Transcripts

 

Erik

Joining me now is Santiago capital founder, Brent Johnson. Brent prepared a slide deck to accompany today's interview. Registered users will find the download link in your research roundup email. If you don't have a research roundup email, it means you haven't registered This email address is being protected from spambots. You need JavaScript enabled to view it. Just go to our homepage macrovoices.com click the red button above Brent's picture that says, looking for the downloads, Brent, it's great to get you back on the show. You know, I've noticed a trend in the finance podcasting industry. Here's what you do. You're a podcaster. You go in the air, you make shit up in your head about what you think Brent Johnson and Luke Roman each said about the US dollar. You set the context that way. Then you bring one of those guys on and ask them questions that don't make sense because you didn't get the story right. I'm going to resist that temptation. Dollar milkshake theory is your explanation for why you think, even though the dollar system might be in big trouble, it's more likely to be upside risk to the dollar relative to other currencies than other people think. You call that the dollar milkshake theory. Give us an update on that, because, boy, it's starting to look I certainly think you already were proven right on that. We saw that unexpected rally up to 116 on the Dixie, holy cow. But wait a minute now it's looking a little bit shaky for the dollar. Let's get an update from the slide deck on the dollar milkshake theory, sure.

Brent

Well, first thing I'll say is thanks for having me back again, Eric. You were one of the first persons to interview me when I first started talking about this, and you were actually your conference in Vancouver, was the first time I ever spoke about it live. So you've been a great supporter of me over the years, and I appreciate you having me back, or having me originally, and having me back so many times since then, you know. So as the dollar milkshake theory goes, what it really is is it was a framework for me to understand what I thought would happen, should we get into a sovereign debt crisis as a result of all this crazy debt that the world has taken out. And I called it the dollar milkshake theory, because the dollar underlies the entire global economy. You can't really understand what's going on in the world if you don't understand what's going on with the dollar. And I thought that the if we got into a crisis and the system came into some kind of an event that would force it to change, it would be as a result of the dollar going higher. But the idea was never to just sit in dollars and wait for this big implosion. My point was that the dollar was going to rise. And I thought that would have a knock on effect for several different things. And I'm not going to spend too much time going through the whole theory again, but, you know, people can look at the slide decks, and the first, you know, 10 or 12 pages kind of summarize it. But if you look at page four, what I really said was, I thought six things would happen. I thought, you know, because of all the debt in the world, interest rates would finally start to rise after a 40 years of going down. I thought that would cause bonds to break. I thought the higher interest rates would pull capital into the dollar and make it rise versus foreign currencies. That pulling of capital into the dollar and into the United States, I thought would also cause US equities to rise. I thought gold would rise as well, both because Fiat loses value over time, but also the uncertainty surrounding the monetary system itself. And I said I thought the United States would continue to outperform the rest of the world on kind of an asset appreciation basis. And we did not get the sovereign debt crisis that I thought that we would, but all of the six things that I thought would happen as a result of that sovereign debt crisis have kind of played out. You know, the dollar has kind of from the time I first said it, it's, it's up about 10% but from from covid, which is when things really kind of got interesting. It's basically flat. But I would point out it's flat despite all the bailouts, despite all the money printing, despite the money printer go bird, despite the, you know, expansion of the Fed balance sheet, and so, you know, we've just kind of kicked the can down the road. But, you know, the framework has helped me understand what's going on in the world and why it's happening the way it has been happening. And so where I think we're at now today, Eric, is we're kind of at the same place we were five years ago. There's a lot of people out there who thinks the dollar's days are numbered. There's a lot of people calling for its imminent demise. There's a lot of people who think that American Exceptionalism is now over and it's the rest of the world's going to outperform the United States. I just don't think that's the case. I think, if anything, over the last five years, the United States dollar has become more entrenched in the world, despite the great desire to get away from it. I just don't think it's that easy to do. And I think, you know, with with the ratcheting up of the trade tensions between the United States and China, and the geopolitical tensions between the United States and Europe against Russia, you know, I don't, I don't think the next four or five years are going to be smooth and calm, and I think when things get crazy, I think the dollar will still rise versus foreign currencies. And I think the dollar will become. More entrenched than it ever has been. So that's kind of a little bit of an alternative theory than most people have. But you know, I have, I haven't changed my story in seven years, and I'm not changing it now.

