B (6:16)

Yeah, there is an alternative view that the Iranians did enter into these negotiations and it was the Americans didn't want to. And I think we could go back and forth on that. But I'm not really a geopolitics expert. I care more about the impact on people. But are you, is the wider thing you're saying here is that we're in a period of restructuring the global financial system?

A (6:40)

I think the restructuring of the global financial system has been put on hold, but I do think that that is ultimately part of it. Right. So you know, you and many other people have correctly identified that the system as it exists today is not working for many individuals. The diagnosis many make is that that's tied to the US dollar. I'm, I'm less convinced that that's actually the case. I think that the much more important component is actually the access to legal remedies, etc that has largely disappeared. If you look at the uk, you know, the single biggest complaint that you, you have correctly is that you no longer feel represented by your elected representatives. You no longer feel you have access to a legal system that looks upon individuals as entities with rights that are inherent to them. Inherent to them. Instead, it's basically become a system of discipline and understandably you chafe under that. That makes a ton of sense to me. I think it's a, I think it's a mistake to say it's simply tied to the money feature. Instead, it's much more tied to the systems of power and control. And increasingly the average UK citizen and US citizen feels that their elected representatives don't. They don't really speak for them, they are captured by other entities and their access to remedies is quite limited. And these are the conditions that tend to lead to revolutionary or at least populist behavior.

B (8:04)

Okay. When you look at what's happened since the Iran war started, we've seen the price of oil go up to, I think a record was $116 a barrel. There's been a. The, the infrastructure behind the LNG plant, especially in Qatar, has been damaged. Other markets reacting how you expected or is something weird going on here?

A (8:27)

They are behaving largely as I expected. So, you know, we should first separate US Markets from global markets. A narrative took place post tariff tantrum in February 2025 that, you know, the opportunity set was basically just get away from the United States. Right. Let's put money elsewhere. Those foreign markets that experienced inflows from US Capital and candidly from the rest of the world as they tried to get away from the United States are now having second thoughts. And so we've seen a much more dramatic sell off in European or Asian markets than we have in the United States. As you know, a lot of my work is around the passive bid, the implications of what happens as markets transition from discretionary management to index based management. And until we see a material change in those flows, like I would be surprised to see the S and P sell off in a significant manner simply because there's just not that much discretionary capital being put to work here. Is that money is coming home from the rest of the world. It tried a brief sojourn adventure off into Africa and Japan and the rest of the world. As that money comes back, it's causing your markets to sell off. US Markets to look relatively good. And people are scratching their head in the same way that they have every year for the past 10 years. Saying this doesn't make a lot of sense. But it does if you treat it as a mechanical system where as long as people have jobs, they're putting money into their retirement systems. Those retirement systems are buying equities and in turn the prices are being supported.

B (10:02)

So is the market evolved then into the way it operates to handle such shocks?

A (10:09)

Well, the market is continuously evolving. Right. It's a complex adaptive system that is influenced by the participants and their behaviors. And the point that I'm emphasizing is more and more of those participants, whether they recognize it or not, are really just part of a mechanical system. The decision to invest passively, to invest in an S and P index or a total market index, is really not an investment choice. It's simply an allocation choice. And you're saying, I will take a portion of my earnings and a portion of a contribution from my employer and put it towards buying these equities at what price? Whatever price the market has, at what valuation, whatever valuation is there, I'm going to continue to do it because that's what I've been told to do. That's what the system is built to do, and it's following through on that process.

B (10:58)

But is that a survival mechanism for the system, then?

A (11:02)

Well, what it really is is a misunderstanding of what retirement is supposed to be. So the way we've built our retirement systems, the traditional pension system was designed to provide income, to allow you to no longer work once you'd reached a certain age or you'd been injured, you received a pension that paid your cost of living and was potentially adjusted to the inflationary impact of that. That's an obligation of somebody else. In the United States, it belonged to a private employer. Right. It was a defined benefit, which means it's a liability of that employer. In the late 1960s and early 1970s, those systems, the assumptions behind them, began to break and we were unable to do that. And we shifted our retirement system to basically, hey, the right way for you to invest or to prepare for retirement is to build up a giant stock of assets, a big pile of assets that you hope is not going to run out eventually. That is really what we're reacting to. We've replaced the need for income with a monetary and fiscal incentive tax incentive to hoard assets, effectively hodling for the boomers. That is really what we're actually seeing. If your mechanism for retirement is of uncertain duration, I don't know what my individual life expectancy is. I don't know what's going to befall me. So I have to assume, effectively the worst case scenario, that I'm going to live a really long time and that my expenses are going to be higher than I think, et cetera. And so I'm going to have to accumulate a lot of assets in order to meet that objective. And I'm going to underspend relative to that pool of assets. Everyone else will think I'm rich, but I look at it and say, I don't know how long I'm going to be retired. I don't know how long I'm going to need these assets. I don't know what the value of these assets, because they're relatively volatile assets, is going to be in my retirement. So the answer is I underspend and I accumulate more and more assets, if at all possible. That has implications for the younger generation. This is effectively a Keynesian paradox of thrift. If the older generation has all the assets and they choose to underspend because they are uncertain about their future. What they really wanted was a guaranteed income, but now they have a giant pool of assets that they have to make last. That means they're going to underspend. They're going to be, that means there's going to be less income for the working generations, which makes it harder and harder for them to buy access into that pool of assets, which includes things like houses and includes things like safe retirements. It includes things like automobiles, etc. That everybody is basically saying, hey, I need as many of those as I can possibly get because I'm uncertain as to what they're going to generate in terms of yield

B (13:53)

doesn't feel sustainable.

