00:00 Absolutely awful. I mean, everything that could go wrong is going wrong, right? This is a bear market, at least a two-year period during which stocks post negative real returns. I see a lot of crises converging and different pain points and you look at the key levels on the yen, on yields, on oil.
00:19 I mean, you're standing on ice and you see the cracks all around you. You don't know which one's going to crack first, but you should probably get ready for swimming. This content is directed at persons outside the United Kingdom. It is not directed at and must not be acted upon by persons inside the United Kingdom.
00:41 Nothing said on Risk Takers is a recommendation to buy or sell any token, asset, or security. Views expressed by hosts and guests are solely their opinion and not financial advice. Check the description for more information. What's your — if you think about it, it's effectively the first time in I don't know 50 plus years where the Fed have gone through a cutting cycle that's been prolonged enough for it to be an actual cutting cycle and rates are higher than when they started. I ask from
01:13 the perspective of — to me it just looks like the Fed aren't really that important. The market goes where the market needs to go and the Fed, yeah, they have a decent amount of control of what happens at the short end of the curve, but really the economy runs at the long end of the curve.
01:31 So the Fed is just like a passenger and the car is driving along. >> So your question is about the fact that the yield curve has steepened as the Fed has cut, right? And what I think it means — I think partly it's normalization of policies that were actively distorting term premia for a decade, right, when you had QE, when you had forward guidance and dot plots. We took that away, so I'm not sure that we've really gone too far in the other direction.
02:17 Partly it's the realization that rates were too low for too long, that we live in a world of higher nominal growth. Now I'm concerned that the breakdown between real rates and breakevens is completely off. I agree the move in nominal yields to 5% doesn't seem that crazy to me.
02:39 I mean, if I were to make a guess, maybe we'll have 2% real growth and at least 3% inflation. So by any standard 5% is not generous. But I kind of disagree that the move has been all in real yields and not inflation expectations. And then finally we have all these supply and demand considerations that indeed blur the picture in terms of, okay, is this an economic message or is it just something that has to do with how much debt we have to roll over and how much
03:13 financing capacity is being used by the hyperscalers. So it's all these things all at once. I don't think it's excessive. Like I said, I don't think bonds are too cheap. But I do see them for the first time — my view for the past 5 years is zero duration in the portfolio.
03:37 Zero. Your 60/40, take out the half of the 40 that goes into Treasuries and shove it all in a mix of cash, gold and commodities. For the first time I would start reallocating a little bit to Treasuries. And there are many parts of the curve that are interesting.
03:57 If I look at the three-year, it's gone up a lot. Three years, one year, that people don't really monitor all that much, but >> it's really moved a lot. And I don't think the Fed is going to be able to hike all that much. And even the long end, I also find maybe not attractive, but certainly more attractive than equities. Yes.
04:19 And if we do, as I believe, get a significant market correction this winter, I think that position will protect the portfolio to some extent. >> Okay. So, you think there's value in Treasuries for the first time in a very long time. And I think that goes against the grain really because — I open my Twitter feed and everything is about the global sovereign debt crisis, I log on to Reuters and all I can see is bond yields across
04:52 the board. The headlines are bond yields are breaking out everywhere, the entire world is going through a sovereign debt crisis, and fundamentally it's interesting because I know you were just in Japan and everyone is saying Japan is absolutely dying, right? For the first time in what, 30 years, they've got growth. >> Yes. >> So is that good, is that bad? Go ahead, because everyone's saying it's bad but they've been in deflation for 30 years. >> Yes, I
05:28 completely agree with you and support you. To me there is a complete misunderstanding of Japan as the problem child when it is the solution. Here is a country that was, just demographically, 15 years ahead of Europe and maybe 25 years ahead of the US, and so they experienced firsthand the two biggest shocks of our lifetime that we will have to deal with: one, aging, and two, China, because they were there from the start, right? Many Japanese industries competed head-to-head
06:03 with China, and these were massive shocks. They led to about 30 years of deflation and relative stagnation. And the solution is: devalue the currency. If you look, the yen halved in nominal terms against the dollar since the 2011 earthquake. We went from 80 yen to 165. You add the inflation differential, it's even more than that. And that is a complete game changer. If you devalue your currency, eventually you reach a point at which
06:42 growth picks up, and this is exactly what happened to Japan. So when people do this debt-crisis fear mongering, what they should be looking at is R minus G, right? That's the fundamental equation of public debt. How much do you pay on your debt versus how quickly are your tax receipts growing? If that gap is negative, meaning you pay more on your debt than your tax receipts are growing, you need to cut spending in order to generate a primary surplus.
