Loading summary
Transcript76 lines
- [00:00]
A
Today's episode is brought to you by Abra. ABRA aims to provide individuals and institutions with a secure way to control, manage and grow digital asset wealth. From a separately managed account, Abra helps his clients get exposure to crypto and crypto financial products like yield and lending through one full service platform. If you're looking to gain access to additional liquidity, Abra has one of the most competitive loan products in the market. You can borrow against Bitcoin, ETH and Solana at up to 50% loan to value. Rates are in the 4 to 6% APY and and are open term. You can continuously draw down against your collateral as the price appreciates. Abra has other strategies to add yields and their team is happy to help align your portfolio to your risk profile. Reach out today and get a complimentary consult in your portfolio. It's worth seeing if they can help you manage your allocation, reach investment goals, manage risk and add additional yield. Go to realvision.com abra and tell them I sent you. Hey everyone. As you know on this podcast, I bring the best guests in the world at that nexus of understanding of business, macro, crypto and the exponential age of technology. If you're enjoying the show, a quick five star rating goes a long way. It helps us grow and keep these conversations coming with the best guests in the world. Thanks a lot. Hi, I'm Raoul Pal, CEO of Real Vision. We get incredibly excited when we can get everybody's intelligence together on one key topic, the topic that matters for people. We've done them on commodities, we've done them on crypto, we've done them on so many things. And coming up next week is Trading the Future. It's our AI Tech Week and it can't come at a more important time. AI is not only as exciting as a technology that's capturing all of our attention, but it's the macro regime shift, the capsule flows, the second order effects, the stuff that actually moves portfolios that matters. We want to know what it means for us, our portfolios, where are the opportunities? And this is where Real Vision shines. On a week like this where we concentrate all the intelligence, we'll have everybody from David Matin, Andreas, myself, Julian Battelle, Jamie Coots, Sebastian Purcell and many more coming to talk through these key topics with us. To give us that deeper understanding of how to allocate and how to think about the world going forwards and talking about asset allocation. We're also launching a Trade ideas and notes competition. You see, this is a crucial part of Real Vision. It's a platform for financial intelligence not driven just by our experts, by you, the members. The members who post their ideas, post their research notes on the platform all the time and generate enormous returns. We want to supercharge this and we want to see your best thinking, your best ideas, your best notes. And we want to give you prizes for the best, including things like a personal portfolio analysis with Andreas who's going to go through your portfolio and help advise you. Remember, you can use the RA bot on the platform as well and ask it to hone your trade ideas for you. Just go to the go to the co pilot and click at the bottom of the forward slash and you'll find the RAL bot. It's trained to help you. So come with your best ideas. Enter the competition. There's going to be some big prizes. It's really only for paid members, so those of you hanging out for the free membership, now's your chance to get in the room. And because today you can get RV Connect for $25 for the next 24 hours. So that's a great opportunity to get in, get the trade ideas, get your ideas in, win prizes. There's some money at stake here as well potentially, but either way it's to hone your investing skills and learn from the incredible intelligence that lies on the Real Vision platform. So anyway, come and join real vision. It's $25 to join for the next 24 hours go to realvision.com connect25. The description's in the link below. If you're serious about this cycle, you're serious about technology, you want to see the opportunities? Join us from Fed 23rd trading in the future only on Real Vision. Before we get onto Andreas, I want to have a word from our sponsor. Figure if you believe in bitcoin long term, the worst move you can make is selling it just to access liquidity. And that's why you should check out. Figure if you're stacking sats but also want yield democratized prime lets you earn up to 8.5% APY paid hourly backed by real world assets, not yield games or token inflation. They also have a $25,000 sweepstake happening until February 20th. Figure also offers crypto backed loans at an 8.9% interest with 50% LTV so you can unlock capital without creating a taxable event or giving up your bitcoin exposure. Figure the largest non bank mortgage lender in the US with over 19 billion unlocks on their lending platform. Now the letting bitcoin holders borrow against their bitcoin instead of selling it. Security matters here. Figure uses decentralized NPC custody, meaning your Bitcoin stays in a segregated wallet, not rehypothecated, not pooled, and not sitting on an exchange balance sheet. They've also rolled out liquidation protection to help borrowers during sharp market downturns. Hold your Bitcoin, unlock liquidity, or put capital to work. Check out Figure using my link below. Hi, I'm Raoul Powell and welcome to my show the Journeyman, where we travel to that nexus of understanding between macro crypto and the exponential age of technology. The exponential age of technology was something I brought into kind of awareness a few years ago and everyone thought I was nuts. Now it's become everybody's focus, and those of us in Macro, it's become our focus too. It's not just about the business cycle, it's about this mega structure that's developing in front of our eyes as the world changes towards the output of intelligence as its main primary destination. And there's nobody better to talk to than my compatriot at Real Vision Pro, one of the great macro thinkers, one of the great analysts of our time, Andreas. So let's talk to Andreas about what he thinks is going on, what this means for our investments and our portfolios. Join me, Raoul pal, as I go on a journey of discovery through the macro, crypto and exponential age landscapes. In the Journeyman, I talk to the smartest people in the world so we can all become smarter together. Andreas, good to see you, my friend. It's a very fine looking jacket you've got on today.
