Transcripts

 

Erik: Joining me now is 42 Macro founder Darius Dale. Darius, prepared as  always a slide deck to a company. This week's interview for our regular  listeners, you already know this, but for everyone else, the way this works is  Darius has a huge slide deck which he shares with his paying subscribers. He's  kind enough to share the entire deck with us, with the condition out of respect  for those paying subscribers that we have to redact the slides that we don't  actually use. 

So please forgive any blank slides that you find in the download link. You can  search. Certainly get all of it by subscribing to 42 Macro. We only provide you  with the slides that are discussed in this week's interview. Darius, I wanted to  get you on the show, very first guest of the year because boy, back in 2022, I  think we had you as the first, or maybe it was the second guest of the year. 

Everybody was bullish. Boy, sounds exactly like today where everybody's all in,  running it hot and you actually were bold enough to use the words crash year  and say guys, I think there, there's a lot to be worried about. You've nailed that  call in 2022. It turned out not to be the very positive year, everybody thought. 

Let's start with the real high level. Is this gonna be a crash year or is everybody  right to be all in?  

Darius: Ooh, that's a great question. Way to start us off Hot Eric. So thanks  again for having me. It's always a pleasure to be with you and your wonderful  macro Voices community. I'll also add just one quick highlight. 

We also had the same view coming into last year, 2025. Recall that we thought  the Trump administration would kitchen sink the economy from a policy  sequencing standpoint. And ultimately we thought the markets would crash to  price that in. Ultimately recover very sharply and violently to the upside. 

And that's obviously exactly what happened last year. Kudos to the team at 42  Macro for getting that getting into answering your question I'll jump right into  sliders, hop right into it. We'll go to slide 115 where we show our the latest  refresh of our positioning model, which we refresh daily for our clients. 

And right now we're observing a historic degree of crowded bull positioning.  Which makes me very uncomfortable as an investor because typically what  happens when you get to this extremes, incredible positioning. You tend to have  bad outcomes in financial markets. That doesn't necessarily guarantee a bad  outcome in financial market, but it certainly increases the probability of one.

So when we look at, the positioning cycle indicators that correspond to the short  to medium term time horizon, in which are the AI bulls bear spread and the  National Association of Active Investment Manager Stock Allocation survey.  Both of those the latest values for both of those time series are breaching their  respective bull market peak thresholds. 

Going back to the early late eighties for the AI bulls bear spread , early two  thousands for the name survey. So that's that indicates that there's a high risk of  a correction over a short to medium term time horizon, which in our risk  management nomenclature is one to three months. 

If you look at the indicators on the far right of that table, on, on the right of slide  one 15 where we show the AI stock allocation survey the AI bond allocation  survey, the AI cash allocation survey, we use that to proxy investment advisor  positioning. We look at the S&P 500 3 month realized volatility to proxy,  systematic fund exposure positioning. 

We look at implied volatility correlations to proxy the gross exposure of our  market, neutral hedge fund clients. And then finally we look at the S&P500  press the next 12 month earnings multiple, as well as investment grade credit  spreads, and as well as economic policy uncertainty to proxy various cohorts of  the broader buy side and their crowd and their crowded positioning, whether it  be bullish or bearish. 

And right now, the. The compendium of indicators are enough of those  indicators are breaching their respective bull market peak thresholds. That  suggest that there's, some bumps likely ahead of us over a short to medium term  time horizon and potentially a medium to longer term time horizon as well,  purely from the perspective of the positioning side. 

And one final thing I'll say on this, on slide 116 if you go back and look at all  those indicators and just look at them in terms of the percentile of implied  crowd at bullish positioning based on the latest values, this is about the third  highest crowd at belows positioning we've ever seen on a median on a mean  basis and the second highest we've seen on a median basis. 

And that would seem to suggest that we're gonna have to have a lot of good  news accumulate for markets to power through this through this dynamic.  

Erik: It seems to me that there's a lot of parallels here. Going into the 2000  trading year, boy, quarter of a century ago. I guess I must be getting old or 

something, the thing that seems similar to me is everybody was betting then on  the internet being a really big deal. 

They were right about that, but it just got so far ahead of itself that we ended up  having to have dotcom bust before we could, a couple of years later get a  recovery. And of course they were still right. The internet was a really big deal.  It still is. It seems to me the parallel there is AI. 

It seems like it's the big driver in the market. Everybody's right that AI is gonna  be a really big deal, but it also feels really overdone. So how do you see, and I  guess the, the challenge there was. Almost everybody knew there was a bubble,  but nobody knew how to time it. So how do you see this crowded positioning  that you're describing on page one 15? 

Resolving?  

Darius: Yeah, that's an excellent question. I'm so glad you brought up the early  two thousands market cycle. 'cause it's very akin to what we're experiencing  here here in 2026. Historically when you have these CapEx bubbles going back  to the 19th century railroad, build out the 20th century consumer durable goods  build out as well as the 20th and 21st century internet CapEx build out. 

You always tend to see those mar those CapEx bubbles tend to precede. Secular  bear markets, and oftentimes, significantly adverse outcomes in the economy as  well. The panic of 1873 led to the long depression. The 1929 stock market crash  ultimately led to the Great Depression. 

We obviously saw the.com bus lead us to the jobless recovery and then  ultimately the housing bubble, which ultimately gave way to the global financial  crisis. I think if you take a multi-year time horizon and perspective. Things  aren't great, I'll just leave it at that. But from a medium term time horizon  perspective, which is set of three to 12 plus months, three, three to 12 months in  our risk management nomenclature, we do see this historic degree of bolus  positioning resolving itself positively. 

But this will probably the last gasp higher in that, from that perspective. If we  could turn to slide 24 where we show the latest refresh of our macro weather  model, which we again, alongside our positioning model. We refresh six days a  week for our clients here 42 Macro. What we find is that if you look at the  current constellation of the six key macro cycles that matter, with those being  growth, inflation, monetary policy, fiscal policy, liquidity, and positioning.

Four of the six are currently headwinds for the market. Now again, this model is  designed to help project the dispersion within and across asset markets, or really  mostly across asset markets. Over short to medium term time horizon, which is  again, one to three months in our risk manage nomenclature. 

And so that suggests that right now we're probably due for a correction and or  some violent chop to burn off some of this crowded bull positioning before we  can set the stage to a meaningful move higher. And looking at what's currently a  tailwind growth in inflation. 

They're both currently tailwinds as determined by the the features in the model.  But when we look at the things that are currently headwinds. Ultimately, we  have to see these things transition to becoming tailwinds for us to, make new  highs on a durable basis and really any meaningful and or explosive move  higher, which still may be in the cards, by the way. 

I don't think the AI CapEx cycle's done. We certainly still see a tremendous  amount of fundamental support for the market, aside from this Credis position  dynamic. So let's unpack the. Monetary policy, fiscal policy and liquidity cycles  independently because those are headwinds that we ultimately expect will  transition to becoming tailwinds over the medium term, which will support an  unwind, a positive resolution to this current credit bull positioning, which is  likely to remain a headwind until this market peaks. 

So on the monetary policy side of things we had a strong easing impulse in the  Fed funds rate. We had a weak easing impulse in the two year nominal treasury  yield. Fed funds rates spread. We have a strong tightening impulse in the Fed's  treasury holdings to marketable treasury debt ratio. We have a strong tightening  impulse in commercial bank reserves to commercial bank assets ratio. 

And then we have a strong tightening impulse in the SOFR IRB spread. So  ultimately we think the fed's. Response to the tight conditions in the repo market  will ultimately be one that is more balance sheet expansion, more reserve  management purposes, and ultimately we expect the structural forms that the,  that we've been forecasting at the Fed for years now. 

We expect the advent of those structural forms will ultimately push the Fed  funds rate lower. And make the market more right? With regards to established  policy bias. So ultimately the monetary policy cycle, which is currently a  headwind for of risk assets and broader financial market risk taking will  ultimately transition to becoming a tailwind at some point over the next three to  six months.

So that's why that's one dynamic that could change, that could help this credit  bullish positioning resolve positively. On the fiscal policy side of things we  that's currently a headwind. We have the strong tightening impulse in the  sovereign fiscal balance to GDP ratio. We got a weak tightening impulse in  Charlie 12 month federal revenue. 

We have a strong tightening impulse in trailing 12 month federal expenditures.  We have a strong tightening impulse in the church of general comp balance.  The bank reserves ratio 30%, essentially an all time high. The bills. The  marketable treasury debt ratio is a weak easing impulse, but not enough. 

To offset the current headwind that is the fiscal policy cycle to, to broader risk  taking in financial markets. Ultimately, particularly as we get past the kind of  late Q1, Q2 of this year, early Q2 of this year, we're gonna start to see these  these indicators transition largely as a function of the one big ugly bill and the  fiscal stimulus that we're likely to see from that our math has the deficit  expanding by, three to $500 billion. 

This year and perhaps doing that again in 2027 as well. So we're in this kind of  u-shaped fiscal policy dynamic where we've seen a tremendous amount of fiscal  retrenchment in the economy, which we can unpack later. We've seen a  tremendous amount of fiscal retrenchment that ultimately more of transition to  fiscal easing. 

And so the fiscal. Policy cycle, which is currently a headwind for the financial  markets, is ultimately gonna become a tailwind, a high probability tailwind at  some point. Let's haul it in the next three to six months as well. And then lastly,  with the liquidity cycle, which is the other cycle that needs to to, to transition  from being a current headwind to a tailwind at some point over the medium  term to get us outta this awkward position that we're currently in as a function  of the positioning cycle. 

If you look at our global liquidity proxy that's a strong positive impulse. Our 42  macro net liquidity, that's our US liquidity model. That balance sheet, T-J-A-R P that is a strong negative impulse. Now we got a strong easing impulse in the  move index, which is biomarker volatility. We have a strong tightening impulse  in the 10 year treasury term premium. 

And then we got a weak tightening impulse in the broad nominal dollar  effective exchange rate. We got a modest head wind right now, the liquidity  cycle. Ultimately we think that'll transition to becoming a tailwind over the 

medium term if we're right on the transition on the inflections in the monetary  policy and fiscal policy cycle, which we see as high probability outcomes. 

Erik: Darius, so many things I wanna dive a little bit deeper on, on this slide  24. Let's start with the monetary policy aspects of this. Something our regular  listeners know I've been stuck on for the last several weeks is it seems to me  that a dovish policy error by the Fed is a near certainty this year. 

And the reason I say that is President Trump is being extremely heavy handed  in terms of just demanding that anybody he allows onto the FOMC board is  going to have to. Vote for a reduction, a continued cutting of policy rates. And  as Jim Bianco has warned, at some point if you cut too much, you end up  having that blow up in your face. 

I don't think the president fully understands that. And you end up with the back  end of the curve revolting as the bond market starts to get afraid of runaway  inflation. How does that thesis fit into your model and how does that jive with  what you're thinking?  

Darius: Yeah, that's, I think that's one of the key risks in financial markets. 

However, I think that risk is dissipating at the margins. If you look at slide 54,  where we show trends in, in, in key inflation operates, we've been declining for,  a couple quarters now across the one year. Two year, five year, and 10 year  tenor. Of these these inflation swap rates, which suggests that the bond market  is getting less concerned about the prospect of a federal reserve that is  ultimately makes a dovish policy error that reignites inflation. 

If you look at slide 55 where we show various estimates of our various market  based estimates of neutral and R star, if you look at the second panel on this  chart here, where we show the floor Fed funds rate. At three spot 11% 3.11%.  That's the market in our view. 

That's the market's estimate of the neutral policy rate, which is again, the  minimum value on the OIS curve about five years. Given that we're in a, given  that we're in an easing cycle, we'd be using the terminal rate if we were in a  hiking cycle. And if you look at that value relative to the effective Fed funds  rate we're still about 64 basis points north of that in effective fed funds rate  terms above neutral. 

So it's highly unlikely that the Federal Reserve creates any sort of meaningful  inflation without at least getting the policy rate to a easing bias. Right now 

there's at least a couple, two to two and a half rate cuts, if you will between the  current effective Fed funds rate and neutral. 

So it's very likely that the Fed is still actually applying downward pressure upon  the economy and labor markets and ultimately upon inflation. And if you got  one final thing I'll say on this is the, if you look at the bond market. On slide 57  the bond market is not overly concerned about sticky inflation either. 

So right now the 10 year treasury yield is currently about 4.15%. Historically  with data going back to the early seventies, the 10 year treasury yield tends to  be about a hundred, 120 basis points above the fed funds rate. So that's  essentially saying the bond market is, it thinks the Fed funds rate should already  be somewhere close to three three and a quarter. 

Right now would be totally fine with that outcome based on its current pricing.  And so that kind of leads me to the next few slides which says, okay, what  could actually go right on inflation? We're also concerned about tariffs, which.  Our math and our analysis has always suggested that tariffs were a, regressive  hit to aggregate demand that would ultimately wind up in lower aggregate  demand and ultimately lower inflation. 

The San Francisco Fed eventually published a paper confirming what we had  already signaled to our customers back in April when we were telling them to  get along. The, if you look at on slide 58 if the middle panel on slide 58 where  

we show Zillow rent index, strong positive, a strong negative impulse in the  Zillow rent index. 

With the three month annualized, we had a change of 1.8%. That's gonna  continue to drag down shelter inflation and housing, housing, PC inflation to the  levels that are below. Trend. They're already modestly below trend currently,  and we ultimately think the trend of disinflation in shelter and housing inflation  is likely to remain ongoing. 

And then finally, on slides 59 and 50 and 60, we have to remind ourselves that  this is a labor market, but the unemployment rate is still gradually increasing.  And a labor market where the unemployment rate is gradually increasing. And  you have on slide 60, super depressed low labor market turnover is evidenced  by the structurally depressed private sector hires rate of 3.5%. 

Below the pre COVID trend, the structurally depressed private sector quits rate  at 2.2% below the pre COVID trend. And then the the structurally depressed  private sector layoffs and discharges rate at 1.2%. That's below the pre COVID 

trend. We know that this is a labor market that has a very limited turnover, is a  labor market that also has a gradual increase on unemployment rate. 

So ultimately the labor market that should, if you look at slide 59, have slower  wage growth. Workers who change jobs tend to experience faster wage growth,  which by definition workers who do not change jobs tend to experience a  slower wage growth. So we're essentially replacing workers who are changing  jobs with workers who are staying put and or being fired and put into the ranks  of the unemployed. 

And so ultimately we think their, the wage growth dynamic is disinflationary,  the housing inflation dynamic is disinflationary and obviously we continue to  see a disinflationary impulse across. The energy complex which is which is  deflationary as well.  

Erik: I wanna come back to slide 24 now and talk about some of these short to  medium term outlooks, the one to three month traffic lights that you have in the  center of the slide there. 

I appreciate these are. Short term outlooks, one to three months. I'm very  curious on some of these asset classes, how that compares to your longer term  outlook. Because I certainly I don't have any reason to, to dispute what you say  in terms of short term cycles, but it seems to me something like commodities, a  lot of notable people who I respect feel that. 

In the bigger picture, we're at the, maybe the ending stages or final stages of an  equity bull market and the beginning of a secular commodity bull market.  Obviously you've got a red light here on commodities, at least in the short term,  so I'm curious about longer term. And then I look at something like gold. 

Okay. It does feel like it's up an awful lot recently. Maybe it's overdue for a  bigger correction than we've seen. At the same time, if I look at the  fundamentals, it depends, on the reason that you think gold has been so strong.  A lot of people think it's been so strong because central banks are losing trust in  the US government. 

And they want some independence from US Treasury paper as their primary  reserve asset given geopolitical developments of late I, I don't see that trend  reversing anytime soon. The other reason that. People will cite for buying gold.  Is that it's really just about the size of the debt.

Reaching a point where it's unserviceable and you've got a serious concern  about the long-term viability of the US treasury market. I don't think that  argument's going away either. So how do these short-term signals jive with your  longer term views?  

Darius: Yeah, great question. I would invert them. From a longer term  perspective, not even necessarily a longer term. 

So just from a perspective of the median term, which again, in our risk  management nomenclature is three to 12 months. Yeah, I think the next few  months could easily be choppy because we don't have enough accumulated  good news from the perspective of each of these six key macro cycles, namely  the five that aren't the positioning cycle to cause the markets to, make us a  meaningful move higher over a short to medium term time horizon. 

However. If we're right that the monetary policy cycle will to inflect from a  headwind to a tailwind, if we're right, that the fiscal policy cycle will inflect  from a headwind to a tailwind, and ultimately both the confluence of those two  things. With the ongoing tailwinds and the growth in inflation cycle persisting,  then it's likely that the liquidity cycle will inflect from a headwind currently to a  tailwind. 

So ultimately if all that it becomes true, where you have five of the other six key  macro cycles, exposition cycle all being tailwinds for asset markets, then you're  obviously gonna see an inversion of the the traffic lights in the middle of the  page There. You can have green light for stocks, green light for gold, green  light for bitcoin, green light for commodities, and red lights for the bonds and  the US dollar. 

So that, that. That is what our fundamental research summary is currently  anticipating. If you go to slide six in this presentation, we don't have time to  unpack the, everything on the fundamental research summary, but one thing I  call out on slide six is the words the color coding of the words is is associated  with dynamics that are bullish for risk assets being green, and dynamics that are  barriers for risk assets being red. 

So from a fundamental research perspective. And this slide on slide six  summarizes everything in this 160 plus slide presentation. Most of the stuff that  we're, pitching to our clients and have been for since since late April, since we  altered the paradigm C theme in late April of last year.

Most of the things have been bullish and are likely to become increasingly  bullish over the medium term. And so that's why we have so much conviction  that the monetary, fiscal, monetary policy, fiscal policy, and liquidity cycles on  slide 24 will inflict from headwinds to tailwinds. Answering your question,  going back to this you touched on something briefly on slide that, that is near  and dear to my heart and is the guiding principle for our. 

Research it has been for a few years now which is this geopolitically driven  supply demand imbalance in the treasury bond market. If you go to slide 73,  where we show the approximate next 12 month marketable treasury debt supply  as a percent of global savings. You can see that we have a meaningful deviation  from the long run mean of this time series in terms of the latest value of 39% of  global savings in terms of how much percentage of the flow of global savings  that the US government is capitalizing itself at. 

From the perspective of rolling over maturing debt the the annualized fiscal year  to date budget deficit, as well as the annualized divestment for the Fed's  portfolio, which obviously is since is now actually a tailwind from that  perspective. But a very modest tailwind in terms of 40 billion a month of arm. 

It's about 223% of us the flow of us savings. And so obviously both of those are  about a double relative to their long run means. So we have all this debt supply.  But we don't necessarily have the same de demand dynamics that we used to  throughout the great moderation. And ultimately the period of time that, we  created the that created that, that featured the conditions, that created the dual  broad performance of the, let's say 60 40 portfolio. 

If you go to slide 95 where we show some of the foreign dynamics in the  treasury market we've been losing foreign ownership for over a decade now.  Foreigners peaked out at 56% of the total marketable treasury debt market.  Back in back in June of oh 08'. 

We're now at 31%. Currently if you look at slide 50, or sorry, my apologies,  slide 102 where we show, these various cohorts of the marketable treasury debt  market. We see that the fed, the blue line of the fed's share of the marketable  treasury debt market has been declining for a few years now, it's now down at a  lowly 14% from peaking at a route 25%. 

In mid 2022 we see commercial banks. Share of the marketable treasury debt  market has been pretty stable over the past couple of years, but it's still at a very  structurally depressed level of 15%, which is down from a, a high in the early 

two thousands of around in the low thirties. And then obviously the black line,  which is foreign official sector treasury holdings. 

So foreign central banks their reserve management that's declined from about  40% to 13% since peaking out in oh eight. And so the residual of all that  declining flow from these price insensitive buyers. Because central banks  manage buy treasuries for reserve management purposes. They buy treasuries to  implement monetary policy via QE or some other form of a large asset  purchase. 

And then they commercial banks, they buy treasuries because of regulation,  banking regulation, you are losing all these price insensitive buyers and  replacing them with price sensitive buyers, which are the light blue line in this  chart which are now at 58% of the total marketable treasury debt market up  from 36% in late 2021. 

So this is not a good dynamic and this is a dynamic that is likely to sustain this  structural uptrend in term premium on slide 103 that we highlight if you had a  normal level of term premium in the bond market and normal being somewhere  around, let's call it just five 2%. If we had a normal level of term premium, the  bond market, the 10 year treasury yield will be five and a quarter as opposed to  4.15%. 

And so ultimately the excess yield that we should ultimately be having in the  bond market is being replaced by gold, by the capital appreciation by gold. And  this is something we explicit, explicitly forecasted and called out and helped our  clients position for starting in the summer of 2023 when we first authored this  fundamental research view, this geopolitically driven supply, demand and  balance in the treasury bond market as part of our investing, doing a four  turning regime framework. 

And ultimately this is why you saw my fellow Yelly, Janet Yellen. She pivoted  to dovish ne financing policy in the summer of, in the shortly after this  presentation was printed. And then you had our fellow Yelly treasury Secretary  of Scott Besson get on the job after you 18 months of lambasting the Dovish  Financing Policy actually rubber stamp it and promise to keep it going for the  foreseeable future. 

Now that he's on the job. In our view, we think we're right on this supply  demand. I balance and as a function, as that supply demand, I balance, we're  seeing institutional investors, which is something we called for. Institutional 

investors increasingly adopt gold as a diversifier away from the treasury bond  market. 

Erik: So if I can just assimilate everything you've said so far, it sounds like we  should interpret your view as saying, look, there's some really good reasons to  be cautious about, oh, let's say the first quarter of 2026, maybe as being a  choppy time time for some overdue corrections to, to play out, but. 

Beyond that longer term. If we go back to page six, which is your longer term  fundamental outlook, really it's almost all green. So you're very much still long term bullish, but also feeling like we're overdue for some corrections before that  can continue. Is that a fair summary?  

Darius: That is an absolute fair summary that the relative frequency of green  words on the page in slide six in our fundamental research summary relative to  the red words in the page, implies that from a fundamental standpoint. 

Based on everything we know today and could forecast today with any  reasonable degree of precision, suggest that we have an incredibly positively  skewed return distribution. With regards to the medium to longer term time  horizon. Doesn't mean the market has to go up every day between now and then,  or even has to go up. 

It just implies that unless something changes in a material manner to, to alter the  relative, frequency of red and green words on that page, it's highly likely that  this. Current crowded bull positioning that we're all very concerned about right  now gets resolved in a meaningfully positive manner. 

When you look out, let's call it six to 12 months.  

Erik: Darius, let's talk about President Trump, who has been, let's say, not  bashful about implementing policies that are quite bold and non-consensus. He  doesn't seem to be going too far out of his way to keep the opposing Democratic  party happy. 

They're getting more and more upset, it seems as we near the. Midterm elections  later in the year. It seems to me the closer we get to the midterm elections, the  more markets are going to start to get sensitive to, Hey, wait a minute, what  happens if the Democrats take the house in November? And that really starts to  weigh on the President's ability to continue to press some of the bold policies  that he's been pressing.

How do you think about how politics and fiscal policy plays into the whole  outlook for the next year or so?  

Darius: Excellent question, Eric. I think the outlook for bold fiscal policy is one  that requires a rear view mirror. If you go to slide 91, we already passed the one  big ugly bill, and the vast majority of the impact has yet to be felt in the  economy. 

Most of it is likely to occur in 2026 in 2027, where we're likely to see a one to  two percentage point positive fiscal impulse in both years. And that's a  meaningful delta relative to consensus expectations. Transition from slide 91 to  slide 26 here. If you look at slide 26, the our consensus short run potential real  GDP growth estimate that's the blend of 26 and 27. 

Right now, it's only at 2%, and I'll tell you. We're gonna go to slightly, maybe  slightly above two here in or back in 2025 with a, three to $400 billion tariff  shock with the highest average annual level of economic policy uncertainty as  measured by the Baker Bloom Davis Index with time series back to the mid  eighties ever in the time series. 

And oh, by the way, a guy who can't stop tweeting changing policy every five to  10 minutes. I don't know how we don't grow at least three, perhaps even 4% in  2026 and 2027, 4% seems a bit much, and we probably need to see some sort of  productivity boom, which I think we should touch on after we hit on fiscal  policy. 

It's very likely that we're gonna grow three, at least 3% in 2026 and 2027 as a  function of what we highlighted on slide 91. And we're already starting to see it.  If you look at slide 88 where we show our fiscal policy monitor if you look at  the impact that the tariff policy. 

And the tariff really largely, the tariff policy has had in terms of reflating the  federal tax revenue tax revenues up 9% on a calendar, year to date basis through  November in 2025. Whereas expenditure's only up 1%. So you've had this  significant fiscal retrenchment that, led us to minus 5.4% budget deficit versus  in 2025 on a calendar year to date basis versus 6.8% for 2024. 