07:14 Now as we've seen, this is extremely painful, because as you cut spending the fiscal multiplier goes in reverse, you have bankruptcies around, so you can get into this depression-like spiral like Greece had. Japan is not there. Even with the increase — okay, 3%, whatever — nominal growth in Japan is above that. Tax collections have been even faster than nominal growth, something that I found stunning: tax collections in Japan in the past decade have grown by almost 6%.
07:45 So they can afford this 3% higher rate. The primary budget is balanced basically, maybe a small surplus. So G is greater than R and the primary budget is in balance. Japan does not have a debt crisis. Japan is solving its debt crisis. If you look at the debt to nominal GDP ratio and you adjust for the central bank's holdings — because it's a game of, the central bank owns your debt, you owe it to yourself, so you cancel that out — the net debt to GDP
08:19 ratio of Japan has fallen by 50 percentage points since 2011. So in a little more than a decade you wiped out 50 points of GDP of debt. This is the beautiful deleveraging, and you've done that without massive bank failures, without really impoverishing your population, without the stock market going to hell.
08:43 This is Ray Dalio's beautiful deleveraging. And the fact that people are still peddling "Japan is bust, look at the debt, bro" tells me people are not paying attention. >> Yeah. It's funny, right, because I think in a lot of ways the people who are saying this is a sovereign debt crisis across the board and look at Japan, they're a disaster — actually, at the end goal they're kind of right, because Japan did devalue their currency by 50%
09:16 relative to other fiat currencies. They got absolutely destroyed relative to gold, relative to things that actually hold their value or go up in value. But they're starting at A and they're getting to C and they're sort of missing the bridge between.
09:34 So, can you use Japan as an example — maybe it is an example, maybe it's not — because the US right now is on that path, right? It's on a path to where tax receipts — right now if you add up entitlements, Medicare, Medicaid, etc., plus interest on the debt, for the first time that is basically one-to-one with tax receipts.
09:57 So the US is roughly thereabouts from Japan 15, 20 years ago or whatever it was. Are there similarities? How do you square that circle? >> Yeah. I think there are similarities with the US, but I think the one that is more important is with the eurozone.
10:21 That's where I think Europe now looks more similar to Japan 10 years ago. The US still has many idiosyncrasies, singularities, because it's the world reserve currency, because we're the only superpower, because, for example, tax rates — I would argue there's massive fiscal space in the US. >> Increase taxes. >> Yeah, do a VAT, a sales tax like everybody, undo the past 10 years of corporate — we cut the amount of corporate income tax that we used to collect
10:57 by 66%. So there are policy levers that barely existed. I mean, Japan I think increased its tax rate from 5 to 10%, but they were a lot more constrained. So the continent that seems most related to this, to me, is Europe, where we do have the same demography that Japan had 15 years ago.
11:24 And we do have the same kind of geopolitical shock that Japan had. Basically for Japan it was, oh, China woke up and started eating their exports, and at the same time they had to pay more for the thing they imported, which is mostly energy. Europe is having that now. Now the Chinese competition is reaching — Germany was kind of protected for 10 years because of luxury cars and advanced machinery.
11:49 Now it's hitting right there. And then the energy — we used to be somewhat in a better position than Japan because France had nuclear, Germany had Russian gas, and that's gone. So we are facing the same economic crisis and demographic crisis. Now Europe so far has thought that it should handle this with two solutions, which are your economics-textbook solutions, and I believe they're wrong. One is immigration.
