the one-off appreciation because of the price hikes, we may see a depressing effect in the second or third year. I hope a recession is not what they've talked about in terms of using the tariffs to get inflation down. But expectations for a recession have risen. Even though those expectations have risen, we're seeing certainly, as I said, a backup in bond yields. So
some really interesting dynamics in markets reacting to, as you said, these policies in the first three months. So let's focus on getting some clarity around the first question I asked you, which was how you would articulate or what you think the policy objectives of this administration are and how they compare to how they're going about trying to achieve them. Now,
If the goal is, quote, "reindustrialization," and actually let's be a bit more specific here because I don't quite know what that means. I feel like we have sort of heard that. What I hope that means, although again, sort of broad-based tariffs don't reflect that, what I would hope that means is strategic reshoring and friendshoring of industries that are critical.
to national security and to the wellbeing of the country. Things that we learned about, for example, during COVID that would leave us in a very difficult position should there be some kind of disruption in trade. Did you want to say something? I did because I was, as you were rephrasing the question and you answered it importantly, I think there is a national security component that in many ways, and
probably should transcend some of the macroeconomic challenges that we've highlighted in the kind of last half hour or so. And I don't think either of us, and we're not privy to what is happening sort of deep in the sort of national security skiffs, but that was certainly an added element for, particularly with respect to China, where we wanted to regain control of some of these important supply chains. Yeah.
So, in my opinion, there seem to be sort of four possible categories, all of which are somehow relevant, but it's not clear that the administration has at the very least publicly coalesced around one of them or articulated a hierarchy of importance. So, one is national security. We just sort of established that.
the national security imperative of looking to do things to help rebuild American economic and national security resiliency. For example, we can't have the most dominant military in the world and have to depend on four countries for key inputs into that military, into our systems.
We can't rely on our chief adversary to supply us for the pharmaceuticals we need in the event that we find ourselves in a kinetic conflict. So national security objectives are one obvious category. Another obvious category is socioeconomic. Of course, the Trump administration has gone to great lengths to make this point. It's a good point. It's a valid point that in the 30 years or so
Since the end of the Cold War, in the 20 years or so since China was admitted into the WTO, we've seen a significant rise in wealth and income inequality among especially certain segments of the population that supports Trump. Good enough, fair enough. Interest group politics is another one. This is something that's less laudable, but one that certainly plays a role here. And we see it in how Trump has targeted the way he talks about tariffs. For example, when he talks about steel tariffs and things like this.
And then there's a kind of showtime element to this, which I think also doesn't get much player attention, but actually can, I think, help to explain some of the ways in which Trump talks about tariffs. And that isn't just a sort of like get the vibes right, but I think there's also a kind of action packed. This season is going to be action packed. We're going to have tariffs everywhere, here, there, everywhere. So I think these are kind of sort of all in Trump's head.
what he thinks about this stuff. Now, when we go back and we look at the effect of the tariffs, the effect that the tariffs have had, for example, on the US dollar, if you're looking at reshoring, let's say in French shoring, in your theoretical model, especially if you have a theoretical model that's informed from the 1950s and '60s and '70s, you're thinking,
If we want to increase domestic manufacturing, then let's make our domestic workforce more competitive. How do we do that easily? Well, we just devalue our currency. That's how it works traditionally. I think the pushback I would give there for that sort of very simplistic answer is one, we don't have the level of preexisting industry in the United States that we had in the 1970s, where if you devalue the currency, you could just ramp the factories, start pushing out more products.
So, one is that you need to actually lay the groundwork for that and that takes time and effort. And the other factor is that labor isn't as much of an input today in industrialization as it was in that period of time. We are hugely more productive. Exactly. So, this is where...
I struggle. And unfortunately, in the climate we're in today, if you push back, a lot of times, unfortunately, your fellow Americans will come back with, you have TDS, you have Trump derangement syndrome, or something else, you're being biased. Instead of, hey, let's actually have a conversation here. Because I think many of us have the same objectives here and really want actually the country to excel. And Trump has done a very good job of highlighting a lot of the dysfunctions of the previous administration and the status quo that was unworkable.
But in my mind, and this is my best attempt at a question where I'm going to throw it on your lap here, Mark, it seems to me that tariffs may be something that could
help, if used as part of a larger industrial policy where the heavy lifting is actually on the policy side, on the incentive side, on the regulatory side, and where we are also clear about what industries and what sectors we're looking to support and to do so in a manner that gets us to a final destination that can be articulated in the form of a mission-driven policy to the public.