So we've had 130 ish percent basis point fiscal retrenchment in, in, in 2025,  which is pretty meaningful. It's very meaningful. The thing about, looking ahead  with, in, with regards to the impact of the one big ugly bill that's going to  reverse and reverse meaningfully in 2026 and 2027.

If you look at slide 89 where we show the our fiscal policy monitor on a fiscal  year to date basis. So we have a couple of months of fiscal 2026 in the data  already, we're gonna, at the bottom there that one of the bottom rows there, a  federal budget balance. We're going from a 5.8% deficit to GDP ratio in fiscal  2025 to a 9%. 

Deficit to GDP ratio in the first two months of fiscal 2026. Now, it's not gonna  say at 9% it's gonna go down from 9% to something that's probably closer to  7% or maybe even seven point half 8%. But this is a meaningful fiscal  expansion that's taking place. As a function, partially as a function of the one  big ugly bill, but also as a function of what our friend, our mutual friend Luke  Groman, over a forest for the trees caused the the true interest expense. 

The runaway freight train that is true interest expense. If, and that's for those  who may be new to the framework. That's the aggregated sum of Medicare  national defense, debt interest and social security. Together, they're about, on a  fiscal year to date basis. They're about, four point $7 trillion annualized two  thirds of the federal budget. 

They're 16% of GDP and they've been compounding growing at about nine 10%  per annum. Whether you look at, on a, a fiscal year to date basis on a calendar,  year to date basis, so we have double digit growth in two thirds of federal  expenditures. Which we know are, have a low probability of ever being  legislated down, let alone flat, or, sorry flat, let alone down. 

In fact the signal that we got from the one big ugly bill legislative process was  that these things are untouchable, and then when they do get touched, they go  up faster. And so in our view this is a runaway freight train from a fiscal policy  standpoint from a messy and uncomfortable fiscal policy standpoint that will  ultimately require some very creative solutions and erosion of a further erosion  of central bank independence, which is something we've been explicitly  forecasting since we altered. 

That investing doing. Afford attorney regime presentation back in the summer  of 2023, which featured that geopolitically driven supply demand imbalance in  the treasury market. Analysis.  

Erik: Let's continue on that topic around central bank independence and go  more into monetary policy since we've been talking fiscal policy here. 

It seems to me like there's a lot of room, especially as we get to potentially a  changing mix. If the Democrats take the house, if there's confirmation 

difficulties after that of the President not getting his way with who he wants to  put in various, FOMC positions and so forth what could happen with respect to  fiscal policy if we have a revolt, if you will, against some of the president's bold  policies. 

Darius: Yeah, look, in our view, it's highly unlikely that we get a revolt  partially as a function of our jobless recovery thesis. We are of the view that AI  is productivity enhancing and ultimately will be job replacing maybe not at a, at  an alarming rate, at least in 2026, but on a multi-year, taking a multi-year time  horizon. 

And it's very likely that this technology causes some meaningful societal  disruption in the form of a higher unemployment. And if we're right on that  view, or even partially right on that view, you're talking about a federal reserve  that's going to see a just a consistent and persistent threat to its maximum  employment mandate in a way that essentially forces it to do what the president  wants. 

If you throw slide 79, pre fed chair, Powell already started alluding to this at the  December FOMC press conference. Where he highlighted, some of the  structural changes in the economy. He didn't say what I just said, but I'm not  even sure the fed chair or anybody the Fed is allowed to say what I just said. 

But the reality is, what I just said is, in my opinion, in our opinion of, 160 slides  of research that we pump out every month to our customers it's a high  probability outcome. So let me walk you through that thesis here over the next  couple of slides. So the slide slide 80. 

Shows the blue line in slide 80 shows labor share of national income where we  show nominal employee comp compensation divided by gross domestic income.  That's down at an all time low of 51.3%. We show capital share of lash national  income at the red line, which is corporate profit using corporate profits as a  proxy for that as a share of gross domestic income. 

That's up at 13.2% an all time high. We've had a secular downtrend in labor  share of national income. Without AI, a technology that can replace people. Just  due to globalization, just due to among other things, the neoliberalism era and  the various forms of tax treatment that caused this, that, that have contributed to  this dynamic. 

Obviously things like NAFTA and China joining the WTO as cause of this as  well. We've had a secular bear market and labor share of national income 

without a technology that can literally replace labor. It's already replacing labor.  If you look at the youth unemployment rate, it's already replacing labor. 

If you look at slide 41, the bottom panel is slide 41, where we show the long term unemployed as a percentage total. We're up at a structurally elevated  24.3% which compares to a long run mean of this time series of 16.4%. When  you get fired now or you lose your job, for whatever reason, it's very difficult to. 

To find a new job. And this is because every company in the world is  incentivized to wait and see, to see how much of their biggest cost expense. The  biggest, expense in most businesses is labor. To see how much of that expense  they can take down with the with the development and adoption of ai. 

And so ultimately, if you go to slide 81, where we show how this is likely to  impact the economy. Know this top panel shows the the time series of non-farm  productivity in, in, in, through meth annualized six month annualized, and you  rated change terms. And then in this kind of the third to fourth panel show, the  third panel shows the time series, the same dynamics of unit labor costs  inflation. 

The light blue horizontal line show, the pre COVID trends of each and you, we  somewhere around 2% for both. The promise of AI is that we go from a trend  2% productivity economy to a trend. A 3% productivity economy, which  ultimately implies that we're going from a trend 2% unit labor cost inflation  economy to a trend 1% unit labor cost inflation economy. 

And so ultimately we're talking about a significant tailwind for corporate  profits. We're talking about a significant headwind for inflation in terms of how  in productivity has historically impacted both of those cycles. And every  company, whether they implicitly understand what I just said or what, they all  inherently understand this as business owners and as business operators. 

And so ultimately we just think this, low, higher low fire environment, whether  unemployment rate continues to gradually rise, particularly as more and more  companies that throughout the economy adopt ai and find creative ways to use  AI to, to hold back labor their most their biggest expense. 

We think this dynamic is gonna be ongoing. It's a secular dynamic that will  ultimately require. The Fed to implement dovish monetary policy regardless of  how politicized they may appear to be in the context of what the signalling that's  coming outta the White House. 

Erik: Darius, let's pull all of the things that we've talked about together into,  okay, where are the trades for our investor audience? 

Because we've talked about monetary policy, fiscal policy, there's so many  different things you're talking about. Really, a very. Bullish longer term outlook  with some serious cautions about the next three to six months. So how do we  position for that?  

Darius: Yeah, that's a great way to put it. I, maybe not even the next three to six  months, I think by, but certainly by six months and probably by three months,  we're, it's likely that we could be resolving our way through this uncomfortable  setup from a crowded bull's positioning standpoint. 

But again, that does imply we're probably gonna chop around perhaps violently  in the interim, if not even correct. Again, when you're in this. When you're at  this extreme in terms of incredible Bullish positioning terms, it doesn't take  much. A squirrel could get hit by a bus and markets could correct. 

So I want investors to be aware that, just because the, frequency of green words  relative to the frequency of red words and the fundamental research summary  on slide six is over overwhelmingly positively skewed from a return distribution  perspective. It doesn't necessarily mean that, we're outta the woods yet. 

However, when it comes to how we think investors should be positioning for  these emergent and developing market risk, the fundamental research has no  bearing on that answer for us at 42. Macro as you know from our previous  discussions, Eric, we're systematic investors. 

We rely exclusively on our institutional grade risk management overlays to help  our clients and myself as someone who uses our KISS model portfolio to  manage his entire liquid net worth. We rely exclusively on that as it relates to  what investors should be doing in their portfolios at any given time. 

I'll just briefly touch on kiss and ultimately touch on the KISS system itself.  And then I'll conclude with where KISS is currently allocated. So if you jump to  slide eight, just real brief kiss, there's three core elements of our KISS model  portfolio, which is short for keep it simple and systematic. 

Number one is our factor selection. So this is a 60 30 10 quantitative trend  following strategy that is designed to expose investor portfolios to productivity  growth. And it's also designed to help investors outperform outrun financial  oppression and monetary debasement via allocations to gold and bitcoin.

And where KISS really shines is in its risk management. We use our market  regime now casting process to incorporate volatility targeting into the strategy.  And then we use our volatility, just momentum signal to incorporate dynamic  position sizing into the strategy. And the, anybody on the buy side understands  that, volatil targeting and an AM position sizing. 

These are the two of the core hallmarks of institutional risk management that  KISS uses. To create a positively or skewed return distribution in investor  portfolios and in my own portfolio. So if you look at, jump ahead to slide 12. A  couple numbers I'd hit on in this, on this back test is rolling out a sample back  test. 

If you look at KISS relative to 60 40 60% stocks, 30% gold kiss has an upside  capture ratio of about 300%, and a downside capture ratio of about 60%. So  you're essentially getting. 60% of the downside of 60 40, 300% of the upside  effectively. If you wanted to compare KISS to a naked long portfolio, 60%  stocks, 30% gold, 10% Bitcoin, which is what KISS is when it's maxed out, it's  not always maxed out, but that's what KISS is. 

When it's maxed out you'd have an upside capture issue of about 90% and a  downside capture ratio of about 50%. So you're essentially getting 90% of the  return you would have in these high beta asset classes. With only about half of  the downside which obviously creates an incredibly positively skewed return  distribution from the set of investors with a very minimal max drawdown,  particularly relative to the frequent crashes that we've seen in 60 40 and 60 30  10 stocks go Bitcoin naked long. 

So where we are today in Kiss. Kiss is 10% cash on slide 13. It's at 10% cash.  It's at a hundred percent of its maximum exposure of 60% stocks. Both the top  down and bottom upper manage and overlay are giving it a green light to be  fully invested in the equity market here. Gold. It's at a hundred percent of its  maximum exposure of 30% in gold. 

Both the top down to bottom upper percent over there, giving it a green light to  be fully invested in gold as well. And then it's at 0% of its maximum social of  10% in Bitcoin. Neither the top down risk manage overlay's, giving Bitcoin the  green light, but the bottom up risk manage overlay, which again, we use to  feature dynamic position sizing into the strategy that's giving it a red light. 

And right now KISS is, more or less, let's call it 90% invested. We think that the  gold position can do reasonably well in a choppy market environment. 

Obviously if stocks are choppy and or correct, that's not gonna feel so great. But  ultimately we think the kiss is. 

What markets, what the risk management systems that feed into KISS are likely  looking ahead to is where we started this conversation on slide 24, which is four  of the key six key macro cycles that influenced the momentum and dispersion  within and across asset classes are currently headwinds. 

Ultimately we think based on our fundamental research, which again is  summarized on slide six, based on our fundamental research, we think three of  those four which are currently headwinds, will eventually transition to tailwinds  and ultimately make Kiss right over a medium term time rise of perspective,  which again is three to 12 months. 

And our risk manager nomenclature, I think all bets are off when you get  beyond 12 months. Like I said, when we started this conversation, it's highly  likely that this bull market. Concludes or transitions to a secular bear market as  we've seen historically at following all these major technological revolutions  that you know, that feature CapEx bubbles. 

Erik: Darius, I can't thank you enough for a terrific interview. As we close, tell  us a little more, this slide deck that our listeners have seen a snippet of that's  actually more than 160 pages. You send this out to who this is for, what kind of  investor, who's your service for how do people find out more about it? 

Darius: Yeah, I wanted Eric thank you for this brief opportunity to embellish  what we do. I'm, one of the things I'm most proud of in my entire life is the  breadth and depth of our customer base. When we started 42 Macro, half a  decade ago, it was done, designed with the express intent that, I just, I don't we  don't believe that the gatekeeping exercise that is institutional insight and  institutional risk management process. 

That is either kept via prime brokerage gates, or, two and 20 or three and 30  accredited investor gates. We just don't think those gates are appropriate in a  kha society, of which, I come from the very bottom of that K-shaped society. So  we, we built 42 macro to break down those gates and supply an institutional  grade insights and more importantly, institutional grade risk management of  portfolios to every investor on the world. 

In the world, and we do so at price points that meet people where they are in  terms of what they can afford, as opposed to what we would prefer to charge,  what could, what we easily could charge if we wanted to, gate this thing up and 

turn it into a hedge fund. And we're very proud to say that many of the world's  top financial institutions across the asset manager, pension fund, insurance fund  spec cyber wealth fund space, or customers of ours in so much that, the your  barber could be a customer of our, your Uber driver could be a customer of  ours. And they very likely are we're very proud to say we work with some of the  best investors in the world, and we work with many of the ver more, most  novice investors in the world. 

They're all here benefiting from built. And I'm incredibly proud of that. As  someone who, like I said, comes from the very bottom of the bottom. I wanna  make sure that, we're lifting everybody up with these insights and these risk  management signals.  

Erik: We'll look forward to having you back on later in the year after. 

We see how the this choppy period that you're anticipating plays out Patrick  Ceresna and I will be back as Macro Voices continues right here at  macrovoices.com.

Erik: Joining me now is Mark Williams, who is a partner with Lane Neave.  Mark is not only an immigration consultant who processes investor visas, but  he's actually one of the architects of New Zealand's Active Investor plus Visa  program. So Mark, it's great to have you on the podcast. I wanna start at the  high level. 

We've heard a lot of news stories and so forth about famous people, Hollywood  movie stars flocking to New Zealand to get residency there. A lot of our  investors are familiar with Peter Thiel, a very high profile fund manager who  didn't just get a in an investor visa. He actually got citizenship in New Zealand  leads some people to wild-eyed conspiracy theory, speculation. Do these people  know something? Are they going there to survive World War iii? I don't think  that's what it's really about. So why don't we start with why are all of these  people flocking to New Zealand for investor visas? 

What is the appeal and what's driving the sudden rush of interest?  

Mark: Typically, this seems to be two trains of thought around looking at New  Zealand as an option. First train of thought is that a lot of family offices that we  deal with identify that it's probably good to have assets or funds outside of one  single jurisdiction. 

So it's seen as a way to diversify. Investment holdings into an alternative  jurisdiction where there's maybe potential jurisdictional risk. Basically, I guess  the old adage is just not having all your eggs in one basket as they say. And the  second common piece advice that our clients seem to be receiving from family  offices. 

Is that it's wise to have a Visa option banked in the event it becomes necessary  or desirable in the future to be able to utilize a visa like New Zealand at  relatively short notice without having to go through what can sometimes be a bit  of a lengthy process.  

Erik: Let's talk about how this process works, what it takes to qualify for it. 

There's two different ways to qualify different investment levels depending on  what you're investing in. Suppose that I want to get myself a New Zealand visa  and I think it's important to point out this is not just a, something that lasts for a  

year. If you. Go through this program after a couple of years, you get a New  Zealand permanent resident visa.

That's good for life, if I'm not mistaken. What does it take to do that? How do  you qualify? What's involved?  

Mark: Yeah, there's two subcategories under the Active Investor plus policy.  The first is what's called the balance category, and that's for investors who wish  to take a fairly soft entry into New Zealand's economy. 

It requires. An investment of 10 million in New Zealand dollars in the country  for a period of five years. That investment can be placed into fairly passive  investments such as New Zealand government bonds and the main applicant in  a family filing is required to spend 105 days physically in New Zealand during  that five year investment term. 

So that's the first general category balanced. The second category is the growth  category. That has by far been the most popular. Around 80% of filings have  been moved into that category. That requires investments that are of a higher  risk in nature. Things like venture capital, private equity, private credit, and  direct investments into New Zealand companies. 

That's a three year investment commitment, and the main applicant is only  required to spend 21 days in New Zealand during that three year term.  

Erik: Okay, so for a lot of our audience who thinks in US dollar terms, that  works out. If you convert those New Zealand dollars to US dollars, a choice of  either about 5.8 million US dollars equivalent in government bonds or some  other very low risk investment, or much more likely about 2.9 million US  dollars into some kind of either venture capital fund or something that invests in  growth in New Zealand's economy. 

After two years, if you spend I think it's 21 days of visiting New Zealand in  those two years, you end up with a permanent resident visa. That's good for life.  Is that just for the investor? Does it cover their family as well? If so, is it just the  spouse? Is it children? Who gets this thing?  

Mark: The growth category's a three year commitment, so it's 21 days over the  three years, so it works out to be on average, say a week, a year. 

But you can clock up all the days in one single visit if you wish. The policy  focuses on a main applicant who is required to make that time commitment.  Secondary applicants such as a person's partner and dependent children can also  be included in the application. They the secondary applicants are required to 

come in within the first 12 months of residency to activate their residency, and  then after that, they have no time obligation whatsoever. 

So as long as the main applicant. Spends those 21 days here, in that three year  term, they're able to then upgrade their residency visa to a permanent visa. And  you're quite right now that can include all the individuals who are included in  the application. And the permanent residency visa is indefinite, meaning there is  no ongoing investment commitment or any other commitment required. 

So in theory, if someone invests them for their funds for that three year period.  Subject to what they invest in. At the end of that period, there are no  immigration restrictions. So they could technically take all of the funds out of  New Zealand, never return and then 10, 20 years later decide to buy one way  ticket travel in here as permanent residency visa holders. 

So a lot of the people we are dealing with. Like securing the option because not  only does it right, create a setting or a visa for the entire life of the, individual  investor, but also children included in the application will have this permanent  re residency visa for their entire lives. So a lot of our clients are looking at long  term succession and like the fact that they can secure a permanent visa for their  children, even at a very. 

Early age that will be valid for their entire lives.  

Erik: So let's talk a little bit more about the 21 day visit and so forth. Basically,  if I want to get myself, my spouse, all my dependent children, the right to move  to New Zealand anytime they want to. So it's a call option if the world really  were to take a turn downhill if there was a risk of a global war or something.  New Zealand is one of the safest places on earth because of its physical  location. It also has a ratio of people to natural resources that's very low. So in  terms of competition for natural resources, if you really got to a Mad Max kind  of situation, it's a very good place to be. 

You can basically, for a. Little less than a 3 million US dollar investment over a  period of three years. You can earn that unlimited lifetime call option for you  and all your family members. And the only thing that the government asks of  you beyond that investment is to visit the country and kind of check the place  out. 

That can be a single visit of three weeks, or it could be several visits that, you  know cumulatively. Total up to 21 days. What's the rationale, what's the reason  for having that and how do people usually spend that time? 

Mark: Yeah. The rationale for having that a desirable setting around 21 days is  to make it manageable. 

Many people obviously have poor time at hand and it's just, it's New Zealand  kind of sneaks up on people. People would say 21 days is not too significant  time. They come in. What the data shows us in New Zealand and perhaps also a  reason why we issue a permanent residency visa at the end of the investment  term without, demonstrating any ongoing obligation or commitments is that the  money tends to stay here. 

It grows over time. It diversifies, and the more time that people come into the  country, the more integrated they get and the more the typically more funds  flow and they increase their commitment. Into the countries. So it's seen as  desirable from an external point of view where you can commit and obviously  move funds. 

But typically what we do see is we do see the money re remaining here and  people actually spending more time as they integrate in New Zealand society,  enjoy their time here and spend, have, an incentive to spend more time. I think  it's fair to say too that the, if you look at the categories, people tend to score  success in these categories in terms of the amount of capital that's be coming  into the New Zealand economy. What's missing from that is the extent of the  human capital or the value of that to New Zealand. So we're talking about  obviously some very sophisticated. 

Often very influential investors who not only invest their capital but integrate  into our society. They have offshore international connections, which New  Zealand can utilize. And we have quite a few people who are venture capital  investors who are making quite significant contributions to, early stage  companies down here just because of their experience and their capability. 

Erik: Mark, I want to congratulate you and the New Zealand government for  the design of this program. I've evaluated quite a few of the Golden Visa  programs around the world. I think this program is superior in many ways to  almost all the others that I've looked at. There is one wrinkle, though in the  design of this that I want to ask you about, which is a story I've heard a couple  of times now from immigration consultants who help people get these visas is  the investor applies for this thing. They make their investment. They're granted  the visa they now have to make their their 21 day visit. A lot of them will do  that in a single visit to knock it off, as you said. And frankly, from what I've  heard, many of them come with an attitude coming in of, okay, this is a burden.

I have to go and spend these 21 days. I don't really want to, it's a long ways  away. I'm gonna do it. About halfway through those 21 days, their immigration  consultant gets the phone call that says ok we can't believe this. We've  discovered this place called Queenstown. We just can't imagine any place being  more beautiful. 

We've got to have a home here, but the realtors must be confused 'cause they're  saying we can't buy one. Call 'em and tell 'em who we are. We've got these  active investor plus visas. Surely, even though we don't intend to become tax  residents, because we're really doing this for optionality now that we've seen  what a beautiful place this is, we wanna buy a home here. 

So we've got that home ready to go if we ever decide to move here, and we'll  just use it as a holiday home, spend a week or two a year here, they're not  allowed to buy it. That actually is the truth there. The realtor's not confused.  That's the law. Why in the world if the government is frankly trying to seduce  people into falling in love with New Zealand, by having this 21 day  requirement, why wouldn't they allow them to buy a home? 

Mark: Yeah it's a. I guess a long, complicated history in terms of New  Zealand's restrictions around buying residential property in 2018. Due to some  offshore speculative investment into the country into our residential property  market restrictions were put in place where individuals could only purchase a  residential home here if they had a residency visa, and they either were or had  intention to become tax resident here within 12 months. 

We, however, when the government was looking at mechanisms to increase  foreign direct investment in the country. They ask a simple question, what  mechanics are missing or what do we need to change to facilitate, increase  foreign direct investment and there were three inputs from the private sector on  that. 

The first one, what was the visa or the previous Visa was not up to spec to be  competitive international, in international stage. So that was the first thing that  was reviewed, changed, and this is the current policy we've got in contemplation  of that. The second part of it is that we advised that people, if you're wanting to  integrate people into New Zealand society, encourage them to spend more time  in New Zealand. 

Then they really should have the comfort of having their own home here. Two  rationales for that. One. If you've got a property in New Zealand, you're likely  to spend more time, so therefore the chance of integrating is higher. And also, 

of course, if you're investing in New Zealand, you want to be comfortable in  terms of your stay here rather than having to move around hotels. 

Second rationale around that was that if individuals have got property here,  they're likely to invite friends and those friends coming to New Zealand for the  first time may also fall in love with the country. And that may lead to a visa application made. So the current policy has been reviewed and that is about the  change as legislation being introduced in Q1 next year, which will basically  confirm that if individual holds one of these active investor visas they will be  permitted to purchase a single residential property in New Zealand or buy land  and build a home in New Zealand as long as the price is in excess of 5 million  New Zealand dollars. And they do not need to become a tax resident to do 

Erik: okay. So this podcast is going to air on New Year's weekend. So from a  planning standpoint, anybody who's starting now, if they're about to go through  the process of evaluating New Zealand working with you or another firm in  order to get that active investor plus Visa, by the time the Visa's been granted  and they're making their trip to New Zealand. 

The law will have been changed and they will have the option. At least that's  what's expected. If the law goes through that they will be able to buy one home,  but they're not allowed to buy a dozen homes and flip houses and do that kind of  thing. You don't want that sort of speculation. But to buy your own personal use  residence, that's going to be changed, it sounds  

Mark: yes. That's more or less a certainty so the coalition government have  reached a deal in terms of this legislation coming in. Those requirements have  been set. The legislation was supposed to be introduced into the house in  November. However, this is a very busy government. They're introducing a lot  of legislative changes at the moment. 

So it's been delayed. It's likely to come into force in, in Q1, so yes, if you've got  someone who's say starting on January, by the time they've moved through the  process. Completed the investment. Then we're expecting this policy to be in  place where they can then access New Zealand's property market. 

Conservatively what we are thinking is that the policy should be in place by one  April. However, it just depends on the legislative priorities. It's already, it's been  bumped back a little bit because of the priorities. However, discussions with.  Has recently indicate that this certainly is something that's going to be  introduced in Q1, and it's designed to actually accelerate.

And further incentivize further applications under the policy. When the  government made the announcement, they're making the changes and stipulated  what they were you, within a week of that notice, we onboarded quite a few  new applications from people who saw, the ability to purchase a home was a  trigger for them to actually commit and invest under the setting. 

The theory around. Having that property as a draw card has been proven already  and we've got multiple investors who are at various stages. Some of 'em already  have their residency visas. Some of them we're still preparing filings, but they  all have the intention to purchase a home here once the legislation is in place  and they're able to do  

Erik: and listeners stay tuned. Later in this podcast, I'll have another interview  where we'll go into the real estate aspects of moving to New Zealand in much  more detail. Mark, I wanna come back and stay focused on your specialty,  which is the visa itself. I want to talk about how. Long it takes to do this, and  frankly, I think you guys are doing a fantastic job because I've been through this  a couple of times myself with other golden Visa programs. 

