Transcripts
Erik: Joining me now is Michael Howell, CEO of CrossBorder Capital. Michael provided two downloads for our listeners this week. The first one before the slide deck is a very interesting write up about how CrossBorder Capital thinks about markets. And I'm going to highly encourage everyone, if you've got time to pause here and read it first, it will give you some really good context on how Michael’s firm thinks about markets, which I find fascinating, because any experienced businessman knows that it doesn't work the way textbooks say, where supposedly, you get credit based on an analysis of your ability to repay. It really is based on the system's need to lend more than on the borrowers need, our ability to repay and need to borrow. Michael's approach really analyzes markets from the context of understanding how the system really works, not what the textbook says. I really think that that article is worth a read, but for the part of our audience who won't actually do that because they're busy driving or whatever, Michael, give us the quick rundown, 30 second overview of what the global liquidity cycle white paper says before we move on to the second download, which is your slide deck. And listeners, you'll find those in the usual places in your Research Roundup email. If you don't have one, just go to our home page at macrovoices.com, click the red button above Michael's picture that says, looking for the downloads. Michael, global liquidity cycle, Cliff’s Notes, let's hit it.
Michael: Yeah. Okay, Erik, well, let's try. I mean, basically our approach is, as you pointed out, very different. I mean, what we're looking at is global liquidity at the heart of the system. And effectively, we take a flow of funds approach and trying to understand how liquidity flows and capital flow shifts are really changing the whole dynamics of the system. And we're not focusing on individual securities, which is really the textbook approach. We're looking at, I suppose, behavioral aspects. In a way, we're looking at the constraints that are imposed on investors. In other words, investors operate with constraints about their liabilities. Those are often duration constraints. In other words, they've got to time future retirements, or insurance companies have got to time payouts at certain future frequencies. So, these things are really critical in terms of asset allocation. And then we also look at the constraints that are operating on credit providers. And credit providers clearly are operating in an environment which is highly cyclical, where central banks are operating and changing their own liquidity dynamics. And what we've had, particularly since the evolution, or the evolution since the global financial crisis, is that the whole financial system now is really based around collateral where the repo markets are really central. So, understanding these various dynamics is important, and that's what we put most of our emphasis really on. It's not a textbook model of where interest rates are important, and interest rate setting drives a sort of capital spending cycle. What we're saying is, it's balance sheet that's important. Flows of liquidity matter, and the whole system is now a debt refinancing system, where something like three out of every four transactions in financial markets involve a debt refinancing trade.
Erik: Joining me now is Tressis chief economist and fund manager, Daniel Lacalle. Daniel, it's great to get you back on the show. I was particularly keen to get you on the show this year because one of my rules is that when you have a changing geopolitical landscape where the balance of relations between really strong allies like Western Europe and the United States, is starting to come under question now, I think it's really important for investors to reach out to their friends on the other side of that divide and get their perspective. So, let's start with the European asset managers perspective. Somehow, I'm guessing the media in your country is not telling, is not lauding JD Vance for coming and enlightening Europeans on the benefits of free speech. I'm guessing that the European perspective on the Trump tariffs might be a little bit different than the White House's perspective. Tell us what the international audience, Americans and everyone else, should understand, maybe about how European finance is changing its perspective on its relationship with the United States.
Daniel: I think you guessed correctly, Erik, thank you so much for inviting me. The media and the political narrative over here is very, very, I would say, one, biased and second, very one sided. You also have to remember, as you know very, very well, but for the people who are listening, that in Europe, we don't have any kind of political party that is in the mainstream parties. There is no one that is similar to the Republican Party. So, the exaggerations when there is a Republican president are enormous. So the position of most fund managers in Europe relative to the situation in the United States right now is a little bit more informed, I would say, than what the media is telling us. In general, there is a perception that there are some merits to the arguments of the United States relative to tariffs and relative to the trade barriers imposed by the partners of the United States. But certainly, there is, at the same time, a perception that the way in which those demands have been presented, and the not particularly diplomatic, one would say, and the extent of the damage created in the financial world are creating also quite a significant, let's say, concern that the approach to negotiations can be significantly more damaging than initially expected. I think that the average fund manager is more concerned about the next tweet or the next change in headlines than looking at the big picture and focusing on what this really is about and what can be improved, both for the European Union businesses and North American and US businesses.
Erik: Joining me now is Simon White, macro strategist for Bloomberg, and for those of you lucky enough to have a Bloomberg terminal, also the author of the MacroScope column. Simon prepared a slide deck to accompany today's interview. Registered users will find the download link in your Research Roundup email. If you don't have a Research Roundup email, just go to our homepage macrovoices.com, look for the red button above Simon's picture that says, looking for the downloads. As we get into the discussion of treasuries in just a few minutes, just follow along with us in the slide deck.
