Scott Bessent Could Change Everything w/ Andreas Steno

**Andreas Steno** (0:00)
I think it's a big deal what Scott Bessent has done over the past few weeks here. I think it started out as a nothing burger, but then slowly but surely, it has turned into something big.

**Raoul Pal** (0:08)
But now it's become so systemically massive that it is now an important part of the market that's too big to fail. And all the central banks have talked about it. It is now, as you say, it's like the core component part of the market here.

**Andreas Steno** (0:20)
They also need a solution to the Strait of Amuse to really unlock all of this. But if we get that, and I can easily say that, we'll have maybe three, four months in a row with negative CPI prints of the month. And that will really allow the Fed Reserve to do something.

**Raoul Pal** (0:33)
I'm struggling to see how the cycle can stop. And we're not seeing inflation, so it's not like they're going to jack up rates in the middle of this in any meaningful way. To me, this looks just like the 90s. And we saw ISM go up a lot, it cooled off a bit, it then went up again. It feels like this is what's going to play here. I don't see it playing any differently. I'm Raoul Pal, and welcome to my show, The Journeyman. The Journeyman is where we travel together that nexus of understanding between macro crypto and the exponential age of technology.
I'm a macro guy, I've been doing it for 35 years, and I love the opportunity to talk macro. And I particularly like macro thinkers who have taken on board the new world and understand the impacts it's having. I can see many still trailing it, saying it can't be so. But Andreas, who shares part of Real Vision Pro with me on the Real Vision platform, is a favorite there, really has been thoughtful about this. And I always love talking to him because he has had a consensus idea, he's generally very right. He's a super nice guy to boot, and is just a thought partner that I really enjoy spending time with. So let's chat with Andreas to figure out what he thinks is going on with the economy and markets. Join me, Raoul Pal, as I go on a journey of discovery through the macro, crypto and exponential age landscapes. In The Journeyman, I talk to the smartest people in the world, so we can all become smarter together.
So it's time, as ever, for that conversation with the great Dane. Andreas, how are you, my friend?

**Andreas Steno** (2:12)
Good. It's slightly hot here in Copenhagen. We have nice Indian summer, so that's why I'm donning my Hawaiian shirt, and I look a little bit moisty in my face, but other than that, I'm good.

**Raoul Pal** (2:24)
What is hot for Denmark? Is what, hit 22 degrees or something?

**Andreas Steno** (2:28)
Yeah, if we're talking Celsius, right?
Yeah, the thing about Dane's, Raoul, is that we complain all year about the weather, and then as soon as we get sunshine and decent temperatures, we moan about that as well. So we're never satisfied with the weather here.

**Raoul Pal** (2:46)
You just got to... It's the same as English people.

**Andreas Steno** (2:49)
Yes.

**Raoul Pal** (2:51)
So what's on your mind? What are you looking at?
Because there's a lot going on as ever, right? In macro.

**Andreas Steno** (2:57)
Yeah. I think it's a big deal what Scott Bessent has done over the past few weeks here.
I think it started out as a nothing burger, but then slowly but surely, it has turned into something big. Everything he's done over the past few weeks relates to the management of the US. Treasury debt. And I think it's more important than ever to stress the fact that it is increasingly difficult to get foreigners to buy the US debt, meaning that they're seeking alternative buyers. And that marginal buyer right now is mostly a hedge fund. And that has altered the picture quite a lot in terms of debt management.

**Raoul Pal** (3:47)
That note you put out about the kind of carry trade that the hedge funds are doing in treasuries, the ARB and stuff, the repo market. People talk about it, Bank of England has written about it, the Fed have written about it, but people don't really understand it. And it's quite an important thing. Do you want to run through a little bit about it?

**Andreas Steno** (4:06)
I'd like to, yes. I mean, first of all, a hedge fund is not a patient, classic investor, right? It's not an investor that will just buy a US Treasury and then sit on it. So what's the deal for a hedge fund when they buy a US Treasury? Well, currently there's a spread between the US Treasury yield curve and the interest rate swap curve. So basically the interest rate you get in a swap arrangement with the bank. That's not usual. At least it wasn't usual ahead of the great financial crisis. We've basically seen such a spread since 2009 or there about. As a consequence of regulatory changes, making it a lot harder for banks to warehouse bonds and all of those things that were implemented after the great financial crisis. So that spread is interesting for a hedge fund, at least if you can lever it up, because that spread is decently stable over time. There's maybe even a scope for that spread to compress now, which I'll get back to.