Normally there's a lot of red taping, bureaucracy, and just a mountain, a  ridiculous mountain of KYC background checks. Private investigators have to  be hired. All kinds of things have to be involved in getting a golden visa in a lot  of countries. When I talked to another immigration consultant and they told me  they were turning these visas around, in some cases in three or four weeks, I  said, no, don't tell me the date when they first acknowledge the application.  When you actually get the visa and they said, no, we're actually getting Visas  issued in a matter of a few weeks. Is that really true? And how are you guys  managing to do this? Frankly, so much more efficiently than most of the other  countries that offer Golden Visa programs? 

Mark: When the policy was set through and worked with the government, one  thing we raised is that, if you're aiming to create the best investment visa  product available internationally, then you have to have a very swift process to  do that. So the government actually scaled up personnel internally before this  policy released on the 1st of April to achieve that, generally speaking. 

It takes around two to four weeks for the documentation to be prepared and we  typically file applications, which we term decision ready. So really there should  be a few questions, if any, coming back. When we were filing in April and May,  I can tell you we could file one of these applications from a a good jurisdiction  and we were getting approvals within as little as three to five working days from  submission.

That has pushed out a little bit due to the volume coming into the system. So it's  fair to say at the moment, from filing, I think people should expect preliminary  approval. Within one to two months. And assuming there's no other  complexities and then from there, individuals have six months to actually  transfer their funds to invest, to then secure that, that visa. 

So a lot of resources at the government side have been put in place. To actually  create what is hopefully a very efficient, fast process. And if you think about  that, it's logical because if you are wanting foreign direct investment to come  into the country, then the quicker you process those applications, the quicker  that money lands and goes to work. 

So the, yeah, the processing times at the moment, it pushed out a little bit  because of the demand Now that's come into the system. However, it's still  fairly fast in our view based on alternative jurisdictions.  

Erik: I predict that backlog is going to get even bigger because I think it is the  best program that exists anywhere worldwide, and it also happens to be a  country that's absolutely a beautiful, amazing place. 

So just to summarize all of that, if a listener of this podcast, here's this New  Year's weekend, says, wait a minute, $3 million US investment, actually less  than that. I put that to work for three years in a venture fund where I'm gonna  actually make a decent return, hopefully, and I end up with my entire family  having a lifetime call option to move to New Zealand if they want to. 

If they call you after listening to this podcast, they want to go with that  program, it sounds like by April 1st, when the law is expected to change around  purchasing real estate, they've probably got the visa in hand by that point. Is that  realistic timeframe?  

Mark: It's realistic if they move quickly. 

However, if we take a step back in terms of looking at the design of this policy.  The prior duration of this policy a few years ago brought in around a billion  New Zealand dollars into the economy per annum. And that was the aim was to  achieve that standard and that work, the math works out to be around 200  applications. 

Per annum. However, as of the end of November, eight months in, there's been  just over 450 applications already made. So it's well subscribed. If we continue 

to see that momentum, we do believe applications all tend to slow. That said,  we've had some very fast approvals through recently aswell. 

So I think the, this Visa product hasn't reached maturity in the market. And what  I mean by that is when you design investor visa products like this  internationally, it takes around two years for that to reach maturity, where it's  very well known. Internationally. So we think we see the demand is actually  increasing over time and will continue to increase over time. 

But we're hoping, the people that are applying Q1, they should. Expect quite  swift processing times, but that certainly does depend upon how many  applications are being made. We've got multiple applications under  management here, which we're preparing to file. We're onboarding weekly and  we just don't see that demand stopping. 

It's been extremely busy, pretty much from the 1st of April.  

Erik: Mark. One more point I want to cover is we've discussed the immigration  law requirement, which is a three year commitment to this program. Over that  time, you've gotta spend 21 days in the country. But if you're choosing the  growth option, it's probably gonna be something like an investment in a venture  capital fund. 

Now, most venture capital funds, as our investors already know, have a longer.  Commitment period than that. Is that true in these investments? And what do  people need to know in terms of, I suppose if they went for the larger  investment in government bonds, they would be done after three years. 

I'm guessing that although they may have met. The government requirement to  get the visa after three years, they probably still have a longer lockup than that if  they chose a venture capital fund. Is that right?  

Mark: Yes, that's right. So taking the growth category as an example, it's a  three year immigration related commitment, however. It depends. The actual  investment commitment depends on the instrument entered into. So if you're, if  people are looking at venture capital, obviously those legal investment  commitments will exceed that three year term. There are, however. Alternative  instruments within the growth category, which do offer liquidity, around year  three or four. 

Private credit, for example is one of them. But it is a common misconception  where people confuse the fact that what's just a three year commitment, that's it. 

But it does depend on what you are committing you are committing to. But like  I've said there, the growth category is designed to channel funds into various  investment options. 

We have people who are focusing just on venture. We have people have a  spread venture private equity. And then we've got, private credit and some other  development funds where infrastructure developments are being put into the  country, which have liquidity options. Most people look for liquidity at the end  of the investment term if they're not familiar with the country. 

That said. I've said previously very few people end up withdrawing once they've  got, confidence in the system. They've spent some time here. So the investment  class under the growth category is always under active review. It may well be,  by the time list is prepare and file applications. 

There may be other more diverse investment assets available under the system.  It's an ongoing piece of work around that. But definitely it is. Yeah. A common  misconception that people have is that it's three years in and out. It certainly  does depend on the investment instrument that you're entering. 

Erik: Well, mark, I can't thank you enough for a terrific interview, but before I  let you go, obviously some of our listeners may be interested in this program.  Your firm, Lane Neave is not only a, an advisor who helps people get these  visas, but you're one of the designers of the program. So needless to say, you're  highly expert on this. 

If someone is interested in pursuing this, how do they contact you?  

Mark: Yeah, certainly probably email is the best contact for us. But yeah, we  are, I'm an immigration partner, so I'm actually a I guess an attorney in New  Zealand, so a little bit different than licensed immigration advisors. And we're a  full service law firm in addition to the immigration aspects. We also handle  property transactions, commercial, corporate investments, the whole suite of  services typically required to manage one of these applications. Yeah, like I  said, email is probably the best. My email address is  

This email address is being protected from spambots. You need JavaScript enabled to view it.. Happy to hear from everybody, anybody who  wants to discuss this further. And we tend to set up teams or Zoom calls with  people to get 'em across the details to allow them to make fully informed  decisions before they move forward with with the process.  

Erik: And we'll put that email contact in the research roundup email, so  listeners, you'll be able to find it there.

Or if you don't have a research roundup email. Again, it's  

This email address is being protected from spambots. You need JavaScript enabled to view it. listeners, I was surprised in talking to Mark off  the air to learn that really the main reason that people are flocking to this visa,  there's quite a few of them. It's primarily about the interest in New Zealand. 

It's a beautiful place. It's a potentially, if the world took a turn in the wrong  direction, it would be a great place to move to with your family. They don't  seem to be pursuing this visa for the sake of the four year tax holiday that's  offered by New Zealand to new immigrant investors. I think the reason for that  

is nobody knows about it. 

We're going to break that story next In my interview with Graham Lawrence,  who is a tax advisor in New Zealand, will find out about that four year tax  holiday, which I don't think most people pursuing this visa are even aware of.  That's coming up next. 

Joining me now is Graham Lawrence, managing tax partner for New Zealand at  Acclime, which is a global tax advisory firm. 

Graham, it's great to have you on. Our listeners have heard about the active  investor plus Visa from Mark. A lot of people as Mark described, are really not  intending to move to New Zealand full-time. They're going to New Zealand or  they're making a visit to New Zealand for the purpose of obtaining what  eventually becomes a. 

Permanent resident visa that would allow them to come to New Zealand  anytime they want to. What, if any, tax implication is there just to getting the  visa? Is there a tax obligation if they don't move to New Zealand and they've got  the visa?  

Graham: Yeah. Thank you Eric. For putting, for inviting me onto the show. 

I guess to answer that question, if people are looking to apply for a Visa and not  move to New Zealand. The tax implication is essentially nothing. New Zealand  just taxes their investments that they make in New Zealand and they don't seek  to tax their worldwide income.  

Erik: Okay? So if they made an investment in order to qualify for the active  investor, plus they took $5 million, put it in a New Zealand fund.

The income that they make from that investment will be taxable in New  Zealand, but any of their other global income is not taxable in New Zealand. Is  that an accurate summary?  

Graham: Yeah, that's correct, Eric. And the tax rates are relatively low and in  some instances the tax can actually be a 0% tax rate. 

Erik: Okay, now I wanna move on for people that would consider moving to  New Zealand to something as far as I can tell, very few people know about,  which is New Zealand offers a four year tax holiday to what are called  transitional residents. What's a transitional resident who qualifies for this, and  what are the details of this four year tax holiday? 

Graham: Yeah, that's a good question, Eric. So a transitional tax resident  person is essentially someone who has not come to New Zealand and become a  New Zealand tax resident for the previous 10 years. And what the rule seeks to  do is exempt your worldwide assets in liabilities for a period of four years,  really just to enable you to come to New Zealand, settle in. 

And give you four years to reorganize your affairs so that you don't get  essentially a tax surprise.  

Erik: Okay? So that's the intention. But I'm gonna go out in a limb here and say  I think that there's a profound value for some global investors. Now, I don't  think this helps Americans or Japanese or. 

Eritrean very much. I'm not sure there's a whole lot of wealthy Eritrean to worry  about, but those are the three countries that are going to tax those investors  global assets or global income based on their citizenship, regardless of where  they live. So for those people, I don't think that this particular rule has any  profound advantage, but for Canadians or Western Europeans. 

If you are willing to move to New Zealand, physically, take up residents in New  Zealand, pick up and leave the country that, that you were born in. As I  understand this, for the first four years, you would have essentially the same  benefits as moving to a territorial tax jurisdiction where any income that you  make in New Zealand, you get a job there. 

Sure. You gotta pay income tax on that like everybody else. But all of your  global income from investments would be completely exempt from taxation for  the first four years. That seems to me like a really big deal, and I was expecting, 

when I spoke to Mark, I was expecting to say this is the reason everybody's  flocking to New Zealand. 

It's because of this tax holiday. Mark said, no, actually, that's very uncommon.  A lot of people don't even know about it. Most people are. Pursuing the active  investor plus Visa because they wanna have optionality to come to New  Zealand later, or because they want their kids to have that lifetime visa grant,  which, would hopefully benefit them, give them more flexibility of what they  might do in life. 

Is this an undiscovered gem here and am I understanding it correctly in terms of  its implications for people, let's say from Canada or Western Europe who could  move to New Zealand and essentially be, tax exempt on their global investment  income outside of New Zealand for the first four years? 

Graham: Yeah, let's, that's a great summary, Eric. Look, I'd love to say as a tax  guy, this is the reason why people are coming to New Zealand but it isn't, mark  is absolutely correct. People are coming to New Zealand because of the, you know, the friendly environment, the open spaces, the beautiful landscape. 

But then what they do understand is there is actually a significant tax advantage  to actually moving to New Zealand. And, the four years is a hidden gem. And  then post those four years, there's even more surprises. New Zealand does not  have. A broad based capital gains tax. 

It doesn't, tax shares, doesn't tax a lot of real estate. Obviously there's some  exclusions around that, but we have a very good tax system here in New  Zealand.  

Erik: Now this is something I was really fascinated to learn about because my  first thought being a skeptic and something of a cynic at heart was, okay, if  they're teasing you with this four year tax holiday, there must be a real Gotcha. 

Afterwards, in the fifth year they're gonna, they're gonna nail you with a really  heavy tax. Actually, the opposite is true, is, I understand that it's called FIF it's  not really a capital gains tax. It's not really a wealth tax. It's a hybrid between  the two. But the Effect of it, as I understand it, is you are fully taxed on the first  5% of gains on your global income. 

So if you're a, an aggressive investor and you have a great year and you make  40%, yeah, you're gonna pay a 39% tax on the first 5% of gains that you made 

in New Zealand. But. The next 35% of gains if you had a 40% year is, I  understand it is basically tax free. Am I in, am I interpreting that right?  

Graham: Yeah it's a really complex area, this FIF or foreign investment tax  regime. 

But if I would've taken an example, someone who's moved to New Zealand, you  post their four years and let's to say they've got some shares in Apple. So the  way the rule looks at it is on the 1st of April, you take the market value of those  shares. You just return 5% of that as taxable income. 

So you pay tax on that 5%. You don't pay tax on any gains, any dividends. And  so essentially, if you're making more than 5% on those Apple shares during the  year being capital gains or dividends those are all tax free. From a New Zealand  point of view.  

Erik: Now what happens if at the beginning of the year you take that 5% and  it's not a tax of 5%, it's you take 5% of the value of those Apple shares. 

That's the presumed return that they think you might make, and you would be  paying tax of whatever your marginal tax rate. The maximum is 39% on that.  That 5%. So it really works out to about 1.95% of the asset value of the Apple  shares is the maximum tax you're gonna pay. What happens if it's a down year  

and you lose 10% because Apple shares go down that year, do you still pay tax  on that 5%? 

Graham: Yeah, that's where it hurts Eric. We are talking about a paper tax  here, so in down years. Irrespective whatever the value those shares is on the 1st  of April. So if it's down 10% compared to the year before you're still paying tax.  

Erik: Okay, so it is effectively a form of wealth tax, but it's not on all of your  assets. 

It's on stocks and certain other qualifying assets. And if you know it sounds like  it's 5%, but if you multiply the 5% by the mo, maximum marginal tax rate of  39%, which you actually get is a 1.95%. Wealth tax on your overseas stock  shares. What about things like overseas real estate and other types of investment  that are not directly in financial markets? 

Graham: From a New Zealand point of view, we do not have a capital gains  tax across the board on real estate. So the first premise is that you won't be  taxed on gains point of view. A couple ways to explain when you do get taxed 

on them would be if you're in the business. So if you're in the business of  buying and selling real estate, you will get taxed on it. 

Or if it is residential real estate. If you are buying and selling within two year  period, at the moment, you will get taxed on that game. But outside of that, New  Zealand does not seek tax capital gains on real estate.  

Erik: Okay. So it really is, and I'm gonna make a prediction here. I think what's  going on is New Zealand is such a beautiful place that people are flocking to  New Zealand because it's, it's an amazing place to go and see the countryside. 

I don't think people know about this. I don't because I, when I lived in Hong  Kong full time, I met lots of Canadians, lots of Western Europeans both Hong  Kong and Singapore because their territorial tax jurisdictions, meaning that they  don't tax your offshore income. A lot of people were moving. To those countries  just because they were high net worth investors, most of their income WA was  essentially tax free. 

They only had to pay tax on the income that they had inside of Hong Kong,  which was typically minimal. I don't think that community of global high net  worth private investors knows that there's a deal in New Zealand. On, it's an  English speaking first world country where you can live in an absolutely  beautiful place and really not be taxed at all for the first four years. 

And after those first four years, it still sounds to me like it's one of the best tax  regimes anywhere in the world. Am I overstating that?  

Graham: Look, I don't think you are. We are, New Zealand is one of the few  countries without a broad-based capital gains tax for starters. We offer this four  year exemption that you've explained really well. 

I think to add to that when I travel and present on this matter, people are  surprised that, we don't have a wealth tax, we don't have an inheritance tax, we  don't have a payroll tax, we don't have a social security tax, and on top of all of  that, New Zealand has a vast network of what we call double tax agreements  with other countries. 

From a, an exit point of view. A lot of the high net worth people that we look  after, they're looking at, when they come to New Zealand, that's great, but these  people are really smart and they wanna understand if they exit, what does it  mean also? So these double tax agreements allow us to plan really easily in 

terms of if they do potentially exit, how do we exit and how do we minimize  any implications on that side? 

Erik: And that would be particularly relevant. As I said before, the real benefit  of the four year tax holiday is mostly for people who are not American or  Japanese, but for people who are American or Japanese, you don't want to have  to pay tax in two countries. So you've got the agreements with both of those  countries that you're not gonna get double taxed if you're paying US taxes and  New Zealand taxes there, there's gonna be a deduction on one side or the other,  so you don't get taxed twice.  

Graham: Yeah, that's right Eric. And we look after a lot of American Japanese  clients and what I would say is you bang on those agreements, allow those  investors to be taxed relatively low rates and rates that allow a full tax credit  back in their home country. So there is no double taxation so long as you look at  what you're investing in properly and apply the appropriate rates.  

Erik: Now, I heard a rumor that the government has looked at this and has  realized that the four year tax holiday is such a good deal, that there are some  people that have come for four years and left just. Before the end of the fourth  year, there's a rumor that the government may be revisiting the rules, trying to  figure out how they could encourage those people to stay permanently, maybe  making the deal even better than it is now. 

Any truth to that or do you know any more about that?  

Graham: There is some truth to that and we've been working with the  government on those rules. So those rules are currently contained in a tax bill,  and that will be passed. At this stage in probably March 26, there's still a bit of  discussion going on. 

We've, we've gone one step forward and a couple steps back, if that makes  sense. So we've made a positive step forward on the rules but there's still some  work to be done. Around those rules. But really what they're looking to do is,  instead of the 5% tax that we talked about earlier in this interview, they're  looking to bring in a realized taxation. 

And the question is, does that realized taxation provide a better result, for the  individual as compared to the 5% taxation under the foreign investment fund  rules. So this is a little bit of wait and see, but we are making positive steps. 

Erik: Is there any consideration for making it a 5% cap so that you would have  a 5% maximum? 

But if it's more than that, you don't get taxed on it,  

Graham: so that cap will still stay. So the old rules will still stay. It will just be  more a realized basis. We have suggested a cap. At this stage there is no cap.  And I guess to give the example. In comparison, I talked about the Apple  shares. 

So under the proposals, as they are right now, you would essentially be taking  an individual who's moved to New Zealand. They've done their four years, so  we're now a full New Zealand tax resident. So at the end of those four years. A  value on the Apple shares would be made, which would just be on the date, and  then if that individual sold those Apple shares, the difference between the  opening and closing value would be taxed at the New Zealand marginal tax rate. 

But only 70% of that gain is actually taxed. I guess in a roundabout way, the tax  rate on the gain is about 27%, which is, still relatively high. But you need to  take into account that the valuation of it is the date that the individual finishes  their four year tax holiday, and when they sell the gains. 

So the cost base could actually be quite, low in comparison to what the  individual bought the Apple shares at some time ago. 

Erik: Let's imagine that international high net worth private investor from  Europe, from Canada, someplace other than Japan and the United States where  they don't have to deal with citizenship based taxation, they move to New  Zealand. 

What about the part of, you're still taxable obviously on your income in New  Zealand? What about other taxes? Terms of real estate taxes social security  taxes, Medicare taxes Etc. What is the tax regime like if you were considering  moving to New Zealand to live there and be a private investor there? 

Graham: Pretty simple, Eric. We don't have, any of the payroll, social security.  We don't have any real estate, capital gains tax. We do have, real estate taxes in  terms of local councils. From a, I guess an insurance point of view you are to  what we call a CC and that will come out of your wages, essentially. 

Or if you're a contractor you make the payment yourself to the government. And  that is to co that covers you for, personal. And also business injury outside of 

that really we just have a form of sales tax called GST guess it's just really a  simple system, Eric.  

Erik: It certainly I think is a fantastic opportunity for people who can live  anywhere, who derive most of their income from investments and are not  burdened by being Japanese or American and having the the citizenship based  taxation. It's one of the most beautiful countries in the world. Fantastic place to  be, and at least for the first four years, all of your offshore income from capital  gains, from interest, from dividends, whatever is completely tax free. I don't  think most people know about that. You heard it first here on Macrovoices. 

Folks. Graham, I can't thank you enough for a terrific interview, but before I let  you go. Please tell our listeners how they could contact your firm if they're  interested in learning more about the tax implications of either just getting the  AIP visa or investing in New Zealand or moving to New Zealand and being a  private investor based in New Zealand. 

Graham: Yeah, thank you Eric. It's been a pleasure to be on your show and in a  hope I'll being able to distill some of the matters around taxation. Look, we've  been doing this for about 25 years. We've got a team of people that help  investors from all around the world move to New Zealand. 

If people do want to get in contact for a discussion, please go to  Newzealand.acclime.com, and my details will be on there. Or alternatively I'm  on LinkedIn under Graham Lawrence. I'd be really happy to help you, think  about. What this means in terms of New Zealand. 

And once again, Eric, thanks for being on your show.  

Erik: You're very welcome, Graham, and we tremendously appreciate your  perspective. Listeners, stay tuned. We've got one more interview coming up  with Brendan Goodwin, who is a realtor slash lawyer slash jack of all trades and  concierge to high net worth in individuals migrating to or considering migrating  to New Zealand. That's coming up next. 

Erik: Joining me now is Brendan Goodwin. Brendan, your background and  career history is a little bit confusing. Why don't you walk us through it?  

Brendan: Eric, thanks for having me on the show. Yeah, so I'm a Auckland  born and bred, and I actually started my career as a lawyer, which is a little bit  unusual. I practiced property law with DLA Piper in New Zealand, Australia,  and Auckland.

So I spent a lot of time on the legal instruction side of commercial real estate  transactions before I ever actually sold a house. About a decade ago, I moved  into the family business at Auckland, which is good ones. A multigenerational  real estate firm, but over time I've specialized more and more in high-end  property and I'm looking after international clients. 

Who are trying to make New Zealand home either part-time or full-time. So  that's ultimately led to what I focus on now, which is dedicated offering for high  networth clients under my new brand called Unique, which has felt a little  differently. UNIQ  

Erik: I certainly can attest personally that you approach real estate quite a bit  differently than most realtors I've encountered. 

In the interest of full disclosure, I do wanna let our listeners know that I do have  a business relationship with Brendan when I was looking to set a second home  in Auckland. I I ended up meeting Brandon. He told me basically what I was  looking for didn't exist in the market, but he thought it would in about six  months, he went out of his way to basically. 

Call in a favor with a developer he knew. He showed me a penthouse that was, I  think it's probably the most elaborate penthouse in Auckland, if not the entire  country. A little bit overkill for what I was looking for, but he set up a short  term lease on that property for me, even though it wasn't listed for for rent, it  was only for sale as a holdover until I could find the property I was actually  interested in. 

Turned out I never got to stay in that amazing penthouse because he was able to  accelerate the availability of the property that was a fit. So I definitely, my, my  hat's off to you, Brendan, for making that all come together. I never got to stay  in the cool penthouse. But other than that, it worked out fine. 

Brendan: Yeah. Yeah. And it's still available for sale, just quietly. But yeah,  anyway, yeah, it was a good experience.  

Erik: So I want to get into what really is going on in terms of this people  flocking to New Zealand. To my surprise, I thought it was gonna be about this  tax holiday thing and people being interested. 

For that reason, Mark Williams told us in the first interview, no, that's really not  it. Almost nobody that he encounters is coming for that reason, most people are  coming because, it's a beautiful. Full countryside, English speaking, first world, 

country and so forth, and they're setting up a backup plan, having a place for  them and their families to have a lifetime call option on residency, which is  fairly easy to obtain with this new active investor plus Visa. 

You have the benefit though, of talking to people, not when they're considering  this, but after they've already done it and they've come to New Zealand and you  find out what their reactions are, tell us a little bit about who's doing this and  also with respect to what they're doing, give us the rundown for people who  don't know the country well, north Island, south Island what's it all about? 

For people who are considering real estate, what are their options?  

Brendan: Geez, Eric, that's a good question. How long do we have? I guess I've  been lucky enough to travel a little bit globally and New Zealand really is a  stunning. Even by global standards. So essentially we are three small islands  located in the Pacific Ocean. 

We are never far away from the water and obviously a lot of stunning coastline.  So recreational boating, scuba diving and fishing are all world class. But we  have snow cap mountains with amazing hiking trails or lakes. Rivers for  freshwater fishing. So there really is something for everyone who loves the  outdoors. 

And the convenient part for me, when you think about, big larger countries like  the US we've got a, a huge continent. You can pretty much drive the length of  New Zealand and under about 30 hours. You can drive from Auckland three  hours depending on the season and be either skiing or snowboarding or deep  game fishing up north. 

So I think that's a pretty unique feature and Stunning part of the country. But  ultimately I think there's, New Zealand does have a few layers. 'cause I think  probably a lot of people globally just think of the natural beauty. But actually,  we do have true city living in, in Auckland that, that's our commercial hub to a  lesser extent, Wellington and Christchurch. 

But in, in Auckland, you have a very international walkable lifestyle. You've  got city and harbor apartments, you've got character inner city homes. So I think  that's something that could appeal to a lot of your listeners. And then you've got  the lifestyle destinations. People might have heard of places like Queenstown,  Wanika, parts of the Bay Islands, Waihiki Islands.