- [06:17]
B
It's the year of the dragon, isn't it? Or the year of the horse, actually. So year of the horse.
- [06:21]
A
Maybe it's the wrong dragon at all.
- [06:24]
B
I'll find my horse jacket for next time then.
- [06:29]
A
So listen, it's always good to catch up just to, you know, both of us are in Real Vision Pro. We think independently, we always swap notes as well, who's looking at what. So I think the good thing is to get your perspective on where we are right now, what we're looking at, and we'll just dig in as we go and just have a general conversation about it because we've not had a long form catch up for a while either. In person. Well, in person, that was only over drinks in Miami. But to have a proper conversation about it. So what are you looking at? Where do you think we are in the world right now?
- [07:03]
B
So the question that I discuss with most fund managers right now is whether Capex is A good or a bad thing. And we've obviously seen pessimism around this max 7 capex cycle from many of the big sell side shops such as bank of America, BCA Research, some of the big ones, they've labeled this capex cycle as overinvestment by now. And the interesting thing is that they start comparing this capex cycle to what happened in the run up to year 2000 to the capex cycle in the 70s and 80s around the oil crisis and stuff like that. And quite frankly, if you look at the earnings outlook compared to for example the dot com bubble or the oil crisis, nothing compares. A very, very simple study on for example the MSCI IT index gives you the conclusion that the current earnings cycle roughly matches what we've seen return wise from the technology sector in percentage terms. While in the run up to year 2000 you had a return cycle that was probably 5x of the earnings cycle. That symbol analogy doesn't really hold, does it? And that's why I kind of think that we're stuck in an AI fear regime right now which is not really fundamentally backed. And I get the sense that many of these equity strategists and equity portfolio managers, they're stuck in a resistant to change mode that is incredibly human given everything that's ongoing in technology, but that is not really fundamentally backed. When you look at the upcoming return on investment that is likely over the coming years and I think these, just to take that max seven discussion, I think the big four, just to take those, Amazon, Alphabet, et cetera, they'll be able to pay back this capex investment in a matter of years, very few years. Just look at their backlog.
- [09:33]
A
Agree exactly with everything you say. The other thing is there's very little debt, so all we're doing is taking their positive cash flow and instead of buying back shares, this is where people get well, they're going to stop buying back their shares. You're like, well if they're correct, then the allocation of capital into more intelligence AI is a better use of their money than buying back their shares. I, they believe their shares will outperform by doing the capex. And what we're seeing is the earnings are suggesting that that is the case, that it's not wasted capital in, in doing it. So I don't, I don't see where the problem is. The other thing I play through in my head is okay, let's, let's say OpenAI goes bust. That's what people are thinking. One of these are going to go bust. What happens the following day is somebody Amazon, Apple, Microsoft, Google, whoever, will buy all of their compute and will double the intelligence of their models and they win everything. So therefore there is no collapse here. You'd have to have everybody running out of cash. But if that was available, if all of OpenAI's compute was available to reallocate to Anthropic or to reallocate to Amazon or whoever it was, then it'll only accelerate everything and not slow it down.
- [11:02]
B
Yeah. I had a simple look at the accumulative expenditures on AI and data centers since 2023 and I think we're roughly running at $1.5 trillion by now. And out of that $1.5 trillion, a little less than 300 billion is debt financed. It's a small part of the CapEx expenditure that is debt financed, which is again in sharp contrast to what happened in the run up to the dot com. So I feel a lot more comfortable saying that this is not accredited eventually, even in the situation where we get, for example, a bankruptcy of one of the big AI companies because the debt profile is simply different to other cycles.
- [11:52]
A
So therefore you're suggesting that this correction in both NASDAQ or some of the other technology plays is probably overdone and we probably re accelerate as the business cycle reaccelerates and earnings continue to rise with the business cycle.
- [12:11]
B
Yeah. And you know, if we look at the backdrop right now, Raoul, finally we have some decent confirmation from the live data that we track that the manufacturing cycle is actually picking up. I feel pretty comfortable saying that we'll probably reach +55 territory in ISM manufacturing within a couple of months from now. And we see this exact capex cycle spilling over to the domestic activity, which is what we've been waiting for. Right. We've seen this CapEx cycle among the big four over the past 12, 18 months, but we've patiently waited for it to spill over to the domestic CapEx cycle, but that is happening now. On top of that, all big data aggregators following price developments in the US were will tell you that inflation is nowhere to be seen amidst this, which is an odd cocktail. You rarely see that, and on the now casting we do, inflation is trending between say 15 and 17 basis points a month, which is essentially below the 2% target when you annualize it. That is an incredibly bullish backdrop when you have inflation basically falling relative to what you've seen over the past year at the same time as the domestic manufacturing cycle picking up speed. That is a textbook goldilocks setup. And I don't think that's appreciated by the market right now since we're stuck in this AI fear mode. And let me just say that I actually do appreciate these grumpy old men hating on the capex cycle because it's kind of their job, right? If you're a credit analyst or if you're a credit investor, you need to be a glass half empty kind of guy, right? Because that's what you're paid for. And it's obviously the job of the executives of Anthropic OpenAI and Big Four to convince these guys that they're wrong. And the way that they'll convince them is that they'll show a strong return on investment over the next one to two years. And I think they'll show that. And once that becomes increasingly clear over the next two or three quarters, we'll get a rebound in nasdaq.
