Speaker 1Tell us what the stupid Washington consensus is.
Speaker 2The stupid Washington consensus is what Vice President J.D. Vance referred to the financializing of the U.S. economy. It's as big or bigger than the Berlin Wall coming down in 90 and every bit as big as Nixon closing the gold window in 71. 120% debt to GDP, multiple
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Speaker 1The stupid Washington consensus is what Vice President J.D. Vance referred to
Speaker 2the financializing of the U.S. economy after the fall of the Berlin Wall. He gave a speech in, I believe it was Munich in February, or March or so of 2025, in which he said that everybody followed the stupid Washington consensus and de-industrialized and offshored their industrial base to China, essentially, and importantly, their defense industrial base, and said that Germany had been the only nation that refused to, but had in recent years begun following the stupid Washington consensus as well. And so it was an early sign, in my opinion, that the Trump administration, part two, was going to actually really press towards reshoring, et cetera, because you had Trump, you had Vance, you had Besant, everybody reading from the same hymnal on that front. So, yeah, it was good for a laugh at the time, for sure.
Speaker 1And there's something that's been popping up a handful of times across Besant, Trump, Vance, discussing this phrase, Hamiltonian economics. And I heard it the first time and I was like, what are they talking about? And I heard it again and I heard it again. So will you tell us a little bit about what this means and then what are they referencing? Do they know what they're referencing? And then what is the actual implications?
Speaker 2In a nutshell, Hamiltonian economics are high tariffs, protection of domestic industry, and a neutral reserve asset. Hamiltonian economics are the exact opposite of what the United States has been doing for the last 35, if not 40 years, certainly since the fall of the Berlin Wall. And arguably since Volcker in the early 80s, we've been doing the opposite of it. It's called Hamiltonian economics for Alexander Hamilton, for his treasury secretary, who wrote a report on manufacturers, I think he called it in 1791, gave it to Congress early days of the United States and basically says, look, if you want to become a great power, you have to put up trade barriers and make your own stuff and become largely self-sufficient in, in a lot of things. And it, it set the tone for certainly the first 50, 60 years of the United States. Bringing it forward, we've seen in the second Trump term, talk about Hamiltonian economics over and over. We had in 2025, Trump didn't say Hamiltonian economics specifically, but he said in early in his second term, we want to take the U.S. back to when it was richer and more powerful than ever before. And in the second term, he said, we want to take the U.S. back to when it was richer and more powerful as a senator. He goes as far as says, I think the dollar's reserve status is no longer a positive for the United States. It's now a negative for the United States. We've hollowed out our manufacturing. Another nod towards Hamiltonian economics before Vance was ever appointed by Trump as our vice president. Fast forward another call it eight to nine months. We have U.S. trade representative Jamison Greer at Davos, who flat out said we are going back to Hamiltonian economics, cited the Hamilton paper. This kind of got dropped until until Hamiltonian economics came back up with Secretary Besant. Treasury secretary gives a speech at the America 250 gala at the New York Economic Club, which is obviously sort of a big. Very politically connected group of people, particularly around the finance politics beltway. And he says we're pursuing Hamiltonian economics. And just in case anybody thinks that he was. Talking out of turn, he publishes a Wall Street Journal op ed the same day, saying flat out says we're doing Hamiltonian economics. And so I think it's a super important recognition of a shift in policy. And for 40, 50 years, we've all been working in markets where I'm not more than 50 years, but 30, 30 plus years. We've been in markets where the system was anti Hamiltonian economics. It was globalization. It was neoliberalism. It was, quote, unquote, free trade. And what that looked like was America offshores its labor. It offshores its factory base to the lowest cost provider. It buys stuff from them. It exports dollars. Those dollars are recycled into U.S. Treasury bonds and U.S. financial assets that helps finance deficits. And it leads to a very predictable set of responses slash policy outcomes slash symptoms. You end up. With a hollowed out defense industrial base, you end up with a hyper sized financial sector, you end up with rapidly growing wealth inequality led by the financial sector, free trade and anti Hamiltonian policies are very good for Washington and they're very good for Wall Street and they're very bad for America and in particular, the middle and working classes and the U.S. industrial base. And that's exactly what we've seen. We've seen since 1982, but especially after the Berlin Wall came down, Trump, Besant et al are now saying, we're going back the other way, we're going to put up trade barriers and we can see they've been doing that attempt. We are going to do that to try to protect industry here to reshore because it's become a national security imperative. We're borrowing money from China to build weapons to face down China using Chinese components. This is what the chairman of the Joint Chiefs of Staff, Admiral Michael Mullen, said in 2011. So the U.S. military has been warning about the national security risks of anti Hamiltonian economics for well over a decade, almost 20 years now. And so we got tariffs. We're getting price floors in critical commodities, government price floors. We are getting government investing in critical industries. We are getting security arrangements as it relates to markets. The United States Treasury bond can no longer be the world's reserve asset under this, right? Basically, we've been offshoring dollars, exporting dollars and financial assets and getting back stuff. And now we want to make stuff. Well, we can't do both. And so if we start making more stuff, ultimately our deficits are going to have to be resolved in something other than Treasury bonds in particular and in financial assets more broadly. And so if we start making more stuff, ultimately, our deficits are going to have to be resolved in something other than Treasury bonds in particular and in financial assets more broadly. And so if we start making more stuff, ultimately, our deficits are going to have to be resolved in something other than Treasury bonds in particular and in financial assets more broadly. And so if we start making more stuff, ultimately, our deficits are going to have to be resolved in something other than Treasury bonds in particular and in financial assets more broadly. And so if we start making more stuff, ultimately our deficits are going to have to be resolved in something other than treasury bonds in particular and in financial assets more broadly. So it has massive, massive implications for global capital flows, the dollar, rates, national competitiveness, industries, etc. So just massive, massive shift. Arguably, if they continue down the line, it's as big or bigger than the Berlin Wall coming down in 90 and Nixon, every bit as big as Nixon closing the gold window in 71.