A (13:55)

I don't think it is because it has, it falls into a category of what's called overlapping generations models where we have a very large retirement class, we have people who are living far longer than they would have anticipated. The, the proportion of those people that live to adulthood in the, in the baby boomer generation was far higher than in prior generations. And as a result we have an economic or a demographic disconnect where we've, we're going to have a growing class of retirees that require those very workers that we're underpaying because we under consume. So it is not sustainable. It will eventually lead to a change. My hunch is, is that that change will be largely again, demographic and feature. I've highlighted in one of my pieces that the modal, meaning the, the most common boomer age is this year will be 70. Life expectancy in the United States and the UK is roughly 85 to 86 across male and female. That means that over the next 15 years, half of those political individuals who vote, demand services, et cetera, are going to disappear and they will be disempowered in favor of a younger generation that's going to look at it and say, yeah, we've had enough of these old people. That's my hunch.

B (15:12)

So do you think there will be some form of Mandani style redistribution?

A (15:17)

Well, I think there already is. Right. That's what Mandami is, is he's pitching to that younger generation. He is the face of the millennial voter. Whether it's economically rational or not is somewhat beside the point. That is the will of the people of New York City.

B (15:34)

It's rational to them.

A (15:37)

Well, what they, you know, this is part of what I wrote about this weekend, right? There's two ways to think about it. Is it rational relative to what you believe is actually happening. And for many young people, they see a system that is, in their view, inherently corrupt. And I can understand that. I don't necessarily agree with it, but I can understand that perception based on what has happened in their lives.

B (15:59)

I want to talk to you about one of my new sponsors, which is monetary metals. Now, if you're like me, you probably spend a lot of time thinking about sound money and how to protect yourself from currency debasement. Now, for some people, that's bitcoin. For others, it's gold. For me, it is both. But here's the thing about gold. Most of it just sits in vaults doing absolutely nothing. Monetary metals is changing that. They let you earn a return on your physical gold holdings, but they pay it in gold itself, not dollars. So instead of your gold just sitting there, it can generate more gold for you. So to put it simply, if you deposit 100 ounces and earn around 4% at the end of the year, you're going to have 104 ounces of gold, regardless of whatever happens to the price of gold in dollars. And in a world where fiat currencies are constantly losing value, earning a return in actual gold ounces is pretty cool. It's essentially making your gold productive instead of idle. Now, if you hold gold and want to learn more, check them out at monetary-metals.com McCormack that is monetary metals.com McCormack you describe in one of your articles, you talked about flow inelastic unwind. You've talked about this. Can you explain what that is so someone like I can understand?

A (17:14)

Sure. So flow inelastic refers to the price change that occurs in response to a flow of investment capital. So when I go to buy a share of The S&P 500, the measure of elasticity is going to be effectively, how much is the price of the S and P or the securities within the S and P impacted by that decision to buy or to sell? And what we know, and we can see in the empirical data, is that that inelasticity is rising, meaning we're seeing larger and larger price changes for a change in the dollar amount of flows. Unfortunately, that creates conditions for exceptional volatility, which, going back to the original point, if I accumulate a pool of assets and plan to spend that over the course of my retirement, as that volatility rises, I become more uncertain and as a result reduce my expenditures. And you know, when you talk about that implication, that means that reduced spending then translates to reduced job opportunities, which then means that there is less Money that will be flowing into the market, creating similar conditions where that even reduced selling activity can cause markets to turn down. It's a little bit like a switch, right? If it turns positive, then prices will tend to rise. If it turns negative, then prices will tend to fall. And one of the key questions is once it turns negative, does it accelerate? And that's the part that most of my work is focused on, which is there is a bit of a switching behavior as that potentially turns negative. As boomers could see lower prices of equities but still need to sell. Would that overwhelm the inflows and create conditions of what's called a discontinuous price movement or a crash? And unfortunately, most of my work lends itself to assuming that that's the outcome.

B (19:10)

You're seeing that in the short term, medium term.

A (19:15)

Well, the math behind it suggests that there's a couple of tipping points. We're currently about 54% passive by market capitalization. Our conservative modeling is if we cross about 65%, which on our math is about two years out, we hit effectively a point of no return. And at that point it simply becomes a question of when it's going to happen, not if it's going to happen.

B (19:41)

And so that'll be an unwinding of everything.

A (19:44)

Unfortunately, that's the direction that it leads to. Yeah.

B (19:49)

Kind of necessary, though.

A (19:52)

I don't think so. I don't, I don't think it's necessary. I actually think, look, I, I, I think the valuation that many securities trade at is simply too hot. I think there are other securities, candidly that are priced too low. Meaning, for example, I'd point to many areas of fixed income where there's neglect that's created by these same mechanics. That suggests to me that interest rates are too high, which I know is very contrary to what much of your audience probably believes. We could, I could share some of the analysis behind that and why I think that's the case. But the simple reality is those are the areas, the safe investments are the ones that people are being driven away from because of the narrative dominance of it's all about the dollar, et cetera. Right. Why would I want to get fixed income that's going to pay me dollars in the future if I know the answer is we're going to massively depreciate the value of the dollar? I don't think that's correct, but that's my opinion about the future. Not a set in stone guarantee that this is going to happen.

B (21:02)

It feels like a System that's grossly unfair to just the normal average worker in that those who understand the plumbing and the mechanics are able to benefit, benefit from the system. But those that pay for it are the people who go to work trying to fill up their car, trying to pay their mortgage, who don't understand the plumbing and how the mechanics work and how to play themselves well.