- [14:29]
A
If I'm right, also, it profoundly looks like the Greenspan year playbook is A, what the government wants and B, what is happening. So I look back over that period, productivity exploded, core inflation went nowhere, GDP growth exploded. What did Greenspan actually do? Nothing. I mean, it did nothing over that whole period, really. And so that's, I think what Walsh will do is nothing. Cut rates and then sit on it and let productivity lower inflation so inflation's not a problem and let the economy run hot, which is what Trump's been saying, which kind of helps them reduce the debt to GDP or at least keep it stable. And that seems to be the playbook. And that was, if anybody remembers, a stunningly good cycle for almost all equities, not just for Internet companies. And so I see that. Then I also see what you're saying about the business cycle picking up. And if this compute intelligence idea is the key defining idea of our times, then the right thing is, okay, well, people are moving down to the capex cycle in cyclicals, the mining of stuff, the stuff that goes into making this. I've talked about solar. It's going to be a big part of this and that's the part that actually is driven by the business cycle. So we should see that. And we're starting to see that catch up. You've been on those trends as well for a while. So we end up with a barbell where the intelligence side of the equation keeps going up and the energy side of the equation keeps going. You know, the input side of the equation goes up now and plays catch up.
- [16:20]
B
And you know, Raoul, on top of that, I've, you know, every single week I try to, to meet up in person with executives from the corporate sector to discuss, you know, how far they are in terms of implementing the intelligence. And it still strikes me that most of the big blue chip companies remain a couple of years behind, for example, small business owners, as the two of us, in terms of implementing AI. To give you a few anecdotal pieces of evidence over the past couple of weeks, I met with a guy running an M and A shop and he told me, well, due to the nature of the M and A business, he's only allowed to use Microsoft Copilot, him and his team in an offline mode because obviously they're scared of the model sharing the intelligence, that they're looking into this and this company. Right. And therefore he basically told me that it was kind of useless for them to use AI at the moment. Right. Because it felt like using ChatGPT in late 2023. Right. A lot of flaws still, a lot of hallucinations. It could only search your local hard disk, and so on and so forth. But I think it's very, very common that you see blue chip companies restricting their employees from using the online versions of Gemini, Claude, et cetera, and they ask them to use an offline version of Microsoft Copilot until they figure out how to do this. So they are at least a couple of years behind the companies that allow their employees to just work the wonders of AI. So we are still so early in
- [18:03]
A
the implementation of this. I've seen exactly the same, I've had the same conversations, and they're all like, well, we can only authorize Microsoft Copilot. I'm like, oh my God, you're so far behind. Here was a really interesting data point. A friend of mine's son joined a big family Office hedge fund, I won't name the name, joined one of the pods within it. And I kept saying to him, he came out of London School of Economics. So I'm like, just lean into AI. He joins the pod. Nobody's using AI. I got called by a very good friend of mine who runs maybe a billion bucks at one of the. It's another Macro family Office, one of the world's most famous macro investors. And he's like, how should I think about using AI? Haven't quite got my head around using it. And that's shocking that at giant hedge funds, they're still not using it. Yes, the technologically centered ones, let's say Two Sigma and Renaissance and stuff like that. Sure, because they pioneered this stuff. But the others, nobody's using it.
- [19:05]
B
Yeah, we're so early. And as soon as you recognize that, It gets very comfortable as an investor, if you know what I mean. Because all of the talk about whether we're in a bubble is silenced as soon as you get to the conclusion that no one's really using it yet.
- [19:30]
A
Yeah. It reminds me, I was sitting in NatWest before I joined Goldman. This is maybe 96. And we started using email because I think it was Capital International, somebody, one of the big program trading desk clients, needed the entire Excel files of every single share that they'd done and what was executed, at what price, all of this stuff. And so they started using email. We weren't using email. That was 1996. By 2000, everybody was using email on the planet. So you forget how the adoption starts slowly. Investment banks were not the first to adopt this stuff for the same reasons. Nobody knew how to deal with it, et cetera. But within four years, the entire world had changed. And I think what you're saying is roughly the 1996 level of this tech adoption, the technology companies were all using the Internet well before then. The Netscape browser had been done, and Marc Andreessen, and all of this stuff was happening, but the average people, that hadn't happened yet.
- [20:34]
B
It leads me to the discussion on where are we in the cycle? And, you know, some people have made the analogy between Netscape and the launch of ChatGPT. Whether you could use, you know, Netscape as year zero and ChatGPT as year zero, I don't think that's unfair, to be honest. But if that's true, we're probably, I don't know, three, four, five years from peak.
- [21:01]
A
Yeah.
- [21:02]
B
And what is in this cycle?
- [21:03]
A
Right.
- [21:03]
B
Yeah.
