I was a guest on “The Derivative” this week and enjoyed a wide-ranging conversation about macro and commodities. YouTube link is here, and the interview is also available wherever you get your podcasts.

Early in my career, a mentor taught me something that has stuck with me since. We often talk about the “government” or a “company,” but in reality these entities are not monolithic. They are collections of people. And those people have their own set of motivations. Understanding those motivations is key to navigating them and getting what you want from them. The best salespeople have a nuanced feel for this. Who is trying to get promoted? Who has an ego that needs to be fed? Who is the ultimate decision maker and what do they care about?

Senior members of the US government generally fall into two camps. One camp has, as their overwhelming source of motivation, extending their employment for as long as possible. For members of Congress, this means getting re-elected. Term limit bills are DOA, donations are welcome and “appreciated,” and any rings or babies that need kissing will get smooched. For members of the cabinet, it means keeping the President happy. For senior members of various regulatory agencies, it means following the marching orders that come down from the White House, even if they are in direct opposition to their personal beliefs.

But there is also a sliver of the government that cannot be fired at will. This puts them in a second camp. For those folks, you see a more nuanced set of motivations. Jerome Powell seemed to me to be concerned about his legacy, afraid that future historians would subject him to the same bashing many of his predecessors regularly suffer. Paul Volcker cared deeply about the long-term health of the American economy and did the hard things to foster it.

Which brings us to the question of the day - what will the “government” do about the bond market? Bond yields have been rising steadily, with 10 year yields up about 50 bps this year. If by “government” you mean Warsh, then the rise in bond yields is, in his words, a welcome sight. It is the market setting prices without intervention, and in doing so tightening conditions in a strong economy that needs tightening. If by “government” you mean Bessent, then his boss hates interest rates with a crooked number as the first digit, and if you want to stay employed you need to do whatever it takes to get them down. Including, but not limited to, directly intervening in the bond market and bailing out the Yen.

The result of this tussle is one of the most consequential things investors face today. We have spent umpteen hours in the last few days studying the history of Fed/Treasury conflict, with no clear roadmap or synthesis to show for it. We don’t know where policy will settle. We also don’t really know what will motivate Warsh now that he has the job he has so long sought after. Does he believe in his light-touch approach enough to fight for it? What we do know is that the optimal Warsh portfolio and the optimal Bessent portfolio are basically opposites of each other. We also know that having a big bet on who will “win” and being wrong will be ruinous. So, we are monitoring events closely, stress-testing our client portfolios for both scenarios, and adding hedges accordingly.