12:19 Oh, growth is slowing, we have this big Ponzi-scheme-like pension system, let's increase the labor force, let's create growth that way. And it was not a bad idea, why not? But practically, we have to admit there's a lot of studies that show that in Canada, in Sweden, in Scandinavia, the net contribution of immigration to the welfare system is negative.
12:43 So you can't really get out of a debt crisis by increasing immigration. And on top of that, you create all sorts of social, cultural issues that are very negative for political stability. The second plan that Europe had was some sort of magical thinking that's very common with economists, which is: productivity will increase.
13:07 But productivity is not something you decide in an office in Brussels at the Commission. It's a complicated alchemy of investment, education, terms of trade, political direction, and when all these things are going wrong — when you have to pay more for your energy, when you have to tax your citizens more in order to pay for your welfare, when your economic model is being completely undercut — productivity does not magically soar because you want it to
13:44 soar. That's why Europe comes up with a bold and brave report every year, right? Last year it was the Draghi report on growth and competitiveness, and I'm old enough to remember the 2000 Lisbon strategy that was the same thing: make Europe the leader of the knowledge economy by 2010, and it was published in 2000. We keep almost like Native Americans running around the fire hoping that would make
14:18 it rain. So now we're hitting the limit on this and we've got to get real and we've got to do what the Japanese did, which is: hey, tax collections are not going to magically increase. We have very little room for adding more taxes to the system. Politically it's very hard for us to cut. We'll have to do it, but we want to minimize that, because at the end of the day it's people's lives. You cut people's pensions — like in Greece, the suicide rate spiked after the austerity plan. These are
14:49 actual lives. So the only way to do this is just to devalue the currency until eventually we restore our competitiveness, exports really pick up, and tax collections grow faster than social spending, which is where Japan is today. >> This is a paid promotion for Kalshi. This content is directed at persons outside the United Kingdom.
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16:18 Terms and conditions apply. Check the screen. And so that devaluation of the euro, how long does that take and how do they go about it? >> Well, that's an excellent question. So I am a lot more pessimistic — I think Europe's path is going to be a lot more painful than Japan's path.
16:43 Japan had a fantastic window. 2012, the yen was massively overvalued. We just had the big earthquake, so people were like, okay, let's give Japan a break. Central bankers were concerned about deflation, not inflation. Commodity prices were falling. The US was doing the whole shale revolution so it could afford the higher currency, and the world was at peace and free trade was giving deflationary benefits to all.
17:10 So you could actually trash your currency without pissing off your trade partners. The US Treasury never designated Japan as a currency manipulator although it clearly was one. Or creating inflation in your economy, because you were starting from a point of deflation. So it was the golden window, and also Japan had — when the Japanese decide on something, it's a beautiful sight to see, the level of commitment throughout the Abe administration, at the central bank, at
17:40 the Ministry of Finance, at the pension funds, everybody was behind the project, right? You had the fiscal government running big deficits and talking down the yen, you had the central bank anchoring rates at zero with forward guidance and buying a bunch of assets, and then you had the pension fund sector moving all its assets abroad.
17:58 So everybody was rowing on the boat. Now I look at Europe, everything I just said is almost reversed, right? We have a big inflation problem, so if you trash your currency, you make it worse. Trade is extremely contentious. The US is extremely aggressive, especially towards Europe. So if we basically tell the world, hey guys, give us a break while we sort our mess out,
18:25 basically give us some of your growth — that's what a competitive devaluation is, hey, let me steal a bit of your growth for a little bit. Okay, that's going to be really difficult. And then finally the hardest part is we don't have this unity that Japan had.
18:43 Japan is run by 50 people who went to the same high school and worked at the big Japanese conglomerates and the Ministry of Finance. They all know each other, they all think alike, and there was a political consensus. Abe was very popular.