- [21:05]
A
What does the cycle mean after all of this? I mean, I don't know. And I keep telling people that you think you know what's about to happen. We've all got our models in our head. We're all trying to think exponentially, but nobody's figured out that we're about to put. Within the next five years, we will have AGI brains in humanoid figures. So this is something smarter than us by maybe 5 or 10x in a figure that is stronger and more adaptable than we are. Yeah, we're not ready for understanding what that means.
- [21:38]
B
No. But it actually makes the investment environment a little bit tricky because if you look at the S curve of the LLMs right now, they still roughly double. They even accelerate versus a logarithmic regression now, but they roughly double their capabilities of competing with a software engineer every fourth month, maybe every fifth month, right? So we're very early in that S curve. And a very simple analogy back to Covid, when we were in this part of the S curve, during the early innings of COVID it was the timing where the Imperial College in the UK ended up concluding that everyone would die within a couple of years. Right? Because it's just impossible to extrapolate anything at this juncture, right? Because you don't know the slope. You don't know whether the slope will continue for years or decades or whatever. It's just impossible. So every time a sector is faced with this AI kiss of death, right now, the simple response from investors is just to say, okay, if we extrapolate this, the left tail will get very, very nasty in this sector. We've seen that in trucking all of a sudden because of a white paper suggesting that you could Increase your output 300% without adding to costs in the trucking industry and so on and so forth. And then all of a sudden the trucking industry just loses 25% overnight. Right? We've seen it in software as a service, obviously, but we've seen it in many sectors and it makes it very difficult to avoid these drawdowns. I've had a look at the S&P 500 over the past month or so. We've never ever seen this many stocks with more than with drawdowns bigger than 7% in one day trading periods without a complete crash in the index. But we're not seeing a crash in the index. So you have these rolling drawdowns across sectors and then suddenly they rebound again.
- [23:36]
A
Because it tells you, people can't, as you are saying, extrapolate what is signal and what is noise. They just don't know how to, because we're dealing with something very new and very fast. And so it's really difficult for the market to get a handle on until it can find its next narrative to grab hold on. And that's why so many people moved out to the commodity sector, emerging markets, because that was an easier story to tell.
- [24:05]
B
But still, Raoul, the emerging markets trade is still very AI driven, right? Because if you look at the emerging markets equity index, it's heavily concentrated in South Korea, for example, where you have QNX and Samsung, basically two of the major semiconductor manufacturers. Look at the trade statistics between Korea and the U.S. and Taiwan and the U.S. right, they're through the roof due to the semiconductor exports. So even the emerging markets trade is AI linked at this juncture. And I think this is a very relevant point to make because sure, a lot of these investors are scared of the capex cycle right now, but they're still buying the companies on the receiving end of all of this Capex. So they still trust that the capex will be undertaken. Right, because they buy tsmc, they buy hux, they buy Samsung, they buy some of the landlords, you know, capable of building data centers and so on and so forth. Right. So they, they expect this cap capex to continue. They're just scared of the paying end of it, not the receiving end of it, if you know what I mean.
- [25:15]
A
And I would argue that everything is one trade now, that everything is all this trade expressed in different ways. Literally everything, everything that's happening in commodities, everything that's happening in technology is this trade. And anything in the middle is less interesting and doesn't get any attention or narrative because it can't. It has to be those two ends of this barbell, I think. Yeah, and geopolitics is in line with this as well. All geopolitics appears to be around. This is like, how do you get the cost of energy lower? Well, sort out Venezuela and Iran, okay, that helps. See if you can get Russia back into the system. That will help too, whether they do that or not. Secure rare earth metals and go for it. And China's been doing that forever, and now the US is doing the same.
- [26:14]
B
Raoul, let me ask you this, because it's another question that I've discussed with many portfolio managers, but also geopolitical strategists, because if you look at the grid expansion in China over the past two or three years, it's almost a miracle. They've expanded their grid at a pace that is just incredible. Also in solar, to take that solar,
- [26:35]
A
they added more solar than the rest of the world, total solar in one year.
- [26:41]
B
Yes, but the question here is, and I actually think it's an interesting question, are we able to compete with the speed of their grid expansion? Because we all know that in China you can do things, you can move people around if needed. I mean, they're not scared of taking very, very bold decisions. For example, say, okay, we just use this region for solar and we just put solar up everywhere. Could we do that in the West? That's a good question, whether we can compete and stuff like that.
- [27:20]
A
So if I'm right in my hypothesis that everything is this process of turning energy into intelligence, then you've got two multipliers. The US is leading intelligence and China is following. China is leading Energy, but the US has all the oil and gas, so it's starting from a higher base. But China is ramping up faster, so there's two dials to move here, I think. And I think the US solar is growing stupid fast as well, coming out of here in Texas. So I don't think the US will ever catch China in solar. But China doesn't have actual oil in the ground. The US has that. So I think it's to do with total baseload and the rate of change increase in that and then the cost per unit of energy, because that has to come down for everything. And solar's doing that, and then how much intelligence you can get out of it. Now China's leading in terms of robots, that's clear, but probably not. Well, it's not leading in terms of AI, but it's not a million miles behind. So that's the race. I mean, this is the biggest race of all time.
