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- [00:06]
Chef Meilin
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- [00:52]
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- [01:18]
Andy (Guest, Investment Expert)
I generally think geopolitical change is something you want to fade. Do the events in the Middle east have any impact on the US economy? The answer is not much. Even if they take share and GDP grows, there's just not enough support for all of the tech companies that are priced the way they are to all win. The promises that are made on AI spending, foreign direct investment in factories and government deficits require somebody to lend the money to the people that are going to do that spending. And those promises have mass are have massively increased. I started lightening up in January and just have continued to lighten up until now I'm fully out of the us. The very large promises being made to be funded with equity and debt and what that costs when it hits the market. By far that's the most important thing to me.
- [02:25]
Host 1
Andy, welcome back to Excess Returns.
- [02:28]
Andy (Guest, Investment Expert)
Thanks for having me guys.
- [02:29]
Host 1
You've spent over four decades in investing and researching global markets, and today you lead the team at Damp Spring Advisors where you advise investors on macro strategy and portfolio positioning. What we thought we'd do with you today is work through four distinct themes or areas of the market that many investors have their minds on, and we want to work through with you how you might approach thinking about the investment implications of each of these. So first is how you're thinking about analyzing geopolitical shocks like the Iran situation and how a framework that you recently put out there kind of helps you work through things like this that are happening in the market. Second, we'll dig into AI, specifically the Cintrini piece that's been circulating around and whether AI's long term productivity tailwind and the risks and opportunities to that. And then we'll get some of your thoughts on the broader economy. And lastly, we'll talk about the shift that you recently made away from US Stocks to more international markets. So a lot of ground to cover. People can follow along with Andy at Damp Spring advisors. That's just dampspring.com so to start and people will put this tweet up on the screen so people can see it. But it was a great tweet over the weekend about how you think about starting or a framework when we are presented with situations like we're going through in Iran. And it was this idea of like red flags and green flags and how investors should think about this. So I'll let you, because I think this is great. It's a great starting point. So I'll let you kind of talk about what you were trying to educate people on here.
- [04:08]
Andy (Guest, Investment Expert)
Right. So I think the, the big takeaway from that tweet was my entire life I've been a constant active learner and my family and in my own way myself have been a constant educator. Like everyone in my family is a teacher. I try to teach whatever I can. At the same time, I'm also an active learner. Like I don't know everything, not even close. And even the stuff I do know, I'd like to learn more about sometime. So that tweet was really about like, I think the skill. And it's probably becoming even more so nowadays given the amount of content that's created by artificial intelligence. The skill set that I value tremendously and really think that people need to really pay attention to is critical thinking skills. Why are you reading a particular piece of information? Is that a credible piece of information? Is that piece of information biased? Is that piece of information overly confident? Or is it humble and uncertain? And so when I think about learning a new topic, and we make fun of this on Twitter all the time, whenever there's a, an event of any sort, all of a sudden everyone's an expert in that particular thing. Now the fact is there are some experts in things like real experts that really know what they're talking about. And then there's a bunch of people that for whatever reason deem themselves an expert. With no credentials. So I think it's important to understand those people like, and then again, experts themselves have biases. And in particular when you're talking about geopolitical experts, those biases can be heavily political. And so if you're really trying to understand a situation that you need more information of, and I strongly encourage, and do it, I'm doing it all the time. I strongly encourage learning more about things. It's really important how you get, how you process your information. And so I laid out a brief framework. One is, I find there are a lot of people that have no basis for expertise who express that expertise with high confidence. And those are the people you run across them all over Twitter. Those are the people that you really probably better off not reading anything about. And then there are experts who deserve to be heard but are heavily political biased. And those are red flags to me as well because you're not getting proof, you're getting information which is better than somebody who has no expertise. But at the same time you're not getting truth, you're getting something, some bias. And then of course there's, there's the people that have no prior experience and are heavily politically biased and, and express their view with high confidence. Now that's the worst. You know, those are, those are the people that you really don't need to spend even a moment thinking about their contribution on Twitter or, or in, in your reading in any way. So those are the things that I find are really useful in just streamlining the information content I'm getting. And then there are things that I actually really value and I think the things that, so experience is a two edged sword. Like I think we've talked about this before on one of the other programs that we've done. Experiential learning is not necessarily a good thing because what people do when they are learning something from somebody who has had experience or a person who has had experience is looking out into the world. They start with I've seen this before. And then they conclude based on decisions they made before and how those went, what to do going forward. And where that fails is they typically do the things that went well and don't do the things that didn't go well. And that could have been luck. They could have made a horrible decision based on the information they had and done something that just happened to work out. They bet a 30% odds thing at a 50% needed payoff and just got lucky. And so that's not, you don't want that repeated. That sort of failure to Understand whether you did it right the first time. And then there's, of course, are they right that they saw this before? Like, maybe it's different. So experiential learning to me is a crutch that people use. And it's just as dangerous as having no information at all. Sometimes. Sometimes it's worse. Why? Particularly when you're dealing with factual situations and want a good sense of what history is about. I value people with experience because they've been there, they've done that. But the synthesis of what that experience is is less certain to me. So I look for people with experience who have low confidence in their views that recognize, hey, it might not be the same. I also think people, there are people out there that are just great thinkers that think through things with no experience at all. You drop them in the middle of a problem that they've had no experience with and they consider lots of possibilities and come to solutions and make judgments. And that thought process can be high quality and you can learn a lot for how they think through the problem. They're almost like your colleague as they're thinking through a problem. You both don't have information. So I value that person. But ideally I find a person that has good thinking ability and good experience and has low confidence in their views. So that's what I'm looking for when I look out on the world and it's very hard to find because mostly because the rest of the people are all trying these other things, which are very noisy
- [10:53]
Host 1
and well, by the way, I think this is fantastic and great and it's a great way to think about how to consume and digest, you know, information that you're hearing from others out there. But I think the low confidence thing is very interesting because, you know, a lot of times when someone says, well, it could go this way, it could go that way, it's, you know, the probability of it is maybe 30%. That almost seems like to many people, that's like a lack of, like, yeah, it's a lack of confidence, but that's that person that, you know, acknowledging that, listen, no one can predict the future. We really don't know. And this time it could be different. And yet that's not the type of personality oftentimes that, you know, people sort of gravitate to, particularly during times like this when there's a lot of, like, uncertainty.