Speaker 1So Ari, all this is happening, and I think everyone would probably nod their heads as we've been talking about this and agree and say, look, we don't have Keynes's Bancor. We have this modern system of all these fiat currencies and all these massive flows moving around through the world. So what now?
Speaker 2Well, once you understand that. Once you understand that. Once you understand the different, think about the different levers and tradeoffs, choices to be made, then it can inform where do I want to be positioned with my portfolio, right? So we just discussed Hamiltonian economics. It's 180 degrees opposite of globalized neoliberal economics and globalized neoliberal economics. We know who the winners were. The winners were Wall Street, Washington, China. if we're going to do the 180-degree opposite with that under Hamiltonian economics, then the losers of the last regime, the U.S. industrial base, U.S. middle and working-class nominal wages, inflation, gold, those should be the winners in this new system, right? So you can kind of look at it and go, okay. So let's assume we're going to keep going down this path of Hamiltonian economics, which I think is a fair assumption because, again, what are our tradeoffs? If we go back to non-Hamiltonian, if we go back to neoliberalism and this absolute free trade that we've been trying for the last 35 years, China's going to make our entire military for us in the next 5 to 10 years, basically. And the military's not going to allow that. Washington, I can say with absolute certainty in critical, in critical circles, is aware of this problem. They aren't going back to that. And you can see hints of that. We saw Trump won. Oh, trade, right? Trade war won. Okay, we got a more classic Washington politician with Biden. Things are going to go back to normal. He did a lot more stuff than even Trump did, right? He went after semiconductor sanctions. He, if you look at domestic manufacturing construction spending under Biden, it's orders of magnitude higher in terms of growth rate than it is so far under Trump, too. And so when in America, when you go from someone like Trump to someone like Biden and the policy doesn't change and then you go back to Trump again and the policy doesn't change, that's just your figurehead king. It doesn't, they don't matter. The Washington has changed its view of neoliberalism. It's dead. And that's still, I think, a very controversial or certainly not a consensus view amongst Wall Street and most investors. So. Neoliberalism is dead. It's over. We're moving towards Hamiltonian economics. What does that mean? Higher tariffs, more protectionism. Higher inflation, higher nominal wages. Okay, that's great. But we've got 120% debt to GDP. We've got 6% fiscal deficits on their way to 7-8 thanks to this war. What we can't afford rates above X. And then you say, okay, well, whatever X is, and it seems to be roughly four point, you know, I've been saying 4.6 to 4.8% on the 10-year. You know, we got the 4.7 again and boom, Besant's intervening in markets in a way that Treasury hasn't intervened in 40 years. Okay, it seems like that's still pretty good bogey. How does he intervene? Well, that's ultimately about weakening the dollar. It's ultimately about injecting liquidity. Well, now you're injecting liquidity into an energy, you know, the spike is down, but it's still higher than it was, oil is, than when the war started. It's good for, it's good for the debasement trade. We've been hearing in the last three months, the debasement trade's dead. It's not close to dead. The debasement trade, if Hamiltonian economics are being pursued, and we just said across three different, you know, two different, three different administrations, very two different leaders, we've pursued the same sort of Hamiltonian policies, then the debasement trade by definition cannot be dead. It has to run for the next five to 10 years minimum. Because we need to, we need to reshore, right? If offshoring all of this stuff to China was disinflationary, which we know it was, by definition, reversing, it has to be reflationary. And to me, when you then look at, it has to be reflationary. We are continuing this policy across administrations. And we have a debt load that can't afford rates above 4.7 on the 10 year. Real rates have to go lower and lower. And lower over the next five to 10 years. So as you're looking out next five to 10 years, you're looking at a regime where real rates have to keep getting lower secularly. And that implies something different things in terms of stocks. It's great for stocks. It's great for business models that are capital hogs like AI, which is pretty much driving GDP right now, certainly on the margin. It's great for gold. It's great for Bitcoin. It's terrible for bonds. It's terrible for bonds on a real basis. I don't think bonds, I think the lion's share of the nominal moving yields in treasuries is probably over, from call it whatever, one and a half to 4.8 on the 10 year in the US. I think we're in like inning one or two of negative real rates. I think stocks are going to have a great five to 10 years in dollar terms. I think stocks in gold terms. Well, I mean, let's look at it already. Since 2022, when the Fed started hiking rates, S&P is up whatever it is, 60, 70%, something like that. And in 50% in dollar terms, it's down 25% in gold terms. In real terms, stocks are losing money. I think they're going to keep losing in real terms. But in dollar terms, I think they're going to soar.
