Transcripts

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Business staying? How do they make money doing this?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Matt: or suicide? Hopefully suicide.

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

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

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

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

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

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

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

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

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

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

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

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

How are we gonna top Luke Groman?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lyn: Yeah, good set of questions. Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And that can really shake up various investment outcomes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you,

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

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Emmanuel

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Again,

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

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

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

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

Erik: Joining me now is Gavekal, co-founder Louis Vincent Gave, Louis, I  think everybody in our audience already Knew. We're gonna do a countdown from the five best guests. Louis Gave, gotta be in there somewhere in the middle at number three. Lots of pressure on two fantastic interviews that we just followed before that, there was one from you the timeless piece. So you're on the spot, buddy. You gotta outperform that somehow. Where are we gonna start? Equities we're pretty much certain everybody said to, to roll over pretty much anytime now, except they went the opposite way. And it seems like quite a few other markets.

A lot of reflation, gold lots of things up. Copper, not so much. Where's the action here? What should we be thinking about? 

Louis: Thanks for having me on Eric, and I'm very flattered to to have made the top five. I'm a very flattered to podium that sound like a bronze medal.

That's that's, that's pretty exciting. So thanks thanks a bunch. Yeah, look to your point, the world feels very reflationary right now, right? I think when you look at markets, you find that pick any major market you care to to pick. You'll find that financials are typically outperforming.

Yes, to your point. Precious metals have definitely broken out on the upside, but metals in general have been doing pretty well. I think you find that emerging market debt is massively outperforming developed market debt. You'll find that equities have started to outperform value is no longer sucking wind.

It feels pretty reflationary. And to be honest, I think that reflects a number of economic realities. The first and perhaps most important economic reality is that in all the major economies, policy makers are following very reflationary policies. I think if you start off with the us, which is obviously the most important when Trump came in.

For about six weeks we were promised Doge and tightening a fiscal belt and, slashing of government payrolls, etc. But it seemed to have lasted about as long as as one of my new year resolutions. Four to six weeks and then it goes on into the dustbin, I think when I look at the US today, what you have from policymakers is, a promise to go pedal to the metal. And, Bessent said it himself in his April interview, he said, look, we're gonna grow out of our debt situation and we're gonna put pressure on the FED to give us more money to do the US is following Reflationary policies. China is following massively reflationary policies. Few people realize this, but the budget deficit this year in China will probably be about 10% of GDP, give or take. For China's never run budget deficits this big, and this is occurring at a time when interest rates in China are at record lows, so in China as well, you have very stimulative policies, and unsurprisingly, Chinese equity markets continue to grind higher. Then, you look at Europe you really have pretty much the same setup except perhaps for France, Britain, where those two countries are trying to do some kind of fiscal consolidation, but it's very small at the margin.

And then in Japan, you obviously the Prime Minister just resigned. And the two leading candidates are both promising easier fiscal policy and more spending. So it's like the two guys the girl and the guy running, it's more and even more anyway, everywhere around the world, policy settings, you remember that spinal tap it's like these go to 11.

It feels like everywhere around the world. The dial is set to 11. And that's only, I think, part of the reflationary picture. Another massive part of the reflationary picture. The one that matters a lot for us in emerging markets, is the US current account deficits. The US current account deficit a year ago was 3.6% of GDP.

It's now 6% of GDP. That's the fastest deterioration in the US current account deficit on record. It means that concretely the US today is sending to the rest of the world $2 trillion. Every year, $2 trillion in cash to the rest of the world and the rest of the world takes that money and then, it can decide to reinvest it in the us it can decide to reinvest it at home.

But increasingly, I think what's happening is, on the other side of that US current account deficit, you have countries that increasingly feel that maybe they don't need as many US dollars to trade as they did before. Because most of the growth in trade is actually occurring in emerging markets.

We're now in an environment where. You get lots of excess dollars. Dollars is drifting lower, which is always reflationary for emerging markets. And then finally, I'm sorry for a long-winded answer, but finally, you also have a massive change of policy in China where instead of adding excess capacity onto excess capacity, which is what they did essentially since the semiconductor embargo of 2018, what you and I discussed in our previous interview, what they're now doing is a policy of anti-evolution. It's that's the new buzzword in China. Cracking down on excess competition. And so as essentially you stop lending to. Industry to add excess capacity on top of excess capacity.

I think that's actually pretty reflationary for everybody else. If you're a Japanese automaker, a Korean ship builder, the fact that China might be done adding excess capacity, at least for a year or two, gives you a little more breathing room. And so unsurprisingly, industrials are now outperforming everywhere.

Korea's outperforming, Japan's industrials have been doing fine. I think, yeah the markets. You could say are feeling very reflationary but all that corresponds to an underlying economic reality. 

Erik: Louis, my mental model for what reflation are all about is reflation usually set up fairly long lasting trends in asset markets and as traders trends obviously are our friends, as long as you get in on the game fairly early.

So when I look at some of these reflationary trends, clearly gold is trending up. It's part of your reflationary hypothesis. Makes perfect sense. Gotta go long gold. Wait a minute. Gold's, more than doubled, almost tripled in the last few years. Is it already at the end or are we just getting started?

How do you tell when you know there's a reflation, it's already run a long way, where's the entry point? 

Louis: It's the old story, right? If best time to plant a tree was 20 years ago, and, second best time is now. So I think for gold we are in a structural bull market for gold, partly because, the view of a lot of emerging markets of the dollar shifted massively with the Russian invasion of Ukraine and the and the seizure of all the, all of Russia's assets. You and I discussed this many times in the past. So is it time to, to let go of gold? Look I think we're starting a new easing cycle from the Fed.

I think we're in a US dollar bear market. These are usually, tailwinds to gold. They're not headwinds to gold. So I, given that I am a bear on the US dollar, I'm not gonna tell you to go sell your gold. Now, having said this, there's no doubt today that gold is expensive. When you look at gold relative to oil, when you look at gold relative to copper, to silver, to platinum, when you look at gold relative to US wages, when you look at gold relative to US house prices on any historical measure, gold is expensive.

But yes, it has momentum. Yes, the fundamentals are good. Yes, you can play the reflationary environment through gold. I think at this juncture, there's probably better assets to own, to play the global reflationary environment whether copper, whether energy I think these probably have more torque now and more upside potential.

But, to your point, gold is in a bull market and in a bull market, there's two things to do. You either buy it or you stand aside and look at it, but you definitely don't short it. So yeah gold is in this strong bull market. You've got buyers that are essentially price insensitive like global central banks.

You have very little increase in supply because gold miners have been deprived of capital for 20 years. It's, I think it's pretty hard to stand in the way of that bull market. 

Erik: Louis, let's move on to US equities, both the S&P and also the broader indices. So many really smart people, whether it's Goldman Sachs, Mike Hartnett, lots of really, high profile voices saying, hedge, baby hedge.

We're headed into that difficult time of year. You don't know what could happen in October. Could be a crash. Oh my God. Seems like the market is just loving that wall of worry and climbing right over it. Should we expect this trend to change? Is it long in the tooth? 

Louis: Look, my, my own business partner Anatole Kaletsky just published a couple pieces on this very idea that yeah, we may be approaching a, a top on, on US equities.

And behind that idea is I think the main. The two main threats to the reflationary environment I've described because I do believe we are in this, global reflationary environment, but if we want to take a step back and think, okay, what could go wrong to this unfolding reflation?

I think what could go wrong? Is one of two things. The first thing that could go wrong to this global Reflationary environment is is a US recession. And, I think that the reason you might fear US recession is the, there's increasingly a lot of anecdotal evidence that the low end US consumer is being squeezed.