That's where you see the classic postcard, scenery, lakefront Vineyards, big  Land holdings, coastal estates. You raise an interesting question. So in terms of  is it restricted, to purchase those types of properties for overseas people? The  short answer is no. So New Zealand has a concept called sensitive land, which  simply means some types of property, like larger rural blocks, coastal land, or  islands like Wahiki, which is a 45 minute ferry from downtown Auckland, need  extra consent if you're an overseas person. But that doesn't mean they're off  limits, you can still buy them. There just is an overseas investment office  consent process, which you'll hear people referred to as OIO Consent. But most  high-end urban homes and places like Central Auckland aren't classified as  sensitive at all. So many buyers proceed without any additional approvals. 

If someone is looking at coastal estate a vineyard, a lifestyle block for example  or anything on Waihi the OI consent is required and we help clients navigate  that from day one. So the takeaway really in that sense is simply awareness, not  alarm. The rules aren't a barrier, they're just part of the buying premium off an  iconic New Zealand property.  

Erik: Brandon, as someone who's very well traveled, I can certainly attest that  New Zealand is the only place I've ever been that really outdoes Hawaii in terms  of natural beauty. 

It really is a strikingly beautiful place for people who are interested in that kind  of real estate. There's lots and lots of it. Personally, I happen to be more of a city  dweller myself, so I can't speak from personal experience to to living in that part  of New Zealand or wanting to. And, despite the fact that Mark said that's  probably what most people are are looking for. 

I'd like to talk a little bit more about this idea of mine, which. I don't think the  offshore world knows about this tax deal yet. The combination of the four year  blanket tax holiday where there's no tax, whatever on your offshore income, and  then after that, it's capped at 5% of your gains under these FIF rules. 

Now it doesn't help Americans or Japanese very much, but for everybody else.  All the people I met in Hong Kong, the guys that were either high high-end  private investors or running hedge funds and so forth, they moved to Hong  Kong and Singapore because of the territorial tax doctrine, not having to pay tax  on. 

Offshore sourced income. There's a huge community there, and I think frankly,  that's the reason it costs 50 million US to buy a decent apartment in Singapore is  because so much wealth has moved in because of Singapore's golden Visa 

program. I think. Frankly, the New Zealand's program is pretty darn close to as  good as Singapore's, and it's an English speaking first world country that's more  beautiful than Hawaii. 

It's an amazing deal, and from the sense I get from Mark, either I'm the only  person who thinks that or a lot of other people haven't figured it out yet. Out yet.  So what's your take? You talk to people after they've come to New Zealand,  after they're down this process. Is that part of this or is it just unknown so far? 

Brendan: Yeah, from my experience it's unknown. And I guess one of the  challenges that we have for those, involved with the AIP Pathway program is to  really get it out there into forums like this with people like you who are able to  understand how much of a good opportunity this is, not just in relation to tax but  lifestyle. 

As you say. We, we've got a beautiful, generally a pretty beautiful climate and  it's a really big opportunity, which when I think it gets out there, will potentially  cause some issues with the amount of stock. And that is in the market to meet  the demand. So I think it's a really interesting time at the very beginning of the  program. 

Erik: The other thing that occurs to me is Australia, a couple of years ago,  canned their significant investor visa program, which was Australia's golden  visa. In terms of English speaking first world countries, where else can you go  besides New Zealand to get a a golden visa that allows a path to permanent  residency the way that you can get in New Zealand? 

I'm not sure if there is any.  

Brendan: Yeah, Australia closing what they called their SIV has definitely  made New Zealand more interesting in the English speaking world. Particularly  for people who like the idea of this part of the world and wanna safe. Rule of  law of jurisdiction. I from what I hear from clients, which I guess is where  you're asking me on the coalface, very few people will say, Hey, I'm moving to  New Zealand solely for tax. 

Normally it starts with lifestyle, sort of safety. Education for children is a big  one. Political stability, quality of life, and then the tax and the investment  framework reinforces the move. Once they learn more about what is globally a  pretty good. Financial framework as you've identified yourself, and I think for  the European and Asian investors, once their tax advisors explain those 

transitional rules and how New Zealand treats offshore investment income, it  becomes a much more compelling package. 

And I guess, you touch upon the Americans in the Japanese as your market  discussed, that picture is different, but they're still very active because the value  of the lifestyle and that diversification. That has value. So I would say Mark is  right, that sort of people don't lead with the tax conversation. 

It absolutely features in the decision making for a lot of families once they dig  deeper.  

Erik: I'm going to posit a hypothesis that New Zealand has a serious marketing  problem because I don't think that the community of high net worth global  investors who have based themselves in Singapore and Hong Kong, and much  less so Hong Kong now because of the PRC complications. 

I don't think they know about this because if they did, I don't know why you  would be paying 50 million US for a small apartment in Singapore when there's  a better deal here. And I suppose the counter argument to that is Hong Kong and  Singapore are both major financial centers. So there's a lot of people who came  from banking. 

In those financial centers and are staying in the town that they know. But  frankly, I met a lot of people in Hong Kong Europeans, Canadians people who  were able to relocate and escape from their home country's tax regime to a much  more favorable tax regime with territorial tax jurisdiction. 

And I think maybe because New Zealand is not technically a territorial tax  jurisdiction it doesn't get considered. I didn't. Know about it. I was curious as to  why Peter Thiel and other people were relocating to New Zealand. I had  absolutely no idea that I would ever consider it myself until I got curious about  this. 

For the sake of this, we needed something to fill the year end special on  Macrovoices. This year we did nuclear energy last year. I was looking for  something to do when I found out about the difference in quality of life and.  Cost of living. The penthouse that you showed me at 51 Albert Street in  Auckland is ridiculously expensive by New Zealand standards, but it's dirt  cheap by Hong Kong or Singapore standards. 

The thing that I think you've got a problem with though, if I imagine that  community coming to Auckland is. I think a lot of those people like myself are 

city dwellers. They're people who are used to living in a big city with walking  distance to lots of really good restaurants and so forth. I'm actually very  impressed with the restaurants in Auckland based on the size of the city, but. 

In terms of housing you showed me one very impressive penthouse. How many  more of those do you have? Because if this was Hong Kong and I said, look, I  wanna see at least, 30th floor or higher luxury condo and, priced it, say 3  million US or higher. They would say it's gonna take six months to look at all  those properties. 

I think you could look at all of the properties like that in Auckland in about six  minutes or maybe six hours. How much inventory is there? Could you support a  community of let's say, metropolitan, the high net worth investors? Because  frankly, I think that once this story breaks, maybe this podcast will be the  catalyst. 

I think that if people discover the tax deal, you're gonna see an influx of the  same people that moved to Hong Kong for that reason.  

Brendan: Yeah and I agree with you. I think that once the offshore world really  understands the combination of the AIP pathway, the transitional tax rules and  general quality of life proposition, New Zealand should be on a lot more  shortlist than it is, for city dwellers. 

Sorry. Like yourself, people are used to Hong Kong and Singapore and London.  Auckland is interesting because it gives you, a reasonable sized city. We're not  huge, but it has lovely food, good restaurants, as you have attest to, the public  transport connectivity is improving in the city, and it's only 20 or 30 minutes  from beaches and vineyards. 

It's not trying to be Hong Kong. It's a different scale, but that's exactly the point  at the end of the day. So I guess on the inventory piece I am a little bit nervous  around, hopefully people do engage with us around moving to New Zealand  through this pathway and I think there's gonna be a real shortage because as you  said, right now, there's one full floor luxury apartment on the market and it's  sitting around 8 million USD.  

And behind that. There's, part floors or there's apartments being built on the city  fringe. But I think there's gonna be, I'm hoping a shortage of stock because this  is gonna be such a popular program, which will be a good problem to have. But  I think that marketing piece in getting it out so they understand the opportunity 

in New Zealand, not just from, the tax implications and the financial structure,  but the quality of life. 

I think this, there should be a really. Sound based to, to launch this program or  encourage it to keep growing.  

Erik: I suppose something else that I don't know is my own personal preference  as a city dweller. I'm not sure the other people who are in Hong Kong and  Singapore for those reasons, share that value. 

They might prefer to be in, an oceanfront home someplace. There are a few of  those in Secco and in Hong Kong, but it's it's quite expensive on that side of the  island. What about the not way down in Queenstown and snowboarding  country, but around Auckland? Is there plenty of housing, high end housing? 

If you did have an influx of high net worth migrants, is there enough inventory  to support that outside of the city?  

Brendan: Look, I think a lot of the high-end real estate in New Zealand and in  and around Auckland particularly, it's around those networks and having  someone plugged into to unveil those off market opportunities. 

Short answer, there's probably gonna be a struggle of in inventory, but there's  increasingly developments that are people, the listers might have heard of the  golf enthusiast. There's a couple of becoming now pretty world famous golf  courses called Tara Iti and Te Arai You know, there's more and more  development. 

There's helicopter rise from Auckland. Direct almost to those golf courses  where there's international standards and there's an ever-growing presence of  those type of properties. But I think, the window for people to be able to  purchase those type of properties is definitely closing. 

And for our Australian friends or Singaporean friends, or even the expats, Kiwis  that might be listening, this change is coming legally where people under this  program will be able to purchase one residential property. At a minimum of $5  million, and I think we've already touched on it, that window is closing and the  reality of what's happening in the market, I can tell you for certain, there are  already real estate transactions that are happening that are subject only to the  change of the rule where one of these people down the pathway can buy a  property over 5 million.

For those that are considering, that's changed in the new year when this airs, the  sooner people can reach out. The better because I think the stock is gonna  become a problem. There is not enough properties to service a potential surge.  So I think the best way to either grab that opportunity is to reach out as soon as  possible because I think there's gonna be fewer and fewer good quality  properties to purchase. 

Erik: That's an interesting point 'cause when I heard Mark's interview I was  thinking, boy, come April 1st when they pass this new law, you better move  quick if you want to get property in New Zealand. 'cause it'll get, I should say, if  you want to get city property, it seems like there's plenty of countryside in New  Zealand and I don't think you're gonna run out of that. 

I do think you're gonna have an inventory problem in downtown Auckland. So  you are saying it's not a question of hurry up as soon as you get to April 1st,  you're saying? Put an offer on a property that's contingent on that law passing  and lock it up in a contract before the law changes. Is that, did I get that right? 

Brendan: That, that's what I'm saying. So it's December, 2025 for those  listening and those contracts are already happening subject to the law changing.  So for anyone who's considering it or thinking about it, when you think about an  investment of, I think just under 3 million USD to get into the program, and  then you're looking at properties, which as you say globally. 

Really dirt cheap. When you think about the US dollar currency and those other  global currencies, I think there's a real good chance that people are gonna miss  out if they don't act really quickly.  

Erik: Brandon, I am still convinced that there is just an untold or unbroken  story here, and I hope that this podcast will break it, which is for that global  investor community, and especially if you trade US markets and you're living in  Hong Kong or Singapore, I've been there before. 

Trying to get up at three o'clock in the morning to catch that last hour of trading  in New York. That all happens late morning in Auckland. So the time zone is  way better for trading US markets if you're a trader and it's a way better quality  of life. The real estate is dirt. It's not dirt cheap. 

Compared to other places, but compared to Hong Kong and Singapore, it's dirt  cheap. I really think that this tax deal for non-Japanese and Americans is gonna  bring all of the Canadians and Europeans that I met in Hong Kong, many of  which have already moved to Singapore flooding in. And frankly, I'm fascinated 

by the idea of a market to create, I'm thinking of a residential tower that is  designed to accommodate that community in Auckland and frankly, if the influx  of high net worth investors because of the tax reason, which is, nobody seems to  be doing that yet. I think it's 'cause nobody knows about it. 

If that influx happens, dude, I'll partner with you to build that building.  

Brendan: Look and I think what you're describing is very plausible, right? The  same type of people who moved to Hong Kong 20 years ago because it was a  well run territorial tax jurisdiction, and who now want this plan B, that's  geographically boring in the best possible way, we'll eventually look at New  Zealand very seriously. 

And to touch on what you mentioned before, if the government keeps the  settings sensible. Particularly around FIF in the absence of a broad capital gains  tax, then yes, I can see a future that is defined where a global community of  investors who base themselves and then around Auckland live very well, and  they run their offshore affairs from here. 

You, you raise a funny point around time zone because I think for active  investors and traders, that time zone is actually a quiet superpower. You can  trade US markets from here and still be functional human being the next day  you are not annihilating your sleep to watch the market open. And then when  you wake up, you're in objectively a pretty easy place to live. 

So it's a nice combination. That tower concept is something that is really  something edit, that, that tail concept you mentioned is exactly where I see this  going. If the material the demand materializes, it's about. Something that was be  built to specific design requirements, a bespoke offering for people that have,  full double floor residences, lock up and leave Security concierge services  designed for frequent international travel. 

Connectivity to the rest of those amazing places that we've talked about, the golf  courses and the ski resorts and, who knows, maybe a pretty cool helicopter  hanger on the roof for those that are inclined to that sort of travel. But yeah, if  we get a dozen like-minded financially qualified people aligned with that sort of  vision, then I think we could definitely get a building marketed to a very  defined audience. 

And that's the sort of projects that I think Auckland. Has the opportunity to, to  harness and create and like you say, create a hub of people of like-minded  opportunities. 

Erik: I've lived in a building like you're describing before, where it wasn't just  the penthouse, but every floor was a full floor apartment. 

And it, it really created a community of, people of similar high net worth who,  who worked well together. And the helicopter idea is amazing because the  traffic from the Auckland International Airport is not exactly ideal. That's a five  or 10 minute helicopter ride with helitrans. 

But the thing is, the heli trans heliport is a good 15 minutes outside of the CBD  if you had the helipad on the roof, so the concierge in the building could just get  ahold of Heli Trans and say. Pick my resident up in 15 minutes and take him to  

the airport. That would be at a pretty amazing lifestyle, and the cost of that  building compared to Singapore or Hong Kong would be nothing compared to  those other markets. 

I think it's a really fascinating idea. I don't know, maybe it's just me, but I don't  think anybody knows about this yet because there's a lot of people that go in  Singapore and Hong Kong used to have a a golden visa program called CIES  that was decommissioned years ago. And frankly, with. 

The PRC kind of taking over Hong Kong. I don't think anybody really wants to  go there anymore. But Singapore's program which is called GIP, is still  extremely busy. That's I think a $25 million golden visa if you invest in a fund  as opposed to 5 million in New Zealand. 

And then the cost of real estate here is so much less. I think probably the reason  it's not on anybody's radar is technically speaking, it's not a territorial tax  jurisdiction, but when you consider that there's basically no broad based gains  tax, so what you're paying. 

Taxon is your global interest in dividend income. That's not that big of a deal  for most investors, and it certainly is possible to structure your investments to  optimize around that. So I'll be very fascinated to see what kind of reaction we  get to this podcast. I think there, there's a real potential for a significant influx of  of high net worth international investors who would come here for the same  reason as you said that they went to Hong Kong 20 years ago. 

Brendan: Yeah. And my role in all of this is essentially to make it easier for  people who are thinking seriously about New Zealand to help them understand  their options on the ground, from where to live, what to buy, and who to speak  to, introduce 'em to the right people in relation to tax advice and lawyers, and  how to buy a boat.

And, I shared with you a contact to, to buy a car because I think a big part of  any transition to a new country is about. Dealing with trusted people and let's be  honest, not a lot of people have a lot of time these days, and when you're based  offshore, before you move, having someone locally to help navigate that and  save you time is an essential part of making that journey. More palable or even  enjoyable, which is I think we, you've got to over the last few weeks. So I think  that's an important part of that connectivity, that trust network, having someone  plugged into those off market opportunities. So I'm on your page. I'm excited  about this. I think there's a lot of opportunity, not just for Auckland and the  country, but also for people that are listening to the podcast that are thinking,  Hey, where do I go next? 

Or What are the other opportunities to have a nice quality of life for my family  when, let's be honest, globally. Things are a little bit shaky. The good thing  about New Zealand is we're so far away, and that's probably the first time that  people have seen that in such a positive light. And with air travel the way it is  now, we're a lot closer to the rest of the world. 

I'm helping people at the moment from the US and they're getting here in less  than half a day. So I think that whole piece for people around thinking that we're  so isolated, actually we're not as isolated as you might think. And I think once  people get here and they experience that lifestyle and that community, as you  say, I think it will be high on, or it should be high on a lot of people's wishlists  of where to base themselves.  

Erik: That's an important point that you just made, and I guess most of our  listeners probably already know this, but for anyone who doesn't, the face of  long haul international air travel has changed radically in the last 10 or 15 years  as a result of lay flat seats in first class or in business class. 

Make no mistake traveling to New Zealand from anywhere in economy class  sucks. It's just not a fun experience. But I've gotten to the point, Brendan, where  I actually much prefer a 12 or 13 hour flight over an eight hour flight because  on an eight hour flight you don't really get to sleep. And I should actually  correct that statement. 

I prefer a 13 hour flight with prescription sleeping pills over shorter flights. And  the reason is with lay flat seats, you just sleep through the whole thing. I'm  awake for the first hour on my laptop, checking email. I'm awake for the last  hour and a half, two hours to make sure I'm ready to put my sleep back and tray  table forward so I don't get yelled at for landing.

Everything that happens for those, 12 hours in between I'm zonked out on on  Ambien. It is so much better than it was 15 years ago. So I really am sold on  this and like I said, I had no idea until I started researching this podcast episode  that I would actually end up with a second home in New Zealand. 

And I'm actually recording this episode from Auckland New Zealand in real  estate that Brendan helped put me in. So it's it's been a real discovery for me and  I'm gonna be fascinated to see what kind of reaction we get because, maybe the.  People in Hong Kong and Singapore feel like they would only want to be in a  place that is a major banking center. 

Although, frankly, if you're running the kind of fund that most of the guys that I  knew in Hong Kong were running I, I think it's much nicer here.  

Brendan: You have been a really interesting test case or I guess scenario of  people that were probably less than super positive or motivated about the move.  People make different moves for different reasons and I've had clients that have  come to New Zealand from all around the world for various motivations, but I  think once people get here, they really do enjoy the environment and the  lifestyle and the way things move relatively easily through we're not a perfect  country by any means, but I think globally, again, what we've thought is  something that people should look really strongly at and all those reasons you've  highlighted for those high net worth individuals. 

Again, the 21 day scenario of people coming through the country, we can help  put together a curated. 21 day tour to give people a feel for all those parts of  New Zealand that they might be interested in, in, in exploring, before deciding,  Hey, look, yeah we would like to make New Zealand a second home or a  primary place and we would like to buy a property. 

And one of the other things that I do, which in New Zealand is not.  Commonplace is I'm a buyer's agent, so I represent the interest of those people  coming in to the country. And that right now I'm acting for various nationalities.  Back to your point earlier in the conversation, I'm helping someone from China,  I'm helping someone from Switzerland, I'm helping someone that's just coming  back from Ireland. 

I'm helping someone that's from the us. So I think more and more having people  and networks that you can plug into quickly. Will make that experience so much  easier. So yeah, I'm really excited about the opportunity for New Zealand and I  think we should be sitting in a very different space talking about this maybe in  12 months time and looking at what impact, hopefully Macrovoices has had on 

this program, which I think is a really exciting, smart, and essentially well  played out program, like you say, so long as they keep it sensible and don't  make huge changes to the taxation piece, then we should be good to go. 

Erik: That was something that I was concerned about from Graham's interview  is even though the tax holiday doesn't really do much for Americans and  Japanese, although it's extremely valuable to everybody else, the FIF rules  around capping capital gains tax at 5% is important to me long term for sure. 

If they were to. Undo that and turn it into a realized capital gains tax, which  sounded like maybe is under consideration that would completely sabotage the  whole thing that would guarantee that everybody moves out after the first four  years. What have you heard about that? Are they actually dumb enough to think  about doing something like that? 

'cause frankly, I was a little bit disappointed in the government. We reached out  to them several times to offer them the first interview on this episode, and we  couldn't get a reaction out of them. I think that they're not really that good at  marketing.  

Brendan: And I've had heard that from various people coming in that are high  net worth, that similar to yourselves, they just didn't realize the opportunity that  was here. 

So I think that's one of the areas that the government can improve. And I know  that there's a lot of people putting in a lot of time and effort, but ultimately, if  people don't hear the story as clearly as what we are talking about with Graham  and Mark, I think that there's gonna be really. A lot of trouble punching through  the noise that's potentially out there with a lot of these countries trying to attract  the high net worth. 

You touched on the American and Japanese clients, and even though that tax  holiday isn't as transformative for them, as I said, there's still strong interest.  They're looking for political stability, English speaking jurisdiction, a safe base  for family access to good education. So I think New Zealand is often about  diversification and quality of life rather than headline tax. 

Implications, but as you've said, they're actually globally very good. They may  not be the, essentially the best, but those other jurisdictions come with lifestyle  differences or you don't get to drive 30 minutes to the beach, into the pristine  water you do in New Zealand. So I think they may keep their primarily fi, 

financial institutions in the US or Japan but they want a well, structured  foothold. 

That they can genuinely call home and have a happy time. So I think that's how.  That's how ace up the sleeve for sure. Down in New Zealand.  

Erik: As you were talking a minute ago, I realized I should have asked you  earlier, let's imagine the high net worth investor who is contemplating, maybe  they're motivated by the tax holiday, maybe they're just motivated by the fact  that it is an amazingly beautiful place, and they come to you and they're saying,  okay, Brendan, I don't know anything about New Zealand other than I've heard  it's a beautiful place. 

I don't share Eric's. City dweller obsession with having to live in walking  distance to lots of restaurants. I wanna see the smorgasbord. Can you  recommend, since I've, I'm gonna do this 21 day thing, I'm gonna get my AIP  visa I've gotta do 21 days visit of New Zealand and I wanna optimize that to see  as much of the country as I can to get a sense of if I was ever to move here,  where I would move to. 

So I wanna do the tour of the country for the purpose of seeing all the different  lifestyle options from. Golf courses in the Bay of Islands all the way down to  ski and snowboard retreats in Queenstown. What's the itinerary? What would  you recommend for someone if they just wanted to see the whole thing? 

Brendan: Yeah, look, so what I do essentially is act as a single point of contact  for those high net worth families who wanna explore New Zealand seriously. So  luckily we are past that post COVID. Era where or during COVID era where  you just had to buy from overseas. But now we have the benefit of, yeah, that  practically looking around for 21 days. 

So what I help people do is essentially tailor a tour. I might not be the person  driving the bus or driving the plane, but we try and work together with the, with  essentially at that point, are a guest, what are they interested in, what do they  like to see? What things, so it's not a, it's not a cookie cutter. 

Type operation that we run for our business. But it's about understanding do  they like golf? Do they like fishing? 

And try and tailor a package, which let's be honest, sells New Zealand in its best  possible light for that particular person. And then moving forward from that, it's 

that sort of trusted, safe pair of hands, whether it's, a concierge type service to  say, Hey, if this is what you need to do, go and speak to this person. 

I help introduce people to trusted tax advisors. You heard from Mark and the  team around immigration, but there's banking, there's private healthcare. There's  cars, there's boats private shifts. I even help people with things like  memberships and relocation, logistics. So these are all the pieces of the puzzle  that when you probably look at a move for yourself or your family. 

Even though they may have done it many times, it can still be intimidating. It  can still be time consuming, and you're still not sure if you're talking to the right  people or paying too much money. So I think the idea of what I do for this type  of client is essentially instead of having to deal with what, five or six providers  across various industries, they can come to one place and then I can curate or  orchestrate that for them. 

Typically when they're overseas. I do a lot of. Teams and Zoom calls with  videos at various times of the night to help those clients. Make that transition  and coming up in, in this Christmas holidays I've got clients coming over from  the US where we're organizing what cars they're gonna drive, how they're  getting over to Wahiki. 

In that particular case, I had a, a Mercedes-Benz parked in the, of the basement  of a client 12 months ago because he arrived on Boxing Day and had a pregnant  wife and two other children. Just trying to make things as smooth as we  possibly can for people to have the best experience. Is where we position our  sales under that unique brand and cater to these types of people that we are  hopefully gonna see more and more of in the near future. 

Erik: If anyone wants to reach out to Brendan particularly if you're interested in  that idea of a themed building just for an investor community, which I think is a  fascinating idea, it's Brendan, at unique UNIQ.nz or nz if you're American. In  closing, if anyone listening decides to pursue an Active Investor Plus Visa,  please tell 'em you heard about it on Macrovoices. 

As I mentioned, we were a little bit disappointed that the government didn't  respond when we in invited them to participate in this podcast, and particularly  tell 'em not to screw this up by changing the the 5% FIF rule, because that  would completely sabotage what I think is a fantastic deal that I think has the  potential.

