INTERVIEW: Derivatives Expert Reveals Shocking Market Risks CNBC Ignores

Summary

The video features a far-ranging discussion between George Gammon and Mike Green on various economic and market issues. Topics covered include the risks facing tech stocks like Nvidia, the impact of demographics and declining fertility rates, challenges in the commercial real estate market, the Italianization of America leading to less risk-taking, the role of passive investing in markets, inflationary and deflationary pressures in the economy, the direction of interest rates and Fed policy, and more. There is an engaging dialogue around existing market risks and potential future scenarios.

Takeaways

• 😲 Nvidia's extraordinary growth and profitability is facilitating a potential 'bubble up' effect on the stock market
• 😵‍💫 Higher interest rates are reinforcing inflation by increasing government fiscal deficits rather than facilitating productive investments
• 👀 The dynamic of passive investing and positive feedback loops can cause stock prices like Nvidia to become disconnected from fundamentals
• 🤔 The constraints around energy availability may eventually limit the growth potential of companies like Nvidia that rely heavily on computation
• 😯 Government and military entities appear to be stockpiling Nvidia GPUs due to scarcity concerns around future access
• 👷‍♂️ Productive fiscal investments that raise living standards seem preferable to deficit spending on consumption
• 😥 The current economic environment reflects a societal shift towards self-interest over mutual benefit
• ⚖️ Achieving the right balance between inflationary and deflationary pressures poses a major policy challenge
• 😎 The direction of interest rates over the next year will likely depend on the risk of an economic slowdown or crisis
• 📉 Many companies may struggle to service debt if rates rise too quickly before they have a chance to refinance

Q & A

What are some of the main risks Mike sees to the stock market right now?

Mike sees risks around entering a recession, seeing unemployment rise, and retirement funds beginning to reverse. He also sees risks of money 'dripping out' of the market slowly like in a China-type situation, leading to a slow bleed.

How does passive investing amplify risks in the market?

Passive investing amplifies risks because as money flows in, it buys more of the outperforming assets like Nvidia, creating positive feedback loops and causing prices to rise rapidly without traditional checks on valuation.

What happened in the early 2000s tech bubble that shows similarities to today?

In the early 2000s bubble, valuation was thrown out and eyeballs/users were focused on over profits, similar to today's focus on technology and future growth projections over current fundamentals.

How could a drop in Nvidia GPU prices potentially be positive?

If Nvidia prices dropped sharply like 90%, it could make powerful GPUs much more accessible and affordable, potentially enabling new use cases and innovations.

What role do demographics play in current housing market trends?

Demographics of retiring baby boomers combined with lower immigration and birth rates mean less population growth to drive housing demand. Also more multigenerational households forming.

How do higher interest rates reinforce inflation right now?

Higher rates increase the government's fiscal deficit for interest payments rather than investing to increase productive capacity and lower costs.

What happens when passive money flows reverse?

When passive money flows reverse, there are no active investors to step in and buy, leading to a liquidity crisis and rapid price declines.

Why is commercial real estate vulnerable right now?

Appraised values for commercial properties are often coming in lower now, meaning owners need to put up cash to close refinancing loans to maintain leverage.

How could the Fed being forced to cut rates signal economic deterioration?

If the Fed has to abandon tightening and cut rates again, it likely signals the economy has weakened enough that rate hikes are doing more harm than good.

What role could a risk-off event play in bringing 2-year yields higher?

A risk-off event could cause credit issues leading more economic deterioration that forces the Fed to cut rates, benefiting the 2-year instrument.

Outlines

00:00

😞 Worried About Missing The Last Nuclear Shelter Before Armageddon

The opening paragraph discusses how the speaker would be willing to give every penny they have to get into the last nuclear shelter ahead of nuclear armageddon. It then transitions to mentioning economic indicators that signal an impending recession.

05:00

😲 Staggering Statistics Of Nvidia's Extraordinary Growth

This paragraph highlights the staggering growth Nvidia has experienced, including a $10 billion increase in sales without needing to increase spending on sales, general and administration. It discusses whether this growth is sustainable long-term.

