WEBVTT - How Did We Get Here? Australia’s Economic Reality Explained by Chris Joye 0:00:00.320 --> 0:00:03.120 Chris Joy was straight to it. Mate, thanks for coming in. 0:00:03.360 --> 0:00:06.240 Thank you, Like this is a public holiday, you know, 0:00:06.240 --> 0:00:07.680 it's a big a couple of weeks coming up. It's 0:00:07.720 --> 0:00:10.280 been big days every day since March third or whatever 0:00:10.280 --> 0:00:13.119 the date was, whenever the Iran war started. People could 0:00:13.119 --> 0:00:15.440 be excused for having conniptions right now because no one 0:00:15.480 --> 0:00:18.799 knows what the fuck is going on. It's like brain damage. Shit. 0:00:19.720 --> 0:00:21.840 So what would be great to talk to you about? 0:00:21.840 --> 0:00:23.520 And last time we spoke to you and you did 0:00:23.600 --> 0:00:26.759 exceedingly well in our show. I'd like to talk to 0:00:26.800 --> 0:00:31.160 you about things like Iran, US equities, Australian equities, interest rates, 0:00:31.200 --> 0:00:35.519 of course, any recession going on here? What's going on 0:00:35.560 --> 0:00:37.240 in the world? Mate, Well, where do you want to start? 0:00:37.280 --> 0:00:39.239 Let's talk with Let's start with America. Let's start with 0:00:39.280 --> 0:00:43.879 Trump America, Iran. What's your prognosis on what's going to 0:00:43.880 --> 0:00:47.400 happen there and how will it spill back here to Australia. 0:00:48.240 --> 0:00:52.160 So I think the Iranian conflict, we had an unconventional 0:00:52.280 --> 0:00:55.800 view on that that was it would be cauterized quite quickly. 0:00:56.520 --> 0:00:59.400 So we're of the view the guts of the campaign 0:00:59.440 --> 0:01:03.320 would be done by the end of March, and we 0:01:03.400 --> 0:01:06.080 obviously got a seats far in the first week of August, 0:01:06.080 --> 0:01:10.040 and we positioned accordingly, so we bought hundreds of millions 0:01:10.040 --> 0:01:10.880 of dollars of assets. 0:01:11.240 --> 0:01:15.760 Late March, he joined about bonds now government bonds, YEP. 0:01:15.720 --> 0:01:21.480 Government bonds, bank bonds, corporate bonds. And Trump has had 0:01:21.560 --> 0:01:24.919 great success in Venezuela. I think he's going to roll 0:01:25.200 --> 0:01:28.840 the same playbook with Cuba. They had great success in 0:01:28.840 --> 0:01:31.839 Iran last year with their strikes, which were very surgical. 0:01:32.600 --> 0:01:36.400 The campaign itself has been I think astonishingly successful. They 0:01:36.440 --> 0:01:42.120 haven't lost a single person inside Iran, and they've basically 0:01:42.160 --> 0:01:46.560 achieved most of their objectives in terms of destroying most 0:01:46.600 --> 0:01:50.120 of the air Force, Navy, Army, they've killed most of 0:01:50.160 --> 0:01:53.080 the existing regime. I think Kameni and his son are 0:01:53.120 --> 0:01:57.720 both dead, and if his son's not dead, he's well incapacitated. 0:01:58.880 --> 0:02:00.880 I don't know if they will be raised. Change doesn't 0:02:00.920 --> 0:02:05.480 really look like they'll necessarily be Ragiam Change. There is 0:02:05.520 --> 0:02:09.320 this five hundred kilos of sixty percent and rich uranium 0:02:09.639 --> 0:02:13.359 sitting under the rubble in Isfahan that he needs to resolve, 0:02:13.440 --> 0:02:16.120 which is why I think he's still negotiating with him, 0:02:16.680 --> 0:02:19.960 he doesn't need the straight of hormones open necessarily. I 0:02:20.000 --> 0:02:23.280 think once they exit, which is a key waterway where 0:02:23.440 --> 0:02:27.760 roughly twenty percent of the world's oil passes through, the 0:02:27.880 --> 0:02:30.880 US is actually making out like an absolute bandit. From this. 0:02:31.720 --> 0:02:35.919 They've massively increased their crude oil exports and their a 0:02:36.000 --> 0:02:39.440 net energy exporter. But the minute he exits, the Iranians 0:02:39.520 --> 0:02:42.240 that's their life. They have to open up austrade. So 0:02:42.400 --> 0:02:46.679 once he's gone, I think that gets resolved and he 0:02:46.720 --> 0:02:49.640 doesn't need a cease far agreement. I think the midterm 0:02:49.680 --> 0:02:52.040 elections are