To attract a huge amount of capital into New Zealand and to really maybe  change the face of Auckland's business community because I saw what  happened in Hong Kong, all the people who moved in because of the the tax  opportunity that existed there. As far as I can tell, New Zealand is a better deal  when you consider the cost of housing and the lifestyle and everything else.  Anyway, we'll see what happens. That's gonna be a wrap for our 2025 New  Year's Holiday special. We'll be back to our regular show format next week  when Patrick Ceresna and I will welcome a regular format guest to the show. 

Happy holidays everyone.

 

Erik: Joining me now is Rosenberg research founder David Rosenberg. Rosie, great to have you back on the show. It's been way too long. Let's start with the Fed, Boy who is it? What's gonna happen? And it seems to me like, this is maybe a setup for a policy error because I don't remember politics ever being quite this influential in Fed policy in my memory anyway.

David: I would tend to agree with you and I guess we'll have to reserve judgment going forward as to who, the choice is gonna be to replace J Powell. It looked as though just a week or two ago that Kevin Hassett was going to be the choice. Donald Trump said that he was down to one.

But it looks like there has been quite a bit of pushback on that. So now he's tied with Kevin Warsh. I think Warsh probably is, the more desirable pick. He actually has central bank experience and I think the view is that outta the two Hasset would be actually justthethe voice piece for the administration.

Sowe'llprobably find out about that I reckon early in the new year. Then it comes down to, does it even matter? We'regonna have a shift in, the Fed Bank presidents as to who's gonna be coming in to vote on the voting committee and who is not gonna be voting. It looks as though the take is that it could be a more moderately hawkish makeup.

But, the bottom line is that although there's a wide divide on the Fed, they are, as they said, data dependent. It's really gonna be the incoming economic data and how the data shapes the views and projections of the Fed. That'll dictate whether they just do one more rate cut next year, which was in the latest set of do plots.

Whether they do none there are several that don'twanna do anymore. Or do they do more than one? I'm in the camp that believes that the data will dictate that the Fed probably ends up cutting rates more aggressively than what'spriced in right now. 

Erik: More aggressively than what's priced in. So you expect 'cause it seems to me like everybody's expecting that as soon as the fed share changes policy is gonna get much more dovish.

You think it's even more than consensus Dovish. 

David: You have the perception that you get a new chairman that will be more dovish. I think you could argue that Kevin Hassett certainly is extremely dovish, but again, he's viewed as being a spokesperson for Donald Trump and we know where he wants rates to go.

But it is a committee after all. And I don't think a new chairman really wants to have a mutiny or revolt in in his or her first year at the helm. So we have to recognize that the Fed is an institution, it's not one person. It probably is way overblown to some extent as to who is going to be the next Fed chairman.

If you remember when, I think it was President Obama appointed Janet Yellen and everybody thought she was gonna be some sort of patsy. She was the one that started engineering, quantitative tightening. You go back to all the way back to when Volcker resigned early and you had Greenspan in 1987, which was a surprise choice.

And people were baffled that Alan Greenspan. Who's handing out whip inflation out buttons for Gerald Ford was ever gonna become Fed Chairman. I remember I was starting out in the business back in 1987 that raised a lot of eyebrows and you couldn't have predicted that within two decades you'd be calling 'em the maestro.

So what isn't always what you get. I think when push comes to shove, it will be like it always is how the data unfold. You have a wide divide on the Fed. The hawks are uncomfortable with the fact that underlying inflation has been above target now for four years. There's still this collective shame over blowing the call on transitory.

A lot of committee members still live with that memory and simply put, they are still not comfortable with the fact that inflation is still. Above target, from my lens, inflation's a lagging indicator. And what they should be doing is the analogy with Wayne Gretzky and Mark Messier back at the Edmonton Oilers in the 1980s.

So Mark Messier said you don't pass the puck to where Wayne Gretzky is, you pass the puck to where he'sgonna be. I agree actually on this with Stephen Miran that. The Fed should be more forecast dependent than data dependent. 'cause the data inherently that they look at are backward looking and lagged in nature.

And the Fed's actions have their peak impact at least a year down the road. You mentioned before about a policy error. Yeah. I would tend to agree with you. I think the more the Fed talks about de dependency, the more they're paying themselves under the corner of we're just gonna be focused policy on coincident to lagging indicators, which I do think is actually a mistake.

So the hawks don't like the fact inflation today is above target without referencing where inflation's gonna be a year from now, they're just looking at the here and now. The same group of hawks tend to believe that the weakness in the labor market is not demand related. It's supply related because of the immigration curbs and the impact it's having on the labor force.

And that's about half the FOMC. The other half see it the other way. Less about inflation. They're concerned about inflation, but they're more concerned about the labor market and see the cooling that we've been witnessing as being more demand related. Than supply related. And they're respecting the fact that they have a dual mandate which is full employment and price stability.

Price stability defined as 2% core inflation. Even within the doves there's tension. Because they're not comfortable with inflation anymore than the Hawks are. The big difference is their view on the labor market. From my perspective, by the way, aswe're talking about the Fed and they talk about the dual mandate, they call it the dual mandate, but it's not really a dual mandate.

It still is a single mandate because you're not gonna be getting inflation if the labor market doesn't play ball. So they call it the dual mandate if the labor market is cooling off. And what I say to the hawks is that you can see it in the rise in the unemployment rate. And you could see it in the fact that despite what they say on labor market constraints, as we saw in the non-Farm Bureau report the participation rate is actually going up not down, and wage growth is cooling off.

You got wage growth cooling off. You got the participation rate going up. You got all the different measures of unemployment going up. That's not telling me that we have a fundamental supply problem in the labor market. It looks to me as though the cooling is demand related. And so what happens is that in so far as we have any inflation, it's just gonna get snuffed out in the labor market, which means that real wages contract, real wages contracting, leads to a decline in real consumer spending, which is 70% of the economy.

And that demand destruction, which nobody's talking about, is what ultimately isgonna trigger. The disinflation that the hawks don't see right now 'causethey're looking in the backward, looking in the rear view mirror. So that's where I come out of it. I think that people are gonna be surprised that probably as soon as the second quarter the inflation that's above target is gonna be back to target and heading below target.

And the Fed will be scrambling to cut interest rates. I know that's not in the market right now. That is far from the consensus view. But I've never been shy in my career from betting against the consensus rightly or wrongly. But my sense is that when I'm taking a look, for example, at the information that J Powell gave us at the last meeting, powerful information.

I don't know why people in the bond market and people in the swaps market have ignored it. Powell came out and said that core inflation. After adjusting for the tariffs, which by the way haven't had a monumental impact on inflation, not nearly to degree that we thought it would by now, but he says, we're already in the low twos on core inflation Ex tariffs, which means we're almost that price stability Ex tariffs.

And you'll say why you exiting out the tariffs? And I'msaying because he also told us that the tariff effect should start to subside in the first quarter of next year. So if the tariff effect, which is really a cost exogenous cost shock, it's not a demand led shock with any multiplier impact, it starts to fade.

But what's gonna be ongoing is this dominant component of the CPI and Core CPI, which is shelter. And now you're seeing home prices declining but you're also seeing rental rates continue to decline. And that hasn't shown up yet with its full force. In the CPI data, but once we get past the tariff effect and a Powell's right, it's the first quarter peak in tariff related inflation, and we get the cascading impact where the negative rental rates start to seep in with a lag into the CPI data.

People be surprised, they'll be surprised at where inflation's gonna be going. This reminds me of all the inflationbe talked about in 2008 of all years. Now I wanna make the point that up until Lehman and AIG and Merrill collapsed in September of 2008, nobody had a recession in their calls except for me and a, maybe a couple of others.

The recession started in December of 2007. Once we got all the revisions and we were told that the recession started in December of 2008. By the NBER and they had the temerity to tell everybody, by the way, it's been with us for a year. It didn't start with Merrill and Lehman, and it didn't start with Bear Stearns in March of that year, starting December of oh seven.

And if you remember in that same year, people were not talking about the economy. They were talking about what? They were talking about inflation, because oil hit $150 a barrel. You had tremendous consumption coming outta China, driving commodity prices sharply higher. All anybody talked about was inflation.

In fact, if you go back to the summer of 2008, the Fed switched to a tightening bias two months before Lehman collapsed. Richard Fisher, who was president of the Dallas Fed back then was a voting member on the FOMC, and he voted for a rate hike. In July of 2008, and the ECB actually raised rates. And if you told anybody, as oil was heading to $150 a barrel in the summer of 2008, that in the coming year inflation was gonna swing from say, plus five to minus one, you would've been a laughing stock.

You would've been a laughing stock. I'm not saying that inflation's going negative, but I think the surprise in 2026 will be. How pronounced this disinflation is gonna be that nobody seems to see right now. 

Erik: Okay. So softening inflation in 2026, let's broaden the conversation not just to fed policy and inflation, but just the US economy generally.

Seems like most market participants are just obsessed with artificial intelligence as if it's everything. What are the major drivers gonna be in the US economy? How important is the AI trend really, and what do you see in terms of the big picture for the economy? 

David: It was all AI this year, and most likely will probably be all AI next year.

Unless you start seeing a pullback in these dramatic spending commitments that have already been announced. Maybe that'll happen. But right nowthat's just a guess. It's a very lopsided economy we have in our hands. And even though there's been some broadening out in the stock market lately, it's still basically a a bifurcated market as well.

I was astounded to see that almost 40% of the S&P 500 membership isactually hasn't risen this year. In a year where we were up until the other day, up 17% of the S&P almost 40% of the market didn'tparticipate. That'srather astounding. When we hit the highs in the stock market back on, when was it?

December 11th, just a few days ago. On that particular day only 17%. The members of the S&P actually hit a new all time high on the same day that the S&P hit an all time high. SoI'm starting to see all sorts of divergences in the stock market ongoingly that is also reflected in the economy.

So 2025 was the letter K, K shaped economy all around we always talk about. The K shape for the consumer. But we also have a K shape to business capital spending because that's where the boom has been. AI and related CapEx in volume terms is up at a 17% annual rate so far this year. That's a boom.

The rest of CapEx and what we used to call the old economy is negative 3%. You look at the industrial production numbers,it's incredible. You look at the 12 month trend, 12% in technology, and it's almost flat in Ex technology. We haven't seen a bifurcation like this really since the late 1990s.

It might not be a hundred percent the same, but there's a lot of similarities. SoCapEx is actually in a downturn X AI the AI boom. Is basically diverting resources out of other parts of the capital spending picture. This is not a broadly based CapEx story. And then we all know the consumer story, right?

Where basically the top 10% are carrying the load. The low end consumer is in a whole lot of pain, and that stress is now morphing into the, middle income people. And of coursethey've been hit by these stubbornly high prices and the fact that wage growth is rolling over so their real incomes are being constrained.

The high end is carrying the ball and the high end's carrying the ball because their spending is less sensitive to the labor market and more sensitive to the equity wealth effect on spending. As Ben Bernanke should talk about out Asia when he was fed chairman, we have the mother of all equity wealth effects on spending, which is allowing the top 10% to carry the load as the other 90% are dragging their dairy, as they say on the Quebec side of the border.

Soit's a bifurcated CapEx picture, a bifurcated consumer spending picture. It's astounding that people talk about the vibrancy in the economy because if you'retaking a look at the economy from an income standpoint, now of course, equity investors pay for profits. But most of the country's income comes from the labor market.

And in real terms real disposable personal income. Is actually running almost negative 1% in annual rate since April, but consumer spending is up almost 2%, about a three percentage point gap between what incomes are doing and what consumer spending is doing. And so if the consumer writ large, we're compelled to.

Keep their spending and learn with their incomes. We would actually be talking about a mild consumer recession right now. But you see that hasn't happened because the stock market gains have triggered a significant decline in the personal savings rate that's allowed consumer spending to rise even with negative real incomes.

And that's principally because of the high end. What happens for 2026 is basically it all comes down to the stock market. You'regonna tell me the stock market swelling up another 10, 15, 20%. The high end'sgonna continue to keep the whole thing together. That'll be the energizer bunny. And if the stock market doesn't continue to go up, we got some major problems.

Everything really rests on the stock market for 2026. Not fiscal stimulus, but the stock market. ' cause the glue is being held together right now by the high end consumer and that's it. And the glue and CapExis being held together by AI. Sothey're all joined at the hip, basically. And what if we start to see a pullback in some of these spending commitments?

So these are some of the downside risks. The labor market to me is really key. The labor market is really cooling off significantly. In fact, when you'retaking a look at the data. We're either at a point of just utter stagnation depending on the measure you look at, or jobs are actually contracting.

But the one thing we do know with certainty is that labor market slack is coming into the system. Look at it that we got, what did the unemployment go to? 4.6%. We're already above the high end of the fed's forecast. For the cycle. We're already above that. And if that continues, it puts downward pressure on wage growth and wages, lead consumer spending.

And so everything boils down to the stock market to keep that high end. High ends gotta keep on spending. 'Cause they don'texpect at the low end and the middle end are gonna participate. Now, maybe they will in the opening months of next year because of the tax refunds, but there's no multiply impact on that.

That is the tax refund that everybody talks about is not a repeated source of income growth. That's a one-off. And basically from my back of the envelope calculations 50% of that windfall is going to go into Healthcare premiums, auto insurance, property insurance, and electricity costs, that's gonna eat up. All those refunds that people are talking about are gonna precipitate a consumer spending boom.

Yeah, there'll be a spending boom in the basic necessities of life, but that money is not gonna flow through into airlines autos, furniture, appliances. Hotels, casinos, that's not gonna be happening. That money's gonna be diverted intointo sustenance. And so I think next year is gonna be a pretty difficult year for the economy.

This year was a difficult year for the economy, but the market saw right through it because of the AI craze. But we'll see if that's gonna be repeated in 2026. SoI think that there are a lot of challenges for the economy.

The big difference now compared to a year ago is the shape of the labor market is deteriorating. And this is why we never got the recession in 2022. 2023, we had the invert yield curve. We had the fed aggressively tightening to get ahead of the inflation. We see. Back then we had two things going on. We had the $2 trillion of Biden stimulus checks still being spent in the system which managed to dwarf the impact of rising interest rates.

But we didn't have any job loss. The labor market in 20 22, 20 23 was just fine. Late market was tightening and that was giving workers more wage growth. That'swhy what the Fed missed that for a period of 18 months. We had a wage price spiral, but that's something we have on our hands right today.

I think that's probably when I mentioned that there's a lot at risk if the equity bull market doesn't continue a lot at risk because the spending growth in the economy is confined to the high end and they're spending their equity wealth. So a lot rides on what the stock market does. But at the same time what's really changed?

What's really changed? The bond market hasn't changed that much. The stock market hasn't really changed that much. What's changed the most is maybe the most important market that's out there, which is the US labor market. It'sbasically responsible for over 70% of the economy. So that to me is gonna tell the tale.

And frankly, when I hear about the refundsare not gonna cause employers to go out and hire people. It's a transitory effect. So that to me is my principle concern for the US economy. Two of them really will the bull market continue? And we've never had a situation before where S&P 500 and GDP were this tightly linked to the high end consumer and at the same time is this just a blip in the labor market. It doesn't look like a blip it looks like a pattern and will it continue? Because that of course is going to have a big impact on the lowermiddle income households at the same time. 

Erik: Okay. You've made a really good argument that basically everything is riding on the stock market more so than ever before. Seems to me like a lot of people have made a very good argument that what's holding the stock market up is the AI trade. That's really what is all been about.

It sounds like that you agree with a lot of that. I can't help but notice the AI. Boom, cannot continue without a whole lot more electricity supply that we don't really have. And as much as that makes me, bullish about nuclear energy in the long haul, it takes 10 years plus to build a nuclear power plant.

It's not gonna solve any problem this year. Are we at risk of the AI boom basically being stopped in its tracks by a lack of energy and also complaints from consumers about higher electricity prices? Is that potentially, the Black Swan event that could screw everything up? 

David: Absolutely. That is a critical constraint is the strains that AI is putting onon power infrastructure.

You're already seeing the impact it's having on electricity costs. For people that talk about the deflationary impact of AI which is probably valid in the future. The currently, the energy related strains and constraints are pervasive. But the other part of this story is what about the financing?

And this is where the AI story is shifted because it's no longer the case that. The boom is being financed from internally generated cash flows and strong balance sheets. We're seeing tremendous debt issuance. And now in a lot of cases those credit spreads are widening out pretty dramatically. Sothere's two constraints.

One is the capital markets and one as you say is energy. And when you consider that you know The, the AI craze has been such a monumental shift in expectations. Historically, at any given year, corporate profits are up around a, at a 7% annual rate, seven and a half. That's the normalized historical earnings trend.

The market now has priced in for the next half decade, 15% average annual earnings growth. Sothere's been this shift in the innovation curve. Has caused the investor outlook for corporate profits because of all the alleged productivity gains we'regonna be getting and cost reductions. That'sa double.

So you have a lot priced in look, the the reality is that comparing this late 1990s, it's true that the valuations were in the stratosphere back then. But this is basically, I would argue the second biggest bubble after that one in the past century. And when you're in a bubble phase, the news has to continue to come in stellar.

And soit's interesting because this AI trade and the financial markets has started to roll over. Maybe not everybody simultaneously, from their respective peaks. The average mega cap tech stock is actually down 20% and the meeting is down 10%. It's just not that noticeable because there's been this rotation towards the value trade and rotation towards the value trade because there's this view that the economy's gonna be doing just fine.

So going to the cyclicals, but I think that's gonna be put to the test as well. The thing we have to remember is that the major averages don't typically peak all at the same time. They certainly didn'tback in in 2000. My sense is that if you're looking beneath the veneer, you're starting to see some cracks already emerging as far as the stock market's concerned in the AI trade.

The question you'd have to ask is that how much will this rotation into other segments of the market continue to play out? But,I'll just say that the valuation. Accesses really aren't just limited to what's happening with large cap tech. Most segments of the s and b hundred are actually have their price earnings multiples between one and two standard deviation events above their historical norms.

Nothing'sreally cheap. There's some areas that are cheap. Energy is cheap. Materials are cheap. The rates are cheap. Utilities actually, believe it or not, screened pretty well on their relative multiples, but that'sbasically it. And that's a small share of the market. They, that will not be able to hold up the financials and consumer discretionaryaren't in bubbles.

But they're between one and two Sigma events. Tech is tech. Tech and telecom are well above too. So overall this is still a problematic market. If you're a purist and you believe that valuations matter only in the sense not being timing devices, but are you investing with a tailwind or a headwind, is the wind in your face or the wind in your back?

I'd say that for the stock market overall. Even with a lot of these value plays that recently have worked out well and prevented the stock market from going down more than it has. 'cause this AI trade has started to more than, it's been, more than just a wobble over the course of the past four to eight weeks.

If that value trade doesn'thold, and remember that we had another shift into value after the tech wreck started in 2000, there was that shift into value with the same mindset ok we'regonna shift to value. That didn't work out so well. And that's what I mean. That was the last time really we saw the economy and the stock market joined at the hip to this extent.

When I started on the business in the mid 1980s, it was the economy that led the stock market. The economy led the stock market. Stock market participants wanted to know from people like me, what's the economy gonna be doing? Today, economists have to base their economic forecast off what the stock market's doing.

It's like the tail and the head of the dog of change places. So if you go back then, you know the stock market peaked basically depending on what measure you wanna look at. Certainly the tech sector peaked in March of 2000. The recession started in March of 2001, 12 months later. Sothere's a case where the stock market basically dictated where the economy was gonna be going, and nobody, not even the Greenspan fed up until January of 2001 when it started the cut rates thought a recession was probable in 2001.

Now, I'm not gonna go on a limb again and say we have a recession for next year, but I do think that recession risks are higher. Thanwhat's commonly perceived. I find this to be just fascinating that in 2022 and 2023, and remember, 2022 was a pretty bad year for the stock market overall.

Cyclical stocks were down like almost 30%. We were all consumed with recession fear in 2022. In the 2023, we never got the recession, and now the recession risks are higher and nothing is priced for recession. Not one asset class. So that's the dichotomy, but that could also be the opportunity if you're a contrarian investor.

Erik: Speaking of contrarian investors, let's go back to your disinflationary call. The other side of that, the inflation is, are saying, look at commodity prices. Gold is just the first one. It's all a sign that massive inflation is coming. That's the reason we're seeing all the upside and gold and copper and all the commodities.

Hang on a second. The most important commodity is crude oil. We're certainly not seeing a huge inflationary signal there, but boy, golden copper have been awfully strong. So what is driving commodities and why are we getting these kind of uncertain signals? 

David: These commodities have different specific dynamics and, idiosyncratic features.

Copper is, obviously tight supply, silvers, tight supply. Gold has been in a bull market since 1999 when the Washington Agreement was signed and the central banks stopped dumping gold on the market. Gold is really a function of what central banks are doing in diversifying outta US dollars and into bullion.

So that's the story. Sun inflation story. It'sa allocation shift, story amongst. Global central banks. I don't think that's an inflation story. And the bull market and gold that people have woken up to has been going on for the past quarter century. You have a lot of people recognizing it right now.

There's nothing more powerful than oil and oil is going down maybe for its own specific features. It's not been OPEC plus over production, then now it's. This concern coming to the oil market over possible peace with Ukraine and Russia. We'll see where that goes. So remember, oil always has some sort of geopolitical element attached to it.

But the oil price can't get out of its own way. There's no impulse from oil. And oil is far more important. Oil, what does copper go into? Copper might go into a lot of things in terms of, industry input, and it'spart and parcel of what's happening in the proliferation of data centers.

But oil goes into everything. There's nothing more endemic than oil and it also has powerful spillover impacts into core inflation. I'm not getting a big inflationary impulse from the commodity complex. And even if I did. Remember I was talking about what oil did with 'cause of China when it got to almost $150 a barrel, back in the summer of 2008 and inflation got to between five and 6% and you had central banks around the world freaking out, and then a year later, inflation's negative.

Sothere's nothing more powerful really than the labor market. And the labor market is loosening. So we can talk about commodity inflation all we want, but how sustainable is it gonna be? If you have a loosening labor market in any cost push inflation from any sourcewe'll hit the wall in the labor market ' cause it'll lead or lead to contraction and real work-based incomes.

Which leads to demand destruction in the economy from 70% of GDP called the consumer, or it gets absorbed margins. Pick your poison. 

Erik: Do you think the loosening of the labor market is AI related? As many people are saying, 

David: I think that there's a strong element to that. I think that we're still, look,we're still in this policy uncertainty environment.

Even though the in uncertainty levels 'cause of the tariffs have come down. From their peaks. They're still in many cases, two to three times higher than the historical norm. When you're taking a look, for example, at the Challenger Gray and Christmas survey data that come out, every month and they tell you the what's happening.

By reason. Why are we seeing these layoffs and layoff announcements have been picking up almost 40,000 pink slip announcements in the past two months, October, November, just from ai. That's new this time last year, October, November of 2024. Layoffs announcements due to AI were zero. And now we're up to just two months, almost 40,000.

I was rather surprisedthat g Powell downplayed that at his last press statement, but I think you're starting to see some of that come to the fore. 

Erik: David, let's translate all of this discussion of the economy and so forth into where the trades are in the market. As you said, the Gold Bull market has been strongly in place since 1999, but boy, it's had a hell of a run.

Does that mean it's over? Does that mean it's overdone here? Likewise stock market. Boy, it's really been blown up by AI. It sounds like you're a little nervous about that. What do you see in terms of asset allocations and where the trades are? 

David: Again, it's a situation where. Your assumptions will drive your conclusions.

If you're in the world or that believes that we're not in a asset price bubble, then you just wanna, whatever worked in 2025, you'll believe will work in 2026. You may have believed that the same story from 1999 to 2000 and I would reckon that was probably apretty big mistake to have made.

I think we're in a a three standard deviation event just about when it comes to the most important multiple that I look at, which is the Schiller Cape, the sickly adjusted price earnings multiple, which is pressing against 40 right now. Jeremy Grantham famously said that a price bubble is when you cross a two standard deviation event.

And that actually happened in the US stock market back in June of 2024. So this is about a year and a half now of being in a bubble, which by the way, historically is the norm. Bubbles don't Last one day. We're just in a bubble phase. It's like basically we're playing extra innings. Bubbles go into extra innings.

And historically before the Ghost Runner rule in 2020 and baseball parlance extra inning games went to the 13th or 14th inning. And what I'm saying is that,we're in the 13th, 14th inning right now. And historically during the bubble phase, you can make money. You just have to understand that you're chasing nickels in front of the steamroll, in the bubble phase.

But normally you're up 25% in that period. This time around, up until the recent peak, we were up 27% in a year and a half, which actually mirrors both in terms of magnitude and duration, what a bubble period looks like. But as Bob Ferrell famously said, that bubbles last longer than you think, but they don't correct by going sideways.

So I think that if you have that mindset and keeping in mind by the way that, the sixth bubble of the past century in terms of crossing a two Sigma event in the Cape multiple. And when you cross a 35 and we're at 40 now. 35 is the cutoff point. 'causeit's the only point in the Cape multiple.