- [28:31]
B
Yeah. Probably the reason why they're decoupling on everything physical. They just have to. Because this is an arms race.
- [28:40]
A
It's an arms race. And with an aging population, don't get a choice either.
- [28:44]
B
No.
- [28:44]
A
And I've argued that this is what Japan is doing as well, that Japan is normalizing how its system works because it was all run by the central bank and the mof, and now they're letting the banks run by steepening the yield curve so the banks can earn a profit, so the banks can start lending. Because the only way of building out the capex required for the automation revolution which Japan is part of, is the new capital. And it won't come from the central bank. It has to come from the banking system itself, which hasn't been lending in decades and has to relearn that muscle. I think that's what's going on. They're renormalizing the economy to allow the banks to relique and to then lend to fund a CAPEX boom.
- [29:29]
B
Yeah, I think you're right. And allow me to add one thing, Raoul, because a lot of people sent me the link to Ray Dalio's recent blog post, around the New World Order and the End of Globalization and all of that. I actually think there's an important twist to consider in this whole globalization discussion. Take a look at Waymo Alphabet's autonomous vehicle unit during a hearing in Congress, Was it a month or two back, they admitted to having a workforce in the Philippines taking over the wheel in case of emergency with these cars. Right. So I'm actually pondering right now Whether we end up getting, at least initially, almost a hyper globalized labor market out of AI and robotics, since you probably need a plan B in case the vehicle suddenly ends up in trouble. And you know that plan B is in the Philippines. A guy wearing VR glasses and you know, taking charge of the vehicle. In that case, you had the same with, with Tesla's Optimus. It was also revealed that they had, you know, a workforce in India. So I think that's a very interesting twist to this, that you could probably end up hiring anywhere in the world with this combination of AI, robotics and virtual reality. Right.
- [31:05]
A
So a quick break in your regular programming. If you're serious about your future, grab my free report called prepare for 2030. I think you've got five years to make as much money as possible and this guide will help you navigate what's coming. The link is in the description. Download it now. Yeah, we've also seen a massive amount of people workforce in Africa and Southeast Asia and South Asia labeling data for AI. So there is a, you know, there is an ability for those people to find work in this new intelligence economy in a way that doesn't feel obvious yet. It's like we're not fully there yet and we need to train these things in certain ways and humans are pretty good at that. Yeah.
- [31:56]
B
I also noticed when I visited Miami, a couple of the hotels had virtual receptionists in Asia now instead of local receptionists. It's amazing, right? And I don't think we have completely wrapped our head around how that will impact the labor market yet. What is clear to me is that you need to look at the trends in the technology sector in terms of hiring because they're aware of what's coming. And it's essentially the only sector that is currently harvesting all of the AI returns through their shrinking labor force while they're growing earnings. It's quite interesting. It's probably the sector that grows earnings the most and it's the sector that hires the least. It will show up in every sector in a few years.
- [32:46]
A
And if you've stepped back as an investor, what does that tell you? Their margins are going to go up.
- [32:51]
B
Of course, yes.
- [32:53]
A
You've got the CapEx cost, I get that. So you're playing human costs with capex costs, but the human cost keeps going on forever while the capex cost gets paid off over a period of time. So they're making a long term decision about margin, which is our margins are going to go up over time because we can reduce the workforce in the companies.
- [33:20]
B
This is from an outset of already extremely high margins. In a historical context, margins have been going up since year 2000, more or less, on a trend basis. And they can go up further, of course. How do you even. How do you even measure margins if you have, for example, autonomous taxis? I mean, the margin is endless, more or less.
- [33:42]
A
Right.
- [33:42]
B
So you can have it running 24 7. There's this startup in the UK doing 247 booking calls for restaurants. I don't know whether you've seen it. They've received funding from Nvidia and others. So, I mean, they're using AI to just call people making restaurant bookings. But it's basically a call center, AI driven. It's running all the time. There's no limits to it. There are no limits to it. Right. They'll have more or less endless margins if they manage to scale this.
- [34:14]
A
Yeah. And you just see that everywhere. But you know what's weird is how macro now has become this whole conceptual thing, because we are having to go through the biggest period of change, humanity, the global economy, everything's ever gone through. Macro's job is to see it in advance. So we're much earlier generally than others. Yes. The technology industry obviously knows it because it's building it, but so few others really yet get it. And so when people talk about a bubble, it's not a bubble. If I speak to any of my friends, they have no idea about any of this stuff. None of it. We're on X all day looking at people building stuff on Clawbox, going, oh, my God, how do I. I met a friend of mine from Coinbase, happened to be at an airport yesterday, and I'm like, what have you been up to? He's like, oh, in my spare time, I'm building clawbots and I've got one running my company and I've got one in a startup that I invested in as employees running all of this shit. I speak to my friends, they've got no clue. I mean, zero clue. And these people are now, you know, because they're all in their 50s, you know, in senior positions in senior companies, they have no idea what's happening.
- [35:22]
B
No. And, you know, even the people from my generation, my age, slowly but surely getting into the executive roles, they're still two, three years behind on this. So, again, we're so early on this. And, of course, you know, I'm not going to be gullible on this show. I know that there are plenty of practical roadblocks in terms of implementing this in blue chip companies. I Get that. But they haven't even started yet. That's the main message. They haven't even started yet.