19:03 Even Teshi today has like a 62% approval rating. Europe on the other hand is this complete chaos of 20 countries with completely divergent interests, a central bank that doesn't seem to understand the assignment. And then we can't just tell the pension sector, hey, shift like the Japanese did, shift 25% of your assets overseas.
19:32 There's just no way to do that, at least easily. It is going to be a lot messier, a lot harder, and I think it will happen by political crisis, with pain. There's a beautiful quote I like, I think it's from Confucius: there are three ways to learn. The most noble is by thinking and getting to the truth yourself.
19:59 The second, which is still pretty good, is by imitating those who do. And the third one is through pain. So Japan thought its problem through, solved it. Europe should imitate. My concern is that it's going to be through pain. Basically, thinking that the euro is going to blow up, having a full-blown eurozone debt crisis,
20:21 seeing France and Germany tear each other apart on deficits and ECB holdings, and eventually that will take the euro down. And then you keep doing that, and eventually we'll reach the point at which tax collections are growing faster than social spending. >> Okay. So a debt crisis in Europe — the debt bros are right, but just in the wrong place.
20:45 >> Yes. Yes. >> And then possibly in the US. I have a lot of sympathy — I think the argument you're making was kind of a Luke Gromen argument, which, I love Luke and I think he's brilliant, then he's surely right. I'm just thinking it hits Europe before it hits the US, because every bearish argument you can make on US debt, you can make it with much greater power on France specifically.
21:15 And it does not have the tools that the US has to deal with the problem. The US can still outrun the bear for a little bit. I think in France the bear already has his claws in our back. >> Cool. So I would love to get your opinion on how you think the UK will fare, if you're bundling that in with Europe as well, or if you think, because they are not in the eurozone, it's a little bit removed from that.
21:44 >> Yeah. That's probably my most out-of-consensus call, and I'm already getting a lot of hate online for making it, because I don't think there's a single person in the world who likes the UK. Certainly not the British themselves. >> We hate the UK. >> Yeah, everybody does, right? It's an emerging market without the sun.
22:07 It's Brazil by the North Pole, or all of the above. But I take solace in this loneliness. >> Yeah, it's a sign that this has gone too far. Since Brexit — sorry, before Brexit, but really since Brexit — everybody has been on this hate-UK train.
22:37 No one more so than British investment managers themselves. So I found this crazy stat: British defined-benefit pension funds used to invest 50% of their assets in UK equities in the early 2000s. That has fallen to 5%. That is just stunning. I don't think of any country where there's this level of self-hatred.
23:02 And you can make the case that maybe it'll keep going. Maybe the UK will just keep cycling prime ministers and one bad budget after the other, but still, we're not going to go from five to minus 50. Who's left to sell, right? So that's why, and then I am actually somewhat optimistic on the UK, at least relative to Europe.
23:22 They are not part of this train wreck. They have an independent central bank that doesn't need to master a consensus of 21 people who don't have the same interests. They can easily tell their banks or their insurers to do certain things. If they really want to reform, they can actually implement it without worrying that if we do this in this country, that will impact that other country.
23:54 So I think they will reap the benefit from having left the Titanic, which is the European Union, and they were never in the most problematic part of the Titanic, which was the eurozone. >> So with respect to Europe, how much of an impact will a European debt crisis have globally? Will it impact the US in any way? Surely
24:16 it's going to have some impact in how the UK gets through as well. >> Yeah. Obviously it's not good news. Europe as a continent, depending on how you measure it, is still the second largest economy in the world; if you include the UK it's probably the first export market.