A (21:23)

So that is one of the key criteria for money itself, right? You shouldn't have to spend a lot of time trying to figure out the plumbing, right? You don't spend an awful lot of time and you walk into your house saying, you know, gosh, do I have copper or do I have cast iron pipes? Right? Have I properly navigated them? Are all turns executed in the most optimal way? You don't spend a lot of time thinking about it because it's just supposed to work. And again, it by and large works, right? When you walk into a coffee shop and you pay for something, that payment system works. What's not working is the income system and your ability to earn enough to allow you to participate in society given the costs that currently exist. You know, more and more Americans and UK citizens are experiencing the simple reality that things that they took for granted as part of their life, right, being able to afford a nice cup of coffee or tea, being able to pick up a, you know, a delicious meal at a restaurant, those are becoming more and more out of reach for the average worker. And that's creating understandable stress. And it's not being helped, candidly by know, tech bro leaders saying, you know, all jobs are going to disappear except for skilled trades. And that's an incredible diminution for many individuals who are raised to look down upon trades as, quote, unquote unskilled, relative to the niceties of being able to go into an office and put on a tie and, you know, participate in polite conversation around a water cooler. You know, there's going to be some disappointed people if that ends up being the outcome, particularly those in the United States that have spent an enormous and inordinate amount of money on obtaining the credentials that are required to participate in that white collar society.

B (23:17)

But what do we do about this? Mike, I know we touched on this last time I spoke to you, but it does seem like a grossly unfair system. And we're, we're almost disincentivizing ambition now because it's like, however honest you are on playing the system, the system works against you.

A (23:36)

Well, I don't know that we're dis, you know, that we are Disincentivizing effort. Although some of that. Yeah, no, I, well, that part I understand, but as much as I would say that we're inculcating a culture that candidly I experienced for the first time when I went to my wife's hometown of Wilkes Barre, Pennsylvania. And it's an area that had had no legitimate growth since the 1970s. It's an old coal mining era area. As coal was de. Emphasized in the United States for Clean Air act reasons, et cetera. It fell on extraordinarily hard times and basically the only source of success was taking money from other people. And so it incentivized very dishonest behavior, very counterproductive behavior from a societal framework. And I'm just seeing more and more of that. I'm seeing people see the path to riches via betting or gambling or speculating. All of which are effectively zero sum games, right? If I win at a, you know, betting on football, somebody had to lose because, you know, the, the, the bookies are not actually conducting a social service. They're not subsidizing the industry. They're merely facilitating losses from one person into the pocket of another person. It's not a wealth creating behavior, but it does fall into the general category of I got to get mine first and then I can worry about everything else.

B (25:06)

I guess that, I mean, to me that feels like the same appeal again going back to Mandami. It's exactly this. It's the same playbook.

A (25:15)

It is the same playbook. And, you know, I had an interesting experience, Peter. I was on a. The polar opposite of this. I was actually with the London Institute of Mathematics presenting a paper I had done on the implications of effectively social safety nets and the cost of reset. And what I mean by that is basically the cost of a bankruptcy, right? Or a mini form of bankruptcy. Being evicted from your apartment is a mini bankruptcy. You incur costs because you've been unable to meet your obligations. That requires you to suddenly move all your stuff, find a new apartment. It's going to be harder to find that apartment because you've now got a negative credit score on your, you know, on your, your rental record. That basically puts you into a situation where you're behind the, you know, to use a pool analogy, you're behind the eight ball and trying to figure out what to do. I can talk about the implications of that in a second. But the more interesting thing was in this very educated group of economists, it became entirely apparent to me that none of them had actually read the wealth of nations by Adam Smith they didn't even understand what capitalism actually was. And I think that's one of the really key things, and I see it in the comments on our prior show, et cetera. You know, there's tons of arguments about, well, you don't know what inflation is, here's what inflation is, or capitalism doesn't work. You know, communism is the solution, Communism doesn't work, capitalism is the solution. And nobody really knows what the heck they're talking about. You know, the simple reality is, as Adam Smith properly framed it, capitalism is a moral system. It's a system in which you engender people's desire for selfish activities. Right. I want to improve my lot in life. And you basically create a system of rules that allow the pursuit of that, that then raises everybody's standard of living rather than creating a fragile system in which the king dictates, here's how much bread everybody gets. Right? Here's how much housing everybody gets, here's how much, you know, is assigned to us. And it doesn't matter whether it's a king or it's a totalitarian party in charge. Centrally planned systems are inherently fragile. Capitalistic systems are inherently robust because they are using the, the self interest of every participant to raise overall aggregate outcomes. The problem is that the bane to capitalism is restraint of competition or monopolies. And that's really what people are experiencing. They no longer go to their local grocer, they go to Marks and Spencer. They got, I assume that's the case. I don't know anymore. They can afford it if they can afford it. Right, Exactly. They no longer, you know, go to the local electrician, they go to the private equity owned, horizontal roll up of electricians that set prices and control advertising. So you're not aware of alternate choices. That's the bane of capitalism, as Smith correctly pointed out. And weirdly, our governments, because they are so terrified of lack of growth and so weirdly focused on this idea of national champions and that the indicators of success are tied to the market capitalization of our largest companies. They've lost sight of what actual competition is.

B (28:47)

So it's the capture of the capitalist system that's become.

A (28:51)

Which is what corruption means, right? Which is, that's really what corruption is. Corruption is the capture of the regulatory and legal frameworks, whether it's done for the, you know, the, the interests of Kir Starmer putting money in his pocket or Donald Trump putting money in his pocket, or whether it's done, you know, for reasons that you think are in the best Interest of people under a, you know, totalitarian system because it is the future. Right. It's built into the mathematical system so the ends justify the means. Either one is a form of corruption

B (29:24)

and that can only be solved by attacking the monopolies that exist which are defended by.

