Previously, we spent a lot of time discussing the logic behind the rise in long-term bond yields in Europe and the United States, as well as the various methods central banks and ministries of finance have come up with to address this. Finally, last night, we saw the U.S. Department of the Treasury directly using repurchase agreements to suppress long-term government bond yields. The Treasury Secretary stated, "The current maximum size of $2 billion per operation will be at least $4 billion per operation." I think there are a few points I would like to share: 1. Although this is not in the traditional sense what is known as Yield Curve Control (YCC), in terms of definition and the operational entity, you can find many differences, but such nitpicking discussions are meaningless; this is the government directly intervening in its own funding costs. And I also think there is no need to debate whether this practice will have a long-term effect; the core issue is how far the government is willing to go and what price it is willing to pay. 2. A few days later, remarks from the Fed or Warsh at Jackson Hole became very subtle. It is known that he often communicates with Benson, and the market has always been saying that the Fed needs to raise rates and increase communication to reduce policy uncertainty. However, you can see that Warsh is not as hawkish; in the latest minutes, he tries to continue to reduce communication frequency. This difference is very clear. I think ultimately this is a short-term and long-term issue.

The long-term concern about U.S. government bonds is the deficit rate, which has two parts: economic growth rate and expenditure level. The expenditure level is unlikely to decrease, and may even continue to rise significantly in the autumn and January of next year. So, to solve the deficit rate, it can only rely on the economy. The economy currently consists of two parts: traditional industries and technology. Currently, it seems like a pipe dream for the U.S. to reduce the deficit rate through traditional industries. Everyone understands that if the U.S. wants to achieve a low deficit rate again, it needs higher economic growth, and everyone's hope is on technology. Of course, in the past six months, technology has been in the GAI, and GAI has shown some decline. I believe there will definitely be a new narrative coming up soon because, other than that, I really don't believe that the U.S.'s traditional industries can bring the U.S. back to its heyday.

This is the narrative that the White House, Benson, and even Warsh believe in more. For the reshaping of the industry chain, for the development of technology, more financing, credit, and economic growth are needed, not to mention populist issues. At this time, suppressing demand may be short-term monetary discipline, but long-term it may be a policy error. Powell has always said, "Without price stability, we cannot achieve anything," but in reality, the U.S. needs some economic highlights to reduce the deficit rate. "Without price stability, we cannot achieve anything" is true, but stability in price alone is useless. So, I very much believe what the market says: raising rates can curb long-term rates, and increasing communication can reduce term spreads. I have no doubt that these measures can reduce short-term risks, but they are actually of no help in solving the real problem.

A few days later, we will be able to see the Fed's attitude. If Warsh is willing to share, his choice may be a watershed moment, impacting how the Fed views the issue in the short term. However, I believe that in the medium to long term, they are both facing a strategic issue. How to make a massive investment in the United States while the deficit is high, attempting to develop technology, reshape the supply chain, and at the same time minimize the pain felt by the American people. This is a very difficult issue. Money has three prices: interest rates, exchange rates, and inflation. You can see that over time, when the inflation issue is hard to solve and the market does not buy into the interest rate issue, Bernett, who has always supported a strong dollar, is now starting to ignore the dollar's exchange rate and trying to buy some time. So, the core issue in the short term is to see if the Fed will cooperate with the Treasury Department's actions.

This kind of intervention in long-term interest rates has had several comparable times in U.S. history. In terms of magnitude, they have successively increased. Firstly, the Treasury Department bought back government bonds from 2000 to 2002. This behavior is most similar, but the underlying logic is completely different. At that time, the U.S. deficit rate was very low, and the Treasury Department's issuance of bonds was not to lower the financing rate. According to their own words, it was more about liquidity management rather than rate management. Secondly, twist operations in 2011-2012 and the 1960s. These operations were carried out by the Fed, not the Treasury Department. The scale was larger, but the effect depends on whether the Treasury Department cooperates. Thirdly, the real wartime Yield Curve Control (YCC) during World War II directly pegged the interest rates of short-term and long-term debt. Currently, we are at most at the 1% or 1.5% level. If the Fed joins, it could be 2%. In the short term, I think the Fed may not need to participate in this process. I speculate that Bernett's idea is still to achieve big results with a small budget. During the most tense months in the long-term bond market liquidity, not to cause too much disturbance, to prevent the market from constantly creating a steep yield curve. However, we do not know what Warsh really wants to do and how much influence Trump has on him. This is a practice that fits his personality very well and is consistent with his experience, but the final effect will depend on subsequent fiscal and economic policies.