a key binding constraint, which is why we 0:02:52.040 --> 0:02:54.880 were confident the guts of the campaign would be done 0:02:54.880 --> 0:02:58.960 in March, and he's not expected to do particularly well, 0:02:59.000 --> 0:03:04.560 but more generally, has had some interesting results. If you 0:03:04.560 --> 0:03:07.720 look at illegal border crossings in the US down ninety 0:03:07.720 --> 0:03:11.760 five percent, so he has shut those borders. He as 0:03:11.800 --> 0:03:15.320 a consequence, US population growth is the lowest in history, 0:03:15.480 --> 0:03:19.760 which is interesting for inflation. He's slash taxes. He's paid 0:03:19.840 --> 0:03:22.760 for the four trillion of tax cuts in this one 0:03:22.760 --> 0:03:25.480 big beautiful Bill act with the tariffs, which has been 0:03:25.480 --> 0:03:31.720 a bit of a genius move. He has coalesced the 0:03:31.760 --> 0:03:34.360 mother of all cap X booms, about a trillion dollars 0:03:34.400 --> 0:03:38.800 the US a year via AI and the tech oligarchy, 0:03:38.840 --> 0:03:40.680 the tech leadership in the US, which used to be 0:03:41.000 --> 0:03:46.200 disposed to the Democrats, has really galvanized behind him. He 0:03:46.280 --> 0:03:49.840 is reasserting US I think, geostrategic promise. There's this no 0:03:49.920 --> 0:03:52.760 doubt about that. They are now the dominant global hedgemon 0:03:54.200 --> 0:03:57.120 and having their way with the world, you know, whether 0:03:57.120 --> 0:03:59.880 you like it or not. And I think he's re 0:04:00.040 --> 0:04:06.160 asserting US economic exceptionalism because the US is unambiguously by 0:04:06.200 --> 0:04:09.920 far the biggest beneficiary of all the AI innovation research 0:04:09.960 --> 0:04:13.240 and development, all the AI spending. I mean, they're just 0:04:13.360 --> 0:04:17.360 killing it in AI. So having said that, you know, 0:04:17.400 --> 0:04:21.240 he's super polarizing, obviously, but we are seeing a secular 0:04:21.279 --> 0:04:24.560 global swing in the political pendulum to the right, and 0:04:24.640 --> 0:04:26.880 you've see it everywhere here in Australia with one nation 0:04:27.160 --> 0:04:29.839 is the UK with the reform Europe in Europe yep, 0:04:30.480 --> 0:04:36.360 and you know South America and Argentina. So it's fascinating, mate, 0:04:36.400 --> 0:04:38.400 and what that means for Australia as well, Like if 0:04:38.440 --> 0:04:42.240 we were to ever get Prime Minister Pauline Hanson which 0:04:42.240 --> 0:04:45.400 is an interesting conception. I mean, obviously she'd have to go. 0:04:45.520 --> 0:04:46.120 Lower house here. 0:04:46.200 --> 0:04:50.080 Yeah, but yeah, it's fascinating the. 0:04:50.040 --> 0:04:54.000 US stock market, it's sort of traveling at all time 0:04:54.080 --> 0:04:57.680 highs are close to there is an inflation. There is 0:04:57.720 --> 0:05:01.520 inflation in the US. Yeah. The the USAID has not 0:05:01.640 --> 0:05:05.160 responded to that either with interest rates. In fact, Trump's 0:05:05.200 --> 0:05:06.839 sort of trying to tell them to push them put 0:05:06.839 --> 0:05:09.200 the rates down or continue to put the rates down. 0:05:09.360 --> 0:05:11.560 How is how is the US traveling so well if 0:05:11.560 --> 0:05:14.840 they don't have new people coming into the town and 0:05:14.920 --> 0:05:18.920 starting to spend money. Yes, as an experiment in relation to. 0:05:18.839 --> 0:05:21.240 The US equity market, and this is the great conundrum 0:05:21.240 --> 0:05:23.800 of our time because you've got equities, as you say, 0:05:23.920 --> 0:05:28.279 at all time highs, and paradoxically, you've got the FED 0:05:28.760 --> 0:05:32.640 price for interest rate cuts despite the fact that core 0:05:32.680 --> 0:05:36.240 inflation in the US is running more than fifty percent 0:05:36.320 --> 0:05:39.120 above the fed's target. And for markets guys like US, 0:05:39.160 --> 0:05:42.080 this is just like I think, a not many people 0:05:42.120 --> 0:05:44.159 are actually talking about it would be it's kind of 0:05:44.160 --> 0:05:47.840 astonishing for me. So US core inflation. The FED has 0:05:47.880 --> 0:05:51.640 a particular measure called PCEE that they focus on slightly 0:05:51.680 --> 0:05:54.360 technical but that's been running at three point four percent 0:05:54.360 --> 0:05:57.159 anualized last six months, and that's way above what number, 0:05:57.320 --> 0:06:00.080 the two percent target? Yeah, they target two percent. In 0:06:00.120 --> 0:06:01.960 the last twelve months, it's been running at three percent. 