A (29:33)

Right. And Correct. And one of those is of course the state. Right. That's, that was the theoretical unique innovation of the parliamentary and US republican system is that it was a government of the people, by the people, for the people. Most people don't believe that anymore and I think the evidence is fairly strong that that isn't actually the case.

B (29:56)

But is it, is it because the governments aren't really controlling this anymore? I watched this chamath interview recently, I'm not sure of, I brought it up in our interview but we said essentially the world is run by 150 families or 150 people and they're all men and they decide where the money flows. Is that it sounds like a conspiracy, but is it? Is it a reality?

A (30:20)

It's a conspiracy when framed in that way. But you know, the really critical thing to understand is this, is that when you think about the efficiency of government or the effectiveness of government, one of the most important criteria there is effectively can they enforce tax collection? Right. You know, the Roman system of tax collection through tax collectors like Matthew etc. Was one that was viewed with incredible hate by the populace because the tax collector was basically empowered to do anything they wanted. Right? They bid for the contract of tax collection by guaranteeing a minimum collection. They were pursuing their quote unquote economic self interest by effectively stealing from people who could not afford to oppose them. Now what we're seeing is a not dissimilar system at the, at the high end and this is particularly acute in the uk. You've effectively tried to attract wealthy immigrants by saying, you know, hey, we're not going to enforce tax collection against you. Right? That's an unfair system in which the average worker has no real recourse to avoid that. But billionaires do. It should be the exact opposite, right? The system that kept Rome as a republic alive was effectively a system of noblesse oblige in which the entitled, you know, senatorial class believed that it was their duty and their responsibility to pursue things in the best interests of the populace. Once, you know, Carthage was defeated and effectively the workers were largely replaced or threatened by the influx of Carthaginian and Greek slaves that removed that incentive and it became truly exploitive. I'd argue that the appearance in The Western world of Chinese labor and the ability to outsource much of the work to a billion Chinese who are desperately poor relative to Western standards created very similar dynamics. And we've allowed the system to atrophy to the point that again, most people don't feel represented by their governments.

B (32:25)

But how do we fix that? I mean, you're saying the rise of popular. Yeah, this is why we've got the rise of populism. We've got the rise of both left and right populism in the UK at the moment. Both sides.

A (32:34)

Yeah. And, and that's.

B (32:36)

Right.

A (32:36)

And that, and that makes perfect sense. Right. Populism is simply the early stages of a revolt. It's, you know, people saying this is not working, we have to change it. And understandably, not everyone agrees that the right solution is to change it the way I see it or the way that you see it. And so, you know, revolutionaries on the left and revolutionaries on the right. Sounds pretty standard.

B (32:58)

Yeah. And it's funny, when you go and read, if you go and read the blogs of these people, they're pretty much saying the same thing.

A (33:05)

They are saying the same.

B (33:07)

Yeah, they're saying the same thing. Apart from when they get to their solutions.

A (33:11)

Yes.

B (33:12)

One is big government, one small government.

A (33:15)

Yeah. And both are somewhat unrealistic. Right. Because the big government solution takes more and more power away from that capitalist framing that empowers and u utilizes the self interest of every individual and the zero government effectively removes the enforcement that prevents unfair competition. And so, you know, both are wrong, but both are understandable because the current system, which skews towards that more. Right. Small government, we're going to, you know, to quota grow. Grover Norquist in the United States. Right. We focused on getting government down to the size that we can strangle it and drown it in the bathtub. Right. Well, who can actually do that? Can you as an individual? No. Can you as the CEO of Google? Possibly.

B (34:09)

But I guess the language of revolution is a little bit more sexy than the language of attacking monopolies and reforming the system.

A (34:19)

Oh, absolutely. Revolutionaries are young men. My son is in the military, as you know, like, his solution would be much more likely. I'll pull out a gun and do something about it versus mine, which is, you know, hey, let's all make sure we understand the problem that we face.

B (34:36)

How would you explain that problem again just so people are listening. Okay, I'm with you now, Mike. I didn't understand at the start. What is the problem we face?

A (34:43)

The key problem that we face. Is that we have corrupted our system of capitalism to remove the enforced. That prevented effectively monopolistic behavior, right? So we are faced with fewer and fewer choices. And choices are really what matter. And I'll just give a really simple example, right? The economic definition of unemployment is unintentional leisure. Right? If I decide to work less because I want more leisure, that's a really good thing. If the choice is removed from me and I still have leisure because I've lost my job, that's a bad thing. That's a decision that is not expressing my preference. That's a decision that is expressing conditions that were imposed upon me. And so when you go to the grocery store and there's only one grocery store and they mark up raspberries to 3 to 3.99 pence or pound whatever, you know, and you don't have any choice, that's a bad thing. If I can, if I see that the price is 399@ store A and store B is offering them at 299 because they're trying to attract additional foot traffic, that's a good thing, right? That's competition. That's what I want to experience. That's how things get more innovative. Store A sees their foot traffic falling, lowers their price on raspberries to 298. Other store responds to 297. Eventually the stores turn to raspberry producers and say, hey, you guys gotta produce raspberries more cheaply because there's big demand for raspberries and we can just get them down to £2. Right? That's harnessing self interest and competition to raise outcomes for everybody.

B (36:32)

Is there. I don't know if you've looked at this. I saw this interesting tweet from Eric Weinstein recently where he was talking about AI essentially monopolizing under a few companies, the entire sucking up and monetizing the entire history of human ingenuity and discovery into a few small companies. So is there a risk that large monopolies are going to be created around these AI companies? Is that something you've looked at?