Do you agree with that, that general sentiment and sort of what do you think is missing here? I would say not nearly to the degree that kind of Trump proffers, but we had and have an existing set of tariffs that govern all sorts of global trade. So, you know, a huge book, if you kind of actually sort of take a look and, you know, all sorts of statutes and codes and schedules, um,
As he talks about a blanket reciprocal tariff rate, he's putting that on top of this existing codex in place. Right. We certainly don't have a trade embargo on the single largest trade exporter in the world. That's something we don't have, or we didn't have.
Which is what, 165% tariffs or whatever it is, is effectively- Is that what it is? I've lost track. I have no idea. I have also lost track, but I think that was something, it was large enough that it was basically an embargo. As you said, you get a 22 or a 28, you're bust in blackjack.
I just want to go back to your four pillars because I think you have captured sort of all of the strategic sort of reasons why he is doing this. But I think the emphasis on national security – let me give a sort of quantitative description. I don't know the factor loadings.
on those kind of four variables. I'd like to think that national security has a very high factor loading just because the risks of losing that position in the world would be sort of devastating to America and the American— Trevor Burrus: I think interest group politics is number one for the Trump administration.
That's my guess. Yes, although he clearly gets a lot of political benefits out of the Showtime sort of aspect. And as you were rightly listing them, I thought the whole aspect of negotiation sort of feeds into the Showtime.
We don't really know how much negotiation is going on. The Treasury Secretary, the President, the Commerce Secretary, Lutnick, are all talking about the deals, the sub-deals. There are no details to the deals, but there's going to be a deal. So I think the President clearly enjoys negotiations.
Let me phrase it this way. I think some people would maybe imagine that the rest of the world is not taking the president seriously. I think one of the features of season one was the world kind of looked at the Trump administration and didn't know what to make of it. It took a long time to get started. He obviously hit the ground running in season two. We won't comment right now on a third term, but he's a lame duck.
I think he kind of really sees a sort of more eternal aspect to his administration, perhaps in the wake of the assassination attempt. All I mean to say is I think he's taking the job more seriously, and I think the audacity
of his policy announcements. We're talking about tariffs. The rest of the world has to take him seriously. And so that Showtime aspect, I think, just raises, you know, his importance in the world. As he told Jeffrey Goldberg in the Atlantic interview that was released just yesterday, you know, he believes he's governing and the most important person in the world. And so, you know, I think the sort of leaders of all of our trading partners need to take him seriously. Again, he put
all sorts of punitive tariffs on even our closest allies and our largest partners. So I want to give listeners some idea of where we're going here, because I do want to end up somewhere that is sort of practical and useful for investors who are trying to think about the impacts of policy on their portfolio and how to navigate those policy implications.
Before we do that, just something else I've been hearing now. Again, we live in a world of narratives. I feel like so much of what I understand now is simply I understand it or take it as a narrative, and then I sort of try my best to work backwards to assess the substantive nature of that narrative and if it has any sort of staying power. One of the narratives is that we're about a month away or so
or maybe less, from beginning to see the inflationary impact of the tariffs through the supply chain. That we're going to start showing up at Costco or Walmart and things are either going to be off the shelves entirely or they're going to be price increases
Obviously, one analog that people might reach for is the pandemic. What do you think of this narrative? In other words, is this just a feeling just based on our experience of the pandemic and what we can theoretically understand about the effect of tariffs on supply chains? Is it based on some of the concurrent and leading data? What do we know about what's going on and how that's going to factor through into prices and the availability of goods?
So, I think we saw the supply chain effects on prices, devastating impact from the pandemic. I think we haven't seen any correction in food prices. If you dig into the details of CPI, you'll see that food at home continues to move forward. I talked about, and the tariffs are clearly adding to inflation anxiety, even with lower gasoline prices.
Lower gasoline prices happen for all sorts of reasons, supply and demand. It's probably indicative of sort of downgrading to our growth prospects. I am not imagining a return to 9% inflation, headline inflation, such as we saw in 2022. But I think the reality, as I mentioned, the Amazon story, your point that we are probably weeks away from seeing on goods prices, are just staring us in the face of
If you kind of look at markets expectations for forward inflation, Dimitri, I think it's important to point out kind of fair and balanced that we are seeing a real compression in forward inflation. So near-term inflation expectations are rising markedly for all the reasons we've been talking about this morning. But one year, one year, five year, five year forward inflation rates are actually falling.
