Scotty Doesn't Know
In this episode of Geopolitical Cousins, the hosts discuss rising U.S. Treasury bond yields, Scott Bessent's interventions to stabilize markets, the geopolitical drivers of the bond sell-off (particularly the Iran conflict), and broader economic concerns about AI CapEx sustainability and political populism threatening data center development.
Summary
The episode opens with a discussion of the U.S. Treasury's decision to double bond buyback operations from $2 billion to $4 billion as the 10-year and 30-year yields hit 20-year highs. Treasury Secretary Scott Bessent's statement that he doesn't understand why oil prices are up becomes a running theme, prompting the hosts to argue that the real driver of bond yields isn't mechanical factors but rather "the vibes"—specifically, concerns about geopolitical competence and the Iran conflict.
Marco argues that bond yields are rising for three main reasons: (1) strong U.S. economic growth, (2) hyperscalers crowding out the government by issuing massive amounts of debt to fund data centers, and (3) bad vibes from geopolitical uncertainty, particularly the ongoing Iran war. He contends that Bessent's technical interventions (bond buybacks, yen support) won't solve the problem because the core issue is geopolitical instability. Jacob counters that while the economy appears strong on the surface, stripping out AI and data center investment reveals weakness, with deflation rising and consumption dependent on these sectors.
The hosts trace three major bond market sell-offs over 24 months: the September 2024 reaction to Kamala Harris's candidacy, the Liberation Day tariff announcement (which the hosts argue spooked markets due to perceived incompetence rather than policy mechanics), and the current Iran conflict. They argue that markets aren't reacting to the actual economic impact of these events but to the perception of administrative chaos and unpredictability.
Regarding AI and data center economics, Marco emphasizes that hyperscaler revenue is growing astronomically (cloud services up 43% off a massive base), suggesting the CapEx story has years left. Jacob remains skeptical about second-derivative decline and worries that open-source Chinese AI models will hollow out the frontier model companies, though Marco argues this will actually extend CapEx cycles by democratizing AI access. They agree that when AI models become cheaper, more companies will use them and infrastructure providers (Amazon, etc.) will continue profiting.
The discussion shifts to political populism around data centers. Both hosts note that 71% of Americans oppose data centers in their backyards, with politicians from both parties exploiting this sentiment. Jacob argues this is foolish and will be regretted in 2-3 years when AI's productivity benefits become undeniable. Marco suggests politicians are searching for populist positions because populism has won the last three election cycles.
They conclude by discussing fiscal policy's connection to elections, with Jacob predicting that corporate and capital gains taxes will rise significantly in 2029 when Democrats likely control Congress, while Marco notes that Trump has already pioneered tariffs as his form of taxation. Finally, they briefly discuss the Lakers sale and its possible geopolitical dimensions involving Middle Eastern money and Trump administration connections.
About this episode
<p>Scott Bessent says he doesn't understand why oil prices are spiking. The guy standing between America and the River Styx is confused :) The cousins crack open a few cold ones this week and break down why the 30-year just hit a 20-year high - not debt, not deficits, just vibes. Atrocious ones. The lads cover the war in Iran, tweets about North Korea, and a bond market that's done playing along. Plus... are hyperscalers minting money or building the next great overbuild? And what does the Lakers sale have to do with any of this? Everything, obviously. </p><p>--</p><p><strong><u>Timestamps:</u></strong></p><p>(00:00) - Beer And Banter</p><p>(01:02) - Treasury Buyback Shock</p><p>(04:15) - Why Yields Matter</p><p>(05:44) - Growth And Data Center Debt</p><p>(09:34) - War In Iran And Bad Vibes</p><p>(10:27) - Three Bond Selloffs Explained</p><p>(18:16) - Debt Deficits And AI Debate</p><p>(26:23) - China Models And AI Capex</p><p>(43:06) - Dollar Multipolarity Risks</p><p>(46:03) - Reserve Currency Reliability</p><p>(47:40) - South Korea Tweet Fallout</p><p>(48:48) - Pound vs Dollar Inertia</p><p>(51:57) - Trump 1 vs Trump 2</p><p>(54:04) - Iran War Limits Debate</p><p>(59:14) - Multipolar Reality Sets In</p><p>(01:01:56) - Backlash Against Data Centers</p><p>(01:05:10) - Why AI Fear Spreads</p><p>(01:11:26) - Populism and Tax Future</p><p>(01:19:39) - Lakers Sale Conspiracies</p><p>(01:22:34) - Private Equity in Sports</p><p>(01:25:52) - Closing Banter and Wrap</p><p>--</p><p><strong><u>Referenced in the Show:</u></strong></p><p></p><p>--</p><p><strong>Geopolitical Cousins</strong> is produced and edited by Audiographies LLC. More information at <a href="https://audiographies.com" rel="noopener noreferrer" target="_blank">audiographies.com</a></p><p>--</p><p><strong>Jacob Shapiro</strong> is a speaker, consultant, author, and researcher covering global politics and affairs, economics, markets, technology, history, and culture. He speaks to audiences of all sizes around the world, helps global multinationals make strategic decisions about political risks and opportunities, and works directly with investors to grow and protect their assets in today’s volatile global environment. His insights help audiences across industries like finance, agriculture, and energy make sense of the world.