Transcripts

 

Erik: Joining me now is Goehring and Rozencwajg founder Adam Rozencwajg. Adam, it's great to get you back on the show. It's been way too long. I, I think we gotta start with gold because it's on everybody's mind. Boy I don't know what, uh, Tuesday was. I think it was the biggest down day in, in the history of gold for the last several years.

Is it, uh, time to panic? Is it all over or is this just a hiccup?

Adam: Well, no. Wonderful to be back. Nice to chat with you again. That is certainly the question on everybody's mind right now. It's Wednesday, October 22nd and we had a second down day after yesterday's large correction, and I'm staring at the screen right now with.

Gold at $4,098 from a high of 43 50 only a couple days ago. So down about 260 bucks in the last two days. Fielding certainly a lot of questions and look, the gold market is, has been a super interesting one. I mean, obviously we all know gold has been a absolutely. Rocket investment the last couple years.

Gold equities this year playing a big catch up after having, uh, underperformed last year and the year before. Uh, and then, so the big question is, you know, are we in a correction? Is this just a natural pause and, I gotta kind of disappoint people. The truth of the matter is I don't know what tomorrow or the next day is going to bring, but I do think that we're still in a larger bull trend in gold.

I don't think that the gold bull market is over. And there's a couple reasons for that. You know, the first is when I, whenever I think of gold, I try to think of it in two terms. It's a little bit of a unique commodity. It's different than let's say, oil. And, and the reason it's different than oil is the following.

Imagine Oil. We have 104 105 millions barrels a day of supply every day, and 104, 105 million barrels of demand. And then about 4 billion barrels of inventory. So if you think of a bathtub, you, your faucets bringing in a hundred a day. Your drain is letting out a hundred a day, give or take. And the size of your bathtub, the level the inventory is, is about 4 billion.

You have about 40 days of inventory cover in that market. So what really matters in oil markets and indeed most commodity markets is the marginal cost of the production. You know, have you hit a level where people are gonna stop drilling new wells and declines are gonna take hold? And what is the price to squeeze out the incremental unit of of demand?

It's really all about the faucet rate coming in and the drain rate going out. Uh, if you compare that to the gold market, gold mine supply. Which is effectively the faucet, right? Your new production coming in. That's about 1% of all of the available gold in the above ground stocks in the world. So instead of 40 days of cover, you can think of your inventory levels as a hundred years.

Cover and realistically, the gold trade where prices set happens by people buying and selling units in that inventory back and forth to each other. Yes, of course you have mine companies coming in and you have true, demand that takes gold out of the market, I suppose, is intestinally small. Most of the gold that's ever been mined is still available somewhere above ground.

So really what you're talking about is the price elasticity of your buyer and your seller. That's really what matters in the gold market because you're trading ounces in that inventory pool, the bathtub water, as opposed to the faucet or the drain. And when I look at that, you know, the big buyer in the last two years has been the central banks.

It's been China, it's been India, Brazil, it's been, it's. Poland, uh, it's been all the countries that effectively have watched what happened following Russia's invasion of Ukraine, because what happened then is the United States pressed a button on their computer terminal in Washington and they froze all the Russian treasury assets, which are cleared through the Swift system.

Now, I'm not here to debate. The ethics of that or the real politic of that, you know, maybe a country like the United States should stand up, uh, and, and impose, uh, what it thinks is right or wrong. I don't know that's a topic for another day. All I'm telling you is it's happened and there's countries around the world that say, look, you know, the bulk of our reserves backing our currency, our treasuries and they're susceptible to Washington pressing a button, uh, and freezing those assets. And perhaps we should diversify that into something that they can't quite as easily reclaim. And that's been the appeal of gold. So those buyers, first of all, I think that trend's continuing. I don't see anything in the geopolitics to suggest central banks, you know, particularly emerging markets.

Central banks, uh, have bought enough gold. To reach sort of Western standards, if you will. Uh, so I think that's going to continue and that's completely priced in elastic. I mean, they don't care what the price of gold is. What they're trying to do is get dollar denominated assets out of the swift system and into something that's immune from that.

And I think that's certainly gonna continue. The other thing that I think is quite crucial when you look at. Those marginal elasticities of supply and demand is that we have not seen a huge buildup in Western speculative investment interest in gold. And I think that's really crucial and it shocks a lot of people.

Yes, it's hooked up a little bit, but it's nowhere near what the western speculators or investors have accumulated in past cycles. And that's a really finicky source of supply and demand, because that's something, it's really a momentum driven player in the market. When gold prices rise, we see western investors become more interested.

When you get a pullback, you start to see them sell. We all know that if gold were to hit $6,000 next week. We would see more interest from Western fund managers, not less interest. And conversely, if it fell back down to $2,000, which I don't expect it will, uh, we would see widespread selling on the part of fund managers that, that do hold gold.

Uh, so since they haven't accumulated this massive stockpile, like they haven't past cycles, I don't think that's a finicky source of supply that can come back into the market one day. It will be, and that's something to worry about, but I don't think it's something to worry about just yet. Who is doing the buying and the selling, then who is effectively selling the gold to the central banks?

All indications suggest that it's a little bit of Indian retail. It's some recycling, and it's mine supply Now. Mine supply is falling for seven years in a row, and both Indian supply and. Recycled gold are very price sensitive. They need higher prices to bring more material into the market. So you have price sensitive sellers and completely beholden price insensitive buyers.

And I think in general, that's a good recipe for a bull market in gold. That's the micro structure. The next thing you have to look at in gold is the valuation of gold. Is gold, expensive? And of course, the question becomes relative to what? It. We could look at is it expensive relative to housing?

What's the median housing? Price an ounces of gold. Is it expensive relative to a basket of goods like the basket that they use for the GDP deflator? And if you look at the price of gold today per ounce, relative to the median house in the US or relative to the GDP basket, uh, then gold does seem expensive.

It's not at a record high, but not far off. And, and it does seem a little bit expensive if you look at it On the other hand, relative to, let's say. All the gold that's ever been mined, the value of that relative to all the stocks in the world today, all the common equity or all the debt, sovereign and commercial, then gold is awfully cheap.

You know, we've seen in past cycles a really simple measure. You divide the Dow by the gold price, and we've seen in past cycles where, where stocks are cheap and gold's expensive that ratio can get down to two to one or one to one. And just to put that in perspective. Today with gold at $4,098, and the Dow is well in excess of 45,000 today.

In fact, it is 46,590. So one to one would mean you'd bring gold to 46,000. Maybe that would happen with the Dow selling off fine. So maybe you take gold to 30,000, 20,000, or even 10,000 if you hit the two to one ratio. So when you look at it relative to stocks. Or financial assets in general, or the monetary base, let's say.

It doesn't look very expensive. It looks a little bit cheap. So that I would call a neutral. I would say that you can't really make the case. It depends what you look at, whether it's expensive or whether it's cheap. Uh, the micro structure is telling you that you probably will continue to see gold rally from here.

So I don't think that the Gold Bull market is over. I think that gold prices by the end of this cycle will hit extreme levels. I wouldn't characterize them as extreme. Uh, but gold realistically no longer represents the cheapest commodity that I look at. It doesn't represent the most out of favor commodity that I look at.

And probably with incremental dollars that I had to invest, I might be able to find deeper value and deeper contrarian investments elsewhere in the market. So that's where we stand today. We're holding our gold investments. We might trim them a little bit, um, not necessarily. Taking big exposures off the table, but in recent weeks with oil doing poorly and gold, doing very, very well you know, our, our exposure to gold has obviously increased and our exposure to other areas has decreased.

So we might consider doing some rebalancing on the margin. Uh, maybe even, a little bit more than that, but I still think that gold ultimately has legs to run.

Erik: Adam, you described primarily a central bank buying as a result of the experience of the US freezing Russian assets. Other central banks are afraid, Hey, wait a minute.

What if they froze my assets next? I agree with that personally, but I've also heard quite a few different pundits say, no, no, no. Wait a minute. That's everybody's talking about that. But that's not really the story. This is about secular inflation. This is about the market. Recognizing that financial repression is the only way out of the us uh, fiscal.

Circumstance with, with just way too much debt. That's really what it's about. Then other people say, no, no, no. It's none of those things. It's really all about China. This is about China posturing. In order to get ready to, in some kind of partnership with Russia to, try to intentionally replace the US dollar globally as reserve currency, as an overt act of, I don't know what you wanna call it, financial warfare or something.

Okay. If any of those other. Explanations turn out to be right then the signals that we should be watching for would be different than just the central bank signals. What do you think of those other arguments? Uh, do they carry weight? Do or do you feel convinced that it's the central bank doing the buying?

Adam: No, listen, I think, I think it's all of the above and I'm gonna maybe, uh, sidestep the question a little bit or answer it in a little bit of a different way. We've spent a lot of time. Studying commodity cycles going back 150 years, and one of our observations was that big commodity bear markets usually end with massive shifts and shocks to the global monetary system, the way that we conduct our monetary affairs and.

What's interesting, which we did not articulate nearly as well, 'cause we've written about that. You go back all the way to the summer of 2000 and you remember summer of 2000 was the depths of the COVID Lockdowns and I was invited to Switzerland to give a speech and so I decided to go. I was having a little bit of wanderlust being locked up for a couple months and so I got on a plane.

I was the only person on a plane, and I delivered this speech in Zurich and I talked about how from an observational perspective. If you wanna know the catalyst that's going to end the commodity bear market and begin a new robust bull market, look for cracks or changes or shifts in the global monetary system.

And I said at the time, look, I don't really know where that's going to come from exactly. Or not even exactly. I don't have enough hubris to even say what direction that might come from. But that's the area that I think you should watch and pay attention to and remember at the time. That was really the beginnings of this idea of China trying to implement trade settlement outside of the dollar in Rebi and maybe have that be backed by gold or convertible into gold.

So they didn't have to directly open up their their, their current account and things like that. Since then, you know, we've gone through a few iterations. We've had the Mar-a-Lago Accords, uh, which, which has been an attempt to re dollarize or double down on a dollar standard and bring people into this sort of coalition of the West, if you will, where if you're on team USA, you enjoy much lower trade tariffs.

You enjoy, uh, reciprocal defense agreements and lots of fed swap lines. Which like the likes of which we're seeing in Argentina right now. O Otherwise, you're sort of on the periphery and, and. The cost for doing that is, is effectively to come in and double down on the dollar as a reserve. Currency and Treasury Secretary Bessant and Steven Miran, et cetera, have all talked about these Mar-a-Lago accords in one way or another.

And they've talked about wanting to have a very dominant, if not strong 'cause, I don't think they want a strong dollar, but they want a dominant US dollar. Uh, and you're seeing some really radical shifts being, being proposed. By those white papers. So I'm not sure the exact direction it's taking, but I do think that you're in what we call the right zip code or the right neighborhood for a fairly major monetary regime change.

And how big could that be? Well, look I'll put it into perspective the bear market in commodities. Through the twenties ended right around the same time as Britain officially left the pre-World War I Gold standard. They were trying desperately to get back on gold post World War I. They, they suspended the standard during the war, which many countries did Germany went through.

Its hyperinflation. Britain tried to rightsize its economy to get back on gold at the pre-World War I exchange rate. They tried desperately through the twenties. They finally abandoned it in 28. The market peaked a couple months later and all of a sudden, about a year later, and then all of a sudden you had the stock market collapsed, the depression, and what people don't realize in such an economically.

Horrible time. That was actually a great time to be a commodity investor. Commodities and commodity stocks doubled in the next 10 years, and you had a really strong bull market in the 1970s that obviously came at the end of Brenton Woods, which was put in place post World War II and lasted all the way up to.

I would say 68. Most people say 71 when Nixon shut the gold window, I would say 68 when Johnson took away the requirement to back the dollar by gold, it took another two or three years before you finally did run outta gold effectively and closed the window. And that brought in place this massive new bull market and inflation of the 1970s.

And in the 1990s there was the Asian currency crisis, you know, and that completely changed how we conduct monetary systems. And it brought into being what we have today, which is most of. The global South pegging their currency below market rates to the dollar to help spur exports and recycle excess dollars into treasuries.

So you've had these three huge monetary shifts, and each of them was a catalyst to devalue the dollar relative to gold, and to bring assets away from hyper long duration growth. Stocks and assets, bonds too, back into real assets. And I think this time will be exactly the same. So look when you look at what the United States is proposing to do, either on the Mar-a-Lago Accord side of things, or on the stable coin treasury side of things, and in the other side of the world you have China.

Threatening to bring back a new gold-backed currency for global commodity trade settlement. This is nothing, if not a major monetary regime change. Th this is the period of monetary regime changes. It tends to end what I call this carry bubble that we're in right now, which is emblematic of the everything bubble and the AI bubble and everything growth.

The fact that. GDP or the equity markets to GDP is about 240%. That's a huge anomaly that usually comes along with these carry bubbles, and I think a monetary regime change is going to be the catalyst to bring that back in line. And I think that's what Gold's telling you. So is it inflation? Yeah, it's related to inflation for sure.

Is it China trying to. De throw the dollar. I think that's definitely part of it. Is that the US fighting back? Absolutely. Do I really care which way it goes? I mean, obviously as a human being, I have some preferences. Uh, as a commodity investor, I think what this is proving to be is the catalyst to bring back a big, strong resources bull market.

Erik: I wanna move on to a commodity that's not getting a whole lot of sunshine right now, which is oil. Our mutual friend, Dr. Alhaji, and yourself are the only two voices I've heard recently saying, Hey, wait a minute, everybody. You're missing the story. It's actually a bull story, not a bear story. Why do you think that?

Adam: You know, I respect his work quite a bit. I enjoy his readings. Uh, and so if I'm going to have only one person on my team, that's a good one to have. I think that right now, before we get into the supply and demand, and before we get into the underlying market forces, realistically oil is the most hated asset class in the world today.

You know, in. We got oil and gas down to 1.8% of the s and p, and today it's about, I don't know, 2.3, hardly above that long-term average, about 12 to 14% in bull markets ended 30%. So we're nearly down to COVID level sentiments in energy markets and oil markets. In many cases, I find that oil today reminds me a lot of gold back in 1999, notably because of this term, the Barbarous Relic.

So you remember, you go back to the nineties, actually, I guess you really have to go back to the seventies. We ended the Bretton Woods Standard in 71, and we tried our hand at Fiat currencies by 1980. It really wasn't clear that Fiat currencies. So most central banks just kind of held onto their goal.

They really didn't know what to do. It. Uncharted territory. By 1980 vol comes in back of inflation. 10 or 12 years later, this fiat currency thing looks like it has legs and it looks like it's here to stay. So all the central banks in the world said, well, what do we do with all this gold? We've had it for thousands of years trying to prop up our currencies and back our currencies, uh, but we don't really seem to need it anymore and it doesn't yield anything.

I could buy bonds with this and, and be much better off. So what am I doing? And they all got together and they agreed how much they could each sell and dump into the market every year. And. It was became known as the Barbarous Relic. It was a barbarous relic of the past. It's how we used to conduct our monetary affairs, and it had no use going forward.

And in that environment, you could make the case that it was kind of worthless. You know, what would you pay for a gold mine to produce a metal that used to be used as money? You know, it was basically. Worthless. And the only problem with that was that by 1999, so much pessimism had baked itself into the oil market, that you got oil prices down to about $280 an ounce below the cash cost of extraction.

And it went on to become the best performing asset class, not just at the next decade, but of the next quarter century. And actually my, my partner Lee. Article in Forbes Magazine around that time in the summer of 2000, saying that gold would go up tenfold and be the best performing asset class of the coming decade.

And from, I wasn't working with the time, but what I heard when. Prudential, which is where he is working saw the article published. They'd expected him to talk about oil and how he thought oil might be up five to 10% next year, and instead he said, gold, which had fallen 80% over 20 years would be a 10 bagger in the next decade.

They almost lost their lunch because it was this barbarous relic of the past with no use going forward, except that it wasn't. The narrative was wrong and today I feel like oil's a little bit of the same. Everyone today has this hyper bearish view on crude predicated on the fact that it's this barbarous relic of the past.

It's how we used to get around. It's how we used to transport ourselves, but it effectively has no use going forward. And what would you pay for a long-lived oil asset today? Probably nothing. Because it has no place. And why does it have no place? Well, 'cause we're moving, we're electrifying everything. The problem is that that narrative is completely wrong and the IEA, the International Energy Agency is the one really promoting this view.

You know, according to their data. We're now in. Surplus market in excess of a million and a half barrels per day. Now the global oil market's 105 million barrels a day. So a million and a half might not sound like a lot, but the oil market's all set on that marginal unit of supply and demand. So a million and a half surplus is about as bad as I've ever seen it.

It's as bad as it was during COVID. Now it certainly doesn't feel to me, or most oil traders, if they're being honest with themselves, that oil. Balances today are as bearish as they were during COVID. It just doesn't feel like that at all. In fact, if the oil market can be very complicated and nuanced, but sometimes it's simple.

If you pump a barrel of oil out of the ground, it has two places it can go. A refinery or a storage tank. And so according to the IEA, we're pumping out a million and a half more barrels every day outta the ground than it need to go to the refinery. So they should be going to storage tanks, right? Except they're not.

Storage is actually flat for the year. What's going on? The surplus that everyone's talking about is not showing up in the numbers. And I would argue that whenever that happens, nine times outta 10, if not more. What it is, is its understated demand. It's that demand is actually running hotter than the IEA anticipates, and I think that's exactly the case today.

So this kind of debunks a little bit of the. Big, broader narrative that most of the market has, which says, last year was a balanced market. The first half of this year was a terrible surplus. The second half's an even worse surplus. And then following that trend, what does next year look like? Well, it must be a disaster, and sure enough, that's what they're predicting.

But if all of a sudden the true data that's coming in shows that last year was balanced, the first quarter was balanced, the second quarter was balanced, and the third quarter is balanced, then you begin to question that narrative entirely. The oil price today is about as bad as I've seen it. It's not low, it's not an all time low in nominal dollars.

As of today, we're talking about a WTI price. It's up to date a little bit, so 58 bucks, but in real dollars compared to kind of the monthly lows during COVID of 25, it's not far off from that. When you look at it, priced in ounces of gold oil's. Never been cheaper. Never in history. 76 barrels to the ounce.

To put it in context, in 1999, a single ounce could only buy seven barrels. That's when gold was the hated asset class. Today, oil's the hated asset class, and it's, you buy 10 times as much of it as you, uh, with the same ounce of gold. And I think it's this capitulation low pricing on a narrative that just doesn't exist.

So if the market's kind of balanced today, what is that? Mean for next year? Well, first of all, it means demand is running stronger than they expect, which means next year it'll probably run stronger than they expect too. The second thing, which is probably, maybe I'm bearing the lead here, is probably the most important, is that the only source of non OPEC oil supply growth for the last 15 years, the only source has been the shales and it's now.

Rolled over and we're a bit of a broken record on this because we've been saying that this was going to happen since 2019. And before people come out and say, well, that's ridiculous. That's six years ago. We didn't say it would happen in 2019. Go back and listen to our podcasts and watch our, read our letters.

We said that 2025 would be the year that shale and total US production rolls over and on a monthly basis. It was actually October of 24. That was the month that Total Shell production and the Permian, including the Permian rolled over. And since then we're down modest, about a hundred thousand barrels, but.

I think we have enough data now, 10 or 11 months worth of data that shows that that was not a blip. It wasn't just one bad monthly read, which can happen in the oil markets, but rather it's the beginning of a sustained trend. And our models have been predicting this because of very, very standard geological features.

We have run out of the best areas of the shells. The shells have been huge, and I don't blame anyone for thinking. While we were on the ascendancy side of the shale boom, that they were infinite, but immense is not the same thing as infinite. And we've now gotten to the point where we've drilled out our best wells.

We're drilling lower and lower quality wells and productions about to roll over. That's only happened twice before. The first was conventional US production in 1970. It brought about a huge bull market in crude. The second was the North Sea. And Gulf of Mexico rolling over in 2003 brought about a huge bull market, and I think that this time will as well.

So I think the market's very, very misunderstood here.

Erik: I couldn't agree more, Adam, and one of the things that's been reassuring to me because I've shared your bullish view, has been the term structure. And I've, I've always made the argument that for people who have the experience to interpret the term structure chart, it tells you a lot more than the flat price trend.

And what I saw was more than six months of backwardation beyond the front month telling me that. The storage arb, guys that, that are just gaming, how much available storage exists in Oklahoma and so forth. They think that there is a shortage despite the flat price. You've still got that backwardation.

Well, guess what? That backwardation has almost come completely out of the market. We've got. A month or two of backwardation and it's much softer than it was much, much less backwardation than it was a few months ago. Does that concern you at all? 'cause it looks like we're about to flip into a complete structural contango, which would normally be a bearish sign.

Adam: Yeah. And, and you know that, that's a very, very good point. You know, I, I'm astonished at how many. Oil market watchers, many of whom should really know better, treat the term structure of crude, which is to say the future's prices as some sort of a voting mechanism or predictors to where investors think that oil will be in a year or two from now, or five or six.

And in reality, you know, you and I both know that it's nothing of this sort. It's, it's an arbitrage. So if you wanted to take a long. Oil futures position for five years from now, just to really kind of draw out the term structure. Someone's gonna sell you that, and they're gonna have to offload that exposure by buying physical crude.

Now, maybe they don't, maybe they pair it with another futures contract, but somewhere down the chain, right? If you're long, someone's gonna be short and they have to hedge that with a physical barrel. So what do they do? Well, they buy the physical barrel, they pay for it, and they store it for five years and they deliver it back to you.

So what price are they gonna give you? Five years from now? It's not gonna be the spot price, it's gonna be. The spot price plus the cost of storage, plus the cost of capital. And that's why in normal conditions, the term structure of crude is always upward sloping. When you get a shortage, people tend to think of the long end of the curve as being lower, but it's not so much that it's that people are willing to pay a premium for prompt or delivery because they're worried about physical scarcity right now.

And so the front end gets pulled way up because you have a, what they call a convenience premium. And at the same time. There's not a lot of oil and storage. The cost of storage becomes very, very benign. So that's not an upward force on the futures price, the same as it is when storage is full. So you're right that a backwardated market or backward market.

Tends to occur when inventories are low, and that has always been a little bit of the fly and the ointment for the oil bears for the last couple years. So now you're in a position, you're right, you have two months of backwardation, uh, I guess four months. You know, the, the, the backwardation hits its extreme at two months, and then it's actually tangled relative to the spot at five months, I think.

And from there on out, uh, it's an upward sloping, contango and that suggests that inventories are more ample. And indeed, look, we see that, inventories have ticked up a little bit in the last. Two months or so, mainly as a result of some of these OPEC plus barrels flowing into the market. And so I do think that inventories are slightly higher than they were.

And that's why I'm not one to say that the market today is in a big, sharp deficit. I would call it largely balanced. And maybe it's loosened a touch. And that's probably why, uh, you flip from a backwardation into a contango, however. Here's the caution that I would make because, you know, Lee and I used to have this debate all the time, and, and you could go from the theory which says that a backwardated market is more bullish.

