Speaker 1If I look at people 40 and under, those in their 20s and 30s, their number one problem is they can't afford housing. If you want to get housing back to some more reasonable levels, you need to have wages rising at about 7% a year, so sort of doubling in 10 years. And then you need to have the housing market be flat in nominal terms, so falling in real terms. So that requires you to have a real rate of about 3%, so people keep their money on deposit rather than sticking to real assets. So that gives you an interest rate around 10%. And that's still my target for the year treasury is a 10% yield. So the question you sort of ask yourself is, you know, how far could wages go?
Speaker 2This episode of Other People's Money is brought to you by the Tucrium Soybean Fund, ticker S-O-Y-B. Let's get into it.
Speaker 3Welcome to Other People's Money. I'm Max Wheatley, and I'm joined today by Russell Clark, a hedge fund manager based in London. Russell, thank you for coming on the show. Thank you for having me. You write a sub stack as well as managing a hedge fund, and I have been reading and following. You put out an interesting piece in the last week. Looking at the AI trade, a lot of people are saying this might be the end of a big speculative bubble in this AI trade. But you pointed to another asset class. You think is far larger and far more speculative. Tell me why you think this other, much bigger market is really where there is a lot of risk right now.
Speaker 1Yeah, so I think, Max, you're talking about the treasury market. There are two questions there is, you know, is the AI market speculative and why do I think treasury markets are speculative, if that makes sense. So with the treasury market, I mean, normally if you look at for me, if you look at any big bear trade that I've seen in my investing career and even before it, normally there were pretty good signs that things are going wrong, but people just happily ignored it, partly because it's human psychology. It's if there's a problem and you have to do something about it, it's always more comfortable just to ignore it. If it hasn't been a problem, if that makes sense and that's, you know, just natural sort of human sort of psyche. So, you know, if you go back to like the GFC, for example, people knew there was a problem in the housing market three, four years before it actually sort of blew up and then that started to be a problem. And everybody was like, it's a problem, but it's a problem we can deal with. We've dealt with it before, you know. And then you had, of course, people saying. Well, look, actually, you know, the balance sheets of these banks are so bad that this housing crisis is going to be a bigger problem and then eventually everyone sort of accepted it. And I'd say we've, you know, U.S. treasuries in particular, but, you know, government bonds in general is, you know, for the last few years, particularly since COVID, there's sort of been this understanding by the electorate and by politicians that governments will spend whatever it takes to get rid of these bonds. So I think that's a really good point. I think that's a really good point. I think that's a really good point. I think that's a really good point. keep growth going if that makes sense so if there's any problems government come in uh and with the trump administration seem to have gone to another you know even more extreme version of that in that we will spend what we need to spend and we won't tax anyone uh either uh in particular the large corporates so you just want you know we're going to have the spending but we're not even going to try and get the taxation uh in and so if you start looking at you know uh the sort of government what's the word profit and loss statement if you like you know it's revenue now so it barely covers its sort of mandated expenses of like social security interest payments and these sort of things i think we're about 90 percent so that's excluding other spending like on defense education infrastructure wherever you want so the fundamentals of the the government's sort of spending uh taxing your tax and spend have really broken down and that's not just in the us it's also in japan um and so what's been interesting for me is that uh you know i i sort of originally became quite bearish on treasuries in 2022 mainly at that time there were other reasons but mainly because uh when russian foreign reserves were frozen so they couldn't access them after they invaded ukraine uh i thought to myself well if you have foreign reserves you know if you're a russian government with foreign reserves and suddenly this money you're saving you can't access why would you save it in that place in the first place and then you know you take that sort of thinking logic a couple more steps further and you go well actually why would any country that could theoretically disagree with the trump administration which is basically everybody you know why would anyone hold uh treasuries as foreign reserves that makes sense um and so you know i i suspected we were going to see a natural flow out of treasuries into gold for me that was one thing i thought would happen but i also suspected that we'd see buyers for fixed income slowly particularly government sovereign fixed income slowly disappear and that certainly i think has been the case um treasury markets have held up relatively well but if you look at markets with more peripheral sovereign bond markets japan is a big one you know that's one of the biggest sovereign bond markets in the world and the yields there have risen tremendously uh but the uk as well the gilt market remains uh very unstable if that makes sense the long end keeps selling off and i think you know the u.s treasuries have held up all right but you know the the fundamental buyers of that are slowly but surely disappearing i think the thing um that i try and emphasize people when i'm talking about is that you know so i'm 52 so i'm getting old i know i look much younger but hey i'm getting on um but this idea of you know massive sovereign wealth funds massive foreign reserves is actually a relatively new one until 1980 the idea of holding another country's fixed income as a foreign reserve was unknown that makes sense uh all foreign reserves were basically gold and then we have this long period where japan started buying treasuries because they stopped didn't want their currency to appreciate china did the same very other nations the same so when you see those like 500
Speaker 3year charts that say well the the reserve currency used to be the pound and before that it was another european currency and we go all the way back and forth between the two countries and so we're going back to the portuguese and say that people tie it to the strongest navy in the world so you're saying that that that's not really how it worked going back we weren't owning bonds or
Speaker 1currencies of other countries like we do today so foreign reserve currency is very novel all right that is a currency as a foreign reserve is novel gold used to be the only foreign reserve and typically the country that had the biggest army had the most gold for various reasons basically they went took it from whoever had it so if you lost a war reparations tended to be big chunks of your gold reserve would be sent to whoever won that makes sense uh and so when you looked at foreign you know i think you're confusing foreign reserves with sort of like the main trading currency or the currency that was used for transactions if that makes sense uh and they often was backed by gold so it was like you know really until 70 70s you know you were told it was always backed by gold uh you know once the once the british empire started falling apart after world war one you saw pounds sterling become weaker and weaker because they couldn't they couldn't make the the numbers work if that makes sense
Speaker 3okay so you think we're moving back towards a more historical period where where hard assets particularly gold make up the bulk of foreign reserves or the concept of foreign reserves are