A (37:02)

It's actually the subject of an upcoming paper I have on it called the Silicon Sigmoid. Look, we're in a really remarkable time period. The forces of competition in AI have effectively pushed tools out to the general public that are fantastically powerful. My productivity is exploding because of the access of AI. Suddenly I have the equivalent of 400 junior analysts working for me when before I had one or two. Right. Those analysts are more well read than the human beings that I would have had. They are sycophantic to a fault and desperate to, to appease me and do almost anything that I want them to. By the way, that's also true if you are a, you know, managing director on Wall street and you've got a junior employee, there's nothing they want more than to kiss up to you and basically tell you how brilliant you are in the hopes to advance their own career. So somebody like myself who's been in that situation understands those junior employees can't be trusted. Right. Can I enforce that they're going to do work? Yes. Do I trust the output intuitively? No. Do I have enough domain expertise that I can look at their work product and say, that can't be right. Do it again? Yes. Right. Now those are all skills that are developed over a 30 plus year career on Wall street. But it uniquely positions me to take advantage of this revolution. The problem is that the companies themselves see this. And so there was actually a fascinating report that came out of the Riksbank at the tail end of last year that looked at the impact of AI on unemployment. And there's a natural experiment that happened in Sweden. Because they hiked rates earlier than other central banks, they experienced job loss and so they can effectively disaggregate the two signals. And what they found was that the hiking of interest rates caused the unemployment that Sweden experienced. It wasn't AI per se, but there was also something really interesting happening inside the companies themselves, which is that the value of domain expertise, that experience on the job, was rising dramatically and so fewer old people were becoming unemployed. But hiring was collapsing for young people in the United States. These statistics are actually available now. Hiring of those 55 and up is up 84% year over year. Hiring of those 29 and below is down 25% year over year. Wow. Right? The reason why is because I'm suddenly valuable not for my ability to train junior workers to replace me, but to train AI to replace me. And because I'm an older individual, my general perception is oh my gosh, if I lose my job, I may never work again. So I'm not going to demand a whole bunch of pay. I'm really thankful that they allowed me to keep my job and I'm really happy to contribute to this, this process. But once that domain specific knowledge has been transferred to the AIs, then it sits in the corporate exactly as Eric is highlighting. And it becomes a question of do they have any incentive to ever make it open source or public? Right. We Went through this on the Internet, when initially everybody had their newspaper and you had to pay for the physical newspaper, but the online was free, right? Now the physical paper is gone and we all sit there responding to somebody posting something, saying, oh, it's behind a paywall, we can't access it. Right? We have to pay suddenly to access these things. That again is, you know, I went from surplus, I was paying to get the newspaper and now I got something extra. Now I don't get the physical paper and I have to pay for the digital copy of it. Which, you know, we can debate the veracity of digital versus paper versions, but the simple reality is that surplus has been taken away from me. That is a byproduct of a loss of competition.

B (41:07)

But do you fear there'll be a distinct lack of competition within the world of AI?

A (41:15)

Well, this is the key question. And you know, I'm a little bit more sanguine about AI if it is allowed to develop along the lines that it's currently developing. And so, you know, necessity is the mother of invention. When it is very expensive to execute training, people try to figure out cheaper ways to do it. They deploy AI in a self improvement cycle. And so, you know, if I go back two years ago, one of the hypotheses that I had formulated was that AI would prove to be very much like the fiber rollout during the early stages of broadband Internet. That was also a theory of scarcity, right? People are willing to pay much more for high quality data collect connections than they are for voice. Voice is, give or take, $800 per megabit. Therefore, the opportunity from rolling out fiber is effectively unlimited. That's what created companies like Global Crossing or WorldCom was the belief that those were inherently valuable. What those assumptions failed to recognize was that there were opportunities for innovation in the compression of data and the distribution of data. And the algorithms that were actually used for disentangling that data at the end, effectively the node. All of those exploded in productivity and capability and turned that scarce fiber optic into effectively unlimited capacity that we have been harvesting ever since. My hunch is AI is going to develop the same way, right? The relative expensive, relatively expensive nature of processing and electricity and memory are creating innovations where people realize, hey, wait a second, we don't have to use GPUs for everything. We can actually substitute in CPUs for some of this. In particular, math calculations lend themselves much more naturally to CPUs than to GPUs. Right? That means that if I'm trying to do something like Finance research. A mixture of CPUs and GPUs is likely to be far more effective at meeting my objectives. And the cost is going to be a fraction of what I would have assumed if I simply projected this on a linear basis. So I think ironically, we're going to end up with an extraordinary surplus of processing capability and that's going to lead to many of these companies that are rolling out these extraordinary hyperscaler type frameworks. Some of them are going to go bankrupt, and when they go bankrupt, those assets are going to clear at debt levels or below, and all of a sudden it gets even cheaper. And then we have to ask ourselves the question of who retains the ownership? Who controls the data that's used for programming these models and the inputs. And to Eric's point, if the data is actually contained within the corporate setting as compared to an open source type framework, which is largely how it exists today in most of the archives on things like Reddit and everything else that are being referenced for these TR training, if it moves into the corporate sector, the rest of us are not going to be at a disadvantage because of computing and, and processing capability. We will be operating blind because we can't see the data. And that's that that ultimately is always what people find out, is that, you know, the computing is relatively expensive, the transmission of data is relatively expensive, the data itself is scarce.