If you look at say the fast food sale, the, the latest corporate releases all the fast food guys pretty much had. Very poor numbers. So did a lot of the specialty retail Vegas numbers were also pretty poor. The, all the cardboard sales are about as ugly as they've been for a decade. There's little anecdotal signs here, there and everywhere that I think between, rising cost of of housing because you've got very rapidly rising cost of home insurance. Obviously higher mortgage rates, but also higher local taxes that is, the, I think the low end guys are getting a squeeze rising cost of car insurance because with the tariffs. Obviously replacing a car now costs more, so that gets reflected in car insurance. And you look at your car insurance costs and they have gone up a lot. I think the low end consumer in the US and the mid middle range consumer in the US is getting squeezed. And of course consumer consumption is such a big part of the US economy, which incidentally, is more or less the Trump policy. Let's not beat around the bush. The whole Trump policy is we wanna bring production home to the us. We want to, cut back on, on consumer. We wanna swing back towards the producer. And so if that's the policy, should we be surprised that, consumption in the us which is the real driver of US growth starts to stall a little bit.

So I think that's your first big risk to to the sort of reflationary environment that, that I've described. I think that the second big risk is the, perhaps the growing realization in the market that, you know. You've had tremendous excitement around artificial intelligence. Chat, GPT was released in November, 2022.

Since then, the US stock market has gone from 40 trillion market cap to 65 trillion market cap. Put things in context, that 25 trillion market cap is bigger than all the other markets in the world combined. Outside of China the total market cap of China is roughly 18 trillion. All these other markets Germany, France, Britain, etc, they're below five. Japan's at about seven. So the US has added more than the rest than the total value of the rest of the world combined. It's been simply unprecedented. The wealth creation that has occurred in US equities in the past. Two and a half years and under underpinning a lot of this because over that period, S&P 600 small cap index and mid cap index have done very little.

It's essentially been the 50 biggest stocks that have ripped higher underpinning. All of this is really the excitement around AI and the hope that AI was gonna leash unleash a new wave of productivity and a new wave of profits. But we're now almost three years in and the profits have yet to materialize.

The CapEx is definitely materialized. The capital spending has been off the charts, but. Will these guys who made the hundreds of billions of investments actually make money from all these data centers and all these, massively expensive chips that they bought? Or will that end up being essentially write-offs?

And of course, if it's write-offs, then that'd be pretty bad news for the US stock market. It'd be pretty bad news for the US dollar, again, you go back to the Reflationary environment and you think, okay, what are the two big risks? One of them is that essentially AI doesn't fulfill its profit promise.

The other said, the US consumer starts to feel the squeeze and starts to hold back. These for me, are the two big risks in the system today. Now, either one of these risks means that the US equity market goes down. It also means probably that the Fed eases. It means that the US fiscal spending goes up higher, all of which ends up leading to a weaker US dollar.

So interestingly. Of course, depending how bad the recession is or how bad the AI face plant is, but you could conceptually argue that to the extent that these, you have these two risks, should they materialize but not materialize in too severe a way. All you end up with really is, lower feds fund rates, more fiscal stimulus in the us, weaker US dollar, and that combination actually turns out decently reflationary for the rest of the world.

It's, an interesting juncture because I completely get the argument for lightning up on US equities. Yes. US equities are expensive. Yes. They've had a hell of a run. Yes, they are overbought. Yes. There essentially held up on the premise that one, the US economy won't have a recession at a time when that premise is at least debatable.

And two, they're held up on the premise that. Profits on AI are gonna be magnificent. And the scope for disappointment there is quite high. But meanwhile, if you see that, does that mean that Chinese equities crater? Does that mean that Latin American equities crater does that mean that Japanese equities crater?

I'm actually not sure in fact all those markets could do quite well because. Essentially the NASDAQ would stop acting as, the big liquidity suck that it's been for the past 10 years or so. 

Erik: Okay, Louis. So big picture. The trend is reflationary wanna be on assets that are gonna benefit from that trend and continue on that trend.

Stock market seems a little tired, probably not the right place to put new money into. That begs the question, okay, what is the trade that benefits from that reflation that's been beat up that you can buy cheap? How about high grade copper? The US contract, the one that got absolutely annihilated when president Trump changed his mind five or six times about tariffs on copper.

Louis: Yeah, and you'll probably change it another five times before, before this interview's over, 

Erik: but we're still way below the 200 day moving average. And you know that chart got absolutely clobbered and it seems to me it should benefit and eventually recover. I guess some of it of that, real froth well above five and a quarter or so was probably due to tariffs anyway, but at least getting back to 5.40 or so. That ought to be just a matter of retracement, but it's not happening yet. 

Louis: I agree. I think when you look at the world's reflationary forces around the world, you have parts of the market that have been, that continue to participate. We mentioned the financials, obviously gold and the other precious metals, silver, all that stuff.

And other parts that have completely not participated. If all you had were energy charts, if all you had were the copper charts, to your point, you would say, what are you talking about, reflation? I don't see it. It's nowhere near to be found. I think, some of that is linked to the fact that Chinese growth has remained disappointing.

Let you know, let's not beat around the bush Chinese growth for all the stimulus, etc. China is still going through some level of balance sheet recession and, some digestion of the past few years, policy mistakes or whatever else you wanna call it. So you know, that I think has weight on copper.

It's weight on energy. And part of it perhaps is also frankly the lack of policy visibility in the United States. Who, who today wants to build a new factory? You're just joking. Oh, you'll change it five times again by the time this po this podcast is done. But if you're. An industrialist in the us an entrepreneur.

This is no laughing matter, having this lack of visibility really I think prevents you from really doing big investments. Now copper is, the typical metal for large infrastructure investments for. For large capital spending for factories, for all that stuff.

And whether you're in Vietnam, whether you're in China, whether you're in the us, Mexico, you're dealing with the level of policy uncertainty that you've never dealt with before. So for now, I think a lot of people are still sitting on their hands and. This policy uncertainty won't stay forever.

At some point, the US administration will say, okay, we have a deal with Vietnam and this deal is good for the next 10 years, and so on and so forth. And then perhaps it'll be a little bit like a coiled copper spring. And quite frankly, I think the opportunity in copper today is an attractive one.

Just as is perhaps the opportunity and energy. Now I know energy has been a dog with fleas and. It's been a, a drag on most people's portfolios and including mine. I've been probably too bullish on energy for the past few years. Here we are in a reflationary world and and usually, and it as the world reflates energy at some point starts to participate.

Erik: If you've got uranium in your energy basket, you're doing just fine. 

Louis: Yeah, no, actually, it's not been that bad. 

Erik: But but yeah, I agree on the oil and gas, it's it hasn't quite jumped onto the trend yet. Louis, as we're talking about things like copper, which are absolutely essential to running the global economy and the international trade of them is essential to the continued operation of the planet.

Let's talk about. The formative escalatory rhetoric. I think we're still years away, hopefully from kinetics here, but awfully strong rhetoric about US and China going to war over Taiwan at some point. I really hope that doesn't happen, but I had a call last week with a bunch of supply chain experts and I was asking them if we're about to go to war with China.

What are you supply chain guys doing to figure out how the heck we're gonna replace our complete dependence on China for our pharmaceuticals and for so many other things? You guys in the supply chain business must be all over that. And they said, no, Eric, the reason we're calling you is because we're wondering, nobody in the supply chain business is thinking about that.

We're wondering who is. I said, oh, I thought it was you guys. So Louis who's thinking about this? 

Louis: I think the Chinese are thinking about it. You and I discussed this before in, in 2018, when the US essentially cut off China from semiconductors, China then decided, okay we have no choice but to build self-sufficiency in everything because whatever we're dependent on the west for today is a point of weakness that the west will press on in times of stress and or simply press on to prevent us from growing, which is of course, what the US was doing in 2018 with the semiconductors. Followed a period of seven years where China invested in all of its money in industry and none of it in real estate. And you see this very clearly in, in the bank loan data.

And that leads us to where we are today. And I think when you look at China's, I would say posture on the global stage, you've had a dramatic evolution in the past seven years. In 2018, essentially when Trump comes out swinging against China, China takes the punch. It knows it, it has no choice but to take the punch again in 21 when there's the Anchorage meeting and, Blinken and Sullivan and accuse Wang Yi of all the crimes and and all sorts of things.

Again, China takes the punch and then comes 25. Trump comes back in and starts punching against everybody against Mexico, Canada, Europe, India and China. And China is the only real country that, stands up and says, you know what? You want to go? Let's go gloves off. Let's have this fight. You put tariffs on me.

