Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Welcome to Marin Talk to Money, the podcast in which
Speaker 2: people who know the market explain the market. I am
Speaker 2: Maren zum zep Web and this week I am speaking
Speaker 2: with well known short seller and Muddy Waters Capital founder
Speaker 2: and CEO Carson Block.
Speaker 3: Carson, Welcome to Marin Talks Money.
Speaker 4: Thank you, thanks for having me.
Speaker 2: You have been talking a lot recently about AI, and
Speaker 2: I wanted to just start on that straight away because
Speaker 2: I think the core of your view is that AI
Speaker 2: really is going to live up to everyone's expectations of
Speaker 2: it. It is going to be spectacularly successful. All the worries
Speaker 2: a lot of people have about the way that llms
Speaker 2: have hit his ceiling and development is over and we
Speaker 2: need a new path.
Speaker 3: All this kind of thing doesn't come into your view.
Speaker 2: I think that it's going to be very successful and
Speaker 2: there will be an employment apocalypse as a result.
Speaker 3: Am I over egging of you there?
Speaker 4: Let me just state that as background, I was a skeptic.
Speaker 4: So until February of this year, I refused to refer
Speaker 4: to any of the models that are out there that
Speaker 4: we're using as AI. They are large language models, and
Speaker 4: so I said, Okay, these things are not going to
Speaker 4: ever find the cure for cancer. They are not that intelligent.
Speaker 4: It's not artificial intelligence. They're lllms. Now, the current generation
Speaker 4: of LMS that was released in January early February of
Speaker 4: this year changed my mind to some extent. They're not
Speaker 4: going to independently develop the cure for cancers. They I
Speaker 4: mean I used to term them the greatest search engines
Speaker 4: ever developed, and that effectively they are. But the ability,
Speaker 4: their ability to synthesize that information and order that information,
Speaker 4: I mean there's real labor savings to be had right
Speaker 4: now in certain areas of knowledge industries I mean such
Speaker 4: as investment. I mean I immediately began using Claude to
Speaker 4: run Monte Carlo simulations that I previously would have needed
Speaker 4: somebody who was pretty young, recently graduated from a top
Speaker 4: university strong in math to run the thing that's important
Speaker 4: to really understanding or that change to change that changed
Speaker 4: my view as to what lllms are going to do
Speaker 4: to the labor market. Is that this generation was coded
Speaker 4: and tested in large part by its predecessor generation. It
Speaker 4: is coding and testing its successor generation. So you have
Speaker 4: a situation where the leading users of this generation of
Speaker 4: AI model, I mean they're in the technology industry. They
Speaker 4: are able to supplant by using AI or displace multiple
Speaker 4: members of a team. Now, vast majority of us are
Speaker 4: not that skilled yet with the current generation of model.
Speaker 4: But we extrapolate that we're going to be hitting a
Speaker 4: point in the not too distant future in which we're
Speaker 4: going to see exponential improvement in the capabilities of these models.
Speaker 4: Because they are coding and testing their successors and so
Speaker 4: on and so forth. Then you're going to see a
Speaker 4: lot more capability. You're going to see more comfort in
Speaker 4: understanding of how to use them. I think it's entirely
Speaker 4: conceivable that within a few years three five two, you
Speaker 4: could see within the US roughly fifteen percent of knowledge
Speaker 4: workers displaced from their jobs. And unlike the GFS, see
Speaker 4: it's not that you just need to grow your way
Speaker 4: out of this and reallocate human and financial capital. It's
Speaker 4: you know, those jobs are gone and the chairs, the
Speaker 4: number of chairs for humans is going to continue shrinking.
Speaker 4: So that's that's where I come out on on AI,
Speaker 4: l ll ms, you know, whatever you want to call them.
Speaker 2: Yeah, okay, so you lose a lot of jobs, but
Speaker 2: also the remaining jobs, the quality of them degrades or
Speaker 2: feels like.
Speaker 5: That's the end game, that these knowledge jobs disappear, and
Speaker 5: if people can get other jobs, they might not be
Speaker 5: of the same quality and certainly not at the same
Speaker 5: income level.
Speaker 4: I mean, a number of these jests, a number of
Speaker 4: these jobs will disappear. I'm a former attorney, I'm a
Speaker 4: professional litigant effectively now and my current you know current,
Speaker 4: you know, iteration of my career. And I got to
Speaker 4: tell you, like, at present, claud can handle a lot
Speaker 4: of tasks that I pay attorneys for. Now. We're all
Speaker 4: familiar with the hallucination it makes up, you know, A
Speaker 4: versus B. I'm not saying you remove humans entirely, but
Speaker 4: I mean, if i'm you know, when you go through discovery,
Speaker 4: you're paying some associate. I mean, depending on the law firm,
Speaker 4: you're paying some associate somewhere between. You know, for good
Speaker 4: law firm, junior associate five hundred dollars an hour to
Speaker 4: fifteen hundred dollars an hour to review email after email
Speaker 4: and text after text, and they make mistakes. Claude does
Speaker 4: it one hundred percent better. So now you have to
Speaker 4: ask you have to query it in the right way.
Speaker 4: But you know, when you're talking about I mean financial
Speaker 4: service related litigation, most of our outside attorneys, especially junior associates,
Speaker 4: don't understand what we do anyway. So I think you're
Speaker 4: much more effective having the client running these you know,
Speaker 4: running the discovery in claude and querying in querying claude
Speaker 4: at least to make your arguments and that's just saved.