Speaker 1are really going to go away yeah i do actually because i think there was this if you look at like this and it's all a political argument so uh this is not empirical uh so people often will argue with me with empirical data saying this is what's happened last for the years why are you saying it's going to be different and what i'm saying to them is that we're moving a changing political environment and this is going to be the outcome from the change in politics so i think what we saw sort of post 1980 with like thatcher reagan revolution was this sort of move away from a focus on full employment rising wages to more free market that prices move wherever they want their wages adjust and wages can adjust in two ways you actually cut them or you let your currency devalue to make your wages lower and you're more competitive and so i think from 1980s through to 16 or something like that the option most the option that most countries took when they had a property or a financial or a current account crisis of some sort was they would devalue and this would push down the the wages of your domestic employees and you could then export your way back to growth this was the model that was existed and japan sort of took it to another level where they they bought treasury to try and try and keep their yen weak to try and create you know inflation and growth that way um and part of those sort of arguments was also free trade um removing removing barriers uh moving away from some government-sponsored uh industrial organizations so used to be when i was a child uh governments owned all the airlines all the big airlines you know they sold all of those they got rid of those unions were moved off books if you look at the states you know you used to have the big three gm ford chrysler were all heavily eugenized and protected by the government post 1980 they invited the japanese auto companies in and they basically broke the unions within those organizations so you had this sort of very well it's actually a globally very deflationary environment and for countries are very competitive like your switzerland's or your japan or even your germany's you know they would see natural appreciation of their currency which they tried to offset by buying u.s dollars mainly treasuries so we had this huge growth in capital driven by basically trying to keep wages low um one way or another but now i feel like the political environment's moved to moving back to getting wages up having full employment very sort of post-world war ii type environment not fully there yet but getting there you can sort of see it with u.s investments into corporates uh you know you can see in a you know sort of range of you know um it's a range of different activities by governments now and the you know increase in tariffs and other things like that and so you know the way i look at it is we're moving back to this inflationary environment um and so governments are actually if you look at japan's a good one it's it's uh jgbc is a good one but you know jgbc is a good one because jgbc is a good one because jgbc is a good one but you know jgbc is a good one because jgb market continues to sell off yields keep going higher but they actually can't seem to get their currency doesn't strengthen naturally anymore they're actually becoming under more pressure to sell their dollar reserves to try and keep the end strong because when they let the currency weaken it's actually causing real wages to fall and the politics is sort of turning against them if that makes sense and so my read of the world we lived in lived in until let's say 2016 or 2020 this will world where we were a piling up bigger and bigger piles of capital which pushed down the cost of capital pushed down interest rates and now instead of saving money we're sort of spending it growth is really good but inflation is much higher and these big pools of capital are getting run down and so the corollary of that is that interest rates starting to rise and will continue to rise until politics intervenes again and it's interesting you know if you look at all the sort of populist politicians around there they're always the biggest problem is always cost of living that's always the issue that sort of comes back to biting them but they still get voted in they're still staying maintain political power and we haven't really seen uh a decisive move away from that yet i don't think it is the number one
Speaker 3voting issue it feels like here in the united states is the cost of living uh you did make an analogy saying you know in the gfc we kind of knew that these problems were coming for three years before they really started to to come to roost in the markets and i would argue that people have been talking about this problem with the treasury market for much longer than three years but it is starting to to come to fruition now i mean was it just the inflationary period post covid that really opened the door despite the fact that people have been talking about the unsustainability of the debt buildups for for so long was that the moment that things changed that's a good question and uh
Speaker 1one of the things that i think works to my advantage so i'm an australian who i lived in japan lived in hong kong studied japanese uh you know traveled around the world a bit so i tend to come at things as like from a globalist perspective rather than the u.s perspective so all the uh you're right about people talking about treasuries being unsustainable but before we used to talk about treasuries being understandable we used to talk about jgbs being unsustainable and people used to talk about jgbs being unsustainable in the 90s uh so very famous economist guy called i think steve roach you know he said the 10-year jgb of the four percent yield is in 1994 was the biggest short in financial history it of course was wrong because it went down to a negative rate eventually jgbs was known as the widow maker right very very much so it's not anymore but it was um so what i'm trying to say is that people talked about japanese debt sustainability for nearly 30 years before it broke now what i found interesting is i always thought the jgbs are pretty good leading indicator on u.s treasuries um and back in 2020 when covert started to kick off what was really interesting was i think it was in march of 2020 so covert just started kicking off at that time we didn't know if it killed everyone or not uh you know we didn't know how long it would last but the jgb market started to sell off off it rallied a lot into that as it always used to do and then started to sell off my read of that is that the japanese of bond investors looked at the political environment looked at the political uh sort of uh sort of solutions to cover that were being discussed which was like huge credit protection massive wage protection a lot of spending and went okay the world's changed here and they was trying to sell their jgbs jgb sold off very early and if you look at jgbs they've been much weaker than u.s treasuries the whole way through um and my my my feel is they still act as a lead if that makes sense the weird thing about the sell-off and this is what i think is where it gets confusing is that the more you push up wages the more nominal growth you get the better the actual financials for jgbs look so if you look at debt to gdp ratio it's actually falling now because nominal gdp is growing uh you know as you know you know as they as they get growth going again uh and if you go back to the 70s when you know when we had like 15 20 interest rates in the states federal debt to gdp was less than 20 so it's this sort of sustainability is not really the issue it's the politics of wage inflation that's the issue that drives i think drives where bond yields go i think the sort of markets sit there and go what do i think wages in the states can look like in 20 years time how much is this nominal how much of the if i buy a 30-year bond now what's going to be the buying value of that uh principle when i get it back in 30 years time am i getting compensated for that sort of you know do you think wages are only going to be four and a half five percent you know in the next five years you know you're going to be you know we're only going to see four or five percent wage inflation for the next few years and it's a it's a tricky one you know i certainly think while you have president trump in power you would be thinking wage inflation would be higher than that i think the japanese are doing the same thing you know wages in japan are very low they now have sort of upward pressure and they're sort of saying you know is that a 10-year jgb at three is that enough competent you know compensation for i think wage inflation is going to be higher than that i think the japanese are doing the same thing wages are going to be in 10 years time and they're still saying no um and like i think you know the what people forget is like post-world war ii so fdr introduced the minimum wage in uh the states in 1939 at the time it was like 35 cents an hour okay 40 years later in 1979 it was 3 bucks 50 an hour right so it'd gone up you know 10 times in four years now the federal way minimum wage in the states now is still only 7 bucks 25 or something like that i know no one earns that anymore except for some very sad people in you know some places but there are some states there