I put tariffs on you. You put an embargo on your semiconductors, I'll embargo my rare earths and I'll embargo my magnets. And at this point, I think the US realizes, hold on. We're now three weeks away from GM plants shutting down 'cause they don't have the magnets.

We're now two weeks away from the Lockheed Martin and Raytheon plants not being able to produce missiles. And this is a real problem because Israel and and Ukraine are firing these missiles at a pretty heated clip. So what you find is all of a sudden the US has no choice but to meet with China and Geneva.

I think back down, and it brings you to, to the sort of equilibrium that that we're in now. Now you mentioned Taiwan. What I find fascinating I'd invite your listeners to do a Google trend search. Where you can, like Google searches the number of mentions of something in the media and to do it for the US media.

And you'll find that in the past four months the mentions of Taiwan have simply dis. And six months ago, 12 months ago, we kept being told that, it was either next week or the week after that China was gonna invade Taiwan, etc. Now nobody talks about it. It's just completely dropped off as a topic and, again, do a Google trend on it.

And I find this fascinating. Because essentially to me, it confirms that the US and China have now reached a sort of stable equilibrium where China doesn't want the relationship to get worse. Because the main concern of the leadership in China is always to keep domestic stability.

It's always to keep domestic peace so that they have no real incentive to pick a fight with the us. But the US now is forced to realize that actually it can't pick a fight with China because if it does, China's gonna stop selling it. The components it needs for the missiles that it would need for the fight with China.

So it, the US is now in a sort of catch 22. And I think this is why, you just saw the Pentagon release a paper highlighting that, you know what the days where the US could essentially. Keep the peace in Asia are now over in the new age of drone warfare of hypersonic missiles.

The US fleet can't be protected out in Asia, and in this paper suggested that the Pentagon should just have a strategy of focusing just on the western hemisphere, on the Americas continent, essentially building Fort Monroe and focusing on just this, and so I think that, the scope you mentioned, the kinetic war, the scope for a war between China and the US is now going down very fast.

Which is of course very bullish for China. One of the big reason everybody thought China was uninvestible the reason we live in a world of A, B, C, anything but China was this belief that, we were gonna have a conflict as this belief dissipates , what you find is, Chinese equities that had spent five years de-rating continue rerating absolutely every single day.

But more importantly, what all this shows is that. While the US supply chains are now very vulnerable to you mentioned the pharmaceuticals, I mentioned, the magnets, the rare earths, etc , while the US supply chains actually very vulnerable to potential outside shocks the Chinese supply chains are now following a massive seven year effort.

Extremely resilient. And so I think that's an important shift in the world that we live in. 

Erik: Louis, the things that you describe all suggest to me that we really ought to be avoiding any kind of conflict with China or any other country for that matter. What should I make of this picture, which nobody in the west seems to be paying attention to, but it freaked me out.

You've got. Putin with Modi on one shoulder and Xi on the other shoulder with a look on their faces that just says, this is the propaganda picture that's meant to send a message to the west that you guys better not mess with us because we're going to respond together. That was the way I res, I perceived that picture.

Obviously, I'm reading a lot of meaning into the look on three guys' faces. And I then last, last week Dr. Anas Alhajji told our listeners about the power of Siberia pipeline, which sounds like a massive infrastructure investment to further build the economic connections between China and Russia.

Should the US be concerned that I mean is this, these forces coming together to come and get the us or are they coming together to defend themselves against a perceived threat from the us? 

Louis: Or maybe they're coming together to, to do stuff together and the US is less involved. But yes, look, I think these were all very powerful moments and very and to be honest, world changing moments.

First of all, to your point, Modi, Xi Putin, they looked really happy together on stage. They looked really happy, you all smiles, all hugs. They weren't French kissing, but it really wasn't that far off. They really seemed keen to be together. Now. I think this is of course, to your point, a super important message for the world because if we think in terms of, the mega trends that might reshape the world for the next decade or so in the Western world, I think we focus pretty much all of our time on two massive trends.

And I'm not saying these trends are bs they're very real trends. But the first one of course is AI. That's it's, how much is that gonna change the world? If it really changes the world, how much does that change the workforce? What does that mean for our welfare states, etc.

Lots of questions around the impact of AI. I think that the second big mega trend that, that everybody focuses on is the growing realization that most OECD countries and especially the big ones, the France, the Britain, the US Canada's fiscally are cruising for a bruising. That, even in periods of economic boom, they're still running budget deficits of 5% 6% of GDP government debt keeps on expending fiat currencies keep on getting debased at an accelerated pace.

These are the two big mega trends when I meet with Western investors. This is all the two things they want to talk about. And, that's why gold is going up the way it is. That's why Bitcoin has done what it's done, etc, etc. But let us imagine. For a quick second.

Now you could say, this is science fiction. It's not gonna happen. But given how they were hugging each other on stage, let us imagine a mega trend where the Russian, Chinese and Indian economies start to integrate more with each other. You start to see more trade, you start to see more exchanges, more trade in their own local currencies and so on and so forth.

University exchanges or, you name it. Now here's here's what's fascinating, why I think this could be an extremely powerful trend. Russia, for all intents and purposes, is the world's biggest commodity producer. It produces everything, oil, natural gas, coal, iron ore, you name it.

Copper silver uranium, Russia produces it and it produces it typically cheaper than anybody else. China is the biggest producer of machine tools by long shots. It's the biggest producer of consumer goods by long shots, and it has the cheapest cost of capital in the world today. And India, of course, now has the deepest pool of cheap labor in the world.

'cause labor is no longer cheap in China. Let's not kid ourselves. So imagine you match the cheapest commodity producer with the cheapest capital goods, cheapest cost of capital. And the cheapest labor. You put all this together in a pot, what comes out could be really powerful.

And, here's something funny for you. If you take the top 30 market caps in the world the top 30 companies by market cap. You find that 24 out of the 30 are American. And then you think, okay, if the big macro trend of the next decade is the integration between these three guys Russia, China, India, how many of the top 30 companies will benefit from that integration?

Maybe Tencent, maybe Alibaba, maybe Saudi Aramco. And that's about it as you go through that list, maybe Samsung. But as you go through that list of the top 30 if you think, most people have equity index portfolios, and if you think, okay the big macro trend of the next 10 years will be AI, then you know, then you're fine with your index.

You're exposed to this, you're exposed to plenty. What if AI turns out to be a bust? And the big story of the next 10 years is that economic integration between the three. And here, you and I have discussed this in the past as well, I always say, if Hong Kong is really the center of the world, it's the center of the, at least demographically speaking, within a five hour flight of Hong Kong, you have more than half of the world's humanity.

That lives there. Now you could say, yeah. So what? Who cares? It's always been the case. What? What's changed? I think what is changing right now in front of our very eyes is that, a generation ago. Two thirds of that half of the world population. Within that, it's called the Valeriepieris Circle, where more than half the population lives.

Two thirds of that population was rural people living in the countryside, very little disposable income living pretty much lives not that different from their grandparents' lives and their great grandparents' lives, etc. Now two thirds of that population is actually urban. Now the reason this matters is economic growth tends to happen in cities.

This is where you have universities, this is where you have businesses, people exchanging ideas, etc. Now, all the cities in that valley, Pierre, is circle where essentially independent islands. Barely talking to one another. Still to this day, there are no direct flights between Mumbai and Shanghai, or between Delhi and and Beijing.

It's now, there's, I think there's 24 daily flights between New York and London come back in five years and 10 years. How many direct flights between Mumbai and Shanghai? It'll definitely be more than zero. I'm pretty much willing to bet a lot on that. And so as you get these flights, as you get more telecoms, as you get canals and roads and ports built as you get exchanges this is where the growth I think will happen.

And to be honest, if all you are doing is owning an index fund, then you're not gonna be exposed to it, at least not for a long time until the indexes start to reflect this growth. And by then, you'll have missed probably at least half of the party. 

Erik: Louis, while we're discussing China Chinese equity markets are starting to rip.

Is that the beginning of the trend to jump on? 