B (44:34)

Just, just back to the war and what's happening and you talked about earlier, most people don't have $1,000 buffer and the increase in the fuel costs and the downstream cost of that for groceries, et cetera, is going to be eating into that. That's going to be politically unpopular. Going into. Very political. Yeah, yeah. And strange that Trump would make these decisions because he must have known these will eventually become politically unpopular. You would hope so that they were smart enough to realize that, but there'll obviously be a reaction. So what do you think they can do? What would you expect the Fed to do in this scenario?

A (45:15)

Well, one of the things that I think we have to be very cautious of is identifying what the Fed is capable of and what the Fed is not capable of. And so one of the things I always try to emphasize in my presentations on market structure is so much of what happens doesn't have anything to do with the Fed. Right. The Fed sets the risk free price for short interest rates in the United States, the Bank of England does the same in the UK etc. They all face constraints. If the bank of England decided not to hike interest rates, that would Pressure the pound, right. That in turn, particularly as a small island nation, no longer an empire spanning the world, you know, that creates conditions under which all the stuff that you need to import and all the, the exposures that you have in risks on that which were manifested most severely in the 1970s, you know, suddenly comes home to roost. And so the bank of England isn't all powerful, Right. The Fed is a little bit more powerful, but all it can basically do is cajole through low interest rates and increase in, in supply to address shortages. What we're trying to do, and this is where I just think we've, we've kind of smoked our own pipe a little bit too much. You know, we're basically saying the Fed is all powerful. They should be able to address inflation, they should be able to address labor markets at the same time, et cetera. And they're a little trapped because we're simultaneously seeing this decline in demand for labor tied to productivity gains like AI. And at the same time, you know, we're looking at an increase in prices that's caused by a conflict in the Middle east that the Fed can do absolutely nothing about. I mean, there's, there's literally nothing they can do. What, what are they going to do? They're going to hike interest rates. And their hope is that by hiking interest rates, that will slow aggregate demand enough that it reduces the pressure on oil. And the reason we're doing that is because high oil prices depression demand. So we're going to depress demand to depress demand. That doesn't really sound like a great solution. Right. We kind of need to recognize that the solution to this is to allow the prices to actually flow through to markets and incentivize production in alternate regions and create effectively a price umbrella that then in the UK and the United States, we say, you know what, for national security reasons, we probably should accept that we should pay a little bit more for these things to make sure that the systems are robust and we don't experience those types of shocks as we just experienced when Iran closes the Straits of Hormuz. But we're largely unwilling to do that because people want the answer now. They want the solution to the problem now. And it's one of the reasons why I emphasize education. If people really understand what we're trying to accomplish. And I would argue that what's happening in the Middle east right now is something that had to be addressed. You cannot allow a nation that sponsors terrorism to effectively control a central artery of global commerce. You can disagree with me on that, by the way. You're entitled to. But the simple reality is that we were going to face something like this eventually. We had to recognize that this is the underlying condition. If policymakers were to speak openly and honestly to the population, say, you know what, we screwed up this, these are the implications from it. Here's what we're doing to address it. My hunch is, is that most people would be a lot more patient than they currently are, but I don't think we have a lot of respect for people.

B (48:53)

Yeah, no, I, I, but I don't buy Trump as a martyr in this scenario. Who is?

A (48:58)

Oh, I don't either. I don't either. I want to be very, very clear. I don't think that Donald Trump is conducting this because he's got the long term best interests of the, you know, US or, or certainly UK population at heart. But I would push back pretty hard and say that the politicians in the UK that are effectively currying favor by saying, oh, we're going to oppose this horrible action by the United States and Israel is pretty short sighted and really basically in the interest of the French diplomatic class that wants to get together and have nice tea parties in which they discuss the great unwashed and how fortunate those great unwashed are to have them to set policy direction for them.

B (49:42)

But, but there still is a reality of this. You, you will have the midterms. Trump won't want to get eviscerated in them. So what do you think they may do? Do you think they're going to juice the market?

A (49:54)

I think that's hard. I think that's harder than people think. Right? Yeah, yeah. I think they're a little trapped. I think the Fed in particular is a little trapped because if they raise interest rates with the large quantity of debt that is outstanding, that actually is just transferring money to that already quote, unquote rich and endowed older generation and creating conditions under which supply, which creates jobs is less available to the younger generation that desperately needs those opportunities.

B (50:31)

Mike, this is so complicated.

A (50:33)

It is very complicated. I wish it were easy and I wish it were as easy as, you know, it is organized in my own head. Because the simple reality is the world is a very messy place. I can't tell you whether we're going to win versus Iran per se. Mathematically, there is no question that the United States and Israel should prevail in this conflict. But you hit on the really critical point, which is that we effectively have somewhat loose cannons in charge in many countries and we don't Know whether they're going to chicken out, are they going to try to curry favor with the population? Despite the fact that these hard choices have to be made, are we going to choose the short term solution in exchange for one more chance at the political control system? Very hard to know. These are the accidents of history.

B (51:26)

Yeah, I mean I look, look at the UK already. I mean we've already in a high tax environment, low growth environment, people are already struggling. Add to that, I mean it was £130 to fill up my car the other day. Normally it'd be just over a hundred pound. I mean it was a significantly higher. And everybody's facing that less disposable income. It's the cost of running your business is going up, the cost of importing goods has gone up, the cost of food is going up, all at a time where people can't afford it. And so what's the political response going to be? What's Rachel Reeves going to be able to do? And I imagine in most countries are facing these similar questions. Well, are they going to increase borrowing? Most likely. What happens in the next budget? Increase taxes? I mean these are already politically unpopular and if they increase borrowing, increased taxes, are we going to see higher inflation or are we going to be squashed into to a recession? Like every direction it looks bad. And so is this the time we do essentially have a, do we have a reset? Do we have a credit unwinding?