Or you could go by the observation, which is that big sharp cont tangos in the market tend to be a really good predictor of future price. Why? Well, a big contango means that inventories are ample. Inventory is ample means that prices are low, which means you don't invest enough. Which means production begins to roll over and that's what drives things.

So I think if you're looking at the term structure today, it reflects the oil market today, which is basically balanced to ever so slightly in surplus. Uh, but when I look forward into next year, and particularly the middle part and end of next year, I see a very, very tight market. So I suspect that the market next year at this time when we speak, uh, will be in backwardation and people who have bought oil equities, uh, will be in really good spot if you buy.

Oil futures in a contango today, and you get a backwardation later. You might have given some of that up, but I think people that buy the equities will be in a really good position because I think the spot price is gonna be a lot higher. You can't balance the market at today's price. You just can't do it.

Erik: The thing that worries me about the term structure is a lot of traders, there's a whole group of people in the market whose rationale is, look, there's a backwardated market. I'm getting paid a roll premium, even if the flat price stays the same, I still make that, that, that yield because I'm buying the next contract at a cheaper price.

As soon as you have the state transition from a prompt backwardation into a prompt contango. All those guys say, okay, that trade's not working anymore. I'm outta here. So the question is, how big is that group of traders compared to the rest of the market? It looks to me like we're only a month or two away from that trade state transition happening.

If so, how concerned are you about those guys bailing.

Adam: I think it's possible. You know, that's always the tough part of the oil markets is that the paper trade is much bigger than the physical trade. It's underpinned a little bit by the physical reality that when it's all said and done, the crude market is a physical market and we need to deliver 105 million barrels of oil day in and day out to a global integrated refining network to get gasoline in our cars.

Right. So it, there's a lot of paper churning about and it can. Absolutely distort markets on a short term or sometimes even a medium term basis. But the oil market, maybe more than any other single market in the world, is rooted at the end of the day in fundamentals because it we're so reliant upon it, uh, day in, uh, and day out.

So will there be noise in the oil market? Almost assuredly, uh, does that mean that you can't invest? I think it just means you probably have to have a good, strong courage of your conviction here. You know, the other thing that I worry about in the oil markets is that it's quite clear that the administration would like to see lower oil prices, particularly between now and the midterm, uh, elections.

I don't really know how many levers. They have to pull, I can't think of too many. The natural one to think about would be to release oil from the SPR, but given how politically intolerable that would be, remember Trump went after Biden, vehemently for having squandered our. Strategic petroleum reserves, so I don't know how you're gonna go about doing that.

I think the way the administration has chosen to date, they had hoped that they could get the industry to produce more, but as we said, starting about a year ago, we said, look, this is a geological problem. It's not a political problem. And so a geological problem can't be. Can't be fixed from the Lecter and it can't be fixed from, uh, the podium.

And I think we're beginning to see that. So you recall that the administration tried to run on a three Arrows policy, one of which was. Boosting domestic supply by 3 million barrels per day. We never thought that would be possible. Incidentally, Nixon in the early seventies, in the first year when the US production stagnated then came up with project Independence to try to boost US production.

At least in that plan, his intention was to raise the oil price to incentivize drillers. In this plan, it was to lower the oil price and somehow that was gonna elicit a big supply boom. I'm not sure how that was going to happen, but it's not. Uh, and so now you've seen a little bit of a pivot looking towards our opec.

Uh. I'm saying maybe between air quotes, our OPEC allies, because we don't usually think of OPEC as being allied with the West. Uh, but our OPEC allies, notably Saudi Arabia to increase quotas and increase production. Uh, they've done that. You know, you've seen about a million barrels increase come outta Saudi.

Uh. It's not clear to me that they have much spare capacity from here. And what's that done to the oil market? I mean, not much inventories have moved up a touch and you've taken out a $2 backwardation and made it into a $2 contango. But this is not a market that has a high level of inventory in it today, and it's not a market that's in a sharp.

Surplus and it is a market that's gonna have to contend with the only source of non OPEC growth, the shales turning negative year on year. By the end of this year, I think October of this year is my estimate for crude oil production and then continuing negative into next year. So I think you're, I think it's a very, very, very bullish outlook for the next five to 10 years until you recapitalize this industry.

Erik: Adam, let's move on to uranium a, uh, commodity. I'm very passionate about these days. What's your outlook and what do you think the major drivers are in this market? The

Adam: Iranian market is absolutely fascinating, and we got involved all the way back in 2019, 2018, when it was about 20 bucks a pound, and you could buy Cameco for $5 a share compared to, you know, 90 bucks where it's today, it's probably off a little bit in the last couple days with the sell off 84 as of today.

That's the US line. I think it still has room to run. And here's the reason why. There's lots of talk about SMRs and the new nuclear revolution and things like that, and I know the SMR companies very, very well in particularly I, and in particular, I know Terra Power very well, but I know ALO is also, I know new scale.

For those publicly listed ones today, I, I really struggle with. With their valuations. They've been unbelievable. Performers, good on them, uh, but I have a tough time with those valuations. But leave that aside. I think that will be a huge story in the 2030s. But realistically, for most investors, they're investing between now and the end of the decade.

And that's probably on the generous side. And when I look at over that timeframe, the market is in deficit today. That deficit is only gonna get worse, and that's what I don't think people understand. I get a lot of questions, how many nukes do we have to build to really. Put this market into a tight situation.

It's in a tight situation. It's been in a tight situation for four years. What happened was that after Fukushima, Japan continued to take delivery of all of its contracted uranium supply, even though it had no reactors turning, and so they built up a huge stockpile. Beginning in about 2018, 2019, with some new reactors coming online in China and Korea, as well as KaMMCO and Kazadi prom curtailing their mind supply.

The market shifted into a primary deficit. What does that mean? Mind supply was not meeting reactor demand. It was a deficit in the primary sense of the word and what kept, what made ends meet. What kept that market together was a sustained liquidation of the Japanese stockpiles. That's what allowed mine supply to run below reactor demand for so many years.

And those stockpiles are now gone. They've all been depleted, and you're in a much more heads up situation between mine supply and reactor demand. And that's a very, very tight market as a result. So people say to me, what has to change? Nothing. Just time has to change. And that started to change and really come to the fore in late 22.

In 2023, the hedge funds became very involved in the uranium space and their preferred vehicle was to buy the uranium junior miners and then to go and bull up the sprott physical uranium trust, get it to trade at a premium, it would go out into the market issue shares, and buy spot uranium. And that drove up the uranium price, which helped out the junior miners with the big.

Levered beta. And so these guys could just roll that trade over and over again. And it worked incredibly well. In 2024, spot prices lifted about 25 bucks above term price. And that reflected, I think, the speculative fever in the market. We were invested that whole time. We decided to stick with it because we saw a tight underlying market.

We debated whether we should sell at the beginning of 24. We didn't. I wish we had, uh, because in 24, those hedge funds unwound everything. They unwound everything. And in fact, they had started to go really net short. By the first quarter of this year, you could find Australian juniors with 30 days to cover and 35% of their float sold short.

And it was the trade working in reverse. The idea was to keep the spread physical below nav spread a rumor that they would be unable to pay their bills and they'd have to liquidate their uranium holdings. And that pushed downward pressure on the juniors, which they made, uh, up for in their shorts. That's all done now. Sprott was able to come to market. They were able to raise money. They put that rumor to bed. It's all behind us, and the hedge funds, for the most part, are now outta the market. Did they make money? Did they lose money? I have absolutely no idea. I suppose when it was all said and done, they probably broke even.

And. But now they're outta the market. They're no longer distorting things, and we're seeing a nice gradual increase back in the Iranian price. So I don't see that changing until you bring on more mines, and we will not bring on more mines till the end of the decade. I just don't see it. Next gen will be the one to go first.

It's not gonna be before 2030. So how high can prices go in the interim? Well, that's where things get really exciting because once you have a nuclear reactor built, and remember, you don't need to build anything more. To make this a tight bull market. So just on what we have already built, you will pay almost anything for your fuel.

All of the cost of that reactor is the CapEx. Once it's built, you feed the beast. And so would you put 2, 3, 4, $500 uranium today? It's about 85 bucks. Would you put 500 in your model and still make it work? I mean, you wouldn't wanna do that as a fuel buyer, but you could. In fact, you would prefer to do that than shut down your mind.

So I don't see where you squeeze out demand. Supply. I guarantee you that the end of this bull market will come because of too much mind supply. Uranium is not the rarest thing in the world, but it is impossible to bring it on quickly because it's radioactive. There's a lot of permitting involved.

There's a lot of. Civic engagement and discussions you have to have with the communities. You're not going to balance this market until at least 2030, and then it'll become a tug of war between the SMR new demand and new mine supply, but that I will defer to another day.

Erik: I couldn't agree more. I, I very much echo your extremely bullish views.

I, I'm very long and very bullish, but our job as professional investors is to think about what can go wrong, what can go completely wrong that would turn, that would reverse this uranium bull market. Is it. Another Fukushima sized accident is it? What are the things we need to think about that could completely derail this?

Maybe the AI trend getting unwound probably is contributing a lot to the nuclear demand.

Adam: Look again, you know, I don't think that you need this big AI data center build out to accrue to new nuclear demand. In fact, you know, it takes a long time to build a uranium mine, but it also takes a long time to build a reactor.

So in reality, the AI demand in the next five years will be met through natural gas. And so I think that's the biggest beneficiary, short term. And I think potentially that's the biggest, detriment. I suppose if all that falls apart, that could be a headwind. But it's gonna be more on gas. It's not gonna be, you know, uranium to power.

AI is 2030 and beyond. It can help with the speculative fever in the market and vice versa. It can deflate that. Right. And so I think that you could definitely see selloffs related to ai and certainly uranium stocks have a degree of momentum factor in them right now. Uh, are they trading in and alongside the AI baskets?

I'm sure that they are. Uh, but fundamentally I think that that should be largely immune in the next several years. Obviously. Another Fukushima style incident would, would deliver, could deliver a major blow to the uranium industry. I mean, look, ultimately many people died in Fukushima from the tsunami and from the ravishes of that, uh, when you look at the people that died from the nuclear incident it was zero, uh, including all those guys that they sent into the reactors to contain certain parts of that damaged reactor.

I think the first gentleman. In that group, in that cohort just passed this last year. And you know, I think the actuarial tables say that in a group of eight guys in their forties and fifties, you know, 10 years or 15 years on, uh, the likelihood that one of them passes, although tragic is, is not zero.

Uh, and I think it's right in line with that table. So, so you could really make the case that that. Nobody died in that and that it was as bad as a incident as it was, it was completely manageable, particularly if you think that nuclear is going to alleviate global warming, which is obviously a, a much bigger concern for a lot of people.

But nevertheless, if something were to happen, uh, certainly I think that would, from a sentiment perspective, deal a big blow to the uranium trade. Um, the other thing you know, is. I'm not so sure that this is a, a bearish thing of what could go wrong so much as it could signal the top one day. You know, one thing that I do think about quite a bit is that.

The Sprott Physical uranium trust. And I know those guys quite well and I like what they do. I think they're very smart and shrewd that they set up that vehicle. But you know, there's a lot of material in that and there's always been this fear that they're gonna sell pounds back into the market. I don't agree with that.

I don't think that they'll sell pounds back into the market. I think they will stop at, nothing to, uh, avoid doing that. But I also. Can envision a world where we're so tight uranium, and to think of a company in Canada sitting on a large stockpile of uranium when actual reactors can't get their hands on materials to be able to spin and provide, uh, electricity and risk impairing all the capital that went into that, that does not seem like what they call an economic deal.

Pareto optimal outcome. There's a situation that's better for everybody now. I don't think, again, I, I don't think that the team at Sprott is looking to sell pounds under any circumstance, but I do wonder if at some point we get such a bull market going that someone doesn't just make a bid and acquire the entire sprott physical uranium trust in order to get access to those stockpiles.

And I kind of feel like if there's a bell to be rung at the top. We like to think about what ends the bull market. I could see psychologically that ending the bull market when that happens. Uh, but we're a long way away from that, and I suspect there'll be a lot of fireworks between here and there.

Erik: Yeah, I couldn't agree more.

I think that is a very important signal. I'm very curious if you'd agree with me on this point, because a lot of people in the uranium market seem to fear desperately fear, oh my gosh, what if they try to confiscate spot? And my answer to that is that's an excellent goal that we as uranium investors should hope for, will be thanked for having created, essentially, a strategic uranium reserve that serves humanity well when the, when sprott correctly insists on behalf.

Of those of us who are shareholders in it. Yeah, of course, if it's the right thing for the world, uh, we'll be happy to liquidate the entire trust at a 25% premium to spot, uh, in order to help save the world, pay us off. And there's no reason not to pay them off. There's no reason to expect a big political objection to that.

So I don't see why anybody is. Fearing the force majeure, which I think is probably coming someday. Where, where Sprott, uh, where Sput is forced to liquidate entirely for the good of the world to make that, uh, uranium available. That seems to me like a wonderful outcome. What do you think?

Adam: It's hard to speculate on, on things like that in the future.

You know, just the other day we own a small position in the company, trilogy Metals, and now we have a large shareholder on the registry next to us, which is the department of War. You know, which made a direct equity investment into that project. Would I ever think that I would see the Department of War alongside me on what can really only be described as like sort of Copper Junior pre-production copper Junior in Canada?

No. Not really, but, but here we are. So certainly anything can happen. I'm of the opinion that. The most likely buyer, at least as it stands right now. Because when we used to say, look, someone's gonna buy it in that material, there's no way that if that material has better use in the public market than the spot price is indicating, uh, then there's going to be a situation where there's just benefit for everyone, uh, to put that material back in, in, into a useful form, right into fuel rods and stuff like that.

And. While, the government could do it people often would say to me, yeah, the utilities would never do that. That's a super aggressive move. And that's true, but you know, who would do that? The hyperscalers would do that. You know, the, the risk capital involved in these large tech companies that have now committed to large nuclear buildouts to power their AI data centers.

And, and we can talk all about the AI bubble if you want. That the hyperscalers in five years from now don't look like they do today in any capacity. In fact, I think they'll be in a lot worse shape. However, you could begin to see that risk capital say, look, you know, we're gonna just own a huge in, uh, uranium inventory to power the AI data centers to be fully integrated.

Uh, I could certainly see that happening. Or if not them directly, then them funding a consortium that does that for their own benefit. So I think eventually that material does make its way into the market. I don't think. Like you, I don't think that's bad for uranium investors. And I do suspect however, that when it happens from a just a psychological perspective that we might look back and say in retrospect, just like Glencore going public in 2011 right before the commodity markets fell apart, or these, these weird psychological events that take place, that in retrospect you realize that was the top that could be, but it's not gonna be a direct, uh, negative event for the uranium markets.

Erik: Adam, I can't thank you enough for a terrific interview, but before I let you go, I wait a minute. This is a little awkward. Normally, my job here as the host is to say, pitch your services. What are you selling in terms of your institutional research in this market? You guys are a little bit weird. You are selling, or you are providing institutional quality research on commodities, but you insist on giving it away for free and not charging anything for it.

What gives what's, what's the catch?

Adam: All I ask is some, some nice conversation and, uh, and good friends to talk to about this. Look we are an investment firm. We invest in resource equity markets. Uh, we have funds and different wrappers, uh, for, uh, distribution in the US and abroad. We have a US its fund and a US mutual fund.

We're long only and easy to own. Uh, and our research, you know, one of the things that we do do that's quite different, uh, is that we. Spend a lot of time, uh, researching. We spend a lot of time on the top down because I think to be a good resource investor, you have to have a good differentiated view on the commodity.

And we put it in the public domain so that people can follow us and audit us and understand the decisions that we've made and decide whether they agree with them or not, because. Inevitably these markets take longer to play out sometimes or move against you, and you can be right, but still have your stocks go down.

And so we've always felt that our partners and our clients and just the general public for that matter, uh, we wanna be very transparent in the research that we do. So everything's on our website. Go Rosen, Goehring, and Rozencwajg is the name of the firm. Go Rosen is the website. Uh, we put up all of our letters.

We keep all of our old letters up so you can see. All of our spectacular failures in years past as well as our good calls. And, uh, and, and we're just very, very passionate about the space. So please, if you have any, any interest, definitely go to our website and check it out.

Erik: I very strongly encourage everyone to do that.

That is excellent institutional quality research that is free because you're basically, it's the same way that I started the Macro Voices. You're, you're in the asset management business and you're promoting yourself by giving away free research and I applaud you for doing so. Patrick SNA and I will be back as Macro Voices continues right This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Erik: Joining me now is Variant Perception, CEO, Tian Yang as usual, Tian provided not just one, but two slide decks to download. In association with this week's podcast, registered users will find the download links in your research roundup email. If you don't have a research roundup email, just go to our homepage, macro voices.com.

Click the red button above Tian's picture that says, looking for the downloads. Tian, it's great to have you back on. Before we get started, we should say probably that we are recording this. On Tuesday morning, a couple of days before it will air. This is a week when quite a lot has happened since Friday.

Needless to say, we're back to President Trump throwing the market some unexpected tape bombs. What's your take on Friday's action? What could happen between now and when this airs on Thursday? And after that, why don't we dive into your leading indicator watch, which is the first of your two slide decks.

Tian: Yeah. Thanks. Thanks, Eric. Great to be back. Obviously there's a lot of uncertainty, but I think the biggest picture remains that the Chinese and the US are ultimately talking, right? So compared to when Trump first returned to office compared to Liberation Day, I think there's a lot more established channels of communication.

I think the Chinese response has actually been a lot more measured. The market's obviously a bit worried about the risk of escalation, but compared to a hundred percent tariffs, like China's responded with very targeted measures, I wouldn't even be surprised if they maybe gave Trump a warning before they announced it.

So overall it feels like there's a bit of posturing, ahead of the meeting in the past kind of. Few weeks and months, you can see China getting prepared for that. Strategically lowering their imports of like American agricultural products so they have something to give Trump for the meeting coming up.

So I, I would say I'm heartened by how measure the Chinese have been in response to this. So that kind of suggests this isn't really the kind of tip for attack, extreme escalation we saw back in April. This is ultimately, I think, gonna be a bit more contained. 

Erik: I certainly hope that you are correct about that. Let's move into a whiff of Reflation, which is the title of your G3 Leading Indicator Watch this month.

Tian: In terms of the big picture, six month outlook, we essentially think this is a setup for a potentially reflationary environment. Our macro risk indicators has gone from, when we last spoke a bit more neutral towards more kind of risk on territory in the last few months.

Essentially what we see right now is a synchronized global easing cycle amongst all the major central banks. Pretty good improving liquidity conditions, credit creation driven by the private sector, and our US growth allies have been pretty resilient all year. Whilst we're starting to see the first signs of Europe lead indicators recovering and China becoming less bad.

So overall, that's a pretty decent macro. Set up, at the same time we think the Fed cut in September potentially is a cut into a non recessionary environment. So historically there's been a couple of these examples in 84' 95', and you can also count the September, 2024 cut last year. And the key takeaway is that, the fed cut ends up being an insurance cut, puts a bottom under growth, and ultimately growth and inflation.

Hold up and obviously that broadly leans into the idea that potentially yields and dollar find the bottom and actually squeeze a bit higher. So that's the biggest kind of, three to six months ahead roadmap we have right now. And that's broadly how we're thinking about it.

I obviously understand concerns around AI bubbles and those things, but I would almost phrase it like. That's a valuation problem in some pockets of the market maybe, but at least on our leading in cases, we don't think there's necessarily a huge macro problem right now.

Erik: John, let's dive into your leading indicators starting on page three.

Tian: Like I mentioned, our main US growth value is still pretty stable, around 2% annualized growth rate. This is pretty much in the ballpark of where most high frequency coincident measures of US growth is. The Fed weekly as we show here. Annualized 2.3, 2.4%. If you strip out the volatile components of GDP now you get at the core underlying private sector part that's now a 2.5% annualized growth.

And, other high frequency data like, TSA travel restaurant booking, so forth, credit card spend. Most things are fine right now. We were characterize as Allis, leading indicators are resilient and constant growth is also resilient.

Erik: You're describing an analog to 2002 through 2003 on page four.

What's the connection there?

Tian: Yeah. So I think one of the big outliers, or points of concern right now is clearly the US labor market. So there's a lot of concerns on is the US labor market weakness a sign of recession? Why is it that retail sales have held up and, the economy's held up yet the job market so weak.

So we essentially had a look at when was the last time you had this kind of a setup. And so it's very interesting to note the last time we had. Hiring be this weak, but retail sales holdups and start to even accelerate was actually in the 2002 2003 period, which was essentially characterized as a jobless economic recovery and there's a lot of analogs.

In addition to the retail sales divergence, you also had a similar kind of. Bottoming and acceleration in capital. Good spending back then against the backdrop of weak hiring. So again, you can see the analogies to today with ai CapEx but weak jobs and the liquidity context is also very comparable.

So again, you've got the weak label market, but back then, by 2002 and three, you have a pretty synchronized global easing cycle amongst the major central banks. You have the surging global excess liquidity coming out a period of cheap energy prices, right? As we show here with the kind of drawdown in the, in crude oil prices as well.

So all those things actually suggests, this is more of a setup heading into a recovery rather than on the precipice of a recession. The major structural caveat is obviously to note that. Back then it was after China joining the WTO in 2001. So that was a pretty structural offshoring of US manufacturing jobs.

And obviously that is something that isn't gonna be happening today. So ultimately that kind of suggests there's less of a structural reason why the job market is gonna remain. We like back then, there's some underlying signs for the US labor market is decent. For example, prime age participation rate is, has recovered back to a pretty healthy level.

Ultimately, we would think this is more likely a setup heading into recovery, and if there's a recovery eventually that will result in the turnaround, the labor market, again, just like we saw in 02' 03'

Erik: I can't help but react to the headline on page five. Recession is unlikely if everyone diss saves, and financial conditions are loose.

So as long as everybody spends beyond their means into easy money, everything's gonna be fine.

Tian: Yeah, the way we think about recessions is ultimately. These are like phase shifts, right? Where you go from a pretty normal cyclical behavior in economy towards the sudden shift when the hard economic data and the soft kind of financial market data start deteriorating.

At the same time. The real reason to worry about recessions is those times when you know financial assets start selling off, which then leads to kind. Precautionary behavior. Households maybe save more, but as a result, earnings start falling, companies lay off more workers and these vicious cycles are formed.

And I think that window of vulnerability was actually a bit more elevated. If you think back to May and June when equity markets had drawn down, there was a bit more signs of financial market stress. And obviously the economic data was distorting The difference today is that.

Some of the things we measure here, like real M1, the top left chart here has returned to growth. So us real narrow money growth real narrow money is growing. We obviously still have a pretty big absolute fiscal deficit. The US household savings rate had been rising but it start has started actually rolling over again.