Speaker 3are some states that still have the federal minimum wage yeah but i don't think many people
Speaker 1earn that anymore yeah like yeah mcdonald's is kind of is more like 20 bucks now i'm pretty sure uh you know it doesn't matter where you are so that world is you know sort of changing um so the sort of ask yourself is you know how far could wages go right and that's the question i ask myself um i try and come up and answer that i don't know if it's a good answer you can i tell people my answer i let them make their judgment my answer is that um if i look at people 40 and under if that makes sense in their 20s and 30s so those in their 20s their number one problem is they can't afford housing they either spend too much on rent or spend so much on rent they can't afford to save a deposit this sort of thing so i think you know you're going to get a generation of voters coming through saying we want cheap housing and certainly you see you know both sides of the political divide are always pushing for more home building or cheaper housing uh you know and you have rent controls coming back in new york that sort of thing um so i sort of use that as a well i think is going to happen this is my view and why i have i think treasuries and interest rates go higher is that if you want to get housing back to some more reasonable levels you need to have wages rising about seven percent a year so sort of doubling in 10 years and then you need to have the housing market be flat in nominal terms so falling in real terms so that requires you to have a real rate of about three percent so people keep their money on deposit rather than sticking to real assets that makes sense yeah so that gives you an interest rate around 10 percent um and that's still my target for for the treasury is a 10 yield this episode of other people's money is
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Speaker 3dot com slash soyb so ten percent three percent real rate so inflation running around around seven basically around wage growth wage growth keeping up with inflation uh wow that's that is a very different world than where we are today um it's funny you do see a lot of people commenting on the level of real interest rates right now and saying that it is so high getting up above to approaching that three percent level that you're talking about and and largely saying that this is that level of real interest rates is unsustainable so you believe that that will become the new normal uh to to see really really high real yields yeah very high because you
Speaker 1you have a government spending and pushing wage growth pushing full employment which is not what we've had for the last 40 years but you have governments there you know when you think about all the strategic investment you know when you think about all the strategic investment you know all the sort of investments the semiconductors all the investment into moving away from a chinese supply chain all these things so you have this sort of very tight market government pushing for that um but you know trying to sort of keep prices under control particularly housing prices which are very sensitive to interest rates um you know that's the world that i see um you know and that's where the politics is you know when you look at populist parties they also sort of want you know to keep prices under control but they also want to keep prices under control but they also want broadly speaking that type of outcome and so that's all the world i see um uh yeah you know and here's a good uh you know here's a good way of i think makes it easier to conceptualize i think for people and i've written about this a long time ago i'll have to find that old note and republish it um but uh so you ever see back to the future too of course you sure okay i'm not that i'm not that young oh you look very young so anyway when they get to when they get to where is it uh 2015 it's from 1985 they go to 2015 30 years into the future and then doc brown goes to my reply here's 100 bucks go buy yourself a coke right and so people in 1985 thought that by night by 2015 a can of coke was going to cost $1,000 a can of coke and so people in 1985 thought that by 2015 a can of coke was going to cost $1,000 a can of coke close to 100 bucks maybe it's 50 50 or 100 something like close to 100 bucks maybe it's 50 50 or 100 something like close to 100 bucks maybe it's 50 50 or 100 something like that that that um if you go back to sort of 1985 and look um if you go back to sort of 1985 and look um if you go back to sort of 1985 and look at the long at the long at the long end of the bond market it was around sort of end of the bond market it was around sort of end of the bond market it was around sort of seven eight percent because that's what seven eight percent because that's what seven eight percent because that's what people thought people thought people thought inflation was going to be and actually inflation was going to be and actually inflation was going to be and actually they were completely wrong inflation they were completely wrong inflation they were completely wrong inflation what's happened to them in the past what's happened to them in the past what's happened to them in the past going to happen to them in the future going to happen to them in the future going to happen to them in the future it's it's it's it's just a human condition and so they it's just a human condition and so they it's just a human condition and so they couldn't couldn't couldn't they couldn't conceptualize this idea they couldn't conceptualize this idea they couldn't conceptualize this idea that that that prices wouldn't keep rising at a very prices wouldn't keep rising at a very prices wouldn't keep rising at a very elevated rate even though they had voted elevated rate even though they had voted elevated rate even though they had voted in in in ronald reagan and had volcker running in ronald reagan and had volcker running around around around in their minds they just thought in their minds they just thought in their minds they just thought inflation would always stay high inflation would always stay high inflation would always stay high and i'm saying that was for me it was a and i'm saying that was for me it was a and i'm saying that was for me it was a good illustration of how good illustration of how good illustration of how humans generally just sort of say what's humans generally just sort of say what's humans generally just sort of say what's happened in the past can keep happening happened in the past can keep happening happened in the past can keep happening into the future into the future into the future um um um and so i think we're going back to we're and so i think we're going back to we're and so i think we're going back to we're going to go through a period of going to go through a period of going to go through a period of a very long period of above much a very long period of above much a very long period of above much higher inflation higher inflation higher inflation um and people are going to get used to um and people are going to get used to um and people are going to get used to that and they're going to slowly demand that and they're going to slowly