Where on a one year, three year, five year, tenure year basis, your total return in the S&P hundred is negative across the board. Why would you relegate yourself, your family, your friends, and your clients to that outlook? I wanna wait for the valuations to normalize. I'mactually amazed that people seem to think that the market cycle and the economic cycle have been repealed, that somehow Mother Nature's been shot in the head.

No. Everything in our personal life and in our professional life they move in cycles. And so I believe we're in a bubble. When you get to these multiple levels, the news has to continue to not just come in good, but come in great. And it didn't take much it didn't take much. Remember, the recession didn't start till March of 2001 and the NASDAQ peaked 12 months earlier, and that was the leading indicator and it just took small amounts of not so good news to cause things to reverse. That's the danger of inflated multiples. When people say multiples only matter, valuations only matter when they matter, but then when they start to matter, they really matter because in a bear market, 80% of the drawdown is the compression of the multiple, and 20% is the actually decline in earnings.

That is the power of the multiple, the heartbeat of animal spirits in. The risk asset space. You know how. I can tell you how I'm situated. I am still involved in gold and silver and the gold and silver miners. I still like uranium as a long-term play. I've taken a long-term a bullish position in the Japanese yen, which is maybe the most undervalued of anything on the planet today.

I also have treasuries, twos, and tens. I have the mid part of the UK gild curve because the UK and the US are the high yielders in the G 10, and I think the central banks in both countries will be cutting rates more than expected. On top of that. I would say that other themes that we like we do have a derivative AI play, I guess you could say, but one that has a yield and a payout ratio which is utilities which has cheapened up a lot in the past couple of weeks.

And global aerospace defense that's a core holding and healthcare. When you take a look at my portfolio. It's diversified. Diversification to me is not a dirty 15 letter word. I'm not zero weighted inequities despite how bearish I am. I don't believe in zero or a hundred. I don't believe in black and white.

I believe there's just shades of gray. But there's different ways you can de-risk your portfolio without having to sell your equities. It's about managing your beta and managing your sharpe ratio. In other words. Risk management, that's the operative word for the coming year, much more so than this past year when you can just basically throw a dart against the wall and think that you're brilliant.

That's been the case for the past few years. That's why everybody thinks that the cycle's been broken. They can'tbasically separate luck from skill. But this is gonna take skill this year. You wanna be creative, you wanna be thematic you wanna drill down to the sub-sector level. If you're in ETFs.

But I would say that you wanna be mindful of risk management, which means maintaining a low beta. The beta in my portfolio is 0.4. I like that the sharp ratio is 2.5. I like that the running yield is almost 3%. I like that. I would say that if you'regonna be in equities, yeah, you wanna be defensive and you wanna be involved in areas that are not expensive.

And also have secular tailwinds tell me that global aerospace defense does not have long-term earning earnings visibility. Right nowI'm taking a good hard look at what's really lagged this year. A lot of that was because of the tariff effect, but consumer staples. Now I buy the consumer staples.

On an equal weighted basis, not market cap, since Costco is such a big chunk of that. But I would say that the equal weighted consumer staplesis something I'm looking at really closely. That probably isgonna be my next move. And we're also looking at I should mention also we have Canadian pipelines in our portfolio. But we're also starting to look at energy more broadly speaking since it's so far out to favor but investing in parts of the energy infrastructure that isn't correlated with the oil price. So you see, I'm not telling you to go out and buy baked beans, can tuna barb wire and saw off shotguns?

What I'm saying is that we have to focus on ideas. Thematics, I would not be investing in any of the major averages. I'd be drilling down into your thematic and what you believe has earnings visibility so you don't get hurt when things move in the other direction. Focus on blue chip dividend growth dividend yield.

So you have at least a running income flow. And I would say that having some cash on hand is not gonna be a bad idea. You won't have liquidity. You wanna have liquidity. This is the year coming up thematically, where you want to engage in much more diligent risk management than you've done any other time this cycle.

And you want to make sure that you have liquidity, you know what you wanna do. You wanna focus maybe on what Warren Buffett is doing now,that'spretty extreme. Pretty extreme to have over 30% of your portfolio in cash. David Rosenberg does not have 30% of his portfolio in cash, but I have a nice cash position.

But you should ask yourself the question, somebody who has that much experience, and lemme tell you something, I don't know Warren Buffett personally, but I know people that do and they tell me he has not lost a step. It's about $380 billion in cash right now. Over 30% of his portfolio is in cash. So I think we should all ask ourselves what is it that he is seeing that the vast majority of retail investors without his experience or acumen, because it's not the institutions driving this market, it's the retail investor.

The retail investor who has been buying through low cost ETFs and they don't even know what it is they own, but they should ask those the question, what is it? Because Warren Buffett has never, not once had a cash position this high as he has today. 

Erik: Rosie, I can't thank you enough as usual for a terrific interview.

But before I let you go, I wanna ask you about a couple of rumors that are floating around. One is about a new Rosenberg research macro, ETF, that might be in the works, and also maybe a new book coming out. What's going on? 

David: Word spreads quickly, but the thing is that I've been writing about this in my daily I unveiled a model portfolio.

I had to show the world that this radical permabear. Known as David Rosenberg can actually make you money in a diligent and prudent manner. When I told people that I had not had a down year personally since 1987, people refuse to believe it. But why would you think otherwise? Because I'm a conservative investor.

I don'tswing for the fences. I bumped for singles and hit the odd double. What I, what my philosophy has always been you win by not losing. So I don't head home runs. If want home runs, I'm not your guy becausedon't like strike downsthat's the bottom line. Because people were asking me for so many years, if I had to grade my career, all my calls, how would I do that?

I thought, okay. At the end of 2022, I said, I'mgonnaactually put my money where my mouth is and start a model portfolio, and I've highlighted it and it's there on my website all the time with all the holdings. People could see it, it's ETF based and it covers all four corners of the capital markets, equities, fixed income currencies, and commodities, and,it'sactually up 50% since inception, three years ago, and up 25% this year. And through client demand now I got clients that are actually mirroring this portfolio in their own accounts. But I didn't start it to ever run my own ETF fund but... I'mgonna be starting that again, mostly on client advice and advice of from my advisors.

And it should be sometime in the first quarter, has to go through all the certification right now, all the regulatory situation. And it'll be, I don't know what we'regonna call it just yet. It'll be listed on the TSX, but US investors can can invest. There'll be a US dollar, Canadian dollar version.

That'll be sometime in Q1, probably close, closer to March the way things are looking right now. Right now we call it the Rosie Macro Fund. And you can check it out on our website. The book is something that, again, people were bugging me to write a book since I left mural back in 2009.

I finally got to it about a year ago, and I'vebeen in that writing, adding more chapters. And that will probably be, again a first quarter story. I may end up, because I don'twanna wait a year to have a big publisher. I've been talking to some of the publishers. It seems to be a little just too bureaucratic for me.

I may just end up self-publishing so I can get it out earlier. And that'll be coming out. Probably sometime, I hope, in the first quarter as well. And it'sbasically just a book about my 40 years of experience on Wall Street and on Bay Street and how these 40 years of experience have continued to, to help shape my views and convictions to this very day. 

Erik: Now, of course, all of our listeners are familiar with Breakfast with Dave, the newsletter that you've been writing since before the beginning of time. I think you've expanded quite a bit in your offerings at Rosenberg Research, and you've been a perfect gentleman about offering our Macrovoices listeners a free one month trial to all that cool stuff in your last few interviews.

Can we get that deal again? 

David: Yes, except Jacob, my COO has told me that it'sactually atwo week trial. But it doesn't mean that if you like it a lot in another couple of weeks that it wouldn't extend it. But we do have a free two week trial for everything that we do, which includes the daily commentary and the weekly.

And we scan the world our, I have 2300 clients in 40 countries. And our investment analysis and economic analysis looks a lot like our client base. Geographically diversified, but also diversified across all the asset classes. The other thing I just wanna mention is that we also have an information hot box that 24/7.

People that wanna contact me through the information hotbox, I call it the information inbox. Clients have access to me 24/7 through email. And that has been a major home run that one service I spend 20% of my day just conversing with my clients and so far as they have questions, queries, criticisms, whatever.

That'sa great way for me to stay engaged and keep myself sharp. 

Erik: David, if people wanna sign up for the two week trial or if they wanna find out generally about that, give us both the contact for the two week trial and also the website. 

David: Sure. You could always just Google Rosenberg research and it'll pop up.

If you wanna sign on to the free trial, it'll take you 20 seconds to register. Just go to information at Rosenbergresearch.com or if you run into any difficulties, just email me This email address is being protected from spambots. You need JavaScript enabled to view it. 

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

 

Erik: Joining me now is Robert Kahn, managing director of Global Macro for Eurasia Group. Robert, last time that I had you on, we talked quite a bit about tariffs because that was the big news item of the day. Let's do a review since that last interview of how the news flow in geopolitics has evolved.

It seems like we don't hear quite as much about tariffs as we used to. Is it still as important as it used to be? And if not, what is?

Robert: Thanks for having me back on again. And you're right to say that tariffs were the central story of 2025, but maybe not fully in the way we had anticipated and talked about it several months ago.

It's still a source of important volatility. I always warn people when I talk to them tariffs will never be done with this administration. They will return they will reopen negotiations. Tariffs are a central element of their vision of rewiring global trade and investment in putting up a material wall around the US.

I think the average tariff rate now is right around 17% stated on the tariffs. It's a little lower when you take some exemptions into account in terms of what they actually collect, but, and that is a lot less than we thought it might be, say six months ago, but it is still the largest tariff shock.

This economy this country's had to deal with since the 1930s. And I would argue that it is still playing out in significant fashions. The US economy's been very resilient to these tariffs rates. But I think it's, there's disruption coming from them. And so to that extent, I would say tariffs are disruption deferred, not disruption avoided as firms now will be trying in the coming months to maybe more fully than before, pass through those tariffs to higher prices, to consumers.

Erik: Let's move on to the current geopolitical situation. It seems to me as we come into a midterm election year that the midterm elections probably are the big thing. Would you agree that's what market participants should be focusing on geopolitically? If not, what instead? And assuming that you do agree, what do you think the big items are in terms of midterm election outlook?

Robert: I think you're right to highlight the midterms, but if you ask me from my list of the, from the economic perspective, what should investors be worrying about? Let me give you a couple of things that I wanna highlight. And the first one really comes from the tariff conversation.

And so let me take, one step back on that, because to the extent tariffs were the story of 2025, I would argue that Clay is beginning to harden a bit around that tariff hole. Let me explain how that. We are seeing what's the formation of a three tier tariff structure, China with high tariffs around 30%, much lower than they were, but still at around 30%.

Most countries in the 10 to 15% range, and Mexico and Canada lower below 10% because of the legacy. But I do think that those rates are starting to settle and while, as I said before, I think that we will see tariffs continue to fluctuate. Exemptions continue to be negotiated. It'll still be a factor.

There's less room, to vary that there's less, gonna be less volatility in that space. And of course, we have a Supreme Court ruling pending, which could overturn the basis in which many of these tariffs were. Put in place necessitating a plan B. And so what I think we're starting to see it going into 2026 is an administration that while they will still use tariffs are moving, are pivoting towards a greater reliance on what economists call industrial policy.

It's deal making with companies and countries where the government is getting directly involved. In the investments the deals the strategies that companies. Take on whether that's taking a share of profits that Nvidia will generate from its China chip sales, or taking an equity stake in a company for permission to to invest or giving a tariff relief to a pharmaceutical company that agrees to sell drugs through a portal named after the president. All these are examples of direct intervention in markets in ways that we really haven't seen in the US economy before. And I think that's gonna be a big story in 2026. So that would be the first thing on my list. The rise of a greater industrial policy, greater market intervention.

By this government, which is interesting because you have a government that on terms of its commitment, wants to deregulate, wants to free up industry, but at the same time much more actively weighing in on the terms and conditions of deals. That ties into the midterms in the following sense.

As I look at the upcoming midterm elections, I think that you're gonna see the center of the debate focus on what political analyst call the affordability debate. I think what we're seeing from voters, and we saw this very much in recent off cycle elections in New York City, in Virginia and New Jersey and elsewhere, is that voters are very frustrated.

With the rising cost of living with the uncertainty around their economic prospects, jobs, wages, and the like. And to some extent, the president is being blamed for that. Presidents often are blamed when people feel insecure about their future economic. Prospects, and certainly that is the case here.

And the Democrats, I think, have probably been the first off the mark to highlight affordability as an issue they believe should serve them well in the midterm well, the President is fighting back and that means that these issues of affordability are going to be front and center heading to the midterm.

Of course, tariffs raise prices. That cuts the other way. It creates attention, I think, very much for the White House. In terms of that affordability. And so you're gonna see them cutting deals on tariffs lowering them, for example, on bananas and coffee. As I say, giving exemptions to firms if to, if they lower prices.

So affordability will affect and constrain that tariff structure but it will not fully offset it. Tariffs will still remain an important part of policy. So we're gonna see this tension playing out between the president trying to both accelerate his. Vision for the US economy, but at the same time trying to respond to these affordability concerns in going forward and trying to reclaim that narrative.

I think it's gonna be very hard for him. I think people's views are starting to get set in that regard. And so if you ask me how, I think right now the midterms are likely to play out I would put a very high probability. In fact, this Eurasia call is an 80% probability at the House of Representatives.

We'll move to the Democratic side of the ledger. In the midterms we put 30%, probably the Democrats could take the Senate. The path for that is much tougher given the seats that are up than the candidates in play there. But it's still possible in a wave election. But getting back to the house.

What we often see when a president's in his first two years has a both houses of Congress. There is a backlash. There isn't no usually a big swing in parties, and of course. We're starting with a very narrow Republican majority, even though I think we're our debate, our political debate is more polarized now.

Even though redistricting for a while we thought might tip the battleground a little bit in the Republican side, it now looks like that will be a minor factor. So as we look at it, it looks very likely that the Democrats will actually retake the house and that will of course, change very dramatically the political balance going into the last two years of the Trump term, it means even more so than now. The president would've to rely on executive orders and administration action rather than looking to Congress to support him with legislation.

Erik: I wanna focus on the first thing you said about midterms, which was the government policy intervention directly in deals and so forth.

I have a speculation, I can't prove this, but frankly, I think that President Trump is very focused for all of the reasons you just described on getting lower gasoline prices in the United States. So he can take credit for it and say, look I'm the president who's looking out for the little guy, and keeping those affordability issues under control.

I think he's probably already made some kind of secret deal with Saudi Arabia that we don't know about that has resulted in the Saudi increase in production. And I suspect that deal has an expiration date that comes before the midterm elections. And I think probably the reason that President Trump is so obsessed with.

Bringing peace to Ukraine. I'm sure part of that is, is legitimately what it is supposed to be on the surface, which is wanting to stop the killing and bringing peace to a wartorn region for the sake of humanitarian reasons and so forth. But frankly, I think to an equal, if not greater extent, he wants to solve that conflict so that he'll have justification to remove sanctions on Russia in order to get more Russian oil flowing in order to, again, keep consumer prices down and address that affordability crisis. What do you think of those ideas?

Robert: I think that you're that're spot on, and I'm almost entirely agree with you on that. I think there's a lot of good historical analysis that reminds us that gas pump prices are perhaps the most important single variable for how people feel about affordability, and particularly for those Americans.

And there's more of them than ever living paycheck to paycheck. What you pay at the pump. Matters tremendously, right? For how you feel. And I think the president has, as you say, put gas prices high on his list of how he has measured his success. At the same time, there are other factors some of which are being driven by his policies.

That also factor into what you pay for that gasoline and what you pay for. Energy more broadly, right? Gas prices can move differently than price of a barrel of oil. We know that electricity prices are facing a lot of upward pressure from this boom in data centers and related investment spending.

So it's a, it is a complicated story in that regard. I think you're right to say that this is a factor that has been animating the president and probably does come up in every conversation he has with Middle East leaders.

Erik: Now, another area that I think relates to affordability that the president has not been shy about intervening in, is determining the next Federal Reserve Chairman.

So we've had at first it, it seemed really clear that Kevin Hassett was the pick, and now maybe it's not so clear. What do you guys think about who the pick is, but maybe more importantly, how much does it matter? Because I think everybody's focused on who the next chair is gonna be to replace Jay Powell.

The chair is only one of a whole bunch of voting members. I don't think that there are a whole lot of other changes under consideration to who the other members are, although I think there, there would be a rotation. So what's the outlook in terms of the Fed? People who are likely to be in charge, and what is it gonna mean in terms of fed monetary policy going forward in this election year?

Robert: So those are great questions and pretty hard ones too. And I'll start with the one, the hardest one, which is who will the president pick to be the next chair? And the honest answer is, I don't know. That I don't know. And I don't think many people do know the president's mind. The sense is that he hasn't made a final decision yet.

Certainly we know that he can, kind of mole over these big decisions to the last possible minute, sometimes be influenced by the last person he talks to and not and probably keep counsel with a relatively small set of people. We do know, as you said that early on, he was making comments that suggested he was leaning towards Kevin Hassett.

Who he is known for a long time has a great deal of trust in and values as an advisor. Kevin is also very good at communicating the president's views. Which is something the president values, that sense of loyalty commitment to the president's vision. All of that made him, I think, probably an attractive candidate early on.

His background isn't in monetary policy. He's well known from his earlier days as a person focusing on tax policy. And he has played more of an advisory role in the administration than a driving of decision making. And but still all the signals were that the president might be leaning that way.

It does seem like as we get close to the finish line that those who support other candidates are making their case. And I think you've had this broad public debate now going on, and I do think there are legitimate arguments made that Kevin Hasset will struggle as chair.

To command a majority in favor of Trump's policies. In other words, he could advocate them, but as you said, when you go to that Federal Reserve open Market committee meeting, there are 12 voting members around. You need a majority of them. And you can't just as chair come in and say, I want this and expect to get it.

And indeed, the center of that committee right now really is not. In alignment with what the administration wants. And so I think Kevin Hassett might struggle quite a bit. I think one of the arguments made against him is that some of the other candidates in particular Kevin Wars, who is formerly on the board or even Chris Waller, who is currently on the board and is really a very strong macro economist.

Might be able to do better at coming in and building a consensus for different policies. Although those policies may not be entirely what the president would want. So the president seems to be trading off that sense of loyalty versus low rates versus maybe an effective and efficient chair.

In that sense. I think the leading candidates, and I might throw a reader into the mix as well. They are very different characters and might have different outcomes. And so I'm gonna say, I'm gonna give you my bottom line answer here and it's gonna be a bit the two handed answer on the one hand because these are different candidates and because the president himself has been forceful in pressing the Fed for policies and has the has by doing so. Raised concerns about Fed independence, that this will be a consequential choice, who he chooses may matter a lot. On the other hand, I'm gonna also argue to you that the person chosen might be quite weak in the early days. 'cause of that lack of consensus, we may see more descents than we have seen for some time.

We may see a board that is more sharply divided, and so from that perspective, it may take time before we really get that imprint. I do think we should be watching this very carefully and I am hoping that whoever is chosen does recognize the huge value. To the US economy of having a credible federal reserve that is independent from the administration, whichever, Democrat or Republican, and pursues a mandate of price stability with full employment.

Erik: I wanna go a little deeper on that last point because it seems to me that what we're seeing really is almost a certainty of the opposite outcome. In theory, the Fed has been independent from the federal government and makes its own decisions. I don't think anybody, who's intelligent really believes that completely. But at least there was an appearance of Fed independence. It seems to me that President Trump is pressing pretty darn hard for dictating what he feels fed policy should be, and really looking for a new Fed chair that will carry out the President's vision for lower policy rates.

And Jim Bianco told our listeners last week, be careful because real estate guys like President Trump. Always think lower policy rates are a good idea. Sometimes not. Realizing that lower policy rates don't always translate to lower borrowing rates further out at the end of the curve. If you create an inflation risk with by making a policy error with.

Too low of a policy rate, you're creating a risk that inflation fears will spark higher rates at the back end of the curve. I'm not sure if if the Fed's independence is really going to be possible with so much political influence. Am I reading too much into that?

Robert: You are not reading too much in it.

And Jim is spot on to use a spinal tap reference. I think you turn, on a scale of one to 10, let's turn it up to 11 and agreeing with that. I do think that the president's pressure campaign over the medium terms gonna, is counterproductive. It may generate slightly lower policy rates, but as you said it, the risk is a steepening of the curve.

Because of higher uncertainty, higher inflation risk and the like. And so there be, that idea that a lower federal funds rate means lower mortgage rates really is off the mark. There's a political aspect to this as well, because I think the president, hoping to spur the economy and making this kind of, I, I think mistaken analogy between the po policy rates and growth per se, in the near term just wanted lower interest rates for a long time.

I think as we head towards the midterm, and if I'm right, that affordability is gonna become a focal point. And if it is also true, as I suspect will be that firms will start passing through more of the tariffs to prices and the immigration crack down will create some labor market shortages, putting upward pressure on wages, and you add that all in, we're gonna be looking at an environment in a few months where inflationary concerns are the bigger concern for voters.

And I think the president may in that moment. See a trade off where actually having a fed that is more credible and diligent in fighting inflation actually serves him better. A fed that is seen as bowing to political pressure, cutting rates too much resulting in a much deeper yield curve and tighter financial conditions.

That's a real risk for him. And I think actually he may ru the day that he highlighted the interest rates. If we end up in that world.

Erik: Do you think there's a realistic chance that. He sees that and comes around to the point where it's President Trump, who's saying, wait a minute, let's not risk a dovish policy error.

We've got to focus on inflation, guys. Maybe we should be raising policy rates. I can't imagine those words coming off of,

Robert: I don't, I certainly don't expect that last sentence, that he would advocate higher rates. But I do think the first sentence saying, Hey, prices are too high.

We understand that it's not our fault, it's the Fed's fault. Could become an a more, a narrative we hear more of in 2026.

Erik: So in other words, president Trump might be publicly saying it's the Fed's fault, and those suckers at the Fed, they need to get policy rates down and they need to fight inflation harder at the same time.

Get to it boys.

Robert: Get to it, boys. Now, I do think that the, some the president's economic advisors do under, I think do understand the inconsistency, if I can say it that way. The tension in that argument. And they do understand that ultimately this administration is well served by a credible and strong fed that is balancing it.

Look, the Feds cut rates the last three meetings, right? Not as much clearly as the president would want, but they have bought some important insurance against the softening labor market. There are some measures, say they may have cut too much, but I think from their perspective and as an insurance policy in a period of high uncertainty and also some missing data it probably made a lot of sense and they can always, of course, pull some of that back if they overdo it.

So I, I do think we've seen a fed with the willingness to act. A fed that is attuned to labor market weakness, as well as inflationary risks, and frankly speaking in a lot of ways have gotten it right over the last year and a half in trying to thread this needle between, bringing down inflation and also, putting a floor under the labor market.

Now, I'm not giving them full credit for bringing down inflation. We've still running above the 2% mandate that Congress has given them. But I think they've acted pragmatically in that regard. And by and large, Powell, Chris Waller, importantly, who's given some very, insightful speeches and all of this, they have basically not been far off in their assessment of the economy.

Really in the last, say is a year and a half, two years, I do think in the pandemic, they misunderstood the inflation spike and were slow to react to it. But I think more recently they have shown a willingness to act.

Erik: Let's move on to the Russia, Ukraine conflict. I think the curve ball that's surprised me a little bit is it seems that as President Trump is pushing really hard to try to get a peace deal together, which I think is partly because he wants to take credit for the peace deal and also take credit for the resulting lower energy prices.

It seems like that's actually causing pretty significant tension between US and European Union policymakers and I'm questioning whether that's going to lead to a breakdown in the US relationship with the EU.

Robert: I think the US and European relationship has as strained it has been since World War II. I think it's unfortunate, but I very much, I think, consistent with. The President's vision of the world, his distrust of Europe, and his desire ultimately to get a peace agreement between Russia and Ukraine.

That would also come with a normalization of relations with Russia. All of that is, of great concern to European leaders, and as you say, the European, the Russia, Ukraine conflict has exacerbated those tensions. I think, the Europeans have been very focused on keeping the US involved with in in, in creating a path for peace.

Providing continuing support to Ukraine. And I think by and large, Europeans have been pretty constructive in that regard. But stepping back, where are we going is really the big question. Despite the flurry of talks over the last few weeks, it's hard to be optimistic that these current round of negotiations will lead to a, any kind of peace deal.

Putin has held Maximalist demands. Two sides are still very far apart, and it's hard to see the current deal being the basis for a peace agreement. Now that said could this be the start of a conversation that could. Over the next year or so, set the basis ultimately for a peace deal. One could be hopeful for that, but I think I would take as long as very significant differences remain on territory, on security guarantees.