And I think that's indicative, as I said, of a market expectation that growth will be severely degraded, that we may have a recession by the end of this year. And that's important. I'm sure we'll touch on Fed policy decisions. The Fed is clearly in the crosshairs. We're almost an hour into the conversation, and I think this is an important aspect for investors to think about. We started with presidential pressure. Will the Fed deliver some accommodation, even in the face of
This is an important balance, Dimitri, even in the face of inflation and inflation expectations that in the near term are rising. So are we talking about – are you describing stagflationary conditions? I think a recession, should it develop, would actually take a bite out of inflation. So I think the stagflation would –
sort of conjure a contemporaneous period of negative growth and high rates of inflation. I think by the time we see the rates of negative growth, we may actually be in a period where, again, headline inflation might be coming down. But I think it's so chaotic and it's so difficult to understand what the sort of tariff program will look like for all the reasons we've touched on that I don't see any let up in inflation anxiety.
Okay. So let's focus on the Fed then. So the Fed has a dual mandate. Actually, it has a dual mandate, but financial stability has increasingly become another one of the- Arsonist and firefighter. Arsonist and firefighter. It should have been there from the very beginning. It's a lender of last resort. I understand. Yeah. But hasn't done a good job of preemptively raising interest rates when asset prices were rising
substantially, or credit availability was growing such that it was creating underlying instability in financial markets. It didn't really seem to see that as its role.
during the great moderation? It would argue, it, not us, but it would argue that until that impact is sort of in the realm of consumer prices, targeting asset prices. Yeah, I mean, exactly. And by the way, I'm not sure we want kind of Federal Reserve technocrats deciding kind of when the asset price level is too high. Easy for us in retrospect or easy for us as market
sort of investors and practitioners to say that? Well, isn't that also, I mean, I agree with you, but doesn't that also apply to consumer prices? In other words, I think, not to necessarily go down this road, but setting interest rates was never originally a mandate of the Fed.
Correct. The Fed was there to be a lender of last resort and to deal with periods of seasonal liquidity and illiquidity. It wasn't there to actually determine what the price of credit should be in the interbank lending market. That is something that developed over time. So I think they're increasing and
really, the sort of apex role they take in setting the price of money is both a simple but sort of a byproduct, as you say, of their 100 years of history. And I believe, you know, a deflection of blame on the part of Congress, they established this entity, obviously, at a time of great financial panic in the early 19th century. And they have over time, increasingly, increasingly given the Fed more and more responsibility, even in the wake of
of policy failures. Financial crisis, a key example of this where they failed utterly on the supervision and regulation of financial institutions. What happened as a result of Dodd-Frank? They wound up with more and more concentrated responsibility for bank supervision and regulation.
Well, this is what you and your co-author, Sarah, do so well in the myth of Fed independence, is you show just how interdependent the Fed is with Congress and the executive. And then in fact, it's very helpful to have someone to blame.
for politicians. It's very helpful to bring Ben Bernanke up to Congress and reprimand him for all the mistakes he's made. And so they don't have to actually take responsibility for anything that happens to the economy, especially when fiscal policy has played a big role. And we saw a marginal benefit to their electoral prospects. Yeah. And exactly. They also get to go back home and be on TV and show that they're whipping the Fed into shape. Because let us not forget, Dimitri, their objective is re-election.
And so establishing an entity who can absorb that blame, an agency that knows that's what their mandate is. 50th anniversary, McChesney Martin gave a really impassioned articulate speech to Congress. He said, blame us. That's what we're here for. Yeah. And so they have- Incentives matter. One more question I have before we're going to move into the second hour, where I really want to focus more in on implications for investors and for their portfolios.
But also one comment before the question I'm going to ask, and I just want to reiterate this point that I've never been convinced, and I've posed this question to multiple Fed governors and a former vice chair, which is I've never been convinced that the Fed should be in the business of setting interest rates. It's one thing to have a benchmark for liquidity to make sure that the financial system is functioning properly, but that's not the same thing as targeting the price of money, targeting interest rates.
And there's no reason to believe that the Fed is better at doing that than a central committee would be at pricing the bushels of wheat or computer chips. So I think that's something that we just kind of do. And no one actually, in fact, in the past when I've tried to understand why and when this practice...
came into practice, I just feel like it just became something that the Fed just started to do more and more. At first, it was something that it did in the shadows, and then eventually it became sort of a policy rate that they would publicly enunciate, and then they would have to try to target around that. And then eventually we got forward guidance, which is, again, part of what you guys talk about in your book, about that part of the Fed's compromised independence has led to more public communication, and that isn't necessarily conducive with good monetary policy. My last question before we move to the second hour...
has to do with how the Fed is going to manage these trade-offs. So we're not necessarily talking about stagflation, but we are talking about a period of inflation potentially at the same time as the Fed, if it were dealing with inflation, maybe would want to actually be easing monetary conditions to get ahead of a contraction in economic growth. How do you see Jay Powell's Fed managing this?