So again, households are continuing to, keep a low savings rate. And obviously financial assets are still near all time highs, right? Know, obviously it's been a couple of days since the Trump tweet. So this is not to say that there's no risk per se. Our US recession model risk is around 30%.

So low-ish, but not zero. The reason it's low is 'cause the US housing and labor but the key thing that would make it jump higher is that ultimately the time to worry is when, say s and p draws down five to 10%. Then you get a bad job print, right? That's the time when these feedback loops could potentially start and both deteriorate at the same time.

And it gets a lot more concerning about the phase shift to recession. As of right now, that isn't really the case. We can see how the, how this China, US trade war escalation plays out, but I think that's the key point I wanna make on this.

Erik: John, moving on to page six, it looks like you're anticipating the potential for an inventory rebuilding cycle.

Tian: Yeah. Again, on that theme of are we more likely heading to a slowdown or recovery? There's some typical signs you actually see going into recovery right now. So on the consumer side, one of the things we're showing here is that the bank. Bank's willingness to make consumer loans has actually been improving.

And historically, this leads the US kind of credit delinquency rates for consumers. So again, this will be a sign that delinquency rates have peaked in the us. Equally, if you look at US discretionary retail sales. Which we define as those, big ticket items, furniture, home furnishing, electronics closing and the like.

Again, that's had a pretty tarry couple of years and been forming a base and has actually already returned to growth. So again, something you see more out of a slowdown there heading into one on the wholesale side. If you look at durable goods wholesale. Revenues that's actually started to accelerate even as inventory growth remains tap.

So again, something you see more out of a slowdown than heading into one. And finally, within the ISM survey is this very interesting sub-component called customer inventories. And that's something where you can see the red line, the bottom right chart there. It's actually low and has been falling.

So IE. Within the ISM survey, people reporting that their customers have low inventories and have falling inventories. So again, these are more signs of the potential for recovery than not. Overall, we get that the labor market looks a bit weak, but you're not getting that much confirmation elsewhere.

Erik: Moving on to page seven, let's take a look at inflation pressures.

Tian: Yeah, so I think the headline on inflation is that we're going to be above target for a while, but the risk of a second wave remains relatively low for now. And I think ultimately probably around 3% annualized inflation in terms of the key data to keep an eye on.

One thing we're tracking very closely is actually PPI and import prices, which is the top right chart here. So you can see PPI for both goods and services are settling in just below 3%. This is obviously a measure of how much pass through pressure that will ultimately need to be on consumer prices.

And equally import prices are a reflection of our. Kind of foreign supplies ultimately eating the tariffs, which the answer is no right now. So I think we're a little bit at a point where, yeah, there'll be some moderate pass through pressure on the inflation front. But, PPI is not surging factors like, cheap energy prices and the like of likely helped there as well.

And ultimately what determines the ability to pass through price increases is actually lower income consumers, right? Which we know have been struggling a lot more. The rate to pass through would tend to be more moderate. In general, you can think about the top 20% of consumers as driving growth and the bottom 20% health is being important for how much inflation pass through there is.

So right now it looks like there's some moderate, input, cost, pressure to pass through in general but it'll be passed through at a more moderate rate.

Erik: Let's move on to China on page eight.

Tian: I think what's very interesting in China, the price action has obviously been pretty reflating so far.

We show here that Chinese small caps have been surging relative to large caps. Chinese 10Y yields are finally bottom and started to tick up and you're actually seeing the very first signs of things going from terrible to slightly less terrible. The bottom chart that showing a essentially employment PMI survey for China, private sector one, and it has gone from kind of very depression like levels and started to recover.

So broadly speaking, we would say that China overall. It doesn't look as bad as it's been. And at the same time, leading indicators of in, of both growth and inflation have bottom and started to recover. So overall we're heading into kind of the the fourth planning now. There's a lot more of talk about the, the Chinese authorities need to do some more for the consumption side.

So yeah, I would say macro tailwinds are still there for China. And obviously I'm making an assumption that Trump and Xi will ultimately meet and, try and announce a win for each other. Within that context, the macro seller looks okay, economy going from bad to slightly less bad.

Liquidities tailwinds are good, and asset prices broadly are on board with the kind of recovery story.

Erik: Let's move on to the Euro zone on page 10.

Tian: Yeah. On Euro specifically, what's very interesting is that, Europe structural problems are well known, right from the political dysfunction to, elevated energy prices.

We show here on page 10, the bottom there's a lot of problems, but what's very interesting is that we're actually seeing a bit of a recovery in our lead indicators and some of the underlying data for the first time in a very long time. Essentially, over the past three, three to four years, you're really starting to see in more kind of coordinated recovery in, in the German data, so for example, the German IFO expectations minus current conditions.

That differential is actually turning positive now for the first time in a very long time. We see that on the top right chart down on slide 10 the percentage German manufacturing industries where production expectations are improving. Again that's recovered to more than half. So we potentially have a little bit of a cyclical rebound coming in Europe.

Again, I think the structural problems are real, so the magnitude might not be there, but you're finally seeing this come through, on, on the back of some of the excitement around German and fiscal as well.

Erik: John, let's touch on slide 11, consensus two, optimistic on disinflation.

Tian: Yeah. So on Europe, I think it's worth pointing out that the market there used to be obviously was a bit further ahead of the of the US into getting their rate cuts in and policy rates being taken out to 2%.

I would say the consensus is fairly relaxed on European inflation risks. But it's interesting to note that our estimate of our star in Europe, I either, the neutral policy rate, the real neutral policy rate is actually 1.8, which is a bit towards the higher end, I would say, consensus of where ECB is.

So that would actually suggest that the neutral nominal policy rate right now is more closer to 3%. Rather than two. So we suspect that if anything ECB policy is actually towards slightly more stimulatory. Territory. The market is obviously focused on the France risk.

Right now it's trying to price some cuts in, but if you look at the bulk of the arrival curve we got on the bottom right there. Ultimately there are now hikes discounted for 2026, 2027, and it's hard to price a lot more in for next year. So given the ECB is ready for the cuts in, given the very first signs of some of those cyclical lead indicator recoveries the risk reward probably actually favors a, slightly more reflation in Europe and positioning for that.

Erik: Tian, I wanted to start there with the leading indicators because that's what variant perception is best known for. You also sent us a second PDF titled Macro Snapshot October 2nd. Tell us what that deck is about and go ahead and dive in.

Tian: Yeah, so that's more the investment implications in terms of trade ideas or asset allocation.

Obviously, using our lead indicators for kind of months, obviously a lot. The elements we already touched on. So maybe the key things that we wanna highlight here is if we go to like slide six and seven, that's probably the most important, and then we can talk about commodities as well.

So I think right now, one of the concerns that even if. There isn't necessary as obvious signs of macro problems. Clearly there's some concerns around the lack of risk premium in asset classes, right? Whether you look at credit spreads or US large cap equities. So it's natural to be a bit concerned about have we fully discounted this relatively benign macro outlook.

And, the way we think you can deal with it is that we have two very tangible signposts to watch. For a sign that a correction may be playing out. And in fact, obviously we put this on October 2nd. We actually had a kind of a hedging signal October 8th, which was fortuitous timing. But but essentially that, there's two things to, to think about.

The first is, joint periods like this. What we want to be very focused on is how cross asset volatility and just credit and credit linked are trading in general normally. When a, a correction potentially starts what you observe. Is that all volatility across asset classes start to take up from the lows and all different measures of credit start to deteriorate.

The key is the kind of breadth of it and the simultaneous nature of it, rather than the magnitude. So if they're all deteriorating the same time, that tends to be more reflective, the beginning of a broader de-risking. And so that's one of the key things to keep an eye on. And then we're starting to see inklings of that a little bit.

So that's just a very market behavioral stuff. We formalize it into the kind of VP correction signal. We have various versions of kind of tactical hedging signals right now. So it does make sense to keep some tactical hedges for the month of October. This is. The bulk of earning season, we have the fed at the end of the month.

And we also obviously have the Trump meeting end of the month as well. So there's quite a lot of catalyst. That likely means that imply vol will remain bid, so you're a lot less, less likely to bleed as much as normal. So that's the overall thinking there on the tactical piece of the portfolio in terms of the cyclical roadmap and the signpost to watch for.

One of the key worries right now is that the fed cuts may become interpreted by the market's political as reflecting Trump's desire for more cuts to lower interest expenses. And that works and works until it doesn't. We just don't know when. But the sign from the market will be that at one of these upcoming fed cuts, it's possible we see the yield curve, have a sharp bear steepening in response to one of the cuts.

And that will be, a market based sign that okay, we've hit the limit here and then, they probably need to pull back a little bit. So I think that's something I'm watching for very closely. I don't know when, it could be even October Fed cut, the market has that reaction, but obviously it could be January or whenever it's.

And I think that's just something to bear in mind that I think we have this pretty decent macro goldilock setup until the fed over does it and cuts too much, and then the inflation fears pick up and then timely all these things matter again. So those are like the two tangible things right now to watch for.

Erik: Let's touch on semiconductors on page seven.

Tian: Yeah. So obviously in the talk of the town, AI bubble. Mental energy is being spent on this already, again, we're not gonna pretend to be like the AI experts, but we do have some general frameworks. We used to think about this the key one being our capital cycle framework.

And so ultimately on our capital cycle framework, what it tries to do is it tries to understand CapEx and R&D spend, what the marginal operational ROIC is for that spend, and ultimately how that translates into profit. But we do it across the entire aggregated profit pool. So what's been, what is more interesting to us is that on our capital cycle models is actually software that has been relatively weak within tech.

Semis have actually seen improving capital cycle, while hardware has been deteriorating slowly, but software is the weakest. Despite all the, I think it's understandable a lot of the concerns around, dot com, repeat dark fiber or the rail build out, like a lot of those things are valid.

But timing wise, typically the sequence would expect to see is that, we need to see the marginal operational RIC start to come off a bit, and then the capital cycle score will deteriorate a lot. So far, only one of the pieces are in place, which is essentially the surge in CapEx. But for a lot of the AI centric stuff for the profit a whole the kind of marginal returns are still significantly higher than the weighted average cost of capital.

Obviously these things will shift as assumptions around useful life depreciation schedules, vendor financing. All these things will eventually show up in how, the weighted average cost of capital is calculated. But it's just worth highlighting a high level that, at least right now, the industry is covering the cost of capital is actually profitable.

And so it may be a little bit early to be worrying about the surge in CapEx.

Erik: Let's touch on commodities on page 11.

Tian: So I think the last thing that I think is very interesting is that we have a pretty unambiguously bullish commodity set up with our models as well. The demand supply and balance models are suggesting quite strongly for commodity recovery cyclically, and obviously structurally the backdrop should be pretty favorable, where we are moving to a more, a world of great power competition, right?

Supply chains, commodities are being used and weaponized. In geopolitics and you have not just cyclical recovery, but also more price and sensitive industrial policy driven or politically driven demand potential as well. So it's a pretty good setup for commodities in general now that gold prices, in real terms of surge back towards the 1970s, 1980s high the, it's really about whether the other things can start to catch up.

As we show on the top right hand chart here, so broadly, I think, overall for the complex we think the upside is still very good. The laggards probably gonna be oil this time just 'cause of, OPEC and supply and obviously some of the political imperatives around, keeping inflation contained.

But I think industrial commodities and the the catcher potentials is very good and ultimately obviously we'll get recovery in in oil as well.

Erik: John for the last few minutes, let's zoom out to this big picture that everybody's trying to figure out. Seems like just last Friday, China was absolutely evil and was the end of the world and then all of a sudden they're best friends again.

Is this just a part of the Donald Trump approach to diplomacy and what should we expect next?

Tian: Yeah, so I think the biggest picture here is actually something we laid out all the way back in 2022 when we wrote a kind of pretty big thematic report on the coming CapEx supercycle, the end of the invisible hand essentially the end of free market driven, let's say Fair Globe, globalization, right?

And I think this is the biggest context. For that, basically the US and the Chinese systems are moving from a focus on profit and efficiency towards the need for resilience. But, efficiency can, the flip side of resilience essentially inefficiency, right? You're gonna duplicate supply chains, you're gonna stock power more inventories you're gonna change how resources are allocated.

And so I still think that's what is really going on and having to manage that process. At the same time, there's, with the great power dynamics kicking in here, there's obviously a lot of, lessons from history we can learn. So I think for me, the a very useful context to think about is actually more the, US period would be World War II into like the fifties with FDR and essentially the arsenal of democracy kind of analogy.

So what that ultimately means is that when you have very important. National policy imperatives. You need to start thinking about the government's balance sheet and the private sector balance sheet is just one thing, one national balance sheet. So in FDR example I cited, that was like getting, the private sector to build your tanks and planes and to fuel the war effort, right?

And then later on coordinating between private and public sector in the Cold War, and this is essentially the playbook China has taken for. Quite a while in terms of how China coordinates their private sector with government policy to drive a lot of, industrial policy imperatives, national policy imperatives.

So I think that's the biggest picture context that we're just moving towards a world that, both countries wanna emphasize resilience, supply chain resilience. And this idea of to compete you a.

Broadly speaking, like most of the marginal news we see it leads into that story, right? All year long. So I think that's the, where ultimately both sides wanna end up and then they just have to manage the transition in the middle, right? And this is where I think there's a realization that leverage is becoming.

In my opinion, at least a bit more balanced. So I think the US probably does not have as strong a leverage as the US or in terms of tech sanctions on China, right? The rapid pace of Chinese tech development I think has probably surprised the US side. And equally, I think the us I might have underestimated kind of short term, rare earth choke point, again, in the long term, rare earth doesn't matter, right? Rare earths are not that rare. It's abundant. You just have to be able to refine it. But in the short term, obviously China has the refining capacity and so they need to play that card while they can. So I would say that's where, because the leverage is a bit more balanced, heading into kind of the Trump sheet meeting that they can obviously try and position.

But ultimately I think, as I mentioned right at the beginning of this. Meeting the structural direction is set, right? Both countries know they need to build a resilience from each other and just to, prioritize domestic, national needs, but they don't want to have such a dramatic kind of divorce.

That the short term pains too much. And so that's why all these communication channels have been established, since Liberation Day. And they're gonna, and they're likely talking. And so I think you'll just keep getting these nominal wins that both sides can announce to that domestic audience avoid the worst of the disruption.

Ultimately the trend is really towards, trying to build up essentially economic nationalism and resilience in terms of supply chains and manufacturing.

Erik: Tian as always, I can't thank you enough for a terrific interview. Before I let you go, tell us a little bit more about the work that you do at Variant Perception.

What services are on offer for our institutional investors and where people can follow your work?

Tian: Yeah. Thanks for having me on as usual. Variantperception.com. We can share a link for some of your listeners as well if they're interested in getting some more materials or to have some access to our portal.

But essentially, we focus on building. Investment models, right? Modeling the economy, modeling asset classes, modeling market behaviors and modeling long-term structural capital cycles. And then from those models, we will find outliers or interesting investment themes, contextualize those in terms of the news and price, action and flag ideas.

Erik: Patrick's Ceresna and I will be back as Macro Voices continues right here at macrovoices.com.

 

 

Erik: Joining me now is Freelancer.com, CEO, Matt Barrie. Really interesting story folks. How this one came together. We were trying to figure out who the top five macro guests were. You already know about the countdown. Lynn Alden was the big winner, okay? Believe it or not, those were just the macro guests, the number one all time download champion episode of Macro Voices was actually a Matt Barrie AI interview.

And the thing that's really striking to me is people like Luke Groman and Lynn Alden spent half of their careers building their following and promoting themselves and so forth. Matt's not even a guy who promotes himself yet he's done more downloads in a single episode than any of our guests that do, and it has to be this amazing topic of artificial intelligence. Matt, anytime something like this happens, public internet AI, it leads instantly to the obvious debate. Okay, is this a bubble that's about to burst or are we just getting started?

Or, where are we in this story and how should we think about it? Is, are we coming up on the dotcom bust or are we just getting started?

Matt: If you think back to the dotcom days, and there are a lot of parallels between then and now. Cisco got to half a trillion dollar market cap, which was about 5% of us, GDP.

And if you thought that is a bubble, what do you think about Nvidia at four and a half trillion dollar market cap and 15% of US GDP. It's become an absolute behemoth. It's about seven to 8% of the S&P 500 market valuation. It's doing about 6% or 7% revenue of the S&P500.

It is an incredibly profitable business. It does about $160 billion a year of revenue at about a hundred billion of EBIT, which is insane. It is built upon a very interesting foundation. The, they've released in the latest financials that the top two customers of Nvidia generate around 40% of the revenue and the next four customers generate another 40% of revenue, and it's believed to be that the top customer is Foxconn. And the second top customer is Quanta. And these are two Taiwanese manufacturers of boxes. They're put Nvidia chips in them. And number three is another Taiwanese company called Western. And below that, so your Dells and your Super Micros.

So you've got incredible customer concentration. The top six customers, top three being from Taiwan, but the top six customers are about 80% of the revenue. And top three customers are at 50% of the revenue. And then you look at their, product segments that NVIDIA produces, 80, 88% of the revenue is currently coming from So it's interesting.

And then out, out of the a hundred billion dollars of EBIT, the biggest supplier to Nvidia is TSMC, which has got, just like NVIDIA's got 60% concentration of the semiconductor market. TSMC has got 70% capture of the foundry market.

And so you've got this incredible revenue story, incredible revenue growth. That's all been on the back of data centers. It's all concentrated into six of which three are in Taiwan, and really, Nvidia story, which is really holding up the entire market, is built upon a fault wine, one island three customers one foundry and a prayer that the geopolitics that shakes Taiwan is less than the geophysics underneath the ground.

So it's pretty interesting thing to look at. And if you look at that, so you look at that revenue number of $160 billion a year, which is about 40 billion a quarter. The entire AI compute space. So we're talking Open AI, we're talking Midjourney, we're talking Anthropic, Etc. That entire AI compute segment in its totality is less than $40 billion of revenue a year, and every single one of those companies is losing money.

The entire ecosystem is really built around Nvidia prop, profitability, and and a whole Taiwan story underneath it. The more you dig into these numbers, which we'll do in a second, I'm sure the more the crazier the whole thing gets. And that's in the backdrop of a pretty frothy overheated market.

I mean of o f over 10 times that's already passed the dotcom peak, which was about 25%. And back in the dotcom days revenue growth was about twice as high, 20% year on year. That's where we are. And it's it's interesting with that basis of where we are today, of what the projections are for tomorrow.

Erik: Matt, this industry has already spent an incredible amount of CapEx.

It seems like the interest in it is unlimited. There's probably unlimited capital that wants to chase this. Wait a minute. You're gonna run outta energy at some point. We'll come back to that later in the interview. Is CapEx unlimited? Does it limited by energy? Is it limited by something else? When does this stop?

Matt: Obviously there's an incredible amount of money being spent not just on Nvidia, but in the CapEx to build the data centers, to put the machines that have Nvidia chips in them. Einhorn came out this week from Greenlight and said, this could be the biggest bonfire of money since the the dotcom boom.

If you look at, if you look at the amount of money that that the big sort of hyperscalers are spending, the likes of Microsoft and Google are spending at the moment around 50% of earnings on their CapEx. And the METAS and the Oracles and the Amazons are projected at the moment to spend about 70% of their earnings on CapEx with next year, potentially up to 1.3X their earnings.

If you think about the dotcom boom, and you think about, all the telco boom and bust that happened there, and the optical fiber boom bust that happened there, at its peak AT&T, when it was, dominating the market and it had about, I think it was about 60% market share back then of telecoms, it was spending at its peak about 72% of its earnings on CapEx. And, Exxon was spending about 65% of its earnings on CapEx on the shale, boom. And now come at the peak of CapEx. So we're really reaching the point of CapEx to earnings.

That hasn't been really paralleled since, the railroads were laid across America. And those numbers are getting to a pretty insane predictions. I think Altman came out just recently and then I think Jensen's kind of backing them up on this, on spending by 2030 7 trillion dollars on CapEx.

Now, if this sounds like a big number, it is, that's about one third of the M2 money supply in the us and how are they gonna finance that? A lot of, in fact, possibly most. The CapEx is being financed by ads. So what are you gonna do, you're gonna finance $7 trillion of CapEx on banner ads. The advertising market's kind of interesting to look at.

In the last a hundred years, advertising as a percentage of us, GDP has never really changed from about a 2% level. The composition of advertising in that spend has changed. Digital advertising now is the line share that's about 70, 75%. Of advertising spend, in the US it's 2% of GDP.

In Australia, for example, it's 2% of GDP. Worldwide it's about 1% of GDP, but in the rest of the world you don't really have a strong consumer market like you do in the US and so forth in the Western economies. So there's pretty limited ability for Meta and Google and so forth to increase I think their advertising. I don't think that increasing more ads in the feed or placing more banner ads on the page. Is going to be able to sustain a ever increasing exponentially growing CapEx spend. And if it's not ads that's financing this CapEx spend, it's cloud.

And so it's, you've got three major players in cloud. You've got AWS, you've got Microsoft Azure. And I was very surprised actually to see that in the last quarter. Microsoft's actually have taken Amazon. In terms of the revenue, it's about $47 billion in the quarter versus a AWS is 29 billion.

And then third place you've got Google Cloud and. For a long time, there were pretty decent margins. But now with, the ai, CapEx boom, those margins are eroding quite dramatically as the CapEx spends ramping through the roof.

And you've got now fourth and fifth players coming into the market. So you've got Oracle now trying to get into the market and they're trying to do it on price. So they're saying they're gonna undercut. The cost by about 40%. And then behind that you've got coreweave and the newer clouds coming in.

And if you reflect back on the dotcom days, AT&T had, one analyst I think said, better, better profit margins than drug dealing. When it was just three players in the market and they had 60% market share, and again that's the market share that Microsoft has in software, and that's the market share that NVIDIA has in ai.

And it's the market share that TSMC has in foundries. And now, if you look back at the telecoms boom and the fourth player and the fifth players came in, all the economics just fell apart because of the CapEx. You've got that dynamic happening now in the market , for AI data center build out.

And the funny thing behind all of this it's the demand isn't there. They're all building this out a ahead of time. And if the money's not coming from banner ads and it's not coming from cloud, it's coming from VCs.

So you've got, huge amounts of money sloshing to the space. The numbers are absolutely astronomical. Nvidia I said they're doing a one 60 billion a year in in, in revenue. And the rest of the AI compute space is making less than 40 billion in totality and and losing money.

Each of these big hyperscalers, they're spending, they anticipated to spend next year, a hundred billion dollars plus or minus 20 billion on CapEx alone. And they're not even doing that in revenue. AWS at the moment is doing about 110 billion a year in revenue. That's gonna be spent in its entirety next year on CapEx, just by each other's hyperscalers.

So these numbers are astronomical. In the back, in the dotcom days, at least when you had that boom the software market generated around 300 billion of revenue in its totality and employed about a million people. This AI boom is generating what, 20, 30 billion a year in revenue.