0:06:02.040 --> 0:06:04.840 So US core inflation not only was a way above target, 0:06:05.200 --> 0:06:08.520 but it was accelerating. All those numbers mark pre March, 0:06:08.680 --> 0:06:12.400 pre this huge order pre now wow yeap that's before 0:06:12.440 --> 0:06:15.960 the inflation shot wow, accelerating, And so it makes no sense. 0:06:16.320 --> 0:06:18.920 Our modeling suggests the Fed needs to hike rates by 0:06:19.040 --> 0:06:24.160 fifty to sixty basis points. Trump's been very successful in 0:06:24.240 --> 0:06:27.320 Drawburny the Fed to cut rates last year. He has 0:06:27.320 --> 0:06:29.800 this beef with the current boss of the FAED, J Powell. 0:06:30.080 --> 0:06:32.919 He appointed him in his first term. He feels that 0:06:33.000 --> 0:06:35.880 Power was lobbying for the Democrats, which he was pre election, 0:06:36.520 --> 0:06:39.320 and so Trump's gone, iye for an eye Mode, wants 0:06:39.360 --> 0:06:44.000 to take him out, which he's He's definitely had his 0:06:44.080 --> 0:06:46.560 way with Power, and he's appointed this new guy called Wosh, 0:06:46.880 --> 0:06:50.880 who's been ostensibly much more dubbish fish means supportive of 0:06:50.880 --> 0:06:53.400 the notion of interest rate cuts. So markets are thinking, well, 0:06:53.839 --> 0:06:57.000 Power's getting replaced by Walsh. This is Trump's proxy Trump's 0:06:57.120 --> 0:06:59.080 Trump warts cuts, but there's no way they can cut 0:06:59.160 --> 0:07:00.960 rates in my view, because I've got this huge inflation 0:07:01.000 --> 0:07:03.440 shock and they are running more than fifty percent above 0:07:03.440 --> 0:07:05.640 target before the shock. And so what that means for 0:07:05.839 --> 0:07:09.320 listeners is that it's very difficult to rationalize the US 0:07:09.320 --> 0:07:11.040 equity evaluations. It makes no sense at all. 0:07:11.080 --> 0:07:12.760 Are we talking about a new style though, Are we 0:07:12.760 --> 0:07:14.960 talking about a new approach to this stuff? Or as? 0:07:15.200 --> 0:07:17.400 I don't think so, I mean, that would be one explanation. So, 0:07:17.640 --> 0:07:20.040 you know, one explanation would be that the Fed's going 0:07:20.080 --> 0:07:22.160 to shift the target. We've talked about this before, but 0:07:22.320 --> 0:07:24.520 there's no chance of that happening. The FED is these 0:07:24.520 --> 0:07:28.160 are very big data dependent organizations, you know, the politicians. 0:07:28.200 --> 0:07:30.880 One thing people need to understand is that whilst Trump 0:07:31.000 --> 0:07:33.520 has been criticized for attacking the FED and politicizing the FED, 0:07:33.800 --> 0:07:37.240 the reality is that every political leader appoints every central 0:07:37.240 --> 0:07:40.320 bank boss. So Charmers here sacked fille Low as he's 0:07:40.440 --> 0:07:42.720 entitled to do, and he appointed the governor of a 0:07:42.760 --> 0:07:46.120 deputy governor and seven of the nine voting Interest. 0:07:45.920 --> 0:07:49.400 Rate Committee members the whole on your board now, and 0:07:49.480 --> 0:07:50.000 what we get. 0:07:50.000 --> 0:07:52.920 We got a WHIBA, which means the IBA cut rates 0:07:52.920 --> 0:07:54.960 before the election, the cut rates three times last year 0:07:55.200 --> 0:07:57.440 and charmers. All power to him. I would have done 0:07:57.680 --> 0:08:00.000 more less the same thing, like everyone wants the two 0:08:00.080 --> 0:08:02.360 the probabilities in their favor. Trump is doing the same 0:08:02.360 --> 0:08:04.720 thing as well in the US. But you know what 0:08:04.800 --> 0:08:07.680 happens in Australia. We wake up, the RBA wakes up. 0:08:07.760 --> 0:08:11.320 Last year, they forecus two point six percent coinflation. Michelle Bullock, 0:08:11.400 --> 0:08:14.680 the boss of the RBA, the governor said we're going 0:08:14.720 --> 0:08:16.440 to hit our target. The targets two and a half percent. 