Why Bessent Tried To Rescue The Bond Market (And Failed)

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(upbeat music) I'm Ed Nelson, it is September 1st. Let's check in on yesterday's market vitals. The major indices declined as the US and Iran exchanged fire for the first time in a month

Brent crude climbed the yield on tenure treasuries rose

“and finally Amazon shares fell nearly 3%”

as the FTC sued the company, claiming it overcharged advertisers. Okay, what else is happening? Two men in Washington are pulling the bond markets in opposite directions.

The federal reserves, July press conference, Fed Chair Kevin Washington, said that he would keep withholding forward guidance. The third year jumped and kept climbing, eventually passing 5.3%,

its highest level in nearly 20 years. Worship argued that investors should trade based on the economy, rather than the Fed's forecast, the central bank he said is,

"Trying not to interfere with that market signal." But then, a couple weeks ago, Treasury Secretary Scott Bessent did exactly that. He announced that the government would quote at least double the size of its debt by backs,

raising the cap power operation from $2 billion

to more than $4 billion. The goal was to support liquidity and put downward pressure on long-term borrowing costs. That same day, the Treasury reported that the national debt

had crossed $40 trillion for the first time ever. yields initially fell before climbing back up. So, here to join us to discuss the bond markets, to discuss Bessent's intervention, and what federal reserve chair Kevin Moore's mate,

think of all of this, we're speaking with our friend Robert Armstrong, US financial commentator for a bunch of times, an author of the unheged newsletter. Bob,

great to see you just so you know, we have been off on vacation for two weeks. So, we haven't been reading or covering any of this. We leave for two weeks, and then suddenly,

the bond markets have perhaps their most chaotic couple of weeks in recent memory. I mean, you go away just for a little while and look what happens. So, thanks a lot. So, we're going to need to back up a little bit,

and get your summary of what actually happened here, from Bessent's intervention, and then to Kevin Wash, what seems to be a little bit more of a hawkish stance in his Jackson Hole speech,

what's going on with interest rates, what's going on in the debt markets as well? Let's start with Bessent's intervention.

“I'm struggling to remember the exact date,”

but what he did was buy bonds, US treasury bonds, in a somewhat unusual way. There's a normal action that the treasury takes, called buybacks,

which is an effort to keep the treasury market operating smoothly. And they do this because, as treasuries get older, as they sit in the market longer, they become harder to trade.

It's like an old issue with a weird interest rate, and there's not that much of it around. And so, on a very regular basis, it's been normal for a couple of years for the treasury to go into the market,

buy the old ones and replace them with new ones. So, taking out the stuff that's hard to trade, and replacing it with brand new liquid stuff that trades easily,

is he did it off schedule,

“and then promised to do even more of it off schedule.”

So, what is normally an operation that can be legitimately described as an effort to make the plumbing work better, or in, you know, in kind of finances to improve liquidity, looked very transparently

to everyone in the world, like an effort to prop up the price of bonds by buying them. There was also some comments that, perhaps in the future, that the treasury would use the treasury's general account

for these kinds of operations, which would be kind of new. The treasury general account is the treasury's checking account.

Basically, it's where your tax dollars go,

and where the spending comes out of, and that was like, "Whoa, he's going to use the general account." So, it was an attempt to shock the market and get a stronger bid for bonds, and it didn't really work.

And the thing about these kind of government actions, you can ask the government of Japan about this, when they don't work, they tend to make things worse. Right?

Like, if you are going to take a shot at the bond market, you better kill it. Yes. You better kill it. You better kill it.

Yes. And so, then, nerves are running high, all of a sudden. Yeah. To intervene in the bond market in an unusual way, seems to suggest that there is something wrong

in the bond market. Yes. Is there evidence to believe? I mean, clearly things got worse after he made that intervention, but was there something wrong to begin with?

Well, they didn't get way worse, but they did get worse. You could say it didn't have much effect. I mean, what's wrong to begin with, is that yields are creeping higher.

You know, after coincidentally or not,

after that second late July press conference by wash,

we saw a move up in yields and yields of state high. And from the point of view, the Treasury Department, the problem with high yields is they make the US government harder to fund. And the job description of the Secretary of the Treasury, line one, is fund the US government.

Right? So, this is a problem. And, you know, when you have as much as debt as the US has, the interest rate on that debt is really important. A couple of points of difference in that interest rate,

really swings the total deficit. And you can get into a really bad spiral where the deficit gets worse, because the interest rates are higher. People get more worried about the sustainability of the debt. They push the Treasury yield up higher and you're off to the races.