It's hard to tell 'cause all the companies are private. Losing money and not employing anywhere near as at that level. And in fact, if anything, they're saying, we're gonna take everyone's jobs away and create unemployment. The numbers are very fantastical and the more you dig into that, the more you dig into just how big those numbers are.

I just saw literally about an hour ago, Mark Andreessen tweeted a an interesting graph. It was, uS real GDP growth contribution from Tech CapEx and at the moment in the second quarter of 2025, the US real GDP growth is around 2% per annum, and half of that is CapEx from big tech. And they wanna lift that CapEx from 400 million to a $7 trillion spend by 2030 in totality.

Erik: Matt, as energy investing is my personal passion, and I gotta tell you this, AI one is a completely different ball game than anything else I've looked at.

I'm not really thinking about, okay, what's the demand of this and the supply of that? I'm thinking this fundamentally changes society in a way where potentially AI consumes so much energy and it needs it to grow that it. Exacerbates an energy price escalation that I think was coming due to inflation anyway, and all of a sudden you've got everybody feeling like AI is both stealing our jobs and consuming our energy.

It has to be outlawed, it has to be shut down, and I think it potentially adds to a social divide that's already outta control. So to me, there's almost nothing you could say about the scope of how much energy it's going to use or what the consequence of that. Could be, that would surprise me. I have to admit though, I'm a narrative oriented guy.

I haven't done enough homework to have any data to back the things I'm saying. Am I crazy to think it's that big? And how big is it?

Matt: In all these things, in all these bubbles, you have blue sky and then you have reality. And energy's where the reality practically starts to hit. Data centers are drawing huge amounts of energy from the grid and the US already, it's about 4.5% of the whole US energy demand.

And projection go to 9% by 2030. And this is at a scale now that it's causing real problems for a lot of different countries around the world. In fact, Bloomberg just came out with about a week or so ago with a, an analysis of energy prices in the US and they found within within vicinity of data centers, I think they looked at, within semi kilometers of a data center.

They did a survey of wholesaler energy prices in the United States, and they showed that within the last five years that those prices have gone up 267%. So you can imagine the average person in the street's probably not very happy with their, if their bills got, by triple to power someone else's chatbots.

At the same time, it takes a long time to put energy generation on the grid. It's highly political as you well know, you were just out here in Australia. Even though we're an energy superpower in five different capabilities, uranium, coal, gas, we've got some oil, Etc we're not allowed to use most of it.

And so it's very, we're shutting down coal plants, Etc, so it's very hard to get new supply on the grid. If the average data center now is what, 300, 400 megawatts gonna a gigawatt. If you try and put that on a lot of city grids, you'll brand it out. So in addition to grid cap capacity problems and energy, price problems, you've just got the practical reality of building these things, right?

Schneider Electric has an order book backed out till 2030. So I don't know how they're gonna get this CapEx, done. At the moment they're drawing down the capacity that's come from the office market rolling off. So as the work from home and the COVID thing hit, the office market in in the US and other places around the world, there is some construction capacity that's been drawn down to to build these data centers.

But, if you can't get the, electrical transformers and the switching equipment and you can't get the builder to, to be available at any reasonable price to build the data center. And then on top of that, AI demand is moving. Electricity markets like OPEC used to move oil.

You're gonna have some real problems in terms of your ability to actually deploy this. And then, at the end of the day. The economics aren't there because no one's making any money yet other than an Nvidia. So you've got this whole infrastructure that is built upon, very a great story a great promise.

And I do think in the long run, it's very similar as a dotcom boom. In that, I think I said this in the last, one of the last MacroVoices episodes, right? Cisco, networks. Networks. That's their motto. That's their tagline. As the internet got deployed in, in, in around the western economies, people thought, everything's gonna be on the internet.

Your clothing will be connected in a personal area network to your watch, to your handheld device, to this, that, the other, to your computer or to the world. And Cisco makes all the routers, the switches, the hubs, and ultimately the chips that will your network, the fabric of mankind and industry.

And so they're gonna be the richest com company in the world. You look at AI and it's a very similar issue where you go think AI's gonna power everything. It's great for highly personalizing experiences and really taking automation to the next level.

Which is the essence of computer science and, but we may be getting ahead of ourselves in the stories here. You've obviously got some personalities that are great. Showman, you're Sam Altman's, the, one of the PT Barnums of our time in terms of weaving a story and telling a story.

But the numbers now are so fantastical and so large and just so incredulous that you have real constraints in the physical world. Building up with numbers that get, you keep adding zeros to them and then you, at the end of the day, that may be way ahead of where the current usage is in time. Just we had the telecoms blow up in the dotcom boom.

Ultimately people, the law of compute computing basically is that, ultimately you'll use up on the memory, all the bandwidth, all the disk space, all the CPU capability, available to you. But it may take time, some time to get there, and you may have a massive o capacity for a period of time as people get over exuberant.

Erik: At the beginning of the public internet and the then the ensuing dotcom bubble and so forth, there was a lot of contention over completely unorthodox business models, Google giving all kinds of things away just to establish market share, which seemed crazy, but it was actually very effective. It seems to me like we're going through the same thing again, and I've gotta tell you, I went from Chat GPT3, I felt like it's a cool novel, but I'm not gonna spend 20 bucks a month on this thing.

Now at Chat GPT5, I've got the $200 subscription. I wouldn't go down to the 20 if you paid me to because I just, even for that small little edge I really value it and I would frankly love to, to be offered the $500 a month option because I've come to use it so much. Okay. If they're mostly only able to sell the $20 option, is this.

Business staying? How do they make money doing this?

Matt: It's clear that there's no sustainable business model with a foundational model. At this point in time, there's zero switching costs. If open AI, deep research.

O3 is better than, SONET, whatever from Claude I immediately switched my activity there and I'm sure you do the same as you just go to whatever the latest, greatest is. There's nothing holding you back. And what's very obvious though, as you become more of a power user, and I do spend a lot of my day admittedly in in GPT making all sorts of queries, Etc, when you kind of run outta, usage in your $20 plan or your 200 plan, or whatever the plan is. It the platforms don't say, please put in your credit card and buy more credit. They say you're on a timeout in the Nordic corner for six hours, seven hours, six. Six days, and in some circumstances I was given a several week time out on one of the platforms.

So you can tell that they're actually, the unit economics of inference is not there. They're not making money on you actually using the product. It's more like a gym membership. They're making money and you not turning up and paying the subscription. And this is I think a real tangible problem that you're getting like this incredible build out and data center usage for companies that are completely unprofitable and, you may be willing to pay $500 a month for greater usage of your model, I would think that would still probably be unprofitable in your usage at that level. Are you prepared to pay 2000 a month, 20,000 a month, or whatever the true number is for profitability? I don't I dunno. One, one of the, one of the big usage ca use cases that are coming out now, which is which is burning a lot of tokens are these sort of, AI enabled, in integrated development environments. So you see like your cursors and so forth where programmers can get, ordered complete on steroids effectively. Writing software cursor makes no money on on that token burn. They've got an incredible revenue ramp rate.

In fact, they're the one of the only three companies in the entire AI compute space that has. $500 million a year or more of annual recurring revenue and, no annual recurring revenue, not revenue. There, there's a lot of funny calculations being used to project the hype.

But 100% of cursors revenue is sent to Anthropic who provides the underlying foundational model to basically power their products. And, they're not making money's, not making any money. They're losing money, losing billions a year, Etc. And at this point in time, even companies like Perplexity is sending a room to send like 165% of their revenue to the underlying foundational model providers to run their search service. And then those foundational models, providers are sending it off to the cloud computing guys who are sending it off effectively to Nvidia, who sending it to TSMC.

So it's so what are the, so what do these companies have to do? So the open AI is the world. They've come out now saying, okay, we're not gonna make any money on 20 a month. We're not making any money on 200 a month. We have to come out with some sort of a story to justify these sky high valuations.

Now we'll note that Open AI has raised about $64 billion worth of money, I think today. And and they've done it at a $300 billion valuation. They're about to sell some employee stock. I think they've, they're upsizing the employee sell down round at half a trillion dollar valuation. So it's interesting, the open AI guys are cashing out, by the time that's done, they'll cash out about 11 point something billion dollars worth of stock, and they're only doing about, four mil, 4 billion of revenue in a quarter, sorry, a half or billion revenue a half, and losing eight in the first half of this year.

So to promise to, to pry their justification for these sky high valuations, they've gotta come up with these fantastical stories in the current one. I saw was Sam saying, I think about two weeks ago that 40% of jobs, so in order to justify these sky high valuations, and open ais employees sell down at a half a trillion dollar valuation of $10 billion worth of stock.

They've gotta come up with these fantastical stories. And the latest story I saw from Alman about two weeks ago was that 40% of people will potentially have their jobs taken. Thanks to AI and by implication of that, what he's saying is that open AI will generate the income that 40% of people would in the past be paid, and that's gonna be the revenue stream in the future as they take over all these different categories of work.

Now. If that were remotely true they would launch Jihad on on Sam. They'll burn down the Open AI headquarters and they'll put an ax to the data centers and governments would regulate and ban it. The Great Depression unemployment was around 32%. And so these numbers are extreme.

And to date, I still don't know. And I know there's dislocation that's gonna come in certain segments, but I still dunno, someone amongst any of my friends or even online who could put their hand up and truthfully say. I've lost my job thanks to AI despite all these stories around, agents and so forth and so on.

Now, I do think it's gonna come in some parts. I think, in customer support in some areas of sales, in some areas of administrative work where people have highly paralyzable task based workflows, which lend themselves very highly to automation and very good automation, I will say.

Because remember, the whole art of software is around automation. This is really just taking things really to the, a 10 x step up. And I think you can do some of those task-based functions very well. It's still not there yet. Nobody is making a profit doing this yet, but it is coming.

But it's not gonna be on the scale of 40% of the world people, the people in the world being unemployed. And you've got this, if you just step back and just look at the ecosystem, right? So you've got Nvidia 160 billion in in, in revenue, a hundred billion in earnings. They're making bank. And then you've got this, a whole ecosystem around them basically pumping Nvidia to the moon in terms of their revenue.

And by, by a result of that, their valuation. None of that around them is making any money. You've got open AI pitching all sorts of fantastical things. You can remember that they still have to revenue share with Microsoft. There's still a nonprofit this, that, the other, but they're, talking about, trillion dollars a year of CapEx 7 trillion by 2030.

There's the Oracle deal, which we should talk about in a second, Etc. And they don't have the money for any of this stuff. And it's almost. It feels much bigger than Enron in terms of the of the look and feel of the whole story around open AI and all the funny things that are happening now around the financings and the space and the justifications for how the CapEx is gonna be gonna occur.

And by example of that, there was what the calling now on social media, I think Elon called it the Infinite Money Glitch. You've got this announcement by Oracle that have just come out. The other day, Oracle share price jumped by about 39%, because they had like this it was like 380 or so billion dollars worth of cloud compute bookings that they've got out till 20 30 or so. Now, Oracle hasn't built their cloud yet. They're saying they're gonna build one, they say they're gonna do it, the price competitive approach of, roughly a 40% discount, Etc.

But then they showed this order book, and the order book was quite. Interesting actually when it came out, 'cause it was like a hockey stick, I think it was like 2026? It was like 18 billion in in, in bookings. And then the next year was 32 billion. The next year was 73 billion.

The next year was a hundred and 14 billion and 144 billion. And so it showed this huge hockey stick ramp and their share price went up 39%. But then a day or so later I think it was the Wall Street Journal published that 300 billion of that is OpenAI. Now open AI is only doing was it $4 billion a quarter of revenue.

They don't have 300 billion to spend. But what they've done is they've done the, they've done the, this deal with Oracle where they're gonna they've committed to this order book and off the back of that, Oracle share prices has pumped. And then in parallel, all of that.

So Jenssen's come out and he is now offering, this is the infinite money glitch. So he is offering a hundred billion dollars worth of GPUs to Nvidia under vendor financing. So he's effectively saying, take the GPUs now, pay me later for them. And then what OpenAI has done with those GPUs is gone to Corewave and Corewave is a neo cloud.

And we'll talk about them in a second. That's like the new generation cloud. AWSs and Azures and so forth, and it's gone to them and said, okay, I've got hundred billion dollars of GPUs. I'll give them to you to to, to use. And I'll book with you $22 billion worth of compute over the next couple of years.

And we take or pay. So I'll lock that in and I'll guarantee that I'll spend $22 billion with you. Corewave then go off and going, look at my bookings. I've got $22 billion of the bookings. And then open arrow on the flip side saying, look, I've got 22 billion of committed spend I'm gonna make on compute, so I must have a big customer pipeline.

So pump my valuation and give me a sky high, half a trillion dollar thing. So I can do $11 billion stock sell down. Then Corewave is saying I've got 22 billion of bookings from OpenAI. I'm gonna go to the private credit markets and JP Morgan and Goldman Sachs and so forth.

And I'm gonna raise money in the debt markets. And what I'll, from private credit, the lender of last resort. And what I'm gonna do with that is I'm gonna take that money, I'm gonna go back to Nvidia. I'm gonna buy the data center, gear that to build out my my AI, GPU powered, data centers.

And the money just goes around a circle. And at no point in time yet has a single customer spend a dollar. And so you, you look at all of that and you go if you send a check, check the numbers. And there's actually a really interesting blog called Where's Your Ed at which I encourage everyone to read where someone's gonna look, looked into this in far more detail.

And just going through the numbers, Etc and so forth. And if you believe the Oracle story, and if you believe about this 300 billion dollars in spend, then what that means is that in five years, Oracle. Is going single handedly grow the AI compute market 500%. They're gonna take it from sub 40 billion to 200 billion.

They are going to overtake AWS by I think 2029 with a hundred and AWS does about 115 billion a year in revenue. And by 2029, Oracle is predicting they're gonna do that from their cloud business and then overtake it to 144. So they're gonna do that and the whole thing.

Is gonna come from one customer being open AI who doesn't have the money. And I asked you before coming in here, I just checked Oracle's balance sheet. Oracle's a big business. They've only got a billion, 11 billion in cash. So these numbers of a hundred billion a year of CapEx for each of these companies.

400 billion up until now, 7 trillion being a third of the M3 money supply that some of is gonna be financed with ads or cloud or VCs. The numbers are just. Insane. And it is this, all this infrastructure and all this whole environment is now is built around Nvidia who's making all the money.

It's the only one making any money other than TSMC. And then you've got this new paradigm coming in with the the neo clouds, right? So the neo clouds that's Corewave, it's Lambda and it's Nebius.

Erik: Matt, hang on a second. Neo clouds, I have to admit, I don't know that one. Fill us in.

Matt: It's one of those things where, you know, from time to time I browse the internet and I see these new businesses that pop up that look like they're very large businesses, and I guess think to myself, I must be really stupid or just not understand.

And so you read through their website and so forth. And you go, wow, this is really cool. It's like really advanced. It's really huge. This is the whole industry I didn't know about. These are next generation cloud computing providers. So these guys are aiming to provide the GPU powered version of AWS or Azure.

And they're coming into the market as the fifth entrance, the sixth entrance and seventh entrance to compete against those incumbents. And, the interesting thing about these companies are obviously I've talked, just talked about the infinite money glitch, where it seems to be like a bit of a circle joke going between, in Nvidia Open AI CoreWeave, and they're all using the same money that's just sloshing around in a circle.

These neo clouds, they're like the WeWorks. Of GPUs, right? It's basically take taking some pre bookings. Use those pre-booking to raise some money. Rinse, repeat, and go in a circle. And these guys are building out infrastructure and they've got huge spend.

I think they're spending about $50 billion a quarter. Of those three, they're financed by the by Nvidia and by the the customers are Nvidia, so for example, super micro funded Lambda. And they're basically just building out data centers that are GPU powered and, doing so in a very much a buildup, and they'll come business model because to the best of anyone's knowledge at this point in time, not really making any money outside of your traditional open AI's measures and of course Nvidia itself.

And it'd be interesting to see where NVIDIA's going with this. 'cause because ultimately it feels that Jensen's heading towards. A, his own foundational model being, being launched on Nvidia hardware, but we'll see if that happens or not.

But the these Neo Cloud providers are basically trying to enter the market and through price pricing and through arguably a better products because it's using Nvidia GPUs rather than nutritional cpu, Etc. Basically trying to enter the market and, captures, potential huge revenue streams in the future that may or may not eventuate.

I think core has spent this year about $20 billion building up their infrastructure and it, and yeah it just feels, it feels like a very strange business model if you get down the bottom of it.

Erik: Matt, I wanna move on to the social implications of this. I am, as I get my head around this, I'm increasingly convinced this is much bigger almost than anybody is thinking about or talking about. And I'll use this idea of the competency crisis that people have talked about. Let's use Uber as an example. Back in the day getting a job as a limousine driver.

Required a fair amount of skill. You had to make sure you knew how to find addresses and so forth. They dumbed that job down to the point where it's just so idiot proof with a moving map in front of your face that shows you exactly where to go. That just about anybody can be an Uber driver. And my prediction is AI is gonna make it so that just about any numb skull whose gut.

Some kind of of device that they can use AI for is suddenly qualified to do all kinds of jobs that they might not even understand, but they can still get through it because they got AI to coach them. It's like they've got their own personal little coach for it. If that's where we're headed, I think it dumbs down society.

Why the heck would you want to graduate high school or be bother finishing, nevermind going to university. If a lot of the jobs that are out there, you just need to learn to operate AI and that's it. So is that where it's headed or what do you think the social implications can be of this just huge explosion of AI into society?

Matt: It's, yeah and in some regards, are we gonna see a huge spike in the Dunning Kruger effect as a result of everyone becoming an expert in 15 seconds from querying something on chat GPT, without doing the hard work to. Learn something over a period of years. Look, what I see is.

Oh generally what we are seeing, so I've got 83 million people in my marketplace who are using AI on for every type of job you can imagine now, we're seeing a big lift in skills, right? I think I've said this before, if you're an average copywriter, you're now an exceptional copywriter with GP or Claude.

If you're an average Illustrator, now you can become exceptional quite quickly with, your Midjourneys and the like. The same thing's gonna happen in all the white collar trades, whether you're a programmer or whether you're a, industrial designer or an architect or what have you.

So it does dramatically with the skills of people. I think it's like the world bef when you went to work and I was just at the cusp of this when I did the workforce, you you entered the workforce and there used to be no computer on your desk during the day.

And then you came to work and there was a computer on everyone's desk and all of a sudden everyone was a lot more productive and so forth. And yeah, you had some dislocation and a lot of jobs went away that the typing pools of secretaries and large companies disappeared. But, they got redeployed, Etc, ultimately to different jobs, Etc.

I do think that, skills lift. We're seeing a lot of productivity. We're seeing a lot of liquidity. So for example, our contest functionality where people can put up a prize and people compete for the prize. And we do that all the way from, simple things like logos.

We're up to, $6 million gene editing. Innovation challenge for NIH. We are seeing a lot of entries coming in a lot faster, a lot quicker, a lot higher quality. In fact, we had to recently rate limit that because we're getting over 700 entries per contest. So we're getting a liquidity effect and, and a speed effect as well as a quality effect and a bang for buck effect.

So all in all, you can probably encapsulate in the word productivity goes through the roof. But, yes. On one hand, if you're at university and you just to cheat by looking up Google the answers you know that cheating's now on steroids by getting GPT to do stuff for you, and that's certainly gonna continue.

If you get your, if you get your, big brother do your homework, or you get Google to do your homework, or you get wolf from Alpha to do your homework, or you get GPT to do your homework Yeah, and you're not learning the materials you're gonna really suffer. The flip side of that is that AI is going to be probably the most powerful forces in history for education in that.

It will be able to personalize a lesson plan for you and just what your pace is that you wanna learn at, and I know your, you, Eric, are very good at asking, I have the right questions to really maximize your learning rate on a new topic or a new area and so forth. And the same for me.

It does have the power particularly is, from the, the high school to tertiary education and above really empower the ability for people to learn new skills, new trades, new knowledge. Super quick. Now the question is just gonna be, and that, and this is one of the questions, the trillion dollar question that you kinda look at when, you know a lot of these AI guys hype these models to the moon is, will the AI be able to create new knowledge and do you independent scientific research and come up with new things and new inventions and will we enter this sort of hyped up, AGI super, super singularity sort of event.

Event horizon. Is it just a really good autocomplete that may be better than any autocomplete you've ever seen in your life. But basically. While it can find correlations and this, that the other it does struggle to come and find new advances, to push scientific breakthroughs.

That that's gonna be the big question. And I use a lit test for that. Will we see sort of creativity emerge from these models And, for example, will there be a song trending in the top 100 soon? That's gonna be completely done by AI designed, composed, produced, and executed and deployed by AI.

Are we gonna start seeing that with literature? Are we gonna see it, start seeing that with music? Are we gonna start seeing it with entertainment? If that starts to happen, we might also be there with scientific progress and technical advances, or is it gonna start capping out?

And there are real fundamental limits on access to data, which is fundamental. All the cheap oil of data has been mine, drilled out and used to train these models Now. Increasingly there's tariffs, rules, regulations, and restrictions on the ability to use it.

And is that gonna be, which is required exponentially more, with every generation of the models that are coming out. Is that gonna be the fundamental limit? And in fact, yeah, we get a computer in our desk, that computer is faster, better, 10 x better than you've ever seen before. And everyone's gonna be super productive.

But there is gonna be a limit from where it's gonna go from here, particularly in, in the practical reality that the underlying economics of this AI at scale is not actually working.

Erik: You mentioned something at the beginning of that answer I wanna come back to, which is the fire hose the excess amount of productivity.

I've felt this myself, Matt, on your platform. I've been using freelancer.com for several years now. If I need logos, graphic things I'm really bad at, just, hire somebody. It's amazing to me using the contest function a few years ago when I started using that. Boy, I could put up a hundred dollars contest and a whole bunch of well-qualified designers would submit over just a few hours.

I'd have a bunch of really interesting designs. I'd get to pick one, the guy gets a hundred bucks. It was just a great deal. Recently I thought, Hey I'm gonna up it to 300 bucks and I really wanna do a good one this time. What I had no idea was coming, Matt, is if you put a $300 contest on freelancers.com, you better have a staff of people ready to help you sort through the thousands and thousands of submissions you're gonna get.

It's that much, and it's literally to the point where I feel like I need AI. In order to filter all of the AI proposals. 'cause all of the sudden that freelancer community has so much capacity that I literally can't give each designer a fair shake or a fair chance because there's just so much coming.

And that's a good thing but it also. Presents a problem.

Matt: Yeah. That when you mentioned $300 in graphic design, I, you're gonna be, I could be overwhelmed.

Erik: I sabotaged myself by paying to and think about it, just a few years ago, 300 bucks, if you wanted a logo done by a professional graphic designer where you're gonna get one person's best attempt, and they were gonna put a few hours into it, that used to cost 500 bucks.

I only put 300 bucks on the contest and the result was. I almost couldn't use any result because in order to, not that I didn't get plenty of value back for my 300 bucks, but I didn't have time to sort through it all and pick one in time.