- [11:42]
Andy (Guest, Investment Expert)
Right? And so to me, and there's levels of this too. Like somebody told me this is what's going to happen. That's hard to believe because of, because that's not how the world works. No one can predict the future. If somebody tells me there are a bunch of possibilities and here are the probabilities of each of them, that's actually not that much better because you're saying it's a 30% chance of this and a 70% chance of this, and you might be on the right side of 50 50, but you might not be. And having that confidence to assess the probabilities. Now, market pricing can give you a sense of the prob. Of the implied probabilities. It's just when people then use those implied probabilities to inform themselves of the actual probability. No, that's just what the market's saying the probability is. So it's not quite. It's a little better to say, hey, there are a bunch of possibilities. Then you start. Then people are immediately asked, well, what's the probabilities? Which is a good question, but also one that people then express with more confidence than they probably ought to. So I generally look at the world and say, what are the possibilities? And try not to spend a lot of time nailing down the probabilities of those things, but just keep my mind open to that. That's how I learn about things. Now, over time, things converge to the actual probabilities. They become digital. In some cases, like if the Fed's going to cut rates or hike rates at the next meeting, they become digital. With a merger transaction, lots of things become digital. But in general, the probabilities of markets are something that you just can't place a lot of confidence in.
- [13:30]
Host 1
You know, and speaking of like, I guess a lack of confidence or different signals being sent, you know, when the bombing started in Iran, you know, it was like at first the stuff I was hearing was this is going to be quick in and out, you know, then it was like, it's going to be a few days. Then it's, I think it's now, you know, Trump has said it's going to be maybe four to five weeks. And then I was just listening and he's not taking off the table, boots sort of on the ground. So there's a lot of different things being thrown out there that investors are trying to digest here and understand and the world's trying to understand, but just at a, at a high, high level, you know, how do you think that this current event sort of impact market
- [14:11]
Andy (Guest, Investment Expert)
with what my framework is for what's happening right now? Firstly, before we went to war, and let's just call it a war just to keep it simple, Maybe it's not. I don't want to get political about what in fact is happening. There's a kinetic, there's military activity happening. I'm going to call it a war. Before the war was announced, there was a possibility of no war. And so that had to be a possibility that you considered. Since then, we now know that there is a war. So now we're at the, well, what are the possibilities of the war? So I think the first thing to realize is if you're now catching up to what the possibilities of war were, your process is probably late. Like you should have been a few steps ahead in terms of what to expect so that it wasn't. You weren't at this junction of war, no war. You were at the junction of no war with a bunch of possibilities and a junction of war with a bunch of possibilities and maybe even a step further. So just in terms of process, I think people tend to jump from one node to the next without looking through. And then of course there's, we all know this is going to end one day. And so what does that world look like anyway? Those are just how I'm laying it out. But for this one, to me, the first thing that I care about, and it's, you know, I laid it out this way, the moment it happened, markets weren't really open. I'm sure there were some, you know, small betting markets and things like that. So we had to think, well, what are the possibilities for the Sunday open? And for me that was simple. He could call for talks. So I'm going to use this call for talks, as some people call it, Taco, whatever it might be, but de escalate. And so to me, one dimension is the timing of de escalation. Was it by Sunday nights open? Was it by sometime this week? And then no. And by the way, I'm working with a one week horizon. I'm trying to look out only one week. So that framework is before the open de escalation, during the week. De escalation, no de escalation. And so by Friday, one of those three things will be true. Clearly the first one was not true. And it was pretty low odds to me when I assessed what. And again, the moment I say pretty low odds, my confidence drops. Not because the odds were low, but because I'm saying something that's predicting the probability. And I have no business doing that. I'm just saying one of the paths has closed now. The markets seem to be pricing in. Well, it's interesting, you know, what are the markets Pricing in, we've had a, I don't know, $15 rise in oil, which at one point was $20 from the, you know, the 56 sort of level low that we saw a few weeks ago. That's a big move. Sure. It rallied to 75 and now we're at 71. And so today it's, you know, the people faded, the news, equities, they're trading as if the war is going to end soon. Bonds rallied initially and came back immediately to a point where they're, you know, had a significant backup. That seems to be the trading as if the war had ended. Gold, on the other hand, has stayed high, has rallied a lot for the last month and has stayed high. Vix VIX futures has been upward, heading upward for a month now and remains very high. So to me there's still pretty great uncertainty about whether we're going to get something this week or not. But the market seems to be, and the market seems to be pricing it differently across assets, which to me raises a possible opportunity. Now