24:40 If you think also in terms of savings, Europe is a saving superpower. So anything where you talk about euro breakup and banking crisis will not stay in Europe. But that's the way things heal. It's because Europe has the ability to export some of its pain abroad
25:13 that eventually the US will have to pay attention and then, out of self-interest, help that transition, instead of what seems to be happening now where the US is actively blowing on the ember, trying to precipitate the crisis. There will be a level at which the crisis is so acute that the US will be forced to get everybody around the table and say, okay, how do we ensure that Europe does not completely fall off the cliff? Because if it does, there's a risk — we have
25:46 very aggressive neighbors that don't have great intentions towards us: there's Russia, there's Turkey, there's Iran. We cannot just have Europe completely fall off the cliff. So it will propagate its pain, and that is what will bring the solution. >> Okay, I just want to circle back to what you said earlier in terms of a potential correction through Q4 in the US, with respect to obviously oil breaking past 100 bucks in —
26:23 >> — the front futures contract of oil is now trading above $100, but you've actually got delivered oil in Shanghai, for example, the spreads are really wide, right? It was 130 bucks this morning, and it's not even that oil was 100 bucks, right, it's diesel. Crack spreads are wider than ever.
26:42 We've got diesel prices effectively at the highs relative to Ukraine. >> As if oil were 200, basically. Yes, exactly. From what you pay for products, it would be >> even more if you look at Asian jet fuel. We're already at $200 practically, because at the end of the day we consume products, not oil.
27:05 So yes, we live in a $200 oil world. >> And so we've got effectively $200-a-barrel oil with respect to petrochemical deliverables, and bonds obviously recently just hit 5%, as we were speaking about at the start, potentially even looking like they might have to go higher as well.
27:26 You look at the dot plot that was released earlier — the Fed are saying, and markets really want, three or four more hikes at the Fed. Not sure that's necessarily going to happen, but what's your outlook on US equities right now? >> Yeah, I would say don't overthink. What you describe is absolutely awful.
27:48 Everything that could go wrong is going wrong, right? Your cost of capital is going higher. You face a massive commodity shock. The stock market has gone nowhere for 3 months. You see cracks emerging in the AI narrative. You see a massive policy risk with the midterms. You see tariffs and completely insane policy proposals.
28:13 So great, you can sell stocks 2% away from the all-time high — actually we're down 75 basis points today, so maybe we're like 4% off the all-time high — and earn, if the market's right, you could very soon earn 5% on cash. This really reminds me of early 2000, early 2001.
28:36 You really don't have to complicate things. It's not a good environment for stocks, even seasonally. You all know September is the worst season. And it's especially bad when the incumbent administration loses the midterms, and then think of what's on the other side of these midterms.
28:56 My guess is it's going to be a complete blowout for the Democrats. We'll see >> we'll see Texas, we'll see Alaska flip blue, kind of like an FDR-like moment. And then we still have two years of lame-duck presidency, which will be incredibly acrimonious. Nothing will get done.
29:17 People will be at each other's throats trying to blame whatever weakness on the other. So there will be no incentive to fix anything. So yeah, I would want to have some cash, because I believe there will be opportunities to buy assets at much cheaper valuations than they are today. >> And so how long do you see this weakness potentially lasting for? Is this just weakness up to the midterms, maybe a little bit after the midterms, or do you think it has the
29:50 potential to really bleed into >> Yeah. >> 2027, even maybe into 2028? >> Yeah. Of course, the uncertainties are — the disclaimer of, whatever, I don't have a crystal ball, but if I were to have one, yes, I would think this is a bear market. This is at least a two-year period during which stocks post negative real returns.
30:17 And then depending on what happens in 2028, maybe we get a kind of cathartic sell-off, kind of like what I remember of Obama coming in — when Obama gets elected, it's almost the end of the great financial crisis, but the market doesn't bottom until March, maybe something like that, right?
30:37 My idea is that it's going to be some very hard left swing. The DSA, the left wing of the Democratic party, is clearly on the ascent. But maybe once we finally have these people the market fears in power, this is what will set the conditions for a bottom.
30:56 But the next two years — unless you make the case that AI is going to transform everything and productivity is going to surge, and that's the case I'm not smart enough to make. My internal skepticism tells me — you look at productivity over time, it's so steady, from 1 to 3% with the 2% on average —
31:22 it's hard for me to imagine that it will really change as much as we would need it to solve all our problems. But that would be the argument that the equity bulls are holding on to. >> Yeah, the AI bull case obviously is the entire bull case for the stock market at this point.
