← Excess Returns 
Excess Returns
Investing in a Fourth Turning | Neil Howe and Ben Hunt on Inflation, Trust and What Comes Next
01:11:52
Loading summary
Transcript99 lines
- [00:00]
Experian Narrator
New Year, new me. Cute. But how about New Year, new money? With Experian, you can actually take control of your finances. Check your FICO score, find ways to save and get matched with credit card offers, giving you time to power through those New Year's goals. You know you're going to crush start the year off right. Download the Experian app based on FICO's Score8 model offers an approval not guaranteed. Eligibility requirements and terms apply subject to credit check, which may impact your credit scores. Offers not available in all states. See experian.com for details.
- [00:28]
Neil Howe
Experian Inflation is not a problem, it's a solution. And I come back at that again and again. It's a solution. It's how you. You basically wipe out everyone's nominal assets so that you can say this is how we can get resources instantly to you because those people no longer have purchasing power.
- [00:49]
Ben Hunt
Trust what's broken, you can glue it back, but it's never the same. I mean, that's the central tenet of equilibria analysis and using all these other $10 words. But that's what it means that once trust is broken, you can try to glue it back together and get part of the way, but it's never the same.
- [01:06]
Neil Howe
The net national savings rate as a share of national income has been zero over the past five quarters. This is the first time that's ever happened outside of recession. It happened in briefly in the pandemic recession. It happened in the gfc. It never happened before that.
- [01:26]
Matt
You'Re watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use where better questions lead to better decisions. And now we have Epsilon Theory and Persian founder Ben Hunt. Say hello, Ben Hunt.
- [01:40]
Ben Hunt
Hello. Hello Ben Hunt.
- [01:43]
Matt
And joined today by extra special guest rejoining us on Excess Returns, portfolio manager at HedgeEye Asset Management, author of the Fourth Turning is Here and other books. Come on, everybody's got their copy in arm's length. I am sure. Neal Howe welcome back to Excess Returns.
- [02:00]
Neil Howe
Matt and Ben. It's great to be here.
- [02:05]
Ben Hunt
Neil. I gotta say, Neil, I can't believe you took the plunge and now you're a portfolio manager. Man. What are you thinking? What are you thinking?
- [02:13]
Neil Howe
I'm thinking I must be crazy.
- [02:16]
Ben Hunt
Yes.
- [02:19]
Neil Howe
You know this Ben. You wake up in the morning and you can't help but think of one thing, right? What the hell is happening at 9:30, right? And, and, and you, you just sit there, you look at the after hours and you try not. And so you try.
- [02:37]
Ben Hunt
You can try. You can't you can't help yourself, man. It's, it's the worst. Yeah, you'll start waking up at 3:30 for the European markets, I'm telling you.
- [02:47]
Neil Howe
So. But I, I, I'm also working on a new book so that you know, we can talk a little bit about that. It's going to be the, the working title is something like how to prepare for the end of the World and appropriately sort of appropriate for Turning theme. And I will have to say the reason I'm doing this book. Single biggest question I got after my last book, the Fourth Turning is here is basically a lot of readers said okay Neil, we get it. The whole thing about history, we got it. You don't need to say that much more about that. What the hell do we do? You know, I was like, what do I do in my life, right? How do I prepare my family? Where do I live? What's going to happen in the world around me? What about markets? What about asset preservation? And what if the worst happens, right? Just how do I, how do I arrange my life? So that's what this, this, this book is going to be about. So and so when I, when I'm not thinking about markets, I'm thinking of other horrors. Ben.
- [04:05]
Ben Hunt
Give me both. Modern me both.
- [04:09]
Matt
In the interest of this outpouring of optimism and with your newfound job, I want to start here in case somebody hasn't encountered it for some reason. Just say what the framework is. Explain the fourth training framework. Explain where you think you are right now and why you're getting this question so often.
- [04:28]
Neil Howe
Yeah, well, the overall framework of the Fourth Turning, which is a, which is actually a book that came out in 1997, so it's almost 30 years old now, believe it or not, was, it was co authored, I did it with Bill Strauss back then, but it was about the fact that we noticed there was a long series of generational shifts that has recurred periodically throughout American history in long cycles that are about the length of a long human life or about 80 to 100 years. These are recurring. In fact, it's not just in America going back, but in much of the modern world today. These are shifts between building and entropy. But really what they are is you see periods of great crisis in our outer institutional world, politics, economics, infrastructure, that we tear them down, rebuild them often in a period of emergency crisis and organized conflict at these long human lifetime markers. We had a very huge period of, of tearing down and building up in the last quarter of the, of the 17th century. This is the Period of the, you know, glorious revolution and all of the upheavals in the colonies. And then about a lifetime later, the American Revolution, a lifetime later, the American Civil War, a lifetime later, the New Deal, the Great depression, World War II. And here we are a lifetime later today. Right? And I will say, if you look at Ngram, the 1930s is the one decade that's being mentioned more and more frequently now, and all the other decades are being mentioned less frequently. And we see now commonly this comparison made to where we are in terms of both geopolitics, inequality, the rising partisanship and tribalism and politics so on. We naturally make comparisons back to that period, if not sometimes to the late 1850s, which was also a period of great angst and tribalism in politics. So that's the general theory. And this is driven by generational aging. That is to say, certain generations who arrive just after a crisis behave in a certain way, and certain generations who were coming of age during the crisis age in a very different way. And that's. I don't know if that's good enough, but that's. In other words, generations are shaped in a characteristic way, depending upon their age location in history, that forms a certain archetype, a certain generational archetype in how they think and behave. And that archetype pushes history on. And in particular, every time we see the last generation that shaped as young people, the new America that emerged during the crisis, as soon as that generation ages out, is no longer relevant, is when the new crisis emerges. I mean, that's how it always happens. And I will say the generation that's born just after the crisis is usually the senior leader in the new crisis. I mean, for instance, Abraham Lincoln was born not too long after the founding fathers created the new Constitution and the new government and leaders like, you know, FDR and Stimson and Marshall and Douglas MacArthur reborn shortly after the Civil War. That was. And, and similarly, today we find boomers in high places who are born shortly after the last crisis. So you can kind of see the generational alignment. I often on this when I look at generations, we look at history moving in two dimensions. If you think about years moving on the X axis and age on the Y axis. We all age in a diagonal line, right? We all get older as time moves further. And a generation is a series of diagonal lines, kind of a bundle of diagonal lines. And you can see that generations then sort of diagonally follow each other. Right? And Emilitray, who wrote a lot about generation of a French historian in the late 19th century, he said he likened generational history to tiles on a roof. I love that, I love that metaphor. Right. Tiles on a roof. And if you take, if you look at social change this way and you look at any one vertical line, that's what happened in a single date, and you can see that you're plunging a line through all of these different generational experiences. And typically the way historians write history is they write about what midlife people are doing in any given year. Right. But we don't realize that what those midlife people are doing in midlife, or maybe as senior leaders, young people just starting that diagonal are actually beginning to observe very different lessons from their perspective, and they will take those lessons forward in the future. So our way of looking at history generationally is a way of linking these, these experiences. That's what we call it Age of location, history thinking, when you know who you were when. Right. Sort of shapes who you will be later.