The more long-term issue is the U.S. economy itself. These liquidity operations or the actions of technical officials are essentially treating the symptoms rather than the root cause. The two ends of the K-shaped U.S. economy are still mired in the mire.

The absolute data of the real estate market looks good simply because prices have risen. Recently, the narrative of the upward part of the K-shaped recovery has loosened, revealing a bleak overall economic outlook. I understand Bessant's perspective very well. Previously, when everyone saw weakening economic data, they thought about lower interest rates. Now, with weakening economic data, the focus might be on increasing the deficit. In addition, the Fed's communication has caused the term spread to widen rapidly in the past month, prompting some administrative intervention. It makes sense to eliminate some of the market's bets.

As for gold, in the short term, it may need to see the Fed's stance. If the Fed's approach is that raising rates is the only way to curb long-term rates, which is currently the view of many market participants, then gold may face fluctuations but not a major issue. If there is no actual improvement in productivity and rates are raised for various reasons other than that, they will eventually come back down. If the Fed's approach is that only loose policy can stimulate more supply to enhance U.S. competitiveness and reduce inflation, then gold may have already broken through.

Lastly, I would like to briefly discuss some abstract topics. Many of America's current issues, whether getting stuck in the Middle East or making huge investments in AI without seeing a reasonable short-term return, cannot be solved by fiscal or monetary means. Technical bureaucratic maneuvers do not address the core issues. (Moreover, I don't think Bessant and Wash are outstanding technical bureaucrats given the current situation. I fail to understand why many people praise Bessant. "China is a crumbling house that will collapse with a kick, the dollar must remain strong for the U.S. economy, tariffs can generate sufficient revenue, 3% economic growth, 3% deficit, 3 million barrels of oil." From 2024 until today, you can do the opposite of what he said to make money.) As a country reaches the mid or late stage, the necessity and demand for reform increase day by day, while the feasibility and drive for reform decrease day by day. Successful reforms exist, but there are more failures. The nature of this matter itself is extremely challenging. Successful reforms are often subtle and gentle, while grand reforms driven by ideology often face too much opposition and therefore fail.

For example, in Chinese history, many have heard of Zhang Juzheng and Wang Anshi, but few have sought to understand the Two-Tax System reform, while the reform of the Two-Tax System during the Tang Dynasty was successful and far-reaching. In a way, I think the views of many old-money financiers on Wall Street are more sophisticated than Bessant's. For example, Jamie Dimon and Ray Dalio both expressed their views on the Iran issue, stating that if war is declared, it should be fought to win, not half-heartedly. They also believe that raising interest rates may alleviate long-term debt pressure. These are all correct but challenging actions. Sometimes people have to do the right thing, even if it's difficult. A skilled politician is one who can persuade society to do the right and difficult things.

If you have always wanted to take a shortcut to find the so-called optimal solution. It feels a lot like many Indians I have encountered. They always feel like they can see things others don't know and easily come out on top. The biggest lesson I have learned from history is that many things cannot be easily manipulated. If you haven't gone through life and death experiences with your brothers, if there is no one to save you when you are in a life and death situation, if you don't have decades of accumulation and trust, then you cannot have a core team to accompany you in doing things that take decades to bear fruit. Our era is full of fast narratives, technology has diminished the importance of humans, but I believe the underlying logic has not changed. Many things, whether done with robots or with humans, require time.

Today, the operation of the U.S. Treasury Department gives me the feeling of encountering Indians at work, who always think they can achieve great results with little money and can see things others can't. I have never believed in this. I think that anyone in front of you is not a fool, assuming you are not a fool yourself. So if this is just the Treasury Department's short-term maneuver to deal with seasonal and geopolitical disturbances, I think it's fine. If the Federal Reserve also joins, then I think the underlying logic will change dramatically.

I rarely discuss the decline of the U.S. dollar, not because I think the U.S. has no problems, but because I always feel that these grand narratives take a lot of time and must witness enough catalysts to have a valuable discussion. I think if the Fed also joins this control of long-term yields and if the situation in the Hormuz Strait ends in a fiasco, that is a sufficient catalyst. We can discuss this further tomorrow.

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