31:44 Estimates range, but give or take one whole percentage point of GDP is attributable to AI capex. The market is what, 45, 50% AI or AI-adjacent, and the thing that brings everything into question for me is Nvidia posted 70% year-over-year growth, or earnings-expectation growth, right, and then you look at Nvidia's chart and effectively they're trading at the price that they were in October, November last year.
32:17 Now, obviously it's gone up higher than that, it's come down lower than that, but this $200, $210-ish region for Nvidia, despite the fact that since that point they've effectively increased their earnings expectations by about 150% when you compound it out. Yes, it's the law of large numbers, they're a very big company, but it just doesn't seem right that the one company that is effectively the biggest recipient of the continued build-out of the AI trade is trading so cheap on a forward-earnings basis. Is that the
32:50 market just going, we don't believe these earnings are going to come to fruition, and the market is just smart enough to know that? How do you read that? >> Yeah. There's an awful lot of circular financing, same customers, the view that just the base effect, right — this doubling of the revenues or the earnings of Nvidia comes from the doubling of the capex of the hyperscalers, right? So we're already talking
33:24 more than a trillion dollars just between five companies. You can't just keep doubling that, until at some point you run out of economy to eat. So I think that's what that means: the AI narrative is starting to weaken, and that would be part of my case for the secular bear market. I haven't done the study, but I would be curious to compare — these massive
33:57 investment cycles always are on the back of some fundamental, transformational narrative about the nature of the economy. Whether it's the canals, the railway boom in the 19th century, the internet, some big idea suddenly makes us see new possibilities. And for us, AI, it's four years almost to the day since ChatGPT was released.
34:28 And maybe that's how long it takes for this narrative to run its course. Certainly when I hear the AI founders tell us about their product, what I hear is, "Oh yeah, there's about a 20% chance we destroy all humanity. If we don't do it first, the Chinese will do it anyway.
34:52 Please give me a trillion dollars." That's the pitch. I don't really see that as a rosy, enthusiasm-inspiring narrative that propels a bull market, and I can certainly see the reaction on the other side. You see the opposition to the data centers. You see the level of hatred for characters like Sam Altman.
35:21 You see the IPOs being pulled. Anthropic pushing it back. OpenAI saying it may not even do it. So that to me suggests we're closer to the end. Unless we can reinvent the narrative, right? Maybe it's something about healthcare. Maybe we have a beautiful moment where some Claude model finds a miracle cure to something.
35:45 But unless that happens, I think it's natural for the narrative to deflate. Because if you can't bring new water into the well, it evaporates. And I haven't heard something that makes me think that there is indeed a much better narrative.
36:07 >> It's interesting, right, because I remember nine months ago, give or take, really thinking through: I really think that when these IPOs end up happening — when SpaceX happens, when Anthropic happens, when OpenAI ends up IPOing — these traditionally mark the tops, the ends of cycles. It's happened every single time: 2021, 2000, 1999, obviously these are big crashes anyway, but there's just this flurry of IPOs, and it's hard to argue the reasons why,
36:43 and maybe it's because of the IPOs, maybe it's just because of the market conditions — the market conditions need to be ripe enough for this amount of capital to come online. Is it the chicken, is it the egg, but fundamentally these things do end up marking tops typically. >> So the SpaceX IPO was June 2nd. >> The Nasdaq on that day closed at 30,666.
37:10 Oh, there's even a devil number in there, I didn't realize that. That was the high for the day. And today we are trading at 28,845. So far your theory of big IPOs signaling the market top — and especially when that IPO, what was the pitch, data centers in space, the $30 trillion — the TAM was the entire universe. That's certainly the same thing. Have you read the Anthropic one? Same thing, $30 trillion TAM. And also, before their expenses, they're
37:58 profitable. Which I thought was interesting. They have a 100% profit margin ex-expenses. >> Well, this is why the Anthropic S-1 that should be coming out pretty soon if the IPO does happen next month — this S-1 seems to have been undisclosed, probably for good reason.