to be honest, I don't think anything's really happening yet. Like, okay, not much has changed. Even though there was some short term intraday volatility, not much has changed and we still have great uncertainty. So I think there's a very good chance we have de escalation this week. He didn't de escalate today in front of his drapes, but he certainly could and there's a very good possibility we don't de escalate and it takes multiple months, multiple weeks. That's one framework. The other thing is like what pressures are on the characters in place. I think it really matters if the US and Israel, which was very important in this part and to some extent are some extent other Middle Eastern countries experience casualties. I think that can change the dynamic. So if there are no casualties, that's pretty encouraging for various things in terms of the success of the war, the results, the resolution, etc. Etc. If they're meaningful casualties in Israel and local US bases, that's going to demand a US escalation and that's something to watch. Are there going to be meaningful casualties? And then anybody who studied history knows that when the country gets really pissed off about casualties, there's pushback on the war effort. Now I think we're a long way away from that. God forbid we have such casualties that that would occur. And then of course lastly there's this absolutely demand for massive retaliation of anything that sounds like a domestic attack here. Now that's probably a very low probability, but it does exist. So that's another dimension. And then there's regime. Like I think about regime and say the regime doesn't and can't capitulate. What does that look like? Now? That favors escalation. The regime completely capitulates. Now, that's a ginormous win for the US in many different ways and has implications on assets, obviously. And then there's an extreme campaign where the regime falls due to a local couple and an extreme campaign where the regime clamps down even more. And so just those are the various things I'm thinking about over the next week. What signs am I seeing on those dimensions? How's the regime doing? What's the casualty rate and what's the dimension of Trump and the opposition coming to the table? And with that. So then you say, I don't know shit about any of that stuff. So what I'm looking for, back to the original point, is people that are experienced, good thinkers, politically unbiased to provide me information on each of those things that I care about. And so anyway, that's my process. What have I concluded? Not a damn thing. I have no idea what's going to happen, but I at least know the things I care about looking at and also have gamed out in my mind. I haven't really changed positioning at all, but in my mind gamed out what I want to do if each of those things happen.
- [22:04]
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- [23:05]
Host 2
So when you're running a portfolio like you do at DS Alpha, you're basically looking forward now. So you haven't seen anything yet that would make you make any changes to that. But you're analyzing this from the perspective of looking for potential opportunities that might change your views coming in.
- [23:17]
Andy (Guest, Investment Expert)
Right. So last night I sent around a video. Actually, I rarely do this, but I sent around our weekly process video, Outlook video that you can see on YouTube. It's on my site on, on. On the damp spring Twitter. That just tells you exactly what I want to do. I had a level for where I wanted to sell bonds, I had a level for where I wanted to sell oil, gold, where I wanted to buy stocks. And I was ready for the morning. And I'll do that every day based on what's happened, what's based on the market, pricing, etc. So I'm prepared for that. But to be honest, like, you and I are going to. We're going to do this podcast, we're going to do our thing. I'm going to go to the hospital for my kidney stones. Whatever might happen, all that shit's going to happen. We're going to eat, we're going to watch television, we're going to go out and party, we're going to go out and buy stuff. We're just going to do our stuff. And it doesn't matter what's happening across the globe. Now, oil matters a little bit, but oil's complex because you say, well, what's the oil market going to do? The answer is we're probably in cahoots with the rest of opec. We have a domestic oil industry that would love a $75 persistent oil price. We have Venezuela coming on and then, oh, my gosh, what if we win and we can control influence? Iran oil. So you say that and say, is oil going to create a massive inflationary spike? And I think the answer is absolutely not. But of course it could. We saw in Ukraine there was a period of time where it was a catalyst for high inflation. It came back immediately. So most of what I'm doing today is trying to see is there any dislocations that are very unusual and bloody and worth playing, those I'm going to seize upon. But by and large, my beta portfolio is still going to be what it is. And my alpha portfolio, you know, it's been three months, really, where very little has changed. I've bled theta. That's pretty much all I can say about my alpha portfolio. You buy out of the money calls, you buy out of the money puts and they expire. You lose money. Right now, I'm not pounding the table on any asset class. So the war, I mean, you look at the market prices, the war didn't change much. It's probably not going to affect the global economy much. If there was a dislocation, I would have seized upon it. But for now, I'm pretty much sitting on my hands.
- [25:54]
Host 2
Is there any value in looking at the past conflicts and the aggregate data associated with that? You've probably seen on Twitter. There's the charts of a year later. The probability is exceptionally high that the market's higher after a war starts. Is there any value in any of that?