0:08:17.040 --> 0:08:19.000 We said no, no, no, you're going to be running 0:08:19.000 --> 0:08:19.200 it through. 0:08:19.240 --> 0:08:20.400 You were cooler bar cool ol bar. 0:08:20.560 --> 0:08:23.280 Yeah, my guy said, that's not a snowballs chance of hell. 0:08:23.320 --> 0:08:25.480 Are hitting two point six? You'ren't run a three point 0:08:25.480 --> 0:08:27.760 three for core inflation. They printed three point four for 0:08:27.760 --> 0:08:30.720 the year, way above target. Disaster. So but to the 0:08:30.800 --> 0:08:34.120 RBA's credit, what do they do? Data dependence doy. They're like, okay, 0:08:34.120 --> 0:08:36.320 we got it wrong. Guess what We're hiking rates and 0:08:36.360 --> 0:08:39.719 they've hyped rates twice. The market's pricing in another two 0:08:39.800 --> 0:08:42.320 to three hikes. They're pricing in a four point seven 0:08:42.320 --> 0:08:45.319 percent cash rate. Now remember at the peak of the 0:08:45.400 --> 0:08:49.280 hiking cycle after the pandemic, we peaked at four point 0:08:49.320 --> 0:08:53.120 three five percent, so we're going this is absolute capitulation 0:08:53.280 --> 0:08:56.000 and humiliation. The RBA is the first central bank in 0:08:56.040 --> 0:08:58.920 the world to have cut rates in the pandemic, hiked 0:08:59.400 --> 0:09:01.800 cut again, and they had to turn around one hundred 0:09:01.840 --> 0:09:03.719 eight degrees and say we've got it totally wrong. We're 0:09:03.800 --> 0:09:05.880 hiking again. First in the world to do that, right, 0:09:06.360 --> 0:09:08.640 And now interesting series, first in the world, first in 0:09:08.640 --> 0:09:10.680 the world. Yeah, yeah, the Japanese were always hiking, so 0:09:10.679 --> 0:09:13.640 they don't count. But yeah, first in the world. The 0:09:13.679 --> 0:09:17.880 most embarrassing, you know. But in the Harber's defense, first 0:09:17.880 --> 0:09:21.480 point is when inflation smacked them in the face, they said, hey, 0:09:21.640 --> 0:09:24.280 we're going to lift rates. They didn't hesitate, so you know, 0:09:24.559 --> 0:09:26.880 all power to them. And they may lift rates again 0:09:26.920 --> 0:09:29.439 in May. They've got a meeting before the budget. But 0:09:29.480 --> 0:09:32.200 we're talking about monster short term rate hikes. We're talking 0:09:32.200 --> 0:09:36.679 about a totality of four to five hikes, a totality 0:09:36.679 --> 0:09:38.280 of more than one hundred basis points of hikes. 0:09:38.360 --> 0:09:39.560 One hundred basis points. 0:09:39.679 --> 0:09:41.600 Yeah, we've already had two and we're talking about marcuts 0:09:41.600 --> 0:09:44.400 pricing number two to three. So this and you're seeing 0:09:44.440 --> 0:09:46.120 in your business already and you were just telling me 0:09:46.160 --> 0:09:49.040 before that you know you're seeing an instantaneous radioaction to 0:09:49.880 --> 0:09:53.720 rate hikes in mortgage approval flows and mortgage settlements. So 0:09:53.880 --> 0:09:55.880 this is a game change of Frustralia. We're going to 0:09:55.880 --> 0:09:58.320 see house prices are going to fall. They're already starting 0:09:58.320 --> 0:09:59.920 to fall in Sydney and Melbourne. You saw the minute 0:09:59.920 --> 0:10:02.040 that they started talking about hike slate last year, Sydney, 0:10:02.120 --> 0:10:06.880 Melbourne got ko Wushka market rolled over. Brisbane and Perth. 0:10:06.960 --> 0:10:09.680 House prices are still as strong as ten men, but 0:10:09.760 --> 0:10:12.480 that's going to cool unambiguously. National house prices are going 0:10:12.520 --> 0:10:14.880 to fall for sure. At the start of last year 0:10:14.920 --> 0:10:17.120 everyone was like house buses were falling in and saying, oh, 0:10:17.160 --> 0:10:19.000 Hausprus are going to be weak. We thought the RBA 0:10:19.000 --> 0:10:20.720 would cut two to three times. We didn't agree with 0:10:20.840 --> 0:10:23.360 what they were doing, but I argued that house pruces 0:10:23.400 --> 0:10:25.760 would rise five to ten percent. National house bruses rose 