38:21 There must be some reason why it's not out yet. But it is hilarious. They recently came out and said, "Yeah, we're profitable now if you remove the cost of inference" >> the cost of training the model. Yeah. >> The cost of training the model. And it's like, well, yeah, because that's your cost of goods sold.
38:38 You can't just take it out unless you don't want to make any better models. Fair enough — if you give them a monopoly, because they are obviously and clearly good people and you should trust them, and we know that if you don't give them a monopoly AI will destroy the world. So the only solution is to stop the progression of models and turn them into some sort of big tobacco company where they can just keep selling the same product and no one is ever allowed to compete with them. And
39:09 then yeah, maybe they can get this training cost down to zero. That seems to be the pitch to me, if I pair the financials with Dario's come-to-Jesus moment on the need to regulate AI. I think that's where it comes from, right? It's like, I can't keep spending all that much on training my models.
39:31 I need to somehow explain that it's going to come down. And if I can convince the government that AI is going to be run like a utility and I'm going to be the only one setting the price of that service, I don't need to compete. Because it is true, this war is extremely destructive of capital, right? It's very much like the railway boom — during the railway boom, you literally had railway companies laying parallel tracks, and then the goal
39:59 was to be the first one to connect the two cities. What a waste of capital. It's almost the same thing with the LLMs, right? One week I overtake you, the next week you overtake me, and we all have to spend billions and billions just to keep up in this arms race.
40:15 So that, I think, is what they're trying to regulate, so that they can show a business case. But if you show a proper business case, then you take away the moonshot — oh, we're going to have AGI and everything is going to be better. No, it's either one or the other.
40:37 >> With respect to AI right now, so many things are tied up in this trade. It's a property trade, it's a debt trade, it's a capex trade. You've got anything tied to it — Caterpillar for example, Caterpillar's up like 10x in the last few years because obviously they're just the construction company behind it.
41:01 It's filtered into everything at this point. And so when you actually boil it down, functionally right now you need OpenAI and Anthropic to continue to be able to spend money to keep the entire thing going. Now, that's not to say that there might be a better way to use the stuff they've created, from Google or Amazon maybe, and they pick it up and they're able to use all the compute from all the data centers that have been created.
41:29 But fundamentally, right now, if Anthropic and company are unable to either continue to raise capital or actually turn their inference into profit — which maybe at the inference level it's okay, but then you've got Chinese open-source models effectively reducing the price by 100x, literally last week, DeepSeek V-something, I forget all the names, but functionally as good as Fable and 100x cheaper —
41:57 so you've got so many spinning plates. It's kind of hard to know what to believe. I think this S-1 that's coming out should give people an insight into how to understand this. Have you got any ideas as to how to interpret it, or are you just sort of thinking, I'm not sure? >> I share every concern that you had.
42:25 I can't predict the outcome. I'm not a token maxer, I'm not an AI specialist, so you'd have better people. What I can look at is my exposure, right? My risk. It's almost like looking at earthquake insurance in California, where I live: you have no idea when the earthquake is going to hit, but if you own a lot of property on the fault line, you should probably insure. And
42:59 I think we all own a lot of property on the fault line, and then, as you point out, it pervades everything, right? The AI-adjacent 40 stocks are like 50% of US market cap. The bond market now is effectively a derivative of the AI trade. So as you point out, it's the economic strategy at this point. We gave up on cutting government expenses with DOGE, and we are basically hoping for a productivity miracle.
43:36 So the entire exercise rests upon this going right. If it goes right, trust me, just by having SPY in your portfolio you'll be fine. But I think as investment managers our role is to protect the portfolio in case things don't go as right as they need to go. >> Do you think it is effectively too big to fail at this point? >> Yeah.
44:06 Yeah. That's the argument. You see that on both sides, right? Both the big AI labs basically turning to the government and saying, okay, if it doesn't work, bail me out. You certainly see that with Oracle and OpenAI — hey, hand me 500 billion here and there.