- [10:33]
Matt
Ben, as you think about this, and I love this metaphor as an avid watcher of too much Tour de France over my lifetime and looking at all those beautiful French rooftops, the shingling of narratives, the lapping and the way that he just described it, how do you interpret the stacking of narratives like that?
- [10:50]
Ben Hunt
Well, we absolutely see that in our work. Right. So the. And I've been as guilty as many as to say that that narratives have a life cycle, a beginning, a middle and an end. And there is a cyclicality to them in the. The same way, exactly the same way that Neil is describing the cyclicality of generational impetus. Right.
- [11:19]
Matt
But.
- [11:21]
Ben Hunt
What'S really true is that they're all present all the time. It's not that, oh, there's only one when it comes to a dominant narrative and everything else has fallen away. What's true is that they're all active all the time. They wax and wane over time. And you can see real patterns in terms of their half life of influence, how that waxing and waning takes place. But narratives never die. They never die out. There's a pattern to them, but they're all there all the time. And so it's actually very similar dynamic. In fact, what I'd argue is that a lot of what I think Neil captures so well in his generational analysis when he's describing different generations after a crisis as having different lessons learned, different motivational ideals and ideas. Those are exactly what we mean by. We call them semantic signatures. Those are ideas of meaning, what gives meaning to a life, a generation. And they like, say they're never absent at any point in time. The same way that the generational qualities that Neil's describing are never absent, but they do wax and wane and different sets of these ideals and semantic signatures come into the forefront and then they subside. For another group to take their place, not to replace them, but to achieve a position of attention. We say in terms of semantics or in terms of power and leadership, as Neil describing. So it's a very similar dynamic.
- [13:25]
Neil Howe
Yeah, I will say that. That archetypal ways of thinking are. All of them are always present, but certain of them go into a relative dormancy depending on which generation is dominant. I mean, for example, we talk about the artist archetype who's the children of war, the children of crisis. And this would have been the silent generation in America. America's truly silent. Right. I mean, they get no respect. They came after the World War II winning GI generation. They were the children of the Great Depression in World War II. And of course then boomers after them got all the limelight. But we're talking about nearly a 20 year period of birth, cohorts. And we're talking about Joe Biden at the youngest edge of that generation. But you think of the Walter Mondales and you think of the Colin Powells, you think of all of the presidential candidates who never became president. Joe Biden is the only member of that generation who ever became president. And one thing they're known for is process and expertise, polysyllabic ways of describing what fairness should be like. And they were into fairness and they were into the rule of law. They were into due process because they came at their childhood. They were haunted by an America that was doing huge, horrible things to people, you know, without any due process. I think that's fair enough to say. And now though, we have the generation, the archetypal opposite, Ben, Gen X, who are now all the department heads right in. In the Trump White House. And when you look at them tweeting to each other, it's stuff like Europe is so pathetic. You know, that person's a. Or, you know, just. We now have Gen X in power and they are archetypally the opposite. And, and instead of virtue signaling their feist signal just, just how bad I can be, you know, and you understand where I'm going with this. In other words, yes, all narratives are there, but at certain periods, some narratives seem to dominate and others are suppressed.
- [15:57]
Ben Hunt
So, Matt, sorry, I've got to jump in on this. So. So what we find in. So we're tracking Thousands of these different, can we call them semantic signatures? Not at the archetypal level that you're describing, Neil, but often at very, I'll call it market specific levels. Without exception, the utility for these for investors or people in markets are for identifying dormant narratives and waiting for them to start coming up. That without question, in our work, that's the most I would say utility we can get from the sort of study here is knowing, identifying beforehand narratives that have happened in the past, currently dormant, and then looking for them to re emerge. Because once they start to re emerge they don't stop. They don't stop emerging. There is a pattern here and it's so powerful to think in those terms. One other point I'll make, and it's the utility of being a historian like Neil. You can't ask an LLM what are the narratives we should be paying attention to right now because the LLM will tell you and it will tell you the ones that are active today. It will not tell you. It cannot identify the dogs that aren't barking. It's not going to identify those dormant narratives. It requires that historian's eye to say, here's a cycle, here's a pattern. It takes an experienced trader's eye to say, oh, here was a narrative that was important 20 years ago. It's been dormant for 20 years. I'd like to know when that comes back. Identifying the dogs that aren't barking the dormant narratives and then looking for their return. I think that's something that is a very human directed exercise and it's something that's incredibly value as a citizen or as an investor alike.