Speaker 4: That will save innumerable billable hours. So that's a profession
Speaker 4: where that I think is going to shrink significantly in
Speaker 4: the coming several years. And that's a very highly paid profession.
Speaker 3: Yeah.
Speaker 2: The problem I suppose with that is that you you
Speaker 2: need to train the young people to have the more
Speaker 2: experienced people available to put in the correct queries. So
Speaker 2: once your once your pipeline of educating young people disappears
Speaker 2: or shrinks significantly, end up with a problem higher up
Speaker 2: the tree.
Speaker 4: Yeah, but that's I haven't seen businesses really think too
Speaker 4: long term about you know there, you know for a
Speaker 4: long time, right, I mean, everybody's focused on, you know,
Speaker 4: how much am I going to make this year? Maybe
Speaker 4: they're thinking next year. So and the problem, you know, look,
Speaker 4: one of the pushbacks to this idea that they're going
Speaker 4: to see the level of labor displacements that you know,
Speaker 4: I think you're going to see is that, oh, well,
Speaker 4: the technology the adoption curve. You know, technologies are never
Speaker 4: adopted at the rate at which they could theoretically be adopted.
Speaker 4: And yeah, that's true. But the thing here is that
Speaker 4: the cost savings for you know, for the the providers
Speaker 4: of these services, the cost savings are going to be
Speaker 4: so significant they're going to be able to massively underprice
Speaker 4: their competitors. So you know, it's going to be an
Speaker 4: existential problem for businesses that don't take advantage of this
Speaker 4: technology and reduce their cost and pricing structures accordingly. So
Speaker 4: that's why I think that the adoption curve argument here
Speaker 4: is not going to or counter argument is not going
Speaker 4: to win the day that there will actually be pretty
Speaker 4: steep uptake of these technologies.
Speaker 3: I mean, it hasn't happened yet.
Speaker 2: We haven't really seen this happening yet, you know, I mean,
Speaker 2: it's all still to come, right and that white collar workers,
Speaker 2: a number of white color workers in the US and
Speaker 2: in Europe is up since the first STEMP chat GPT
Speaker 2: was released and you.
Speaker 3: Know, there are more AI engineers than ever, etc. It's
Speaker 3: not yet a.
Speaker 4: Couple of things. Yeah, well, all right, So the current
Speaker 4: generation of these models, which was at least in January February,
Speaker 4: was the first This is the first generation where it's
Speaker 4: you know, I said, these are not idiotic. You know,
Speaker 4: they have flaws, they have limitations. But I mean previously, yeah,
Speaker 4: it was it was a running joke. But you know,
Speaker 4: what we extrapolated as humans is that the progress would
Speaker 4: be linear, and it's not linear. It's going to be
Speaker 4: exponential because of how they're able to develop their successors. Now,
Speaker 4: just a little pushback. I'm not normally a macro person.
Speaker 4: But one thing that you know, as far as the
Speaker 4: know the great job success in the US, a lot
Speaker 4: of that's been in healthcare. And you know, healthcare is
Speaker 4: a really interesting sector in the US because look, on
Speaker 4: one hand, okay, it's going to grow. And when you
Speaker 4: go back to two thousand, information technology and look the
Speaker 4: way that the you know, uh, you know BLS. Clayer,
Speaker 4: you know, classifies sectors as antiquated really should be updated.
Speaker 4: But information technology and telecommunications and healthcare are the only
Speaker 4: two sectors that have grown materially as a share of GDP,
Speaker 4: and healthcare has grown significantly more as a share of
Speaker 4: GDP than information technology. So, you know, is it driven
Speaker 4: by innovation some? Is it driven by demographics some, But
Speaker 4: a lot of it's driven really by the parasitic nature
Speaker 4: of this healthcare system, at least in the US that
Speaker 4: I mean, there's there's so much fraud, there's so much inefficiency.
Speaker 4: So look, if you say the US has a healthy economy,
Speaker 4: we have a healthy job market because we've added all
Speaker 4: these healthcare jobs, you know, I think that's a misinterpretation.
Speaker 4: So look, does that really go to whether AI or
Speaker 4: llms are going to make a meaningful dent in employment
Speaker 4: going forward? Now? Because as I said, we're really at
Speaker 4: that point now where you're starting to see how these
Speaker 4: can replace employees in certain situations, or at least prevent
Speaker 4: the hiring of employees, and the next generation will be
Speaker 4: even more powerful.
Speaker 2: Okay, well, well we'll wait and see what happened in
Speaker 2: five ten years if new jobs, new different types of
Speaker 2: jobs that created you know, this whole business of jobs
Speaker 2: we never thought would exist now ten years ago, job
Speaker 2: being ever thought existing this, So who knows what will
Speaker 2: happen in ten years. But let's take the base case,
Speaker 2: your base case here that fifteen percent of knowledge jobs disappear. Now,
Speaker 2: the interesting bit for the purposes of our listeners and
Speaker 2: we discuss.
Speaker 3: We are interesting podcasts, is what that does to the market.
Speaker 2: And I think that's where this gets interesting, isn't it.