Matt: Yeah. We recently had to deploy something to actually rate limit the ability for people to, to enter in contest.

And and we were gonna use AI to actually sort through and so forth and rank and so forth, but also as the reputation system as well. We order all the entries now by basically the quality of past work of the particular entrance. But you are right.

We're definitely seeing a lift in not just the quality of work that people produce, but the speed at which they can actually do it. And ultimately the bang for buck bag for money. What we have is an incredibly deflationary business. I think NASA published a white paper while.

Between 80 and 99% of what they'll traditionally pay are going to traditional labor arrangements and not business, but crazy. We. Steps to make it manageable because there is an absolute explosion in productivity.

Erik: Matt, final question. Tell me about Sam Altman your sense of him, his sincerity, his intentions whether he's a good guy or a bad guy.

I, I have to admit, I can't read it. I thought his interview with Tucker Carlson was incredibly revealing. I'm not sure exactly of which. And there was a tweet also. Which really got my attention because I've seen this before. I know over, you guys in Australia went through this with social media and, oh we need to protect the children.

We we need to protect the children from profanity and bad things on social media. So therefore. Everybody is not allowed to use it until they identify to the government. With a government Id exactly who you are before you're allowed to log into your social media site. Sounds to me like Sam Altman is pushing for the same thing for AI, and I don't trust his intentions.

Am I being paranoid and more broadly, what do you think of this guy?

Matt: Yeah, I think you always have to take a look at the, what's been said and just think about it carefully and think through what, what's really going on. There's this, there's, I'll take this the second question first and then we can come back to the Tucker Carlson interview.

So he said that I think in the context of the was he was saying that they're gonna allow adult content on open ai and as a result of that, they need to protect the children and therefore they're gonna do age verification. There's a few things going on there.

Obviously Elon has been using, sexualization of content, I guess for not of better word, on Grok to try and encourage a bit of a cult following of the Grok AI.

Erik: But hang on, timeout there, there's just only one sane way to do that, which is to say if you want the adult content, then you can opt in at your sole personal discretion to, to show your ID.

That's not what he's pushing for. He is saying, everybody has to show their ID in order to be able to use the thing because they're not gonna, it doesn't make sense.

Matt: Yeah. So on one hand, Elon's kind of saying we can get a Grok that's uncensored. And I think I, I think if you look at the sustainable competitive advantages between the foundational a AI models, there's basically none.

They all do the same thing. They all can write a story for you. They all can. Give you advice, they can all generate an image, Etc. The only different competitive advantage is how censored they are and how left wing biased they are in the training, right? And Elon's kind of said you can come to, and, you can talk about anything and we're not gonna censor you.

And that, that's my advantage. Now maybe Sam is saying to himself the internet. I think last time someone published something, 80% of the traffic on the internet is PornHub. And so maybe on one hand, Sam's saying, okay, how do I get usage up of my AI?

And what are people potentially willing to pay for? I don't know. Maybe we'll go into kind of like the, pornographic style content and maybe that will get more people subscribing and more usage up I don't know. What I think is probably really going on is, in Australia, for example, we've got a effectively a censorship division of government which is run by someone who's nicknamed E Karen.

And in December of this year she is going the law comes in place which has already passed through government. Which is going to require, under the guise of protecting the kids. Every single social media platform in the world that operates in Australia will need to do age verification to prove that you are not under 16 now that has absolutely do nothing to do with protecting the kids, and everything to do with requiring digital ID to be rolled out in Australia so that everyone on the internet can be identified.

As the source of a comment on Twitter or the, on a YouTube video or whatever it may be. In fact, our Prime Minister, Anthony Albanese some years ago, there's a clip online where he was asked if he was ever gonna be dictated for a day, what's the one thing he'll do?

And he said, ban social media because he's not so thick skinned. And doesn't like. People about things on the on, on the internet about him. So this law is coming in now. The tantrums are going to be insane. Obviously. They just tried banning social media and was it Nepal and everyone rioted and set fire to parliament and so forth, but the ramifications of trying to stop people saying nasty singles on the internet is more than just, X and Facebook and Instagram and so forth. The eSafety Commissioner is now looking at whether to ban Roblox, Lego Land and GitHub because they're all places that people can leave comments, Etc.

So that shows you how insane this law is. And so by virtue of that, they've also said they're gonna require it for search engines. Now AI is basically a modern version of a search engine. And while we have not seen, I think yet substantial deviation away from Google and traditional search engines to the chat lock interfaces for search, that's basically what a lot of people are predicting.

And I believe the reason he's rolling out the age verification is because he knows that the ety regulator is gonna require, them to do age verification and, starer over in the UK is now trying to push digital ID as a excuse to of what he needs in place in order to solve the mass immigration problem that he's been running at full speed over there as well and it's causing all sorts of social unrest.

And he's saying these people coming across from Africa into the uk, we can't stop from working unless we have ID, although pulled up. Said they've gotta show a national insurance card, and if they're not doing that, they're getting work anyway. From, doing illegally working and not showing an insurance card, how's digital AI gonna help?

They're still gonna work the same way. But yeah, I think I dunno what's going on there. There may be a few things, a bit of confluence of events, but it feels that it's just getting ahead of that, 'cause there's quite substantial fines for the companies that allow kids to operate on them.

And it'll be interestingly where it plays out or whether they're actually gonna ban GitHub. Yeah, you I come home and watch YouTube at night sometimes, and I watch prospecting videos and geology videos and how to repair old electronic equipment or what have, it's a fantastic resource for kids and, but yeah, they're gonna ban it.

I get the feeling that they're just gonna apply that rule to OpenAI as well. In regards to your first question. I was pretty amazed by the Tucker Carlson interview. Isn't Tucker an incredible interviewer?

Erik: That interview pissed me off because we had this scheduled and I was thinking to myself, boy, we are gonna rock it, Matt.

We're gonna do the best AI interview ever done. And I, Tucker nailed, Tucker, blew me away. 'cause that guy is not technical at all. And he absolutely nailed that interview.

Matt: It was like a story a. Rivaling Breaking bad, watching that interviewer. Just how you set it up and it was, for those of you who haven't watched it, I highly encourage you.

You, you watch it. It's incredible. Work of art from Tucker. Yeah, it was interesting. Obviously all these guys who run these, multi-billion dollar companies talk a big game. They need to talk a big game because, whole venture space is kinda like a base of power law of investing.

You gotta kind swing for the bleaches, and you gotta get one investment to return a phenomenal amount of money to make any mo to make a return in your portfolio. So they all talk huge games, whether it's Elon, whether it's Sam, whether whoever it is. But yeah, it, and so you he started off asking him just things about, have you seen.

Higher powers, of some, is there something spiritual happening inside the AI that are they alive? Are they, and so forth And use, setting, setting Sam up and then and then got to the belief system. You know how, what, how's the belief system set up in, in these foundational models?

In, in chat GPT right? If it reads everything on the internet. You can see if you look at the YouTube comments that the sum total of humanity is actually quite bitter and and, argumentative and negative. And how do you get how does GPT train on the all the world and then end up, being so politically correct and so forth.

And it got down to the point where it's like, who inside OpenAI is deciding, what the belief system is of GPT? Is it you? I want names, give it their names and titles. And then of course yeah moved on to the. Copyright issue that's happening. I didn't mention before, obviously all the data in the world needs to be consumed to get these models to the next level.

And Anthropic just lost a 1.5 billion class action over copyright infringement because they were scanning in half, they scanned in half a million books without, paying the authors. And at $3,000 of work it's just been ruled to pay 1.5 billion. So there's a real compute cost there that's added on top with the training data.

But yeah, there was, I think there was a whistleblower inside open AI that was talking about potential copyright infringement or what have you from OpenAI. I don't the full details of that. But then that whistleblower ended up dead. And I don't know if I probably a preempt people watching Tucker's interview, but it was absolutely incredible the questioning that, that kind of came out around that and asking Sam what he thought of it.

And I don't know I thought the average person in the street, if you asked, did you kill someone? They would go, no. And then they'll go, and then don't. Stupid, you're an idiot. Sort of response, but.

In which that was an, I think Sam was completely thrown by the question. But, yeah, it was interesting how the responders came out.

Erik: I thought that was amazing. And as an interviewer, boy, I was just envious of Carlson because he nailed that. I guess we should explain what was going on is he was, Carlson was asking Altman about a very high profile murder of one of open AI's employees. And Sam...

Matt: or suicide? Hopefully suicide.

Erik: Oh, yes. I'm sorry. Murder or suicide. Could it be either? Sam tried to take the high road and show Tucker up and say, Tucker, come on. We're talking about the dead here. Don't you think we should have a little more respect for the subject matter? And he was trying to be the holier than thou, I'm gonna put you in your place Tucker, and make you look the bad guy.

And Carlson just kept his composure so perfectly and said, oh. Gosh, Sam, you would definitely be right. It would be, frankly, very inappropriate for me to ask that question at anything less than the behest of his mother who believes that you ordered his murder. So let's just skip to the chase. Sam, did you kill him or didn't you?

Or? It was something almost that direct and I thought, wow. I don't even fantasize about being that good at interviewing someday. On that note, let's let's end it there, Matt, because we are running out of time. freelancer.com is an amazing platform. That is your day job. It is just a phenomenal to me you pretty much upstage our entire episode 500 countdown.

With something that you do as a hobby. This is not even your day job. What do you do for a living in your day job and how can people learn more about how they can outsource a whole lot of cool stuff freelancer.com?

Matt: What, whatever you need done we can do it for you at Freelancer, right? So we make it real.

We turn your dreams into reality. What? You start wanna start a business. You want to grow your business. You wanna find people to build a product for you. We have 83 million people around the world with every skill you can possibly imagine. You'll get it done for you. A fraction of the costs, right? So you can just down a credit card and start the next.

I don't know, maybe start the next Open AI, start the next, Uber for cats, pizza review site that delivers whatever it is you can get done. The freelancer and freelancer.com. Just post your projects free, give it a go and you'll see the magic. And all the freelancers now AI powered and can get your job done, your product builds, your service delivered and a fraction of the time, fraction of the cost.

Erik: And I can definitely give a personal endorsement because I do use it regularly, and I would say it's not really a complaint, but the only really urgently needed repair at Freelancer is you gotta filter out how much you can get at a low price because it's overwhelming to the point that it, you just can't handle it.

Don't pay 300 bucks for a logo design. You will get three weeks of sorting through. Contest. Entrance be before you're done. Matt, I can't thank you enough. We're gonna wrap it there. And Patrick Ceresna and I will be back as Macrovoices continues right here at macrovoices.com.

Erik: Joining me now is Lyn Alden, our number one macro voices all time listener favorite, as measured by listener downloads. Lyn, congratulations on taking the number one slot.

Lyn: Thank you. I'm humbled. Happy to be here.

Erik: The thing is I actually feel bad about this. The whole idea was to flatter you and honor you. And what did we do? We set you up to follow Jim Bianco, Alhaji, Louis Gav and Luke Groman.

How are we gonna top Luke Groman?

Lyn: I'm happy to have been part of the journey. It's always interesting when you start as a listener. So I listen to Macro Voices before I came on the show.

And so it was of course fascinating to join it and participate along the way. So I certainly thank you for having me on all these times. And hopefully I can continue to provide value. And as far as following all those people, that is certainly, challenging. I guess the best that I can do is try to add to it, try to build on top of it. Certainly not really trying to top anyone in particular. And those are all people that I've certainly learned from over the years.

Erik: Let's dive right in. You told me that you agreed and disagreed with various different parts of Luke's interview last last week.

Tell me more. What did you agree with, disagree with, and why? What did you see differently?

Lyn: I mentioned I pretty much mostly agreed with it there. There's rarely anything that I outright disagree with Luke on. We generally get, I think, correctly lumped together in, in kind of the same macro camp in some ways.

Main where area where I disagree I differ, I guess I would say from Luke is just areas of emphasis or areas that he has built up more expertise than I have on and other areas that I focus more on. But I thought that entire interview was directionally correct. One way that I maybe sometimes differ a little bit is that I'm of, in some ways Luke Gromen light, uh, which is that my timeframes tend to be a little bit longer than his sometimes correctly, sometimes incorrectly.

And so I tend to maybe be a somewhat more muted version of Luke. But otherwise quite similar. So there, if there's areas that you wanna touch on, I'm happy to go in multiple directions.

Erik: You just alluded to it. What's really interesting in my mind is this question of what is it that causes or enables that change from slowly at first to then all at once. And of course, that was a major thrust of Luke's interview. I was actually affected more by reactions. When we called the pandemic in January of 2020 on Macrovoices. It was weeks weeks and weeks of hate mail and angry people saying, you're alarmists you're fear mongers, you're crazy.

Luke's interview was pretty darn grim, frankly, with respect to its outlook. Lots and lots of attention, almost all of it positive, and were not getting all of the accusations of fear mongering, so forth. It says to me that people's attitude has changed and this Luke Gromen moment idea of a really significant breakdown in the international monetary system because the US dollar is at the center of it and the US dollar is not quite as strong as everybody hoped it would be.

That was really controversial stuff a few years ago. It seems like everybody's maybe ready to accept it and that scares the hell outta me. 'cause it, I think it means we're. Accelerating is, am I right to interpret it that way? And what do you think causes that state transition to all at once?

Lyn: Yeah, I think that's a reasonable interpretation.

And I'll start by saying that I actually remember you, you talking about the pandemic early on your podcast. I was a listener back then , it was helpful for me hearing you and Jim Bianco and others cover it. And so for example, I was able to have notes about it in my research service and also provide warnings.

And that was in large part because of I was listening to the right people at the right time. And I was able to dig into myself and help confirm it. So I certainly appreciate the work you did there at the time. Going back to where this goes, or are we hitting a gradually then that suddenly moment.

Part of why I got into macro in the first place was to answer that very question or more specifically, the question was, where is the public debt going? When will it matter? And so I, I, prior to that, I, listeners probably know I worked as an engineer for a long time. I had a long history of investing primarily in equities.

I consider myself more of an equity analyst. And I started, realized that we were entering and to some extent I had already entered a very macro heavy. Decade. And so more so than just getting individual stocks, right? It was really important to get the macro right. Big questions like, are stocks gonna outperform bonds or vice versa?

Are things to run hot and inflationary or are things gonna have more disinflationary and contractionary type of things. Getting those really big pieces, right? What sectors to own. There kind of major trends and my kind of starting question was basically, so we have rising public debt to GDP at, throughout the 2010s decade there obviously, there's lots of polarization. There was the Paul Ryan versus Obama. Era that whole kind of, the republican more fiscal hawks back then, and then and Obama on the other side of that and that great debate around deficits and public spending.

And what we started to see at the end of the 2010s decade. And I, Luke covered this early, I started covering it early, was that we started to get rising deficits as a share of GDP even as we had unemployment continue to fall. So there's a multi-decade history of those being highly correlated.

And they separated on a sustained multi-year basis. In the late 2010s. And that was like a handful of reasons. There were some tactical ones, like for example in Trump's first term he did unfunded tax cuts. Which, which, around the margins contributed to the deficits. But the really big piece was simply demographics that the baby boomer generation started entering retirement in pretty significant numbers. And therefore we started to draw down on some of these really big entitlement things. Things that, like Stanley Druckenmiller and others have been warning about for a long time started to really actually happen. So that whole top heavy entitlement system started to really matter.

Then of course. COVID kicked everything into high gear. And that distracted people a lot, I think, from the secular trend. But then after that, all eventually subsided, we're still back on this more secular trend of structurally high deficits in large part because of the entitlement system, because of multiple other factors contributing.

And what I became known for over the past five, six years is my emphasis on the importance of fiscal. Which is that, so many people are focused on what the Fed's gonna do and of course that is relevant. But my view was. The really hot fiscal deficits that were running matter.

So back in, in 2020, 2021 and all that, it was me kind of warning about inflation. And after that kind of hit and eventually, somewhat cooled off from that really explosive period, it was more about this nothing stops this train thesis, which is sure it's not running quite as hot as the, the hyper stimulus of 2020 and 2021 and the lagged after effect.

But it's more of the sustained. Run it hot large deficit environment that mutes economic cycles keeps inflation generally above target offsetting, a lot of various kind of technology driven disinflation we would otherwise have. And keeps going. So then the question is, it goes back to my original thing is where is this all headed?

When does the public debt truly matter? So my first answer to that is that it has mattered for at least the past six or seven years, ever since we've entered this more sustained fiscally dominant environment. The economic cycles have changed. Things like the yield curve have become less predictive than they historically have been.

I think it's fueled some of the political polarization because those on the receiving side of the deficits. Are experiencing on average, a very different economy than those not on the receiving side of the deficits, and they're instead more on the tight side of monetary policy. So all of this has been mattering, but it's not mattered in any sort of grand, moment of crisis.

It's more like a bunch of mini crises that string together. I think where I differ from Luke is that I think it won't matter in the true. Mega crisis sense, probably for many years with certain caveats that we could go over. So I'll stop there for a second. Before we get into that, in case you had any comment.

Erik: Yeah, I definitely want to go a lot of different directions with this. So one of my favorite Luke Gromen lines he very frequently says, deficits don't matter until they do, and then they matter a lot. That's a lot of wisdom built into that. But of course, the question is the timing. When do they start to matter?

Because all the grownups have really been talking since the 1970s about the fact that the us government was starting to move in a direction. Didn't seem to be sustainable by the 1990s. And you had Ross Perot in the 92' presidential election talking about it. Clearly those people were right about unsustainable aspects of US fiscal policy, even though they're not sustainable long term, they were able to sustain them for several decades and it's getting dangerous to say it's a, it's gonna start to matter really soon, so you better be watch out. So many people have been conditioned to just say, oh, come on. It's, everybody knows someday that's gonna be an issue, but as you just said, probably not for several years.

Why don't we just ignore it and not worry about it? Needless to say, that's what's got us here, but how do we know when we're getting close and how do we assess how close we are to that moment where all of the sudden deficits do matter and matter a lot?

Lyn: Yeah, good set of questions. Yeah.

So the late eighties, early nineties were the peak zeitgeist for the public debt being relevant. So the national debt clock went up in the late eighties. As you point out, Ross Perot really emphasized that ran the most successful independent presidential campaign in modern history largely on that topic.

And if you look at the chart of interest expense, so public interest expense. As a share of GDP. It was peaking right around that time. Prior to that for, decades after World War II into the seventies, we had falling public debt to GDP. And what was different is that in the eighties we went back to a period of rising debt to GDP.

So after, five, 10 years of that, people I think were rightfully freaking out about that trend. We're also hitting giant numbers a trillion dollars in public debt for the first time. So that combination was pretty significant. I think, a significant reason for why they were early is throughout the eighties China started to open to the rest of the world. That really kicked into the high gear in the decades that followed. And then of course, the Soviet Union fell by the early nineties. And so what we had was, this massive supply of Eastern labor and resources was able to connect to Western Capital.

And so we went into this period of renewed globalization, which is, which was disinflationary and productive. Now it came at the cost of fragility. When you globalize supply chains, you make them more efficient but fragile. And so, that gave us a wave of disinflation, a raise, sustained wave which allowed interest rates to keep falling for longer than people expected and lower than people expected.

And so we basically entered, we had a 40 year period of falling interest rates which was able to offset the rising debt to GDP. And so what's different now is a couple things. One is we are entering the more draw down heavy period of our entitlement system. So with baby boomers entering their retirement years, that's new.

That's all in the past, you know, like I said and the other big factor is we no longer have structurally declining interest rates. We basically bounced off zero other parts. The developed world went negative. At that peak, we had something like $18 trillion worth of negative yielding, Yen and euro bonds outstanding. And so now we're in this period where we no longer have some of the offsets and we have troubling demographics and we're no longer globalizing.

Even if we don't rapidly deglobalize just the sheer fact that we no longer have that tailwind of evermore productivity, evermore international connections and evermore fragility, where instead we're reintroducing local. Into the equation. We're reintroducing the concept of robustness rather than just efficiency.

It's not how efficiently can we make things with near zero inventory? It's how can we prepare for shocks along the way? And you mentioned before some of the things you warned about. Before the pandemic, people weren't yet really accustomed to really big things happening.

It was the idea that nothing ever happens. And, if anything that these past five years told us is that some really big things happened whether it's of course the pandemic, whether it's Russia, invading Ukraine, and all the, geopolitical stuff that followed there.

Of course the. Massive ongoing conflict in Gaza and the world reorienting and, emphasizing that whole situation. So we've entered a new kind of geopolitical situation where things do happen. I think there's so there's two separate answers to the question.

If we look at it from a purely quantitative mindset and this is probably where I channel my Brent Johnson for a minute. The, milkshake theory. With most currencies, as soon as investors and the public lose confidence in it. So confidence is one of those things.

It's hard to predict ahead of time at what stage it will be lost. But once you lose it, it can happen very rapidly with most currencies if they lose confidence. They can quickly spiral into disaster because there's no, or there's very little required demand for that currency outside of the country.

What makes the dollar different of course, and what gives us a longer runway both to benefit from and to hang ourself with in some ways is that there is a lot of entrenched demand for the dollar that has nothing to do with people's opinion of the dollar. It's just a bunch of contractual obligations for the dollar which mostly takes the form of debt, so depending on what source you use.

The bank for international settlements is one of the better sources out there. They show something like $18 trillion worth of offshore dollar do debt. And that's mostly not owed to the us It's mostly owed, between all entities in all these different countries. Some entity in Brazil were owe were owed to some entity in China and so forth.

And that's this big entrenched network effect of demand for the dollar. And so that's the part that, that historically, will likely move very slowly even as public sentiment around the dollar and kind of the optional side of demand. Can change very quickly just like it does for any other currency.

And so when we quantify that, when you have all that offshore debt that, that's a bigger amount of debt than there is a monetary base of US dollars. And it's smaller than, but comparable to the entire US onshore broad money supply. So that's a lot of entrenched demand. So I, going purely from a quantitative standpoint.

I think the US still has a long runway ahead, which is not to say that it won't matter. It's that the magnitude with which it'll matter will be manageable. So for example, in the seventies, the, the oil crisis very much mattered. The high inflation very much mattered but for a variety of reasons, the US and its financial system was able to get through it and then even get stronger on the other side of it.

And so at the current time, we, when we had that kind of quantitative basis that's where I get my kind of, nothing stops this train view, which is from now into the 2030s. Based on, how rapidly our money supply is growing and is likely to continue to grow with a couple of these other, physical limitations along our way, which, for example, Luke Gromen covered in your prior interview.

Things like Rare Earth things like our de-industrialized manufacturing base, all these things. So we're running these big deficits. We're growing money supply. But it's offset by this entrenched global demand for it. So I, if I were to say, okay, what could shorten it, what can make this not last very long?

It's actually less so the macro side and more the political side. We're in the era of the big headlines we're in the era of increased political polarization. We're in the era of realizing that significant percentage of our kind of structure for how governance work is less so on based on laws, is more based on norms.