Louis: Yeah, you look, I think the Chinese equity bull market started in earnest in January 24th. That's when the government stepped in to, to put a floor under the market, and they've stepped in a couple times since then. Essentially signaling to the market, look, each time this goes down 10%, we'll we'll buy in and I think the, there's a lot of drivers to the unfolding equitable markets. The first and biggest driver simply is the difference between. Today's dividend yields and the cash, the money that that the interest rate that people get for cash at the bank you know that differential is basically 3.5%, 4%.

And so this means that each time the market dips a little bit you do see Chinese savings. The individual savings, which are very high 'cause they're no longer buying real estate. They've just been, so shell shocked. They've kept a lot of money at the bank. As soon as stocks fall 10%, the the Chinese savings come in and buy all the high dividend yielders, whether they're PetroChina or China Mobile or or Bank of China.

All these companies that, people know the government isn't gonna let go bankrupt. Still offer dividend yields of 5%,6%, sometimes seven, 7%. So I think you do have this rotation and as long as the government is perceived essentially to backstop equities that will continue.

And as long as you have this very high positive differential between, again, cash yields on bank deposits and dividends on the other. But I think there's other drivers that are increasingly emerging. You just discussed, the fact that the US China relationship is probably now finding a sort of even keel and isn't gonna deteriorate from here.

I think we're gonna get confirmation of this in late October when President Xi and and Trump meet at the APEC meeting in Seoul. And. If anything mildly friendly comes out of this will be a massive green light for a lot of foreign investors to participate in the bull market in China.

And last year China was the best equity, best performing major equity markets. I. This year, again, it's it's outperforming the us it's actually outperforming most markets. I think there's, I could wax lyrical. There's other drivers to the unfolding bull market.

But the reality is Chinese bull markets typically end in one of two fashions. We are in a bull market today. The market has essentially doubled since January 24. And most Chinese investors are very momentum driven. Things go up, they buy more.

They're, they, they're very momentum driven. And Chinese bull markets typically end in one of two fashions. The first way Chinese bull markets end is the governments decide that enough is enough. They crack down on margin loans. They raise interest rates. They sometimes, they.

They crack down on sectors they don't like, like the education sector or, Jack Ma goes missing for six months. And when the Chinese policymakers make it pretty obvious that we don't want stocks to go up anymore because we're worried about, feverish speculation. That's definitely a time for you to get out.

Now, today there's absolutely zero sign that it's the case. Quite the contrary, given the weak domestic growth, they're doing everything they can to prop up and boost asset prices. So right now the government is fighting in your corner. You don't have to fight the government. The other big, usually the, the end of Chinese equity bull markets come around when you see massive equity issuance when as equity prices go up, you start to see a bunch of IPOs, you start to see a bunch of rights issues essentially companies saying, you guys like this paper here. Here's a bunch more of and.

Almost 30 years in China. I've often said that perhaps the best indicator for the Chinese equity market is how thick your copy of the South China morning post is. Because when there's the IPOs and and rights issues, etc, you get like full page advertisements. In the in the South China.

And so the thicker your South China morning post copy is the more worried you need to start becoming. Today. The reality is, yes, we've seen a pickup in IPOs, but it's hardly being a liquidity drain, especially when one contrasts with the amount of liquidity that central bank is still pushing in the, like I mentioned, the budget deficit of 10% of GDP, etc.

So for now, yeah, I think we are in a bull market in China. The next leg of the bull markets will most likely be driven by Trump and Xi meeting in Seoul some kind of arrangement. I would imagine that part of the arrangement will be a mild revaluation of the Reminbi that will give even more confidence to local investors.

Right now we're in a pretty positive cycle. Most people are looking at it from the outside and, they, most people feel why do I need to be, why do I need to bother with China? US stocks are doing great. European stocks have been doing great, good for China, nice for them to have a bull market, but I don't really care.

Not my problem. But I think this is where, the big opportunity is today. 

Erik: Let's suppose we wanna pursue that big opportunity, take a heavy position on Chinese equities as an American investor. Some people would say, Hey, that's a suicidal thing. Maybe the trend is there, but from a geopolitical standpoint, if US goes to war with China over taiwan or anything else, it's entirely reasonable to predict that one of China's moves might be to essentially confiscate any, overseas investment until it's over or something. Are you taking a risk there? Would you worry about that? If you're a, say a US institution thinking about a big position in Chinese equities, do you worry about a nationalization or war risk, or is it just, too far of an outlier?

Louis: Look, I first, I think if China and the US go to war, we'll have more to worry about than just our portfolios. 

Erik: I agree with that. 

Louis: What you're talking about is World War III, Armageddon. So at that point in investing for Armageddon, seldom works. Now, because by the way, if they do go to war what's Nvidia worth?

Let's assume they do go to war and TSMC, is the first thing destroyed in this war? How does Nvidia produce chips? Where does Apple produce its phones? What is Tesla worth? So if you think, if you're. Per worldview is us and China are gonna war, are gonna go to war.

Ergo I'm gonna own Nvidia, Apple, and Tesla. You're gonna have a nasty surprise the day that hypothetical war comes around. Now, my view is much simpler than this. Is. Not only is a war between them, unthinkable it, it also isn't gonna happen because like I mentioned, the US can't produce rockets.

It can't produce cars without China's help. And it's gonna take at least 10 years, if not 15, for the US to be able to produce its own magnets for the US to be able to produce its own rare earths. And that's if they start now with a massive industrial policy and epic industrial policy and billions, hundreds of billions of dollars in capital investments and essentially building rare earth refineries in the US at a time when, you know the not in my backyard. This is, which is one of the most polluting thing you can do at a time when the not in my backyard forces in the US are so high, etc. Bottom line how can the US go to war with China when it can't produce weapons without China's help?

And if you can't answer that question cogently, then you know that they can't go to war against each other.

Erik: It's pretty darn clear by that description that they can't, why are they talking so aggressively? So much rhetoric about going and doing it. I don't get it. 

Louis: Because how do you sell the next aircraft carrier?

How do you sell the next, F35? How do you sell the next big weapons project without an enemy? You need, the US military industrial company, the US military budget is a trillion dollars a year it's more than the next 10 countries combined, and it's the US can't cogently be invaded by anybody.

And how'd you justify that? You need to say, okay China's gonna invade Taiwan, or China's gonna invade South Korea and, you need to create the boogeyman the scary guy. Otherwise you have no US military industrial complex. 

Erik: So when you see US senior military officials that are actually writing papers saying, look, war with China, we should just accept it.

It's inevitable within the next five years, you think what they're really saying is, we need to pump up the defense budget. Let's invent a boogieman so that we get some public support. 

Louis: That's one way to look at it. But I think increasingly, look, I think with this new administration we have a more isolationist administration than we've had in a long time.

I think you, you have an administration that acknowledges that the US has fought two wars in the past 20 years to very unsatisfactory results at great costs in blood and treasure. That if the US can't win in Afghanistan, and if the US can't win in Iraq, what are the odds that they're gonna win in China?

The reality is that wars between superpowers are essentially wars between industrial systems. That, that's the simple reality. And, you look at World War II, and this isn't to take away from the courage of American Marines who stormed the Normandy beaches, etc, etc.

They, you needed the courageous soldiers and the US had them, and it was tremendous. But the reason the US won the Second World War is that. The US outproduced, Japan and Germany by a factor of five when it came to tanks, when it came to airplanes.

There's a great book on this called Valley Forge, which I would recommend to all the readers.

The second World War, and again, I'm not taking away from the valor of American soldiers or Russian soldiers or British soldiers or anybody but the second World War was won in Michigan. It was won in upstate New York. It was won in the US rust belt. That could produce more trucks, more planes more than anybody else.

The reality today is that. There is only one global manufacturing and industrial superpower, and that is China. You look at China's manufacturing exports. China's manufacturing exports are now greater than the US's The Japan's and Germany's put together manufacturing exports. So you take the next three.

China still does more than the next three combined, all this to say that we can't go to war with China like we the western world. We can't go to war with China. It'd be absolute madness. It'd be just as stupid as Japan bombing Pearl Harbor. You awaken a giant that can outproduce you 10 to one.

It's not gonna happen. 