Speaker 4: Yeah. And so again this has been a u turn
Speaker 4: for me because there was actually a podcast I did
Speaker 4: in January where I was talking about how we had
Speaker 4: developed this systematic momentum strategy and house at Muddy Waters,
Speaker 4: and you know, it's been compounding for us at north
Speaker 4: of seventy I mean even I think most recently about
Speaker 4: ninety percent per year. And I was completely sanguine about
Speaker 4: the outlook for the market and why. And you know,
Speaker 4: in the idea that momentum, as much as it shouldn't,
Speaker 4: you know, as much as the fact that the stock
Speaker 4: has gone up shouldn't determine that it'll continue to go on,
Speaker 4: but it does.
Speaker 2: I mean, it's a you know, momentum is one of
Speaker 2: the greatest strategies.
Speaker 4: There isn't, especially these days, and a lot of it
Speaker 4: relates to market structure. Yeah, And so this is where
Speaker 4: what I'm saying about job displacement due to AI becomes
Speaker 4: a problem. So in January, I'm completely sanguine. You know,
Speaker 4: question Carson, Well, when does you know when does it
Speaker 4: become a bad idea to invest in momentum within the
Speaker 4: S and P five hundred index when unemployment rises materially? Well,
Speaker 4: when do you see that happening? And not anytime soon? Well, okay,
Speaker 4: here's the issue. I now do see unemployment, particularly for
Speaker 4: high wage earners, rising significantly in the next several years.
Speaker 4: The problem that that creates for markets is that, especially
Speaker 4: with the S and P five hundred, so much of
Speaker 4: that is driven by flows, so especially for one K
Speaker 4: retirement plan contributions from these knowledge workers and that you know,
Speaker 4: and look when you look at the S and P
Speaker 4: five hundred index, I mean, it's it's kind of ridiculous
Speaker 4: that we use that as a proxy for the stock
Speaker 4: market because you know, generally, you know, two thirds of
Speaker 4: the stocks are underperforming the mean of the index, and
Speaker 4: the mean of the index is really driven by small
Speaker 4: number of companies that are out forming. But what has
Speaker 4: happened and so here I reference work that a friend
Speaker 4: of mine named Michael Green or Mike Green of Simplify
Speaker 4: asset management has done on passive investing, and he's been
Speaker 4: banging this strung since probably twenty nineteen or twenty twenty
Speaker 4: about how passive has warped markets. So it's created this
Speaker 4: virtuous cycle whereby money goes in from paychecks every month.
Speaker 4: And what happens is these index funds they buy stock
Speaker 4: at any price. They're completely priced and elastic. They remove
Speaker 4: supply of stock, and so for the largest names in
Speaker 4: the index or the indices, and if you look at
Speaker 4: Nasdaq one hundred, same thing. Those get the greatest share
Speaker 4: of every dollar that's allocated to the index, and so
Speaker 4: by removing supply, they create this situation in which the
Speaker 4: stocks that receive the largest allocations, the impact on their
Speaker 4: prices becomes parabolic versus linear, and that gets turbocharged with
Speaker 4: stock buybacks. So this has been great for the most part.
Speaker 4: I mean twenty twenty two, there was you know, there
Speaker 4: was like a little bump in the road, but we're
Speaker 4: well past that. So this has been fantastic for investors.
Speaker 4: But the thing is, if you have say fifteen percent
Speaker 4: of knowledge workers lose their jobs and they're not going
Speaker 4: to be able to replace that income they have credit
Speaker 4: card debt, they have mortgages, they have car loans, a
Speaker 4: student debt. This is going to massively impact the flows
Speaker 4: into the markets, and so probably the way it plays
Speaker 4: out on a micro level at first is a person
Speaker 4: who's lost his or her job will sell the taxable investments.
Speaker 4: A lot of the taxable investments are in the largest
Speaker 4: names in the S and P five hundred index, so
Speaker 4: you get selling there, but you've already had a situation
Speaker 4: where that laid off person is no longer making the
Speaker 4: contributions to the four one K plan. So you get
Speaker 4: to a point where those contributions go net zero, especially
Speaker 4: because from a demographic perspective, you do have people now
Speaker 4: who are also redeeming just because they've retired. And then
Speaker 4: you get to a point where on a net basis,
Speaker 4: the flows go negative as people have to sell you
Speaker 4: redeem their retirement accounts because they've been unable to replace
Speaker 4: their income and the issue. So, while passive has been
Speaker 4: this very virtuous cycle on the way up, it's built
Speaker 4: this significant fragility into the market, and so when those
Speaker 4: flows go in reverse, there's really not nearly enough active
Speaker 4: management out there to catch the following knives, especially because
Speaker 4: if you were looking at the valuations of some of
Speaker 4: the largest companies in the indices. In trying to look
Speaker 4: at them on a purely fundamental basis, it's hard to
Speaker 4: justify the evaluations in some cases. So that's where you get,
Speaker 4: in my view, the GFC type events. It has to
Speaker 4: do with the fragility that's been created in the equity
Speaker 4: markets through passive investing. So if you really want to
Speaker 4: understand my view, it's my own view on AI displacing
Speaker 4: labor layered on top of Mike Green's work on passive
Speaker 4: investing and in the vulnerabilities that creates in the equity
Speaker 4: markets and.
Speaker 2: That reduction in demand frequity, so that reduction and flow.
Speaker 2: It coincides with the period an unusual period over the
Speaker 2: last decade of an increase in the supply of equities
Speaker 2: as well, because we have these big IPOs coming through
Speaker 2: at the same time.
Speaker 3: It SpaceX and then we'll get open eye, we'll get
Speaker 3: down tropic.