Erik

Okay, that's perfect context, because I'm changing my story. Brett, what I would have said until maybe six months ago is, look, first of all, you've already been proven right on this. As far as I'm concerned, yeah, we haven't had a full on sovereign debt crisis, but we really are, in my opinion, having at least a an awareness, finally, of how bad the sovereign debt situation is, and I think it's driving these, these rises in the dollar and the bonds, breaking the interest rates, everything you said, the gold. I think it is all happening for those reasons. But what I would have said until about six months ago is, look, Brent, there's so many people around the world that agree that the dollar is the world's reserve currency because there's no viable alternative, and they're working hard to build that viable alternative, and once they do, I think it's toast for The dollar, because I couldn't see any smoking gun that could possibly preserve or salvage that that US dollar reserve currency status long term. Until recently, and I've been looking for somebody to talk about this. You just wrote a 30 page paper about it. So what is the smoking gun that might extend the dollar's hegemony over the global financial system longer than a lot of us thought possible, at least, certainly longer than I thought possible.

Brent

Well, you know, it's really, really interesting, because when this first came out a couple years ago, I didn't think it was that big a deal, but I've changed my mind on that, having done a bunch of research on it. And that is the rise of US dollar stable coins. And I think perhaps it's been missed by most for the same reasons I missed it is that it was, you know, it kind of came up in the world of crypto and these digital assets. And, you know, for many people, perhaps they understood the monetary side of it, but they didn't understand the technological side of it. And for many people, when you don't understand something, you just kind of stay away from it and don't really dig into it and and as a result, and I think there were some shady companies that were involved in the stable coin market, and that kind of, you know, probably kept me and perhaps some other people from from embracing it too much. But what really got

Erik  

me hang on a second, Brent, let's just do a definition before we go on of for that audience. And it's definitely part of our audience. For the people, okay, stable coins, that's one of those crypto, whatever the heck things, for people who are not interested in crypto. Why the hell should you care about a stable coin? Why should I even care what it is?

Brent

Sure, well, what a stable coin is essentially a digital token that is then tied to something else that's tangible, so as an example, or something that exists in another form. So rather than a new meme coin, you know, like Doge or something coming out that that really gets its value from either some perceived use or speculation it. The stable coins derive their value from the underlying assets that it's tied to. So you could the, you know, you could have a US dollar stable coin, in which case it's tied in a price manner to the US dollar. You could have a gold stable coin, in which, you know, you have this digital asset that is tied to the value of gold. And there's kind of different kinds, you know, some of them.

Erik  

Let's define that word tied Brent. What do we mean by tide? Do we mean backed by like, for every stable coin, there is a US dollar behind it someplace in a bank that hopefully is not in the Bahamas. That's

Brent

that's the idea. And I think for a long time, people were very skeptical of whether there actually was enough backing those stable coins, and if there was enough assets backing it to where, if you wanted to return your stable coin for the dollar itself, or the piece of gold or whatever, whatever it was tied to, that the backing was not there. And I think, I think what really kind of changed this for me was when they passed the genius Act. Now I started hearing about the genius act a couple years ago, but it was still kind of in, you know, legislative creation form. It wasn't really an official thing, and it was still kind of on the fringe, but then they literally passed it earlier this year, and Scott Besant has spoken about stable coins quite a bit. And so it's kind of getting official sanctioning or backing from the US government that it is going to be a thing. And that's what really got me thinking about it in a bigger way. And as I started thinking about it in a bigger way, I think the government is going to mandate in some way or another, that these stable coins are backed, and I think transparency is going to need to be more forthcoming than it has been, and I think audits are going to be more stringent than they have been. But the idea, as you suggest, is that, you know, these are backed, and. You know, in the past, there have been some stable coins whose backing fell apart, and then the price of those stable coins fell apart. I think that's going to be much more stringent oversight going forward, and that oversight is again, part of the reason why I think this could be a much bigger deal than than people perhaps have realized so far.