0:10:25.840 --> 0:10:29.000 nine percent, and within that you had like killer growth 0:10:29.040 --> 0:10:33.040 in Perth twenty plus percent, Brisbane fifteen percent, Sydney and 0:10:33.080 --> 0:10:36.720 Melbourne weaker. So the RBA, I think has done the 0:10:36.760 --> 0:10:38.400 right thing. And we can talk about this later, but 0:10:38.400 --> 0:10:40.560 just come back to the original question on equities. The 0:10:40.920 --> 0:10:45.599 essential challenge here is you've got all time stock market evaluations, 0:10:45.600 --> 0:10:48.400 which is reflected in our super portfolios, and you've got 0:10:48.480 --> 0:10:51.320 the FAED price for rate cuts which makes no freaking sense. 0:10:51.320 --> 0:10:53.280 And again our models, which are very accurate, at saying 0:10:53.360 --> 0:10:54.880 the FED has to raise rates. And what does that 0:10:54.920 --> 0:10:57.719 mean for Australia in the world, Well, that means a 0:10:57.800 --> 0:11:00.560 hiking cycle. And what we're starting to see the portense 0:11:00.559 --> 0:11:04.040 of mark is a globally synchronized hiking cycle. Now, last 0:11:04.120 --> 0:11:08.960 year this serious. Yeah, So last year, no one in 0:11:09.000 --> 0:11:11.520 the world, I think, aside from US, was talking about 0:11:11.520 --> 0:11:13.120 the risk of a double hiking cycle. I told some 0:11:13.200 --> 0:11:16.560 of my class, prepare your portfolios for the specter of 0:11:16.559 --> 0:11:19.080 a second hiking cycle. Everyone thought I was crazy. The 0:11:19.200 --> 0:11:21.640 US bond market, the most powerful mark in the world, right, 0:11:21.760 --> 0:11:24.680 trillions and trillions at all. The bonds was pricing in 0:11:24.800 --> 0:11:28.079 as zero percent, zero percent chance of a rate hike 0:11:28.160 --> 0:11:31.000 in the US in twenty twenty six, twenty twenty seven, 0:11:31.320 --> 0:11:31.960 twenty twenty eight. 0:11:32.080 --> 0:11:33.600 At what point, what point was this. 0:11:33.840 --> 0:11:36.040 Mid to late last year? Right? Yeah, but think about 0:11:36.040 --> 0:11:38.920 the US economy right now. Unemployment's falling. Yep, four point 0:11:38.960 --> 0:11:41.720 three percent. Growth is strong. You asked me, why is 0:11:41.720 --> 0:11:44.760 the economy doing well despite population growth being non existent. 0:11:44.760 --> 0:11:48.120 It's a great question. US productivity growth is amongst the 0:11:48.160 --> 0:11:51.440 strongest in the world. So what that means is again jargon. 0:11:51.720 --> 0:11:56.640 Productivity growth just means that you're producing more for a 0:11:56.679 --> 0:12:01.120 given set of human and money inputs hours. Yeah, so 0:12:01.280 --> 0:12:03.920 more output per our works. So they've just been more efficient. 0:12:04.280 --> 0:12:05.559 That's all about. What was driving that now? 0:12:05.640 --> 0:12:08.200 Yeah, so you're getting a massive manufacturing boom in the US. 0:12:08.200 --> 0:12:09.920 There's another thing that we kind of been talking about 0:12:09.960 --> 0:12:12.840 for a long time because Trump's bring brought all the 0:12:12.880 --> 0:12:15.240 supply chains or a lot of the strategically important supply 0:12:15.320 --> 0:12:20.520 chains that come home. With automation, robotics and digitization, you 0:12:20.559 --> 0:12:22.800 can now make a lot of stuff cost effectively in 0:12:22.800 --> 0:12:26.320 the US. Look at SpaceX, number one producer of rockets 0:12:26.360 --> 0:12:31.280 and satellites in the world. So the US economy and 0:12:31.320 --> 0:12:34.800 I've traveled a lot many states through the US in 0:12:34.800 --> 0:12:38.400 the last six months, and the zeitgaist there mate is 0:12:38.679 --> 0:12:41.199 super positive amongst businesses. If you're a business person in 0:12:41.200 --> 0:12:43.360 the US. You feel you have the most business friendly 0:12:43.480 --> 0:12:46.160 government in the history of the US behind you. Well, 0:12:46.200 --> 0:12:49.520 remove red tape, remove reregulation, whatever you want to get done, 0:12:49.720 --> 0:12:51.720 you call Washington. They've got your back to you. An 0:12:51.720 --> 0:12:54.400 anecdote A guy I know was speaking to the CEO 0:12:54.360 --> 0:12:56.640 of Welds FAGA, one of the biggest US banks, and 0:12:56.640 --> 0:12:59.000 he said under Biden, he couldn't get a single meeting. 