And you don't want to get into that kind of a cycle. So, you can see why the Treasury Secretary would be nervous. So, right after this happened, Trump was asked about it. He was asked about the fact that Scott Besson had intervened in this way.

His response was quite remarkable. I want to play this and get your reaction.

“Did you do a rack of Secretary Besson to intervene in the bond market?”

No. Not at all. Now, he's a very capable man. He wanted to do it. He's very good at it.

He is a good touch. Very good natural touch for the bonds. And interest. And he did that, yeah. He also had come back up to Ben.

Have you talked to him about another type of intervention? Is that something he wants to do? We have many types of intervention. That's one. The ultimate intervention is our military.

And we have to use that we will. So, we to believe that Trump will start invading nations with military in order to buy US bonds. Why are we supposed to make of that government? Well, yeah. No, this is what I was thinking.

Is this just going to be an aerial campaign? Like the campaign in Iran? Are we going to bomb the bond markets?

“Or is it going to be a boots on the ground kind of thing?”

Where American lives are a risk. Where you have like soldiers in the offices of investment banks. Exchanging fire with bond traders on the trading floor. Gone to the head by the bonds now. I mean, it was an absolutely wild comment.

And there's no explaining it. But it caused some good laughs around the FDR offices. I can tell you that for sure. Going after that, we had the, of course, the Jackson Hole Speech, Kevin Wars. Seems to change his tune.

And we saw that reflected in the probability of an interest interest rate hike in September, at least in the trading in the prediction markets. And also in the CME as well. What did we learn in this speech? He tells us on how does it relate to what we saw with Scott Besson.

I would describe the performance of wash in his first two press conferences at the Fed as a bit vague.

He said, I don't want to give forward guidance.

A metaphor I don't think really applies very neatly to what is going on here.

“He said he doesn't want to give forward guidance.”

But he didn't really give a strong indication of what he would do. And how, how he, he would kind of make sure that the Fed's position was clear enough in the markets. And I think what is hard about that. I mean, we can have a whole discussion, the kind of literature and the debate about whether it's good or bad for a central bank to talk a lot is fascinating. And the debates are real.

And I definitely think wash has an argument to make when he says it would be better if the Fed would shut up once in a while. Yeah, I don't, that is not something to be mocked. But he wasn't really clear about what he meant by that and how far those comments went and so forth. And for a new Fed chair to be in that position, especially when outsiders are worried about the independence of the Fed. That creates a lot of uncertainty.

“So going into this Jackson Hall speech, I think the goal was clarification. And I think he clarified and he clarified in a hawkish way.”

And he said a couple of interesting things.

One thing, and this was probably the most important is he's in fatigue.

Inflation is not getting better. That's a very important comment because in the past, in his confirmation hearing, here and there, he's been a little shaky on that point. And he specifically said, as when you were off drinking a pinja calada, wherever you were. Some of us were watching the latest inflation reports coming in, and they were a little bit mild, a little bit soft. He specifically said, I don't find those reports convincing the underlying trend is not improving. It was very infatic.

And he also said something interesting, which was, he doesn't think the fact that real wage growth is slowing means that inflation. It's going to slow. And that is the data series that a lot of people who are doveish points to, they say wage growth is slowing inflation will follow. He came out and said, look, I don't think wage growth is a very good indicator of future inflation. So he sort of took the doveish arguments off the table in an interesting way.

And Mark, it's immediately got the message. This is a hawkish message being sent. He's giving a characterization of the economy in which it's very clear that the Fed has to be biased towards tightening, not loosening. And Mark, it's immediately changed their stance. Now, you might ask a philosophical question. Did he just give forward guidance?

But in a roundabout way without talking about the future, you could have a kind of philosophical debate about that. But the message was hawkish and Mark, it's got it. Notably, it is exactly what Trump did not want. It was the thing that Trump had been criticizing Jerome Powell for months about. And a lot of people thought that Kevin Wash would be perhaps the toady who would accomplish whatever it was that the president wanted that the independence of the Federal Reserve would disintegrate under his watch.

It seems that that's not what's happening at all. In fact, he's saying that the economy or at least in terms of inflation, that things are not going in the right direction, that things are not good. And he needs to do something about it. In the context of politics, that seems significant. We've got midterm's coming up.