Erik

Okay, now let's talk about the stable coins role here. Because what I said years ago when I wrote my book in 2018 is, look the US government. Once they figure out what all this crypto stuff really is, and they realize that it really is a threat to the US Dollars role as global reserve currency, they're going to outlaw it. They're going to do whatever they can. Of it. They're going to make it difficult for crypto people. What I never saw coming is that actually there's a way for some crypto assets to kind of be the salvation that saves the dollar from being displaced as the reserve currency. How does that work? And how does stable coins play into that?

Brent

Well, I think you've just hit the nail on the head. And that's, that's kind of the realization I came to. And that is what I would say, is that what is emerging here as a result of the genius act. And listen, I have to say that this is, I say this somewhat tongue in cheek, but I'm also serious, is that usually when I see the name of a law come out, I laugh, because the name is usually the exact opposite of what's going to happen in this case. I actually think it's appropriate. I think this is a rather ingenious idea by the US government, perhaps saying Machiavellian is a better way of describing it. But essentially, what's emerging is not a decentralized alternative to the global financial order, but rather a deeper centralization, which may be disguised as efficiency and freedom, but is actually, you know, it quietly reinforces the US Dollar as the global reserve currency, and it reinforces the United States government's control over the global monetary system.

Erik

So the essence of it is, if you wanted to go digital, and you were kind of thinking about ditching the dollar and going with Bitcoin, okay, there's a lot of volatility in that. But if you go not with Bitcoin, but with a stable coin that might be cleared on the Bitcoin Blockchain, but it's a stable coin tied to the US dollar. Now, all of that demand for US dollars is still there, and you don't have the competition from other Euro stable coins and New Zealand dollar stable coins, because all the stable coins are dollar based, for the most part,

Brent

that's correct. 99% of stable coins in existence are already tied to the US dollar. Now, I have no doubt at all that other countries are going to launch their own stable coins as a way to kind of compete against the US dollar. But I would say countries around the world that are worried about the US dollar stable coin should be worried about the US dollar stable coin. And the reason is, and I'm going to take a step back here, and because I think it's important to understand the argument that we're making, and I think the mistake that a lot of people make is that they think that stable coins are competing with perfection, but they're not. They're not competing with perfection, they're competing with other fiat, right? This is a Fiat versus Fiat argument. This has nothing to do with Bitcoin. This has nothing to do with gold. It's nothing to do with diamonds or other tangible assets that increase in value over time as Fiat loses value. This is a Fiat versus Fiat battle, and for most countries around the world and most individuals and even kind of small and medium sized institutions, the US dollar is a much more stable currency than the local currencies in which they transact. And typically in an emerging country or a newly developing country, the government of that jurisdiction has a way to control the monetary flow. The capital controls what kind of a bank account you can open, what you can hold in the bank account, and so they can protect against an outside monetary influence coming in and disrupting them. But in this case, the technology is allowing citizens, individuals, and you know, again, small and medium sized institutions, to skip those capital controls or those banking laws or those regulations, because anybody that has a phone, a smartphone and a connection to the internet can download a wallet, and now all of a sudden, hold a US dollar balance. Previously, you had to have a bank, and then that bank, you had to have a bank account, and then that bank where you had your bank account had to allow you to own to hold us dollar balances. And then, not only that, that bank had to allow you to withdraw US dollar balances in perhaps physical form. And if that didn't work, then you had to go to some local merchant or some bazaar or some money changer, and, you know, pay a big spread in order to get out of your local currency and get into dollars. Dollars. And this has a way to, kind of, you know, immediately bypass that entire infrastructure, both regulatory and financial, to to allow, you know, the people in these jurisdictions, to immediately circumvent those controls and hold the US dollar. And what this ultimately gets to, what it ultimately gets to is the sovereignty of a country. And this is where, you know, understanding the definition of terms, I think, is pretty important here, because sovereignty basically means ultimate power. And every government wants to have ultimate power over their jurisdiction. But if you are beholden to a country or to another country, or if you are beholden to another currency which you cannot control, then you are no longer truly sovereign. And as I think these other countries start to become more quote, unquote, dollarized, it starts to eat away at the sovereignty of those local jurisdictions. And it's not an accident. If you look back through history, whenever there's been a currency crisis or a currency has failed, it's not very long after that that the government of that jurisdiction typically fails. And again, the reason is a loss of sovereignty. Once you lose control. Once you lose power, you're out and, you know, a new form takes its place. And I really think this, this, this is the genius of the genius Act, is it? It's a way for the US and the US dollar to kind of infiltrate foreign countries, foreign economies, and use the US Dollar as a weapon to a greater extent than they already have. And not only that, they don't even have to do it themselves. The market will do 99% of the work for them. And again, it's because the US dollar is a better currency than 99% of the other fiat currencies out there. And so I think a lot of people have focused on the fact that these new stable coins will be a source of demand for the Treasury, and that's true, it will be a source of demand, but I think that is a secondary benefit. I think the primary benefit is a more of a geopolitical and strategic currency as a weapon, that I think will will, quite honestly, change monetary architecture of the entire world. Let's