demand that and they're going to slowly demand so i think you're already seeing it in so i think you're already seeing it in so i think you're already seeing it in the results if you look at like bank the results if you look at like bank the results if you look at like bank results just came out like last week results just came out like last week results just came out like last week loan growth is through the roof because loan growth is through the roof because loan growth is through the roof because if people are going if people are going if people are going i think i think price is going to go up i think i think price is going to go up i think i think price is going to go up seven eight percent a year seven eight percent a year seven eight percent a year and they made me borrow a you know four and they made me borrow a you know four and they made me borrow a you know four it's a bargain it's a bargain it's a bargain right right right uh and so so you should see loan growth uh and so so you should see loan growth uh and so so you should see loan growth accelerating we're seeing that in japan accelerating we're seeing that in japan aspects we're going to see seen in the states as well you're going to see everywhere and the only way to get loan growth down to control the inflation will be higher and higher interest
Speaker 3rates how do you square this longer term view with a lot of people in the treasury market are playing an extremely short-term game of trying to figure out whether is it going to be this meeting or next meeting where they're going to hike and it feels like uh treasury rates um are are really trading around and even gold i mean you could argue that this big sell-off in gold was that people had had such high expectations for rate cuts coming in this year and now we're potentially getting hikes and and obviously gold for so long has has traded off of that real interest rate and we're just seeing it continue to go higher when when people were expecting um a big reversal in that and the change in real rates has driven gold so so many of these asset classes it feels like are being pushed by short-term expectations you have this long-term view how do you work around these short-term moves with still keeping this long-term view in in front of you back in the old days when i used to manage
Speaker 1uh money uh so a horseman the way we had this sort of pro capital world and the big thing that people always misunderstood was that inflation was going to be lower and they didn't understand the metrics by that but we used to have this sort of beggarly neighbor devaluations used to happen where wages would be dropped in different parts of the world and they kept wages relatively low everywhere and kept uh so inflation in check and so you know the way i used to think about was okay i'd be looking at which exchange rates looked most mispriced when were they starting to show signs of correcting and then you know manage money around that because that's the way the politics worked these days i sort of look at the world and i think about well you know i think interest rate is going to be much higher than what the markets expect you know where is that priced incorrectly and where isn't that pricing correctly that makes sense um and you just sort of move from one place to a to another place and if i look at like something like gold gold for me tends does do well when you know the fed is sort of talking about cutting rates or doing stuff like that because then people know nothing's nothing's there to stop you know assets rising with rising wages um but you know it's you know it so the way i try and do is just have a number of different assets all all fitting in with this idea of higher rates and then trying to manage around that you know moving capital between where it's priced incorrectly and where it isn't um and you know generally that sort of works for me it's sort of just but you know it's the the opposite of how i used to do it which was always looking at where currency risk was not priced correctly now i look at where in interest rate risk is not priced correctly and try and stay uh you know as close to that as possible
Speaker 3you brought up the the housing market before and you think we're going to need housing prices to basically remain flat nominally decrease decrease real um you did give the caveat that you take a global view but i think a lot of people think about the housing market particularly in the us you know we just had this bipartisan bill come through uh trying to address these high these high housing prices and trump basically refused to sign it and has come out multiple times and said i don't want to hurt all of these based by and large older people who have huge amounts of home equity they're just one they vote more it's a huge voting block and and the american people have used home equity value as a piggy bank for decades um and despite what the young people people want lower housing prices. There's a bunch of people who never want their house price to go down. I mean, do you think there's gonna be a winner in that tug of war? And will it be the older or the younger people?
Speaker 1- US is a difficult one 'cause it's such a huge country and there's so many different dynamics going on there. But if I start with the UK and then I can try and talk about the States. In the UK, for example, it's really happened. So if you look at like high-end property markets in London, for example, have done nothing in nominal terms for the last 10 years, pretty much where they were pre-Brexit. And that's even with the pound being weak and growth being okay. You've just seen this sort of really decline in nominal rates in line with your, so the UK gilt market has been much weaker and you've seen wages go up. So you really had some rebalancing going on there. The issue now is that they're trying to, you know, they're trying to push through this sort of build more policy, which is, you know, difficult 'cause you're taking on even more entrenched interests. You know, and Starmer talked about, but couldn't do it. You know, maybe the new prime minister can, but that, I think that trend is gonna be ongoing. And in the US, you know, certainly again, if you look at like sort of high-end markets, like New York market, like the top end market, you know, it's like, you know, the top end there I think is probably trickier these days, you know, because I think you can see the legislation's coming in. So in the UK, for example, high-end properties now, in London anyway, you know, attract the extra surcharge. I think a similar type of policy is coming in the States. And these things can get very dramatic. You know, London, which is a very old property market, you know, there's been a lot of, you know, there's been a lot of talk about how, you know, what's the best way to get into the market? What's the best way to get into the market? And at a certain point, you know, houses got broken up into flats because they were, we avoid a lot of taxation issues and made financial sense. And then last, you know, 20 years or so, the flats got amalgamated back into houses 'cause they made more financial sense. So, you know, where tax goes, property markets and markets in general tend to follow. And so I sort of see that as an ongoing process, but certainly, you know, Trump, you know, Trump, I think, you know, I knew that he has two years left. You know, I just don't see him going for a third term, even though he probably thinks he can. I mean, the question is who replaces Trump on the right as a standard bearer is an interesting one.
Speaker 3- They're passing things like millionaire, you know, pied-a-terre taxes here in New York City. So certainly what you're saying about tax policy, obviously we're having, you know, millionaire, billionaire taxes being proposed in places like California and you're seeing capital move, but that is one of the differences I would argue between the UK and the US is that there are competing tax regimes and it might be the thing that extends it a little longer is that it's not driven by national policy so much. And in the short term, different jurisdictions can compete for that high end dollar with more attractive tax policies.