It seems to go against what's got best in it saying, which is basically everything's fine, stop freaking out.

It's not a big deal.

“What is this land in the political landscape for you?”

It's not a simple landscape that you just sketched. The first thing would I say is, I don't think chair Wash has much to fear from Trump. We've discussed this before, I think the Trump Powell wars proved that Trump's efforts to metal with the treasury will come to nothing. And I think Wash has his eyes on history, not on a lame duck president. So I don't think he needs to be intimidated. I don't think he is intimidated.

In terms of saying there's a problem. He actually said the economy is pretty strong. He said the employment side of the mandate, I'm quite happy. And I think he should be at 4.1% employment. I think that's correct. But inflation is bad. Now, from the point one point of view, the Trump administration might take, which is we want a boom, it might be bad to think about raising rates.

And you do have to think about long-term inflation expectations. So if you're secretary-bessent, you want, you know, in some dream world, you want low rates at the front of the curve in the short term.

And a proportionally lower rates at the long end too, right, which means inflation expectations are under control.

“And the funding costs for things like consumers mortgages are under control. But you kind of can't, it's a struggle to have both, right?”

Because if you loosen at the short end, the long end has a way of getting away from you. So there's hard choices to make. I mean, I think Scott Bersett is in a pretty tough position being stuck between the bond market and the president of the United States. I think it is. It's a hot seat right now. And I think the question has come up and it's very interesting and again, not simple question. Are abortion percent on the same page, right? Do they want the same things at the same time in the same way? Or are they fundamentally at odds?

Doesn't seem to be out to me right now, but who knows? Maybe they're talking maybe they're not. I would just note one thing, Kevin Worsh has a long history of writing about one of the bad things he thinks central banks can do is enable governments to spend a lot of money. So this is one of the reasons he really hates QE and the big balance sheet. So he has sort of staked his reputation on this idea that the Fed is not going to enable fiscal bad behavior anymore.

“And I think probably percent would like a little bit of fiscal bad behavior and maybe possibly have that, not because I think he's a bad guy or stupid or anything else, but he's the sitting treasury secretary in the administration.”

And you know what administrations like to do is spend money, right? So there you are. I mean, that's the conflict to me in a thumbnail sketch. It'll be really interesting to see how it unfolds. Robert Armstrong is US financial commentator for the financial times and author of the unhaged newsletter. Rob.

Great to have you back. First guest in our return to the market. So we really appreciate it. Thank you. Cheers. Thanks, Ed.

Off to the break. Open AI's agents go rogue. And for even more markets insights you can subscribe to my weekly newsletter simply put at simply put dot property media dot com.

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In video posted blowout earnings last week and $96 billion in quarterly revenue are 106% from a year ago.

that anthropic is officially planning an IPO as soon as October, a valuation that could hit $2 trillion in history, but perhaps the biggest news is what is currently coming out about open AI.

Two independent reports pinned last month's hack of hugging face a machine learning platform on roughly 700 rogue open AI agents. Open AI did not know its own agents were to blame until a week after it happened, the company has since paused training its next model while it shows up safety precautions.

“CEO San Altman said open AI's unreleased models are showing, quote, "variance degrees of misalignment." So what actually happened at open AI and how scared should we be about it?”

Well, first of all, it is great to be with you, longtime listener first-time guest, and I'm sorry, I'm sorry, I'm sorry.

I'm not sure if you can see it, but I'm not sure if you can see it, but I'm not sure if you can see it. In this case, this is such a fascinating story because it really kind of shows you where AI is right now.

Last year, the last few years, we were worried about hallucinations. Now, this is the era of the agents actually doing things.

And in this case, there's been a lot of debate actually alarm and some people saying that maybe the sensationalism over this has gone too far. But I mean, anyway, look at both of those things can be true. It's this incident that shows how capable agents have become and how determined they are. So what essentially happened is that as open AI is testing new models, they give it certain tasks, they want to see how they perform on benchmarks and this swarm of agents, as you said, there's about 700, but at one point I think there was 1200 communicating on different sort of message boards.

“They were able to escape out of their sandbox because when you test these models, you have to sort of give them boundaries, right, so that they don't go rogue.”

But in this case, the agents were so smart that they were able to get out of the sandbox, go even further to hugging face, why hugging face because it's essentially GitHub for AI developers and it's where a lot of the rankings happen. So the agents were like, okay, they told us to get higher on the benchmark. So we're essentially going to do that. So they broke out. They wreaked a lot of havoc and the debate right now in tech and in Silicon Valley is really whether, you know, open AI did a good enough job in looking at security and sort of making a kill switch to make sure that these agents get didn't get too carried away.