</p><p><strong>Jacob Shapiro Site:</strong> <a href="https://jacobshapiro.com" rel="noopener noreferrer" target="_blank">jacobshapiro.com</a></p><p><strong>Jacob Shapiro LinkedIn: </strong><a href="https://www.linkedin.com/in/jacob-l-s-a9337416" rel="noopener noreferrer" target="_blank">linkedin.com/in/jacob-l-s-a9337416</a></p><p><strong>Jacob Twitter:</strong> <a href="https://x.com/JacobShap" rel="noopener noreferrer" target="_blank">x.com/JacobShap</a></p><p><strong>Jacob Shapiro Substack: </strong><a href="https://jashap.substack.com/subscribe" rel="noopener noreferrer" target="_blank">jashap.substack.com/subscribe </a></p><p>--</p><p><strong>Marko Papic</strong> is a macro and geopolitical expert at BCA Research, a global investment research firm. He provides in-depth analysis that combines geopolitics and markets in a framework called GeoMacro. He is also the author of Geopolitical Alpha: An Investment Framework for Predicting the Future.</p><p><strong>Marko’s Book & Newsletter:</strong> <a href="https://www.geopoliticalalpha.com/marko-papic" rel="noopener noreferrer" target="_blank">www.geopoliticalalpha.com/marko-papic </a></p><p><strong>Marko’s Linkedin:</strong> <a href="https://www.linkedin.com/in/marko-papic-geopolitics/" rel="noopener noreferrer" target="_blank">https://www.linkedin.com/in/marko-papic-geopolitics/</a></p><p><strong>Marko’s Twitter:</strong> <a href="https://x.com/Geo_papic" rel="noopener noreferrer" target="_blank">https://x.com/Geo_papic</a></p><p><strong>Marko’s Macro & Geopolitical Research at BCA:</strong> <a href="https://www.bcaresearch.com/marketing/geomacro" rel="noopener noreferrer" target="_blank">https://www.bcaresearch.com/marketing/geomacro</a></p>
Key Insights
- Scott Bessent's mere appointment as Treasury Secretary in January 2025 caused bond yields to fall by approximately 50 basis points without requiring any specific policy action, suggesting markets respond to perceived competence rather than mechanics.
- The hosts argue that the three major bond market sell-offs over 24 months were driven by perceived administrative incompetence ('bad vibes') rather than by fundamental economic changes—the Kamala Harris polling shift, the 'Liberation Day' tariff announcement using ChatGPT, and the Iran conflict.
- Marco claims that U.S. Treasury bond yields rising to 4.7% is not a crisis because 10-year yields were higher in the 1990s when government debt was lower, suggesting context matters more than absolute yield levels.
- Hyperscalers are now issuing debt rather than using cash reserves to fund data center construction, which is causing them to crowd out government borrowing and increase competition for capital, thereby raising government borrowing costs.
- The speakers contend that bond market intervention by the Treasury won't resolve the underlying geopolitical uncertainty—only ending or de-escalating the Iran conflict would genuinely calm yields.
- Marco argues that Chinese open-source AI models won't decrease overall data center CapEx because even if these models are cheaper, more companies will adopt AI, and companies will still pay cloud providers for hosting and compute.
- Jacob worries that the second derivative of AI CapEx growth is slowing (from $300B to $750B to projected $1.5T), which could accelerate when growth rates decelerate, potentially causing market disruption.
- Both hosts note that 71% of Americans oppose data centers in their neighborhoods based on populist sentiment, but they predict this opposition will reverse in 2-3 years once AI productivity gains become evident.
- The speakers argue that the Democratic Party has shifted from 'woke 1.0' to 'woke 2.0'—essentially class warfare focused on higher taxes—recruiting populist candidates with 'alpha male energy' rather than progressive activists.
- Marco contends that the U.S. economy can sustain higher corporate and capital gains tax rates without hitting the negative side of the Laffer Curve, making tax increases likely when Democrats control Congress in 2029.
- The hosts discuss how the global transition to multipolarity means America can no longer rely on geopolitical dominance, yet countries will still hold U.S. Treasuries if the U.S. remains a reliable partner with strong laws and liquid markets.
- Marco argues that even if Trump succeeds in retrench ing America's role globally, subsequent presidents like Marco Rubio or Pete Buttigieg cannot easily reverse this because too many international actors have already committed to alternative infrastructure and trade relationships.
Topics
Transcript
Hello listeners, welcome to another episode of Geopolitical Cousins. Oh, and I didn't warn you, but I'm having a beer. Cousin, it's good to see you. Wait a minute, wait a minute, wait a minute. Hold on a second. I can do that. You can do that too. Let's do it. It's been a long week. I'm going to drink an oxymoronic beer. What's that? It's a Texan classic shiner, but light. I'm going to drink an oxymoronic beer. What's that? It's a Texan classic Shiner but light. Very nice. I think that's an oxymoronic. And hey, Shiner Bock. Free advertisement. Throw me at least a six pack for free. Please reach out for sponsorship opportunities, everyone. I'm still trying…
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