- [26:06]
Andy (Guest, Investment Expert)
I'm really negative about data mining of that nature. For one, the market's always higher. So no matter what you have, the market's always higher. That's because beta is a good thing. You should always own assets in a diversified way to deal with these sort of things. They pay returns. It's good to own. So mostly that bias is always going to be in the data and people are going to show it, absent the general greatness of owning assets. Listen, I worked at Bridgewater. The funny story I like to tell there is I was interviewed by Bob Elliot, who's now all over Twitter, a friend of mine, Greg Jensen and Bob Prince and Karen Carnoil Tambor at the time. And I was coming in to talk about Vol. And listen, I was an experienced VOL guy, Like that was my life. And I came up with them and showed them a type of systematic trading strategy I wanted and had back tested till 1981. And they said, this is garbage. Can't you, don't you have more data? I said, well, index options were invented in 1981, so there wasn't any data prior to 1981, like legitimately. And they said of course there was. You just have to come up with what it would have been if it had existed. So I was like, oh, okay. And what they were basically saying is sample size is just too small. Like you just can't, you can't have experience. If you're trying to draw a picture of everything in the world and you only have 30, 40 years of data, you're not going to get a clear picture. You need hundreds of hundreds of thousands of years of data to get a clear picture. And it just doesn't exist. So that was interesting to me and it's been important to me for a long time. I think that's why microstrategy trading, like the things that Jim Simons came up with at Medallion, at Rennes Rentek, you know, that's where you have lots and lots of data. But for macro, there's just no, there's just. No, sure it matters, but mostly it suffers from very low sample size. And so I know it all. Like one of my projects, subsequent projects was looking at every single stock market since their inception, which includes the UK back to 1701, since the buttonwood tree and the New York Stock Exchange all the way to public data from Russia starting in 1991. I looked at every single market in every single, in every single country that has ever existed to try to understand certain things about volume. And so I remember a lot of that for certain things. And so the only time it really is, is meaningful. Like meaningful things happen is when you lose a world war. Your country gets pretty fucked up if you lose a world war. And there have been two of them, so the rest of it noisy, not something you can depend on. And then it's a question of what your horizon is as well. So the answer is that I know all the history, I certainly care about all the history, but I'm not going to draw, I'm not going to take the history and presume that because this seems to have happened in the past that it'll happen in precisely the same way in the future. So respect for the history, but not, not convinced.
- [30:00]
Host 2
I want to shift and ask you about AI.
- [30:02]
Host 1
And you know, everybody's been talking about
- [30:03]
Host 2
the Citrini piece, which was more of a negative piece, but I don't ask about that. I want to ask more specifically, like how someone like you would analyze something like this from the perspective of how it's going to influence the economy. Because I'm struggling a lot with that. I mean, I'm kind of more of a macro tourist, but I'm trying to think about like things like productivity, things like economic growth and how we would analyze something like AI. You've obviously got the negative situation with Citrini. You've got the venture capital people saying we're about to be into a world of abundance, like, and I can't really think it through. So like what would be your framework? Like how would you think about the long term implications of AI in. Through that.
- [30:36]
Andy (Guest, Investment Expert)
So I mean those outcomes are things I'm thinking about. Like each of those outcomes are possible and so you have to be prepared for each of those outcomes. I'll tell you what I'm doing because let's just cut to the chase. No one knows Citrini. James, this guy I know, he wrote an interesting piece. I found it fascinating, loved it, thought it was at some level science fiction, as any futurist work is going to be. And he prefaced it by saying, this is just a thought experiment, I don't know. So that I think is really interesting. And I found that article extremely interesting and frankly found the interest some. There were some really pretty nasty things, but some of the retorts and responses, the Citadel piece, for instance, pretty good, you know, interesting. I don't know if any of them are right, and I'm sure what I would predict would not be correct. So what am I doing? So I think it's really actually much more healthy to say, instead of trying to nail down what the future of AI is for productivity, it's just saying, well, what's happening now? And let's try to figure out the implications of that. And there are two very, very important things that are happening now. But before I jump into those two things, I think you also want to say, what has history been? And the history is pretty clear. Humans are creative individuals. They have a thirst to work to improve their situation. And you want to improve your standard of living. Even if somebody told me you never have to come to work again and you're going to get the same compensation or more than you got today, I would still find a way to make a new contribution. So there's that incredible thing, and I think that's driven history. You know, you look at every industrial innovation across centuries, and there's always been period of time in which there's some disruption that could be years or decades, but is disruptive. And there's some wiggles on that. And then there's what. Where you end up in which every person works, keeps working. We keep trying to improve our situation. And so you have to say to yourself with some humility, how is it going to. What's the nature of human beings that they're not going to keep trying to improve their personal situation by working hard? I don't care what the computers can do. That's very hard to say that humans are just going to give up trying to improve their life and let the government, ultimately the government is going to have to allocate them their lifestyle in such a circumstance where they no longer have the urge to work, where the, you know, computers can do everything that humans could ever possibly do. And so that has implications. But it does seem to me that, and I was there during the most recent productivity enhancement, which was really, to me, the PC, which then became the Internet. That was a big deal. I wouldn't have ever joined Wall street if it wasn't for Lotus 1, 2, 3, which was a thing that was designed to make People more productive and created jobs, created financial analysts on Wall street, created consultants at McKinsey. All these people that could now do scenario analysis, instead of using literally the back of a napkin to plan out one scenario, you could have 100. I don't know if AI is going to provide that. But back at the time, it didn't