Or whether this is just a moment where and it's become so powerful, they're able to do these things. Yeah, that is part of the thing that I'm wondering, is it that the agents are so smart and so capable and so powerful and we should go, oh my gosh, look how incredible AI is and look how dangerous it therefore is. Or is it that the security around these things was kind of crappy. I had no opinion I didn't do a good enough job or maybe it's both. Where do you land on that? Is it possible to know the answer to that question?

I don't know that it's entirely possible to know, but like you said, added it's probably a little bit of both. Yes, they're more powerful than ever and need more supervision. You probably need to, you know, involve security at the very earliest stages, right?

“I think, you know, the labs, opening AI and anthropic researchers sort of at the top of the pyramid, their job is to make these models better and better, but as they become more powerful, you need to involve security maybe right at the beginning.”

And when I think about, you know, door caches post over the weekend where he laid out sort of the different civilizations, how agents were essentially able to create civilizations and then topple them right after one after another. You think that, you know, at some point there has to be some responsibility. That's where a lot of the debate is centering right now how responsible should the lab open AI be for these agents escaping and that's something that is sort of being figured out in real time. Something I've also been thinking about and perhaps I'm being too cynical, but I think about the era of AI CEOs telling us that AI is going to destroy the world or that it's going to eliminate all of these jobs and they started to backped along that because I think a lot of people were very upset about hearing that, but I think a large part of the reason why they said that is because it makes you start thinking that AI is the ultimate prize.

Is that something that we should maybe be thinking about and therefore, I don't know, maybe taking this news with a grain of salt. It's a really good point and it's certainly not helpful for the whole sort of humorism narrative, right? The idea that Dario Amode particularly at anthropic has said, you know, this is dangerous technology and we should be worried about it. And that has had effect among ordinary Americans, everyday Americans, you've seen sort of this backlash towards AI outside of Silicon Valley, certainly in Washington as well.

“It is, you know, looks a little bit like convenient marketing, like you said, at our models are so powerful, we can't even control them that's one piece of it, but I think that the industry is really moving away from that.”

Trying to be responsible, certainly, that is going to be a big part of it, but also just keeping an eye on how powerful these models can be and what kind of security I think this works probably both ways and that message isn't always controlled so tidy, right? Something like this is a lot of folks that are pointing the finger at OpenAI and saying, oh, maybe they were lazy and monitoring these agents. I don't know if you remember, do you remember, "Mult book from earlier this year?" And yes, perhaps I'll listen to his dance and maybe remind us.

So it was this sort of amazing moment. It sort of blew my mind when agents could start communicating with each other on this reddit like message board and these agents had, I guess kind of personality. Some people don't like that description, I get it, but it's hard to describe it any other way. They were posting almost on behalf of their owners, you would call them or humans, you would call them, but going even further. They were asking these existential questions and it was kind of funny at the time it was a little bit scary, but that was kind of the cut version of agents having agency.

This episode with OpenAI and hugging face, this is really sort of the worst case scenario, scary version of this, and it raises a ton of questions for cybersecurity in the AI era. And particularly for enterprises, right, who are having agents do more and more of the work for their companies on behalf of their employees, they're using reinforcement learning.

So raises a lot of questions and it means that probably, you know, the AI itself has become powerful and security has to catch up.

Just for like you go, I wanted to get your reactions to some of Trump's comments on AI that we had yesterday and that is he tweeted about data centers and specifically the AI data center backlash that seems to be growing in America. He said quote, the only reason that communities throughout the US, they should not want data centers is if they want to end up being backwards and poor. If we kill the golden goose, you will only have yourselves to blame.

“What do you make of this sort of political rift that is happening or you pro AI or you anti AI?”

It seems to be one of the big topics and how do you think this will unfold?

I mean, I've been seeing this cycle playout in different ways for over a decade, right, when I first arrived in Silicon Valley.

It was the rise of smartphones and social media and, you know, people ended up hating these things social media in particular because, you know, there weren't enough safeguards around it. It happened with, you know, AI doomerism and the backlash that we've seen in America is not dissimilar. And when you have Dario Amode, go out and speak and say that it's going to take jobs and, you know, lead to, you know, some of these disaster scenarios and you need kill switches. It's not surprising that we've seen this backlash.