Speaker 1- Yeah, the big comparison is always California and Texas. And what is interesting about Texas is that they have a far more relaxed building code, if that makes sense. So they've been able to build houses much more readily and keep them cheap, while Californian housing is notoriously expensive. And you can see the sort of California Democrats are definitely moving to a let's build more housing, type policy, get rid of, you know, restrictions on regulations on building. So you can see the politics is sort of, you know, I have this view that ultimately it doesn't actually matter who you vote for. You're gonna end up with the same policies anyway. It's just a matter of style. You know, it's like when people voted for Biden after Trump, he didn't really get rid of the tariffs. He didn't really change a lot of the policies that, you know, Trump had in place, you know, and it's the same, and I think in the UK is a, even with the labor government in place, we haven't seen huge dramatic shifts in the policies that the conservative government had in place. 'Cause ultimately all politicians are the same. They just want to get reelected and they just do whatever they think the public want or say they want to be reelected. I don't know if that makes sense or not, but the shift is definitely to the left.
Speaker 3In this world where real estate is doing nothing nominally, losing you value in a real basis, treasuries equally don't look super attractive. Bonds don't look attractive. What is the investment behavior going to look like? And are we maybe getting a little preview of what the future looks like in the form of rampant speculation on equity markets? And a reach for even more yield in private credit markets. How much is the future going to look like a supercharged version of what we're seeing right now?
Speaker 1- So if you go look at the '70s, the '70s the markets were very up and down, but you know, and they really moved on what they thought interest rates are going to do, particularly the Fed. You know, the Fed's going to be, you know, looser on the interest rates and the markets soared. And then very volatile. But in, you know, in real terms, they were going nowhere. And sometimes I feel we're getting close to that. The big sort of issue that I'm struggling with a little bit is that in the '70s, if you owned oil and gold, right, which was sort of two related assets, you did fine. Those are the two assets to own. But that was because oil was the real key to economic growth everywhere. And supply was restricted, not just with OPEC, domestic US production was restricted through the Texas Railroad Commission, which is an FDR type policy. And so once that got deregulated, oil market became more stable. I can't help but feel that the modern growth is actually all driven by semiconductors or compute, if that makes sense. And so that's why semiconductor prices are like the new oil, oil from the '70s. Certainly we're starting to see that. You know, NVIDIA chips have been very up and down. They're very highly priced for a long time now, five, six years, you know, they've looked very expensive. And I thought, you know, historically semiconductors don't stay expensive because we just build new ones, build new fabs. They haven't come down. And now what we started to see is, you know, the more, you know, generic chips, I said, yeah, the generic like DRAM, NAND, now are priced like NVIDIA chips, if that makes sense. And, you know, there is a restriction on the supply there. We basically don't let the Chinese buy a high-end equipment to make them. You know, and the Chinese have been the marginal supplier for all sort of productive equipment for the last 20 years, 20, 30 years almost. And so I sometimes wonder if you stripped down the sort of semiconductors from markets, would we already be looking like the '70s? And there are certainly some signs of that. You know, I see, you know, profound weakness in some areas you know, mainly driven by interest rates, whereas the sort of semiconductor area keeps us up. But, you know, it's already affecting margins for like Microsoft, you know, Meta, these other things. So you've got this sort of strange, you know, it's not quite a perfect analogy, but it's not a terrible analogy either. I don't know if that makes sense, but, you know, we are edging towards a different type of world, I think.
Speaker 3- So you have the businesses that rely on, you know, cheap capital, to fund themselves. The whole business is set on that. And you think those businesses are going to be harmed. You've got financials basically hitting all time highs. They benefit from these higher interest rate environments. And then you have the mega trend of semiconductors and AI companies, you know, there is tremendous debate right now. Very few people sit in the middle on this about whether it's fair for the prices that we're seeing in the AI supply chain, and questioning whether it's a bubble. I mean, do you have a view on the pricing of these AI related equities right now?
Speaker 1- So I have a view. A lot of people don't agree with this view, which is fine. I don't have a problem with that, but I'll just say, you know, it's my view. So I think what's happening with AI, this is my view of it, is that, you know, the sort of LLMs go invented. And I think very quickly, you know, the big, you know, the CEOs of big companies worked out that this was going to break down the moats of, you know, the very profitable businesses, particularly for Google. Like I know I rarely Google search anymore. I tend to search for everything in ChatGPT first, 'cause I get cleaner, better answers. You know, so far as Google, I'd be thinking, okay, we might, you know, we're gonna, our advertising business is threatened. And you start thinking about all the other business, software business, threatened so you start you go okay these big companies are hugely profitable businesses are going okay we need to spend you know we need to spend because we've got to protect the you know try and build a new mode which is fine and you know i think that was the first stage of it i think the real problem has been that uh you know musk with spacex has basically sort of said i want to be in the ai business as well i'm producing compute i've got ideas for making even cheaper compute uh the satellite based data centers who knows you know i know a lot of guys who fancy themselves as scientists of financial scientists say it's impossible and i'm like yeah but he's already built about three or four impossible businesses and destroyed the incumbents so you know i think for me like having elon musk come into the data center compute business has probably got a lot of these sort of big big ceos thinking we just have to spend and spend to try and make it as expensive as possible to try and keep them out i think a good analogy is you know he launched tesla a lot of companies were very slow to get ev products you know they're trying to protect their legacy products and now you know tesla's worth multiples of the entire old sort of internal combustion engine producers i feel like the the tech space sort of going through a similar sort of okay we don't spend we're toast um you know because a lot of the sort of pushback i get on ai a lot of the negative research i read is no one's ever going to make any money uh on ai with this much investment i'm sort of saying i don't think the investment is going in because of the ai is going in to protect the existing hugely profitable businesses that google microsoft even even amazon have you know they're trying to you're trying to stay you know the kind edge and try and keep uh elon musk at bay that's my read of it and i think all of these guys also remember the dot-com bust they remember it very differently to how investors remember it investors remember it as oh buying all these whiz-bang companies and then went bust and zero the guys that survived to run the big tech companies now the ones that kept investing all through the downturn you know and they remember all they remember is the guys that stopped investing disappeared right so you know in the soft bank he kept investing the whole way through you know he's now richest man japan that's so the mentality is totally different uh which is why i'm i'm skeptical on the uh i'm going to come in tomorrow and read that microsoft meta google amazon have all cut ai capex by 50 percent and all the stocks are down 50 i'm very skeptical skeptical of that possible future headline because i feel like the first one to cut spending loses it's almost like in the states when you have a civil lawsuit the first one to come to their senses loses that's the sort of condition we're