- [35:57]
A
So outside of this kind of megatrend, that's kind of complicating it for everybody, business cycle wise. You just think, okay, the business cycle expands from here. It continues to expand till whenever, whether it's into the end of the year or into next year. The political fiscal cycle in the US keeps driving it. What's your just going into the business cycle side, what's your view on all of that?
- [36:21]
B
So first of all, I think it was a game changer that we got this reintroduction of the bonus depreciation in the one big beautiful bill. It basically means that you're incentivized from a tax perspective to do capex now rather than later. We've obviously seen the first signs of that in the quarterly reports from Alphabet and Amazon, et cetera, that they're spending big this year. But it also shows up in the capex expectations for smaller companies now, which is probably the big game changer relative to last year. So this is a, this is a capex year also outside of the max sevens. And that obviously means that we're also, you know, approaching the part of the cycle where everything from oil to industrially LinkedIn commodities will start to thrive. We've seen the first signs of that in the energy space since New Year's. You've seen great returns if you've invested in some of the oil companies. And I think that will keep going through the year.
- [37:27]
A
So
- [37:31]
B
what's the downside of this, if there is any? I think at the point where the energy inflation will pass through the system, which cyclically will happen at some point towards the end of the year, that's probably where you'll get some slowing of the rate of change. Investment wise. We're still very far from that. And just look at the latest inflation report. Energy is still clearly disinflating the overall basket of goods, but we may be 3, 4/4 away from energy spilling over to the rest of the basket. And that's typically where you need to at least consider whether the rate of change slows. I think it's a fair assumption right now that we're three, four quarters away from that. But until then, as long as commodities go up hand in hand with the market, I'm basically long commodities and technology right now, which is probably the part of the cycle we're in, then everything's fine. When technology rolls over and commodities keep going up, that's probably where you need to run for the hills.
- [38:37]
A
And. My working hypothesis is that let's say wash cuts rates, we may never see a rate rise again. We may never have seen. Yeah, we may never see one again because of the massively deflationary pressure of what's happening and the rise in productivity and that, yes, liquidity. We'll come on to liquidity in a sec. We'll get withdrawn because we don't need to roll as much debt. Market goes sideways. For a while. The late 90s were exactly this and what happened was you get periods of consolidation that last a year, but nothing really went down, Nothing really blew up. Yes, we had the Asian crisis in the middle of it, but it didn't last very long. Again, it just was a V shape and then it went straight down and came back up again. It feels like that is the environment we're going into. And I still think if that's the case and people are still late in this, the true bubble cycle comes next. So like 2028 onwards, it just sucks in everything.
- [39:44]
B
Yeah. Again, if you look at the comparison to the run up to year 2000, what you saw ahead of year 2000 was a huge spike in returns in companies doing capex. We're currently seeing the exact opposite. And I would worry if investors started piling in big time into companies with a falling free cash flow. That's odd from a textbook perspective right now we see the textbook reaction to capex. Free cash flow falls in Google, Amazon, et cetera, and investors, they pull out. That's nothing to worry about. It's certainly not a bubble. When you see that kind of response in markets, if you see a divergence between free cash flows and return profiles, that's probably where you need to reconsider the whole thesis. But we're so far from that. I mean, nothing in terms of return profiles versus earnings versus CapEx resembles what we saw in the run up to 2000.
- [40:45]
A
No, exactly right. So let's talk about liquidity because that's obviously an important thing. How are you seeing liquidity right now? And we'll swap, we, we'll exchange notes on what we're seeing or thinking.
- [40:58]
B
So I think it's important when you discuss liquidity to make a distinction between what I typically label as narrow liquidity. So the liquidity that is available for banks to transact with with each other through the Federal Reserve System and then the broader liquidity cycle which includes, you know, deposits from households, corporates, et cetera. Right, yeah. If we look at the narrow liquidity picture first, it Remains slightly tight, to be honest. We've seen a couple of shutdowns, both the one in the autumn and then the brief one we had over the calendar term between January and February. And every time we see shutdowns, we get a reaction in this narrow money measure typically labeled net Fed liquidity. I still think we're say at least 200, 300 billion away from comfortable levels in that metric. That is essentially why they undertaken these reserve management purchases of T bills. They launched those in December, the Federal Reserve, to try and avoid these hiccups in the narrow liquidity between banks. And we're slowly but surely getting there. Also, if you look at the most recent week they've ramped up purchases, they're running roughly at 20 billion a month now. Sorry, a week now, which is a lot, right? Yeah, we're talking 80, 100 billion a month almost on a trajectory basis now, which compares to almost the peak of the COVID purchases. Right. It's not too far off that kind of level. So the Fed is aware of that issue. They're trying to bring the structural liquidity back to an acceptable level. They've been told by all bank treasurers that they needed to add liquidity and they've done so, and they're still doing so. The big question is whether Kevin Walsh and his whole school of thought will continue with these purchases once he's in office. But I actually think they will. And the reason is the following, right? We've seen hiccups in sulfur interest rates, repo interest rates through the autumn of last year, into this, into this year, as a consequence of this tight structural liquidity between banks. I think they want to avoid such hiccups at all costs ahead of the midterms. Why would you run the risk of having hiccups around the quarter turn of October, for example, due to a tight liquidity landscape between banks just ahead of that election. So in that sense, I think you're. It's pretty safe to say that they'll continue these reserve management purchases towards the end of the year. 2027 may be a different discussion. On top of that, I know Kevin Walsh has been an advocate of a smaller balance sheet, a Federal Reserve balance sheet that is for a long time, and he's probably still thinking that it's doable. Let me stress this and underpin this and underscore this as much as I can. You cannot shrink the Fed balance sheet more than what you've already done unless you allow the private sector balance sheet to expand a lot before that.