Speaker 2: And of course on paper, we're thrilled by this right
Speaker 2: because it shows the stock market doing and the stock
Speaker 2: market is supposed to do, which is be a place
Speaker 2: where people putting new money into growth companies as opposed
Speaker 2: to an investor extracturn machine, which has effectively being for
Speaker 2: the last decade, the most of the money has been
Speaker 2: coming out in buybacks, dividends, etc. So you get at
Speaker 2: the same time as if you're right, of course, that
Speaker 2: the flows for the supply is coming up at the
Speaker 2: same time right now.
Speaker 4: The other question there, and I don't I don't have
Speaker 4: a view on this. You know, at least to the
Speaker 4: extent that it remains independent of labor displacement. But to
Speaker 4: what extent are the hyper scalers going to be going
Speaker 4: to continue to be able to issue credit to fund
Speaker 4: their AI buildouts because they need to issue that credit
Speaker 4: in order to maintain the stock buybacks. So if they can't,
Speaker 4: if they can't issue paper at yields they consider to
Speaker 4: be attractive, then they're going to have to divert resources
Speaker 4: that would be used for share buybacks to scaling out
Speaker 4: data centers, et cetera. So you could start to see,
Speaker 4: you know, to me, either scenario is equally probable going
Speaker 4: into when we have this, you know, when these streams
Speaker 4: start really showing up in the labor markets and the
Speaker 4: flows start to go toward net zero, can have this situation,
Speaker 4: you know, can like I said, equally probable to me
Speaker 4: at this point where companies are still engaging in share buybacks,
Speaker 4: so maybe it hits you know, this impact hits more suddenly,
Speaker 4: or companies have to taper the share buybacks because they're
Speaker 4: not able to fund in the credit markets, and so
Speaker 4: you start to see you start to see less upward
Speaker 4: pressure on stock prices as a result of that. Anyway,
Speaker 4: So either scenario, you know, at this point, I'm coin
Speaker 4: flip on those two.
Speaker 2: Yeah, and on the demographics, I mean, this was a
Speaker 2: scenario that everyone expected to happen anyway, just a little
Speaker 2: further out, as the baby boomers work their way through
Speaker 2: the system and start to sell out fund their retirements,
Speaker 2: we would have expected to see those flows reversed. Anyway,
Speaker 2: This just brings that forward by well, probably a decade.
Speaker 4: Yeah, yeah, I mean, look, I think you know, my
Speaker 4: impression of that question has been that there are people
Speaker 4: will argue, well, it's not going to be that bad
Speaker 4: because you're gonna have a great wealth transfer and you know, YadA, YadA, YadA,
Speaker 4: and you know money will be reallocated from credit to
Speaker 4: equities and younger. But you know, no view in a
Speaker 4: world that doesn't go through an AI disruption. No view
Speaker 4: on the timing of that. But but yeah, as I said,
Speaker 4: I think that we're you know, I think that question
Speaker 4: is not really going to be that relevant compared to
Speaker 4: what's okay.
Speaker 2: So let's say we have a GFC style disaster in
Speaker 2: the markets. It's quick, it's huge, very unpleasant. How do
Speaker 2: the play out after that? And we're very used to thinking, well,
Speaker 2: we don't really worry about this stuff over the long time.
Speaker 3: We just hang on because there'll be a government response.
Speaker 2: There'll be a fiscal response or a monetary response, so
Speaker 2: we'll make everything absolutely fine.
Speaker 4: Yeah, no, I'm look, there will be all of that.
Speaker 4: I mean. The one thing is the playbooks are now
Speaker 4: very well developed for you know, unlike the GFC, where
Speaker 4: a lot of the responses theoretical it took a long
Speaker 4: time to implement. Governments had to get authorities to do it.
Speaker 4: The authorities exist, they've been expanded during COVID. So from
Speaker 4: a monetary perspective that you know, I mean rates, you know,
Speaker 4: real rates will go zero or negative you know over well,
Speaker 4: the interesting thing those AI is going to be very
Speaker 4: is going to be deflationary. So maybe maybe it's a
Speaker 4: little bit stepping on a land mine if I talk
Speaker 4: about real rates, but nominal rates you know, will be
Speaker 4: I mean, you know, well below on the short you know,
Speaker 4: short end well below one hundred basis points, I mean,
Speaker 4: probably zero to ten BIPs, you know, very quickly. And
Speaker 4: there's going to be a lot of the going to
Speaker 4: Governments are going to have to buy. The central banks
Speaker 4: are going to have to buy you know, the entire
Speaker 4: curve basically to keep it really you know, to keep
Speaker 4: rates you know, long end rates low. Now there will
Speaker 4: be fiscal issues. I think fiscal is going to be
Speaker 4: a lot more interesting because the monetary playbook is well established.
Speaker 4: You know, the United States has the blessing of being
Speaker 4: able to borrow in the currency that it prints, and
Speaker 4: so I think, you know, q E forever is the
Speaker 4: future here effectively, but it'll be you know, one of
Speaker 4: the third order effects. And where I think it's also
Speaker 4: interesting to look at some trades setting up will be
Speaker 4: what happens in the US to state in local governments
Speaker 4: you know there, I mean, especially if you look at
Speaker 4: you know, the states that are going to have their
Speaker 4: tax bases the hardest hit are the ones that are
Speaker 4: the most prolific issuers of debt. So California, California is
Speaker 4: I mean, it's because so much of its tax base
Speaker 4: comes from income taxes, any individual income taxes. Anyway, this
Speaker 4: is going to be you know, like Armygeddon for California.