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Speaker 2I use gold as an anchor for a number of different reasons. First, it's been money for 5,000 years. Right? And so, you know, as much as a lot of people today in America want to argue that that's just a fact. It was money in America for a long time, right? It backed our currency for a long time. The other dynamic is more practical, which is when you look at gold, it tends to return, I don't know, 1% to 2% above actual inflation over time, and when you have countries in fiscal and debt problems, they tend to understate inflation. And so, when I look at, you know, whatever they tell me CPI is, and I think CPI is one of these metrics that's deeply personal ultimately, right, is mine is different than yours and what have you. But once you start stripping out food and energy and, you know, all this stuff that goes up over time to make your point that, look, inflation's low and your inflation-adjusted returns are good, just show me gold, particularly in a multipolar world. Right? In a multipolar world, you can, you know, in the same way that CPI is manipulated, gold can be manipulated. But that's a much more useful thing in a unipolar world. Once you get into these multipolar world where you can have someone like China who's doing well running big surpluses and looking at the American situation going, "Huh, you know what? I'll just buy gold." Now you can manipulate gold a little, but you can't manipulate it too much because you'll run out of gold. And you know, as much as you don't want gold rising, a lot of American policymakers, you really don't want London and New York going empty because the Chinese bought it all. And so there is a real metric of here's what real inflation is. And so I think gold is very useful, both the tradition of 5,000-year tradition, the fact that it backed the American dollar for most of the 250 years we've been a country in some way, shape, or form, and that you're now into this multipolar world. You're in a world where gold is allowed to, again, move in price because you have different competing interests, you know, somebody who wants to screw people on a real basis to afford their deficit, the Americans, and somebody who doesn't want to get screwed on a real basis by financing those deficits, the Chinese, which is on some level an oversimplification. But between those two, you get a better market than when you just have a moment in history when it's the American dollar. I think that's what we had for gold for, you know, a 20-year span or so, 10, 15, 20-year span.
Speaker 1How do you think about position sizing? How much should, and say it's a traditional portfolio, global equities, global stocks, market cap, how much should, what's the starting point? What do you think? I bet you it should probably be at least 5% to 10%, especially now.
Speaker 2If you look at the inflation-adjusted returns of long bonds. From 1901 to 1981, 80 years. negative one percent on average so you lost a percent a year on average in long-term sovereign bonds for 80 years and yet we're in this regime where like you said 60 40 portfolio nobody owns gold if they do it's token and why well they only know bonds 1982 to 2020 40 years of i just make more money like i get the coupon i get the gain the capital gain as we go from 15 down to zero bonds are great look at i can back test this over the last 40 years i've been doing this 30 years i go back i back tested 40 years bonds are superior and none of those people ever said you know pick up the phone call your friends in brazil when you get into fiscal dominance what happens to bonds on a real base call your friends in argentina they don't make those calls because we're america right and it's like you know we're not going to make those calls because we're america right and it's like you know we're not going to make those calls because we're america right and it's like you know we're not going to make those calls because we're america right and it's like you know we're not going to make those calls because we're america right and it's like well here let me show you a setup a fiscal setup i'm gonna take the i'm gonna take the country flag off the off the uh masthead 120 at the gdp multiple dumb wars that they've arguably at least tied and really mostly lost no by the way as a parting gift we have now have a 400 billion dollar a year asbestos liability in the form of veterans benefits that are growing two to three times tax receipts those that was basically zero when we went into iraq and you know eight percent of receipts now going to veterans benefits growing eight to ten percent a year you've got almost a hundred percent of receipts with receipts at all time highs tied to interest you know they're spent on interest and spent on entitlements and those are growing faster than receipts what are those bonds a buy or a sell are those long term and and they would tell you you know if i put brazil's flag on like oh my god short the bond short the currency oh my god right it's america and to an and it's the uk and to a lesser extent it's certain countries in europe france and you go holy cow and yet there was just we're only now getting to the critical thought part of that 60 40 dynamic it's just been mindless i and so mindless in fact i gave a presentation it's chatham house rule so i can talk about what was said i can't tell you who said it but i was there and i'm presenting and i laid out in 2020 that that bonds have to get killed on a real basis and when you look