The Fiscal Spiral Has No Off Switch | Weekly Roundup

This episode unpacks the precarious state of US fiscal policy and its seismic implications for global markets, highlighting why assets like Bitcoin are gaining traction as traditional financial certainties erode.

Episode Introduction

This episode reveals how the US fiscal trajectory, marked by escalating deficits and a challenged dollar, is forcing a re-evaluation of investment strategies, with significant implications for Crypto AI investors navigating a landscape of systemic risk and technological disruption.

Return of the Trio and Market Recap

• The episode marks Tyler's return to the "Forward Guidance" roundup, joining Felix and Quinn.
• The hosts briefly touch upon recent market volatility and the accuracy of their previous bearish calls, acknowledging the difficulty of market timing.
  • Felix notes, "it was all our bearish calls that got all the views because we turned full bear and people you know that that make when you're a doomer view counts just skyrocket."

US-China Trade Deal: A Temporary Truce?

• The discussion kicks off with the recent US-China 90-day deal to roll back tariffs, which exceeded many initial expectations.
  • Tariffs were reciprocally set at 10%, with an additional 20% on the US side for fentanyl-related items, netting out to 30% before the rollback. Chinese tariffs on US goods saw significant reductions.
• Felix highlights the importance of this agreement, referencing shipping logistics expert Craig Fuller, who described a near-total embargo between the US and China prior to the deal.
• Strategic Implication: While the deal eased immediate left-tail risk (an event with a small probability of occurring but with a large negative impact), investors should monitor its sustainability and the underlying tensions that persist.

Tyler’s Macro Framework: Navigating a Politicized Market

• Tyler, sharing his perspective after a hiatus, outlines his framework for navigating the current market.
  • He emphasizes managing risk by watching fixed income markets, particularly high yield CDS (Credit Default Swaps) – financial derivatives that allow an investor to "swap" or offset their credit risk with that of another investor.
  • Tyler asserts, "markets are now a political utility. They are not free markets." He believes understanding flows, systematic investing, and buybacks is more crucial than traditional fundamental analysis.
• He points to credit spreads, volatility, and buyback blackout windows as key indicators.
• Tyler’s analysis suggests President Trump's attempt to rapidly reverse the 40-year capital-to-labor cycle was met with market resistance, leading to a walk-back and a return to centralized dynamics.
• Actionable Insight for Researchers: The politicization of markets suggests that geopolitical analysis and understanding policy shifts are becoming as critical as economic modeling for predicting market movements, especially in nascent fields like Crypto AI where regulatory winds can shift rapidly.

Quinn’s Skepticism on the China Deal

• Quinn expresses a more cautious view, believing the US-China agreement is merely a "pause" rather than a definitive deal, anticipating a resurgence of tensions.
• He argues that Trump has effectively shifted the Overton window – the range of policies politically acceptable to the mainstream population at a given time – making a 30% tariff seem like a new baseline after initially proposing more drastic measures.
  • Quinn states, "Let's be honest, 30% tariff is not a good place to be with your largest trading partner."
• Strategic Consideration: Investors should remain vigilant for renewed trade escalations, as a 30% (or even the current ~12.5%) effective tariff rate still represents a significant drag on global trade and could reintroduce market volatility.

The Shifting Overton Window and Long-Term Inflationary Pressures

• Felix notes that despite the recent tariff rollbacks, the US is landing at an effective tariff rate of around 12.5%, a level the market now views with euphoria, illustrating Quinn's point about the shifted Overton window.
• US customs duties revenue is soaring, indicating that tariffs are indeed being collected and having a real economic impact.
• The conversation touches on the long-term cycle of labor's share of the financial pie potentially growing, driven by entrenched inflation expectations and the possibility of yield curve control (YCC) – a monetary policy tool where a central bank targets a specific longer-term interest rate and buys or sells as many bonds as necessary to hit that target.
• Crypto AI Relevance: Persistent inflation and potential YCC could devalue fiat currencies, making decentralized stores of value like Bitcoin more attractive. AI-driven efficiencies might also play a role in how labor's share evolves, a factor for researchers to model.

Deutsche Bank’s Dire Outlook: The Fiscal Spiral

• Tyler presents a Deutsche Bank analysis (slides 22-24) underscoring the unsustainability of the US fiscal path, a core theme aligning with the episode's title, "The Fiscal Spiral Has No Off Switch."
  • The US cannot close its large current account deficit without addressing its fiscal deficit, yet recent policy signals an unwillingness to do so, with fiscal deficits projected above 6% of GDP.
  • The US-China trade accord signals a low pain threshold for tariffing US consumers.
  • The US has a record negative Net International Investment Position (NIIP) – the difference between a country's external financial assets and its external financial liabilities – making it the largest in the world and rapidly deteriorating. This means foreigners own significantly more US assets than Americans own foreign assets.
  • Tyler quotes the report: "The current path of America's deteriorating net foreign asset position implies US Treasury yields well above 5% over the next few years."
• This deteriorating NIIP and reliance on foreign capital make the US vulnerable, potentially leading to a weaker dollar and higher bond yields as foreigners become less willing to fund US deficits.
• Investor Takeaway: The structural issues highlighted by Deutsche Bank suggest long-term headwinds for the US dollar and traditional fixed-income investments. This environment could favor alternative assets, including well-vetted crypto assets, particularly those offering a hedge against inflation or sovereign risk.