- [18:09]
Neil Howe
Well, yeah, I mean, on LLM, of course. Well, you know, we could get into an interesting discussion of that, Ben, in my opinion, fundamentally uncreative. All they're doing is scraping the web to find out what everyone's saying about something. So if they do come across a historian, for instance, instance me, and we could talk about, we can talk about compensation for IP and LLMs if you wish, but they could come to an Australian like me and they can say, oh well, he says that these narratives aren't being so in other words, everything LLMs are is they're, you know, auto filling the sentence and they're doing the paragraph basically telling you what people who are regarded as pretty smart, pretty good out there because a lot of people visit them, what they're saying. So an LLM will do that much. So if you say something, Ben, and it's on the web so that it can be accessed, I don't know if you have something blocking those web crawlers. Maybe you do, but if it's able to access you, there'll be an LLM that will incorporate your insights.
- [19:17]
Ben Hunt
And I know this is not where you want to go with this conversation, Matt, so I won't hijack it here. I've got a pretty different view of LLMs. I totally get where you're coming from, Neil, but I really do believe there's a way we're seeing the fruits of this now. Really kind of just now, but where LLMs are what I like to call a semantic native application and to use them, not to ask them open ended questions where you're right, I think they will typically parrot this idea of being the stochastic parrot. Right. But I, but I think that there's a profound usefulness actually if you're using them as a, I'll call it as an operating system that's native to the semantic dimension. Anyway, I know that's not what you want to talk about actually, but it's a great conversation.
- [20:11]
Neil Howe
You know Ben, one of these days we need to talk about this.
- [20:15]
Ben Hunt
I would love to.
- [20:16]
Neil Howe
I agree with you about the usefulness. I use them all the time in my work. Right. So. But when it comes to aspects of creativity and whether they're paying their own way, my fear is that LLMs will destroy the web and because who's going to put anything up there, right, if they're getting pirated for free. I mean I got an, I got an offer from Anthropic, I think it was that recent lawsuit that was settled, you know, for. Oh, your book. And your book will pay you that well. I didn't, you know, this is what party that I had. I do know that my publisher, both my publishers are suing these companies. But my problem is is that if this thing is hugely successful, it could kill the web which was the outgrowth of the last great tech revolution we had, namely the dot com revolution and drive all that stuff. I will then do, I won't even publish my books. I'll just go back to what Homer used to do where you know the bards. I'll just go personally to people who want me my insights and I'll talk to them. I'll be like Socrates. I will damn all print anything that can be digitalized and I will only deliver my insights in person if the, the big AI modelers get their way and they don't pay for the, this kind of content. So anyway, I, I, but this is something that we should talk about at a future time.
- [21:45]
Ben Hunt
Love. I'd love that.
- [21:47]
Matt
Manifesting the Epsilon theory Office hours conversation where this is the topic du jour now inside of this and I want to take the dogs that don't bark thing and I'm not going to go hound to the Baskersvilles on this. But that's where my brain goes because I feel like that's part of this too. For I am going to go is.
- [22:05]
Ben Hunt
Don'T want the Sherlock Holmes story where that comes from, by the way. But anyway, I'm just going to let that slide. Matt, we're going to let it slide.
- [22:13]
Matt
English teacher grandmother rolling over in grave I'm getting the eyes. They're in the back of my head right now. At the beginning we were talking, Neil, about how you just started managing a fund too. And I think this is really important. We're talking about this stuff that feels fairly abysmal, that feels weighty, that feels like you don't invest if you don't. But you don't invest if you don't see a future in a way through you don't invest if you don't think there's ways to try to deal with this. I'm curious with all the stuff that you're feeling right now, right down to your own business, when you're talking about with the LLMs and what they're doing to publishing in your books, how are you thinking about in the fund? How are you thinking about markets? How are you thinking about the world in investing beyond this turning?
- [22:55]
Neil Howe
You know, the great thing about thinking of time cyclically in a broad sense is that you can never get too pessimistic, right? There's always an optimistic side. Right? Everything's going to come around again. And I will tell you that when Bill And I wrote Fourth Turning back in 1997, that was sort of. That was the end of history. You were coming out of a dark recession. The dot com was out there on the horizon. Everything seemed to be getting better in America. We looked and we were in the midst of a productivity boom. Looked like inequality was actually getting better for a while. But my point is that people looked at that back then and they say, wow, this is such a downer. How can you be so pessimistic? This more recent book in 2023 is the exact opposite reaction. My God, are you so optimistic you actually see this coming to an end? In other words, here's the thing. People think about Fourth Turning as pessimistic. I disagree. Because if fourth turning resolves things, if you look at today and you just simply see inequality getting worse, rich getting richer, poor getting poorer, everyone feeling more alone, you know, our communities. Falling to pieces, everyone feeling isolated, no one feeling connected, the young feeling hopeless. You know, they'll never buy a home, they'll never do as well as their parents. And going on and on about this existential despair of practically every social trend. And we've been looking at some of these long term Pew dis very frequently looking at when Americans think about the world 30 years from now, it has never been so bad. And, and, and everyone says, neil, how are you so optimistic that by the mid-2030s, you know, we could be in a completely different place? Renewed community, renewed optimism? Well, because that's what you get when you look at history. You begin to realize that where you are now is not, and where you're going now is not necessarily where you're going to be in the future. So I, I think that was, I think I was triggered a little bit by your, by your comment about pessimism. I'm actually not pessimistic.
- [25:25]
Ben Hunt
A longer term, I want to second that as well, Neil, because I, I, and this is, I think a large part of what drives the popularity of your book. Popularity is too weak a word, I'll say. The power of your book to impact people is that you're absolutely right. When you're in the boom times, it comes across as pessimistic because you're saying, you know, this too shall pass. There is a fourth turning ahead. When you're in the fourth turning. I too find your book quite optimistic sometimes for my, and this, I think you're experiencing this for most people, they be a little too optimistic. Right. And so, so I think that's very well put, Neil, that when you're, when you're taking a cyclical approach, wherever you are, it's going to change, right. That the wheel keeps on turning. So I, I concur now. I find when you're in it, when I, when I read oh well, your latest book too, right. So being in the fourth turning, I find it very optimistic. When I read it 20 years ago, it was like, oh, well, gosh, that's a little pessimistic. And I think that's exactly what drives the power of a cyclical generational approach over time for readers of every generation.