A (52:27)

Well, I think the credit unwinding is underway. And so this is the part that is, I would argue, largely dismissed. The younger generation, particularly in the United States, has largely managed to maintain its standard of living by borrowing. It has done so in areas like buy now, pay later, student loan debt, you know, forced non eviction from apartments if you didn't pay your rent for a period of time under the Biden administration, et cetera. All of those factors basically allowed the younger generation to pretend that things were okay. And now unfortunately, it's becoming very clear that things are most definitely not okay. The college, the unemployment rate for new college grads in the United States is staggering. Nearly 40, you know, 40 plus percent. That reflects the fact that those same corporations that are, you know, desperately hiring 55 year olds for that domain specific knowledge they hope to internalize are looking at the younger generation saying why? Why should we hire and retain these people? Why should we incur the liability of bringing them into our system if this solution is so nearby, you know, those, that reality is now manifesting itself in, in a soaring delinquency and Default rate for particularly young people on credit terms in a credit scoring based system. We're not going to call it a social credit system, but it is functionally a social credit system. When your non payment of bills is tracked at a nationwide level in a database, et cetera, that means they're going to have to, they're going to be forced to consume less. And that is not something that they're very excited about, understandably. And so, you know, we are, we are watching that, that emerge the same

B (54:19)

as the boomers, as you said earlier, they're going to be forced to. So this feels very recessionary then.

A (54:26)

It does feel recessionary. And in fact I would highlight that, you know, across most of the globe, most workers have experienced conditions that they would broadly describe as. Or many workers have experienced conditions that they would describe as recessionary. That further, you know, destroys trust because we see data, we see stock markets soaring for reasons that I said are largely not tied to economic performance. We see reported economic behavior. You know, the economy is doing fine. Right. And that of course then forces people to deal with the, you know, reality that they see, which is, no, people aren't doing fine. You look at young people and the levels of unemployment that are occurring for those with college graduate, college graduate degrees, historically a group that had very low unemployment metrics, suddenly they're facing employment conditions in which they are trapped with student loan debt and they don't have the prospect of earning a decent income ever. And you know, to tell them the economy is doing fine is to, you know, use the term of the 21st century that seems most appropriate for almost all interactions. It's just gaslighting. And when you get gaslit repeatedly, it destroys your faith in the dialogue. It goes back to the exact same thing that, you know, at least my sources within Washington indicate caused us to attack Iran was the recognition that this was a complete waste of time trying to have a discussion with these people. And so that's how people feel about their interaction with the news, that's how they feel about their interaction with their politicians, that's how they feel about their interactions with their bosses. And it's not a good setup.

B (56:09)

But is this just how the system works? Is this just another cycle, another repeat, we're going to have another step up in inflation, everyone's just going to get a bit poor and everything will go on as normal?

A (56:20)

I don't think that's the case. I don't think that's how the system has to work. I think that is how the system is working. For many people, yeah. And again, I would emphasize that the way our governments are set up now in the United States, this is most apparent through things like Citizens United. It's money that talks and gains access to political decisions and political emphasis, not votes. And so the individual feels distinctly disempowered in this framework. You know, you're all. You're familiar with the rat experiments of BJ Skinner and others, right? Like, the worst thing you can do to something is randomly shock it, right? And basically carry conditions under which it's like, I don't know what's going to happen next. I'm just going to sit here and huddle because I'm not sure what painful thing is going to occur to me next or why. If you create a condition that says, if I press this red button, I receive an electric shock, people just stop pressing the red button unless they're bored. Some people actually press it simply out of boredom. But if you create a condition under which the floor of the cage is randomly shocked from no apparent action or behavior of your. Of your own, you effectively start to break down and you just, you know, huddle in a corner, passively accepting the shocks.

B (57:42)

And what does the psychology of everybody.

A (57:45)

Well, the psychology has been broken down because people don't feel that they have a voice. They don't feel that they are in control. And so that in turn engenders itself in two ways. The vast majority of people basically huddle and say, you know, I really just want to be left alone. Right? And a subset of people construct all sorts of fantastical narratives for themselves about, you know, how the system works. Right. Well, you know, there's a repeated pattern of shocks that occurs every three times. There's been three shocks in a row, therefore I am free to go out and do this. That's the same thing as trying to pick out patterns in stock prices or shitcoins or meme coins or whatever, you know, or gambling on, you know, Kalshi or polymarket. People are desperately trying to build pictures of the world that explain how it works. And that's really what, you know, a return to religion in some ways is right. I have to accept that bad things happen because it is the will of an omniscient God. Wow, what a disempowering component, Right? What a disempowering belief. But that's why it works so well, because most people don't feel that they're in control.

B (58:58)

That religion component keeps coming up on the show at the moment about this time in every episode where people either told me.

A (59:08)

You got to stop the banner, Peter. It says talk religion on my screen right now. So I assume that's what you wanted me to do.

B (59:16)

No, but it does, Mike. It keeps coming up about this, like, point of the show, and people are either expressing something to me that there's a return to religion, or they're confessing their own return to religion, or they are just strengthening their bond with religion. But it's. I would say it's like 25% of the shows I make at the moment, which I find fascinating. I felt it myself, Mike.

A (59:42)

Yeah, I definitely feel it as well. You know, I would suggest that it is largely a response to a loss of control. We fantasized for the longest time, right, in a. In a, you know, somewhat libertarian bent in our society, that we were all masters of our own destiny. Right? What is the Austrian thing? We are acting men. We. We express choice. When you start to recognize that you're not actually in control, there's two approaches to it. One is to lash out, which some people are doing. And another is to try to adopt a somewhat Zen view that says, give me the power to address the things I can and the grace to deal with those that I cannot, and the wisdom to know the difference. And that, I think is really kind of what people are struggling with. I know it's part of what I struggle with because I'm interested in a lot of stuff, but there's only so many things I can influence and even fewer things I can control but in my personal expression. And that doesn't translate to religion, that just translates to patience. And maybe that's just because I'm old.