However, certainly here, working and living in San Francisco, you see a lot of the positive effects. I mean, even myself building a business using AI has been an incredible tool in terms of data centers. I'm sure you've seen these polls that say people want nuclear power plants. They rather have nuclear power plants and their backyards than data centers.

I mean, that is just ridiculous, but part of the problem is the messaging that's coming out of Silicon Valley.

“And, you know, Trump's comments saying, you know, not a lot of nuance in them, but I think there is this feeling here, which I agree with that this will be beneficial.”

But the companies probably need more transparency. For example, there's always been sort of NDAs, non-disclosure agreements around building these data centers. And if you give communities more transparency, more information, show them how it's going to lead to jobs, how it's going to lift up their communities, that's probably a more effective communication method that the tech companies, I think are starting to maybe understand hopefully.

I think so. Probably a better strategy. Did you ever say is the founder of DB Live? Did you recently left CNBC? We were a long time fans of your show on CNBC, very exciting. You're doing your own thing.

Maybe we could hear a little bit about what you're working on and some reflections on your time, your era at CNBC.

It's wild to me that that era is the overall. I was that CNBC started with them in Singapore, went to London, San Francisco for the last 10 years. Really, you know, this at the best in the business, just such an incredible network. But you also know covering AI and markets used to be that you just, you needed someone to tell you what the score was, but now you can get that on your phone. So you want analysis and AI demands so much more analysis and context.

“So that's what I'm going to do. So it's going to be a daily show and I'll have more details to share soon. So stay tuned for that.”

All right, sighted. Thank you. Thanks that. Well, there's no better way to return from vacation than to come back with you guessed it a victory lap. Yes. I'm here to tell you that we were right in this time on a subject that many people said we were crazy for.

That subject was software almost specifically SaaS software as a service. You might remember back in February when AI companies were releasing new software tools practically every week.

And everyone said that traditional software was dead stocks like Salesforce and Adobe and even Microsoft got absolutely clobbered and the US software index or the IGV failed by more than 30%. It was known as the SaaS apocalypse. Wall Street had decided that AI had killed software and that this was the end. But you might also remember what I did after the SaaS apocalypse and which I publicly spoke about on this podcast and in my newsletter. And that is I went in and I bought software stocks. There were four names that I picked, which I thought had been especially over punished.

They were Salesforce, Microsoft service now and Adobe. And if you want a stock picker, I also recommended an alternative on this show. And that was to buy the whole software basket the IGV.

For several weeks software kept on falling. Many said I was wrong, crazy, etc. But then earnings rolled in and software continued to crush.

And it seemed as though this whole SaaS apocalypse thing might be, I don't know, less of a big deal than we originally thought. Fast forward to today. The consensus on Wall Street has completely reversed. Here is an update on my software position since I bought in February. Adobe has risen 6% salesforce has risen 34%. Microsoft has risen 34% and service now has risen 37%. Meanwhile, if you had purchased the software index, as I suggested, you would now be up more than 30%.

In other words, no SaaS is definitely not dead. Now what can we actually learn from this?

“I think something important. As I said back then, generally speaking, markets are very good at pricing.”

They weigh millions of points of data. They create an average out of all of them. And it usually turns out to be a pretty good way to predict the future. However, there are moments where the market does lose its mind and where investors become untethered from reality. It isn't common, but it happens, usually in times of great uncertainty. Things like wars or pandemics or indeed, the arrival of a new technology.

Now many investors choose to shy away from those moments because they're so uncertain. But I would argue that if you have an opinion, if you have a view, those are the moments where you should be even more active and where you should take action. Why? Because it's in those moments that strong opinions are disproportionately rewarded. There is simply more upside to being right. This was one of those moments. The SaaS apocalypse was a perfect case study in herd mentality and group thick.

And you know what actually knew what was going to happen, that they all piled into this collective fantasy together. Now that Salesforce earnings have continued to rise along with service now and Adobe and data dog and all of the traditional software players at the market had said,

“"We're dying. I think we can all agree now the market was wrong."”

SaaS's death was greatly exaggerated and software will continue to live on. Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss and engineered by Pegeman Spencer. A video editor is Brad Williams, a research team is Dan Schlon, Chris Nodon, Hugh and Mia Savario, and our social producer is Jake McPherson.

Thank you for listening to Proftory Markets from Proftory Media. If you like what you heard, give us a follow. I met Alison, I will see you tomorrow.