Let's not also forget that he would be managing this at a time where he's coming under intermittent fire from the White House in presidential tweets, attacking him and saying he needs to get his job fired. There's a lot of stress on this Fed potentially in the environment that we're moving through. Three things. First of all, I think listeners should appreciate that part of that push for more transparency came from the boss.
that Congress in their sort of ever-expanding need to deflect blame and criticize the Fed pushed for more transparency, famous – all sorts of famous battles, one between Texas Representative Gonzales and Greenspan.
led to the release of minutes and the transcripts. He found out that there were verbatim sort of transcripts that the Fed kept of its meetings. He forced the Fed to publish those. That really corralled the way the Fed operated. I believe bringing the dark art of making monetary policy out from the shadows is a good thing, kind of forces more accountability, that oversight of the Fed by Congress. In other words, Dimitri, I just want to underscore that didn't happen
Magically, that happened because the boss pushed for it. But that's also because they were gaining more power, right? They were giving more power to the Fed and so they were demanding more transparency. And the argument is, should the Fed have been granted this much power, the amount of power that it has today?
And the amount of mission creep. So at what point has the mission creep gone too far? Sort of clearly some of the impact on DEI, again, a byproduct of congressional mandates if you go through Dodd-Frank. The sort of aspect of climate change.
Is that a financial risk? If you're in the home lending business, you're a large sort of residential lender in the US, I think it absolutely speaks to your need to think about potential climate damage in the city of Los Angeles or the southern Florida. So I don't sort of challenge some of these aspects. I just want to point out that when Professor Binder and I talk about interdependence, this is a great example.
I'm not so sure that a committee or the market should be setting the price of money. I think in many ways, the re-anchoring of inflation expectations from those kind of heady days of the 70s, an anchor that may have been slightly unmoored by the 2022 policy mistake, absolute kind of the worst mistake that a Fed can make, maybe second to a collapse of financial markets and financial institutions.
But the re-anchoring of those expectations, I think, was hard won by central bankers like Volcker and Greenspan. And so I'm not sure the counterfactual that you just sort of proffer as a potential alternative. Sure.
Clearly, the Fed went from not telling us what they were doing in providing the quantity of money. You would get, when I started working, as I said, in the 80s, you'd get an announcement of open market operations. You wouldn't know what the Fed was trying to do. You'd have to infer that from the purchase or sales of government bonds.
We have come a long way, Dimitri, from that. They're very clear in announcing. They've moved from a quantity to a sort of price of money in the interest group. They've moved towards more central planning. Well, they've moved central planning in the sense that they've certainly expanded the sort of credit allocation in the balance sheet. They're making credit decisions.
I'll point out again, in many ways, they're making those credit decisions because Congress fails to. My favorite example from the pandemic was they had to set up a facility to lend money to states and municipalities by purchasing municipal bonds.
If Congress is nothing else but a representative of states and municipalities, literally, and they couldn't come together to allocate capital amongst the 50 states and the many cities, they needed the Fed to do it. Like who's failed at their job in that case? Well, they don't have the courage to do it. They want to offload it to the Fed because it's easy to blame them. And again, that's where apportioning the criticism for me –
The Fed will do what its boss tells it to do, as would you if your employer told you to do something. But clearly, the extension of those mandates and this is- Yeah, it's not so much. I'm not trying to allocate blame in that sense. I'm simply trying to point out or just, and this would require a whole nother show for us to sort of litigate this.
Mark, but I firmly believe that the Fed has taken on too many of the pricing decisions that should be left to the market and interest rates is one of those areas. Let's just make sure we just hit on this last question before we move to the second hour, which is how you expect the Fed, what are the challenges to managing the trade-off of its mandates in the environment that we're describing today? I think the first challenge is the existential challenge that there is a significant threat
to independence of the senior decision maker, to the chair. I do point out, and the book touches on this, but you and your listeners will appreciate, presidential pressure is nothing new. For the reasons we have touched on this morning, politicians want an entity to blame, and Fed chairs are a very sort of easy, large target. LBJ challenged McChesney Martin directly, even physically, calling him down to his Texas ranch,
Arthur Burns, the Fed chair under Nixon, really succumbed
to presidential pressure and backroom dealings. Haldeman apparently was threatening all sorts of revelations on behalf of that Burns had made. I will say in both of those cases, the results were really awful. The Burns submission sort of led to really a terrible, terrible inflationary environment as we know, sort of well documented. A challenge for the country economically, challenges for asset holders and investors.
