This week’s news was dominated by two things. President Trump made financial news on central bank digital currencies (CBDCs) by banning them. DKI and liberty-minded readers cheered this! He also used tariffs to compel Colombian cooperation although the situation with Mexico and Canada is cloudy as of this writing. (That’s more troubling.) The Bank of Japan raised rates again, but remain at a still-low .50%. This is a topic DKI started speaking and writing on in October, 2022. Thanks to Michael Gayed of @LeadLagReport for interviewing me then and explaining the issue to his large audience. DKI Intern, Josh Reaves, joins the discussion in our educational Thing to simplify the topic of repos and reverse repos.
Finally, the big news of the week was DeepSeek turning the US mega-cap tech sector and the energy sector upside down. I spoke with energy experts and AI datacenter designers, and am skeptical of many of DeepSeek’s claims. We’ll go through the details with you.
This week, we’ll address the following topics:
- Presidential ban on Central Bank Digital Currencies (CBDC). This is a pro-liberty move and DKI is cheering!
- Japanese yen carry trade unwind 2.0. It’s calmer this time.
- DeepSeek AI is interrupting US equity and power markets. DKI is skeptical of the claims.
- Tariff Pressure is securing compliance in South America. Tariff threats are not what many think they are (except when they are). We explain.
- Repos and Reverse Repos. DKI Intern, Josh Reaves simplifies a complicated topic.
I’d like to take a minute to thank some of the people who help produce and distribute the 5 Things each week:
- Robb Fahrion of Flying V who acts as Executive Producer of the 5 Things and hosts the video version even when I’m in inconvenient time zones.
- Alex Galbreath and Jonalyn Consolacion of Flying V who ensure you get properly formatted copies on time.
- Howard Freedland, DKI Board Member, who provides valuable counsel when we need to dive into the sensitive topics where politics, economics, and financial markets intersect. I rely on his judgment often.
- Josh Reaves, DKI Intern, who continues to uphold the high expectations we have for students at the University of Tennessee’s Haslam College of Business. Much of what you’re about to read represents Josh’s impressive work. He’ll be joining us on the video version this week to explain the repo and reverse repo market.
- Nazim Abbas of Flying V who is improving our social media effectiveness. Within one week, he earned himself the nickname Nazim the Dream (or NtD for short).
I get a lot of help from great people and if you enjoy your weekly version of this publication, please know they share the credit.
Ready for a week of Presidential action news? Let’s dive in:
1. Presidential Ban on Central Bank Digital Currencies (CBDC):
On January 23rd President Trump signed an executive order named “Strengthening American Leadership in Digital Financial Technology”. This order prevents the creation and distribution of digital currencies by a central bank in the United States.
Central Bank Digital Currencies are a digital form of a nation’s traditional fiat currency. The stated intention of this system is to create a more efficient and modern monetary system. The actual effect is something much more sinister.
This is a meaningful win for the freedom and privacy of U.S. consumers. CBDC’s would effectively allow the government to track, control, and even freeze every consumer transaction and your bank account. They could monitor your spending and limit it to what they consider desirable. This sounds like dystopian science fiction, but there are government officials who want this. Not only would CBDCs enable terrible government overreach, but also economy-destroying monetary policy like programming expiring money, encouraging current consumption at the cost of savings and investment.
In the name of liberty, ban it! No idea why the AI image looks like JD Vance?!
DKI Takeaway: This executive order also established a federal working group on digital assets. While the group will focus on the regulatory framework of digital currencies, it will also consider a national strategic stockpile of digital assets. Many governments and central banks around the world are considering their own versions of a Strategic Bitcoin Reserve and President Trump has said he wants to be the most pro-Bitcoin and pro-crypto President in history. CBDC’s combine everything wrong with fiat currencies with a social credit score. They are the end of liberty. A ban is justified.
2. Japanese Yen Carry Trade Unwind 2.0:
I started writing and speaking about the risk of the Japan carry trade in October of 2022. Among many appearances on the topic was this interview with Michael Gayed of the Lead Lag Report @LeadLagReport . With Japanese government bonds yielding around zero, investors were shorting the yen and buying higher-yielding US Treasuries and US stocks. As long as the yen didn’t appreciate against the dollar, the trade provided a good return. Then, the yen plummeted against the dollar pressuring the Bank of Japan to raise their version of the fed funds rate. This created fears of a market crash as potentially trillions of dollars of US assets might be sold with the proceeds sent back to Japan.
Hard to see on the long-term graph, but the BoJ was BELOW ZERO for years.
Thanks to Michael Gayed for getting this on record over two years ago.