Erik

talk more about that currency as a weapon aspect. Because it seems to me that, you know, the genius Act is a mechanism or an invention of the US government. But wait a minute, one of the US government's favorite sanctions is to withhold access to the SWIFT system to prevent people from being able to transact international transactions in US dollars, basically kind of cutting people off from the global or cutting entire countries off in in the context of sanctions from the global monetary system. But wait a minute, don't US dollar stable coins kind of create a better way to completely bypass and obviate the need for the SWIFT system? And doesn't that undermine the US ability to use that as a sanction tool?

Brent

Well, I think it actually enhances it, and I'll tell you why. Is because the SWIFT system is not a US institution. The SWIFT system is actually a European institution. Now, after 911, 25 years ago, the US government went to Swift the US Treasury, more specifically, went to the went to the SWIFT system, and by using the political pressure of the United States government, was able to, quote, unquote, sort of infiltrate swift and get more information from Swift. But they still don't have perfect control over it. They have more control than perhaps any other group, but they don't have perfect control. And again, when you go back to sovereignty, every sovereign wants to have total control. They don't like a little bit of control, and they have some visibility, and they have better visibility than anybody else, but they still don't have perfect visibility. These stable coins are basically a new digital architecture that would give them perfect visibility, because it's all on the blockchain, or a blockchain, you know, I'm not sure which blockchain they would use. Perhaps they could use a couple different ones. But the point is, is it's it's not only gives them more visibility, it gives them more control, and it allows them to even better a sanction or remove somebody or cut them off. And so what I think happens over time is they're building this parallel system of you can call it plumbing or rails, however you want to describe this. And it will I think this new system will cannibalize the traditional Euro, dollar rails and create this. New us, dollar stable coin, Euro, dollar rail, which gives them more visibility, more control and more more a greater ability to use it as a weapon. Should they decide to do so? And I don't think this will happen right away. I don't think they're just going to flip a switch and happen. But the example I've used of how this could possibly go is the LIBOR so you brought up the Euro dollar system for those are not familiar, there's an entire system of dollar based transactions that exists outside the United States, and that system is called the Euro dollar system, and that Euro dollar system is orders of magnitude larger than the US dollar system within the United States. And for many, many years, the interest rate, which was kind of the standard interest rate that was used for the Euro dollar market, was called LIBOR that was set in London. It's called The London Interbank Offered Rate, and it was basically set by a committee of bankers in London. And again, the United States had a little bit of control over that, because it was essentially $1 based loaning system, but they didn't have perfect control, and they didn't like that. And over time, they got LIBOR shut down, and they got it transferred over to what's now called sofr, which is now a US based rate and one that they have control over. Now, that process took 567, years, but they eventually got it done. And so now LIBOR no longer exists, and now it's sofr, and you know, the US has more control over it. I could see the same thing happening with these Euro dollar rails and these new, you know, US dollar stable coin rails. I don't think it's just going to happen by a flip of a switch, but I think it will happen over time. And if you think about it, all the US would have to do, would say, Hey, this is our new preferred way of doing business. So any vendors they do business with, any any payments that they have to receive from other other partners or or companies or governments, you know, they could say, we want to now use this new system. And you know, it wouldn't take that long for the traditional rails to be cannibalized into the new rails. Imagine if the United States were to be able to get a partner like Saudi Arabia to say, we are still pricing our oil in dollars, but now, rather than sending us a Fed wire over the SWIFT system, we would like you to use this new, more efficient, quicker, cheaper system that the US Treasury has blessed, and then all of a sudden that gives it legitimacy. And for anybody saying, Well, no, Saudi Arabia is not going to do that. They want to sell their oil in yuan or rubles, or they're going to join the BRICs. I would just say, you know, keep an open mind. A lot of people didn't think that, you know, in 1972 that Saudi Arabia was going to price all their oil in dollars, but it happened. And so, you know, I think the US has a lot more tricks that it can still play, and more power and influence that it can use to make this happen, and especially if the market starts to adopt it on its own, it will make it even easier to do something