0:12:59.120 --> 0:13:01.240 Under Trump, He's had meetings with Trump, and Trump will 0:13:01.280 --> 0:13:02.679 randomly call them and say, hey, what do you think 0:13:02.679 --> 0:13:04.880 about this? Trump just wants to do deals. I mean, 0:13:04.880 --> 0:13:07.520 you know Trump as well as anyone, He just wants 0:13:07.520 --> 0:13:09.920 to get shit done right. And the US right now 0:13:10.040 --> 0:13:14.959 is in massive entrepreneurial innovation mode and the zeitgeist in 0:13:14.960 --> 0:13:18.319 atmospherics are super positive. I was actually on the way here, 0:13:18.320 --> 0:13:20.760 I speaking to a dude whose father was one of 0:13:20.760 --> 0:13:24.560 the most powerful unionists, like union officials in the United 0:13:24.600 --> 0:13:27.040 States right and literally on the way here, I was 0:13:27.040 --> 0:13:31.160 spinning this dude and he said, Mate, the unions are 0:13:31.200 --> 0:13:33.680 booming because there's so much frickin building in the US 0:13:33.760 --> 0:13:36.600 right now because of all the data centers and that 0:13:36.640 --> 0:13:38.840 they're constructing. So we're talking about it at trillion dollars 0:13:38.840 --> 0:13:42.200 of spending just through AI and also because they're doing 0:13:42.240 --> 0:13:44.200 a lot of infrastructure investment in the US right now. 0:13:44.880 --> 0:13:47.880 So the US is doing great, which warrants, which basically 0:13:47.920 --> 0:13:50.520 meant so strong productivity growth. You've got strong economic growth, 0:13:50.800 --> 0:13:53.840 you've got strong inflation, which is a huge problem. You've 0:13:53.880 --> 0:13:56.640 got no illegal immigrants coming in. What that means is 0:13:56.679 --> 0:14:00.120 with no population growth, no migration, there's no workers. And 0:14:00.160 --> 0:14:01.720 so what that's going to do is push up wages. 0:14:02.040 --> 0:14:04.120 So rates inevitably need to go high in the US 0:14:04.120 --> 0:14:05.959 in our of you. But the market thinks I'm totally wrong. 0:14:06.000 --> 0:14:08.640 Market's pricing and cut still because they think Trump is 0:14:08.679 --> 0:14:11.920 whipped the FED and power and they think that basically 0:14:11.960 --> 0:14:14.079 his butt boy Wash is going to rock in there 0:14:14.120 --> 0:14:16.520 and cut rates. But I think it's zero. I mean, okay, 0:14:16.520 --> 0:14:19.600 maybe there's a perfunctory cut, but I think right now 0:14:19.600 --> 0:14:22.000 he's got the perfect cover to say, hey, Trumpy, this 0:14:22.080 --> 0:14:24.400 is Wash, the new Fed boss. He's going to say, listen, 0:14:24.440 --> 0:14:27.200 you just set off this mother of or prush shocks. 0:14:27.240 --> 0:14:29.560 I've got this huge inflation crisis. I can't cut rates. 0:14:31.080 --> 0:14:34.440 But there's a real dichotomy or cognitive dissonance between market 0:14:34.440 --> 0:14:37.320 pricing for equities and what's actually happening in the economy. 0:14:37.360 --> 0:14:39.040 And I see the economy just getting stronger and strong. 0:14:39.040 --> 0:14:40.440 And we've been arguing this for a year. 0:14:40.800 --> 0:14:43.200 Because often I think to himself, particularly with the equities, 0:14:43.200 --> 0:14:45.760 I wonder to myself whether or not Trump has a 0:14:45.800 --> 0:14:47.440 team of people that go out to all the big 0:14:47.760 --> 0:14:49.920 Wall Street guys and just say, listen, this will be 0:14:49.960 --> 0:14:52.480 over soon. Don't worry. I'm going to sort this out. 0:14:52.480 --> 0:14:56.640 I think he does like media style pitching, and also 0:14:56.440 --> 0:14:59.480 to your markets, to the interest rate markets, to go 0:14:59.600 --> 0:15:01.360 and say, look, don't worry, we're going to control this. 0:15:01.600 --> 0:15:03.880 We're going to control inflation. Number two. So you know, 0:15:03.920 --> 0:15:06.560 somehow we're going to control inflation, and somehow we're going 0:15:06.600 --> 0:15:08.200 to and we're not going to have to put rates up. 0:15:08.280 --> 0:15:12.760 Yeah. So the only resolution to that challenge where you've 0:15:12.760 --> 0:15:17.840 got a combination of super strong growth and a labor 0:15:17.880 --> 0:15:21.720 market that's tightening up and no fresh labor supply, and 0:15:21.760 --> 0:15:24.400 you've got inflation that's running like more than fifty percent 0:15:24.440 --> 0:15:26.920 above target, the only way to resolve that it's through productivity, 0:15:27.400 --> 0:15:30.120 and that means again just being more efficient, more innovative, 0:15:30.240 --> 0:15:32.640 and producing a whole bunch of stuff with less inputs. 