And on the financing of Ukraine's reconstruction that this. The current talks will, are unlikely to lead to a breakthrough in that regard. The war, unfortunately, is likely to continue. You are prob you are continuing to see attacks including on energy structure from both sides, including from Ukraine.

And of course that's putting some upward pressure on oil prices leading into our earlier discussion.

Erik: It seems to me, if I just think about the tactics of politicians, which is usually to blame somebody else, when it doesn't go your way, it sets the stage for President Trump to say, okay, look, I negotiated the perfect deal.

Everybody loved it, except after the Europeans got to Zelensky, it got thrown out. I would've solved everything. We would've had peace, we would've had lower energy prices. And what if the punchline on that is? Okay. Europe, you're the ones who pushed Zelensky to not take the deal. This is your problem.

Now, the US is stepping out of this. We're not spending any more money on this. Europe. You want to insist that Ukraine has to keep up the fight for not losing its territory. You pay for it. We are out. Is that possible? And would it be a strategy for Trump to push the blame, at least in the perception of American voters onto, I solved the problem, it's their fault for not taking my deal,

Robert: it's their fault.

And so we'll break. We'll, we need to break relations. That's certainly the concern of Europe. That it leads to a fraying of the relationship between the US and Europe. First and foremost, the recently issued national security strategy was very critical of European leaders and European politics in ways that were shocking. I think

For those of us who grew up in the North Atlantic Treaty Alliance framework. And certainly that would be the concern. At the same time, the administration has hinted that there might be more sanctions on Russia if they reject a peace deal. So there's certainly gonna be a lot, continue to be a lot of jockeying by all sides to say, it's not our fault.

This didn't go through, we were being reasonable, they were being unreasonable. And that is certainly central to the politics of the moment. And you see this with President Zelensky offering a referendum on elements of the peace deal. In the context of a ceasefire, but at the same time being very inflexible on seeding land ahead of any ceasefire.

You're right to highlight that as an issue if we do go down this road of the president washing his hands of of Ukraine's future in, at least financially in the context of a failed deal. We will expect to see the full check moves to the Europeans in some sense, the cost of keeping Ukraine afloat of allowing them to continue to sustain the war effort pay salaries.

Make repairs to energy and the like. All of that will fall fully to the Europeans and we, that's our base case. That's why I think that by the end of the year you will see the Europeans strike a deal on using frozen Russian assets. To finance Ukraine. Obviously this will produce huge criticism and threats from the Russians.

They'll be very unhappy with it. The US itself doesn't want Europe to go ahead with that, but at the same time, absent US money, I think the pressures to draw on those frozen reserves will become, impossible to resist. So I actually expect to see a deal by the end of the year moving forward with that.

If it doesn't happen, probably some sort of borrowing arrangement with Europeans for Ukraine. But I think that what you're saying about the direction is Europe's gonna have to take more of the lead in terms of financing weaponry and the like. I think is very much should be the base case.

Erik: Now from time to time, president Trump has made threats and I perceive them as deal making threats as opposed to serious threats.

But he's actually threatened for the US to pull out of NATO completely. Representative Thomas Massey, who is not friendly with the president, has actually introduced a bill for that to have the United States withdraw from NATO. Is there any. Possible, actual outcome that could happen?

Or is this just politics?

Robert: I think it's probably always gonna be a tail risk there. The president is not inherently, instinctively a multilateralist. He doesn't have trust in these institutions, and he absolutely has a, seems a deeply held conviction that the US in a sense has gotten a raw deal from these type of large international security commitments, right? That we have paid more than we got out of it. I strongly disagree with that assessment. I think it has served as an a keystone for the peace since World War II that has produced huge. Benefits for the United States has allowed our rise as an economic and military and political power.

I feel like that's the right answer, is to say that we have benefited to an extraordinary degree from that, but that's not the president's view. So there's always a certain amount of risk for that. But I am hardened by the fact that the, that there is an element of that which maybe is simply leverage or.

Deal making that the president does listen to his advisors who do appreciate the value of the, as I would say, the value of having a fire department in play and that there is a deterrent effect from belonging to these institutions. Now, it does mean Ukraine, remember some time ago. Was pushing very hard to become a member of NATO.

And that's not going to happen. I think that's very much the result of this political debate. But I do think that there's real value in having the US engaged in these structures, even if the commitments that are being made by the US are weakened. Relative to has historically been the case.

Erik: We've actually seen a couple of European countries, not the central ones, making public statements saying, look, if some of these EU values continue, we've had enough of EU. Is that a trend that could grow likes?

Robert: Certainly is. If you, and as I said, there's a, there's recently this national security strategy came out.

It is a a vision statement, if you will from the US and while look, it's importantly a messaging document. It's a signal rather than a specific strategy that will now be implemented. It was very harsh towards the Europeans and very much along those lines, and even hinted at getting involved in European elections in the next couple years.

And on the side of right wing anti European integration candidates. So it's very much an element in the wind if you'll say it that way, it's kind of in the air and I think there are certainly elements of the president's team, and I think a lot of people point to Vice President Vance as one of them who strongly believe that the US should be less engaged internationally in that.

But, we saw his talk. It's a complicated story because. On the one hand, the president ran on an American first strategy that many people saw as saying, let's be less engaged internationally. Let's have less commitments, less wars, and the like. And we used to talk about this in the context of a G Zero world in which the US is stepping back from global leadership and there's no other country that steps forward.

And there's certainly an element bit of that. But at the same time, this is a president that can be very assertive, aggressive, even in, in getting involved in international conflicts in war, as we saw with Iran, la earlier this year in mediating conflicts all around the world. And now of course in Venezuela threatening that country in a way that could lead to significant conflict in.

The region. So we do see a president that, on the other hand is really, is still quite engaged. And the question of having in, in that environment, I would say even more than ever, having these international relationships like and engagements and having us having EU. That holds Europe together.

And having the US engaged with the EU constructively, I think serves the world and serves the US very well. As I say, that isn't the, there are many voices in the US administration don't feel that way and see a United, European Union as actually a threat, a challenge to the US, not a partner.

Erik: Let's move on to the other big potential challenge, which is China's relationship with the US.

Boy, we've got a country that we rely on for almost everything. All of our prescription medication, almost all of it gets manufactured in China. A lot of the midstream of manufacturing, we talk about we've got this big copper mine here. Copper smelting the aluminum smelting.

A lot of the process. A thing that needs to happen to make most commodities actually useful happens in China. So we've got this massive global dependency on China and a growing geopolitical tension. It seems to me that's a recipe for disaster.

Robert: I'm gonna be honest, this is one where I was a bit off.

I didn't get, I got it a little wrong in terms of the last time we talked, thinking back and because you're getting at this really interesting tension, as you say, between dependency and contesting contest, and I think through most of 2025 through most of 2025.

I was focused on the growing contest between the US and China and worried that we were in the process of seeing decoupling between the two countries that this, that the us that because both countries saw each other as chief rivals, we were gonna see growing trade frictions and a wall between the two countries.

We were gonna see growing competition on national security issues and like in ways that would be damaging, not just to the relationship between the two countries. But also would serve to fragment global trade and finance. Because the US China relationship is so central.

Now, all of that I think is still true. As a longer run driver, I do think these two countries will ultimately be in contests a across a wide range of issues. But your point about dependency has become more clear, I think, in coming months, and particularly on things like Rare Earth where the US has come to appreciate its dependence in the near term on China.

For the, not just the mining of it, but the refining of these materials. The Chinese, of course are, have faced a difficult economic situation themselves and probably feel this is the worst possible time for a major trade war. Both sides, I think, have come to appreciate the value of a period of stability and President Trump met with president Xi in Busan, South Korea now a little more than a month ago, and what came out of that was not a comprehensive deal, but certainly some sort of ceasefire, if you will, a putting down of arms.

On particularly trade and also on some security issues, and a framework was laid out in a sense for stepping back. The US in particular took down some of its tariffs. Ease some export controls, made commitments going forward. Chinese resumed shipments of soy, very important to US farmers, and also agreed on to provide easier export licenses for rare earth materials.

There were other elements as well. Now, implementation is gonna be a challenge. A lot can go wrong and there can always be a spy balloon somewhere that unsettles the relationship. But by and large, there was a commitment by both sides to step back. As I say, to put down their arms. I think this is pretty durable.

And so in that regard I think my outlook going into 2026 is a li is somewhat more constructive. Than I it was before. Now, part of that is indeed, it's a kind of bad news, is good news because from a US perspective, the dependence on these rare materials and is really profound in ways that I don't think everyone fully appreciated from defense material to high end technologies to everyday consumer products and it's not going away soon. You can't just decide we're gonna stand up that industry and be competitive in a year. This could be from all our clients we talked to from the experts in the area. This is a five to seven year deal. And so I'm not sure to the extent the US has decided that a pause makes sense.

At this point. I'm not sure that changes in six or nine months. And so as I look down the road, I think certainly for the course of 2026. The conflict between the US and China is gonna be less of a geopolitical driver of volatility than in 2025, and that I thought it was gonna be,

Erik: I couldn't agree with you more on the point that the coming war with Russia, that so many people fear a.

I don't think is a serious risk, and I say that for the simple reason that although it may not be in the headlines yet, there are plenty of people in the US military that are smart enough to recognize that the US could not possibly win. Any kind of kinetic conflict with China because they hold all the cards.

And I think it's very sad that's true, but it is true. There's a Australian entrepreneur called Craig Tindale, who recently wrote an excellent piece about this which is really starting to go viral after Robert Friedland the CEO of Ivanhoe Mines had retweeted it, and it's it's getting a lot of circulation.

We'll put that in this week's research roundup for the benefit of our listeners, but, I want to take the remaining time that we have and really focus on the hardest question, which is, boy, so many different subjects we've talked about in this interview. How do we assimilate all of this to your actual job title, which is not geopolitics, but your managing director of global macro.

What does this mean for markets and how do people position to consider all of these complex chess pieces that we're talking about?

Robert: I do think, I know this is gonna sound self-serving, but I'm pretty convinced that geopolitics is gonna remain a very important driver of market volatility. That was certainly a story in 2025, and I think that that continues to be the case. Some of that is the president. His ambitions of enacting major change, his own management style and some of the volatility and uncertainty.

And that word needs to be stressed, uncertainty that it creates, right? And that's a killer for making long-term irreversible investments. Whether in the US or elsewhere, and that will continue to play an important role. So I think geopolitics still matters, number one. I think that as I look at 2026, and we've touched a little bit about on some of this in terms of the affordability debate in the midterms, I think the, a critical question is one critical question is how this administration responds to disconnects.

I think the president does have a vision that he would be able to, restore a manufacturing future driven future for the us. I don't think his policies get us there, but what happens as that it disconnect between tariffs and the really, and industrial policies and all of this.

Don't generate the results he wants. What does he turn to? If affordability become re becomes an intensified concern for which the voters hold his administration return? What does he turn to? Does he adopt more unorthodox policies? Does he step back? These are gonna be critical questions, I think, in coming months, but as saying that, I don't wanna make it sound like this is just a question of this administration and this president.

I like to always say that President Trump is both symptom and cause of the current moment that we live in, right? That he he and ha came of political age. After a period in which, Americans I even, you can say this globally, but let's focus on America, where Americans were losing confidence in the market system and the free and the open market systems that we had produced and built up.

Since World War ii. Some of that I think was the disruptions, the dislocations from globalization and the discontent from those who were losing out, who felt their futures were not as strong. Some of it was the challenges from shocks, the global financial crisis, the pandemic and the like. Some of that I think is social media.

In the way in which it's changed our dialogues, but that mix of policies and developments and big trends, I think has created a sense of insecurity and a sense of conflict, intention, and the president, in a sense understood that and in a sense, rode that wave. Now I think he's been an accelerant to that process.

But, I think it raises the question of how much of this is President Trump, and how much of this, if you will, is Trumpism? How much of this is likely to persist even after his time as president? I think those are really interesting questions. I like to think that we are in some sense in a geopolitical recession.

What do I mean by that? It's not quite an economic recession, but there's this analogy of a sense in time which our politics are not helping us solve big problems. Are not bringing us together in ways, we've gotta find better ways to do that. So if you're asking me what does the outlook hold? On the one hand I see in a US economy that remains pretty resilient.

It's very dynamic in important ways, but yet I think is also leaving a lot on the table, if you will, by its current policy mix, sacrificing in terms of innovation and dynamism in ways that I think are gonna have some lasting consequences. So I think it's, can we find ways of coming together better and finding bipartisan and.

And, solutions to the challenges we're gonna face, I think this is a big question that we'll probably get answered over the next several years. But even beyond that,

Erik: With respect to some of the trends that we're seeing, price of gold is going crazy. We're not seeing any big upside in crude oil prices.

I think that's probably because of the president's efforts to intervene in the opposite direction. Are there any significant trends that are not already obvious that our listeners should know? About or think about in terms of investments?

Robert: I'm gonna make one comment. It's an economist comment, but I think it speaks to an investment strategy, which is and we, taking it back to our Fed conversation, the, what the Fed does down the road in terms of interest rate, cuts, depends a lot on what they see is what they call the neutral rate or what some economists call R star, which is the real interest rate that is right for the economy.

We've just been through a 20 year period. Where the sort of medium term interest rate that was right for the economy to be at full employment was coming down and for some time was very low. We called it the great moderation. We got very used to having very low interest rates and a low cost of capital.

It was a big source of growth for the US I would argue now that. The things we've been talking about today that include fragmentation, that include maybe some reversal of views on the US as an investment environment, which makes capital more costly. We won't have the giant pool of global savings to the same extent we did, we have had in the past.

All of that is demographics. These are all consistent with a higher R star. In other words, that interest rates fundamentally will have to be higher. In the medium term now than they have been in the past. Now, that is a controversial statement. Even within the Fed, there are people like John Williams, the New York Fed, who thinks that rates can go back down to where they were before the pandemic.

Others like Lori Logan at the Dallas Fed says no. Our stars could quite possibly be higher. In other words, the cost of capital will have to be higher. It has profound implications for the cost of housing. It has profound implications for investment more broadly. The verdict is out on all of that.

But if I had to say that our conversation today gives you some important reasons to be cautious in assuming that rates can come, go back down to where they were over the last couple of decades.

Erik: I can't thank you enough for a terrific interview. But before I let you go, I want to ask you about your boss, Ian Bremmer.

I know he has two super high priorities going into the beginning of the year. Of course, the first one is accepting our longstanding invitation to do a Macrovoices interview, but right behind that, he also publishes this annual top risks piece, which kind of tells people what to watch out for in the coming year, when does that come out, and who is it available to? And in general, for people who want to learn more about Eurasia Group or follow your work, how can they do so

Robert: Well thanks for bringing that up. I'll definitely tell Ian that he should follow up on this conversation we've had today. You're right, we put a tremendous amount of work into our top risks outlook. It's not really a risk, it's really our vision. So it's our base cases for how we think the world is going to go. But we do focus on developments that are not fully appreciated by investors by political leaders and the like, and that's why we call it top risks. It'll come out the beginning of the first week of January. So I think that's around the third. Last year was a weird one, to be honest. In some ways we maybe forget that, but, in the past many times, top risks would focus on far away wars or big geopolitical global trends.

Last year, most of the risks had to do with the US had to do with how the president, a new president's policies. Would change the world. So we talked about tariffs in immigration. We talked about norms and rule of law. We talked about deregulation and those kind of issues, and all of that remained front and center for investors.

We haven't decided yet, and I wouldn't wanna front run Ian on all of this, but I certainly think that as we look ahead and given, if you think about what we've just been talking about today. The US remains at the center there of these debates, good and bad. There will be some wins.

They won't all be problems. But I do think we're in a world where the US effort to, as I've said earlier to the us. Desire to rewire the rules for global trade and investment will continue and the implications of all that, what it means for us in terms of a country on our politics, on our constitutional rights and rule of law and the like. All of those issues will continue to be of central importance for all of us in 2026. And yeah, look, stay tuned for our top risk report at the beginning and I'm happy to talk about it. We put it on the website. We have a lot of public facing documents and even puppets.

Please tune in. It's Eurasiagroup.net

Erik: And again, folks, the website is eurasiagroup.net. Patrick Ceresna and I will be back as Macrovoices continues right here at Macrovoices.com

 

Erik: Joining me now is Bianco research founder Jim Bianco. Jim, what a perfect time. We're speaking Wednesday afternoon, just literally minutes after the Fed Press release. We've got a cut, which was expected, some bill purchases, which some people expected, and I think it's also important to talk about the divide.

This was not a unanimous decision of the Fed. What is in your mind, the signaling of a split fed on a decision like this that was widely anticipated? Let's cover all those things.

Jim: All right let's start with the cut. The Fed cut the funds rate by 25 basis points for a total of 175 basis points since they started cutting in September of 2024. They left the door open to the idea that, they might be done or pausing for a while. The dot chart, which was updated or dot plot, which was updated, only shows a median of one more rate cut for all of 2026. Of course, there's eight meetings.

One rate cut means seven of them. You're not gonna get a rate cut if that's indeed what they all wind up doing the other thing they announced. As you pointed out, they call it reserve market purchases, RMPs, don't call it QE. They're going to buy $40 billion of bills, maybe out to three year notes if necessary, but mainly bills a month going forward.

Now, what's that all about? The Fed has been doing quantitative tightening. They have reduced the size of their balance sheet, which also reduces bank reserves to the point now where the funding markets are not big enough for the underlying treasury market.

Remember, the funding markets, the repo market and everything else, what is their purpose to finance the 38, 39 trillion dollar treasury market? They're not big enough to do that. There's a tightness in that market, and those rates have been going up. So the Fed announced $40 billion of buying to try and add more reserves into the system, give banks more capacity to hand out more repo loans to meet the size of that market.

Now, the pushback I'll give you is stop there real quick before I talk about the vote. The question that everybody's been attacking has been, I think from the wrong side, they've been saying there's tightness in the repo market. So the fed's gotta do quantitative easing, refer market purchases.

They need to change the supplementary leverage ratio or maybe expand the standing repo facility or all these other things to accommodate the funding market to meet the needs of the treasury market. And I've said, but no one's turning it around and saying maybe the funding markets are giving a signal.

The treasury market's too big as opposed to the funding markets being too small, and that signal is Congress. You can't keep borrowing. You can't be keep borrowing at this level. You can't keep running $2 trillion deficits and keep with these massive budgets because if the Fed were to expand the funding markets, which is what they're doing, maybe they're sending a signal to Congress.

Go ahead, keep running these big deficits. Go ahead, expand your budget. Start new programs. And what's the concern there? I think that in the post COVID environment. After the supply shock of 21, that caused inflation to spike into 22. The next biggest driver of inflation is government spending. And if the repo market or the funding markets were too small saying you gotta back off in the government spending, and our answer is no.

We have to expand the repo markets so they continue the government spending, then we're gonna be worried about that. They're just encouraging or enabling more government, which enables higher inflation. Finally, as you pointed out the vote was nine to three. That's the first time since 2019 that we've seen three dissents.

And they were two-sided. Two dissenters Schmid of Kansas City, Goolsbee of Chicago dissented that they did not want to cut rates. And Stephen Miran wanted to cut rates 50 basis points. So we had a hawkish dissent and we had a dovish dissent. But going into this meeting, the expectations were for a bigger amount of dissent. I'll quote Nick Timiraos, the Wall Street Journal, Fed Watcher, yesterday's paper. He pointed out that if you listen to all of the Fed speak, since the last meeting on October 29th, there's 19 members of the Fed. 12 of them are current voters. They rotate the voters. 10 of them have come out with statements that they are uneasy about continuing to cut rates. And five of them were voters, but we only got two con dissents against cutting rates. And overall we got six soft dissents. Now what's a soft dissent? The Fed put out its dot chart again today and there was still a 25 dot plot in there, and six of those dot plots were for three and seven eights, which was the rate before the meeting. So six of the members put down as their dot that the fed should not be cutting rates, although 10 of them have given speeches suggesting it, and only two of them dissented. So a couple of these members that said that they didn't wanna cut rates actually relented and went along with it.

Now why is that important? Because in May we're gonna get a new Fed chairman. Kevin Hassett seems to be the leader in the clubhouse right now and that Fed Chairman is presumably gonna do the bidding of Donald Trump, who has made it very clear. He thinks that the funds rates should be a lot lower than where it currently is.

There's a number of Fed officials that are more concerned about inflation to continue to aggressively cut rates. In theory they could stand up and push back and say, yeah, but you're only one of 12 votes. New Fed chairman, who's the other six that are gonna vote with you to give you a majority because we're not in agreement here with you that we should be cutting rates, which is all fine and good, but if they wait until May to finally push back on that, they look, the Fed looks.

Highly partisan. 'cause you waited for Trump's guy and then you got a spine with all your dissents. But when we had Powell and before him yelling and before her Bernanke, you never dissented on any of that stuff. But now with Trump's guy, you're dissenting. And so they would've been better off, in my opinion, having a seven five vote Now to show, look, we're pushing back.

He had enough to get the cut through, but we're really of the opinion that we shouldn't be aggressive with these rate cuts in the future. Note to next Fed Chairman, but they didn't do that and I think that might come back to haunt them when we get that next Fed Chairman.

Erik: I'll come back to Kevin Hassett in a few minutes, but I wanna go back right now to some of the comments that you made a few minutes ago about how the market is responding to the government continuing to run all these deficits.

It sounds like you're saying, okay, early stages of bond vigilantes showing up in fighting armor might be, starting to show their faces. Is that what you meant? And I guess if the qualification I think is boy, for any sane thinking person, we've all felt for the last 20 years, like US government spending is outta control.

Surely the bond vigilantes are gonna show up and it's all gonna be, forced their hand. But that hasn't happened in the last 20 years. So what would be the changing factor that would cause Bond vigilantes to actually be able to change the or to force the hand of the government. And why hasn't that happened for the last 20 years?

Jim: I'd say for the last part of the question, the last 20 years, let's say pre COVID, no matter what we could do, we couldn't get inflation above 2% to any great degree except for brief moments here and there. So we were always in a very low inflationary environment. So the bond vigilantes really had nothing to be vigilant about.

In the post COVID environment, we are five years. We are approaching the fifth anniversary of the COVID shutdowns. Right now, I actually, excuse me, the sixth anniversary is coming in a few months in February of 2026, and the inflation rate is still 3% or higher, depending on which ones you look at. So they can't get inflation below three Now.

As opposed to above three. So the bond vigilantes, I think are, as you pointed out, putting on their armor and starting to push back. Now, I would argue again what I said before, 175 basis points of cuts and the 10 year notice, 55 basis points higher. On top of that, I would point out that gasoline prices in the last couple of days.

Have now broken below 3% as $3 as national average. That is the first time since the Russian invasion of Ukraine, that we have seen gasoline prices below $3. So that alone should have been very bullish for bonds. So you've got falling gasoline prices, you've got 175 basis points of cuts. And you've got the 10 year yield higher by 55 basis points.

While all that's happening, that sounds to me like a real pushback in terms of bond vigilantes, even though you might say, but Yeah, but it's still 4.15. It's not five, it's not six. Yeah. But they've ignored what should have been. Incredibly bullish stories for bond yields to fall and fall quite a bit, and they haven't.

So yeah, I think that the bond vigilantes are out there in force right now. And if we continue to push, Hey, we need more cuts. We need to be cutting by 50, the president. Criticize Jay Paul after the press conference saying that they should have cut 50 basis points today and not even be talking about being close to being done.

That the bond vigilantes are there. That, that we should probably be in the low threes right now, all things being equal, but we're 4.15, so there is an impact from none.

Erik: Let's stay on inflation before we come back to Kevin Hassett. Obviously we just got a 25 basis point cut, but more importantly, as you say, starting in May, president Trump has been super clear.

He wants a lot more cuts. He wants to see 1% cut, baby cut. Obviously the textbook fear is that really starts to unleash inflation. I suppose the counter argument to that would be while that. Does unleash inflation, it won't unleash any significant inflation before November's midterm elections.

And I think that's probably what's driving the president. So do we have a setup here for cut, baby? Cut. That sets up a big inflation response, which maybe doesn't actually kick in before those midterm elections, but. Boy, it seems to me like we could have a setup for inflation to start to run away in late 2026 into 2027.

Am I right to think that?

Jim: Yes. For the inflation statistics are officially classified as lagging indicators, so they will take some time to kick in and show the inflation bond markets are forward looking. They're not gonna wait for the inflation, they're going to anticipate the inflation.

So if you wind up. Cutting too aggressively, and the markets are worried about inflation, they'll react to it almost immediately. And that, could be the story of 2026 if we were to wind up getting a single-minded focus fed chairman who wants to aggressively cut interest rates. By the way, let me.

Talk about that inflation by diving off a little bit into the labor market. Why did the Fed cut rates, what is the Fed most concerned about? They're concerned about that jobs are falling that a year ago, a year and a half ago, the US economy was cranking out 150,000, 180,000 jobs. The beginning of the year we're still, churning out.