Simon, feels to me like one of those weeks when decades happen. We're recording this interview early on Tuesday morning, so you and I have only experienced one day of this week. On that day, we had, at one point, a 5.5% move up on the S&P500 futures in the course of six minutes, followed by a retrace of those 300 points up, we came back down 200 points in six minutes. Took another 15 minutes to get the remaining 100 points for a complete retrace. That was after somebody third hand, hearsay, said they thought they heard somebody else say something about what might be on President Trump's mind, and then the White House said it was fake news, and that all retraced. Needless to say, it's a headline driven market. Then we had Keir Starmer basically announce the end of globalism, kind of a profound thing to say, and that was just Monday. I can only imagine what happens between now and Thursday, when our listeners actually hear this interview. What's going on? What should we make of this? Obviously, President Trump's tariffs are kind of the key driver in it. But how should we think about these markets with just so many crazy things happening all at once?
Simon: Well, thanks for having me on again, Erik. I think we actually spoke, not the last time, but the time before the last time, just when the pandemic started. So very similar circumstances, and I think the Lenin quote about decades in weeks was being used then, and it's certainly appropriate, the amount of uncertainty has ratcheted up by a huge amount, and it's hard to tell really exactly what the main aim is. I mean, my initial thinking was, when the tariffs were announced, the aim was to reduce trade deficit, for the US to reduce the trade deficit. But I'm wondering really, if they want to close them all together, which is obviously a very different set circumstances. If that's correct, then Keir Starmer’s notion about the end of globalization is right too. But again, we really don't know. I think there are definitely some more ideological people within the Trump administration, obviously, Navarro for one of them, and they maybe do look to close the trade deficits altogether. Whereas, Trump obviously is renowned for being open to deals, and perhaps if the right thing comes his way, he won't be quite as ideological.
But nonetheless, these are big changes, and I think one kind of analogy that's fairly relevant right now is Brexit. I mean, it was almost 10 years ago that UK voted to leave the European Union, and the principal motivations behind Brexit were a renegotiation of the relationships with your trading partners and taking back control of your borders. And that's really not dissimilar to what's happening in the US right now. The fundamental difference is it didn't work out well for the UK, certainly in the first couple of years, because capital started to leave. But the fundamental difference with the US would normally be that the US is insulated from such effects, because the US has the reserve currency and there's always a demand for its assets. But I think, like many things that we are used to taking as rules of thumb, I really don't think we can take that as for granted anymore. So, I don't think we can take that for granted anymore, that there's going to be the same requirement for, or desire for US dollars and dollar assets as there once was. Now, there's a few things here that make it even more interesting. As in the last few years, the US has been running enormous current account deficits. So normally, the sort of the rule of thumb, if you like, that the dollar rallies in sort of risk off events is based on the fact that dollar is normally essentially a funding currency. People tend to borrow the dollar, so there's a structural short in the dollar. And when you have a kind of financial shock that we're seeing similar to right now, that short is covered. But when you had so much capital coming into the US, and the numbers are huge that can easily overwhelm any short covering, structural short covering that you might normally see, and I think that's kind of what we've been seeing. So, the DXY has reversed most of its post-election (before the election and after) rally, can reverse most of that. And I think there's a sign that the dollar is no longer what it once was. And as I say, the current account deficits are huge. Now, most of that money coming into the US has not been for bonds. In recent years, it's really been equities. So, most of those deficits have been funded by equities. So, we've had something like $9 trillion of inflows into US equities since the pandemic, you know, doubling its size. And there's now over $18 trillion that foreigners hold, something like 16% of the total of US equities outstanding. So that's a lot of potential capital that can come out.
Now, equities are kind of in the heat of the storm right now. But it was kind of clear, I think, certainly to me, that why should treasuries be exempt from this? Now, the demand for treasuries had slowed. Certainly, reserve accumulation really began to sort of gradually ease after the financial crisis. But that really accelerated in the wake of the Russia-Ukraine war, after Russia's assets, reserve assets were seized, and then that confidence in the dollar was kind of further undermined with the recent rumblings we've had about a Mar-a-Lago accord. Essentially, you cannot take it for granted that the dollar is a politically kind of meddle-free instrument anymore. So that's really kind of scared the horses, not just amongst emerging markets and people that might be considered flows of the US, but also amongst friends too. So, there's a real fundamental kind of rethink here about what the dollar is about, whether people need to hold as much as they once did, and obviously that applies to treasuries, and that's compounded when it comes to the US by the massive fiscal deficits that the US has been running. So already, I would say that treasuries were facing a demand problem. You know, US has been running 7% fiscal deficits, treasuries aren't particularly attractive with a 7% fiscal deficit. Then, if we get a recession, I can get into that in a bit more detail later on, if we get a recession, I mean, the fiscal stabilizer alone would take that fiscal deficit into double digits. Now, inflation is already elevated, and when inflation is elevated, the yellow rule of thumb that people are probably quite used to is that Treasuries are a recession hedge. I mean, when inflation is elevated, that's just not the case, and you tend to get bonds and stocks moving positively correlated.