- [26:56]
Matt
It feels good too. My initial experience with the book, when it was suggested to me and I picked it up and read it, and this is between 15 and 20 years ago, the first book, and I came away, I Came back with the book, I was like, this is great. Like, just think of where life is in another 10 or 20 years. Think about all the optimism now of like, what this means if we go through this period. And they were like, no, no, no. It's going to be so dark, it's going to be so bad. But there's another side.
- [27:25]
Ben Hunt
Let me jump in, Matt, because when I find this about books in general, right? It matters so much when in your life you read a book.
- [27:33]
Neil Howe
There you go.
- [27:34]
Ben Hunt
It matters so much.
- [27:36]
Matt
When did you step into the stream?
- [27:38]
Ben Hunt
Right, right. When you read a book at just the right time, it impacts you in a way that if you were to read it six months earlier or even six months later, it won't have that same sort of impact. So I think that when you are introduced to these ideas matter so much. I think that when you read a book like Neil's, I think at a younger age, there's an appeal to the idea of a reset. To be, to be honest, you know, a, that, because I think all young people, you feel like, well, I won't say if the deck is stacked against you, but it's a struggle. It's a struggle for everyone. When you're young, you have to make your way. And there is an appeal to the idea of a reset at some point in the future, you read it another time. As an older person, when you're in a period of reset and you think, oh, hell, no, please, no, not have the reset. It impacts you. But when you read a book where you are in your life, so it's a book not just about generations, Neil. I find that its impact, because I've had this conversation with people of different generations, it impacts, is not only about generational change, but it also impacts people depending on where they are generationally, which I find fascinating.
- [29:18]
Neil Howe
Yeah, I certainly agree to that. Obviously, when you're reading it, you naturally tend to think about how you identify with the generation that's yours. You know what I mean? And so, and that becomes interesting. And I, I often remind people it's perfectly normal to hate your own generation. And I always try to reassure people. So I get people coming, you know, boomers can do. I just, I detest boom. I, I, I've been among this generation that I've, I've actually detested all my life. And it's been my fate to grow up young with them and to grow older with them. Them, you know what I mean? And that's one of the problems with generations. Right? You can't ever Leave them. They will be with you. And, in fact, one of the experience of growing old is to have people who remember all the same things you did in the pop culture, in life to gradually thin out. Right.
- [30:22]
Ben Hunt
Yeah.
- [30:23]
Neil Howe
I once had. I was talking to an old friend the other day, and he said, you know, I was at this wedding the other day, and I suddenly realized that it was getting late after the wedding, and I suddenly realized that I didn't know any of the music being played, and I wasn't interested in any of the conversations around me. And then I realized that all the people that I enjoyed talking to had already left the wedding. And then he said, you know, it was at that time I realized maybe it's time I left as well. And I thought that was suddenly a very poignant way of putting it.
- [31:05]
Ben Hunt
Right. Yeah. Yeah. My example of that is I go to the grocery store now, and I think, oh, they're playing really good music, you know. Now, that's old. That's old. You go to the grocery store and you say, oh, yeah, I love that tune. Yeah.
- [31:18]
Neil Howe
Right.
- [31:19]
Ben Hunt
Yeah.
- [31:19]
Neil Howe
Well, it was. I think you. And I remember Ben going into the Safeway when we were in our teens or twenties. It was like a dog or something or.
- [31:29]
Ben Hunt
Exactly. Yeah. So now I'm. Now I'm bopping around, coming. I'm singing the songs, you know, while I'm in the. In the grocery store.
- [31:36]
Neil Howe
Well, there was.
- [31:37]
Ben Hunt
That's really true.
- [31:38]
Neil Howe
There was one decade. We actually talked about it a little while ago with regard to the super bowl halftimes and how briefly Gen X starred at the Super Bowl. Gen X, culturally, was eclipsed very rapidly. And I. And I often talk about the. The hit songs of the 1990s is probably the one decade that will never make it to elevator music.
- [32:04]
Ben Hunt
Right.
- [32:05]
Neil Howe
When you think about it. Right. So. But. But with that. Well, see, I know we'll. We'll see that.
- [32:14]
Ben Hunt
We'll see the.
- [32:15]
Neil Howe
We'll see that. The edges to the grunge somehow in one of those elevators.
- [32:20]
Ben Hunt
I think we will.
- [32:21]
Neil Howe
Yeah.
- [32:22]
Matt
1.
- [32:22]
Neil Howe
It was redone as a. As a piano, you know, and sort of. That slightly change the instrumentation.
- [32:29]
Ben Hunt
That's all.
- [32:29]
Matt
You may not know it. There are full lullaby albums of, like, you know, Alice in Jane's and Nirvana that you can buy. These exist.
- [32:36]
Ben Hunt
Oh, wow. Well, I know. All over the place, but I gotta tell you. And I think that this is part of. I'll call it the generational mix. Like, I'm a Cusp person. I'm. I'm on the last boomer year or the first next year, whatever. I'm such a cusp person and I feel that way in life. Honestly, for me, everything's kind of mixing and matching. And so there's a. His name, Scott Bradley. He put together this group called Postmodern Jukebox. You know it well, Matt. And the, the ability to take, say, old wine, old music and put it into new bottles, new formats, new stylings and the like. It's really powerful. So I, I don't want to denigrate this idea of, oh, let's do a piano instrumentation of a grunge song because reimagining. Reimagining some of the old stories, right? And putting into a. A form and format that speaks to a different generation or a different set of sensibilities. That is such powerful art. It's amazing.
- [33:52]
Matt
Speak to that idea, Neil.
- [33:53]
Neil Howe
It'll be a producer that will kind of do a low. What they call low fi version of Stone, couple pilots or. You know what I mean? Or whatever it is, right? And you'll be thinking, wow, that's kind of nice. It's kind of relaxing. I can see it, I can imagine.