And norms can be changed easier than laws. And so you could have non-linear. Dislocations where, you know, contracts that were thought to be, immutable are defaulted on or changed or major geopolitical alignments shift in a very rapid period of time. And that's the kind of hard to predict ahead of time variables that could move forward.

Kind of the estimate date for when it, it truly becomes a crisis rather than a series of mini crises. For example, in 2022. UK guilt had a crisis. Three years later it's not as though. The UK's currency is trash. Now that was a mini crisis that they handled and, they end up switching their government over it partially.

And, but they got their wheels back on the track. So my kind of base case from a purely quantitative standpoint is that over the next. Five, 10 years, we'll continue to have a number of many crises in the US and elsewhere. Those fires will be put out. There will be ongoing political polarization because the large deficit will remain in effect, people will continue arguing about them. Those in the receiving side will continue to have that higher side of the K-shaped economy, whereas those not on the receiving side will be in the lower part of this K-shaped economy. We're in this kind of sustained, run it hot, slowly meltdown type of environment with the risk of more political driven disruptions along the way.

Erik: Wow. A huge amount to unpack there. Lyn, I wanna go back to one of the first things you said, which is the secular driver of a lot of this is retiring baby boomers going from paying into our entitlement systems to drawing down from them. We're only seeing the beginning of that, Lyn. There's still a lot more baby boomer drawdowns to come.

We've only just gotten to the point where most of the baby boomers have retired. We're not even through that cycle yet, so this is going to stay. With us for a long time. There's gonna be a lot of money that has to be spent to service the obligations that we have through our entitlement system to baby boomers.

Hang on a second. We've got huge political division in the United States already, and one of the big themes is a lot of Generation Z and to some extent also the millennials who came before them, are down on baby boomers. They tend to blame baby boomers for a lot of problems in society.

Now it really doesn't matter whether those beliefs. Are justified or not justified, they hold those beliefs and we're coming into a period of extreme political division. It seems to me like you can get into a generational war out of that, where just as the baby boomers are realizing, wow, all of our benefits could be subject to a complete reversal if we get into a fiscal crisis, we've gotta really stand up for our rights and make sure that nobody messes with our social security. If that happens, just as the Zoomers are getting to the age where they're really voting actively and paying attention and feeling like, no, actually we don't.

I think the baby boomers deserve all of those overpriced entitlements. Yeah. They supposedly paid into that system, but it was publicly discussed that social security was guaranteed to be bankrupt. We're not footing the bill for this. We're gonna cut those benefits that could set up, further civil war risk, frankly, and I think we've already got some of that.

If that caused the rest of the world to get concerned about the United States, as you said, it could play out a couple of different ways. It could be. A mini crisis, although the one I just described is awfully persistent in terms of its duration. But if that causes the rest of the world to start to doubt the US dollars, reserve currency status, and especially if we have a digital currency alternative that seems better than the US dollar.

All of a sudden you could see an unwind where all of those mechanical factors that cause the artificial demand for the US dollar could start to get unwound. So it seems to me like there could be this massive, vicious cycle that just causes horrible outcomes, or it could be broken into mini crises. And as long as there's some time in between, maybe it's okay.

It's really hard to figure out what's gonna happen, isn't it?

Lyn: Oh yeah, absolutely. And, as someone who spends part of each year in Egypt I've been there during 38% official inflation, let alone whatever the kind of the real in inflation number was. And I'm sure other listeners have been in that environment as well.

So one thing I think is that, it, it takes. A pretty as bad as that was in Egypt, for example because their political situation held together it didn't spiral into something worse than it could have. And then they, at least for now, partially stabilized the issue. And so you're absolutely right that there is this extra artificial demand for dollars and that can over time evaporate and it's the analogy I've used before is that, like a more balanced economy is like someone standing straight up, whereas the US economy is more like someone leaning against a wall and pushing on it. Which is basically we have all this extra demand for our currency, for our reserve currency status.

And we run these structural trade deficits with the rest of the world to supply them. With that currency and if that wall were to give out for one reason or another we're unbalanced, we're leaning against it so we can stumble harder than we can compared to economy that's more balanced.

That, that's basically the key risk there. Now, when we analyze what, what could rug pull that wall away from us, or what could break that wall? We can analyze the four major parts of what the reserve currency status is. One is that, with. Over a hundred currencies.

Some of them are pegged, but, dozens and dozens of large free floating currencies. Most of them are not very liquid relative to each other. For example, if you wanna convert Egyptian currency into South Korean currency there's not exactly the super liquid deep market there.

Because the number of combinations between all those dozens of large currencies would, be a huge number. And so the way it usually works is that, something like 90% of currency trades dollars on one side of it. So you trade whatever currency you're starting with into the dollar, and then you trade the dollar for whatever currency you want to get to.

So you have that really big liquid network effect there that is less so about the stability of the dollar. 'cause you're potentially only gonna be in there for a short period of time. But it's more about the sheer scale and liquidity of it. The other big factor, and this one I would, I think it's already been changing, is the reserve holding of it, which is that central banks and other large pools of semi-public capital, like large pension funds and sovereign wealth funds and things like that that they will store a disproportionate share of their holdings in the dollar.

For lack of anything better as kinda the principle ledger for where to store their, accumulated current account surpluses, for example. And that's, around the margins already changing. There's not a lot of foreign demand official demand for treasuries anymore. There's a combination of increased tonnage of gold buying as well as the appreciation of gold.

We're rough at the point. Gold is flipping treasuries in terms of how much central banks hold compared to treasuries. For the first time in many decades. And, around the margins, there's a very slow diversification even to, into other fiat currencies. So I think that the kind of the more optional thing, that's the more optional type of demand for the dollar that can evaporate.

On a fairly rapid basis because that's a voluntary human decision rather than a contract in most cases. And of course the other, the two other big pillars of the reserve currency status. One is international contract pricing. So if you're buying commodities from one country, from another country, or you're selling goods and services often it'll be priced in dollars again, is the biggest, most liquid trusted ledger to do things in.

And then the other one, which I mentioned before, is cross-border lending. So all of this. Dollars denominated debt that's outstanding. Which is contractually owed. And the thing there is when we analyze how could that Gordian not be untied? The, the main way is that it can slowly stop growing the total debt as the US money supply keeps growing until it gets de Delevered or more rapidly, some of that debt could be paid back and then switched over to, for example Chinese currency. There, there are various mechanisms that can enable that. But generally speaking, there's a little bit of a chicken and the egg problem because there are entities that have dollars that owe dollars and that are owed dollars by others.

And so it's, the creditor countries are the ones that have a little bit more flexibility. In terms of saying, okay, instead of paying me back in dollars you can pay me back in this other currency, for example. But, if they still have significant dollar obligations of their own then, how do they pay dollars to, downstream who they owe.

So it, that's the complex network effect that usually takes longer to untangle than clean sheet of paper. We might expect it to. That's kinda one of those real world standoffs that's really hard to unwind. And so basically these network effects are very strong.

And the most optional one is that voluntary holding of excess currency. The other ones are. Varying degrees of involuntary. And there's tens of trillions of dollars of the US' negative net international investment position. So all this foreign capital stuffed into US equities, US bonds, to a lesser extent, US real estate and private equity.

Around the margins that can be pulled out and that, that can give us a pretty significant currency drop when it happens. We saw a kind of a very tiny taste of it around Liberation Day earlier this year. But that can of course happen on a much larger scale. So those are the entrenched things that even if we do have a significant, political feud that's intergenerational or widening ble between the the political polls that we have, a lot of that is still there. It's still contractually demanded for. I think the bigger factors from the US standpoint is, at what point do we risk just outright defaulting on certain foreign obligations, or we put up capital controls and say that capital that you stuffed into US markets that you thought you could get out, actually you can't.

Now, those types of more non-linear things is what can break things more rapidly. And so that's again, back to the political realm more than the numbers only realm. And at that point you can get these kind of big things that you know, much like the pandemic or much like a war things that you know could happen. They might go a decade or two without happening, and then they can happen all at once in a weekend. Where you wake up to like very nonlinear reactions in markets. And the defense against that is to, own assets that are not necessarily securities, things like gold or Bitcoin, things that can be self custody.

Things that are kind of outside of the "system" for those types of extreme events. And going back to the one point and then I'll stop is. I do think that the ongoing generational crisis will get worse. That's my expectation. We've already generally seen that baby boomers do vote in pretty large numbers.

The younger generation, of course, has a more spotty record with voting. And while there is a deteriorating social contract there, people generally feel that. Compared to decades ago, they don't feel necessarily that the government has their back. The way that it had prior generations and the way that prior generations generally felt about it.

They don't really feel part of a cohesive whole. They feel that, that, that say prior generations were bailed out. For example, the global financial crisis and that all the stimulus that happened in response to the pandemic, which, most analysis showed, was actually pretty top heavy in the way that it was distributed.

Despite the fact that headlines folks lot on the, the Stimy checks a lot of it was actually funneled to big corporations, to wealthy small business owners. A after a series of those types of things I do think that the younger duration is fed up. And they do take it out in terms of, more political voting selections sometimes unfortunately violence.

And I, sadly, I think a lot of that's going to get worse. And that's where you enter these more non-linear effects compared to what otherwise clean sheet of paper is what I would argue is a pretty long process.

Erik: You've used this metaphor of an unstoppable train. Nothing can stop this train.

Please be very precise at exactly what you mean by that. What is the train that can't be stopped? But then look, then every train has to stop eventually. 'cause you run out of tracks. What could stop this train eventually, even if that's away down the road.

Lyn: Good question. So I refer to the train as it's US fiscal deficits specifically.

Which is to say that I think there's very low probability in any sort of investible time horizons, let's call it five, 10 years that US deficits are going to meaningfully shrink. Now around the margins, you can add tariff revenue you can trim Medicaid, you can, there's little things around the margins, but right now we're running six to 7% of GDP deficits.

And, we're running hot in terms of nominal GDP. We're, continuing to grow the nominal size of the debt pretty significantly. And the nothing stops this train thesis is the idea that is not going to stop very, with very high level of confidence in an investible time horizon.

Now what eventually stops it I would say death by fire, not by ice, which is that they don't get the deficit under control anytime soon. But that instead it. It debases so rapidly or so significantly that the obligations are devalued enough. Things have become chaotic enough likely politically.

And then the question is in those depths. Does the United States manage to stick the landing? So for example, after World War II we devalued a lot of the debt through inflation. But then we pivoted more toward austerity after those debts were sharply devalued. We had a very, we were in the opposite situation we had now.

We had very strong demographics. We, we had a lot of the cards globally had the. Basically the only intact manufacturing base we had all the gold. We had 40, over 40% of global GDP. And so we were able to grow our way out of it after a significant devaluation. The big question here is after we have a big devaluation and a big kind of it could take the form of a significantly weaker currency, therefore defaulting on bond holders. And to your prior point, it could take the form of eventually defaulting on some portion of Social security or Medicare. And basically saying that those are just gonna nominally be lessened to some extent. Whether it's mean testing whether it's, cost of living increases for a period of time. There, there's kind of various mechanisms that could be some type of default on basically purchasing power in that capacity. So after some degree of default, then the question is can we stop the bleeding? Can we pivot toward a period of predictive growth again that's the part that I think that remains to be seen.

That's more of a political question than a macro question. The numbers themselves are certainly fixable. After a period of sharp devaluation, the question is, can we as a country have enough of a shared vision? I think basically to, to rebuild from there. And one thing I've kinda emphasized in the past, I I've borrowed this from Ray Dalio is that you concept of the long-term debt cycle, which I think has significant, aspects to it, and both you and I have discussed the importance of the fourth turning. And, some of the pushback against the idea of the fourth turning is that it's like astrology for investors or demo demographers. Like it's this woo cycle theory and, there's, I think there's some truth to that criticism, but the reason that I give it so much credence is because behind that cyclical aspect to it, that kind of roughly 80 year cycle approach. There are a handful of specific things that grow and die or strengthening and weaken along the way. And some of those are quite measurable. And so the three that I would highlight, one of them is the long-term debt cycle.

So basically, we go through a period of recessions over decades. Every time we have a recession the central bank gets more dovish. They cut interest rates, they do quantitative easing, whatever the tool of the day happens to be. They reinflate the growth of debt. In addition whenever we have private sector contraction in lending during those recessions, we generally blow out the public deficit.

And that, keeps building and building over time as we get lower interest rates. And, we've really hit the apex of that in, in 2008. So we basically got interest rates all the way to zero. We got private debt very high. So then we started rotating it onto the public ledger.

As as bank debt and housing debt blew up we ran very large deficits. We bailed out large swaths of the system. Then we did it again basically during COVID, during the pandemic. That was another kind of shift from private sector debt, more to public sector debt. And so you pile that debt up and up.

And then once it's on the public ledger you eventually basically inflate it away. They did that in the Civil War. They did that during and after the 1940s. And, we've really done it over the past five or six years as well. It's been one of the worst environments for bond holders compared to every other asset out there.

I don't think it's fully done yet. But basically that's one cycle that happens along that fourth turning, which is basically once you get the, when it's all around the sovereign level and you enter that more. Sovereign level purchasing power default phase. That's the fourth turning. So that's one of the three big pillars that's measurable and watchable.

The second one. Is legal accumulation. So during a normal course of operation every year lawmakers create new laws they generally create more laws than they repeal. And so we get this layered bureaucracy that kind of builds up over time. It's kind if your paint scratches and you just paint over it.

And then that layer starts to scratch. So you paint over that and, a after 30 years, you've got 30 coats of paint. And that's what happens to a country's legal system. So it becomes very bureaucratic hard to operate in. People wonder why, we could build the Empire State Building in a year and a half, but California can't build, high speed rail even given seemingly infinite amounts of time and money.

It. That's one of the factors that goes into it. And so generally speaking, when you have a fourth turning, you've entered such a complex phase of the law that there are calls for, basically breaking of the norms of some of those laws outright disregarding some of those laws or big political movements to, to, reorganize and reset some of those laws.

And that's, we can think of that as like a shields down moment for the economy and for governance, which is. When you're undergoing major change allows for on one hand much better situations. You can clean out a lot of that. It's kinda if you leave your computer on and it gathers memory leaks and eventually you have to reset it.

It allows that kind of opportunity. We can streamline laws you can reorganize things. You can make sure that they're, that the laws are geared to the present day. But of course it also means that you can go off the tracks and wind up in. Either fascism or communism, you go off on one of the two sides where you're not shielded in the same way that you are in a more normal operating environment.

Basically we're entering that kind of era of, some degree of legal resets going on in addition to that long-term debt cycle. And we have those kind of playing together. And then the third one would be institutions. So institutions are generally created to solve a set of problems or social needs in one era.

And we know when you look at the fourth turning analogy is basically, after four human lifetimes or four generations, which is like one long birth to death human lifetime, the people that built those institutions are no longer around. A lot of times those institutions have become corrupted over, over generations.

Entropy, basically social entropy has taken hold. And those institutions for a variety of reasons, no longer serve the way that they once did, or at least they're no longer perceived to serve the way that they once did. And and currently when you look at, say, polls.

Whether it's organizations, whether it's whole sectors like the media or Congress there's been a major loss of confidence and trust in most types of institutions. There's been a gradual kind of building of new institutions. So in addition to the long-term debt cycle rolling over and the whole legal complexity cycle rolling over, you get that institutional birth and death. And so all those things are culminating in this environment. And again, it's not just one year. It's not like what year is the fourth turning? It's this whole era. It's basically the, as they would, the authors of that book would define it.

It basically started with the global financial crisis. It continues through this day with this kind of rising series of crises until we hit rock bottom and there's some sort of massive realignment in a particular direction and that could be a better direction. Or it could be a worse direction.

But I think that's going to continue to play out over the next five or 10 years, and that it's somewhat quantifiable and observable rather than merely, woo cycle theory. And that, that really actually does play a role in macro analysis because you do have to take into account these things that are outside of the normal Overton window.

And that can really shake up various investment outcomes.

Erik: Lyn, I think you've done an absolutely brilliant job in this interview of laying out this entire fiscal train that can't be stopped and what eventually stops it and so forth. Feels like a logical time to wrap up the interview. Oh, wait a minute.

I can't do that because I think there's something. Equally important. Another major secular trend that I see probably playing out in about the same timeframe that you're talking about over the next, quite a few years, be probably beyond the investible timeframe or well beyond the investible timeframe.

And I'm gonna call that broken money, meets broken energy. What I mean by that is we've got a serious problem with energy. And some people will say to me on Twitter, oh, whatcha you talking about? We're back down to, just above 60. Bucks on oil here. It's nothing compared to what it was a few years ago.

Forget that. Look, big picture big picture. Energy from fossil fuels already costs more than double what it cost. When I was a kid, even after adjusting for inflation over all of those years, and it's been a lot of years since I was a kid. Lyn. We're gonna solve that problem. I'm convinced that the fossil fuel source is only going to get more and more expensive compared to what it was when I was a kid.

The solution is nuclear energy, except that takes a long time and a huge amount of CapEx. You gotta be in a really good borrowing position in order to fund all of that CapEx investment in building out nuclear energy. I think you just explained all of the reasons why our borrowing ability is about to start shrinking and maybe eventually collapse.

How are we gonna solve the energy problem? That's really essential to the continuation of humanity and the restoration I think of human prosperity.

Lyn: Yeah, good question. That partially touches on the legal cycle that I mentioned, which is, for the length of time it takes to build a nuclear facility is much longer and therefore much more expensive than it used to be, in part because the legal situation just became so onerous to do that.

And, I agree with you that right now fossil fuels hydrocarbons are well under control in terms of price. I don't expect any kind of near term catalysts to pop them higher. If you asked me three years ago, what I thought they'd be a little bit higher than they are now, I would say yes.

They're chugging along as they are. I do think that as we look out, to the end of this decade. And into next decade. Kinda along this kind of time horizon we talked about, I do think we will have another bull cycle of hydrocarbon. It's basically another cycle of shortages, high prices trying to get more supply to come online.

As you mentioned, nuclear. Is a major solution. We had an, we had a whole episode together, of course called Broken Energy that I would suggest listeners check out. And, nuclear is a very powerful solution to that, but it does take a long period of time, and especially in an economy that is burdened itself with weaker human capital.

Like basically know how to build them. The legal situation that makes it hard and costly to build them. So I do think that we'll have another energy crisis along the way, which is solvable. But basically the longer that is delayed, basically the more that we have energy supply flowing well without disruption, that adds runway to the political situation.

Whereas, you can imagine right now if we had the current political situation where we had oil at, 150 or 200 a barrel. Imagine what do to politic climate as it now, and both domestically in the US as well as globally between nations. What would that look like? I think in the years ahead we could certainly find out, I mean if you look at US shale oil, so if we back up the various reasons, and maybe you have something to add, but if you back up the reasons of why Energy's cheap, there's a bunch of reasons.

One is of course the 2010s. We had a lot of unprofitable drilling combination with low interest rates and, the application of technologies to get, shale oil outta the ground. So even though we had peak conventional oil. According to estimated timelines, we had all that unconventional oil come to market.

And, the war in Eastern Europe hasn't taken barrels totally off the market the way that, that some feared that it would partially, that's a political choice. Europe found themselves not really in a position to, to really get Russian oil off the market.

So it's still find its way to market just through various frictions along the way. And right now at the current time with current prices, US shale production is rolling sideways to over. The price was not significant enough to incentivize enough drilling to both offset the depletion rates as well as substantially add more.

So far secretary Bessent. Goal to, I believe it was increase production by 3 million barrels is not really playing out. We're not really directly going in the way that he expected in large part because the prices don't support it. And in fact, some of the some of the kind of the goals conflict because they wanted cheaper oil, but they also wanted more oil production coming to market.

And really the only way that could work is if you just outright. Subsidize them which they've not done. And basically I think that in the years ahead that kind of weaker supply from shale will impact things as well as, any other geopolitical disruptions that could happen.

And while there are more unconventional sources that can come to market. That generally requires both high prices and sustained prices. Basically some of the deeper water stuff, some of the Arctic stuff these, the underwriters of those projects, especially in a geopolitically complex world where there's more kinetic risk in various parts of the world and sanction risk and geopolitical feuds over places. The willingness to finance those longer term operations has to come with pretty high confidence that the energy prices are gonna support it profitably. And so I do think that we'll have another cycle of energy shortages, higher energy prices which, again is solvable.

But then when you have that hot political mix. Already happening and you're already in fiscal dominance. That's where it's a powder keg. That's where you get things like, financial repression, like you get another inflation spike. But instead of raising interest rates, central banks are captured and they're just keeping interest rates low and debasing the currency anyway.

And that's the, I think, an example of a mini crisis that can happen along the way. And of course, in many crisis, poorly handled can become a mega crisis. And so it's hard to predict ahead of time how that would be handled. But I do expect more of those issues along the way. And the, the earlier that, that people can get ahead of it, the better.

If we have a kind of a general global realignment that nuclear energy is good then that can alleviate the eventual problem, by starting earlier rather than responding to it as it happens or after it happens.

Erik: Listeners, you'll find a link in your research roundup email to the broken energy interview, which Lyn described as she was speaking.

Lyn, you know the drill here. Before we we close. Tell us about what you do at Lyn Alden Investment Strategy, what services are on offer, and how people can follow your work.

Lyn: Sure. So I have a low cost research service, that people can follow. I'm also a general partner at Ego Death Capital, where we do venture related investments.

And so thank you for having me on and congrats again on having 500 episodes under your belt. What does it feel like?

Erik: Lyn, as I said earlier, for me almost 10 years of Macrovoices, it's mostly been about the people that I've met and the way that people have challenged my thinking, and particularly the reward for me is in, touching a few people's lives.

And I, I really feel proud of you. I hope that doesn't sound condescending, but I'd like to think that we played a role in your success and it's just fantastic to see you doing all the things that you're doing.

Lyn: I appreciate that and I'm hope hopefully to be back one day and I wish you continued success with everything you're doing.

Thank you,

Erik: Patrick Ceresna and I will be back as Macrovoices continues right here at Macrovoices.com.

 

 

Erik: Joining me now is Forest for the Trees founder Luke Gromen. Luke, to my thinking, there could not be a better time for you to be acknowledged as our second most popular Macro Voices guest ever. The reason I say that is nearly a decade ago, I coined the phrase, the Luke Gromen moment inspired by the Minsky moment.

And what I mean by that is when we first started talking nine years ago, or ever since then, I have been. Absolutely convinced that you would be proven right in the end on your bold calls that the US dollar was eventually gonna fall into decline, fall outta prominence, not be the us or not be the world's reserve currency anymore, just as the pound sterling fell out of popularity a hundred years earlier.

But I also said at the time, I thought you were early. I thought it was several years away, and, and I knew you'd be proven right. And of course you got ridiculed along the way and so forth. Let's start just by making sure I'm not overreacting here, because I don't think you're early anymore, Luke. I think the Luke Gromen moment is happening right now, kind of scares the shit outta me.

And then I read your last three writings, frankly, over the weekend, and that scared the shit outta me even more. So is the Luke Gromen, uh, moment that I describe actually happening the way that I think it is. Am I being true dramatic or is the shit really hitting the fan in a bigger way than most people seem to be talking about?