at the fiscal side and they've we've already seen episodes of treasury market dysfunction this is before right before covet this is like late late january 20 and ultimately real rates are gonna have to plummet gold's gonna your gold i think i don't know gosh probably 1600 bucks at this point gold and bitcoin are gonna have to soar gold's probably 7 000 8 000 and bonds are gonna have to kill it on a real basis when you look and i there was a conference there was a very famous bond investor if i told you who he was you'd know him you've probably interviewed him he interrupts my speech you are wrong you don't know what you're talking about this is doing damage to to just the perception of the treasury like and it was so bad that the host actually apologized to me after like i don't know why he got that upset i said i can tell you i got that upset he's off sides and he knows i'm right and he's and you know i've been wrong plenty but but i was right in this case and that his portfolio was off sides and he did suffer and but i think it it really highly it gets to the point of your question which is there's just everyone can see the fiscal situation everybody knows we can't pay the debt back without printing money we everybody knows we can't afford above 4.7 but there were in this very unique moment in history i think where we've we've left in right there's five stages of grief right denial anger bargaining depression acceptance and i think you know when i was getting yelled at at this conference was denial and anger you know maybe we can go from denial to anger maybe it's probably anger and we've been in denial and anger for the last five years as long-term bonds have gotten killed and now we're getting into sort of this like bargaining moment right where like maybe besant can intervene in the yen and he can do stable coins and do you know do t-bills stand for stable coins and that'll lower interest and maybe japan and others can use the fema swap lines and that way we can support that market if we do all these things then maybe it the bot that spot this is this is bargaining we still have to get the depression and acceptance which is here's acceptance the last time u.s debt to gdp was 110 or higher was after world war ii that was 1946. by 1951 it was 50 55 percent how did they do it simple capital controls significant inflation and real rates in the united states that bottomed at negative 13 percent thank you for your service long-term treasury holders that's how it happened they got killed they got carried out on a real basis now i also did a study for clients in 2021 you may have read it at the time uh after covid 130 that the gdp we said okay let's run the same scenario as 46 to 51 we're going to drop debt to gdp by 50 points from 130 to 80 i said 80 because i said that's roughly if you go back and look at where it was the last time the fed could intervene without breaking the treasury market could raise rates without creating bigger deficits because debt to gdp is over 100 and so you actually are adding to growth by hiking rates fiscal downfall and so on and so on and so on and dominance. We said it was around 70, 80 percent. So let's take the conservative case. We're going to get debt to GDP down 50 percentage points from 130 to 80 percent in five years, like we did after World War II. What would that entail? And assuming that debt to GDP keeps going 8 percent per year, as it has every year on average since 08. And what I found was that we could do it. We just needed to have real rates be negative 12 to negative 16 percent for five straight years. Mechanically, economically, it's the easiest thing in the world. I could have it done for you by next month. But politically, it's a huge thing. And I think that's part of the problem, which is. Everybody can see this, but nobody wants to come to grips with what it implies. And so we're still in this bargaining phase around. Why does nobody, you know, why they don't believe it and think about the changes to their portfolio and their lives and everything they have to do to do it. And at the end of the day, the math doesn't care about any of that. The math is going to math and the math's already mathing. Right. So to me, I say that's why I say I think five to 10 percent everyone should have in physical gold. I think number one. And I would just replace your duration with physical gold for the moment.
Speaker 1We did an old post 2009 that talked about, the yield curve, and what asset classes performed well. And not surprisingly, the best performer in that negative real yield environment is gold. Commodities historically have done well too, and bonds being the worst. And there was that period over the last couple of years before gold had its big run, where I was kind of scratching my head and said, I wonder why isn't gold responding? What's going on? And all of a sudden, boom, and then it was quick and gold shot through the roof. And it's come back a little bit, then it's gone back up. But I imagine people are listening to this and say, all right, I'm convinced. I hear you, Luke. I hear you, Meb. I'm going to put some gold in. But you sound like a piker. 5%. I want to put in way more than that. I'm like, I hear you guys. I want to put in like 20 or 40. But for the people who say, okay, I'm going to start a position. I'm going to put in 5, put in 10. What the hell is the other 90% in? Because it's not bonds, doesn't sound like. What should I be doing with the rest of this big cash chunk I got? Sitting here in the S&P?