feel to me like the end of the world like all jobs were going to be eliminated by the PC. It seemed empowering. This doesn't, this doesn't seem empowering to me. But, you know, I wasn't around during, you know, the internal combustion engine or the Industrial Revolution or the, you know, I imagine the buggy whippers felt very different than people like, more like people today are feeling than I did when I was challenged to find a place in the world as a person that could use a PC. So it's a little different, but I think we're going to go through that phase. And if we come out in a scenario like the doom scenario, where nobody can find anything, nobody can contribute productively, and the machines all determine what is produced and presumably the capital owners who own those things are in cahoots with the government, allocate our resources, you know, that's a pretty dystopian world. It could happen. But, you know, that's just on my central case and I'm not sure what I would do with it. Like, certainly as an investor, I have no idea what I'd do with it. Like, okay, so let me ground it with what I'm actually doing. And I think it's extremely interesting to me, which is we all hear about productivity boom, which means just use a number 1% productivity boom, extra above the normal productivity that occurs. Maybe you get another 1%, maybe you get 2. Let's just use 1% for the math. The GDP grows 1% more than it did. Okay, who gets that? Who gets that gdp? And so you have this concept of a pie, the size of the pie and the share of the pie. And so if the pie grows and everybody keeps their same share, that has one dynamic. If the pie grows and if. So that's one thing, that's a nice outcome. That's a great outcome for productivity. Everyone does a little better. But at the same time, you have a share thing, which is, you know, that's what we're seeing in what. What has happened in software stocks and, you know, other. Every stock is now threatened by this idea that they're going to be put out of business by AI. Well, that's just share thing. That means the company that was making this stuff no longer gets to make it. So they don't contribute in a gdp. Their share of GDP goes down and somebody else's GDP goes up. That's super important when you're trying to determine which stocks to own. But from a macro standpoint, I'm more interested in like what sort of GDP pie growing. Well, sorry, let's, let's step back. So you got all these companies that are going to be the winners in the, in the, in, in share of GDP in the future. And they're priced like it. They're priced for earnings growth, they're priced for dominant positions in the market in the future. Where does that come from? Where does that share, meaning let's say the 1% we're using is $300 billion. That's 1% of $30 billion trillion dollars, which is 1% of our GDP. Do they get all 300 billion or do they get 300 billion plus another 300 billion that somebody forfeits? How does that work? And to me, and I've been saying this for a while now, and these stocks have begun correcting on this notion, there's just not enough GDP to support even if they take share and GDP grows, there's just not enough support for all of the tech companies that are priced the way they are to all win. There's a movie play a movie called the Producers, and the producers sell a show to their investors called, I think it was called Springtime in Germany. It's about Nazis. It was a hilarious movie. Anyway, they oversell it. They sell too much of the gate to 300%. I feel like there's a lot of that going on right now, that there are going to be some great winners, there are going to be some disasters. And in aggregate, we've probably overalllocated the GDP available to these entities and we haven't taken away any GDP from those who are going to be disrupted. And so to me, that's not great for companies. So that's one thing I'm paying a lot of attention to as it relates to this. And the good news is I don't really have to care about the dystopian future. This is going to play out in the next two, three years. No matter. And by the way they're going for, you know, it's no doubt you can't say, hey, they're not, they're going to stop spending. One day they may realize that there's not enough pie for them to all eat and that'll be a bubble popping and who knows how long it'll take before that happens, if ever. But that's what I'm focusing over the next couple of years. Where does the GDP come from? Who pays it, who loses share, who gains share and how much does the GDP grow? And I think it's overallocated to the equity markets right now, which makes me on the margin bearish equities. Now do I have a big bearish bet? No, I hardly have any bet at all because this isn't playing out real time. And there are other dynamics going on in the economy that are pretty pro growth. But it's first in my mind when I think of AI. The second thing I'm thinking on AI has been a theme I've been on for about six months. I wrote a piece called Can I have a hamburger? I will pay you on Tuesday for a hamburger today. And that is the promises that are made on AI spending, foreign direct investment in factories and government deficits require somebody to lend the money to the people that are going to do that spending. And those promises have mass are have massively increased. Not only the deficits continues to be running at 6% so that needs to get funded quick. Choose a meal deal with McValue, the $5 McChicken meal deal, the $6 McDouble meal deal or the new $7 Daily Double meal deal each with its own small fries, drink and four piece McNuggets. There's actually no rush. I'm just excited for McD for a limited time only. Parts of participation may vary not to alter. And then there's all the credit creation that needs to happen for foreigners to invest in our factories as they promised due to the tariffs and as AI to fund its capex. And so I really care about those capital flows. And so for instance, I've noticed that Nvidia has terminated its sharing, but not Nvidia Meta has terminated its share repurchase. I've noticed the cash balances for all the free cash flow usage of all the hyperscalers have shifted and are now being used for capital expenditures. And I've noticed the difficulty and size of the corporate issuance that's coming from anybody that's involved in this space that's doing capex and its implication on spreads. And then I look at the projections of future spending and say listen, our GDP is dependent on all partly dependent on all this spending. It's also dependent on our consumers not losing their jobs. Which gets back to the dystopian thing. Okay, so that's what our GDP depends on and that depends on being able to finance all this CapEx in the capital markets that are going to have to experience the biggest IPO, two, possibly three of the biggest IPOs in history over 20 in 2026. That's a lot of equity. And you're getting also a lot of corporate debt and you're starting to see some tweaks on that. I'm not, I'm the credit trader. All my life I don't see any blood in the water on the credit market. There are some things that are a little troubling but you know, there's no, mostly I don't see a lot of cockroaches. I see a couple and I know there's supposed to be a whole bunch of cockroaches. There may not be like hold