Speaker 3in now i think another difference is we don't have the the ghost fiber or anything that the fiber that's being completely unused in the 2000s i mean you look at these charts of gpu availability and uh you know we just had a big new model come out um in china and everyone's talking about how uh deflationary it is for the pricing of ai um but they don't have enough compute to support the demand for the model right um that that even if we get these cheaper more efficient models um that we just don't have enough compute and we're right back where we were um it just doesn't make sense to just bring down about the potential profitability of the you know frontier labs who's going to be the model provider that makes any money but um i i don't think it it bodes bodes negatively for for uh capex in any way these developments that we're seeing what about the potential for these developments uh to impact your view on labor and wages arguably a big reason on this is they do see perhaps the same world that you do in terms of labor and these companies that are by and large reliant on on labor to to maintain their profitability see that as a risk and and they see this as a potential out i mean do you do you believe that ai is going to throw a wrench in this higher wage greater value of labor world that you see i don't think so because i think the ai
Speaker 1is mainly negative uh to be honest you're mainly negative with sort of the professional classes have had their wages move in line with asset prices so you know so people who aren't priced off minimum wage or you know that sort of thing it's more the sort of accountants lawyers fund managers uh high-end doctors you know these these sort of people who sort of price relative to you know whatever the market value is i think ai is most vulnerable for them uh is my read um which i think is sort of part of will fit in naturally with the politics that we're going into of like you know how much should the ceo be earning relative to the lowest paid worker in their in their company right that's an old discussion as you know and that ratio has been going up and up and up for years i can see that turning and ai could be part of that you know in that you know it sort of more narrowly defines what is actually worthwhile and what has value um yeah so i don't think it affects it i mean you can remember like in the post-world war ii period right the big technology that suddenly came out you know suddenly in 1945 was nuclear right and nuclear and jet engines and yeah the car you know the car became much more common post-world war ii yet much more huge technological transformations but at the same time wages went up a thousand percent over that period um so sometimes you know the technological change in wages are actually two separate discussions it's a political discussion um it's the technology is more who who gets some money who doesn't um but you know the the the way the wages are going up or not it's a political discussion at least to my view if that just makes
Speaker 3labor unprofitable relative to digital labor for for lack of a better word um you know we'll just see in unemployment will will remain extremely low but labor labor participation is is going to drop like do you don't think that that's a possibility where wages are high unemployment is low and this is a problem i mean we've seen falling labor rates in the last few decades and i think that's one of the biggest problems that we've seen in the last few decades is that we've seen labor rates in the last few decades is that we've seen labor rates in the last few decades is that we've seen falling labor problem i mean we've seen falling labor problem i mean we've seen falling labor participation you could argue it's a participation you could argue it's a participation you could argue it's a demographic trend more so than a un you demographic trend more so than a un you demographic trend more so than a un you know lack of demand for for labor but know lack of demand for for labor but know lack of demand for for labor but uh you know that that's a trend that has uh you know that that's a trend that has uh you know that that's a trend that has been going really since the gfc it's been going really since the gfc it's
Speaker 1been going really since the gfc it's hard to find an example where technology hard to find an example where technology hard to find an example where technology has suddenly caused has suddenly caused has suddenly caused do a process a bit better they tend not do a process a bit better they tend not do a process a bit better they tend not to fire that many people to fire that many people to fire that many people but they sort of and then you get new but they sort of and then you get new but they sort of and then you get new technology new companies coming through technology new companies coming through technology new companies coming through the using the new technology much better the using the new technology much better the using the new technology much better and then they sort of expand massively and then they sort of expand massively and then they sort of expand massively their employment their employment their employment um you know and they um you know and they um you know and they you know that tends to be the way it you know that tends to be the way it you know that tends to be the way it works um i mean it just works um i mean it just works um i mean it just if you look at like how much technology if you look at like how much technology if you look at like how much technology is improved and how many jobs are used is improved and how many jobs are used is improved and how many jobs are used to exist or disappear to exist or disappear to exist or disappear you know normally we just move move you know normally we just move move you know normally we just move move somewhere else somewhere else somewhere else i i i know people are worried about but i i i know people are worried about but i i i know people are worried about but i've yet to i've yet to i've yet to you know see a real example of it working you know see a real example of it working you know see a real example of it working that way and certainly ai i think that way and certainly ai i think that way and certainly ai i think what i see with ai it's sort of from what i see with ai it's sort of from what i see with ai it's sort of from from my perspective from my perspective from my perspective is as it gets used more and more is as it gets used more and more is as it gets used more and more people are sort of recognizing uh ai people are sort of recognizing uh ai people are sort of recognizing uh ai products more easily oh they go that's products more easily oh they go that's products more easily oh they go that's slop slop slop that's an ai generated substack or that's an ai generated substack or that's an ai generated substack or whatever whatever whatever and they instantly devalue it you know and they instantly devalue it you know that makes sense so what my sense of it that makes sense so what my sense of it that makes sense so what my sense of it and this is true on my my sub stack i and this is true on my my sub stack i and this is true on my my sub stack i don't use don't use don't use ai for any of the writing because the ai for any of the writing because the ai for any of the writing because the way it writes is very way it writes is very way it writes is very generic powerpointish uh not always generic powerpointish uh not always generic powerpointish uh not always logical logical logical loves to use a lot of dashes it doesn't loves to use a lot of dashes it doesn't loves to use a lot of dashes it doesn't it's sort of it's nice if you're a it's sort of it's nice if you're a really terrible writer really terrible writer really terrible writer it's great uh but i don't think it adds it's great uh but i don't think it adds it's great uh but i don't