DKI Takeaway: Last week, the Bank of Japan raised its reference rate from .25% to .50%, the highest level in 17 years. While the rate technically doubled, the BoJ has spent decades with below-market bond yields causing a massive decline in the value of the yen against other major currencies. There were renewed fears that this move could create another multi-trillion dollar unwind. It didn’t for two reasons. First, the BoJ telegraphed the move in advance so investors had time to process the implications and weren’t surprised. Second, last week’s DeepSeek announcement temporarily rocked the huge US technology sector ensuring few were paying attention to events in Japan. There was no disaster this time, but with the yen still weak, DKI thinks the BoJ will need to hike again. We’ll continue to monitor the situation.
3. Deep Seek AI is Interrupting U.S. Equity Markets:
DeepSeek caused an implosion of the US-based technology and energy space on Monday. DKI has already written multiple articles on the topic. This week, I spoke with an expert who designs AI datacenters, and I’m highly skeptical of many claims and rumors. We don’t believe DeepSeek’s claim that they spent just $6MM on training cost using $50MM of second-rate Nvidia $NVDA GPUs. China has successfully circumvented the Biden export restrictions in multiple ways, and Nvidia found ways to technically comply while delivering high-quality chips to Chinese AI developers. OpenAI is claiming DeepSeek illegally used ChatGPT code to train its model. Finally, this expert (among others) notes that DeepSeek took shortcuts that mean their AI solution is more likely to produce errors, less likely to be able to handle complicated requests, and will require additional time, energy, and computing power to respond to each query. The reality is likely to be less revolutionary than claimed.
Rough week for Nvidia $NVDA which set a record for single day loss of market cap.
DKI Takeaway: DeepSeek’s claimed efficiency reduced valuations in the power generation and nuclear markets due to fears that expected AI demand wouldn’t materialize. Even without AI datacenters, the US and the rest of the world needs more energy production. The datacenter expert I spoke with said that there are no shortcuts in AI and robust models that provide accurate solutions need massive amounts of power and advanced cooling systems. He said that just 5 years ago, GPU servers would use 3 kW/rack. Currently, they use more than 100 kW/rack. Finally, he believes that as GPUs become more efficient, engineers will devote 100% of those gains towards increased performance and 0% towards reducing energy usage. Our conclusion: Don’t get caught up in short-term headlines when long-term power needs are greater than planned generation capacity.
4. Tariff Pressure is Securing Compliance in South America:
In a post for DKI subscribers last week, I wrote about President Trump’s tariff talk. One of the points I made was that Trump often doesn’t actually want tariffs. He sometimes uses the threat of tariffs to get cooperation on unrelated issues. While economists and Federal Reserve Governors are frantically calculating the costs and benefits of proposed, unannounced, unplanned, and not-yet-implemented tariffs, we suggest that sometimes, a tariff isn’t the end goal. True to form, President Trump gave us a perfect example of this in action during the week.
Commodity markets took the tariff threat seriously.
DKI Takeaway: When the US attempted to repatriate a planeload of Colombian citizens, the Colombian government denied the plane permission to land. The plane turned around and landed back in the US. In addition to threatening visa restrictions and proposing a travel ban, President Trump responded that he would immediately implement a 25% tariff on all imports from Colombia. He added that the tariff would rise to 50% the following week. Coffee prices rose. The President of Colombia quickly reversed his position and at one point, offered to send his own plane to pick up the Colombian citizens. DKI is not going to comment on immigration policy, but whether you like or dislike this action, the economic and political analysis we provided our subscribers and clients was correct. Trump used the threat of tariffs to gain compliance on a non-trade issue.
Update: As I write this, markets are in flux as the Administration is threatening tariffs against Mexico and Canada in exchange for a mix of border security and other economic items related to preventing these countries from helping China evade other US tariffs. Markets are uncertain regarding what happens next. We conclude that sometimes, Trump wants tariffs, and sometimes he wants something else. There’s no one lens to analyze this and we need to evaluate these proposed policies on a case-by-case basis.
5. Repos and Reverse Repos:
Repos (repurchase agreements) and reverse repos (reverse repurchase agreements) are short-term financial transactions that help control the flow of money in the economy. The Federal Reserve often uses them to manage cash levels in the financial system.
A repo is when a financial institution sells a security—like a U.S. Treasury bond—with a promise to buy it back later at a slightly higher price. This allows the seller to quickly get cash while using the security as collateral. Hedge funds and banks often use repos to borrow money for short periods.
You can see where the Fed added liquidity during Covid and then withdrew it as inflation surged.
A reverse repo is when an institution buys a security and agrees to sell it back later at a set price, accruing interest in the process. The Fed uses reverse repos to reduce excess cash in the system, making borrowing more expensive.
While most of these transactions utilize bonds, they may impact equity markets. When the Fed engages in repos, more cash enters the system, making borrowing cheaper and encouraging investment in stocks. When they engage in reverse repos, cash is removed, borrowing costs rise, and investors become more cautious, which can lower stock prices.
Understanding these financial tools can help explain shifts in market behavior and economic conditions.
Here’s the video version: https://www.youtube.com/watch?v=LJiWOFOSgns
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