- [44:09]
A
That's Right. And I think that's what they do, that's what they want. Right. I think the key focus is going to be bank lending, bank credit creation, all of that side of things. And that's where liquidity comes from, from the broader measures of liquidity and not the narrower measures. And that was the ESLR changes as well, was kind of laying the ground for that to happen. And if that happens, then can they have a smaller balance sheet in time, but not yet.
- [44:45]
B
What we're talking about here is banks ability to intermediate in treasury markets by the end of the day. To give you one brief example, I've been a part of running such a strategy here in Europe for a while. It's a very normal hedge fund strategy now to buy, for example, Treasuries and then asset swap those Treasuries. And let me just explain what that means. You buy the U.S. treasury and then you have an interest rate swap against that Treasury. So you basically only harvest the spread between the treasury and the swap rate. There's a spread there and you can lever that trade up, up and up and up and up. That's a typical trade to undertake as a hedge fund manager in the U.S. now you've seen similar traits in Europe with spreads between mortgage rates and govis or mortgage rate and swaps. And those spreads are relatively stable over time. I said relatively stable. So it gives you a return profile that is very interesting if you level that up 20 times or something like that.
- [45:44]
A
That's the famous basis trade that the bank of England got so worried about.
- [45:48]
B
A lot of the repo transactions in markets go to that space right now. And if you look at sulfur transactions, I think they're quadrupled over the course of the last four or five years. Of course also due to the Libor reform, but also in turn driven by this trade. It basically means that either the central bank will have to underpin this trade or the private banking. So the commercial banking system will have to be able to stomach this balance sheet themselves. And when you see a spike in the SOFR interest rate, it basically means that it gets more expensive to be levered up in these trades. And then you start to see the spillovers to Treasuries, for example, and it impacts risk taking all the way through the system. So that's why it's so important for policymakers. Kevin Walsh Scott Besant to ensure that there's a very stable funding market for this trade. Because otherwise you start to impact equities.
- [46:45]
A
They're the biggest marginal bar of Treasuries Exactly.
- [46:49]
B
And Scott Besant is a former hedge fund manager. We both know that he's been running business cycle analysis. He's been running liquidity analysis when running money. So he's perfectly aware of this. He's probably the Treasury Secretary in modern history who's most aware of this.
- [47:09]
A
He's a macro guy.
- [47:10]
B
He's super into the details of these traits. So he's perfectly aware that they need to secure stable funding conditions for this year to avoid hiccups in markets just ahead of the midterms, et cetera. So I expect them to both buy T bills via the Federal Reserve System and at the same time allow the commercial banking system to expand their balance sheets. So we basically get liquidity from both
- [47:34]
A
channels, and the checks from the fiscal rebates are going to start coming through. And what that does is it goes straight onto. It comes out of the tga, and it actually goes straight into the bank balance sheets. And the banks then use that potentially for leverage. And it has a credit multiplier throughout the system. So when you increase the deposits in the system, deposits are the highest quality of capital the bank can have because it pays no interest on it, and it just levers it up, does whatever it wants with it. And they're about to give the banks, I don't know, a trillion or whatever the number is. I don't know how big the stimulus is in terms of rebates. That's a big deal. It'll draw down the TGA until the tax season comes, and then we've got a rebuild of some of that. So it feels like we're getting close and we've got the ESLR changes. It feels like it's a very positive liquidity picture going forwards.
- [48:34]
B
Yeah, a lot of people have been pushing back against my liquidity thesis, but also your liquidity thesis, pointing to, for example, bank of America's monthly fund manager survey, which shows that most portfolio managers, they're running out of cash. They've basically, they're all in, so to speak. So where's the liquidity coming from? Where's the money coming from to push the market higher from here? And the answer is this. At this stage of the cycle, you typically see global central banks on the margin hiking interest rates. You've typically seen global central banks on the margin pulling liquidity out of the market. That was what happened in 2007. That was what happened in 1999-2000. If you want to compare to those situations where you had a similar setup with no cash left for portfolio managers currently we see the exact opposite. The average central bank is cutting interest rates. The average central bank is adding liquidity at a stage where you would typically see the opposite. And that is, I think, the ultimate conclusion for this year from a monetary policy standpoint and a liquidity standpoint, that you're not going to see the tide turning until the rock is pulled from under the liquidity cycle. And it's not being pulled from under the liquidity cycle, it's actually being amplified.