Luke: Well, first, thanks for having me back on and, and congratulations to you and Patrick. I'm honored to have, have been a part of your guys' amazing success and, and wish you all the best and continued success from here. So, to answer the question you know, I, I've always thought of I guess the quote unquote Luke Gromen moment was sort of a, a gradually then suddenly phenomenon, right?

Like, how'd you go bankrupt little by little then all at once and have a few. Having me on for this actually caused me to search for my first appearance. I wanted to see when it was on Macro Boys, isn't it? It was September 8th, 2017, and the title of that episode was, was Luke Gromen. The biggest mean reversion in 50 plus years is underway.

And so at that point, we had been bearish on the dollar beginning late 2016 at a time when most were pretty bullish on the dollar. In fact, you let off by saying that, you know, we had so many secular Dollar Bulls, we wanted to bring listeners a credible secular dollar bear. So here, here's Luke. And so, at that point, the dollar had hourly fallen that year in 2017 from 1 0 1 to 94 by the time we did that first interview.

And, you know, we said, look the d Dollarization trends that had kicked off the Dollar Bowl market in earnest in the third quarter, 14 had gone too far. And you'd started to see the deficit in the US. As a percentage. GDP back then in, in 2017, re widen for first time since oh nine and only the seventh time since 1969.

And basically every other time we had a recession, or one time we didn't, we got the dollar devalued at the plaza accordance. What we said was like, look, if you look at the poll at the debt levels, a recession isn't a policy option. And so we think that the government's gonna, we gonna weaken the dollar.

And so we did see that. And the key thing within that was that was the first time in our career in any dollar at that point. Up until that point, we'd been a bull in, in 16 up until early 17, we had never seen the US fiscal situation. The deficit widen or the fiscal deficit sort of breakout before you had an EM crisis.

But that's exactly what happened. And so what we said in, in, at the bottom line was, look. Because foreign central banks stopped buying treasuries back in three Q 14 on net. Either the fed's gonna have to raise rates. They tried to, it didn't work because the fiscal situation broke before emerging markets.

They're gonna have to force us domestic investors to buy treasuries. They did. Or the fed's gonna have to grow their balance sheet. And so we, we kind of saw that. And so when you, when you look back to that, it's pretty amazing. As you know, from the date of our first show with you, you know, fed balance sheet was $4.4 trillion.

It's 6.6 trillion now after nearly four years of qt. Um, you know, on that show you asked us, Hey, what's the trade? And we said, look, in a nutshell, the trade long gold short oil, you know, that day gold oil ratio was 22 barrels an ounce today at 61 barrels an ounce all time high. GDX gold miners, which is a proxy for gold oil ratio, was 22 bucks at 73 today.

So you got a couple triples in eight years. 15, 16% KRS for both. We also warned on that show about long-term treasuries. We said, look, something that jumps out at me as I try to look at forest for the trees is US retirees, commercial banks and pension funds are all the biggest bid for long-term treasuries.

And if those groups are on the right, the right side of a major macro trade, well ahead of time, it would probably be the first time I can remember in my 22 plus year career on Wall Street. And so, you know, we said that that day, the TLT Long-term Treasury, ETF was 125. Today it's 88, so down 35% in risk-free long bonds when, you know, long-term treasuries had basically been a one way trade for the prior 35 years up to that point.

Uh, and obviously, some pretty well-known long-term treasury bulls were sure that deflation was gonna drive, ETF, you know, the T-L-T-E-T-F, uh, higher and higher and higher. And then finally, on that first show, you know, we said, look, I think the overriding message of the political populism that has broken out in the US and in western social democracies over the last six to 12 months.

Is that all the US entitlements are gonna get paid with printed money. And I think that's what maybe Mr. Market is starting to discount. I said on the show you've seen a breakout in the s and p 500 over the TLT the, uh, the long bond ETFA very pronounced breakout in a 25 year chart. So, you know, went back and looked at it today and, and you know, that day the s and p over T-L-T-E-T-F was 20 and today, you know, it had recently broken out over 15 for the first time in at least 15, 20 years.

You know, today up from 20, the s and p over TLT is 75 x, so nearly quadruple in eight years. And so all of which I bring up by way of, of background to the question regarding the Luke Gromen moment is that I never really saw it as a moment. I saw it as more. Gradually then suddenly, you know, and gradually was, you know, gold to oil ratio up three X in eight years.

It says 15 16% cagr, TLT down 33% in eight years. GLD over TLT up four x in eight years, s and p over TLT up four X in eight years. You know, the dollar's been 94, it was 94, then it's 96, 97 today. You know, we've been tactically bullish and bearish a few times in the show, but you know, I think overall pretty good calls, pretty good positioning early.

Yeah, I think probably maybe, but you know, we should all get 15 to 20% CAG run levered returns on our early calls. Right. In terms of what we were saying. So that was the gradually part, you know, it worked out pretty well for Fftt clients. Worked out pretty well for my own portfolio. And so with as by way of background, as that context is the Luke Gromen moment, I think are we, I think it's really about are we going from gradually to suddenly? And, and to your point, I think we are, I think the suddenly portion is beginning. Uh, you know, we wrote two weeks ago, we thought the fall of the, or the, excuse me. We thought the week, the, the week of the SEO, the Shanghai Cooperation Organization meeting was might've been the most important geopolitical week since the fall of the Berlin Wall in 1989.

And, and if that's right and I think it is, then I think we're likely to see things accelerate further.

Erik: Look, I want to congratulate you. I think you've made some brilliant calls over the years and I wanna be clear when I've said you were early, I meant the part about the US dollar falling out of providence and not being the reserve currency.

I thought that was early. You've certainly been very timely in a lot of your past calls. Luke, I think what we need to get to is what causes the state transition from slowly to suddenly. What is it that causes that to happen? And I think it's the recognition by all the people that were in denial that, oh, he was right.

You know? And think about the pandemic. All of us who called the pandemic early were being ridiculed. We were being called alarmists. We were, you know, all kinds of stuff. And then one day it's like, well, duh, everybody knows there's a pandemic. You know, what's what? Do you think you're smart? And I think all of the sudden, the Luke Gromen thinks the US dollar is falling out of, you know, reserve currency status.

That means Luke has to be a conspiracy theory nutcase. No, I don't think anybody thinks that anymore. I think it's pretty darn clear. Is that what's going on? Is everybody else is waking up to it? Or is it something else that's causing that sudden acceleration?

Luke: I, I think it is. I think it's a gradual awakening, I guess, and on multiple fronts, right?

So when you highlight that, you know, you can look at things objectively, right? So all of a sudden gold is now bigger than the Euro in at Global FX reserves. And it, uh, after another two or three years, if we assume another two or three years of, call it 800 to a thousand tons of Central Bank gold buying, we assume modest gold price appreciation for the next two, three years.

Gold is gonna be the biggest global reserve asset. And then that just gets into a question of semantics. If gold is the biggest reserve asset, it's bigger than the dollar. Who, what's the primary reserve asset? The dollar or gold? And, that I think is, is part of it. I think the other thing.

May, and maybe the biggest thing that is really starting to drive a recognition is the the reaction to the trade war. And in particular, post liberation day, remember we came into Trump's administration and, you know, it was, Hey, we're gonna, we're gonna doge, we're gonna cut and we're gonna strengthen the dollar.

And okay. And we tried to Doge and we couldn't, you know, we saw very quickly, oh, we're gonna take pain. Well, we took pain for like, 10 days. And then the treasury market started dysfunctioning. Uh, we weren't able to scare money out of stocks into bonds. Yields went up, not down as Bess and a lot of other thought.

And I think that was sort of strike one right. To, to the recognition. Then more specifically, uh. April, April 7th, I think it was Bessant who on Wall Street I think is, was seen by sort of the, the adult in the room, if you will within the Trump administration, right? He's our guy. He's the adult in the room and the adult in the room.

Bessant sat on April 7th, Tucker Carlson as the debtor, as the trade debtor. We have all the leverage with China. They're gonna do what we tell 'em to do. And on April 9th, the US treasury market dysfunctions severely very badly. The move volatility index hit 1 75 or something intraday, which it had only done like when Lehman nine 11, the 87 crash.

Like all it was, the treasury market was breaking. And Trump, it it, that led to the phrase taco right? Trump always chickens out. That led to the first Taco instance. We've also, you know, I think people said, well, we, we, we don't need the Chinese to supply us. We can get it from somewhere else.

And, and then, you know, major US retailers went to the White House, I hear in either late April or early May, and said, well, not really, actually, we can't do this without China, and we taco it again. And so I think there has been a recognition, even most recently, how many times have you and I ever occurred from China Hawks that, look, if we cut off food to China, China will starve.

We've heard, I mean, I've heard it so many times in my career, too many times they count. And yet the Chinese have not bought a single new crop, soybean or a single new crop corn from the United States this year. The Chinese aren't starving. Why? They're getting it all from Brazil. They're getting it from elsewhere.

So they don't need us on food either. So we have no leverage on trade. We have no labor. Our, our treasury market broke in five seven trading days after liberation Day, which yes. China would've been hurt, but they weren't gonna be hurt in seven days. I, they probably weren't gonna be hurt in seven months.

So I think that was, you know, we didn't have leverage on food. We didn't have leverage on trade, we didn't have leverage on the treasury market. And then the rare earth situation got layered on as well, which was, as it turns out, again, something else we've been highlighting for a long time was ultimately you know, the key parts of the US military are made in China, and particularly around rare Earth.

And the, the information was all out there. But again, I don't know if it was confusion or busyness or hubris or, or what, but US policy makers seem to think we have all the leverage and we literally can't go to war without China on the conventional side. And so then you layer that on. I think as you kind of layer these things out, that leads to two things.

It leads to the recognition on the trade side that we don't have all the leverage. Then you start looking at some of the stuff that actually, the biggest export market for Chinese exporters relative to the US is, is actually is, is actually consumer electronics and that for a lot of other stuff.

The Chinese consume a lot of their own stuff. And then I think the final sort of reason why we're seeing this acceleration now is because rightfully, you know, something we've heard, and like I said, I think it's, it's rightfully that anytime someone says, well ultimately the US military backs the US dollar.

True. But we just had it demonstrated that the Chinese rare Earth and Chinese factories back the US military. So what actually backs the US dollar? And I think there is this growing recognition. We saw it even again this week. Critical shortages in germanium. Uh, we've seen it a number of other different key raw materials mostly around rare earth, but elsewhere as well.

The Chinese have just stopped sending the stuff as it relates to the US military. And so when you layer all those things on, you realize the US doesn't really have the leverage we thought we had. So when you look at the reaction to post liberation day along the five stages of grief, right? Denial, anger, bargaining, depression, and acceptance.

There's still a lot of investors that are just now getting out of denial. Out of this, Hey, we have all the leverage. And that was pretty obvious from like before it started. You're getting into some of the anger, right? When you hear things like Secretary Bein telling Pulte that he's gonna punch him in his effing face, uh, at Chamath birthday party at the White House a couple weeks ago.

I think that's anger. I think he's under a lot of stress. I I would be too. And now we're kind of starting to get, I think, mainstream into this bargaining. Well, like maybe if we sort of cobble together the Europeans and, and, and the Argentinians and we can create this buying group and we can cut out China and like it's bargaining.

It's it, it's, it's gonna work. Um. We still have to get through bargaining and then into depression, and then into acceptance of all of this. So I guess I would say the last thing as sort of wise accelerating is in the first half of this year, it has become very apparent and obvious that another thing that was said by the establishment was wrong, which is that, Russia was, you know, the ruble was rubble.

Russia was a gas station with nukes, blah, blah, blah, blah, blah. You know, they're putting, they're fighting the US military with tanks that they had to put chips in from washing machines. That was US official government saying that three years ago, well, either our military couldn't beat a bunch of guys who had washing machine ships in their weapons systems, which would be very disturbing or more likely.

And the truth Russia's industrial base is in better shape than ours because we've been offshoring it to support the dollar system for 45 years and they've outproduced dust. And so I think there's this. Reason why I think we're watching this quickening is this accelerate, is this, this sequence of demonstrable empirically demonstrated facts that we don't have the leverage that we thought we did to support the dollar system.

And ultimately, if we can't go to war to support the dollar system from China and Russia trying to change the dollar system because China makes key parts of said military then we're gonna get a change to the system. And that's where we are. And that's why I think we're seeing the quickening.

Erik: I want to go back to something that you said earlier, Luke, the Shanghai Cooperative Organization meetings that were held recently.

You follow much more closely than I do. All I know about it is I was taken aback by a photo I saw of Vladimir Putin, Narendra Ram Modi and Xi Jinping, obviously a a, you know, made for the press, uh, for public consumption. Photo intending to show, at least the way I interpreted it, that Modi or, or that India has pivoted to China and Russia, or is in the process of doing so.

It was like two or three days later, or, you know, wash, rinse, repeat. I see another photo. This time it's Putin standing shoulder to shoulder with Xi Jinping and Kim Jong un, north Korean head of state. And I, and that was at a military parade. I mean, that's a pretty unmistakable message. The, the guys that are in charge of most of the nuclear warheads on this planet are working together, and they don't wanna be messed with.

So I look at this and I think, oh my gosh, that's like really big. I gotta get on this. I Google iconic photo news coverage, and sure enough, it's the biggest thing. Well, the biggest thing in the United States was the photo where Sidney Sweeney apparently put on some blue jeans, and that's created an ideological.

I don't really get what the battle's about anyway. Luke I don't think we're paying attention to the most important stuff. So obviously I brought that up to point out the irony of the corporate media's priorities, but I really think there's an important and serious issue here. You're saying, okay, we're we're just at maybe the denial stage, why, or, or some people are.

Why would you expect anyone to ever come out of the denial stage if the news coverage about the things that are like really, really important signals are being replaced with sydnee sweeney's blue jeans? Help me with this. I mean, and, and it's, I'm not just ridiculing them. I'm saying, seriously, until this gets fixed, why would you expect, you know, the mainstream to ever come around and see what you see if what they're paying attention to in the news is very different than what you're paying attention to?

Luke: I think part of the media strategy is to distract. And without getting myself totally in trouble, I, I will tell you, my sons certainly noticed it. They're all, uh, the young adult men and yes, they absolutely noticed.

Erik: Luke, you had the opportunity. All you had to do was to just run with the Sweeney story, figure out how to pull Taylor Swift into it, and you could have totally leapfrogged next week's mystery guest and locked in more downloads than anybody else.

But you want to talk about little stuff like, you know, the future of humanity and how it's gonna play out in financial markets. Fine. We'll do it your way. Go ahead. What did you write about on the 9th of September? On the 9th

Luke: of September, I said, I thought what had just happened the week before at this Shanghai Cooperation Organization meeting, or SEO meeting might have been the biggest geopolitical week since the fall of the Berlin Wall.

And what we pointed out was you had this meeting, which you saw the pictures, uh, with, with Putin, um, Modi and Xi, which, you know, to me, I think, you know, discredited an army of think tankers in Washington, right? Because we were supposed to be sort of, you know, splitting those three, any number of different ways against each other.

We used the, the media, or excuse me, the picture you referenced to the parade. We had Russia and China signing a major gas deal, uh, that could reshape global energy markets according to the ft in which the head of Gas Pro said it was likely going to be priced, uh, the same way the other gas deals were between them, which was to say in rubles and in foreign currency, which is to say not the dollar.

It highlighted, of course, you know, the, the military parade unveiling new weapons. It was followed by President Trump accusing she Putin and Kim of quote, unquote conspiring against the United States of America, which one of the charms about President Trump is that he will several times a year actually tell you what's going on by virtue of sort of some sort of impulsive, uh, uh, expost or, or, or true social posts.

And I think these were one of these, I think he got a briefing about like, uh, sir, this is happening. And he immediately took to his phone and then he followed that up. E even more tellingly, uh, by conceding it seemed like to me, to the bricks saying, it looks like we've lost India and Russia to deepest, darkest China.

May they have a long and prosperous future together. Which to me, like I said, read as a, as a concession post on truth social after him getting a briefing about what was decided there. And then finally, all in the same week over that weekend, the US Pentagon, uh, released the New National Defense Strategy report, or at least, uh, drafts of it to the Washington Media.

And they said it was gonna be pivoting away from China in a much more realist view and focusing on a more sort of Monroe doctrine like policy in our own hemisphere. And so, like to me I thought that was an enormous set of events. And what I think it meant was that, you know, sort of this, this daisy chain of things we highlighted started highlighting back in 17.

And we've talked through the years, um, that to your point, they were still early. We were still describing things. They stop buying treasuries on net, they start shifting commodities outside the dollar with net gold settlement. They do China 2025, et cetera. They've now reached this point where they're comfortable sort of, coming out on the town on the Grand Promenade.

And, China Rush and India are using their real economic cloud in manufacturing and energy and commodities and, and in population. They're essentially restructuring the rules-based global order. They're gonna force gold back into the system as a neutral primary reserve asset to replace treasuries, to replace Western sovereign debt.

And ultimately over time, that means Western central banks are probably gonna have to engage in some form of yield, curve control or its proxy through, you know, the genius act, stable coins, however they want to do it. And I think that was. I think that week was, we're gonna look back in five years, 10 years, and at the same way we look back at when the Berlin Wall came down, like everything changed.

Erik: Luke, when I read that September 9th piece, I was extremely impressed. Listeners, we do have it for you. It's linked in your research roundup email. If you don't have a research roundup email, just go to our homepage, macro voices.com. Click the red button above Luke's picture that says, looking for the downloads, Luke.

Wow, it was a doozy. I thought it's gonna be a long time before Luke comes up with another tree rings report that, that matches this one. Uh, you actually outdid it three days later on September 12th. And I'll tell you, I just had a really strong reaction to that. I've been reading your stuff for years and the way I read it, Luke, is, Luke's a smart guy forecasting some long-term trends that haven't happened yet.

It feels to me like you're like reading color commentary on really big stuff as it's going down. To me seems like a really big change from the way you used to write and report on things. And it sounds to me like it's a very direct reflection of what you described earlier, which is we're going from the slowly at first to the all at once.

So am I right? I mean, is that how you perceive what's going on? And obviously we've teased the listeners now you gotta tell 'em all about what's in the September 12th report,

Luke: right? I always say it. And so people will laugh when I say it here is, is, well, you know, what's normal for the spider's? Chaos for the fly, right?

Like, if you're long gold with all this happening today, you're not unhappy. You know, if you own Bitcoin, I think if you own stocks, you're not gonna be unhappy. You own long term bonds. You know, I think you're, you're gonna be fine. But you know, I think you're gonna go from, you know, eating steak to eating hamburger, to eating dog food, to eating kibbles and bits, you know, so, that's okay.

What really has gotten why I was so, you know, high, really focused on, on, on the pace of events and, and highlighted in that piece was. Look, three weeks ago we had this SEO in the China parade, right? That that effectively threatened, you know, mutually assured destruction, you know, with a demonstration.

Essentially what they said in plain English, conventional war with China and Russia is gonna lead to mass casualty events in major western European cities, major US coastal cities. That was the message that parade, uh, in my opinion, and I think you've gotta take a step back within that and why it got me.

So, you know why, what happened that week was so big is if you go to three months before that. The US it was reported that the US ran down 15% of its of its tad, T-H-A-A-D air defense missiles. In just 11 days of medium intensity combat defending Israel, Israel ran out of their air defense missiles even faster.

And it was a supply chain issue. We simply can't make them fast enough because we've offshore too much of our industrial base to China. So basically we need to ask China nicely to send us the stuff. And China is keep saying no, because we keep telling them we're gonna use them to point it at them, understandably so.

Uh, and then if you even take a step back from there, over the past three years, NATO supplied intel surveillance, reconnaissance, weapons, tactics, strategies to Ukraine versus Russia. Ukrainians were very good and, and Russia won with China's support. And so when we saw, you know, partly of that was due to the, the na, the nature of war changing.

To, to drones and missiles, partly because NATO got outproduced by Russia because we, again, we had to get out of the industrial production business to support the dollar system over the last 40 years. But I don't, I don't think investors recognize what has just transpired here, which is that, you know, the last three years, and especially last month, the last three months, excuse me, proved to a lot of the world what a lot of people at high levels in finance and in military intelligence had already known, which is that the US defense industrial base has been too hollowed out by the structure of post $71 hegemony to be able to sustain.

A conventional war versus the bricks for more than just a few weeks. And certainly not without severe casualties. And, and certainly by the way, not without the Fed, essentially buying the entire $130 trillion bond market with printed money to, to prevent it from crashing which it would on open war with any of these guys.

So we highlighted, you know, in running through those military things. And then in this report, what we really, on of the 12th, what we really highlighted was that a combination of softening US consumer sentiment. Uh, we then highlighted that ultimately there's a fundamental misunderstanding between how much China can outproduce that actually that the United Nations has, has understated Chinese.

Production so that, you know, and consumption and economic, that China's real purchasing, power, parity, economic growth. You know, we highlighted that, you know, there's starting to be an awakening around, hey, these raw materials that we've been, we have for 40 years said all we need are dollars.

And so let them produce everything. There's starting to be a recognition around that by the International Energy Agency, the US administration, the west more broadly. What we point out is that's great and the bond market is the elephant in the room. We can't just run industrial policy to start producing a bunch of this stuff.

For multiple reasons. We don't have the skilled trades. And from a bond market perspective. You know, we could get the skilled trades if we're willing to let inflation really, really rip, but if inflation really, really rips because our debt is already so high from the things we've done, you end up in a position where the you know, the debts, the debt will create more of a problem than it solves.

So basically what the report lays out is that there is no way this works unless we get into some form of yield, curve control, whether that's via the Fed, whether that's via treasury. There's a lot of different ways to try to do that. But that's what has to happen. And I think we're watching in markets a growing recognition of exactly that.

When you talk about gold, you talk about Bitcoin, you talk about stocks, et cetera.

Erik: Luke, that was the September 12th missive. And listeners, that one too is linked in your research roundup email. Luke, I do want to respect our standing policy that we never ask you to share your latest current writings with our listeners out of respect for your paying subscribers.

I'm gonna break the rules on this one at least a little bit, and, uh, I certainly understand we cannot share the full September 16th PDF with our listeners. But how about at least giving us a sense of, uh, who is Emmanuel Todd and what's he writing about, and, uh, why is that kind of important in your mind?

Emmanuel

Luke: Todd is a French, an French anthropologist who is famous for having written three different geopolitical essays o uh, over the past 50 years. So he spends most of his time studying anthropology, the human of, uh, the study of human, family systems and organizations. The first geopolitical essay he wrote was called the Final Fall.

He published it in 1976, and he predicted the collapse of communism based on the anthropological concepts of declining Russian female fertility rates and rising Russian infant mortality, because infants are the most sensitive indicator of a society that is starting to fail. Uh, he wrote his second, uh, geopolitical essay, and, and of course it goes without saying, you know, he had to wait 14 years or 13 years, but he was right.