0:15:32.920 --> 0:15:34.720 So let's just talk about the US, because it's important 0:15:34.720 --> 0:15:37.240 that this piece is really important because our fed, our 0:15:37.920 --> 0:15:39.920 reserving sort of talks about this every now and then. 0:15:39.960 --> 0:15:43.760 But maybe just put in a simple context the idea 0:15:43.800 --> 0:15:49.080 that wage price pressure can be neutralized with more productivity. 0:15:49.480 --> 0:15:51.920 Just like, just open it up a little bit, because 0:15:51.960 --> 0:15:54.080 it's not something we're going to achieve here. Yeah, but 0:15:54.360 --> 0:15:57.160 certainly in the US you could believe that argument if 0:15:57.200 --> 0:15:58.840 that Trump's guys are out there talking about this. 0:15:58.960 --> 0:16:02.680 Yeah, it's pretty simple. Work harder. If the same team 0:16:03.160 --> 0:16:06.600 is working harder and producing more for the same wage bill, 0:16:06.960 --> 0:16:07.920 then you can grow faster. 0:16:08.120 --> 0:16:10.440 And if I pay you more, but youse, I'll work 0:16:10.440 --> 0:16:12.080 even harder or I'll produce more. 0:16:12.240 --> 0:16:13.000 Yeah, that's okay. 0:16:13.120 --> 0:16:17.120 That's okay because that's non inflationary, correct, because the vendor 0:16:17.200 --> 0:16:20.360 of the product doesn't need to sell for a higher 0:16:20.400 --> 0:16:22.240 price because he can just sell more of the product. 0:16:22.640 --> 0:16:26.240 Conversely, if you keep on having to hire extra people 0:16:26.320 --> 0:16:29.400 to produce the same products, the same goods and services, 0:16:29.680 --> 0:16:31.760 then that's going to drive it be cost base and 0:16:31.760 --> 0:16:33.240 that's going to be inflationaty which. 0:16:33.040 --> 0:16:34.920 Means the vendor will put have to put his price 0:16:35.000 --> 0:16:39.520 up to maintain his margin. It becomes inflationary. Do you 0:16:39.520 --> 0:16:42.400 think people are buying that argument in America that look, 0:16:42.600 --> 0:16:44.760 we will open the doors to productivity, will open the 0:16:44.760 --> 0:16:47.200 doors to let's call it AI. We'll just get rid 0:16:47.200 --> 0:16:50.400 of red tape. And if you need to produce more 0:16:50.400 --> 0:16:54.520 widgets because you got to pay more wages, if you 0:16:54.640 --> 0:16:56.240 help us with the inflationary is. 0:16:56.240 --> 0:16:59.200 Having I mean, he has absolutely destroyed red tape, is 0:16:59.680 --> 0:17:02.520 mass deregulating. So it's happening as because you just gave 0:17:02.560 --> 0:17:05.160 us an example of you and you know I'll give 0:17:05.160 --> 0:17:08.720 you another example. He's shrunk the federal workforce by three 0:17:08.920 --> 0:17:12.840 hundred and fifty five people. He has shrunk government by 0:17:12.960 --> 0:17:15.680 twelve percent? Does that by definition in a short period 0:17:15.680 --> 0:17:16.200 of time? Mate? 0:17:16.240 --> 0:17:18.280 Does that by definition? To shrink red tape or get 0:17:18.359 --> 0:17:19.520 rid of red tape by getting. 0:17:19.520 --> 0:17:21.480 Is that part of a lot of business people would say, 0:17:21.480 --> 0:17:23.720 if you slim down these government institutions that we're trying 0:17:23.720 --> 0:17:27.560 to suffocate us, it might make decision making a little easier, 0:17:27.600 --> 0:17:31.080 particularly if Washington's telling those same government institutions, hey, approved stuff, 0:17:31.160 --> 0:17:34.400 hurry out, Yeah, hurry up. So it's just unambiguous that, 0:17:34.440 --> 0:17:38.080 like the US economy has got a lot of momentum. 