- [34:14]
Matt
Talk me through this part of it, Neil, and I'm going to connect it back to just the rest of the world that we're living in right now because we've got a bunch of stories that haven't been told that are now back in topical interest. Let's face it, inflation's in a part of the conversation that it hasn't been in a long, long time. Interest rates are doing things that maybe we haven't seen or talked about this way in a long, long time. Starting to move in a different direction. I don't know if you heard, but the price of gold's been doing some things in the last couple of years. How do we make sense of some of these old stories that are coming back? How do we think about this through this phase?
- [34:50]
Neil Howe
Well, yeah, look, I think one huge constraining aspect, partly a trigger, but partly a constraint on the. That's forth turning is our. Just a normal enormous economic imbalance, right. Of our economy. We're an economy that you look at as a complete system, saves almost nothing. The net national savings rate as a share of national income has been zero over the past five quarters. This is the first time that's ever happened outside of recession. It happened in briefly in the pandemic recession. It happened in the gfc. It never happened before that the United States had always been a bigger saver. Right. It's incredible. And meanwhile we are running endless deficits on the order of anywhere between 7 and 8, 6, 7 8% of GDP on into the future. We have no real policy to bring them down. And right now it looks as though I'm counting on Supreme Court decision to basically ask for a refund. And Trump is going to love that. I mean, he gets it both ways. He promises to get all these tariffs and then he has to write his name on every check of a refund back to Alamera. I mean, that's like a twofer. That's. I win both ways. Right. And where are we going to rebalance our economy in a way that's sustainable? I do believe that the very low savings rate in the American economy, just in terms of the private sector plus our public sector profligacy is what's ultimately driving what is today called the debasement trade. Right, you were referring to that with regard to the, this continuous downward pressure on FX and these obviously this big rise in all the precious metals. And I do think that that will. You could think of that as two things. You can think of that as part of the, you know, as we, as we move toward a crisis, that is partly what is going to drive America toward paying its own way. Right. I mean, ultimately, a lower and lower FX rate means we will be importing less, exporting more. It will have the benefit of forcing us to confront our own high cost of capital in this country. Right. By weaning us off foreign investors. Now, you might think that Donald Trump might have pursued the same thing more directly by actually closing the deficit, which he is not. About 87% of the deficit at off limits for Trump. I mean, it's basically their entitlements, defense spending or interest on the national debt. All right, so that's, that's the whole game, in my opinion. If you're not doing about that, you're just not doing anything about it. So he's not doing that. But with this process of taking America outside our globalization of trade flows and capital flows, he's in effect going to be doing the same thing. It's almost as though you imagine an alcoholic, I can't bring myself not to drink, so I'll go out and burn down the liquor store. So, you know, I can't. So in a way, it's a little bit like that. Either way, I won't be able to drink right now. If America cannot import capital, we will have to find a way to export more, import less, and actually save our own, which we have not done. Right. For a long Time. Now, longer term, we have this issue of the fact that we've had a long post war Pax Americana and a period of enormous prosperity which has been premised partly on the entire world trusting American institutions, trusting the dollar, trusting American financial institutions, trusting the American language, and everyone in the world wanting to be go into America. Right. And we looked upon that probably rightly as an indication we're probably doing something right. Because everyone wants to flee all these other regimes and come into America. To the extent we succeed in becoming a country where none of this is any longer true is going to be an awakening for us. Right. And. And it could all be a necessary part of this rite of passage that we're going to go through. I do regard for Turnings as history's rite of passage. It puts not, not a person through an extreme event. It puts an entire society through an extreme event. And we're all going to come out differently on the other side. But if you want to know where I think it fits, that's where it fits. We are going to be forced to come to terms with our own income and spending constraints.
- [40:16]
Ben Hunt
Yeah, let me focus on kind of the kind of two big flow questions because we always focus on price. But I really do believe that the bigger driver of world economics as flows, particular flow of people certainly, but flow of goods, but maybe mostly flow of capital. Flow of capital. And certainly over the last 20 years there's been an enormous flow of capital from the rest of the world into the United States, both to finance our debt, but coming into our capital markets. It's been an enormous flow and there are lots of reasons for that. We're seeing those capital flows reverse. Now, this is different from capital flight. This is not domestic US investors saying, oh my God, I got to get out of the country like you would see in Brazil or Argentina or the like. Now there's a little bit of that and that's something we watch really closely. So long as there's repatriation, that's painful. Right. But it's a melting iceberg is the way I describe it. This is something that was, call it two decades of inflows. It can be two decades of outflows, but that's a painful thing. It's the tide going out instead of the tide coming in. And all of us in markets have been so used to the arising tide from these capital flows. It's a really different world when you have to deal with the tide going out. And I feel like that's true in so many ways. Both literal in terms of capital flows, but also more metaphorical in terms of so many things that we had a rising tide. Again, it's a cyclical, generational thing. And now what we're dealing with and it's. You really have to change your perspective on investing and life and politics and everything else. How do you deal with the tide going out?
- [42:37]
Neil Howe
No, I agree with you and I would have to say that it's beginning to reverse that. It really hasn't done much yet. Most of that reversal lies ahead of us. The net investment position in the United States has just hit as a share of gdp, a new negative number this quarter. So it's going to slow around. It is going to be painful. And you just look around the world. It's certainly one thing that I'm aware of from a fund perspective is you have all of these high income countries around the world with much more compressed multiples on their equities than in the United States. And many of these are currencies that are clearly undervalued in terms of goods and services. So you just have to think that in this current context there might be some real opportunities there. Right.
- [43:33]
Ben Hunt
Let me add something to that, Neil.
- [43:36]
Neil Howe
With the proviso. I just have to have the one proviso. With the one proviso, then if things really get bad, there is always that temptation to come back to the dollar. Right. The United States remains the big guerrilla and so you always have that issue. Right. Whenever you're talking about the. Even though we talk about the debasement, trade, it's a new word, it kind of is very stark. Right. But you think there always is that problem that if things really get bad. Right. So you need to play this game carefully. Ben, you go ahead.