He published the final fall in 1976. Soviet Union collapses, 1989. He writes his second geopolitical essay, it was called After the Empire, uh, it was published in 2002, and it was published at a time in which he said or excuse me, in it, he said that the United States would not enjoy an indefinite unipolar era because the world was too big.

The relative size of America is shrinking economically and America will not be able to control this world. And this, this happened at a time, if you recall, where there was, great consensus that the United States was in the very early days of a, of a generational unipolar power moment. And once again, he was right based again on, strictly on anthropological uh, inputs.

And then that brings us to the third, uh, geo geopolitical essay that he has written in his life. Todd is now an, an, an old man, of course, and. He published in January of 2024. What he thinks will be his last geopolitical essay and which is written in French, still not a translated to English.

Interestingly, it's titled The Defeat of the West. In the defeat of the West. He states that as a result of many of the same dynamics that led him to predict the collapse of the USSR in 1976, he says, quote, the west has been defeated, industrially and economically citing US infant mortality, which is, uh, above Russian infant mortality, US f female fertility rates falling US industrial base, having been hollowed out by offshoring in a manner of reminiscent of what happened to the Soviet Union when he wrote his first essay, uh, newly graduating engineer numbers in the US and educational attainment more broadly in the US falling for decades.

Uh, so he wrote that in early 2024 before it was obvious that, that the us uh, or that the, the proxy war in Ukraine was not going for nato. Uh, in April of 2025, he gave a public speech, uh, discussing the defeat of the West, in which he said, we're past a turning point. We're moving from defeat. To dislocation.

And what makes me cautious is my past experience of the moment of the collapse of the Soviet system. I predicted this collapse, but I must admit that when the Soviet system actually collapsed, I was not able to foresee the extent of the dislocation and the level of suffering that this dislocation would bring to Russia.

We read it in, in, it was, he published it publicly at the end of May, we read it then, uh, we kind of set it aside in our cutting room 'cause it didn't feel like it didn't feel like it made sense yet, and we pulled it out as part of the report of September 16th after the events of a few weeks ago. 'Cause it's starting to feel like it makes sense now.

You know, our friend Balaji s Bassan came at this exact same issue. From a completely different angle. In conversation with our friend Peter McCormick, a couple of months ago, in July Balaji came at it from a technologist, but he came to the same conclusion, which is essentially we're past the, the point of no, no return.

China has disintermediated Red America. The internet and Bitcoin have disintermediated blue America, right? They control media and they control the money and, and they're being disintermediated in the same way that China disintermediated Red America with manufacturing in the military. And so we're, we're getting this dynamic that we're watching every day in our lives now, just, you know.

Everywhere. You know, blue fights with red, red fights with blue, red fights with China, blue fights with Bitcoin and the internet. And, and the US as a nation pulls back because it's getting beaten in its own open, global capitalist competition game that it created and it's getting beaten by the global south, right?

How often do we hear? Chinese, China, China's out producing us. We've gotta get them to like slow down. They're producing so much stuff, they're beating us at our own game. That's highly inflationary over time. Best case in this report, in addition to what Emanuel Todd said. In, in May of this year, uh, or excuse me, Jan, he wrote the book in January, but he said this in, in April and May of this year.

In addition to what Balaji and Peter McCormick said in July of, of this year, we highlighted a Chinese People's Liberation Army General who gave a speech in 2015 to the CCP Senior Leader leadership. He warmed up some of the very same things. Most western investors either never even saw it, or, or, you know, those that did kind of laughed at it.

And, you know, they're not laughing anymore. And you know, I don't wanna take things away from our own, our own folks here. Like the US military was ahead of this more than any of the above. As were some major US industrial titans from ge, Google, Intel. Most Western investors ignored her to laugh.

I'm gonna read a brief passage from top US military leadership in 2011 in Edward Lu's 2012 book. Time to start Thinking quote, senior US military leadership. 2011 said this quote, the window in America's hegemony is closing. We are at a point right now where we still have choices. By 2021, we'll no longer have choices.

The US is way too dependent on its military should sharply reduce its global footprint. By winding up all wars, notably in Afghanistan, and by closing peacetime military bases in Germany, South Korea, the UK and elsewhere. All this is a means to an end, which is to restore America's economic vitality. Our number one goal should be to restore American prosperity.

As such, we recommend the Pentagon shrink its budget by at least 20%. Most of the savings would be spent on civilian priorities such as infrastructure, education, foreign aid. Nobody here thinks the politics in this town are gonna change overnight. All we're saying is that we're in trouble if they don't.

This is not about ideology. This is about understanding where we are as a country. And so the US military's been warned about this for 14 years. Of course, they said, we're gonna be out of time in 2021. And the problem of course, is that 2021 is almost five years in the rear view mirror now. And so when you then layer that with what the Chinese general highlighted, some of the same dynamics.

What an anthropologist who in his speech actually apologizes, said, this is not what I want. This is not what I wanted to come up with this data. The data are the data. You can't lie about the fertility rates and the infant, uh, mortality rates. They are what they are and here's what they're saying.

And I'm sorry, America. And so that's what we highlighted. And I, it didn't make me happy to highlight it. But it is what it is, right? Uh, I don't, uh, it's, it was harder to write. It was harder for me to write than it was for you to read. If you can believe that.

Erik: Well, Luke, if I had to write the executive summary of Todd's writings, I could do it in six words. The Luke Gromen moment is upon us, or, or I guess I should probably translate that to your frame of reference, which is the phase of the Luke Gromen. Uh, I don't know. Uh, evolution. We're hitting the acceleration point.

We're going from, from the, happen slowly at first to the then all at once, we know that Emmanuel Todd, who has a pretty darn impressive track record, basically thinks that this is a, uh, a very pivotal moment in history. I wanna know what Luke Gromen thinks. This, uh, moment is going to mean how turbulent could things get in financial markets, and most importantly, for, for this audience, you know, who are gonna be the winners and losers.

Obviously gold has been a big winner here. Uh, I think we're headed into, you know, the, the famous line about inflation is investors always forget that inflation is really, really good for the stock market. In the beginning, at the beginning of the inflation, is that what's driving this stock market and how long until we get to the bad part of the inflation as far as the stock market, and for that matter, any other markets that come to mind.

Luke: Yeah I, you know, I think there's probably some investors that'll listen to this and say, well, oh, you know, never short America. Right. And look, I agree with that. And that's also just a comforting platitude. It's a cop out, it doesn't fit, do anything to fix the problem. And I would also say like, which America?

From 1940 to 1980, what was good for GM was good for America. And from 1980 to 2020, what was good for Goldman Sachs and what's good for the treasury market is good for America. And now what's good for the defense industrial base, the working class, the middle class is, I think we're, I think we're like two years into that is a 40 year stretch of that.

What's being good for America. So, you know, I, I think we're going through this phase change. I think it's an early I think we're early in it and I think it's important to say, look, we're not saying short America what we're saying. Short, the real value of long-term treasuries and short the dollar against gold Bitcoin and stocks because the US' own military saying the US is four years past the we're out of options date.

And so I think what's gonna happen is we are gonna run this economy so hot and I think we're gonna repress the real value of long-term treasuries, so much versus gold and Bitcoin and stocks and look, that will ultimately fix the problem. Uh, it might create some others that we can touch on in a second, but I think it's really important that, you know, recalling COVID, the US got debt, the GDP, you know, after, after the, the Stimuluses and everything initially and the economy was shut down, debt to GDP blew out to 130%, if I recall correctly.

And the US got that right back down to 118 or 117% in just a couple of years. Recall that at the peak in COVID, I think the 12 trailing 12 month deficit was running at $3.3 trillion. They got it down to $1.4 trillion or so in, I wanna say, like 18 months. And how did they do it? Simple. 8%. CPI fed QE with rates at zero into rapidly rising home prices.

50 to 70% year over year gains in the s and p, which gooses consumer spending at goose's tax returns. So all they're gonna have to do is run inflation hotter for longer and the deficit will quickly fall to something sustainable. US nominal GDP is gonna soar. Uh, we'll be able to reshore wages.

Will do, uh, w will be able to rise. The release valve will be the dollar, the real value of long-term treasuries, I would think that stocks, I think stocks will soar in dollar terms. They've already started to fall in gold and Bitcoin terms and I think that's gonna continue. Same thing with home prices.

You know, since COVID home prices, I think are up like 65% in dollars they're down like 40% in gold terms, down, like 95% in Bitcoin terms since COVID. So now what I'll say about all that is what I just laid out, that they are gonna run this thing so much hotter than anybody realizes. That's the optimistic case, and that's why I say what's normal for the spider's, chaos for the fly.

Look, if, if you're a, you know, if you're a boomer and you got, 80% of your money in, in long-term treasury bonds, like you're gonna go from eating steak to hamburger to, you know, kibble and bits and, and that's, sorry. Um. And to be honest that makes some sense, right? Boomers are getting 70% of all time record tax receipts.

The, the, the elderly boomers in silent generation are getting 70% of all time tax receipts for entitlements. They, you know, we can't raise taxes, so we're gonna inflate 'em. We're gonna inflate 'em. So that's the optimistic case. I hope we can get through this without a real domestic political convulsion.

I am admittedly less confident about that after the assassination of Charlie Kirk, after the assassination of the, um, UnitedHealthcare, CEO Brian Thompson, I, and, and maybe more importantly, the polarized political reaction to those assassinations. That really as shocking as those were, those were like a double dose of shock was the reaction and the polarized reaction.

So. Look, if, if I'm wrong and we can't hold it together as a nation, and I don't know exactly what that means, but if we can't then I'm gonna be dead wrong about stocks going up in this. You're, you're I'll be really right on gold Bitcoin, but I'm be dead wrong on stocks because, you know, I think right now we have a, a moment to try to gather ourselves and, and come together.

But the longer we don't do that, I would again really reiterate, foreigners have $62 trillion gross and $27 trillion net in dollar assets. They are so long dollar assets. We saw post Liberation Day. What happens when just a little bit of money leaves the United States stocks down big 10 year treasury yields up big bonds down big dollar, down big, right?

So that was just a little bit of money that moved out of the US Post Liberation Day. If we get an honest to goodness political convulsion here. Wow. That is gonna be that's the fed's worst nightmare. You're gonna get stocks down, big bonds down, big dollar down big. And then what do you do? You raise, you know, you raise rates.

Ugh. You cut rates. Ugh. And, and so that is to me, something I'm watching very closely for signs, hopefully, that we calm things down or if we don't. But, I'm hopeful we can get this, you know, sort of the easy way, right? Which is, I put easy way in quotes on my notes here because it's, look, it's, it's not gonna be easy, but it's the easier way when you make really bad, long-term decisions for 40 straight years.

Sooner or later you'll run out of room to kick the can. And we're there, right? For a number of different reasons. We're there. I think ultimately what it means for markets is, I think inflation's gonna run so much hotter than consensus thinks. I think it's entirely possible that it's reported as sort of slightly elevated and, frighteningly the release valve, if they do that will be more domestic political tensions.

And so, uh, I, I think. I think we're in for a bit of a, a bumpy stretch here within sort of this, this fourth turning dynamic.

Erik: Luke, as you've been describing all of this, it's basically forming an analog in my mind that I'd like to run past you. And this pertains specifically to this question of the state transition from, you know, slowly at first until suddenly all at once.

And I guess I, I'll draw an analogy to the pandemic. Back into the end of 2019, there were plenty of people on the internet that, you know, know about these things that were starting to talk about something's going on in China. The rest of us didn't understand that significance and couldn't. Possibly be expected to.

Then there's a state transition that happens next where, okay. Jim Bianco was probably the first guy in finance to really understand the scope of this, where other, other people in other fields. But right around the end of January, 2020, it was, uh, January 30th, 2020 that we dropped everything and, and re-planned macro voices in order to get Dr.

Chris Martinson on to talk. He was one of the people who had been talking about it since 2019. But. It wasn't really any kind of wake up to what I'll call the second tier of people. You know, at first it was just the Luke Gromen writing about this stuff 10 years ago. That's like Martinson writing about the pandemic in 2019.

Nobody paid attention, nobody cared. Nobody got it 'cause it, it just wasn't registering yet. Then in somewhere around the beginning of February, there was this middle period where it wasn't just one or two guys, it's like 20 guys now it's the smartest guys in finance like Bianco that are all over it. But they're being ridiculed left, right, and center as alarmists.

You know, I was, I had all kinds of hate mail for doing that, that show on January 30th saying that we were irresponsible, fear mongers and you know, yada yada yada. And then that went on for a few months and one day, snap. Everybody knew that it's a global pandemic. Nobody questioned it. And it's like, oh my gosh, everybody's panicking.

I feel like this US dollar secular decline thing, I think we went from the only people like Luca writing about it to the 20 guys, like as smart as Jim Bianco have figured it all out now and I don't think we've yet gotten to that sudden everybody gets it moment. Does that resonate for you? Am I on the right track and well, what could happen when we get to that moment?

Luke: No, I think that, I think it's exactly right. And the reason I think people aren't there yet is it's, it's a little bit cross discipline, right? When you're in our, our business, you're focused on markets and that it, and, and, doing what I do, uh, owning my own business, I have the luxury to, write about what I think is interesting.

And so I have a bit of a cross-disciplinary approach that I think is somewhat unique. And the reason I bring that up for this is. I think there's still a lot of, of, like, I, I think we're no longer in the denial stage of, of sort of, you know, China 2025, you know, when they rolled that out, right?

People are like, oh, ha ha ha. Like, no one's laughing about that anymore. They're not in denial. Um, they're a little bit angry still, right? Oh, they're cheating and they're, they're overproducing and they're manipulating their currency and like, boohoo you know, compete. I think what we're really in this bargaining stage, and that's, to your point, like there's a recognition, but it's not, the bargaining stage is still around.

Well, we can get a, we can get the Europeans and we can sort of block out China and the bricks and, and, and, and it we're, we're only looking at it from one side and nobody is really doing, I. Sort of the deep look of supply chains to go, okay, break your supply chains down, break your trade balances down, and see how much of it ever touched China.

And if they, at some point they're gonna do that and they're gonna go oh my God. Oh my God. Like there that, and that will be sort of that moment. And I, the sense I get is, the old, the old famous, uh, saw, right? The pro amateurs study tactics, professional study logistics, you know, the bargaining stage was taught talking tactics.

Right. You know, you know, BeIN's talking tactics around, well, we just gotta get this group and we're gonna isolate China. The logistics are the guys within the US military and intelligence communities. And I, I just get the sense that they've done the digging on the supply chains and like.

They know we don't have the leverage. They know, and whenever that common knowledge goes from sort of, you know, the, the special knowledge, like you were talking about, sort of the isolated, you know, 20 guys to Oh my gosh. Yeah, then I think it's gonna, things are gonna happen really fast because, you know, to me the conclusion is just so crystal clear.

Look, we cannot win this trade war. The treasury market will blow up first every time. You can game it out however many times you want it. In the end, the only way it works as if the Fed or the treasury basically buy much of the bond market and, and yield curve control it, and. Historically when we've gotten into these tense situations, as the military warned about in 2012, right, we rely too much on our military historically, you know, geopolitics, geopolitics in the, in, in, since two thou, from the year since the year 2000, has been like, don't do anything to mess with the rules based global order.

'cause the American military will show up and kick your head in. That's geopolitics since the year 2000 in, in, in 10 seconds. Whoa, US military critical components are now made in China. So that too, there's still denial are, you know, some, some anger not even really bargaining yet. When you put those two cross discipline things together, which is our debt's too high, our supply chains are all touching China, even if we want to pretend that they don't, and our military critical components can't, we don't have the industrial base anymore.

Those three things together lead you to a conclusion either. We're gonna go to nuclear war and there's no winners there. I think it's uninvestible. I hope that's not how it's gonna go, but let's set that aside. Or we're gonna run this super hot and the market's gonna wake up and go, oh my God, I can't own bonds.

I can't own long-term bonds. I need to own gold. I need to own stocks. I need to own Bitcoin. I need to own, anything but bonds. Uh, anything but dollars. And, and, and that's not even and anything but dollar's. Not even really fair. Right? Anything but bonds. Uh, because I think dollar stocks, I think you're gonna be fine.

I don't know when that moment's coming, but like, I don't think it's years away anymore. I think we're, I think that's, you know. I think it's six to nine months away because then I can overlay that with the fiscal situation and look like I can overlay that, you know, the fiscal situation. We're right now with receipts at all time highs, we have true interest expense, which is interest plus entitlements, plus veterans Affairs.

It's a hundred percent of receipts and receipts are highly sensitive to the stock market. So that like we're, we're to the wall there, we're seeing the US, economy on the consumer side actually slow, which is really weird because, and it's really bifurcating, right? The bottom 50% are really suffering and the top 10% are, you know, it's, you know, party on Wayne, party on Garth, and.

That then reverberates into the geopolitical side, right? You're starting to see people writing articles like what is going on in America after the last two, three weeks? And so it could be a geopolitical trigger, I don't know. Or not a geopolitical, but a domestic political trigger. I don't know. Or simply just a, a spooking of foreign investors, right?

We have so much foreign money here. 62 trillion gross, 27 trillion net. If they start to get spooked about the domestic political situation, do they take five, 10% of their money home? Then what happens? Uh, so yeah, I think we are like right on the cusp of exactly what you described. And there can be domestic political, there could be market, there could be trade, there could be geopolitical, there could be any number of things, uh, that could spark it.

Erik: Luke, I was fascinated by your mention of military and digging into supply chains and so forth. I wanna share a quick story with you. I was recently surprised to be invited to speak at a supply chain conference. So I, do a zoom call with the organizers. I say, guys, I'm really flattered, you know, thank you.

But you've misunderstood. I'm not a supply chain expert. I really don't know very much about it at all. I'm not qualified to speak at that kind of conference. But boy, I would love an invitation because I'm very curious to learn more about the people who do the things that you described, the people who are analyzing things like, Hey, we're about to start a war with China, but we get, we're completely dependent on them for rare earth elements and for almost all of our medications and for all these other things.

I would really be fascinated to attend that and learn from the experts who is analyzing these things. 'cause I don't know that much about it. And they just looked at me like, Eric, you don't get it. We do know exactly what your qualifications are. The answer is nobody that goes to our supply chain conference is looking at any of those things, and we want you to come and point out that they should be.

And I'm like, wait a minute, or what? Supply chain people are not focused on that. Well, I gotta believe they are in the military, but, you know, that would be classified and so forth. It sounds to me like most of the people in the sup in the commercial supply chain industry are not really focused on the things that you're talking about.

And boy, I I agree with you that they should be,

Luke: I mean, you know, it's one of these things like I, I have a good friend who work for a, a major global international freight forwarder. And so someone in that seat is gonna know, and you know, when you talk to folks like that it's.

What, what they highlight are some of just, you know, what I would highlight are some of the, like seven or eight of the 10 biggest container ports in the world are in China. And it took them 30 years working at the fastest pace in human history to build them. And then there's a whole scale and network around engineers and factories and roads and infrastructure.

And it's simply world class across the board. And they've, again, 30 years working the hardest, fastest pace, in, in human history. And that's kind of where I, I say sort of like the bargaining side, right? When I hear those things I say, well, we're gonna move it all to Vietnam. Well, sure, you're gonna move some to Vietnam, you can move some to India.

You can't move it all. Well, why not? Because literally you can't fit it. And, and even if you could fit it which you can't, it's gonna take you, do you think. The Indians are go, are gonna work faster than the Chinese did. Like I remember being an investor in a, in a Chinese spa, the Indian management team come in, they go, Luke, you have to understand in India, you know, the British invented administrative or admin, uh, um, administrative stuff, and the, uh, the Indians perfected it.

Like it is just, you know, it takes longer to get stuff done there. So you're, you're like, best case you're talking, if you did it as fast as the Chinese, you're talking about 30 years isn't, you're not gonna do it that fast. And even if you could fit it, which you can't, and even if you could done in half the time the Chinese, which is still put us 15 years, which you can't, you still have the elephant in the room, which is the global bond market, which is to say like, all this stuff is in China and optimized the way it is for to, to keep inflation down, to support the bond market.

That's why we did this. That's why we did this at the end of the day. So if you want to do it, it's there. It's going to be inflationary and probably wildly so, which wouldn't be a problem except the debt levels in the west in particular are so high that, 10, 20, 30 basis points from where we are today.

Maybe in some cases, you know, the US maybe 60 basis points on the tenure starts to trigger a debt death spiral. Rates up, stocks down and that we've seen happen multiple times in the last five years. Japan, same story, Europe, same story, uk. So that's where I kind of look at this, you know, and I think it's a great summary you highlight of just like.

There's still this bargaining phase of, well, we just need to work really hard and we can move stuff out of China. We can cut China off. You know, like, you know now without a frigging 83 DeLorean and a flux capacitor that goes 88 and you go back in time, 40 years and you undo the stupid stuff, the short term focused corporate profit maximizing stuff that you did to break unions, uh, and support the bond market for 40 years under the guise of neoliberal economics.

You do that like, great, hey, if you've got a time machine, let me know. We can have this thing fixed, you know, six months. But failing that there's like, it can't happen. And so I think once we go from bargaining to the depression of like, oh God, then you're gonna realize like, okay, well they're either gonna let everything collapse, they're not gonna do that.

They're gonna print money. And they can't go to war, right? That's another way out. They can't do that conventional. Hopefully they're not gonna go nuclear. They're, they're gonna run this thing so hot. They have to, that's the only choice. And I think it, I guess I would just finish by saying like, I think the whole discussion around Fed independence and Steven Myron, I think it's totally off base with, like most US investors are playing by the old rules.

You know, I've been doing this 30, 32 years. Most people that have been doing it as long as I have, they're playing by the wrong rules. They're playing by the old rules. They don't understand like, is is inflation to how should they, it doesn't matter. The choice is bring this stuff back and blow up the bond market on a real basis or don't and lose, like, those are your choice.

This whole debate around should the Fed cut, should they raise, are they independent? Are they not? It's noise. It's noise. The variant perception is they're doing to the Fed what they are doing. Because they have to, because of what we just laid on the supply chain front. The bond market has to be anesthetized to, to, for the US to get back on its, you know, on the right track.

Again,

Erik: Luke, I can't thank you enough for another brilliant interview. It comes as no surprise that you're right at the top of our listener rankings for top, uh, guest of all time. In terms of total downloads, frankly, uh, I think you're writing in your Tree rings report pretty much speaks for itself. We've got two examples of that linked in the research roundup email from September 9th and September 12th.

Uh, for people who wanna find out more about what you do or are interested in subscribing and so forth, tell us what you do at Forest for the Trees. How do people sign up?

Luke: Sure, absolutely. You can find out more about what we This email address is being protected from spambots. You need JavaScript enabled to view it. or for both for institutional and mass market products. And, uh, uh, on x at Luke Gromen, all one word.

Erik: And don't miss the two samples that are linked in the research roundup. Email Patrick Serna and I will be back as Macro Voices continues right here@macrovoices.