Speaker 2Yeah, I think it's 5 to 10 for me is sort of table stakes, right? That's where you should be. Just personally, I'm over 25%. And I sleep very well at night. And when you actually look at the wealthiest man in history as a percent of GDP or whatever they could measure at the time was a guy named Jacob Fugger, F-U-G-G-E-R. He said, you want 25% in gold, 25% in cash, 25% in real estate, and 25% in... What would today, I think, be blue chip dividend paying equities. And then adjust to rebalance, right? Because at that point, that portfolio makes you unkillable as an investor over the long run. That it's actually what Ray Dalio's all weather portfolio is based on was this Fugger portfolio. But that takes away, you know, your two biggest, the only ways you really die over the long run as an investor are, you know, hyperinflation and long depression deflation. And in hyperinflation and long depression, like, that portfolio takes away both tails. Because in long depression, deflation, collapse, gold does well, cash does well, real estate gets killed, stocks get killed, you survive. If you go into literal hyperinflation, gold does well. Most people think real estate does. It actually doesn't do well. Real estate in a real hyperinflation collapses to cash value. But at least there's value there. Particularly if it's timberland, farmland, something produced by a real estate investor. So, you know, that's a good thing. That's very important. And your cash evaporates in real basis and your stocks do really well. At least keep up with inflation or close to it. Again, you survive, right? In fact, you not just survive, you survive way better than most. So I think if you start with that for the average investor as sort of your benchmark of this Fugger portfolio, where are we? To me, we are in early days. I don't think we're in a hyperinflate. And to be clear, that's I don't think that's what that's not we're talking about here. I'm just simply saying we're mathematically the United States government cannot repay its debt in nominal terms. In other words, they will default unless real rates get secularly more negative or there is an incredible productivity boom that does not negatively impact employment at all because half of receipts are from employment. Highly unlikely that that condition could be met. So from a positioning standpoint, then you go, OK, gold is somewhere between five and twenty five percent, depending on where you want it to be. Set that aside. I still I still have close to 20 percent. Of my liquid net worth in T-bills and partly as a nod to this portfolio. But it's nice having that optionality because I think I've got I have extremely high conviction in the destination of where we're going and I have increasingly low conviction in the in the path to get there. And what's happened in gold over the last four months is a perfect example. Fifty three hundred to thirty nine hundred pretty quickly. If I'm all in gold performance wise, oof, you know, versus having that cash optionality, I can participate in different stocks. I can that go on sale. I can I can do different things in gold or buy gold. It is what have you. It gives me that optionality. And it also helps me finance my gold position. Gold is zero percent yielding. But if I've got 20 percent cash, I'm getting what am I getting? Twenty. You know, I'm starting the year at seventy five basis points, right? Twenty percent of three, seven,
Speaker 1five. Boom. OK, now the seventies were a haymaker for a lot of portfolios. Exactly what you mentioned, a lot of the all weather risk parity. Mark Faber has won these type of portfolios almost universally that have a big chunk in real assets. And usually that's expressed through gold, maybe tips. But the gold, those were by far the most consistent in terms of positive returns per decade. And this morning, because I was I was thinking about our conversation, I went and ran this back a hundred years to the 1920s. Same takeaway, is that the most consistent portfolios were the ones that almost universally had an exposure to gold. But I think the reason that people shy away from it a little bit is because almost universally it has a little bit lower cager. And I'm not talking about two, three percentage points. It's usually like 50 bips or, you know, relative to the the Buffett portfolio of 90 percent in stocks. And the problem with that is that path is tough. You're going to see 70, 80 percent real drawdown at some point. People bring up Buffett, right? I've had so many
Speaker 2times. Buffett says they don't need gold. He was lucky two ways. He was lucky to be born in America, as he said, as we all are. And two, he was lucky to be born in America in 1932. It was basically like the bottom. And then he had a retest in 42, right? When it was like, oh, God, did we win midway? Did we lose midway? Who knows? Are we going to win the war? He never really had the deal. If you look at from 22 to 42, gold killed everything in America, killed it all, killed it all. And that's with gold at a fixed price until 33. And basically a fixed price after. So that's that's point one. Point two is you can go back and find in his own writings during those 70s, the haymaker decade you talked about. He laments the fact that I believe it was like, hey, I think this was from a letter in either 78 or 79 or 80. But at any rate, he says, look, if you look at all of the Berkshire businesses and everything we've done, we've underperformed gold by like, like 2% a year. So like all of our business, all of our employees, all of the economic value add. And a pet rock beat us for like 15 years. And the point here is not pet rock always better forever, but that when circumstances dictate you do a stupid war, you do guns and butter, you go, you change a currency, you devalue the currency. Gold is going to do better for a time. And I think we're coming into, we're in the early innings of one of those periods of time. So anyway, two other allocations. So we talked about gold, we talked about cash, and then, you know, blue chip equities. Look, I think for me, when you talk about the leverage side, being a path to a very sizable graveyard with a lot of bodies there, that's one. But then it's also excess returns that are positioned like everybody else, right? And so when we get to SM, you know, the US equity market cap is 70% or whatever is now a global equity market cap. And you go, like, this has happened different times in the US, different places, right? Japan was once I want to say it was like 5060, something like that in late 80. Like, we don't know when the top is and when what the catalyst is going to be, we just know that like, if you really want excess returns, you're going to have to have something not in America. Okay, where do I want to be? And again, all of