There's not much that I see good to come from the kind of presidential pressure that Trump sort of did in season one and is doing more aggressively in season two. Whether he has the legal authority to fire Jay Powell is another question. So that's an existential threat. Yeah, although it does seem just to – please continue. But the observation that I think it's – I would draw is that the real sort of –
protection racket for Jay Powell is the market and not actually the legal system. I totally agree. And that 65 basis point backup in tenure notes that we saw just a few weeks ago, I think put the fear of God into that kind of decision and resulted in a temporary walk back.
I believe we will see as the markets wax and wane, we will see another round of presidential pressure and threats. And rhetorically, he's continued to demand that Jay do his bidding. What is that bidding? Lower interest rates. Provide money more cheaply. Sort of cushion the economy from the kind of recessionary fears that have sort of come on par with the tariff uncertainty and the chaos.
That's the real maybe functional challenge that the Fed has, which is do they lean into what could be an uptick in inflation as a result of the tariff decisions? Do they look through them and sort of look at the possible dent or imprint on the economy and provide more monetary relief? I'm not entirely convinced that – well, I guess it depends on how much they were to cut interest rates.
I'm not entirely convinced that cutting interest rates is really going to help much. Can I turn the microphone around? Why do you say that? Well, for one, the use of traditional monetary policy tools, like conducting open market operations to control short term interest rates for the purposes of leaning against the wind, were originally operationalized and predicated on an economy that was more investment driven, and where much of that investment was being facilitated by the banking system.
We are now in a more service-oriented, consumer-driven economy, and it's not clear to me how effective dropping short-term interest rates would be in spurring consumer lending.
fiscal stimulus would be more effective in driving consumption and goosing the economy? I suppose that's my answer. By the way, we appear on the precipice of more fiscal stimulus, I think, providing the tax relief that we see winding its way through the halls of Congress. What would be the channel through which we could expect to see a drop in interest rates? Maybe in the mortgage market, we could see it if it was substantial, but the long end would need to reflect that. I just don't know how much... Again, I would now reverse the question back to you and ask,
Where and how much of a drop in the Fed funds rate specifically would we need to see a positive impact on economic growth and employment? And what would be the primary channels through which that would occur? I think you're touching on an important dynamic in the yield curve and in the bond market, which has been the steepening of the curve. It could actually cause the curve to steepen even more. It could actually...
tighten conditions even more if they actually cut the Fed funds rate. So we've seen a pretty significant steepening so far, and yet we're nowhere near the steepest levels, say twos to bonds. But I believe they would imagine that sort of lowering the Fed funds rate will provide more accommodation. I think they're particularly worried about the interest rate sensitive sector, housing, obviously, corporate borrowing, a lot of uncertainty in
sort of push back on if corporations are sort of restricting CapEx and sort of investment because they don't yet have a clear idea of what the tax framework will be, of what the tariff framework will be. Providing a little more accommodation on the interest rate side just may not be enough to stave off this sort of heightened savings, which in a
kind of very definitional way is what a recession is. Are we just going to see a sort of massive rise in people's savings rates and sort of corporation savings rates, which kind of pushes us from the- Which presumably we need if we're going to undergo an investment boom.
See, there's so many sort of competing objectives here. Always. Isn't that what makes it interesting, Demetri? Yeah. So I think that's where also a conversation about credit rationing comes in here. And so we can sort of hold that for the second hour, Mark. I want to talk a little bit more about just whether or not you think J-PAL will survive.
And if not, what the implications of that are. Also, one of the things that I want to talk about, we touched on it a little bit, was a national security framework for having a sort of mission driven economy, what that means in practice in terms of policy. And also I think, and I've been saying this for years, I think that we need a new social contract in America. That also touches on those four categories we identified. That's more of the socioeconomic. And again, I don't really hear people discussing these things concretely, and maybe we'll have a chance to do that in the second hour.
as well as have, of course, a broader conversation about the implications for investors and how investors should think about these policy changes. For those of you who want to join us for this part of the conversation, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the second hour of this episode on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Mark,
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Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at Kofinas, and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time.