Erik: Louis, I can't thank you enough as always for another terrific interview. Before I let you go, let's talk a little bit more about what you do at Gavekal. What services are on offer there for our institutional listeners and for our retail guys? Where can they follow your work?

Louis: What do I do apart from bitching about the US military industrial complex? The no jokes aside. Yeah, we we publish research. We manage money both for institutions and for private clients. You can find the best place to find us is at our website Gavekal.com. I happen to be on Twitter, but I don't tweet all that often.

But people can still follow me on Twitter mostly. I just make silly comments on Twitter, so don't hold that against me. But if you have a short fuse, maybe you don't want to to follow me, but the the best place the more serious place to, to keep in touch with with what we're doing is our website Gavekal.com, G-A-V-E-K-A-L.com.

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

 

 

Erik: Joining me now is Energy Outlook Advisors, managing partner Dr. Anas Alhajji. Anas, I have to tell you, I'm so excited to get you back on the show because first of all I think a very strong compliment to you that you're not really even a macroeconomics guy. You're an energy guy, but you're one of the most valued among our listeners, on this macro podcast because of all the excellent interviews you've given us, and you've also been named the number three most influential voice in energy markets. So you're actually a bigger name in energy than Dan Yergin, although you come on Macrovoices. Whereas Dan likes to play hard to get congratulations, sir.

Let's move on to, the topic of the day is the group of eight OPEC Group of eight met this past weekend. They're talking about unwinding the production cuts and basically increasing oil production. Apparently all of the sudden Saudi Arabia is seemingly leading the way on an effort to bring energy prices down.

What's going on? 

Anas: Sure. So let me explain this, especially for the audience who are not familiar with these issues people are familiar with the name OPEC, which is the organization of petroleum exporting countries. OPEC is this year is 65 years old. And OPEC in 2015 when the prices, when old prices collapsed.

They looked around and said, okay, I cannot do it alone. And the reason why they couldn't do it alone because there was major producers who are not OPEC members, that includes Russia, Kazakhstan, Norway, of course, the United States. And they said, look, I'm not going to cut production. I'll leave prices down unless non OPEC producers come to me and literally cooperate with me and all of us will cut. And that resulted in what is known right now as OPEC+ because 10 countries being in this new group or added to this group. So we had 13 members from OPEC+ 10 members from outside opec. The total is 23, and that's what we call OPEC+.

Part of this new group is Russia and Kazakhstan in 2022, late 2022, all demand was not as high as they expected. Growth in all demand was weaker and inventories started building. As a result, they met and they decided trim by 2 million barrels a day. So we have this cut from the whole group, OPEC+ of 2 million barrels a day from late 2022.

Here comes 2023. The market was weaker. So eight members, at that time it was nine. But Gabon basically withdrawn. They met and they decided to voluntarily cut production by 1.65 million barrels a day, a 1,650,000 a day. And the whole idea was, it'll be only few months and then I'll bring it back. But the situation deteriorated further.

And in November, 2023, they met again. They decided to go for a cut of 2.2 million barrels a day, starting January, 2024, and ending in March, 2024. So just for those who are new to this, I have three groups. I have OPEC, I have OPEC+, and I have the group of eight. And I have three cuts. The first cut is 2 million barrels a day is done by OPEC+, and the agreement now is not to bring it back until early 2027.

And then I have the first voluntary cut, which is 1.65 million barrels a day that was extended until early 2027. But we know now from yesterday that they changed the date to October, 2025. And then I have the 2.2 million barrels a day cut, and they are already done the N one, all of that. And they are, they will be completely done by the end of this month.

So the 2.2 is already out of the way. They are left with 1.65. It was designed to come back online in early 2027. They decided yesterday to expedite that, basically bring it forward and start in October, 2025. So that's what happened on Sunday. If you go a back a week ago, this was a surprise.

If you go back to Thursday or Friday, it wasn't so they agreed to start doing this, but there was some conditions to that. And one of the things they've done is they did not give any guidance for the future. So although they took 1.65 divided by 12 months, which means that their plan is to do it over 12 months.

They ended up with 137,000 barrels a day in October. Additional production ceiling, and I'll explain that in a minute. They did not say anything after that, but they are emphasizing the point that we are going to go month by month, and we are going to assess the situation. We can stop unwinding.

We can cut or we can expedite. What they did with the previous 2.2, so all the options are still on the table. In this case, the idea of unwinding is extremely important because the 2.2 again was designed to come back online on April, 2024, and they delayed it for a year. And for this 1.65. It was supposed to be only three months, and it's been there since it's been there for a year and a half.

The justification for it is very important and is very important for the audience to think to, to understand what are the triggers for these unwinding OPEC and OPEC+ ministers. Cannot talk about prices. They took this decision based on lawyers' advice in 2016, so they cannot talk about prices. They cannot react to prices.

In general we end up with situations when, let's say prices decline in one day by four or $5, and I'll get those messages and I'll get the comments on Twitter. Where are the Saudis? Where are OPEC cuts? Why they are not responding, why they are not making statements?

Again, they cannot talk about prices. That's number one. Number two, everyone has to understand that the Saudi price. The average monthly has nothing to do with the changes during the day. It's the average monthly, so this is very important to realize. So the idea here is, okay, what are the triggers? There are two triggers for unwinding. The first one is a major decline in inventories, global oil inventories, and the second one is strong growth in demand.

What we've seen that when they decided to unwind in April, they looked at the inventories and inventories were low and they declined substantially. So the first condition is met.

The second one is a growth in oil demand. And according to OPEC and their view, especially the V8 or we call that the group of eight or the V8 V for voluntary, they saw an increase in demand and that increase in demand, part of it is related to the sanctions, especially on Venezuela, Iran, etc.

And the reason why it's related to sanctions, because we always have companies and traders who panic. They want to make sure that they have enough supplies. So the demand for oil from the group of eight increase, especially from the Gulf of Saudi Arabia and its allies increase. So for them, the two triggers are met and then they decided to unwind, and that's what we've seen.

Then they expedited that because they saw the situation can handle the additional oil. At the same time, they want to get rid of the headache of overproduction coming from Kazakhstan and Iraq. Now for the one, the 1.65 that they agreed on yesterday, the question is very clear. Anyone who is looking at the data, I'll say, look, I need to do this and I need to do this for various reasons.

One of them is among the whole. Group of 23 countries, only four can increase production. And here I would like to emphasize the point that the unwinding and the numbers, we hear about the 2.2 and 1.65. These are for production ceiling, these are for quotas. These are not actual productions. Actual production is way lower because some countries cannot increase production.

On the other side, what matters to the market is not really production. They talk about production because OPEC Charter, when it was written in 1960, it talked about production and they are still with it. But what matters to the global oil market is exports. And if you look at OPEC+ exports. They are about half of the headline number.

So in this, so we know that the headline number is 2.2 million barrels a day, but what we saw in the market is about half of that. Now, the situation for 1.65 is going to be even a lower number or lower percentage simply because there are fewer countries that can add production. 

Erik: Anas, you mentioned only four countries are capable of increasing production.

I'm guessing that starts with Saudi Arabia and United Arab Emirates, who are the other two? 

Anas: Iraq and Kuwait. But Iraq and Kuwait capabilities of increasing production forward is also limited. So a few months from now and it's over they'll max out. And everyone else is maxed out, including Russia.

So that will leave only Saudi Arabia and the UAE. And here I would like to point out to the audience that it is not necessary that Saudis and the Emiratis will increase production up to the maximum anyway. They are free to do it because they have no agreement but. They may not do it. And if we look at Saudi Aramco, based on history, it is very comfortable producing between 10 and 10.5, 10,500,000 barrels a day.

And right now they are probably around 9.4, 9.5. So they can add probably 500 to a million. And that's really the range of comfort for them. 

Erik: Now, back in April when the decision was first made to unwind the 2.2 million barrels, that was basically a panic moment in markets. Everybody was bearish saying, okay, this is gonna crash oil prices.

I think you were the only voice that I can remember, at least for from that timeframe, going back to late April, early May, and we had you on Macrovoices on May 8th talking about this very issue. You were very outspoken saying not only is it not bearish, but it might. Even be bullish. And sure enough, it seems like the price action has actually supported your very, uncommon view.