these things are just relative positioning expressions, right? I'm not saying, hey, I don't want to, you know, the average person's got 60, 70% in American equities. What do you do 50? And you put 15% in Japan, and you sprinkle five among EM because oh, by the way, when you read the news, when you look at where the trends are going, America can't reshore, because we can't make the machines and make the machines. And we can't reshore unless we have help from someone like Japan, China, or Germany, a couple other countries in Europe. Okay, well, China's out. So what if we sprinkle a little bit with with Germany and Poland and Hungary, and so where they still make stuff in Europe, and sprinkle some with Japan and wait 10 years, I think if you did something like that, you'd be super happy within your within your allocation. And again, it's all a relative game. I'm not saying that you're going to massively up, but I think you're going to probably have, you know, you're probably going to at least perform in line, if not slightly better on probably lower vol, because you're not the same, you're not the same trade that everybody else is as an allocator. And so that's what I think about the equity side, just bigger picture. I within that sectors, I love electrical infrastructure, anything tied to that, because it's not just AI, I think it gets hit if AI gets hit, but I'm not worried about it. It's I think we are in open field running for the next five to 10 to 15. I generation in 2023 was the exact same as it was in 2004 we were generating the same amount of electricity as nominal gdp has soared which is really interesting because if you want if you said luke you can have one indicator tells real economic growth of a country what is it and it's absolutely electrical generation it's very tight to gdp talk to us a little bit more about that is
Speaker 1that that seems at odds well i'm probably what everyone would believe oh absolutely think about
Speaker 2what's happening that we were offshore industrial base to china right and so you were you were and and there was a huge you know there were booms in parts of the country right basically the entire rust belt in midwest picked up and started moving to north carolina south carolina arizona texas and florida and so you had boom growth in things around that grid around that but at the same time you know it takes a lot of houses of electricity usage to you know you shut down one steel mill you know you're probably taking you know a thousand houses and really you're only building a new house and leaving a house there right so i think that's really is that flat electrical generation for 20 years was a sign of financialization and service jobs which require way less electricity than actually making stuff and you can see that in china where china went you know china in 2003 when we invaded iraq had less than half our electricity generation now they're almost 2x it's incredible and so point being is like these kind of mean reversions like there's there's no country on earth that's a great country that had flat electricity generation for 30 years we've been flat for 20 we're just picking up so that i think is going to run like crazy and that then okay electricity generation what metal goes into it oh you're gonna need aluminum you need stainless steel you're gonna need you know copper you're gonna need silver i think that's sort of just take a basket of those things in your equity thought as a sector right i talked about countries i you know talk about sectors it's good for industrials so there's i'll stop there on the equity basket you think about these these big trends and it ties back to the hamiltonian point being the 180 degree opposite of of neoliberalism and globalism but like we just ended a 40-year period where you know bonds go up a bunch every year even though the long-term history is that bonds lose to inflation for 80 straight years before that on average and this very unique period where the united states you know didn't grow their electricity generation capacity for 20 years and you know we're gonna do it from here it has to happen or otherwise you know you basically by assuming it's not going to grow a lot from here is is essentially assuming the u.s is going to be an emerging market in in 15 years like a real emerging market and i don't think that's going to happen either and so you go wow copper's right at the intersection of that right like inflation infrastructure and people just still aren't really there because it's it's a new it's a The market's playing by a new set of rules. And one of my favorite quotes in investing, let me back up, and you've probably read it in recent weeks. I've used it. I use it from time to time. I used it a few weeks ago about the markets playing by new rules with this Hamiltonian thing. It's by Bob Farrell, the former Merrill Lynch strategist. It said, in times of secular change, the markets will be playing by a new set of rules while most market participants are still investing or playing by the old rules that had existed in the prior secular condition, and that, moreover, by the time most market participants are playing by those new rules, it's mostly over. And it feels to me like we are in the early days of the new rules, which is long-term bonds are certificates of confiscation, which the old graybeards listening to this will remember from the term from the 70s. Gold is where you want to be for your duration, not long-term bonds. Commodities are back. Industrials are back.
Speaker 1I think that's where we are. Today's episode is sponsored by Upwork. Here's something I've learned running a business. The projects that matter often need expertise you don't necessarily have in-house, and another full-time hire won't solve the problem. I've used Upwork for exactly this reason. Years ago, I had an idea to rank the best cooking recipes in the world, a big data-scraping project across hundreds of thousands of recipes. And rather than do it all by myself, I hired a specialist through Upwork. Upwork is where growing businesses find highly skilled freelance professionals. You can browse profiles, review past work, and Upwork handles contracts and payments all in one place. With Business Plus, you can access the top 1% of talent on Upwork. AI-powered shortlisting delivers a curated list of top freelancers matched to your goals in under six hours. No endless searching required. Visit Upwork.com right now. And post your job for free. That's U-P-W-O-R-K dot com to connect with top talent ready to help your business grow. That's Upwork dot com. When you talk about the electricity ideas, what does that mean? Is there particular areas that you think are more interesting? Is it ETFs? Is it stocks? Is it just kind of do-your-own-due-diligence situation? What looks good?