your horses on declaring a credit crisis but then I look at issuance and say it still has to come to market and get funded cheaply or else the growth doesn't come. And if the growth doesn't come, the consumption doesn't come and then you start to have a sort of meaningful slowdown in the economy and mostly due to the fact that the pricing is so outrageous, expect such outrageous future growth. So that's what I'm focused on, GDP share, who's getting it, who's giving it and where's it coming from? And how do all these hamburgers, how do all these promises that are getting spent today get funded? And for now it's working okay. You see some credit spread problems like Oracle's did a $26 billion issuance in the fall and their credit spreads widened by 100 basis points, which is a lot for a single name. So much so that they had to do a $25 billion equity issuance that they kicked off a few weeks ago. So there's, there's some stress there. But you know, the biggest companies are still generating enough cash flow, free cash flow that they are willing to make ever larger promises and those promises came in their earnings. You know, you look at Amazon, you look at Google, I guess Microsoft as well, who's the third one maybe Meta. Anyway, they all, all of them blew away expectations for what, what was already in their guidance for Capex and all the stocks went down. So you know, there's a lot going on in that space but that's the angle I'm taking. I'm not going to tell you whether we're going to have a dystopian future or like every other time in history that there's going to be a Period of transition until when humans find new things to do. I would lean toward the latter than the former, but who knows.
- [45:36]
Host 1
First first time Popeye quote on the podcast here with your your I'm glad we pay you on Tuesday for a hamburger today. That comes from Wimpy so going back
- [45:51]
Host 2
to the overall economy like with your framework growth, inflation, risk, premia flows like the first two of those. How are you thinking about that right now in terms of where we are? I mean it seems like growth has held up pretty well, maybe better than many people expected. Inflation seems to be above the bread's Fed's target, but not really going too much of anywhere. Like how are you thinking about those two pillars right now?
- [46:13]
Andy (Guest, Investment Expert)
So I thought a year ago today I was thinking that we're in for a meaningful growth slowdown. We got a meaningful growth slowdown in the first half and then things changed. And so I think we're still dealing with those things that have changed. One is tariffs didn't turn out to be as much as they were going to be. That was a positive. Two, there was no doge that was a potential negative that never manifested in fiscal and then ultimately there was OBB which came in July. And from then on the fiscal stimulus was clear. You know, the moment that thing printed you could tell you were going to have a stimulative impact in the second half of the year due to immediate ability to to depreciate capex. You saw that immediately that started kicking in the economy. And then of course you had the three tax things which is actually getting delayed a little bit because people still withheld as if they were paying taxes on tips, Social Security, et cetera. And now they're going to see that in the first half of the first quarter. They're seeing it now like that's happening now. And so you've got a fairly strong growth impact from the employment standpoint. I don't care that much about employment. I obviously care as a, as a person, I care. But as a, you know, predicting what's happening when you've restricted the growth of the economy through immigration, that's the first order thing. And then looking at what actually is happening regarding the demand side, demand side seems soft. So I'm not really super about that. But what is true is consumption is staying high and that has to do something to do with wealth. There was a hit of a wealth hit. Not really enough time for anybody to actually notice. Although Wall street was all over could have, you know, the April sell off. April, March, April, May sell off could have been a real hit to the economy if it had persisted but it recovered quickly. So I don't think we got the hit. But now continued wealth impact can't be negative. People are able to just save. Leverage is not rising quickly. As I mentioned the deficit is so that is stimulative. The Fed has cut a few times so that helps a little bit. But then you have the Fed doing what it does. And so I got, I couldn't, I've been thinking that growth would be a little lighter than it was and I've been surprised. Part of that's the capex. I didn't expect it to be so large. Caught up to that now I'm, now I got it. But the consumption side has been a little better than I expected. But what's also true is the Fed while cutting rates also eased in a different way in that they stopped QT and actually began building their balance sheet. And I think that had a meaningful impact particularly on the metals. You look at the metal market and you wonder where it took off. It took off the day that this had been rallying for years going up. But then we went parabolic pretty much right after the Fed decided to buy 40 billion extra bills a month. Now that ends in April. So that's interesting. I'm paying attention to that. So by and large the economy's doing well and it's, and inflation is staying sticky for that reason. Like you're not seeing inflation come in, in meaningful way. So. Those are where I think the main drivers of the economy. You've got, you know, the OBB stimulus, you've got the Fed pretty, pretty easy. You've got wealth doing well and the job market isn't turning over yet. And to me that's inflationary and pro growth. And so then you just have to compare it to what's priced. And bonds don't see that bonds, you know we're at 4% on a 10 year note. That's a little higher than that. That's, that's a pretty low yield. Particularly if you think the Fed is not going to cut a lot. You know the fed funds rate's 363, that's not very steep. So there is some expectation this growth rolls over but not in other asset prices and not and, and now I've been saying this for a long time now about the last for there's been this major problem with data that's been going on within which survey data has become politicized and hard data has become. Less quality. Now saying it was great quality to begin with. Is it is what it is. We had the best data quality in the world, which is not that great. The rest of the world just sucks versus our data. But it's gotten worse. It's gotten worse because we had a slowdown and that's created some, I think unreliable data. And you saw it in the GDP estimate, you know, you had a 1.4 GDP when the consensus was 2.8 for Q4. So I don't think you can place a lot of confidence in the data. But the data is clearly not negative. Like there's nothing to be particularly concerned about. I just don't, don't place a lot of confidence in it right now. So that's what's been, you look at what's priced and equities is priced for what I've described. This AI thing, plus the AI influence, which is sectorial. But overall a strong economy and bonds are less certain. So that's a divergence in some sense.