Erik

like this. Okay, let's go back to the theme of weaponization of currency systems, the goal or one of the principal benefits of the genius act stable coin, as I understand it, is you're describing it is basically it gives the us a way to, very quickly, almost immediately, bypass all the engineering that would have gone into a so called fed coin, a digital dollar, and just say, look, we'll keep us dollars as US dollars. We'll provide the the crypto rails, if you will, the digital currency rails on the US dollar by using stable coins. And that allows you to transact stable coins that are backed by dollars. Very efficient internationally. Don't need the SWIFT system. It's got all these great features, and it does have, I think, a weapon like aspect to it, which is that it potentially perpetuates the life of the US Dollar as the world's global reserve currency. Okay, well, generally, when somebody's got a weapon, whoever their enemy is, observes that carefully and copies it, or does something and tries to come up with a better weapon. So if I put myself in the shoes of Sergei glazyev, the Russian scholar who was the architect of the de dollarization campaign, imagine he's going and meeting with his counterpart in China. I don't know the name of that individual, but whoever the guy is in China, who's, you know, the weaponization of currency guy and the Chinese government. There's probably lots of those. Probably lots of those guys. And they sit down and they say, okay, what are we going to do? We got to design something. It seems to me, we've got the whole world is going to like this digital currency idea. They're going to start using stable coins that are tied to the US dollar for everything. That's going to potentially perpetuate our. Enemy's currency system. How can we design an even more attractive stable coin than a US, dollar backed stable coin that everybody's gonna say, Oh, well, since we're already on stable coins, it's easy to switch to a different stable coin, and we're gonna go use this other one instead. What would they do? And is there a risk that they come up with something better.

Brent

Well, they will no doubt do something, because if they don't do anything again, they are going to get their economy is going to get hollowed out and dollarized. So the countries that have the ability to fight back will no doubt fight back. And I think the countries that you mentioned, China and Russia, are probably best positioned to fight back. So it, but there's a number of countries out there who won't have that ability and don't have the power or perhaps even the technology or the know how to do it. And so I think what happens is even countries like Russia and China, you know, will still probably use the dollar stable coin to a certain extent, but I fully expect there to be a ruble stable coin, probably a yuan stable coin. If you look back over the last couple years, or last several years, our last 20 years, how many times have we heard about the EU on or the new digital this, or the new Libra system? There's been innumerable attempts to come up with a system that is anti dollar, that has been launched by a competitor, that is going to be the new standard of currency issuance and usage, et cetera, et cetera, et cetera. And it just never, ever comes to anything. And it's not to say that there's not great desire there, but again, you're fighting against the biggest network that has ever existed in the history of the world, and that's the US dollar network. Now it's not to say that nothing can happen. It's not to say that the US dollar can never be replaced. You always have to keep an open mind to that possibility. But I think my point is, is that with the network that already exists, the need for dollars that already exists, the desire for dollars that already exists in many of these countries. If now all you're doing is handing them the ability that with a with a with a smartphone, they can, they can now not only hold dollars, but transact in them. It's kind of like, you know, taking candy from a baby, I would argue. And so, you know, none the parents of those babies may not want, may not want the, you know, the US dollar, to be in there. And so they will put controls in place and stuff to try to prevent it, but I think it's going to be an uphill battle for them.