0:17:37.840 --> 0:17:39.760 How does this spill back to us? Does that help us? 0:17:39.880 --> 0:17:42.000 Or just staying on AI. The one of the ringles though, 0:17:42.240 --> 0:17:45.560 is that and this answer to your question about well, 0:17:46.000 --> 0:17:48.520 what's he saying. Are people buying this argument that you 0:17:48.560 --> 0:17:50.760 can grow fast without credit inflation? The problem is they 0:17:50.760 --> 0:17:53.560 do have inflation. The problem is they can't grow their 0:17:53.560 --> 0:17:55.800 workforce because population growth is the lowest in history in 0:17:55.800 --> 0:17:57.720 the US. And here's another problem, which we've argued for 0:17:57.720 --> 0:18:00.720 a year, and that is we believe, contrast to pretty 0:18:00.760 --> 0:18:02.920 much everybody else, that AI is not going to create deflation. 0:18:03.000 --> 0:18:05.959 So the traditional meme or narrative is AI is going 0:18:06.000 --> 0:18:08.280 to eviserate a big part of the workforce. You know, 0:18:08.320 --> 0:18:11.520 we're going to have drivers cars. Uber's dead, We're going 0:18:11.560 --> 0:18:15.560 to have Optimist robots produced by Tesla and rather being 0:18:15.600 --> 0:18:18.439 interviewed by Mark Boris, I could have an optimist here 0:18:18.560 --> 0:18:20.879 cost twenty thirty grand, about one percent of Marks costs, 0:18:21.280 --> 0:18:25.440 and it's free cheaply, and optimists can interview Chris Joy 0:18:25.560 --> 0:18:29.560 and and you know your business can get rid of 0:18:29.640 --> 0:18:32.720 Mark and hologramd Mark, Yeah, hologramd Mark. But there's a problem, 0:18:32.760 --> 0:18:34.520 we think with those you So the first issue is 0:18:34.520 --> 0:18:36.720 that we're not seeing any of that happen. What we're 0:18:36.720 --> 0:18:40.280 actually seeing, rather than kill jobs, AIS creating jobs. So 0:18:40.280 --> 0:18:42.200 if you look at new business openings in the US, 0:18:42.200 --> 0:18:45.119 there's another positive the US economy. They are booming and 0:18:45.119 --> 0:18:47.679 going through the roof, so new business formation. People are 0:18:47.800 --> 0:18:50.600 establishing as you'd imagine, as they did during the Internet days. 0:18:50.600 --> 0:18:54.960 They're establishing startups and companies to service the trillion dollars 0:18:55.000 --> 0:18:57.000 that's been spent on AI. Every man and their dog 0:18:57.040 --> 0:18:59.520 wants to do something in al everyone we know is 0:18:59.560 --> 0:19:05.359 trying to off the AI wave, and so it's actually 0:19:05.359 --> 0:19:09.000 creating a positive rather than negative employment effect. The second 0:19:09.040 --> 0:19:11.280 thing is you're not seeing job losses in industries people 0:19:11.359 --> 0:19:14.280 predicted you see them in for example, everyone said management 0:19:14.280 --> 0:19:17.440 consultants are completely folds. You know, they're dead as a 0:19:17.480 --> 0:19:20.680 doorn on. But the consultants have reinvented themselves as AI 0:19:20.760 --> 0:19:23.960 experts and their industry is booming. People said that radiography 0:19:23.960 --> 0:19:27.359 won't be wiped out, but radiography employment demand is growing 0:19:27.359 --> 0:19:30.080 faster than the broader labor market. So I think we 0:19:30.400 --> 0:19:33.200 are of the view that rather than being deflationary, actually 0:19:33.200 --> 0:19:38.000 ais inflationary. Why basically got these big companies like Amazon 0:19:38.160 --> 0:19:42.560 and Google and Meta and others known as hyperscolars that 0:19:42.600 --> 0:19:47.080 are spending a trillion dollars on data centers and compute 0:19:47.160 --> 0:19:50.640 to basically monetize AI. So you're spending a trillion dollars 0:19:50.680 --> 0:19:52.560 a year and these dudes are all competing for the 0:19:52.600 --> 0:19:54.560 same stuff. They're competing for the same chips, the same 0:19:54.600 --> 0:19:57.080 memory cards, the same people that work in AI. There's 0:19:57.080 --> 0:19:59.000 stories of young Ossie has been paid one hundred million 0:19:59.040 --> 0:20:01.960 bucks to go and leave HI research centers. In these firms, 0:20:02.640 --> 0:20:04.800