B (60:53)

Yeah, maybe. It's amazing. Okay, Mike, look, I appreciate your time. We started late. Just to finish off. How do you think this is going to all play out?

A (61:03)

My expectation. Look, first of all, understand, anytime there is a war or conflict going on, Von Claus, which calls it the fog of war, we don't really know what is going on. The way that you run simulations of war is effectively playing a game similar to Dungeons and Dragons. You get a 64 sided die. You basically determine what the hit points of all the characters are, and then you kind of roll them. Right now you do that electronically rather than physically. But, you know, there are formulas effectively that help you understand how this is likely to play out. I wrote about some of those in a piece, you know, a week ago. Those overwhelmingly point to the fact that the United States and Israel will eventually gain control of the Straits of Hormuz. The Marines that are being sent in are telling you things are going badly for the Iranians. The, the introduction of the Houthis, many people look at it as, like, you know, oh, look, you know, another enemy is joining the fight. Well, the Houthis were already involved. What they, you know, what they are clearly articulating now is we are going to do the minimum amount we possibly can to signal loyalty to the Iranians because we are desperately dependent upon them for the provision of munitions and money. But we're going to do it by effectively lobbing missiles at Jerusalem, where everybody's already lobbing missiles anyway. So it's. It's not really a big deal. But all the indications are that Iran is, is very much on the ropes. It's just the rest of the world looks at their actions and they say, you know, oh, my gosh, this is the most vicious crew we've ever seen. How can we possibly fight against them? And the answer is we keep fighting, right? And the overwhelming odds are in favor of the US resolving this and the us, Israel and other Middle Eastern neighbors of Iran taking control of the straits and the world ending up being a, quote, unquote, better place with a, you know, much smaller terrorist component in the region. But it doesn't have to work out that way. And so, you know, my expectation is it will play out that way and that we will ultimately discover that the US has far more in reserves and in the tank than people are willing to give it credit for. I'm not asserting brilliance to Donald Trump on this. In fact, I think he's one of the key liabilities in this process. But the simple reality is the math is very much in the United States favor. That makes things a little more complicated for our allies who failed to be allies in this process and basically made the most ridiculous statement of all time, which is, you broke it, you own it. And the US's reaction to that is going to be, oh, that's cool. So we now control most of the energy, either through negotiations with Russia or through our own LNG and export facilities, or, thank you very much, through the Straits of Hormuz, which we now have taken control of. It puts Europe in a really bad place. It puts the UK in a really bad place. And I would just emphasize that the UK in particular, and much of Europe has basically been living a variant of the Hemingway line from the Sun Also Rises. How did you go bankrupt? Slowly and then all at once. The UK has put up a stiff upper lip for decades by effectively trading off pieces of its former empire in exchange for relief. Right. We're going to get rid of Hong Kong, we're going to get rid of India, we're going to get rid of Diego Garcia. We're going to get rid of. We're going to get rid of. We're going to get rid of. That's selling off the family silver to pay your bills without adjusting your expenditures. And at the same time, you're now basically doing what you would expect, you know, that rich failing family to do, turning to the servants and say, you know, I'm really sorry, but I've got to cut your wages, I've got to cut your hours. Right. It's the servants who are suffering through no fault of their own. They weren't involved. And. And that's what's happening to the UK population.

B (65:10)

You're. You're rightly pessimistic about the uk I think you're a lot more optimistic about this war than I am. I fear it goes on for a long time and is quite messy. But that's just based on every war I've seen since. Since I've been an adult.

A (65:27)

Yeah. And I want to be very clear. If the US decides that it wants to get involved in nation building, I 100% agree with you. I think what is somewhat unique about the experience that we've seen in Venezuela and that we're about to see in Cuba and that we're seeing in the Middle east is the US by and large, has dispensed with nation building in part because it recognizes that its real opponent in this is not Iran, it's not Venezuela, it's China. And so we allow ourselves to get bogged down with tens of thousands of troops. Not 2,000 or 5,000 troops, but tens of thousands of troops and a continued effort to effectively massage a domestic population in the direction that we want them to go. You're right. I don't think that's what we're going to do. That's certainly not what I'm seeing for.

B (66:18)

I appreciate your time. Your knowledge and understanding the markets and how these things work is far ahead of mine. And I've got an article of yours I've got to go and read now, haven't I?

A (66:29)

Yeah, well, the last, you know, this piece and the next piece are basically, you know, on Bitcoin, which you and I have talked about in the past, and there's an entire series of pieces that are almost already written that basically talk about some of the things that I've been talking about. We are at an incredible transition point and it's really going to depend on how people and elected leaders and candidly unelected and appointed representatives and leaders steer us. If we want to go back and read the wealth of nations, and if we want to understand what capitalism is and embrace what we can control, which is our own self interest, and use those in legal frameworks to advance our own causes and in the process make everybody else wealthier, we can have a phenomenal future for us. But it's going to be. Yeah, well, the Bitcoin bear unfortunately deserves to be poked. I, as I write in the piece, I'm very glad that it worked out for you. It is unfortunately not a solution.

B (67:36)

Mike, appreciate you, man. Thank you for doing this, and I'm sure we'll catch up soon.

A (67:42)

Thank you, Peter. I appreciate the time as well.

B (67:44)

Thank you to everyone for listening. We'll see you soon.