- [44:18]
Ben Hunt
No, I think on the point that point you're making is very apt. So what we see in our narrative analysis is that there's a strong desire to again outside of the US to not rely on the dollar or it's not so much just the dollar itself is. You don't want to rely on the US government for anything because I think they are proving themselves to be an unreliable partner. And once you break that teacup, you know of reliability and trust, certainly a future administration can try to glue that back together. But it's still a. Then you've got a glued together teacup. You can't. It never goes back the way it is. And I really mean that I'm using it metaphorically. But trust, once broken, you can glue it back, but it's never the same. I mean that's the central tenet of equilibria analysis and using all these other $10 words. But that's what it means, that once trust is broken, you can try to glue it back together and get part of the way, but it's never the same. It's never the same. Another example. The first time you withdraw from a golf tournament, it's really important because you're much more likely to withdraw from a golf tournament in the future. Once you do it the first time, it's always now an option, and it's never the same after you break that trust or you take that action the first time, it's never the same.
- [46:00]
Neil Howe
I totally agree with that. And frankly, in generational terms, you'd have to go through a whole nother cycle to build that trust. Exactly. In other words, you're talking maybe a century. It's very interesting, and it's amazing to me how few Americans understand that, but there are probably more than a dozen cemeteries in Europe with the American World War II dead, and they are routinely visited by Europeans. I mean, they provide flowers to the. You know, the. To the graves and so on. I once went, not too long ago in Arnhem. This was the bridge too far. They rebuilt a bridge over the. You know, over that. I believe it's the Rhine right there at Arnhem, and they named it the John Frost Bridge. And for the American commander who held out against the. You know, the. The German forces for three days, you know, in that vain attempt to keep. But all of these ways in which Europeans have remembered Americans as this enormous power. Now, it's interesting that Trump talks about this as ripping off. I mean, these are sleaze bags that want to rip us off. Which just shows you that you can be as cynical as you want about life if you choose to do so. Right.
- [47:25]
Ben Hunt
If you choose to be right. So when everything is a transaction. Exactly. Everything's a transaction. Such a squandering of trust. Just so.
- [47:36]
Neil Howe
So. But you're right, it takes a whole lifetime of experience to rebuild it. And I did find something very interesting, by the way, if you look at the. The April event, I believe it was April 6th or 7th when Trump announced this hugely punitive terrorist. Remember earlier this year, Liberation Day. Yeah, Liberation Day. Thank you. And. And the Greenland event, which was sort of terminated when he came before the Davos summit and sort of said, well, they kind of take it back a little bit. Anyway, what you find is a very similar pattern. World markets went hugely down. They rebounded after he took it all Back then the dollar fell for the next two weeks. And the same thing happened at Greenland, same pattern. The markets went hugely down. They came back, then the dollar started going down. In other words, kind of following up on what you were saying, Ben, it's kind of like, okay, we got it, you took away the immediate cause of our displeasure. But you know, I'm no longer quite as comfortable with this position. At that position. I'm going to trim that back a little bit. You know what I mean? I think that's the pattern you're seeing.
- [48:55]
Ben Hunt
It is the pattern. Look, the issue is. Okay, well D$into what? You raised this question earlier now, Neil. I mean there aren't a lot of German bonds booms, right. I mean they're doing a deficit, they're issuing more. Right. So there's that. It's hard to say, oh, I'm going to go into JGBs, I'm not going to go into the Japanese debt market because, well, that's even more tenuous. Right. So what do you do? And right now what you're seeing is people are saying, well, gold's the best asset for that.
- [49:33]
Neil Howe
Yeah, I believe that's right. And normally you'd expect a negative correlation between real interest rates and precious metals. But I do think that when this is the regime change underway. We saw this in the 1970s where you can have real interest rates going up and precious metals.
- [49:55]
Ben Hunt
And precious metals go up very fast. Exactly right. Exactly right.
- [50:01]
Matt
If we turn this back around to not just the government side but the corporate side. And I'm specifically interested in, Neil, how you're thinking about the other side of the LLMs, these companies that are raising all this money into AI, that are promising our future. The government interests in this connect that to where we are right now and why this type of a raise capital around these ideas environment is so interesting.
- [50:29]
Neil Howe
Well, you know, we, we talk often about the K shaped economy, right? The top 10% doing really well and the other 90%, you know, consuming less. There's also the K shaped capital markets right now. So AI is, yeah, they're, they're, they're, you know, built doing all this hyperscaling stuff. It's one of the reasons why we are certainly long in expanding the electrical grid and all the energy side because for the first time in a long time we're actually expanding our electric electrical grid. Now whether we're going to, just to decide whether we're ever going to make it more secure is something that truly worries me. Because when I look at, you know, Any kind of work crisis, that is our most vulnerable place. Right. Ticking down our grid without question. If I were an adversary, that's how I would attack America. Right, but that's another question. But I will want to say, outside of AI, there's no investment going on. Right? We're not building houses, we're not building plant and equipment. And in fact, I looked last couple of quarters, we've been in about 4.5% of GDP net investment. And that's very low historically. And if you consider that a rising share of that is AI related hyperscaling, that just means we're just not, we're just not doing much in this country other than that.