Erik Townsend 

Let's go back to the question of the blockchain and how this all works. Because what you said earlier is I was questioning, wait a minute, could this undermine the us's ability to withhold access to Swift as a sanction? And you said, Oh, but they'll have even better abilities. Well, hang on, if we're talking about surveillance abilities, definitely the fact that it's all on a blockchain gives visibility to all the transactions. There's an audit trail there that has to be followed. But if we were talking about a cryptocurrency style of blockchain where there is no owner, you know, the US government would not have any ability to prevent a transaction. So are you imagining that this is a different style of blockchain that the US does have control over, and is there a risk that maybe somebody else says, Well, wait a minute, you know, you don't want to use this thing for that exact reason, and instead we've got, you know, that's the competitive advantage of something new.

Brent

I'm the first to admit that I am not an expert on all this technology, to say exactly how this would work. And the other thing I would say is, even if I was an expert on the technology, I still wouldn't know exactly how this was all going to get rolled out. But I do know that there is ways that bond these different crypto assets, or these cryptocurrencies or these different blockchains to basically make it programmable money, right? And one of the things I've been debating myself with and talking to a bunch of other smart people is, is this going to be a system where the US Treasury rolls out their own stable coin or on their own system? Or will it be something where they just let everybody you know do it? Or will it be something where they, perhaps they grant a license, and they, perhaps they grant 20 licenses to a handful of different multinational banks and, you know, financial entities who then issue them. And I don't have a perfect answer that I don't know, but what I do know is that part of the reason for doing this is to have more control. Right? Governments are not in the business of giving up control, whatever you think of the genius act, I promise you that is not so that they are losing control of the money. It is, it is an attempt to get more control of the money. Now, how exactly they do that, I don't know. But to your point, could somebody else come along? Long and say, this is a way to get out from underneath the state's evil intentions. And I have no doubt that that will continue to proliferate, right? That's one reason to own gold. That's one reason to own Bitcoin. It's perhaps a reason to own some of these other crypto assets that gains, that provides an exit from the system. What I think is rather ironic about this, though, is that this new technology and this new innovations that was developed by the private market as a way to exit state control is now, at least from the way I see it, is being co opted by the state and perhaps implemented on a bigger scale by the state than the free market would would prefer to see happening. And so this is where, this is where I don't have it worked out perfectly, but I can see the where it's headed. And it's, it's, again, I go back to the very beginning. It's whether you want to call it genius or Machiavellian. It is, it is rather clever, Brent.

Erik  

Let's come back to what's going on with reserve assets, because central banks around the world watched what happened when the US sanctioned Russia by basically saying, hey, all those treasury bonds that you guys all own, we had the serial numbers and we just canceled them. See you later. Other central banks said, Wait a minute, we don't want that to happen to us. They started buying gold. So I guess my question will be in two parts, seems like there's already a trend going on with central banks. Is there any reason to think that it's going to change? Which is, they're starting to favor gold over US Treasuries as a central bank reserve asset, but maybe more importantly, is there an angle for some clever maybe Russia and China to come in and say, look, we've got a better stable coin that's not just backed by US dollars, but it's backed by gold, and it's audited gold, and they're really, you know, it's basically a gold coin. So you can use the digital currency convenience of instantaneous transactions, but it's all based it's all backed by gold, and it's in a vault in Switzerland. Seems to me like if you were a central banker and you wanted to get some of these digital assets, and you had a choice between US dollar genius act, stable coins, versus some other kind of stable coin that's on a completely ownerless blockchain that's backed by gold in a neutral country's vault. It's starting to look kind of challenging for that us, dollar stable coin, isn't