Speaker 4: From a fiscal perspective, so how quickly does the federal
Speaker 4: government step in in bailac California, Illinois, New York, New Jersey, Connecticut.
Speaker 4: Now it kind of depends on who. I mean a
Speaker 4: big part depends on who's in the White House and
Speaker 4: which party controls Congress. But you know, the from the
Speaker 4: fiscal perspective, you know, I think the US will be
Speaker 4: okay because of the potential for q E. You know,
Speaker 4: the Eurozone countries that's going to be very tough, you know,
Speaker 4: but but that's where but you know, I so so look,
Speaker 4: I think we go through, we go we know what's
Speaker 4: going to happen in terms of on the monetary side,
Speaker 4: and they will have to try to reinflate assts and
Speaker 4: that will eventually happen. Assets will be you know, reinflated.
Speaker 4: But this will this will reorder society significantly because I mean,
Speaker 4: the the politics, the amount of turbulence that we're going
Speaker 4: to have to go through, you know, to really figure
Speaker 4: out how we how we structure societies. It's going to
Speaker 4: be significant. And you know, look, I do think on
Speaker 4: the on the back end of this, on the back
Speaker 4: end of a lot of turbulence, and I don't you know,
Speaker 4: this is a number of years to get there. The
Speaker 4: good news is, you know, I think I think most
Speaker 4: people will be will live reasonably comfortable lives. Okay, I
Speaker 4: think you know, the you know, a lot of the
Speaker 4: private sector will be there to serve the government. Governments
Speaker 4: will be massive employers, massive consumers of highly inefficient products
Speaker 4: and services from the private sector. So I think a
Speaker 4: lot of your private sector ends up looking like Chinese
Speaker 4: state owned enterprises. Then there's another part of the private
Speaker 4: sector that focuses on the private sector. It's gonna be
Speaker 4: the leanest, most efficient companies ever. But you know, I
Speaker 4: think a lot of people, you know, will be working.
Speaker 4: Your middle class people be working two or three days
Speaker 4: a week. They'll have disposable income. This will be great
Speaker 4: for small businesses, you know, leisure businesses, travel, et cetera.
Speaker 4: You know, I think there will be you know that
Speaker 4: our underclass will receive you know, universal basic income, you know,
Speaker 4: but that's and they won't have to work at all.
Speaker 4: And I hope there will still be room for people
Speaker 4: to achieve if they really want to. I don't. I
Speaker 4: don't know, but I've I've got a couple of kids,
Speaker 4: and I'm raising them with that expectation that you know,
Speaker 4: if they if they're willing to, you know, if they're
Speaker 4: willing to put in the work and they have the
Speaker 4: ambition that they can achieve more than you know, just
Speaker 4: owning a cafe. But you know, I think it'll be
Speaker 4: great for cafe owners. And in a way, it's interesting
Speaker 4: because you know, certainly when it comes to I mean scale,
Speaker 4: you know, I would think will remain everything. But in
Speaker 4: so many industries, this is going to be anti oligopolistic
Speaker 4: ye this technology, So that would be a nice you know,
Speaker 4: if I'm correct about that, that'll be a nice outcome
Speaker 4: on the back end where small businesses don't have so
Speaker 4: much of a cost disadvantage to large businesses.
Speaker 3: It sounds that you're expecting a massive expansion of the state.
Speaker 3: That's the net result of this.
Speaker 2: Every crisis in the West brings us closer and closer
Speaker 2: to a state that takes up over fifty percent of GDP.
Speaker 4: Yeah, I don't see an alternative to that, you know,
Speaker 4: I mean, otherwise we'll just have tremendous societal instability.
Speaker 2: Okay, I was about to say to you, what is
Speaker 2: the alternative? What are you alternative view? What are the
Speaker 2: risks to your view?
Speaker 3: And it sounds like the answer is very unpleasant instability.
Speaker 4: Well, I guess you know which view. I mean, are
Speaker 4: you challenging that AI will displace as many people as quickly?
Speaker 4: I mean you alluded to one of the counter arguments
Speaker 4: that Jevin's paradox right, like new technologies always create new jobs.
Speaker 4: I don't think this folds this time because the rate
Speaker 4: of change is going to be so for a long time.
Speaker 4: I'm talking fifteen years. Maybe this is just because I'm
Speaker 4: really cynical, but I've been fond of saying that humans
Speaker 4: are able to innovate and invent technologies faster than we're
Speaker 4: able to adapt to them. You know, whether these are
Speaker 4: financial technologies such as financial derivatives or deep sea drilling technologies,
Speaker 4: you name it. So we invent and innovate. I think
Speaker 4: we understand the risks and how to manage them. Find
Speaker 4: out we don't. We have some kind of calamity. But
Speaker 4: on the back end we say, okay, now we've learned.