Speaker 2I've been recommended for clients for the last three-plus years. Probably close to four years now, the grid and PAVE ETFs, G-R-I-D, P-A-V-E. I have no relationship with either one. Both great tickers. Yeah, those are the tickers. And if you call them up and you look at the companies that make up those, those are the types of companies that you want to own, broadly speaking. In a former life, we did. The two firms I was partners at, we had really good industrial teams. So there were companies like Eaton, Parker Hampton. Parker Hannafin, Danaher, Illinois Toolworks, these kind of things, they're sitting right in the middle of this trend. And they're going to get demand. They're going to get pricing power as the U.S. reverses 20 years of stagnation in grid capacity. All right. We've talked about a lot.
Speaker 1Gold, void bonds, electricity, farmland, timber, Japan, even a little Bitcoin. What else are we not talking about right now? We haven't even mentioned AI that much. You know, I feel like that's if we were on TV, that would be like 99% of the discussion or anything you're looking at there. I know you've mentioned like a lot of people love talking about the CDS of some of these. I mean, these companies have spent a lot of money. My goodness. Any thoughts in general on the topic of AI or anything we haven't talked about?
Speaker 2I think AI is going to be revolutionary. I think that is going to have massive societal. And investing. Fiscal issues that are being glossed over because, again, it's another one of these. Well, there's no way around it and it's all unpleasant. So we don't want to talk about it. But what I mean by that is I think it's going to be revolutionary. I think it's going to do to a lot of white collar jobs what China did to blue collar jobs. And the problem, of course, is that's you've got these AI is borrowing massive amounts of money competing with Besant for money to driving up capital costs on the U.S. Treasury at a time where we can't afford rates much above 4%. 4.7% and the the explicit goal of AI, at least in the, you know, in the ultimately, yes, there'll be new jobs created, new industries, blah, blah, blah. But for the next two, five, 10 years, what AI is doing is borrowing money competing with Besant to undermine the tax base of Scott Besant. Right. Half of American tax receipts come from jobs. A lot of that is from higher paying white collar jobs. And so you're in this situation. Initially, whatever they were spending, retained earnings, they were spending out of cash flow. Who cares? They start borrowing a little, start borrowing a lot. Now they're borrowing a lot and continuing going. It's a snake eating its own tail problem where I look at this and go, it's going to be revolutionary. Totally agree with the technologists. And then but I look at it from a fiscal side. We have a fiscal problem today. This industry is increasing capital costs while decreasing tax receipts prospectively at a time when we're already as a nation spending over 100%. Of tax receipts on just three things, interest, entitlements, and veterans benefits, you know, interest, interest, like interest, like, and so it pushes us into a fiscal crisis where we don't even have the receipts to pay the interest, how they're gonna, they're gonna have to print the money. They're gonna have to do more things like we did last week with Besant intervening various currency markets to calm the treasury market feeds back into our initial point of more secular inflation. I think AI is a is a sort of classic. You know, the early bird gets the worm, but the second mouse gets the cheese type of issue. In other words, you go back to the telecom boom. We still use all the fiber they got laid from 96 to 02. And we it's massive productivity driver, massive, massive, massive. And most of the companies that laid it went to zero. So and the guys who bought it out of bankruptcy are very wealthy today. And I think we're going to get some version of that same dynamic here where these companies are doing. God's work in some level, because a lot of some of them aren't going to be here to enjoy the fruits of their labor. Somebody else is going to buy their stuff on a bankruptcy and it's going to be awesome. And it's and we're all going to benefit as a country from it.
Speaker 1The bear case to me is kind of boring, which is they're all kind of the same. And I know like listeners, I know everyone loves every day be like, oh, this new quad dropped or this new version of GBT. This can do that in the other. I consistently use three. I'll use Claude, Gemini and GPT. And often I'll ask the same question. And many cases they just come back with the same answer. If China is equally good or even in the same ballpark, but they decide, hey, we're going to do this way cheaper, open source like that to me seems like a pretty big risk for these companies, too, because and I think it was in one of your charts you showed. This this just it looked like a very bullish stock chart, but it was actually, I think, tokens used by U.S. companies on. Paying Chinese A.I. right. Like something like that. We're like, wow, that's actually they're smart, much cheaper. Same output.