Brent

it? Well, I don't think so, and I'll tell you why, because I think we get back to the Dollar versus perfection, or the dollar stable coin versus perfection, rather than dollar versus other fiat. Now, I think there's a place for gold backed stable coins, and perhaps some of these other countries will try to do something with gold. But again, you have to remember, most people in the world do not want to hold gold. If they did, they would already hold gold. There's nothing to keep them from already doing it. And the other thing is, if they do want to hold gold as an asset, that's different than holding gold for liquidity, for business reasons, or for, you know, your daily operational needs. And so I don't think this is a gold versus dollar or a gold versus Bitcoin argument. One is a longer term store of value and one is a day to day liquidity needs. And I think we still live in a Fiat world. And I think that is going to continue. The other thing I would say is that to the extent that the rest of the world does try to do something with gold, the United States has a lot of gold. So if the dollar gets or if gold gets repriced higher, and therefore that makes China and Russia, who own gold, in a better position. Well, then how does that not also make the United States in a better position? Because they have more gold than anybody. Now I know some people will come back and say, well, the US gold hasn't been audited in 70 years, to which I would say, well, when's the last time you saw China's gold audit? And when's the last time you saw Russia's gold audit? And did you actually get confirmation of it, or did they just tell you they had it? And so the other thing I would say is I can't imagine Russia storing their gold in Switzerland. I can't imagine the PBOC shipping their gold back to the west after spending so much money to buy gold and ship it east. And so the last thing I would say is you have to remember the whole way that a gold backed stable coin would be given value is the gold that backs it. And the idea is that you could then turn in that stable coin for the gold. Now, do you think that China is going to give you the gold if you turn into stable coin. I don't think they're going to do that, but it does. It doesn't mean that it can't happen. I just, I think it's a lab, or rather lower probability event. But, you know, as it gets but, but I think as it gets back to the US dollar stable coin argument, you just have to remember that there are absolutely 100% Be countries that fight against it, and some countries will be more successful than other countries, but there's a lot of countries out there, and there's a lot of people out there, and a lot of small and medium sized institutions out there who already hold dollar balances or want to hold dollar balances, and the easier that that is made available to them. I think the more they will do it, and it is a way as, again, a Fiat versus Fiat battle. It's a totally different battle than the Fiat versus hard assets. The other thing, I would say, the last The other thing is, you mentioned central banks looking to hold more gold as reserves and treasuries. And listen, I think that is the case again. If we go back to the original the origins of the milkshake, one of my thoughts was that interest rates were going to rise, bond prices were going to fall, and we'd get into a sovereign debt crisis where sovereign bonds, including us, treasuries, are repudiated. And that was one of the reasons why I thought gold would rise, because I said the gold's rise would be, you know, driven primarily by foreign buyers, which I think is what has happened. The other thing I would say, though, is, if you look, if you look at a lot of these charts, there's a chart I have in here. I can't remember which slide it is off the top of my head, but I think it's slide 13. It's a fairly popular slide that's been going around, and it shows treasuries as a as a percent of reserves falling, and gold as a percent of reserves rising. Now that's not to say that nobody has sold US Treasuries, and it's not to say that nobody has bought gold, but this chart is largely explained by price. Treasury bonds have come down 20 or 30% and gold has more than doubled. That is partly why, as a percent of reserves, gold has risen and bonds have fallen. That said, I do expect that probably continues in the years ahead. Again. I think we're still going to get into one of these sovereign debt crisis where sovereign bonds will be repudiated, and I think in exchange, people will want to own hard assets, whether that's gold, whether it's Bitcoin, whether it's us, companies that have property, plant and equipment. I think we're going to continue to see Fiat lose purchasing power. But I don't necessarily think this is going to be necessarily just bad for the dollar and not bad for the rest of the world currencies.

Erik

Brent, I want to skip ahead here in the interest of time to let's see. It's page 21 in your slide deck. You've got the Table of Contents here, and I guess just the executive summary page for a 30 page paper, which I quite enjoyed reading myself. It is behind your paywall, understandably. How about hooking macro voices listeners up with the verbal executive summary of what's in this paper and what it's about? Sure.