- [50:04]
A
Yeah. So we've only got a couple of minutes left. So what are your favorite trades for the next kind of three month, six month period, do you think, considering everything we've talked about.
- [50:15]
B
So it's actually funny, Raoul, the last time I came on your show I ended up saying that perfect setup will make money short term. And I ended up jinxing my own year. I was up 100%, I think, and then I had big drawdown basically days after. So I'll be a little bit less cocky this time around. And interestingly, I actually probably have the same favorite trade as last time I was on. We've seen a technical breakout in the solar company called Next Power. It's a great company with a lot of patents and basically what they do is that they optimize the return on investment on solar panels by ensuring that they always point in the right direction during the day and it's just broken higher. I think the PMI cycle supports that trade as well. I think we're still early in the solar adoption in the US not least. And interestingly, the trade works even though the administration is not particularly keen on that trade, if you know what I mean. So I don't think it is a trade that a lot of domestic portfolio managers have bought into because of the rhetoric against it from Scott Bess and
- [51:33]
A
the blow up from the last capex cycle in solar people they still have in their heads this was a waste of money. So last question then is what is going to outperform, you think, for the next six months out of your barbell? Is it going to be the commodity cyclical side of the equation or is it going to be technology? Now it's had its correction or it's in the middle of some sort of correction. Whether it's sideways or in some of them they've fallen back. What's going to be the bigger performer, you think, in the barbell and you'll probably be 100% wrong, but that doesn't matter.
- [52:10]
B
I would prefer to express the technology bet in the mid to Large cap segment just below the max 7s. I think there's a lot of value in that segment. So if you look at the next gen NASDAQ ETF for example, I think that looks very compelling. So that is the hundred companies that are close to approaching being the biggest 100 in NASDAQ.
- [52:34]
A
Yeah.
- [52:34]
B
So that could be one way of, of trading it. Because you and I well aware that when you see a pickup in the PMI cycle, it, it's typically a very good trade signal for the small to mid, mid cap segment of the market as well. Yeah. Because you start to see a pickup in earnings that kind of spills over to the entire system and that's probably exactly what we're going to see the next three, four quarters. So I, I, I don't think it would be out of the ordinary to see performance from this mid cap segment. And then a lot of people are stuck in this narrative that, oh, it's because of the geopolitics of the US that we see underperformance of US indices versus the rest of the world. And I just have to remind them it is 100% normal to see that at this stage of the business cycle. And we have that discussion every time. Oh, is this the end of the dollar? Is this the end of the US outperformance of the rest of the world? No, it's just a cyclical uptake across the world.
- [53:27]
A
It's the dollar. Smile.
- [53:29]
B
Yes.
- [53:29]
A
Happens every time.
- [53:30]
B
Yes. And we get this discussion every time. Is this the end of the US dominance? And no, it's probably not.
- [53:37]
A
Fantastic. Andreas, always, always good to have a conversation with you and we'll catch up again soon.
- [53:43]
B
Yeah, take care.
- [53:44]
A
Take care. Okay. As ever, a great conversation with Andreas. Managed to cover a lot of ground. As I mentioned at the beginning, we're all focusing on what does this all mean, this massive change in technology, what does it mean for economies, what does it mean for markets, what does it mean for our portfolios, how we should be allocating and hopefully Andreas and I managed to sort some of that out for you. See you next time. Today's episode is brought to you by Abra. Abra aims to provide individuals and institutions with a secure way to control, manage and grow digital asset wealth. From a separately managed account, Abra helps his clients get exposure to to crypto and crypto financial products like yield and lending through one full service platform. If you're looking to gain access to additional liquidity, Abra is one of the most competitive loan products in the market. You can borrow against Bitcoin Eth and Solana at up to 50% loan to value. Rates are in the 4 to 6% APY and are open term. You can continuously draw down against your collateral as the price appreciates. ABRA has other strategies to add yields and their team is happy to help along with Align your portfolio to your risk profile. Reach out today and get a complimentary consult in your portfolio. It's worth seeing if they can help you manage your allocation, reach investment goals, manage risk and add additional yield. Go to realvision.com abra and tell them I sent you. You obviously enjoyed the episode because you're here with me at the end. But listen, don't forget to go to realvision.com join and grab a free membership. It's an incredible community packed with alpha, great investment ideas and the research that you need to help you unfuck your future. So get started now. Go to realvision.com forward/join
- [55:22]
C
ever wanted to explore the world of online trading but haven't dared try? The futures market is more active now than ever and Plus500 futures is the perfect place to start. Plus500 gives you access to a wide range of instruments S&P 500, NASDAQ, Bitcoin, gas and much more. Explore equity indices, energy, metals, forex, crypto and beyond With a simple and intuitive platform, you can trade from anywhere, right from your phone, deposit with a minimum of $100 and experience the fast accessible futures trading you've been waiting for. See a trading opportunity. You'll be able to trade in just two clicks once your account is open. Not sure if you're ready? Not a problem. Plus500 gives you an unlimited risk free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus500 is your gateway to the markets. Visit us at+500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500 it's trading with a plus.