The "Wile E. Coyote Moment" and Asset Allocation

• Tyler describes the current generational market moment as a "Wile E. Coyote moment," where traditional safe havens like bonds offer little appeal.
  • He questions the rationale of buying debt when governments are fiscally irresponsible: "Why would I ever put my money in a bond as a 40-year-old?"
• In this "Ponzi scheme" environment, he advocates for assets like Bitcoin, gold, and growth-oriented tech stocks, which can potentially outpace inflation and currency devaluation.
• Bitcoin, with its tight supply, is presented as a "better Ponzi" in this context.
• Crypto AI Investor Focus: This perspective reinforces the bull case for Bitcoin as a non-sovereign store of value. AI investors might also consider how AI technologies could create new forms of value or efficiency in a world grappling with fiscal instability.

Capital Outflows and Global Market Rotations

• Felix discusses the observed capital outflows from the US, evidenced by days where bond yields rise, the US dollar falls, and US equities decline, while rest-of-world equities (like Europe) perform well.
• A key question is whether this is just "fast money" (speculative capital) or the beginning of a larger institutional shift away from US assets.
• Tyler presents a chart (slide 26) showing year-to-date returns, with the German DAX (Germany's benchmark stock index) up 27% in USD.
  • Crucially, the TLT (iShares 20+ Year Treasury Bond ETF) is down 9% when priced in Japanese Yen, indicating that international investors are losing money on US long-duration bonds once currency effects are factored in, incentivizing repatriation of capital.
• MicroStrategy (MSTR) is highlighted as an anomaly, up 37% year-to-date, which Tyler attributes to its strategy of monetizing volatility and acting as a Bitcoin proxy, effectively "arbing the boomer Ponzi scheme."
• Strategic Implication: The potential for sustained capital outflows from US assets could create opportunities in non-US markets or in global, decentralized assets. MicroStrategy's performance, while unique, underscores market appetite for Bitcoin exposure through traditional vehicles.

The Inescapable Fiscal Path and Impending Capital Controls

• The discussion shifts to an upcoming fiscal bill, which, contrary to earlier narratives of fiscal tightening, points towards further deficit expansion (from 7% to a potential 8% of GDP).
  • Felix notes, "The deficits are going to rise further...this is going up not down."
• This fiscal expansion could necessitate policies like yield curve control to manage borrowing costs.
• A concerning development mentioned is the inclusion of measures like taxes on remittances in the proposed bill, signaling a move towards capital controls.
• Tyler argues that the administration is effectively trapped, needing to keep the "Ponzi going" for re-election, likely through fiscal measures rather than solely relying on the Fed.
• Crypto AI Relevance: Increased fiscal deficits and the specter of capital controls could significantly boost the appeal of censorship-resistant digital assets. AI researchers might explore how AI could be used to navigate or even circumvent such controls, or how AI could optimize decentralized financial systems.

AI: The Wild Card Productivity Boom?

• Tyler introduces a counter-narrative: the transformative potential of Artificial Intelligence.
  • He references Leopold Aschenbrenner's paper "Situational Awareness," which posits that AI could trigger a massive productivity boom within a few years, akin to an industrial revolution.
  • Tyler speculates, "maybe tech is behaving exactly like it should, meaning, you know, they're the ones the large centralized players that can utilize this stuff fastest will have the biggest advantage."
• This AI-driven boom could allow large tech companies (Meta, Google) to operate with significantly reduced workforces while maintaining or increasing output, potentially justifying their high valuations despite macro headwinds.
• Paul Tudor Jones's recent comments on AI's society-changing potential are also mentioned.
• Crypto AI Investor & Researcher Alert: The AI revolution presents both immense opportunities and challenges. Investors should look for crypto projects genuinely leveraging AI for utility and efficiency. Researchers can explore the intersection of AI and decentralization – can AI enhance DAOs, DeFi, or create new decentralized AI services? This also raises questions about the concentration of power if AI benefits only large, centralized entities.

Asian Currencies and the Shifting Global Landscape

• The conversation touches on recent moves in Asian currencies, like the Taiwan dollar, and inflows into Asian dollar currency baskets.
• Tyler notes that this repatriation of capital back to Asian markets is occurring without causing deflationary impulses, which is a significant observation.
• The hosts discuss the artificially weak valuations of some Asian currencies and the potential for future currency agreements as markets act as a "political utility" to correct extreme imbalances.
• Strategic Consideration: Shifts in Asian currency valuations and capital flows could present new investment landscapes. Crypto AI investors might consider how these dynamics affect regional adoption of digital assets or AI technologies.

Bitcoin: The Generational Trade?

• Tyler reiterates his conviction that Bitcoin is "leading the pack" and becoming a critical asset in the re-evaluation of global collateral.
  • He states, "I think that's really what we're watching...that becomes the chokehold for the next you know century of of economics I believe."
• The "generational trade" is framed as short bonds, long Bitcoin, reflecting a fundamental shift away from traditional debt-based assets towards non-sovereign, digitally scarce alternatives.
• Quinn mentions he is short bonds, structured with protection, betting on a steepener due to debt supply issues or a recessionary scenario.
• Actionable Insight: The strong conviction around Bitcoin's role in the evolving financial system suggests that Crypto AI investors should maintain or consider strategic allocations to Bitcoin as a core holding, while also researching AI's potential to enhance or be integrated with such decentralized monetary networks.

Conclusion: Navigating the Fiscal Unraveling

The episode underscores a critical juncture where US fiscal unsustainability and global de-dollarization trends are reshaping investment paradigms. For Crypto AI investors and researchers, this necessitates a focus on assets like Bitcoin as potential hedges and a keen eye on AI's disruptive and centralizing potential.