think it adds much value much value much value and i think people get turned off by it and i think people get turned off by it and i think people get turned off by it so i feel like is with ai it's sort of so i feel like is with ai it's sort of so i feel like is with ai it's sort of it makes very easy low level stuff it makes very easy low level stuff it makes very easy low level stuff easy to do but the high-end stuff easy to do but the high-end stuff easy to do but the high-end stuff it adds the value to the high end stuff it adds the value to the high end stuff it adds the value to the high end stuff because like because like because like oh you know you need to have a lot of oh you know you need to have a lot of oh you know you need to have a lot of skill now skill now skill now i can see you need to have a lot of skill i can see you need to have a lot of skill i can see you need to have a lot of skill to write that way and i think that's to write that way and i think that's to write that way and i think that's always been the way always been the way always been the way um once something becomes more mass um once something becomes more mass um once something becomes more mass produced produced produced you tend to sort of put more value on you tend to sort of put more value on you tend to sort of put more value on high quality stuff clothes is a good produced you tend to sort of put more value on high quality stuff clothes is a good example example example their clothes used to be very expensive their clothes used to be very expensive their clothes used to be very expensive and now we mass produce it and now we mass produce it and now we mass produce it in china and india and places like that in china and india and places like that in china and india and places like that but we still pay but we still pay but we still pay you know a few thousands you know a few thousands you know a few thousands for like an italian suit you know for like an italian suit you know for like an italian suit you know because that is because that is because that is noticeably better noticeably better
Speaker 3noticeably better it is noticeably better and the argument has always been that an ounce of gold is what uh what buys you a suit these days yes that throughout throughout history an ounce of gold and the price of a of a well-made men's suit are about the same and i can tell you having just been in the market for a suit uh four thousand dollars is about what it it'll run you to uh to pick up a a nice italian you know handmade suit um so the it has held it has certainly held at least for right now um so so it's interesting you don't see it going that way and and arguably this might fit in with your political view i mean do you think that that there is a risk to the ai spending trade that could come from politics you know i live in new york state we just banned data centers for a year it's by and large extremely unpopular both the technology and the infrastructure build out around it whether those arguments are are uninformed um is another debate to be had but it's an extremely unpopular new technology that people are very scared of are you concerned at all that that the spending could be um hit a roadblock
Speaker 1that's political it could do but i think the politics i think the politics is much more supportive so generally speaking uh the one unifying characteristic of americans is they love to win they love to win everything you know and they're sort of in an ai race with china so i can understand new york state blocking development this sort of stuff but if uh if it becomes perceived that uh the us is falling behind china in any way shape or form then you know the political will will be there too because no one will look weak on china uh would be my observation uh neither left-wing or right-wing politicians uh and yeah i'm pretty sure you know if you look at the way the trump administration talks about ai they you know it's a technology they want to own and dominate so i i i struggle to see the politics negative there in fact you know if anything it becomes a strategic asset like nuclear so everyone's trying to get it you know um and so the spending should be there uh you know the only the only thing that could really slow it down i think is a big recession and that would be again a political decision so getting the fed to jack rates to like 10 to try and stop everything and i guess the the real issue you know i think a lot of people have because of the past we grew up in a lived through they sort of when they have a big problem with my arguments is like we've had recessions before gonna come back again i just go the thing for me is i think austerity where governments come in and they suddenly stop spending is as a political policy dead in the water i just don't see it um and without that you know the growth will be good inflation will be strong uh and these things will continue for the foreseeable future i just don't see a political environment right now where we all sort of go you know we'll take some austerity because we want to get interest rates lower inflation lower and we're tired of this boom days that we've had i don't i just don't see that politically i don't see any politician pushing that because they're all terrified uh of the of the populists both on the left and the right so the spending will be there and if the spending's there inflation will
Speaker 3be there too so you think that ai will broadly be put into sort of like the military spending category where it doesn't really matter what um the people want i mean you could argue here in the u.s people have said we want lower military spending for a long time and it has never happened um so you think it's just one of those one of those categories that's just going to be unaffected
Speaker 1by the populist will of the people yeah i think at the moment because it's you know it's too strategic of an asset you know i just can't see any u.s politician being the one to say they lost the ai war with with china i just you know i just don't feel like that's something that's
Speaker 3conceivable we've seen a pretty strong momentum unwind right now just because the capex doesn't stop and the spending continues doesn't mean that asset prices can't react negatively to some headlines or just you know there's no rule that says that stock prices have to follow fundamentals and and that has played out many times in history um you know people are very exposed to this trend the punch bowl tends to get pulled away after people have some pain right uh nobody wants to to take it away while the party is going on i mean do you do you have any concerns about the the level of exposure that people have the the triple levered etfs the speculative fervor that we have around these stocks and and the potential for um pain there despite robust strong fundamentals
Speaker 1the triple levered etfs is like uh fundamentally a bad idea uh you know you know just you know my experience with these types of structured etfs they tend to cost retail investors a lot of money um you know and they're you're primarily targeted to them um so yeah i could see an unwind there uh uh you know it's like with everything if it's like the old saying you know if as long as you don't get too greedy you'll be fine but i think the rise of triple levered single stock etf like an sk hynix or micron is really it's about being greedy and the problem you've got as we've seen in financial markets before is like when you're getting unwind in these types of products so you have to sort of they don't they do move away from fundamentals they move to basically the the pain point where people are forced to capitulate um i think we're sort of seeing that in the in the sort of memory trade at the moment i mean uh i think i was pointing out my sub stack is yeah the memory stocks are very weak but memory pricing has actually been very strong this month um you know so it sort of points to you know excessive it was excessive greed excessive long positions and the markets just sort of decided to come in to take your money from you that makes sense uh how long that goes on i don't know you know as you've seen before it can go on for a while essentially the ltcm blow up was very similar they got too levered the market realized they were levered so they came and took all their money from them uh and so you do get these uh blow ups from time to time i actually have concern about the way