What happened there? How were you able to see that? Why is it that that you were able to see something people didn't see there? 

Anas: Yes. The analysts who were bearish, basically, they did not, look at the real situation on the ground, for example. The Hajj, which is the pilgrimage that we talked about in that show on May 8th, where millions of Muslims fly from around the world to go to Holy City of Mecca and Medina.

In Saudi Arabia oil consumption increases substantially within Saudi Arabia. Because of that. So gasoline, diesel, jet fuel, oil, etc, because you're talking about millions of po of people going to the same place at the same time. So they usually it takes a year to plan for these things and that increases the demand within Saudi Arabia.

So they need that oil, but the world is not going to see it while those analysts counted the increase. And or the unwinding as a net supply to the world. While the world did not see any of that at the same time, they missed another point that most of the increases, especially in the first period that oil was already in the market because of cheating.

So what they did in April and May basically just legitimize that cheating. So it was on paper, so they missed that point too. Then they missed the third point, which is the demand for oil increases substantially in the summer. And that demand could add up to about 1.2 million barrels a day. So basically domestic consumption between hedge and domestic consumption.

And oil was already out there that most of the unwinding. So it was clear from the beginning, but they did not see these things. 

Erik: Now Anas, you have used the phrase manufactured bearishness in some of your tweets and substack posts lately. Why are you using that particular phrase? What do you mean by manufactured bearishness?

Anas: You look at the IEA forecasts and they predict that next year we'll have the largest surplus in history. Right now they are talking about a surplus of 1.8 million barrels a day. You look at Goldman Sachs, Morgan Stanley JP Morgan, etc, and there are some really strange stuff going on here because the same narrative that the IEA is pushing, the same narrative is being pushed by the Chinese oil majors, which is very strange.

The Chinese oil majors basically are going public in English, broadcasting the view that oil demand in China is going to peak gasoline demand in China is going to peak, and that's what the IEA is saying. So to have a Western organization saying exactly what Chinese companies are saying, that's the first question mark there.

The second one is the Chinese are talking about peak oil demand. Peak gasoline demand. That means they have the forecast and they know what's going on, but they will never, ever release the actual numbers. What does that mean? That mean they are broadcasting something to the rest of the world, to the old producers, to the companies, to the US and everyone else what they wanted to broadcast.

Otherwise, if this was a normal thing, they would have published the actual numbers. So if you look at the IA forecast, for example, I'm please allow me, because I want to take my time show showing the evidence here. The first thing is the IEA. When we talk about 2025 and 2026, I'm just going to give you an example how this is manufactured.

The IEA predicts that US oil production will increase by 560,000 barrels a day in 2025.

We already have the data for the first half of the year, and there is no way you can get to 560. So what they did is they exaggerated US oil production, but the story is not on the production side. The story is on the demand side, according to the IEA. US oil. Oil demand would increase by 60,000 barrels a day in 2025.

You look at the data for the first six months, they are not double that. They are not triple that. They are quadruple that quadruple. And then you move to 2026 and all of a sudden they say, oh, there is no growth. Zero growth. Us all demand in 2026. No one on earth believed that except them. So right here we have several hundred thousand barrels a day that's being taken out and counted as surplus while it is an actual consumption.

So that's one. But the IEA expect. All demand to grow by I think 680,000 barrels a day, which is extremely low. Our number is 1.1 and OPEC number is 1.3, so you can see that the diverse is really large. But why we have the concern here, we have the concern on two fronts. First of all, we have something called circular information.

Circular information is when you have. Why spread news all over the world and people think, wow, this must be real because I'm hearing it from all over the place. But when you do investigate the source, you find out it came from only one source and then. Most of the media and social media, etc they will be coating like in a chain, like I'll say I heard this from CNBC and CNBC coded, CNN and CNN coded ABC and ABC quoted Wall Street Journal.

Wall Street Journal quoted the International Energy Agency. So we have circular information. Where is the problem? I'll go back to this point of circular information in a minute. After I explain where the problem is, you go back and look at the forecast of global oil demand by the IEA in 2022. The IEA discovered that all their numbers and all their estimates of global all demand where were way low and they revised up all demand back to 2007.

To 2007. So we're talking about 15, 16 years of data that's been underestimated all this time.

Then you move, so that was from 22 back then in May. This May last May, the IEA announced that, sorry, and they did not say sorry. Of course they'll never say sorry. But we underestimated demand in recent years, so we are going to revise up the numbers for 2022, 2023, and 2024, which is a continuation of the the era from 2007 to 2021 by how much?

350 million barrels, the total adjustment in those three years. 350 million, but that's the underestimation of demand by the IEA. So you start from 2007. They were wrong all the way to 2024. And just two weeks ago in its latest report, they said we are revising up Mexico's oil demand by a hundred thousand barrels a day and listen to this, back to 2020.

So what is the problem? First of all, we have a proven record of underestimation for almost 18 years. So why do we have to believe they're low estimate right now? While all the other evidence point to higher oil demand than their number? But to go back to that circular information. This data since 2007, does be revised.

Not every analyst paid attention to it. So many computers at many banks still have the old data and they are still using them. So back to that circular information, it the data being published by one source is still in news, and therefore when they do the forecast in term of growth could be correct. Is wrong,

so we do have a serious problem.

Erik: I wanna move on to India, China, and Russia, starting with India because the spin that the Western press has put on this is basically what's going on with the 25% tariffs. Why did the Trump administration just impose 25% tariffs on India? The reason they did that, according. To the news flow is it's all about the Russian oil.

Russia has been selling oil to India. They feel that's working around tariffs. So now the Trump administration is going to punish India for buying Russia at it, please. So now the Trump administration is going to punish India for buying oil from Russia according to the news. But according to Dr. Anas, you don't think that's really what's going on.

So what is going on? 

Anas: First of all, we have the 25% tariff, which is the general tariff on India, and then the Trump administration added another 25% because India is importing oil from Russia and Navarro, the White House advisor basically, accused India of supporting Putin in the war in Ukraine by buying Russian oil.

He was very vocal about it, and almost on daily basis, he kept talking about it, tweeting about it, giving speeches, giving interviews, etc. And right now the tariff on India is 50%. Here is the problem. Yes. India imports about 1.8 to 2 million barrels a day of oil from Russia, from, but that was by design.

And the design did not come from India. It was the G7 and the Europeans who designed that. So when they import the sanctions in the sanctions itself, that for the first time they agreed on this, they said that the EU and the United States basically can import Russian oil if it is modified and modified in the old business mean it is refined, all they need to do basically is find another third party to do that. India and China basically did that and some other countries. But the idea here is the Biden administration has no problem with it. Even Secretary Blinken at the G 20 meeting in New Delhi, basically he defended India for buying Russian oil above the what they call the price cap of $60.

So that was by design, but here is the issue that why it is really not about Russian oil imports. If the issue is importing from Russia and paying them, and therefore you are supporting Putin's war in Ukraine, then we have a serious problem because US imports from Russia this year increased over last year.

The second point is the EU still imports massive amount of natural gas via pipelines and large amount of LNG from Russia. In fact, if you, we just released a report the day before yesterday, and in that report it shows that in August, 12% of GA imports of the EU came from Russia, but no one accused the EU of supporting Putin's war and China imports everything from Russia since they import the crude.

They import coal. They import natural gas. And the Trump administration did not accuse them of supporting the war in Ukraine. But here's the bigger story. The bigger story is Turkey. Turkey imports the Russian gas and send it to Europe. Turkey, import the Russian crude and send it to Europe.

Turkey, import the Russian petroleum products. Send them to Europe and Turkish exports or petroleum products to Europe is larger than that of India. And what's strange about it is Turkey does not refine that, that those products, Turkey basically just transmit those from place to place while India, at least they refine it.

So why they pick on India in this case, it just does not make sense. There is more to the story than Russian production. For those who do not know, we still import enrich uranium from Russia until today. 

Anas 

Erik: I wanna broaden this picture out because on one hand we can talk about the supply and the demand and the cuts and the so forth, but it feels like the mood has changed.