Speaker 4: But the problem is when you have these you know,
Speaker 4: when you have these machines building the next generation of machines,
Speaker 4: the rate of change is going to be and it's
Speaker 4: it's going to continue. The rate of change will increase
Speaker 4: in terms of the improvement of capability. We are, in
Speaker 4: my view, just not going to be able to adapt
Speaker 4: ourselves quickly enough to to catch up. So there will
Speaker 4: be new jobs created, and there will be people, you know,
Speaker 4: I think a small number of people who are at
Speaker 4: the forefront of understanding how to use these technologies, and
Speaker 4: you know, they'll be okay, But you know, for the
Speaker 4: rest of us, I you know, I just don't think
Speaker 4: that's going to be the case. So I don't think
Speaker 4: jevins paradox. I mean, look, I've kind of made a
Speaker 4: career out of laughing at it's different this time anyways,
Speaker 4: it never has been, but I think it's different this
Speaker 4: time different.
Speaker 2: Okay, So how does the ordinary investor prepare for this?
Speaker 2: So honestners are a lot of ordinary people, ordinary investment
Speaker 2: portfolios listening to you talking and going, well, what an
Speaker 2: earth do I do about this.
Speaker 3: I don't know what the timeframe is.
Speaker 2: I don't know whether this is a two year thing
Speaker 2: or a three year thing, or a five year thing.
Speaker 3: Maybe it's a ten year thing.
Speaker 2: I mean, who knows, who knows, but it sounds like
Speaker 2: it's something I really need to be ready for.
Speaker 3: What do I do.
Speaker 4: Well? I mean right now, I think you keep doing
Speaker 4: what you've been doing, right I mean so, I mean
Speaker 4: one of the best trades has just been to be
Speaker 4: long the index, you know, in the S and P
Speaker 4: five hundred. But you have to be very vigilant and
Speaker 4: look at what's happening to unemployment, look at what's happening
Speaker 4: to flows, and at some point the only place to
Speaker 4: you know, to hang out is is cash. I mean
Speaker 4: maybe gold. You know, I don't have a view in
Speaker 4: dollar terms whether that goes up or down. You know,
Speaker 4: I think it's you know, it's going to hold its
Speaker 4: value relative to you know, other assets much you know,
Speaker 4: much better. But but you know, I think the you know,
Speaker 4: to me, that's you know, that's really what you just
Speaker 4: need to be vigilant. You need to expect that this
Speaker 4: is coming. And you know, right now you could argue
Speaker 4: that we're seeing signal. I mean, you've had a number
Speaker 4: of companies announced layoffs and you know, some of it's
Speaker 4: due to AI investment, but others are saying efficiencies from AI,
Speaker 4: you know. But I don't know how much signal versus
Speaker 4: noise there is right now in these layoff announcements. But
Speaker 4: you know, at some point, I mean, if this keeps up,
Speaker 4: like you know, fifty million ele US fans can't be wrong, right,
Speaker 4: So that's you know, that's something to pay attention to.
Speaker 4: I mean, if you keep seeing layoffs and you keep
Speaker 4: hearing it's because we're automating and becoming more efficient, you know,
Speaker 4: at some point it's going to be meaningful. And look,
Speaker 4: maybe it all maybe there already is signal here. Again,
Speaker 4: I don't you know, I don't know, but but yeah,
Speaker 4: I think you just you have to watch. You have
Speaker 4: to watch employment, unemployment and flows very very closely. And
Speaker 4: the you know, the irony of this whole thing, I
Speaker 4: mean of my thesis, you know, should it play out,
Speaker 4: you know, again, the AI thesis, This is mine the
Speaker 4: market fragility, this is Mike Green convincing me. But the
Speaker 4: companies whose stocks have benefited the most on the way
Speaker 4: up here are the ones that have the furthest to
Speaker 4: fall just because of that dynamic, that reversal and flows.
Speaker 4: Now they were in terms of businesses, they will obviously
Speaker 4: be left standing and somewhat thriving, you know, in the
Speaker 4: wake of all this. And look, one thing we didn't
Speaker 4: touch on, but I think it's implied obviously when you
Speaker 4: see and if you see that kind of mass high
Speaker 4: end labor displacement that I'm talking about, it's not just
Speaker 4: an issue of flows. I mean, you have an issue
Speaker 4: with aggregate demand, and so that's going to you know,
Speaker 4: so we're talking recession anyway, that'll that will certainly impact
Speaker 4: financial results. But in the aftermath, these businesses will you know,
Speaker 4: will still be standing. But you know, I think the
Speaker 4: way like you want to you want to be able
Speaker 4: to protect yourself on the way down, probably cash. You know,
Speaker 4: we've set up a book in you know, in in
Speaker 4: our you know, we've set up a strategy, uh that's
Speaker 4: looking to protect principle on the way down. So I
Speaker 4: think a lot of how if you were going to
Speaker 4: try to actually make money on this, I do think
Speaker 4: a lot of the action isn't credit. And one of
Speaker 4: the things is that you know, that's interesting about the
Speaker 4: post GFC environment is that imply volatility and credit is
Speaker 4: so low because you have these structural bids for credit
Speaker 4: that are also part of the retirement you know, flow
Speaker 4: pick story. But you know, if you get and if
Speaker 4: you get this type of scenario playing out, I mean,
Speaker 4: vall is going to blow out on credit and obviously
Speaker 4: you're going to have a lot of credit events, you know,
Speaker 4: not I mean corporate as well as I'm saying government
Speaker 4: court credit events. So there is money to be made
Speaker 4: on the way down here.
Speaker 2: I don't think it's quite hard for retail investad for
Speaker 2: retail the average access. So for the average investors, like
Speaker 2: what you're saying is you just keep buying and Julius,
Speaker 2: the unemployment you really begin to see these announcements wraps
Speaker 2: it up. Then you get out competing, you go into cash,
Speaker 2: and then you wait and then.