Erik: Joining me now is Sachem Cove co-founder and fund manager, Mike Alkin. Mike, it's great to get you back on the show. It's been, I don't know, six months or so. Last time I talked to you was just before a market bottom. Let's make that a tradition. It's great to have you back on, let's start with the big elephant in the room. We've got, what I think is arguably the best nuclear news flow year in the history of the nuclear industry, between restarts, new builds, SMRs, Chris Wright announcing that the US is mounting a gigantic nuclear renaissance, touring the national laboratories that do the best research, government signaling that they're going to be very supportive of nuclear. It's got to be the most bullish year ever. And I don't think we've ever seen worse investor sentiment. We're down 40%, market’s crashing. What gives, Mike? How is this possible? And how long can it continue?
Mike: Yeah, look, we're talking about uranium prices down, I think we have to ask ourselves, which uranium price? As you know, there are two types of prices: spot and term (long-term contracts). The spot market is 26% of the market, 25% of the market. The last couple of years, utilities, the end user, they're 14% of that of the spot market. So, by definition, just simple math, you take the 2025, 26% of market, and they're 14% of it, utilities by 4% of the overall volume of pounds in that market. And utilities, really the only end user, you know, save a government here or there, but they're it. So, there's a focus on that. And the spot market is very thin. There's not a lot of demand in it. Most of the market, 70% is producers, or 70% are traders that are trading in days and weeks, not in several months and years. So, it's a flows market. Some flows come in at times, off-take, there might not be a buyer there, but it's not fundamental supply and demand. However, the long-term market is, that's where 75%+ of the pounds trade. And in that price, we've seen that price up, last year, that price was up in the high teens, percentage wise. This year, it's year to year from last year, this year, it's up 7% despite volumes being down over 20% in that contract market. That's the economic viability supply. That's the view we're taking. That's where companies make their money, right? So that's where it's been. Spot market serves as a gauge. But why is it? Why do people pay attention? Because it's reported once a day, and the term markets reports once a month. And it’s as basic as that, but in no way, shape or form, is it representative of the supply and demand in the market and the amount of available uranium needed to fuel their global reactor fleet.
Erik: Joining me now is freelancer.com founder and CEO, Matt Barrie, who's also becoming a world renowned expert on artificial intelligence. Matt just published a fantastic article, which I would consider to be a must read. It's called AI of the Storm, that's linked in your Research Roundup email. If you don't have a Research Round up email, you're not yet registered at macro voices.com Just go to our home page macrovoices.com, click the red button above Matt's picture, which says, looking for the downloads. Matt, why don't we start with the State of the Union, if you will. What has changed in the world of AI in the six months since we last had you on?
Matt: Well, it's been a dramatically changing landscape in the last six months. As it turns out, you can assemble a ragtag team with a relatively modest budget and even work on potentially AI as a side project and deliver a model which could, can challenge the state of the art of what was has been coming out of Silicon Valley. You're seeing this not just with independent, private companies launching models here, there, everywhere. But you're also seeing it with open-source efforts, and, in fact, starting a foundational AI model seems to be akin to opening yet another Thai restaurant, albeit potentially a very good Thai restaurant in Thailand, while at the same time handing out the recipe book and the business plans. You're seeing efforts come from left, right and center that you wouldn't expect. Elon Musk managed to assemble, did it the traditional way, and managed to assemble a very large data center with Grok 3 and get access to the hardware, and now has produced one of the leading models, really getting OpenAI run for its money in the US. But you're seeing efforts from all around the world tackling different parts of the problem, whether it's team in France called Mixtral, or now the clear and present threat is coming directly out of China, with the likes of DeepSeek, where, literally just out of nowhere, late last year, a team of 160 ragtag engineers on at a hedge fund, worked on a side project and dumped out a model, DeepSeek-V3 and then the second model, DeepSeek R1 which really challenged the state of the art of OpenAI's foundational models. And they managed to do so on a fraction of the budget. It's been rumored that the training that was involved for DeepSeek involved about 2000 GPUs, when it would normally take 20,000 GPUs, they achieved the 10 times efficiency in the training of these models through just some smart optimizations under the hood. A bit like taking a race car and doing some tinkering with the engine, they managed to speed up the training about 10 times. And as a result of that, the training budget is remembered to be around $5 or $6 million which blows up the water in comparison to some of the latest we've seen in the valley, where training models in the order of $100 million. So, you're seeing all these competitive threats come out of nowhere, and models are being released, really, at such a rate. I think just before we started the podcast today, you commented there was another DeepSeek model was just launched overnight, which people are trying to get their hands on and understand what that's about. But there's certainly competition coming from left, right and center. At the same time, these models are getting a lot more sophisticated, so they're now multi-modal. That means they can take in text, they can take in images, they can take and they can produce text and images, or take in PDFs and a range of different modalities, and output in different modalities directly. So, you don't have to really have a translation step in between them. And simultaneously with all of that, there's been a cataclysm in terms of the hardware layer, which we can talk about in a second, coming out of China as a result of US sanctions.
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