80 to a hundred thousand jobs. Now it's churning out somewhere around 10 to 30,000 jobs. And I say that somewhere because we don't have the official statistics because of the government shutdown. They're still only current through September. We're looking at things like a DP, we're looking at things like challenge of Grand Christmas layoff announcements.

We're looking at some alternative data to that degree. So the Fed is worried that. The labor market is producing less and less jobs. Absolutely true, but they only give very short notification about what the Fed calls labor supply, which the market calls the breakeven rate. How many jobs does the US economy need to create?

The biggest driver in deciding that number is the population growth of the country. So if you go back to 23 and 22, when we were cranking out almost 200,000 jobs a month, the population of the country was booming. Why was it booming? Because of undocumented workers in illegal immigration, we were getting 3 million plus illegal immigrants into the country a year in 2023 that was making the population of the country swell by more than 1% today.

I'll go with the numbers that Trump used at his cabinet meeting last week, and he's repeated these numbers many times that the illegal immigration into the US in the last six months, he says, has been zero zero, not one person. He also says 2 million people have deported. 500,000 of them have been through ICE arrests, and 1.5 million have self deported. Now, he's not showing his work. We don't know if those numbers are accurate but conceptually they are accurate. We do know just from the watching the economy, the number of undocumented workers coming into the country is down a lot. The number of people deported being deported versus last year is up orders of magnitude.

Whether or not it's 2 million and zero or some number, near that we don't know. But, that brings up an issue that it's possible that the population growth in the United States is either zero or negative in the 250 years this country has existed. There's only been one other year that we've had negative population growth.

That was 1918, the Spanish flu, we got close in 2020. We got down to 10 basis points of growth. We didn't even have negative population growth during the Civil War when we. Killed 6% of the population of the country. 'cause the fertility rate, the average woman had about six kids. That's why we didn't have negative population growth, but we could be having it for the second time now, or something very close to zero if you don't have population growth.

Paul actually said this, if you don't have population growth, you don't need a lot of jobs. And we might be cranking out 20 or 30,000 jobs a month. We don't need many more than that. And if you are cranking out 20 or 30,000 jobs a month. Every other, or every third month might be a negative month, and then you have a 50,000 month to offset it there along the way.

If that's the case, and the Fed is cutting rates because they're worried about the labor market, they just cannot make that jump. Yeah, we, we're producing 180,000 jobs a month. Now we're producing 30, but we only need 30 or 20 or zero, and we're okay with 30. So don't worry about the labor market. They can't make that jump.

They're saying, what if we're wrong? What if the labor market keeps sinking? We gotta keep doing what Paul has referred to as risk management cuts, and they're not necessary. Then all that stimulus is just gonna go in the prices and push inflation even higher. So that's really the question about the labor market and about how inflation fits into this.

How bad is the labor market right now? And to answer that question, you have to ask the question, how many jobs do we need? Is it zero? Is the break even rate zero? Any positive number is okay. Again, over. A three or six month average. You can have negative numbers in there and some positive numbers in there as well too.

That is really the open question, and if we come to the answer that yes, it is somewhere near zero, yes, 30,000 is enough, all these rate cuts are just gonna go towards inflation, and we know everybody's angry about affordability and you're just gonna push inflation even more. That could become a real problem.

Erik: Help me if I'm misinterpreting the news flow here. 'cause what I think I've heard is a few weeks ago, president Trump announced, okay, look, it's the fix is in. It's a done deal. I've made my final decision who the new fed chair is going to be. I'm not going to announce it till after the end of the year, but.

It's a done deal. It's decided that's it. And then this week he started interviewing other guys for the job. Okay. Did he change his mind? What happened? I think almost everybody in the market assumed when he said that his decision had been made, that he was talking about Kevin Hassett. So I guess I should ask first, do you agree that's who he meant when he was saying that the Vix was in?

How come he seems to be backtracking on that? Is he, is it no longer a certainty that Kevin Hassett is the pick? What do you think?

Jim: Yes, I think Kevin Hassett was the pick. I think that there is some doubt if you wanna go with betting market numbers. Kevin Hassett was trading mid to high eighties after that announcement came out that, Trump has made his decision and now he's trading 69.

It's still above 50. He's still the favorite, but doubt is creeping in. Why is that doubt creeping in? As best I can tell is after it became known that Hassett was gonna be the guy, a lot of press reporting was corporate American Wall Street was pushing back about Hassett and they were unsure whether or not he should be the Fed chairman.

Not because of his resume. From a resume standpoint, Columbia professor of Economics has worked in the White House, has worked at the Fed. He has got a resume that makes him qualified to be the Fed Chairman. Question is, are we gonna get the Kevin Hassett of the resume or are we gonna get Kevin Hassett stooge of Donald Trump, whose job is to just cut interest rates and not even think about anything else?

Wall Street and Corporate America was worried we were gonna get. Kevin Hassett, stooge, and they were saying what we were, what I was trying to argue, before you cut too much, you're too aggressive. You might have a backlash in the bond market because you're not being sufficiently vigilant about inflation, and you could actually have higher rates.

So what I think happened was Hassett who's been out there almost every day, has been trying to assuage these concerns. About the idea that, he would he would overdo the rate cuts, and I think Trump doesn't like hearing that from him. Also, Trump likes the way that Scott Bessett, the Treasury Secretary, is a respected and calming voice in the market, and Hassett Wise, a very qualified, and he's a, competent person.

He's not getting that respect. From the marketplace right now. Seems like Trump is maybe having second thoughts and he is opening up the the selection process to interviews. But let's be clear. Question one is, what are you gonna do to get the funds rate to 1%? How are you gonna ignore anybody who gets in your way?

In order to get the funds rate to 1%, it's gonna be question two. So he's not looking for an objectively minded person. He's looking for somebody who wants to be single focused in lowering interest rates.

Erik: Let's talk about the prudence of the President's agenda because I can't believe he really cares that much about policy rates, which is what the Fed actually sets, I'm assuming.

The reason he cares about that is he's making the assumption that those policy rates translate, you, you lower the policy rate, it's going to translate. To lower rates further out on the curve. As you've described, it doesn't always work that way. I'm not sure if the president sees that, but boy, if you imagine the Democrat party saying, okay, we wanna do anything we can against President Trump, how many economists could we round up to express?

Publicly, the view that aggressively cutting policy rates doesn't necessarily result in lower interest rates on something like mortgages or car loans or things that voters care about. It seems to me like there's a pretty large contingent of economists that don't really like the president who would be ready to take that view.

And I think that frankly. The way I understand monetary policy, transmission is a lot of it has to do with the mood of the marketplace. So that kind of propaganda, if you will, could be very effective in maybe causing the back of the curve to respond opposite the way the president is assuming.

Am I reading too much into that?

Jim: No, you're reading exactly into that, that is the concern. And there will be enough people that will come out, me included, that would say, look, aggressively cutting rates is gonna backfire on you and produce higher long-term interest rates, because that's where mortgage rates are set and that's where corporate borrowing is set.

And those are the rates you wanna lower. Remember, Trump is already said that he. Thinks he should be fed chairman, but he acknowledged he can't be. He wants to appoint himself because he's a real estate guy. So that makes him, in his mind, an expert in interest rates and in fairness to Trump, every real estate guy I've ever met thinks that they're an expert in interest rates.

And they always have their expertise go in one direction. They're too high and they need to go lower. That's what every real estate guy thinks, because they think in terms of mortgages because that's the way that they're they've cut their teeth. So he's of that opinion right now that he needs to see interest rates come down.

And I still think that, he, that's why he believes. That the economy will boom. If we were to see the Fed continue to cut rates that eventually, long-term rates, mortgage rates, all of those borrowing cost rates will come down. And if there've been slow in coming down now. Trump's ready-made answer is too late.

That's what he calls Powell. You should have been cutting rates aggressively and earlier and we'd have a much lower tenure notes. We'd have much lower 30 year mortgages if we were to do that. Although I would argue no, it's more about. Worrying that you're overcut worrying that there's an inflation problem and that's what's holding it back.

And the only reason we're down at 4.15 is drill, baby drill seems to be working 'cause gasoline prices are down, but you still can't even get the funds rate. The 10 year rate below when you started cutting the funds rate at this point. So yeah, I think that's exactly what it is that.

The president is pushing really hard on it, and there's going to be some pushback if that's where they're gonna go in the future. That is, the new Fed chairman is gonna be single-minded, focused about being aggressive and cutting rates.

Erik: It seems to me that this is all a great big setup for the president to accidentally unleash.

I think there's a secular inflation in the making anyway, but it seems like, it takes a catalyst to really get an inflation to run away. Didn't you just kinda lay out the game plan for creating that catalyst?

Jim: Yes, and that is my concern about why I think interest rates could go higher from here because.

We're not talking about, being vigilant about inflation. Jay Powell said today that every member of the Fed expressed a concern that inflation is too high. I agree with him. Not one member of the Fed, according to Jay Powell has, is their base case. Any consideration to raising rates in the future doesn't mean we have to, but think about what I just said.

We're all worried about inflation, but we're not gonna do anything about it. We're, because doing something about it would mean raising rates. And so that is a, that is going to be a real concern. And as a matter of fact right before we, we started talking, Jay Powell said something at the presser too that was interesting.

He said that the inflation rate ex-tariffs is in the low twos now. There is no measure called inflation rate ex-tariffs. So obviously the Fed has invented one. They haven't shown their work as to where they come up with it, but I was looking at some of the breakdowns of the inflation numbers and I was looking at CPI services 'cause we're not tariffing services.

That's above three. CPI services. Less energy is above three and a half right now. I don't know. Yes, he's correct. CPI goods, which is largely a lot of tariff stuff is in there, is rising rapidly, and that does account for the majority of the rise of inflation over the last several months. But if you take that out of the equation.

Services are still above 3%. I don't know where he comes up with the low twos. Obviously he's got a measure that he came up with to come up with that, but I wish like the president would show his work about what the population growth of the US is. I wish that Jay Powell would show his work as to how he came up with that low twos number of, inflation ex-tariffs.

Erik: Let's talk a little more about inflation's, particularly secular inflations and how they work, because I could imagine, somebody from the Trump administration was listening to the two of us talking about this. They'd say, look, guys, come on, relax. We think that we can bring policy rates down that should bring long-term rates down in the unlikely event that Jim Bianco is right.

And what really happens is that pushes longer term rates up because of inflation fears. We can make an adjustment at that point, maybe we'd have to hike rates in order to bring longer term rates down, but we'll find that sweet spot and it's all gonna be fine. I don't think inflation works that way.

I think the way inflation works is once you start to see a runaway, not so much in inflation itself, but in inflation expectations. What happens is it changes consumer behavior. People start buying things now in order to buy them before the price goes up and all of the sudden you get a runaway situation that's out of control and can't be stopped.

It seems to me like we're playing. We're playing with fire here. We're playing with matches at a time that we don't understand that the forest is really dry and potentially at risk of once something gets burning, we can't stop it. Am I exaggerating to think that's a risk and what could go wrong here?

Jim: No, it's a real risk and it's happening right now, and I'll even, Jay Powell addressed this and I disagreed with him there. There's two broad measures of inflation expectations. One broad measure is market-based measures. You can look at the inflation swaps market. You can look at the treasury inflation protected securities market to back into what's called the inflation break even rate.

What is the market pricing in for inflation? So if you look at market levels of inflation there. Anchored to use the fed term. They're low in the low twos, they're not moving. They don't have a lot of volatility, and they would give the Fed and the administration comfort. See, the market-based measures of inflation are not a problem.

But if you look at the consumer-based measures, the surveys, the University of Michigan Survey of Inflation if you look at the political polls, the number one issue according to the political polls is. Affordability, the president's approval rating is falling because everybody's talking about affordability.

What they mean is the level of inflation. CPI is up 27% since April of 2020. And they would like to see some relief on these high prices in their example. Inflation for the public is unanchored, and they're very upset about it right now. Jay Powell dismissed it by saying that the inflation numbers are well-behaved in the surveys.

I'm like. We've only been talking about the University of Michigan being at 30 and 40 year highs in inflation expectation all year. And I'm sure he's found some other survey that says that, no, that's not the case. But the big ones that we look at are showing that's the case. That really comes down to what is more important than a bunch of bond traders aren't pricing in future inflation, or the public is tanking the president's approval rating and is spit and mad about affordability. I'm gonna go with the public being more important than a bunch of bond traders and that the public is the one that's going to lead towards unanchored inflation 'cause they want something to be done.

I'll say the last thing about this is how mad are they? They just voted a socialist in this New York City mayor. They almost voted a congressman who is a socialist in, in a very red district in Tennessee, and they voted a socialist in the night before we're recording as mayor of Miami. So they're now turning towards socialists that are saying, you want affordability?

I'll just cap the price. I'll just make it illegal for these prices to go up anymore. Does it make. Economic sense. No, but I just want relief. And if they're offering me relief, I'll take the relief is what we're getting right now. So yeah, it is a problem. And just because the tips desk at Goldman Sachs is not pricing it in.

Therefore doesn't mean it's a non-problem

Erik: Jim, I couldn't agree with you more. Let's shift gears now and talk about the consequences of all of this stuff in markets. If you and I agree that there's a very si significant risk that we're about to unleash a secular inflation the first thought is both precious metals in crypto.

Then I guess the next thought is let's talk about what happens in a big inflation to the stock market. I think a lot of people, remember the 1970s and think inflation up stocks. Down. I don't think it really works that way. I think it's inflation up stocks up at first a lot, and then stocks down only after the feedback loops kick in.

So let's get into what this is gonna mean for markets.

Jim: Yeah. So let's start with the precious metals markets. Obviously they're flying year to date. I'm just looking at my screen right now. Silver's up 110%. Gold is up 61%. Year to date. Silver traded over $61. The day we're recording at one point earlier in the day and gold is still at around 4,200.

They're not pure inflation plays, I don't think they are. What they are is they are. Uncertainty, bad things happening plays. That's why you buy gold. One bad thing obviously is inflation. Deflation could be another one. Political strife could be a third one. And the like. And so the fact that gold has been moving up quite a bit has been a signal to the marketplace.

It's worried, there's worried that there is a problem here and a lot of that's been coming outta Asia right now because you could actually argue that within Asia. The inflation problems and the worries are bigger. Japan has got a real inflation problem for the first time in 50 years. 50 years. Japan has a higher inflation rate than the United States.

You gotta go back to 1977 to find the last time that they actually that, that the, they had a higher inflation rate than us, as they do right now. China is an, I've been a very big bearer on China. I think that their economy is struggling. I think they've got a real estate problem. So that's been the big catalyst.

For gold, and the problem with China is if their economy is struggling, their answer is print, more accommodation, more government spending, and that would lead to inflation over in China. Now, the stock market, you're right, the stock market as we talk right now is just closed a few points short. Of an all time high.

The all time high, by the way, was set on October 29th, which was the last day that the fed cut rates. And so at this point I think we need to define the stock market two ways. There are the AI companies and then there's the non-AI companies. I use Michael Camp's at JP Morgan. They went through and they identified what they call 41 AI related companies.

It's the Mag seven. It's a couple of other companies along those lines. It's a few power companies that get primarily their business from supplying data centers with power, couple of capital equipment maker companies, 41 of them, those 41 companies. 47% of the S&P 500 market cap. The other 459 companies in the S&P are 53% of the S&P.

Now, what I just said is one theme is half the US stock market, when was the last time one theme was half or more of the US stock market. The argument is, and I've looked at the data too, you'd probably have to go back to the railroads of the late 19th century. To find the last time that we've seen a theme concentrated to that degree.

The AI companies have been 70% of the gain of the S&P 500 over the last few years. The other companies the have the other 4 59 companies have been only by about 30% of the gain. We restated the non-AI part of the stock market is up about 8%. Per annum over the last couple of years. Not a bad number, but we're all used to this 20% gain that the index has.

That's largely because of AI. So we've got a transformative technology coming in right now in the form of ai, and that has gotten the marketplace to get excited to push those stocks up. Beyond that, you've been getting rather middling kind of stock market returns, seven 8% type of returns in the market, and you're right in the initial stages of an inflation.

The earnings look good. Companies can raise prices and they can fatten their margins. But as the inflation goes on, that reverses because then something else happens. Their input costs go up, whether it's labor or raw material goods, especially if it's raw material goods from overseas that's being tariffed.

They go up and they're gonna start getting squeezed. That's why if you go back to the seventies example, if you go back to the late sixties, early seventies, people were openly saying. The best inflation hedge is stocks because they can raise prices and keep up with inflation, so own stocks. And then by the mid late seventies, that completely reversed and it completely went the other way because it was yes, but your input costs go up and your margins get squeezed, and it's really hard to make a profit.

And the stock market was a terrible performer. Until the early 1980s. And so that's where I think we are. We're in the early stages of the of the inflation boom. But even with that, the non-AI part of the stock market, which would be more interest sense inflation sensitive is really. Seven, 8% returns a year.

It's not the 15 to 20% that we've gotten used to with the overall index. That's because of AI

Erik: Jim, let's come back to what you said earlier about socialists being elected and so forth. It seems to me what's going on here is in decades gone by, younger generations didn't vote and therefore didn't have much say in things.

They were busy going to nightclubs and partying and having fun and, nobody voted. Therefore the opinions of. 20 somethings didn't really matter in terms of electoral outcomes. Seems like Generation Z is voting and they're voting for socialists and there doesn't seem to be any amount of, Hey guys have you looked at the history of this and do you understand the reasons that the United States has been more financially successful than socialist countries? The answer is they're not interested in hearing anything from old people. Okay, boomer, whatever you say, we don't think that your capitalist system is working for us.

We're gonna pick the opposite of it, whatever that means. And we don't really want to think anymore about it than that. At least that's the way I perceive it. It seems to me like that's, they're more than half of the people. They're growing in their numbers. They're going to continue to dominate majorities as long as we have a democracy seems to me we're gonna have more socialists, not just mayors, but congress people and eventually move toward a socialist system in the United States.

Am I wrong to think that's almost inevitable? And if it does, what's the long-term outlook for markets?

Jim: I think you're right, and I think you're right for the following reason, it hasn't been working for them. The widely quoted statistic that a lot of people have been saying is the average age of a first time home buyer's 40.

The reason it's 40 is you need to save for many years in order to buy a house. Prices, as I pointed out, are up 27%. They are finding it at very difficult in order to make ends meet when it comes to prices. Then on top of that, you've got the whole idea about what AI is gonna do to the labor market, the jobs market.

I'm graduating with a degree from a recognized university, in other words, I'm not getting a basket weaving degree, and from a university you've never heard of. I'm getting a degree from the University of Michigan in business or something like that. Good degree. Degree, good school and I'm not being able to find jobs.

And what I've been told is all the jobs I wanna be find I would like to get those entry level jobs are being replaced by a large language model. So they're feeling that prices are too expensive, opportunities are too few. And then here comes a guy like Mandami. We're going to have free buses. We're gonna, we're gonna have cheaper grocery stores.

We're gonna put a cap on the amount that your rent can go up, and the boomers are telling 'em that stuff doesn't work and they're saying, yeah, what you are doing isn't working for me now, so why should I listen to you? 'cause I'm not happy that I gotta save till I'm 40 to buy a house. I can't get a job because I'm being priced out of every job because of a large language model.

I can't afford anything at the store. Now, and you are telling me that if I vote for this guy, it's gonna be worse. It's pretty bad right now is what they're trying to say. And so I understand that. And you're right. Until we can tackle this affordability problem, until we could show them that capitalism is the way to go, look, I'm of the age that, I came into the workforce in the early eighties.

During the Reagan boom during, after the 82 bottom in the stock market, when the 25 year Ole's all wanted to wear yellow suspenders or yellow ties and suspenders and get a job on Wall Street and make a lot of money because there was opportunities there left and right. That is not the case today. So I understand where they're going.

You might refer to this as a fourth turning type of thing, and that you know that we are in that fourth turning, that winter that we're going to see with the pushback that we're getting. On one respect. I get it. I understand their frustration. I understand that, lecturing them about the evils of socialism and the virtues of capitalism, when they don't see it, is it really gonna help them?

Right now? And yeah, it might get worse until it gets better. Now the way it could get better is we start to attack this issue. Take housing. How do you fix the housing problem? More supply. The problem there is the president keeps yelling that the affordability thing is a con and it's a hoax, and it doesn't exist, and prices are coming down and things are becoming more affordable.

That's not the way to answer that question about affordability, that you're wrong. Everything's fine, is really what is what his answer is. So we're not gonna address it and we're gonna have a pushback. So I hope. We're going to start to address it. We need more homes built, being built. The number that I've seen that I believe is from 2009 to today, there's been about 21 million new households formed in the United States.

2009 to 2025. There's been 18 million new homes built. So we have a deficit of about 3 million homes plus. Probably another 2 million existing homes have been condemned and torn down because they were just old and not out in disrepair. So we might have a deficit of about 5 million homes. We need to loosen up, say zoning laws, building laws, land use laws in order to let contractors and let builders and developers build more homes.

Problem is the the boomers that own the homes don't wanna hear that because that sounds like more supply, more competition. My house might fall in price. So yeah, we've got real issues we gotta work through. If Neil Howell was here, I think he would probably say, yeah, and that's exactly why we have fourth turnings and maybe we're getting very close to one right now.

Erik: Isn't it true then? The fourth turning usually breaks down and replaces all of the biggest trusted institutions and so forth. Seems like we are indeed. Very definitely in the late stages of a fourth turning. 'cause they last for about 25 years. The expectation would be sometime in the early 2030s, we start the first turning with newly constructed systems that the younger generation is in charge of designing.

And, it would be the millennials are in charge and Gen Z is doing all the work in order to usher in new systems to replace what we have today. I don't know. It's, it feels to me like. The the feelings of Generation Z are completely understandable, but I think about, I don't think they really understand the consequences of socialism.

What do you do? You could try to reach out to them and communicate with them, respecting their views, trying to engage them in a respectful debate about the benefits of different economic models and maybe why socialism isn't the solution. Thing is Jim. The last guy who tried that was Charlie Kirk, and it didn't really end well for him.

Jim: I agree. What you have to do is instead of lecturing them about the evils of socialism, do what I saw when I was 23, 24 years old, in 1983, 1984, and that was. The opportunities that capitalism was presenting, that you can get these jobs that could give you decent careers and get you moving along to being able to afford nice houses and nice things, and do the things in life that you wanna do.

Show them the opportunities. Instead, we tell 'em, socialism bad. Save till 40. And don't complain about the prices at the store. I'm sorry. That's just the way it is. That's not a solution for them, so they're gonna need to have something more than that. So hopefully we'll get to that point. You are right in the first turning, maybe with large language models and AI being the transformative technology I am a big believer that technology is a net creator of jobs

I've seen the studies that say 50 million jobs will be displaced by AI of 160 million in the United States. So roughly a third, maybe about 30%. Okay. I think that might be right, but I also think that AI might create 70 million new jobs and those new jobs it's gonna create. Are currently in industries that don't exist. And so maybe we could get to the point where we turn to the millennials and the Gen Zs and say, those 70 million jobs in those industries that don't exist, go create those.

Go create those industries, go do that, and you will make, and that's the wave that your generation will ride. In order to become more financially secure and not wait for the boomers to do it, or the boomers won't do it or the Gen Xers to do it. 'cause the Gen Xers are now starting to approach 60 years old anyway, and the older ones are at least.

And so that hopefully could be where they're gonna go with this in the first turn. And I actually think they will. And I think that, like I said, at the end of the day, technology is a net creator of jobs. The problem is. I can identify the job that's gonna go away, the job that it's gonna create doesn't exist.

So it's always a concept that it's out there and but they usually are. And those jobs, go make those jobs reality. And so hopefully they will do that.

Erik: Jim, I can't thank you enough for a terrific interview. As usual, before I let you go, let's talk a little bit about what you do at Bianco Research.

You are not actually running an ETF. You manage an index, which WisdomTree follows with an ETF. So people who want to invest around your views and your strategy have a way of doing so. Tell us more about it.

Jim: Yeah, so I do manage, I'm a fixed income guy, by, by, by training and by practice. And so we do manage the Bianco Research Total Return Index.

You can find out about it at BiancoAdvisors.com, we set the parameters on the index and WisdomTree as an ET TF that tracks our index. I've used the example, think of me like the head of the S&P 500 Index Committee and SPY tracks my index. That's the setup that we've got. WTBN is the ticker symbol for the wisdom Tree Bianco fund, and my day job still exists is that is as being the researcher of Bianco research. You could find out more and more about us at the words Bianco research, either BiancoResearch.com is our website, Bianco Research on Twitter, Bianco research on YouTube. Either Jim Bianco or Bianco Research on LinkedIn.

And so you could follow me on any of the socials. I try to stay active on the socials as well too, or check us out on our website.

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