Speaker 4: Right and then if you really really want to make
Speaker 4: the multi generational money we do along in the aftermath.
Speaker 3: You go along on. But how do you know when
Speaker 3: to buy and the aftermath?
Speaker 2: Do you wait until you start seeing the policy anno
Speaker 2: announcements from the state. You wait until you see QI
Speaker 2: forever announced again, you wait until.
Speaker 4: Yeah. I mean, look, I so for UK market, it's
Speaker 4: hard for me to speak to that, okay, because I think,
Speaker 4: you know, the the US is going to be you know,
Speaker 4: I think we're singularly blessed in this dystopian world that
Speaker 4: we're you know, we're heading toward. So from from a
Speaker 4: US investor perspective, you know that assets will be reinflated.
Speaker 4: We have no choice. I mean, all all of our economies, right,
Speaker 4: all the Western all the developed economies have so much
Speaker 4: debt in them that you absolutely the playbook is to
Speaker 4: absolutely reinflate assets. You know, in the US. I think
Speaker 4: that's you know, I think you know, we've seen that
Speaker 4: accomplished a number of times. They will do that again.
Speaker 4: So yeah, I mean, if you wait for the first announcements, like,
Speaker 4: you're not going to miss the opportunity. You know, if
Speaker 4: you if you buy after you know, the FED analysis
Speaker 4: is that they've cut rates to know ten basis points
Speaker 4: and the you know and the FED funds rate, I mean,
Speaker 4: you're not you know, you can you can wait until
Speaker 4: after that the buy You'll be fine. But look, it
Speaker 4: could it could take a while, I mean, but eventually,
Speaker 4: you know, the reinflation of assets will happen, you know,
Speaker 4: at least in relative terms.
Speaker 3: And do you think this is going to kill the
Speaker 3: passive industry?
Speaker 2: So when we're buying back in, you know, we're sitting
Speaker 2: in cash well waiting and we see whatever signal says
Speaker 2: we think gives us not by signal, do we then
Speaker 2: are we going to go back into ETFs or is
Speaker 2: this the return of the active manager?
Speaker 4: Yeah, that's that's an interesting question. Look, passive will be
Speaker 4: to blame for a lot of the market calamity, but
Speaker 4: how much you know, if we were talking about a
Speaker 4: financial crisis in isolation, then yeah, obviously you know, all
Speaker 4: legislative guns would be focused on the passive investing industry.
Speaker 4: But we're going to have bigger fish to fry because
Speaker 4: we're going to be wrestling with this these existential questions
Speaker 4: about humanity. What is our role in a world that's
Speaker 4: you know, where our work is increasing increasingly being performed
Speaker 4: by machines. How do we solve that? So? You know, again,
Speaker 4: so I think so given that, we're going to have
Speaker 4: some much bigger questions to answer, and they're not totally unrelated,
Speaker 4: but I think most the intention will be on that.
Speaker 4: But yeah, look passive Mike. Mike has been warning, he's
Speaker 4: been lecturing policy makers, you know, like you know, shouting
Speaker 4: from the mountaintops for years about what Passive is doing.
Speaker 4: And I think the response that he's gotten at the
Speaker 4: policy level is like, Wow, that's really interesting. But you know,
Speaker 4: there's zero political will to do anything about that right now.
Speaker 4: So you know, we just have to wait and you know,
Speaker 4: if your crisis ever materializes, then that's when we'll do something.
Speaker 4: So I think there's awareness of the problem, but it's
Speaker 4: just a political will problem, you know, Like right now,
Speaker 4: you'd be taking away the you know, the punch bowl
Speaker 4: in the middle of the party, and that's just not
Speaker 4: that's just not how we run things, you know, post
Speaker 4: GFC anymore, not at all.
Speaker 3: Yeah, ask you this.
Speaker 2: You're obviously thinking about lots of existential things at the moment,
Speaker 2: as am I.
Speaker 3: What are your kids going to study at college?
Speaker 4: Yeah, it's a good one. Look, I do believe that
Speaker 4: math and so my kids are not near college age,
Speaker 4: I mean twelve and eight. I'm I mean math and science.
Speaker 4: I'm very big on that regardless, Like, even though I
Speaker 4: know these things will be able to do all of
Speaker 4: your math, I think you still need to understand how
Speaker 4: to do math. So if you what the end goal here,
Speaker 4: as I put it to them, is, look, you want
Speaker 4: to be in a position to use these technologies as
Speaker 4: a tool, not to have to compete with them. So
Speaker 4: I do think that understanding the underlying functions that they
Speaker 4: are performing will give somewhat of an edge the math
Speaker 4: and science and look reading, So what do you actually study.
Speaker 4: The world is going to need salespeople.
Speaker 3: It's going to be communicated.
Speaker 4: Yeah, so I've got one kid who'd be a great
Speaker 4: salesperson and the other who probably won't wouldn't be. But
Speaker 4: you know, there can be lots of jobs in government
Speaker 4: as well, so I don't know, maybe for maybe foreign relations,
Speaker 4: and you can be a diplomat, you know, trying to
Speaker 4: control the last, you know, vestiges of what humans actually
Speaker 4: can control.
Speaker 3: All right, let me take you back to gold.