It feels to me like OPEC+ and the group of eight were really working on an agenda that was not cooperative with the United States. It feels to me now, like some deal has been cut and for some reason the Saudis want to support President Trump in trying, at least in the short term. To bring energy prices down.

Quite frankly, that makes me wonder if they're doing that because they think energy prices are going up later because of perhaps some geopolitical things that they see on the horizon. So what's the broader picture of what's going on in and how the influence model has changed from the Biden administration to the Trump administration and the decisions that are being made?

'cause I have the sense that. The relationship has gotten better with the us but at the same time, they're preparing for maybe a relationship that gets worse over time. 

Anas: A few things here. If you want to talk about expand this to various areas including politics, I would be happy to talk about that.

The issue here at this, that first of all, oil prices declined in 2025. Mostly because of President Trump policies, not because of the unwinding of production by the group of eight. And to prove this point, the unwinding started in April while oil prices declined earlier, and even when the unwinding started in April.

The supply of OPEC+ declined in April and May. We did not see the increase until June. Even when we saw the increase in June. It was a portion of the what was expected, and then it declined in July and August. So you cannot claim the large decline in prices on the decision to unwind. The reason was the trade wars, the tariffs and other policies, the immigration policies, the visa policies, the treatment at the airports etc. We have even clients basically refusing to come into the United States for fear of being mistreated at US airports. The student visas, as because the, of the demonstrations, because of Gaza and others.

So that reduced travel substantially and reduced all demand. Why this is important. Because if you go back to our reports at the end of 2024, jet Fuel was the brightest spot in the energy complex, and now it tanked because of those policies. So that's the first part of it. The second part of the story is Bloomberg published something about.

Saudi MBS, the Crown Prince is going to visit with Trump in November, and therefore he wants to make sure that the oil prices are cheap, etc. Let's be clear on this because it is very important. Do the Saudis want to lower prices? No. Do they want to please Trump by lowering prices? I don't think so.

They can't please them in different ways. They can't just de dedicate a certain amount of investment like they did with the one, trillion or have trillion, whatever amount they want to invest, and that will be enough. It's not gonna be the oil, but what the Saudis want. We've seen this several times before, and I'm glad you asked this question because the point I'm going to mention is important for everyone to remember all the time.

What the Saudis want, and they've done it before, is to isolate oil from any discussions. They don't want to discuss oil. They are MBS is going to be here in the United States for a certain purpose, and they want to focus on it. When Trump visited Saudi Arabia. They wanted to focus on why he's there. They don't want oil to be the main issue.

When the president of China visited Saudi Arabia or the president of France, etc, they always makes made sure that oil is not on the table. So if by increasing production and keeping prices at current levels. That will isolate it. That's a big win for Saudi Arabia. The other issue is, and this is a reply to the Bloomberg article, when they mentioned that this is a political decision.

So what oil is a strategic commodity? Oil is a political commodity. It's always been. In fact, oil and LNG right now are part an integral part of US foreign policy. Why they are not saying anything about it. In fact, even if you want to look deeper into this, the US is using LNG and oil as weapons, and they are using, of course, the sanctions and everything else.

These are weapons and they are not saying anything. Why? When Saudi Arabia basically look to them as if they are low ending prices, all of a sudden it's something strange. But the main point here is. The Saudis want to isolate oil from the discussions. Oil is not on the table. And if that's what it takes, then they will do it.

The other issue here I would like to mention is when we talk about market and market surplus and what the analyst missed, there is a very important issue related to India of course, and the sanctions on the refinery that we have people saying, look. Inventories are not really that low. Like what OPEC is claiming.

Look at oil on water. It's the, all those guys even in, in April who predicted that oil prices would decline to 30, they missed the point. And I'm going to mention a real story here that tells the whole idea about two months ago there were six. Oil tankers carrying Russian Urals going to India.

Those six tankers belonged to a certain company. By the time the first tanker arrived to the Suez Canal, the Houthis hit a ship in Red Sea and sank it. So the Norwegian insurance company refused to insure the shipment. They told them, look, if you're going to go through the Red Sea, I'm not going to insure it.

So the company decided to reroute the six tankers around Africa. So imagine going back after they went through the Mediterranean, they have to go back and go around Africa to go to India. That increased the time to arrive to India by about three weeks. So oil on water went up. For those who focus on it as increase in inventories, all they see is increase in inventory and therefore we have a problem in the market.

No, this has nothing to do with the fundamentals of the market because if you want to do the balances right, then you have to subtract those six tankers from three weeks earlier to have the balance, right? So they missed that point. They added those. They the they did not subtract those tankers. They added them as , oil on water.

So this is one of the big problems. So whenever we have new sanctions imposed, we end up with this confusion in the market and tankers stop in their place. Basically, they get stuck at sea until they get more information from their management on what to do. So every time we have new sanctions. We have delays in shipping, and then oil on water goes up.

This has nothing to do whether we have surplus or not. In fact, we have a shortage because they are not arriving to their destination, and the analyst missed that. So in the case of the 18th round of sanctions by the EU, when they impose the sanctions on Nayara energy, refinery in India, there was a lot of confusion for about a week.

All the shipments going to NARA stopped and all of a sudden someone can claim, look, oil and water is going up, storage is going up. There is no demand. All of these things are political issues. They have nothing to do with the market fundamentals at all. And the other issue that is important to this discussion when we talk about politics that when MBS comes to visit Trump, of course, like we've seen in Riyadh, we have those major investments, we have major joint ventures, we have all kind of things, etc. And if you look at oil in that discussion, or even if it's brought to the table, it's something small relative to those big contracts, whether the defense contracts, the AI contracts, etc. Oil looks really small relative to it. 

Erik: Anas, let's move on to where this is headed a little bit further down the road, because some news that I found very interesting is China and Russia have agreed to develop what I think it's called the Power of Siberia 2 gas pipeline. So gas pipeline from Russia to China.

New investment. Now I thought that idea was dead. What happened? Why was it resurrected? And particularly I got a feeling that it fits into some strategy that I'm not fully, grokking yet here. Do you, have you figured this out? 

Anas: Yes. I think your feeling is absolutely correct. There is a big story in fact here early in the nineties when Russia basically they started reviving the economy after the collapse of the Soviet Union.

They realized that they have a lot of gas. There is not enough market in Europe for it, so they try to talk to the Chinese about a pipeline. So the idea is really old. It did not catch any any interest until 2007, 2008 when the Putin administration basically agreed that it should do that.

But nothing happened. But when. The the Chinese basic Chinese economy was picking up and economic growth was very strong. We're talking about 11%, etc. They needed the gas, so they agreed on one pipeline. But what we ended up with the case where Putin goes to Crimea, he annex Crimea, and the EU and the US and the G7 imposed sanctions on him, and that affected.

Gas sales to those countries. And he wanted an outlet and the Chinese outlet was there. So it was the sanctions that imposed in 2014 that opened the doors or opened the floodgates of Russian gas to China. So we had two pipelines. The Power of Siberia, one and Power of Siberia three and Power of Siberia two was proposed.

It's a massive pipeline but the Chinese. Found themselves in trouble because they said, look, I don't want to repeat Europe's mistake with Russia. Europe depended heavily on Russia and they got stuck. I don't want to repeat the same mistake to maximize my benefits and enhance my energy security and enhance my national security.

I need to diversify my inputs. So I'm going to buy LNG from all around the world, including United States. They ignored the Power of Siberia 2, from the Russian point of view. When Europe or exports Europe declined by 80%. They looked at the map and said, okay, the only two places I can send pipelines is Europe and China, and if Europe is not there, then I'm going to, I'm putting all my eggs in one basket in the Chinese basket.

If we end up with political problems, I am a hostage to that. And if the Chinese economy tanks, then I have to pay a very heavy price for it. So I need to diversify, but I cannot send pipelines to other places. So the only way to diversify gas exports is to focus on LNG. So they started building LNG plans just like the United States to export gas.