- [52:33]
Host 1
So up until about a year ago, you know, the US market was kind of like the only game in town. But more recently, you know, international stocks, emerging markets have, you know, been performing a lot better. And I think you've become more favorable on, you know, looking outside the U.S. so can you just kind of explain your thought process there?
- [52:52]
Andy (Guest, Investment Expert)
Sure. So this all comes from my experience at Bridgewater and how we thought about how Bridgewater thought and I learned about what makes a good portfolio. And a good portfolio is a portfolio that has pro growth assets, anti growth assets, pro inflation, anti inflation. Everyone's seen the four box grid of the All Weather Fund. If you have it, it's on their white paper. A good portfolio has each of those assets providing a decent expected return. And for most of the last two decades, Develop World X US has had essentially uninvestable bond markets. Bond markets with yields close to zero or below zero in some cases. So what does that mean? When you have a bond market that is in your local country, you have a bond market that you can't own. You can't own because it doesn't provide you any expected return. And as an anti growth asset, when anti growth occurs, you don't see any appreciation because they're trading at their highest price. They can't trade negative yields, more negative yields, they're just capped. And so they don't provide any anti growth diversification. Okay, so that, what does that mean to your equity allocation to that country? Well, a Japanese all weather portfolio just is not that attractive. So you don't want to Own much of it. You'd rather own somebody else's all weather portfolio like the US because it's just not balanced. The Japanese doesn't give you any balance. You can always own. Pro growth assets are easy to own. You just own stocks. And you don't have to own Japanese stocks, you can own rest of world stocks. But if you want some Japanese economy exposure, which is a major part of the economy, the global economy, you have to be able to own both their stocks and their bonds. And you couldn't. Same with Europe. So I've been paying a lot of attention to this for many years now. And I've been looking for a period of time in which the European and Japanese bond markets provide balance to an all weather portfolio. And when they do, you can own their stocks and their bonds in good size as a, you know, as a global portfolio allocator. You now can own a balanced all weather portfolio in Japan. You couldn't before. Now you can. So what has happened? Well, because you couldn't, partly because you couldn't own this and partly because of, you know, this American exceptionalism, partly because of our sizable trade deficit, global trade deficits, people own a lot of US assets and have been rewarded to it. And by the way, the US also does a really good job of making owning assets attractive. Like there's the mix of assets you can own. Like we do tech, well, that's less important to me, but it's important. But rule of law issues, consistency of the way corporations are treated versus labor, lots of things make capital very attractive to be deployed in the US and they have been, and it's been a huge win. Until January of last year, I owned 100% of my personal beta portfolio in US stocks and bonds, part mostly because they've been working. And the other thing I just described where the rest of the world just looked like crap. And that changed. And it changed not because Trump was elected, it changed because European bond yields and Japanese bond yields rose a lot and are now investable. And I said, huh? I don't own any Japanese risk parity and I own it. And I and everybody on the planet owns a ton of overweight US Risk parity. Let me lighten up. And so I started lightening up in January, did again in May, March I guess, and just have continued to lighten up until now. I'm fully out of the US and that trade has worked magnificently because two things have happened. Notice I said that for one, the assets have performed better than the US assets in their local currencies but also because of this flow where people are overweight US assets and want to move to Japanese assets. And some of those are local Japanese people. Some of them are international investors like Warren Buffett. You need yen to do that trade. You have dollars, you need yen. So you have to convince somebody to give them your give me your yen so you can then use that yen to buy Japanese assets. And so part of its currency appreciation and the currency is appreciated nicely as the assets had. So I think the most recent thing I saw is last year's performance in broad rest of world equities. Ex US was 40% in US dollars and the S&P delivered 20%. So it's just been a fantastic trade. Now will it last forever? No, it's going to wiggle. Like today it's wiggling. We got a strong dollar rally today. Obviously that trade's not working as well, but that's the reason why I want to be out of the US it isn't any values thing, it isn't any political thing. It's just like everybody already owns all they could possibly want of US Assets and rest of world assets aren't bad. Seems like a good time to flow. I'll flow back to an even balance over time. What I want is a global risk parity where I own rest of world and US assets roughly at their GDP weight, have currency exposure roughly at the GDP rate and balance between stocks and bonds. And that's where I'm heading. But for now I'm taking a detour from massively long US to no us and then back to even. That's the journey I'm taking and it's been very effective and I think it has more to run.