- [52:00]
Ben Hunt
You know, Matt, there's the, there's a concept in economics called the crowding out effect. And it's usually talked about when we talk about government debt. Why does the deficit matter? Why does it matter? And the fact is, so long as it's, there are only really two ways it matters. It matters if there are foreigners who own the debt. So that's a negative. If those interest payments leave the country. If it's, you know, domestic owners of the government debt, the interest payment is just a, we're just, we're just changing around who owns the money, right? So it's not a net negative. But the other net negative is when the government says we're going to borrow a lot of money, does it crowd out other, this case corporates who say, well, we need to borrow money too. We need to borrow money to build factories or do whatever we want to do. And if the government's saying we're going to borrow and we are the risk free rate and we're offering X, well, in terms of an interest rate, the corporates have got to offer X something. The government's always going to get their money. And so that's what's called the crowding out a factor. You're crowding out other people who want to borrow capital for more productive ends than the government's going to use it for. Well, what we're seeing today is global crowding out effects. So it's not just the US government that is soaking up a ton of money, ton of capital. You've got every other country in the world soaking up a ton of capital. And now you've got the tech principates, right? They're countries in and of themselves, Meta and Google and Nvidia. So they are also now enormous sponges for capital. This is the other big flow I think that we need to be aware of. In a fourth turning, which is that since the great financial crisis, principally through central banks flooding the world with liquidity, there has been so much money, so much liquidity, so much capital sloshing around that world. 20 years, this is what we've been used to. That's another flow that's reversing. That's another tide that's going out right now. There's not enough capital to go around. And that's such a different world. Oracle's experiencing this today. Both every country and every corporation is going to be experiencing again, crowding out effects on a scale we haven't had to deal with for 20 years because we now have so many demands of massive amounts of capital. Trillions of dollars for the United States, trillions of dollars for the AI data centers just in this country. That's a very different environment. And it makes it really hard, as Neil is saying, for everyone else. For everyone else, either as a consumer you want to borrow or as a company, I'd like to reshore to the US I need to borrow some money to do it. Now, a much different situation now.
- [55:41]
Neil Howe
One trend which is partly compensating for that is that we are growing more slowly. We're aging so we don't have the same kind of capital broadening requirements we used to back in the 1950s and 60s. We don't need to build more of everything the way we once did. On the other hand, there's also a negative side to that because we're growing more slowly just because of less people and to some extent due to our productivity isn't what it was before. It means that we can't outgrow those debts and deficits the same way we used to.
- [56:20]
Ben Hunt
That's right.
- [56:21]
Neil Howe
And that is what I think is actually really spooking markets. Right. I saw CBO recently talk about real GDP growth. They're estimating of the next decade about 1.8%. Now that's going to be about 0.4% employment growth, which if you have any perspective on American history, we've never had a decade as low as that, with the possible exception maybe not even in the 1930s. And then the rest of a 1.4% productivity growth. Now this is a lot less than, you know, Fed Chairman Powell recently said 2.0. I don't think we're going to see that. But my point is, is that this is very slow real GDP growth, which means all of those debts and deficits, you're not outgrowing them anymore. Right. They are actually beginning to compound faster than the economy is growing. And it actually complicates the problem. Slow growth actually has consequences because the inheritance of the past looms larger. And this is another thing we're going to, you know, we're going to be facing. I also think that a more dangerous world in which different nations are sort of going their own way is going to be a more crisis plagued world in terms of people continuing a trend which is well underway, of needing to arm. Right. And I'll tell you if you linger, ETFs have done very well over the past three years. Just look at aerospace and defense, right? So that is going to be an issue, right? You're going to have fewer, fewer benefits from the division of labor due to global trade. So that's going to be drained off the top. You're no longer going to be having employment growth because we no longer have immigration. And anyway, our fertility rate's now going down. We're below replacement and you are in and, and you know, you, you have all of these other things coming to bear. And if you have, if you have emergency costs on top of that, right, you suddenly get into a world of scarce resources. And I do think that's another big trend we can talk about, which is along with the debasement, trade, I think you brought up that as a term, Matt, is the concept of resource scarcity. That is not something that's been all that alive recently. The idea of everyone hoarding their resources because you never know when you'll need to use it to cut the legs out from under your adversary. I saw Trump is just about to start a huge mineral reserve, right? It's going to be like our strategic oil reserve. You're going to store up rare earths and all kinds of precious metals. And you know, we're going to. So you see where this is going, right? This again is very much like the 1930s.
- [59:34]
Ben Hunt
The only way out of this, Neil, is that you're wrong about AI, right? If we don't, we have to have enormous productivity gains from AI. And so that'll be the story. It'll always be 2/4 out, big productivity gains from AI. I will tell you, being a tech company and you know, we're a big commercial user of LLMs. I mean we processed our trillionth token the other, the other week. I actually see it in our business, right. It's, it's really wild what is possible today. So I'm, I'm kind of torn. My instincts are like you to say it's slow growth stagflation as far as the eye can see. And yet in my own, in our own business, we're seeing these sort of productivity gains from AI. And I don't know what that impact really is when it comes to the world of atoms and people. I see it in this world of bits. I don't know what the impact is for atoms and people.
- [60:43]
Neil Howe
One of the problems is perspective. I find AI great for what I do, but what I do and what you do, Ben, I suspect is not typical of what most people do. If I look around where I live in West Virginia, I don't know anyone around here who either uses AI or really cares much about it or can't even do anything with it. And that I think is the issue, right?
- [61:11]
Ben Hunt
I think it's the only one productivity gains without job gains without an employment boom. So in the past when there's been a technology that come in, there are.
- [61:21]
Neil Howe
New jobs activity for guys like us, right? When what the world is really going to be missing we just talked about is actual material scarcity, rescore scarcity. People are going to be building things to defend themselves. And that's the issue. Plus in an emergency, and I know you must have thought about this, nothing is more vulnerable than AI. I often have fantasized about spending $100 trillion in AI 15 years from now and all these different nations have built up all these great things with AI and then someone's just going to do an emp, right? That'll be it. Plug off all that worthless and it'll turn out that humans really are the cockroaches in that world after all. We will still survive. But AI certainly worked. Remember I did talk earlier about the grid being our biggest vulnerability bit.
- [62:23]
Matt
So give me this, Neil. Give me something, and I'm not asking for a stock or a security or something like that, but give me something that you think is an appropriate defensive action. That somebody either a question they should be asking or where they should be thinking defensively at this phase in the cycle. But then also what's something they should be thinking offensively about or how they could position themselves, their families, their, their company for what comes next. Balance these two things. How would you interpret that?