Speaker 2Yeah, it's gone from there was I think it was a Bloomberg chart, but it showed, yeah, the token usage on open router, which I'm told is only like two, 3% of all tokens spent, which questions like, all right, well, is it representative of people like we don't know. But so caveated with it's on open router. So it's two, 3% of token usage or whatever. But it's gone from like 3% to 45% or 50%. In the last 18 months. And I think you raise a great point. I'm glad you raised it, because that's another point to like we already had. If we set the Chinese aside, we already had the snake eating its tail dynamic. And now you interject your point, which is most people that use AI. Probably once you get to a certain level of performance, it's all the same. They don't need like the, you know, the super turbo, you know, high end model. And I've been in Cleveland my whole career. And so. I have an advantage. I think versus a lot of these tech guys and a lot of these finance guys about this whole thing, which is. I have already seen once what happens when the Chinese show up with cheap stuff. And I've heard I've heard everything they're saying about it. I heard it 20 years ago, right? Oh, it's not as good. Oh, well, it's close to as good. Well, it's just cheap. And for low end. Well, it's now it's getting higher end, but it's still cheap. Oh, God, it's cheaper and it's better. And if you get to that. Last, oh, God, it's cheaper and better. It's already over. You're done. And the challenge, of course, is what have we started to hear around AI is. Is it? Oh, God, it's cheaper and it's better. Some of them are better in certain metric. And I'm the wrong guy to say about which metric, right? There's like a thousand different metrics of like, hey, it's better in this and that. And there's technologists that will go, oh, that's not right. It's not better on this and that. And America still has these frontier models they haven't released. Fine. Totally concede the point. My point is I've been doing this for 30 plus years and. All of these companies, by and large, are valued. In the markets, either private markets are the ones that are being publicly traded. They are valued in a way that there can be no issues whatsoever. Right. This is like the Scott McNeely ten times sales. What are you thinking? Like some of these things are 20 times sales, 40. One of my mentors. Again, in the public market side was great because early in my career, I'm like, oh, this valuations at 25 times earnings. And he goes, listen to me. See? stop because valuation is arbitrary because valuation doesn't freaking matter. Throw in the trash. He goes, but valuation doesn't matter until something changes. Then valuation starts to matter, right? So like, yeah, thousand times sales. Awesome. And then the Chinese show up and go, hey, we'll do it for a penny when you're charging 10 bucks and it's 99% as good. And like when something changes, I can't debate, hey, which model's better, but serious people are having the debate. Are the Chinese going to catch us? Are they not, right? Five years ago, you go, the Chinese are going to catch us in AI. It's like, ah, right? Like you get laughed out of the room. Nobody's laughing anymore about are the Chinese competing or not? There's a serious debate. A serious debate about China's competitive dynamic, especially for the price to American AI is fascinating. Fatal to thousand times sales, a hundred times sales, 10 times sales, probably to five times sales. Those businesses, those businesses cannot trade at those valuations for long in a world where there's serious debate about where are the Chinese, because I can tell you if I'm being in the Rust Belt, if the Chinese don't go away immediately, I can tell you how that movie's going to go. We're going to get real quick to that. They're cheaper and they're better or they're cheaper and they're good enough. And your thousand times sales is going to two times sales. Have fun. Thanks for playing.
Speaker 1Yeah. I think you've written about this. I'd be really curious to see in the next few years, like, you know, what sort of gates come down in that scenario where, you know, it's under this argument of national security, yada, yada, but it'll be interesting to see what sort of protectionism there is for some of these large companies or not, you know, who knows? We'll see. But you've, you've definitely talked a little bit about that.
Speaker 2Yeah, I've talked a little bit about it. I have a really good friend of mine, who's I've known forever, who's used to run research at one of the biggest hedge funds on the street. And he's doing his own thing now. So he's super busy. We don't talk as much as we used to talk multiple times a day, but at any rate, he pinged me on the blue, like three months ago, he's like, they're not closing the gates, but they were not allowing secondary closing the gates on secondary trading for open AI and anthropic saying, if you do, if you secondarily trade secondary market, your private open AI or anthropic stock, it may void your stock. You can't do that. And this guy goes, those are the first gates coming down. They cannot afford to have a down round. If they have a down round, the entire thing unwinds. I'm like, you're right. That's exactly right. So to your point, what are they going to gate? You're you've already really kind of started it. But I think it's interesting, because the more that you can do something without calling it that, right, it's the old boil on the frog, you know, you can boil the frog without having them jump out of the pot. Look, this has been a blast.
Speaker 1I can't believe we've waited so long to do this. So people, they want to follow up, read some of your writing, see what y'all are up to best place to go.
Speaker 2Yeah, fftt-llc.com for more information about our different institutional and mass market research products. And they can find me on X as well at Luke Groman, L U K E, G R O M E N.
Speaker 1Luke, thanks so much for joining us today.
Speaker 2Thanks for having me on. It's been a fun conversation. Podcast listeners, I'm Luke Groman. I'll see you next time. Bye.
Speaker 1Listeners, we'll post show notes to today's conversation at MebFaber.com/podcast. If you love the show, if you hate it, shoot us feedback at TheMebFaberShow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.
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