- [59:33]
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- [60:33]
Host 1
One of the things we wanted to ask you about here and Jack, feel free to chime in, because I know we were talking about this before, but is you wrote a piece on the Trump accounts and you may have had a, you know, slightly different take than I think. You know, generally speaking, most people think this is a very big positive. You know, each newborn, you know, child in the US Gets a thousand dollars from the government that's effectively going to be invested in the s and P500. I believe that that stays invested until they're 18. They can continue to invest it or treat it as an ira, if I had my facts right. And so there are a number of, I think, positive things, but. But I think you kind of were looking at maybe thinking about some of the mechanics. And, you know, with all this stuff, there's always. There are, of course, positive, but there's also that money's coming from somewhere, and it doesn't always mean that the outcome of everything is always all positive. There's always a balance. Take here and sort of, that's the way you kind of approach this. So I'll, I'll let you comment on that because I think this is an interesting thing.
- [61:37]
Andy (Guest, Investment Expert)
Yeah, I mean, so for one, it's not very big. You know, there's three and a half million children born per year. It's that over the Trump administration, that's going to be 10, 12 million. So that's 12 billion. Okay. Thousand dollars times 12 million is 12 billion. Yeah, yeah. So 12 billion. Who the hell cares? Honestly, who cares? The high takeaway from this is it's a gimmick. It doesn't matter at all in any possible way you could possibly think of. And it's 100% a gimmick. And by the way, I dare you to challenge me with a $12 billion program how it could really make a difference to the world. Now, on the other hand, it's nice. Like, I get the idea. Like my. I, for, for, like, most of my life, I have altruistically pushed and provided people with as much financial literacy as they possibly could get. And I think financial literacy is extremely important. And so for kids, four years of kids, maybe, maybe it lasts longer, get more financially literate. Okay, that's a, you know, that's a win. I can't argue against it. Can't possibly argue against it. How could it be bad? Okay, so that's, that's in the win column. By the way, there are trade Offs. I could do it differently. I could spend $2 billion and educate 14 year olds with a mandatory curriculum and test that they have to pass and then they get a thousand dollars. I could do it differently. But Michael Dell loves this shit. Trump loves it. It just gets gimmicky. Even Dalio likes it for the financial education standpoint. Now I just want to step back and say 12 billion is not much, hardly anything. But you know how it gets funded with 12 billion of debt. Do we want to spend, do we want to borrow another $12 million on top of all that we currently borrow? I don't. I'm a fiscal conservative. I want to raise, I want to cut the deficit. I happen to be okay with raising taxes and cutting spending, but I want to cut the deficit. It's out of control and it's just stealing from future generations. And this isn't going to make a difference to future generations. Like the stealing is like in the trillions and this is in the tens of billions. So I'm against it for that reason. Very simply against it for that reason. But then there's this last bit which I think is interesting that nobody even thinks about who sells the stocks to the kids and who buys the debt that the government issues to do it. Okay, I know who those people are. They're people who own stocks. So is it a good public policy for people who own stocks now to own less stocks and more debt because they're going to have to buy the government debt that the government is using to fund this for kids to have more stocks? I'm not sure I care. All you're doing, if you did it with the Social Security trust fund, would it be a good thing for the Social Security trust fund to own its entire assets instead of government debt? Own stocks. Well, certainly if stocks went up, it would be good for the beneficiaries of outperformed cash. It would be good for the beneficiaries of the Social Security trust fund, but it would be not good for the people who sold the stocks. Meaning the same people, the like. There's only one private sector you can give return and there are only certain amount of returns and you can split them in any way you want. If you want to give them to kids, God bless, but you're taking them from somebody else. And so to me, it's like the government can always transfer wealth in such more sensible ways than having kids speculate on equities and existing holders speculate less on equities, just transfer wealth in some way. That's at least more targeted. And you could do that through tax policy, you could do that through money printing, you can do that through deficit reductions, which has an opposite effect. Lots of ways to transfer wealth. This one's just an absolute nonsense gimmick with one tiny little bit of financial literacy.
- [66:20]
Host 1
So in closing, we've asked you all of our closing questions, but I think where we want to wrap up with you is, you know, if you were to put your finger on some of the most important things that you're paying attention to right now, let's say over the next few months, what would those be?
- [66:36]
Andy (Guest, Investment Expert)
Number one, it's the ability for the very large promises being made to be funded with equity and debt and what that costs when it hits the market. By far that's the most important thing to me. I can't think of something that's even close to that. At some level I care what the Fed is going to do, but honestly it's just not that important to me at this stage. I guess the last thing, and I don't think it'll play out in the next three to six months, but it is clearly the ultimate thing is, well, at what level of rate of return of cap on capex will the market be satisfied or will have a problem with what is being spent? And that again, I don't think that's a three to six month thing. I think we need to see.
- [67:30]
Host 1
Andy, thank you very much. We always enjoy these conversations and so does our audience and so hopefully we see you in a few months.
- [67:36]
Andy (Guest, Investment Expert)
Sure, anytime.