 

Brent

So you know, the paper is titled Empire by code, and we titled it that because, again, I was actually surprised myself when I started doing the research on this. I enjoyed doing the research. I enjoyed learning about it, and I enjoyed writing the paper, because I think it is a rather big deal. And you know, I started the paper off with a quote by von Clausewitz, who was a military general, and he said something to the effect that in war, you know, you have to think of all parts of a whole. You can't just think of the individual parts alone. And the point we made, that's the same thing with money, you know, I'm going to tell you a story, and I'm going to tell you about a number of different pieces, but you have to think about it as a whole. And that's what we tried to do with the paper. And so, you know, the different things that we talked about in the papers, what are stable coins? What is money? How sovereignty plays a role in money, how the Euro dollar market developed, and how that plays a role in global monetary architecture, as well as sovereignty. We then went in to explain the SWIFT system and how that has traditionally been used to kind of regulate and and use the Euro dollar system, and how and the not only that, but the ways the US has tried to gain a little bit of control on it. We actually did a special section on the US dollar stable coin as a weapon. And the point I would make here. I don't know if many people realize it, saying money is going to be used as a weapon this, it may sound like a controversial statement, but it should not be. Money has been used as a weapon for centuries. Perhaps all of history, and the United States has actually used this as a as used money as a weapon in several wars, battles and different military theaters over the years. So this is not, this is not some new idea that I've come up with of a way they could do it. This is, this is already doctrine in which they have used it. We then go into the genius act, and how that how we think the United States is using the genius act. Ali to then use all the things we previously wrote about to embed US dollar hegemony to an even greater extent than it, than they, than many people realize. And then we just kind of go through why it all matters, and why we think this is important. And you know, we and we come to our conclusions. And so, you know, from a very big perspective, we think that this is a very big deal, and perhaps as big a deal as when the United States, you know, severed the dollar from gold and left the Bretton Woods system. The point I would make with the paper is we tried to break it up into easily understandable different sections, and the details matter, but the overall structure matters more, because what we think is emerging is not just a currency system, but a new form of global control. And the one, one thing I would I'll just, I'll just read you this one paragraph from the executive summary, I won't read the entire thing, but we say, make no mistake, something profound is shifting in the geometry of global money. Quiet code and public ledgers are no longer just symbols of rebellion against the state. They are becoming extensions of it, and the very tools once imagined to escape central authority are now being absorbed by the most powerful monetary authority the world has over known through digital tokens that settle in real time and travel across borders without friction, the United States may be transforming the architecture of control itself. And so, you know, like I said this, I don't want to come across as hyperbolic, but we just think this is a very, very big deal. We've actually this is so we've got on our research service. We've got two levels of service. We've got a premium service, which costs 399 a year, and we've got a pro level service that costs 2399 a year. We thought that this report was important enough that we're making it available to both levels of subscribers. If you subscribe to the 399 level between now and next Wednesday, which is November 5, even though this is a pro level report, you will get a copy of this pro level report that can be found at research dot Santiago, capital.com, I think this is a pretty big deal. I wouldn't be out talking about it if I didn't, and if nothing else, if nothing else, it's just an incredibly interesting time to be analyzing what's going on in the world, because if you think about it, this US dollar stable coin is or as an idea, it kind of sits at the center of both capital markets, global geopolitics and the madness of crowds. And if that isn't interesting to you, I don't know why you're looking listening to macro voices.

Erik Townsend 

Brent, I couldn't possibly agree with you more, and I definitely want to eat some crow on this one myself. My prediction going back to my book in 2018 as I said, Look, at some point the US government is going to figure out how much of a threat the whole crypto asset, digital asset infrastructure that's being built, how much it poses a threat to dollar hegemony. And once they figure that out, they're going to do everything they can to stop it. What I didn't see coming is, no, actually, they're going to figure out how to use it to their advantage, and stable coins are the mechanism to do that. And I agree with you, it's a game changer. Patrick, sureshna and I will be back as macro voices continues right here at macro voices.com

 

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.