44:29 And then you also see that from the administration, right? When Trump said, if we don't win the IRA [sic — likely "the AI race"], everything else is lost — that tells you they are too big to fail. But that doesn't mean they're not going to fail, or at least get close to it. The big banks were too big to fail in 2008, right? In the same way we had directed all our economy towards, I would argue, a giant Ponzi scheme of
45:01 we'll all get rich by selling each other's homes and repackaging the same security a thousand times, and yes, we ended up creating so much systemic risk that we eventually had to bail out the bad actors. It's possible that the exact same thing happens with AI. But again, they were bailed out, but a lot of people lost 100% of their money before the bailout came.
45:27 So I don't think it's an argument to say, oh, eventually they get bailed out by the government because they're too big to fail, to just naively stay on the Titanic as you see it rush towards the iceberg. >> Yeah. Okay, makes sense. Okay, Vincent, just bringing it all back together then, for some takeaways: you think that duration, for the first time in a very long time, looks somewhat attractive.
45:52 You like the UK, which is pretty crazy. >> It's hard to say that with a serious face, huh? >> It's hard to say out loud. Yeah. Could you just encapsulate how you're thinking about structuring things for the foreseeable future, for yourself and clients, please? >> Well, I think I would have quite a bit of cash, because I think things are going
46:25 to be quite volatile. I see a lot of crises converging and different pain points, and you look at the key levels on the yen, on yields, on oil. You're standing on ice and you see the cracks all around you. You don't know which one's going to crack first, but you should probably get ready for swimming.
46:48 So have a lot of cash. I would dip back into long-term bonds. Not really out of bullishness or excitement. I just think that 5% — if I look at TIPS especially, 2.5% real yield on the ten-year, that's pretty good.
47:15 Long-term I would maintain the whole debasement trade, because I do think that what I was describing, what Japan did, what Europe is about to do, is the solution. And at the end of the day we have to devalue. And if everybody devalues, the only things that rise are the things that cannot be devalued.
47:36 So gold, commodities, crypto. And then at the sector level, I go back to a portfolio we launched about four years ago, which was this holy trinity idea: healthcare, energy, financials. It's done superbly since we launched it, and this summer I'm proud to announce that these are the top three sectors.
47:59 It's the first time that all three of them are working at the same time. I built it thinking that only one would pull, which had usually been the case: when energy is doing well, the others were doing wrong. But so I would maintain that. And then for European investors, my embrace of the UK is not so much due to an inherent bullishness on UK assets.
48:27 It's more that if you're going to be short euro assets, you want a hedge against it that is highly correlated, right? For example, whatever, you think platinum is in a bull market — you're not going to hedge a short French OAT with platinum even though you think one's going up and one's going down, right? There's no relation between the two. You want something that's correlated, but that will do better.
48:50 And that's my point. The UK will do better in that crisis than Europe, and it will offset a lot of that risk because of the correlation. >> Amazing. Awesome, Vincent. This was excellent fun. Honestly you're one of my favorite guests. I think the way you think is just so unique that it's amazing to chat to you.
49:14 >> Feel free to — I'll leave all your links and stuff in the description, but you can tell people, the floor's yours. Go ahead. >> Yeah. So I'm on X. I try to overcome my disgust at the AI slop and still log in, because there are some smart people there that I follow, and I read my messages.
49:44 I answer. So you can follow me at VincentDeluard; under my pinned tweet there's a link that will point you to a free trial of my research. You can get it I think for a month, but DM me if you want more, and I can certainly share any specific report on the ideas that I talk about — the UK, Europe, Japan, secular inflation. Again, I think I've greatly benefited over the past five years from all these conversations, whether on podcasts, on Twitter Spaces, or just people
50:19 reacting and giving me ideas, so I think collectively we all benefit from sharing. >> Absolutely, 100%. Guys, thank you so much for watching. Vincent, once again, thank you, sir. And we'll see you next one.