- [62:54]
Neil Howe
Well, I could just give you just some themes that are on my mind lately. One of them I already talked about was the idea that in this current period of moving away a little bit from the dollar and you have all of these high income countries abroad with multiples that are 50% lower than where we are in the United States, right? And in a period when the FX seems to be inching down for the dollar. I mean, I just see so many upsides to that. So if you're an investor thinking about diversifying outside the United States to the Japans and the South Koreas and the Europes and we think about Europe, particularly peripheral Europe, you know, the Poland and Spain. Spain by the way, is getting this huge migration from Latin America and Pedro Sanchez is actually inviting it. So they actually have a demographic kicker going on for them now. Right. In other words, think more broadly outside the United States. I think this is a good time to do that. I do think that you need to think about where people will go other than the dollar. So I do think that if you're thinking about a potential inflationary era ahead and I, I, this is my mantra that I often give in a fourth turning crisis. Inflation is not a problem, it's a solution. And, and I come back at that again and again. It's a solution. It's how you, you basically wipe out everyone's nominal assets so that you can say this is how we can get resources instantly to you because those people no longer have purchasing power. You know what I mean? So inflation, we use inflation every time. We used it in the Civil War, we used it In World War II, we used it. I mean, you know, it's a byword. In an emergency you use inflation. And to the extent we see we're going toward that, I think that's a little bit of the shadow that overlays the wisdom of the debasement. Right. People are kind of seeing where the world is going at this point. And I think it's not just precious metals. I think also commodity futures are very interesting at this point. I've often felt, and certainly we do this in our fund is instead of pair our net long equities with bonds, which I think right now are losers long term, we pair them with commodities, commodity futures. Right. That's a better long term synergy, particularly at a moment like this when you're, you know, when, when inflation is such a question mark. That's, that's another idea. And I do, you know, partly because it, it helps to first priorify, we're certainly into health care as a way of unconventional healthcare solutions. Right. One thing is for absolute certain, if you're talking about what America has to spend less on, we're talking about America, you know, producing more and consuming less than if one thing that we are over the top, absurdly and outlandishly and inexcusably outsized consumers of. It's stupid Health care, right? We're in the most, we are the most idiotic health care consumers in the world. And so for me, investing in health care is about investing in new kinds of solutions. So for instance, all the semi glutide is going around now, you know, moving it to pill form, you know, rather than injections and so on. These are kinds of things that really interest me, you know, whether you go with Eli Lilly or Nordisk, you know what I mean? These things I think are interesting, really good, essential approaches to benefiting our health without all of the incredible stupid spending we do on acute health care, which in this country alone, in this country, Ben, is determined by the providers themselves. So the back surgeons get to determine what constitutes beneficial back surgery. Urologist gets to determine when to do a, you know, to go into the prostate. You know what I'm talking about, Ben? We don't have to get graphic here, but every place, no one supervises this but the profession itself. And we're the only country that pays specialists astronomically more than the general physician who actually is at, is at the switchboard actually telling people which specialist to go to so they can get their, you know, so they can get their credit card. You know, that's kind of how it works in this country. But I think it's a disaster. I think everything about our healthcare system is disaster. So I don't, I don't believe, I don't believe it should be long healthcare generically. So a lot of the system is going to have to be reshaped. But I do think opportunistically about it. We are an aging society. We are going to see more and more of healthcare concerned with long term chronic diseases. And we really have to deal with that in America. And I think productivity is part of the way. And Ben, finally to your question, just to switch back a little bit because I left a little bit unanswered about AI and productivity growth. I have no doubt that long term AI is going to have a productivity boost just like every other major invention, you know, in our history from.
- [68:42]
Matt
You.
- [68:42]
Neil Howe
Know, from Bessemer steel to railroads to cars to, you know, you just go through them all, you know, to the dot com revolution and so on. But it won't grow on. It will come in slowly over time and meanwhile we will have a huge ramp up and bust in the market over AI. Now I'm not going to get into, I kind of steer clear of AI personally and, and my fund because I, you know, I don't want to be part of that. It's unpredictable obviously how that's going to happen. But I do see that as the and ultimately you'll have all of these huge hyperscale warehouses full of practically free processing ability and God knows how we'll be able to take advantage of that for all kinds of stuff. That ought to be really fun. It's kind of like all that fiber optic cable we laid, you know, just after the 2000 bubble. Right. Well that was great. That took care of all our needs for the next ten years at least. But my point is that's the kind of if you're looking historically at how these things usually go out, AI is obviously important. Ben, I know you use it, I use it. But I think we need to be level set a little bit and always use history as our guidelines.
- [70:02]
Matt
Ben, I've got the same question for you.
- [70:05]
Ben Hunt
So I'll repeat Neil's first two so non us equities and gold. I think those are what you want to be long and what I think you want to be pessimist to come out what you want to be short or underweight. It's financials. It always is. It always is. Yeah, it always is. So that's. Anyway that's my short answer. Keeping it short and simple.
- [70:40]
Matt
We'll keep it short and sweet. Ben, if people want to find you, they want to read more bug you on the Internet. Where do you want to send them these days?
- [70:47]
Ben Hunt
Always Epsilon Theory. Also the name our new company Perseant so it's actually it's the same company but we call it but it's Percy.
- [70:56]
Matt
Make sure you check those out. Neil, the new book pre orders aren't ready yet. You're going to finish writing that first but if they want to check out the fun they want to see your new title where should they bug you?
- [71:06]
Neil Howe
You know it's it it's bad enough for my editor calling but now you have to like bug me too about it, you know so I, I can't so no, no seriously it be Simon and Schuster again. It probably won't be you know ready until the end of the year. I have a substack where we do a podcast once a week and that is Demography Unplugged. And as for you know where I am, I'm at Hedge Asset Management. Our our fund is Hedge I forth turning gft so that's what people should know.
- [71:46]
Matt
This is Excess Returns. That's Ben Hunt and Neil Howe. What a pleasure like subscribe comment all the things below. Thank you gentleme so much for your time and we are out. Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns network@xsreturnspod.com if you have any feedback or questions, you can contact us@xsreturnspodmail.com no information on this podcast should be construed as investment advice. Securities discussed in the podcast may be.
- [72:21]
Ben Hunt
Holdings of the firms of the hosts or their clients.