With the idea of diversification. So they built TML and then they built the Arctic LNG two. And after they finished Arctic LNG two, they, their interest in the Power of Siberia 2 basically became very weak. They were not interested because Arctic LNG 2 basically was the way out. So it wasn't So when you said it's dead.

Yes, it was dead because China has no interest and the Russians have no interest. China wants to diversify imports, Russia wants to diversify, export, but everything changed this year. First, we have the trade wars and we have the tariffs, and as a result, China stopped importing LNG from the United States last February.

So no zero imports of LNG since February. Remember, they wanted to diversify. They wanted to go everywhere, including the United States. Now, the United States basically being cut because of the trade wars and the tariffs. Now, China wants to sign contracts. Before their idea was, I'm going to sign contracts with the new emerging LNG companies in the United States.

Part of the diversification. Because of those trade wars and the tariffs, they did not sign it. Now they want to go somewhere else. Australia is maxed out. The only two places where they can get LNG is Qatar and UAE, United Arab Emirates, which is in the Gulf. And they did sign those contracts and the Trump administration got pissed off because of that, because they thought that they would get more contracts from China.

All of a sudden, Israel. Started hitting Iran and we started the Iran, Israeli Iran war. That was not a surprise for political analysts who were predicting this to happen for the last 20 years, and this is really not the big issue for China. The big issue for China was when the United States suddenly hit Iran, so in the Trump administration hit Iran and they hit them really hard.

That's when China basically started paying attention. Why? Because all of a sudden the western press, especially in the United States, started promoting the idea of Iran closing the Hormuz Strait

And China looked and said, hold on just a second. I cannot import LNG from the United States. Now I have those contracts with Qatar and UAE, and now I cannot import from them anymore. What is the alternative? The alternative is power of Siberia too. So that was the major change. And this fit with the Chinese policy of reducing energy imports via sea.

So they wanted ev all the Seaborn imports, or the Seaborn energy import to decline substantially. And the reason why, because they think if there is a war. Or there are sanctions or closure of Malacca's trade. Then they are ready. So they are building this massive inventory. Right now we are speaking about the highest oil inventory ever in China, 1.1 billion barrels.

And they have inventories of everything, being built. So for China, it was the US trade policies. The tariffs and then the US attack on Iran, and then the promotion, and I emphasize the word promotion of the idea that Iran will close the Hormuz Strait. If you look at it from a Chinese point of view, it's not Iran who is going to close the Hormuz Strait.

It's the US who is going to close Hormuz Strait, and therefore they needed the alternative. And the alternative is Power of Siberia 2, from the Russian point of view. Again, they had weak interests before. All of a sudden they have strong interests. Why? Because the US imposed sanctions on Arctic LNG two and all the tankers associated with it, and now Russia got stuck.

They want to diversify exports, but they cannot because of the sanctions. What is the alternative Power of Siberia 2. In a sense it was the US policy, whether you look at the trade wars, the tariffs, or the attack on Iran the promotion of the idea of closure of Hormuz Strait that pushed those two, two countries to cooperate together and to start building this pipeline.

And related to that, something we covered in the previous two shows, if you recall. And the question I raised, and I'm going to raise the question without answering it, the question I raised was the following. Most of the Russian Urals crude goes through the Red Sea, but not a single LNG tanker from Russia go through the Red Sea.

Every single LNG tanker have to go around Africa. Now in the summer, some of them basically go through the northern route northern route. But, for most of the year, they go around Africa, Qatar, when they, when it sends LNG to Europe, historically it went through the Red Sea. Now it goes around Africa.

So why no LNG shipments going through the Red Sea since January, 2024? Kind of one, one and a half shipment in a sense. One of them from Oman going to Turkey, but I'm mentioning this just for accuracy, but in general, there were no shipment, no Russian shipments going through at all. So why oil is a right to go, but LNG is not.

And now you look at what China is doing and the idea of LNG in the Gulf and the closure of Hormuz Strait, you, you start having an idea on how that LNG War. Is playing. So yes, you are right that this came out of nowhere. It was a dead idea, and now it became the center of attention simply because of the US policies.

Erik: Now if you look at the electric vehicle adoption rate data coming out of China, it's awfully impressive. The thing is, I don't think you believe that data, from what I've seen on your social media and so forth, what's going on there? Number of EVs on the road in China. Why would they exaggerate that?

Anas: We have a serious problem as we discussed in previous shows, because the media keep reporting. Sales. Sales do not matter. What matters is the number of EVs on the road and those who promote EVs or obsessed with EVs, they always literally mention sales and that's it. But they don't focus on ideas like I, my neighbor basically just bought a new ev new Tesla to replace the old Tesla.

Yet, they're still counting it as something new. So really you can see it's part of the PR for EVs to focus on sales. But what matters is we have to focus on the number of cars, or at least registrations in every country rather than the sales. But in China, we already have several scams being investigated, by the Chinese government.

And yes, or the day before yesterday, I learned about news scam in addition to the two that I knew about before. So I'm going to go over them quickly here. The subsidies to EVs in China are given to EVs in China, so the, those EVs have to be sold in China. So the first one is, of course, they have to create a system.

The, they have a tax system, they have a rebate system, and they have to create this bureaucracy, of course, to work it out. So how to define a new car that deserve a subsidy. Somehow they ended up with an exact definition that is controlled by a barrack, and the exact definition is you have to have zero mileage on it.

And some smart Chinese guys said, okay, that's fine. So they go and buy all those old junk EVs at a very cheap price, take them somewhere, play with the diameter, and basically bring it to zero. And then they bring all those old EVs. Count them as new and give them a new registration and then get the subsidies and the gang, whoever operating on this, basically they'll split the money.

So new vehicles being, or old vehicles being reported as new ones, and some of them probably sold multiple times. So that's number one. Number two, again, the subsidies are given to what is registered in China. So what they discovered was. Couple of manufacturers had an agreement with dealers or some shell companies belong to them.

They will literally take those cards from the factory and sell them to that entity and that entity within 30 minutes will have a registration and insurance on them. And immediately, of course, they will cash in on the subsidies and a few hours later, those cars will be on ships going to the rest of the world.

Whether Brazil or Kenya or Europe or any other place, what that means is those cars are counted twice. One in China and one as export. And the recent one I heard about a couple of days ago that all you get to do basically just show a purchase of the car. So some manufacturers basically c created their own companies and they buy from themselves, but under the new entity and they just park the car in parking lots and cash on the subsidy and that's it.

So the numbers are exaggerated regardless. And I know that some of your loyal listeners heard me saying this several times. Regardless of that, even if you take the headline number, you take the maximum number, you look at all of that and you look at the number of cars on in the world worldwide right now, it's about 50 million EVs on the road.

And the impact of that in term of replacement of all demand is only, and that is the direct replacement, only 1.3 million barrels a day. And that's it. All this talk about peak all demand does not make any sense at all because the impact on all demand is highly exaggerated. 

Erik: Anas, I can't thank you enough for another terrific interview, but before I let you go, I wanna talk a little bit about what you do at Energy Outlook Advisors.

Your substack has become really the the talk of the industry. Tell us a little bit more about what you do, where people can follow your work and what services are on offer. 

Anas: Thank you. Thank you very much. In fact, I was surprised that although. The Substack newsletter. We have a newsletter and we have the Daily Energy report.

The newsletter is intended for institutional investors and the Daily Energy report is for institutional investors and individuals. And it's cheap enough for individuals basically to, to subscribe to it. But I was surprised that the Energy Newsletter, although it is energy, it was classified among the top 15 business newsletters on Substack.

Which is a great honor, basically to be associated with some of the top people in the business. So that, that was really something made me really proud and happy. So we have those two. We have the newsletter, we have the the Daily Energy report. Of course all of those are sisters to Attaqa Attaqa in Arabic means energy, which is the number one media outlet.

In the Middle East and the Arab world that focuses on on energy and it is a very prominent publication. But the, aside from those really the big business for me is the speaking engagements. And now this is the time when companies plan their events, especially for their investors at the end of the year or the board meetings, etc, when they look for speakers.

I already have two two kind of speaking trips around the world coming up. But for those who are entrusted, especially to schedule speeches for the end of the year, I'm still available. 

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