Trust the Process!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Jacob Shapiro and Marco Polo analyze rising US bond yields, attributing them to strong economic growth, geopolitical uncertainty from Middle East conflicts, and potential Federal Reserve rate hikes aimed at anchoring inflation expectations despite low actual inflation. They discuss how bond market dynamics are reshaping political outcomes in France and Brazil, where populist candidates are adopting fiscal responsibility narratives to calm markets.
Summary
The hosts open with a lighthearted discussion about Pete Hegseth's basketball skills and Scott Besant's invocation of "the process," comparing it to the Philadelphia 76ers' failed tank strategy. They transition into a deep analysis of why US bond yields have risen throughout 2024, despite declining actual inflation metrics. Shapiro argues yields are rising primarily because the economy is strong and equity markets are performing well, suggesting this is a healthy market dynamic rather than pernicious. He notes that the dollar is up 4% this year and equity markets are hitting all-time highs, which would not occur if yields were restrictively high. Both hosts acknowledge contributing factors including Trump's Iran war, fiscal deficits, and potential capital flows, but dispute whether these are primary drivers. Marco Polo presents a conspiracy theory that the Federal Reserve is deliberately raising rates in response to supply-side shocks and policy incoherence from the White House, particularly regarding Iran policy and oil prices. He argues the Fed cut rates 100 basis points in Q3-Q4 2024 under similar inflation conditions but is now hiking, suggesting political motivation or a deliberate attempt to discipline the administration. Shapiro counters that inflation expectations, while higher than mathematical measures suggest, are still relatively anchored and that the Fed's actions reflect concern about perception rather than mathematical reality. They discuss how gridlock in the US Congress will create market certainty despite potentially poor governance, contrasting this with France's current crisis. Both analyze Marine Le Pen's recent speech emphasizing fiscal discipline and budget rules, interpreting it as an attempt to calm bond markets and convince centrist voters of her credibility. They compare Le Pen's trajectory to Giorgio Meloni's successful pivot from populist rhetoric to responsible governance in Italy, suggesting European populists have better track records than US populists of moderating in office. Polo argues that only populists can fix France given the need for domestic political capital to implement difficult reforms, similar to how German social democrat Gerhard Schroeder implemented labor reforms. They note that French bond yields have risen more than other European nations despite similar fundamentals, attributable to political uncertainty and lack of a coherent policy vision. Shapiro compares France's problems to Illinois—a once-great region now dysfunctional but not indicative of broader US weakness. They discuss Brazilian politics and Flavio Bolsonaro's emergence as a frontrunner, noting that Brazilian asset performance will likely depend on global macro conditions rather than domestic politics. The conversation concludes with discussion of Middle East dynamics, including US Air Force support in the Strait of Hormuz and the AGR-20 laser-guided weapon system that has reduced the cost of drone interception, fundamentally changing the balance of power in maritime security. They note this represents a significant but underreported shift in military capabilities.
About this episode
<p>Scott Bessent really said “trust the process.” </p><p>Bub, do you know <em>the process? </em>It's the Philadelphia 76ers deliberately being the worst team in basketball for half a decade. Pick a better sports metaphor. Anyway, here’s a conspiracy theory nobody on Wall Street will touch - - - - - The Fed isn’t hiking because of inflation - actual inflation is coming down. It’s hiking because economic agents have started expecting American incoherence as a permanent condition, and that’s the macroeconomic AIDS. They’re targeting oil prices. They’re targeting the war. Also: France might just be Illinois, and why Marine Le Pen in power is better for France than Marine Le Pen in opposition.</p><p>--</p><p><strong><u>Timestamps:</u></strong></p><p>(00:00) - Show Intro</p><p>(00:31) - Hegseth Basketball Challenge</p><p>(02:09) - Trust the Process Joke</p><p>(07:25) - Bond Market Basics</p><p>(14:26) - Is the Economy Really Hot</p><p>(19:46) - Debt Service and Thin Ice</p><p>(25:54) - Fed Conspiracy Theory</p><p>(38:58) - Fed Tool Too Blunt</p><p>(39:37) - Inflation Hits Real Life</p><p>(40:13) - ECB vs Fed Mandates</p><p>(42:59) - Yield Curve Warning Signs</p><p>(45:32) - Gridlock and Market Risk</p><p>(46:59) - France Bonds and Le Pen</p><p>(01:16:06) - Middle East Shipping Shift</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 Besant invoked 'the process' regarding bond markets, but the hosts argue the actual economic process differs from the Philadelphia 76ers' failed tank strategy—yields are rising due to economic strength, not deterioration.
- Bond yields have risen globally across developed nations (Canada, Australia, Japan) despite varied fiscal situations, suggesting the driver is not primarily US fiscal irresponsibility but rather strong global economic growth.
- The Federal Reserve cut rates 100 basis points in Q3-Q4 2024 when inflation was above target, but is now raising rates despite inflation declining, prompting the theory that the Fed is responding to policy incoherence rather than inflation alone.
- Marco Polo theorizes the Federal Reserve is deliberately raising rates to counter inflation expectations destabilized by Trump's war in Iran and incoherent policy signals, essentially disciplining the administration through monetary policy.
- US dollar strength contradicts the narrative of fiscal crisis—if markets believed the US faced a debt trap, capital would flee and the dollar would weaken, but instead foreign money continues flowing in and the dollar appreciates.
- The equity market's indifference to rising yields suggests yields are not yet at restrictively high levels; if they were, equities should be falling as borrowing costs become onerous for corporates.
- Marine Le Pen's Thursday speech emphasizing fiscal discipline and German-style debt brakes represents a significant repositioning aimed at calming bond markets and capturing centrist voters, despite her populist credentials.
- European populists who gain power tend to moderate and move toward the center (Meloni in Italy, True Finns in Finland, ÖVP in Austria), whereas US populists have not shown this pattern, continuing to pursue populist policies even in office.
- France's bond market underperformance relative to other European nations reflects political uncertainty and lack of policy coherence under Macron rather than absolute fiscal metrics, demonstrating the importance of relativistic bond market assessment.
- Gridlock in the US Congress will likely benefit equity markets by creating policy certainty, but will harm average Americans who cannot benefit from AI-driven economic growth while facing elevated prices for food and energy.
- The US Air Force has deployed advanced AGR-20 laser-guided weapon systems costing $30,000 per shot, fundamentally reducing the cost of drone interception in the Middle East and shifting the strategic balance away from expensive naval systems toward fighter jet convoys.
- The Federal Reserve raising rates despite low actual inflation but elevated inflation expectations suggests the central bank is attempting to anchor forward-looking expectations rather than responding to current price pressures, a more sophisticated but less transparent policy objective.
Topics
Transcript
Hello, listeners. Welcome back to Geopolitical Cousins. We published an episode today on October 5th, and we recorded this on October 5th. So we're not going to push it out immediately. But if you're wondering, this was recorded Monday, October 5th in the afternoon. That's all I got. Email at jacob at jacobshapiro.com if you have questions, comments, concerns about anything you heard here or about the Cousins in general. Take care of the people you love. Cheers. See you out there. All right, listeners, we're back at it. We're both at our home office for once. Cousin, this might be the last time we do a podcast at our home offices for like the next couple of weeks. It's…
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