Speaker 2: Briefly you said you thought that might hold hold its
Speaker 2: value relative to other assets. Anyway, what about bitcoins? Oh
Speaker 2: my god, on ever, we always asked about golden bitcoin.
Speaker 3: That's what we do in this podcast.
Speaker 4: The same one exists and one doesn't.
Speaker 3: That not the same, They're completely different.
Speaker 2: But for me, you know, we go right back to
Speaker 2: the early days when people used to tell us that,
Speaker 2: you know, bitcoin with digital gold, and that made us
Speaker 2: lave and we would call gold physical bitcoin just for
Speaker 2: the giggles, right, and we'd ask everybody at the end
Speaker 2: of each podcast, if I gave you a choice of
Speaker 2: holding bitcoin of gold for a decade, which one would
Speaker 2: you take?
Speaker 4: Yeah? Gold? I mean, look, okay, so bitcoin. When my
Speaker 4: when my older kid was five and he asked me, oh,
Speaker 4: what's bitcoin? I said, listen, crypto bitcoin. These are currencies
Speaker 4: without countries. Okay, they don't matter. I mean, you know
Speaker 4: that there is an intrinsic value to them, which is
Speaker 4: just the gas fees as they call it. But these
Speaker 4: things trade obviously well above intrinsic I've looked at bitcoin
Speaker 4: at times in the past as a barometer of speculative
Speaker 4: acts at excess in the markets as well as you know,
Speaker 4: I think there's I think there's a recursive effect as
Speaker 4: well on speculative activity, and more valuable bitcoin becomes, so on,
Speaker 4: you know, the more froth there is in some other markets.
Speaker 4: So barometer as well as cause. But yeah, look, I
Speaker 4: understand the I think it was Warren Buffett who said
Speaker 4: that if aliens observed our behavior toward gold, pulling it
Speaker 4: out of the ground, you know, treating it like it
Speaker 4: has some tremendous value, they'd be completely puzzled. Yeah, I
Speaker 4: mean I understand that. But the thing is, I think
Speaker 4: it's so deeply embedded. You know, for millennia of human cultures,
Speaker 4: you know, every culture, gold wasn't the store of value.
Speaker 4: Gold was value itself. Could cryptocurrency supplant that or join
Speaker 4: that in status? I'm not an anthropologist, I'm not a
Speaker 4: certainly not a futurist anthropologist. So take my view with
Speaker 4: a great of salt. But I don't I don't think so.
Speaker 4: I mean, gold is pretty, you can touch it, it
Speaker 4: has weight, It's not an intangible asset. Yeah, exactly.
Speaker 2: So I can escape with bitcoin too, And I'm like, well, yeah,
Speaker 2: but're just still going to need electricity if you want
Speaker 2: to escape with your base point, still.
Speaker 4: Still gonna need Look, I mean, in a really, really,
Speaker 4: really bad situation, the ultimate store value is cans of tuna.
Speaker 4: So you know, I'd rather have cans of tuna stockpile
Speaker 4: than a USB drive at bitcoin.
Speaker 2: Okay, Well, in when the great crisis comes, can I
Speaker 2: swap some of my gold for some of your tuna.
Speaker 4: Can you eat gold? I don't know, you're.
Speaker 3: Something else.
Speaker 2: All right, thank you so much. I'm gonna ask you
Speaker 2: one last thing. It's you know, quick fire around this.
Speaker 3: What are you reading at the moment?
Speaker 4: Right now? I'm reading, I'm switching between two books. I'm
Speaker 4: reading a book on the dysfunction in the art market,
Speaker 4: and I'm also reading a book about Leonardo da Vinci.
Speaker 4: That's Walter Isaacson book.
Speaker 3: Okay, that's interesting. We should all read that. I think
Speaker 3: that's on my list too.
Speaker 4: You know, I can tell it's not that compelling so far.
Speaker 4: I'm finding it a bit of a slog and I
Speaker 4: don't I don't think that's Isaacson's fault. It's just there's
Speaker 4: not you know, there's a paucity of information, so he's
Speaker 4: kind of it's it's kind of like a book report
Speaker 4: on you know, during this year of Leonardo's life. He
Speaker 4: worked in this shop, and he worked on this sketch
Speaker 4: and here's the picture of it. It's it's kind of
Speaker 4: a book report on his life so far.
Speaker 3: So I hope it picks up kind of made some
Speaker 3: stuff up.
Speaker 4: It would have been yeah, it would have been better.
Speaker 4: I have to, would have perused I have perused my
Speaker 4: bookshelf looking for fiction to kind of because I'm not
Speaker 4: it's just not grabbing me here.
Speaker 2: So all right, well, you know, maybe we won't recommend
Speaker 2: that one to everybody. Stick for the first one. The
Speaker 2: first one dysfunction in the art market. That's a lot
Speaker 2: more fun.
Speaker 4: Uh yeah, yeah, that that could be. So that's written
Speaker 4: by Matt Campbell, Bloomberg journalist.
Speaker 2: So okay, yeah, so we can read that while we
Speaker 2: wait for the great market collapse, and we'll be keeping
Speaker 2: a very close eye on unemployment numbers on this blog.
Speaker 2: Thanks to Hugh, Thank you so much for joining us today.
Speaker 4: Oh, thank you.
Speaker 2: Thanks for listening this week's Marin Brogs Money. If you
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Speaker 2: Now, I'm Mariness w and John is John Underscore Stepack
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