Speaker 3that ai technology is impacting the research that people do arguably in past speculative bubbles people kind of knew that they didn't know anything that they were playing with you know half of the information and now you've got this machine that can tell you anything you want to know it tells you that you're a genius and you can put in well this is my thesis and it'll say that is a very strong fundamental thesis max you you've really been thinking hard about this i mean and and i think that that's something that people don't quite get that that the market doesn't care about your knowledge of the technology or the fundamentals or whatever that that it can find that pain point and you've got a lot of people out there who think well i've done all this research i understand where how important this thing is in the supply chain and they think that that's enough um and that they deserve returns because of that knowledge and i i just have a lot of concern that that that will actually uh create some serious negative feedback loops on on any potential leg down i don't think you need ai for that and i think it's you know if you talk
Speaker 1when i talk to you know people i meet who are like investors into crypto not bitcoin like speccy speccy crypto i go how did you find that how did you find that coin like oh it's my whatsapp group we'll talk about how great it is as the next big thing i'm like okay you know the base is an echo chamber of like oh this coin is going to be the next big thing you know and you know i run into him a few years you know mark a few months later and go how's it going they go i don't know i can't bear to look at my crypto portfolio anymore so i don't you know and that is uh so you know ai maybe have replaced whatsapp groups but humans have always humans always rationalize positions uh even i do it uh it's why i like i prefer uh managing other people's money because it helps me stay disciplined because you still have to think about oh i own this asset how do i explain it to this person you know whoever you know who's entrusted me and you know if you can't explain it then you like i can't own it whereas when i it's just my own pa money i might hold on to an asset far too long because like oh i'm a genius you'll come good at some point you know so having that third-party discipline is out there but you know people have done crazy stuff for as long as there have been markets before ai turned up and for random reasons as well you know uh yeah so it's like i maybe it makes it worse i
Speaker 3think it just stays the same let's close out with a little bit of assessment of other risks maybe that we haven't talked about um what are the areas that you think you know people should be the most concerned about um if rates do continue to move higher what are the the areas of the market that are sort of most mispricing this interest rate risk that you talked about as being sort of
Speaker 1this new framework for you i'm amazed in the sort of private uh credit private equity space private credit in particular you've seen like uh gated redemption subscriptions, particularly in that cliff water, uh, one. Um, so I was just looking at, and what was surprising is yes, they had large redemptions, but they also still had large subscriptions on the other side. It was just that the redemptions that sort of overwhelmed the subscriptions for the first time. And so then they put in a, you know, a gate on redemptions to try and manage that process. Uh, I couldn't help but think, you know, okay, so they got redemptions and they've had subscriptions. What happens when there's no subscriptions at all, when people suddenly go, oh, I'm getting, you know, 7, 8% in money market funds. Why am I bothering with this illiquid private credit fund that I don't know anything about? Uh, where asset value is already weak. Um, you know, these, these things are, you know, I think we mentioned before how you can have problems in something for two, three years before they actually metastasize into something worse and certainly private equity, private credits have problems now for a year and a bit, um, which I found, very strange particularly with private equity when they were talking about liquidity issues. This is they talk about liquidity issues with credit spreads at all time lows and stock markets at all time highs. I'm thinking, how can you have, how can you have liquidity issues in that environment? That makes no sense to me. Uh, I think it just shows that the quality of the assets within those businesses are very problematic. I think they are of all the sort of businesses I look at, they're the ones most hopeful that the fed comes in and cuts rates back to zero and bond yields fall back to sub 3% or something like that. Cause they've built their whole model about ever lower interest rates, um, which they're not getting. And, you know, that's an area that, you know, I think it's like very typical in my experience is like, there's a problem. People still get worried about stocks fall for a while, but then it sort of doesn't become any worse and then they forget about it. And then the problems still work their way through slowly, but surely. That'd be the area that I think, you know, much higher interest rates could potentially cause much bigger problems.
Speaker 3Okay. And specifically like the, the listed asset managers, um, you think that they, they are potentially at risk of, of continuing to drop. I mean, they haven't fared very well for the last year or so. Financials are doing well, but it's the banks, not the asset managers.
Speaker 1That's probably a good way to sort of, you know, go full circle. You know, when I was talking about like pools of capital sort of dwindling, like some wealth funds, they also think like the pools of capital have ended up in private equity. Cause it private equity really is like this pool of capital. It's going out and trying to make you more money by buying a, but not actually doing anything. They're not making anything. They tend not to be investing either. They just buy firms, financially rework them and give you some money back. Uh, you know, this idea of falling pools of capital, shrinking pools of capital, shrinking pools of capital should be extremely negative for businesses like this, because the cost of capital rises that's negative and the pool of capital upon which they've been able to draw upon to raise these phenomenal amounts of money should also be getting smaller. Uh, and so I see, you know, if this sort of in the, in the world, I think we're going to, these are much more problematic, you know, the private equity, private credit, these businesses all turned up, uh, in the eighties, after we sort of, uh, moved away from the pro labor, uh, policies that existed, you know, they are really sort of, for me, big vestiges of a pro capital era that I think is coming to an end.
Speaker 3Well, and arguably just the amount of money that's flown in flowed into the sector has, has narrowed the arbitrage that was available. Just the big difference between private market valuations and public market valuations that has completely closed. And, and, you know, if you look at the, the memory companies, you can get, you can get cheaper valuations, cheaper forward valuations in the public markets now with huge amounts of growth. Potentially. Yes. Yeah, potentially it's a big, if it's a big, if perhaps the biggest, if right now in markets, well, Russell, we will end it right there. People can read your sub stack. What is the, what is the URL these days?
Speaker 1Uh, it's a Russell two L's hyphen Clark, no e.com. So w w w w dot Russell hyphen clock.com.
Speaker 3Wonderful. Well, thank you so much for joining us today and, and, uh, sharing this people. I highly recommend going to subscribe to the sub stack. We'll do it again soon.
Speaker 2Thanks a lot, Max. Thanks for listening. Interested in learning about the two cream soybean ETF. S O Y B click the link in the show notes for more information and get two creams free ebook. Why investors are increasingly turning to commodity ETFs until next time. .
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