10:00

😫 Concerns About Energy Limitations For Nvidia's GPU Growth

The speaker wonders if there is a limit to how much Nvidia can grow based on energy demands, given GPUs require a lot of electricity. There is uncertainty around potential constraints.

15:01

😏 Family Support Networks As Financial Safety Nets

This paragraph discusses the trend of multigenerational households as financial safety nets, using Columbia, Maine as an example where extended families live together. It also covers housing affordability issues.

20:01

🚽 Deteriorating Housing Stock Burning Cash

The discussion focuses on factors impacting housing stock in lower income rural communities, including inability to afford maintenance leading properties to fall into disrepair. This results in cash being "burned".

25:02

💸 Passive Investing Inflows Disconnected From Liquidity

This covers issues with passive investing inflows not properly accounting for differences in liquidity across assets, disproportionately impacting prices. Liquidity depends on volume and spreads rather than market capitalization.

30:03

😱 What Would You Pay For The Last Nuclear Shelter Before AI Armageddon?

The paragraph suggests Nvidia's growth could represent bubble dynamics facilitated by passive flows. It discusses the narrative around an AI armageddon where the first to AGI would pay any price to control it, like the last nuclear shelter.

35:03

🤔 US Military Potentially Hoarding GPUs It Can't Use Yet

This covers the idea that the US military may be buying and stockpiling Nvidia GPUs for future needs before they become obsolete, since GPU technology moves so rapidly. It's uncertain whether they can actually utilize them currently.

40:05

♻️ Government Deficits Offsetting Private Sector Debt Paydowns

The discussion focuses on breakdowns between government created fiat money vs private sector money creation. Government deficits can offset private sector deleveraging and burning of money needed to preserve assets.

45:05

😤 Rate Hikes Reinforcing Higher Inflation Environment

The speaker argues that current higher interest rates reinforce inflation by increasing deficits while failing to invest in new capacity and changing behaviors to solve problems.

50:06

🤨 Historical Rate Levels Tied To Nominal GDP Growth

This covers the concept that historically interest rate levels have been close to nominal GDP growth levels. If rates exceed growth substantially without capacity increases, it becomes unproductive.

55:06

⏳ Longer The Fed Delays Rate Cuts, Less It May Matter

The discussion suggests that while the Fed may cut rates in 2024 to revive things, the longer they wait the less it may matter as companies can't refinance and won't survive to the next cycle.

00:07

😃 American President Focused On Growth Could Make People Happier

The speaker suggests if an American president focused on growing the economy and living standards instead of personal enrichment, it could make people happier than the current griping about unfairness.

05:09

😴 Grinding To An Economic Halt But With Contradictory Inflation Pressures

The conclusion is that demographically and through changing priorities, the real economy is slowing substantially. But government deficits to consume rather than produce offset this deflationary pressure with inflationary pressure.

Keywords

💡Inflation

Inflation refers to the rate at which prices for goods and services rise over time. It is a key economic concept discussed extensively in the video. Mike argues that current monetary policies are exacerbating inflationary pressures rather than controlling them. He states that deficit spending to pay people income they have not earned is inflationary as it puts more money chasing fewer goods. However, he also notes deflationary pressures from demographics and changing priorities.

💡Interest rates

Interest rates are discussed in relation to their impact on inflation and the broader economy. Mike suggests that historically interest rates have tracked nominal GDP growth. He argues that the speed with which rates have risen recently risks causing an economic deterioration and recession that forces the Fed to cut rates.

💡Liquidity

Liquidity refers to the ease with which an asset can be bought or sold without impacting its price. Mike explains how liquidity does not necessarily correlate with market capitalization. He argues this causes issues in passive investing strategies that purchase based on market cap.

💡Passive investing

Passive investing refers to strategies that track market indexes rather than picking individual stocks. Mike argues that flows into passive funds are exacerbating mispricings and bubbles in assets like Nvidia, as buying is not sensitive to valuations.

💡Money supply

Money supply refers to the total amount of money available in an economy. It is linked to inflation, as increasing money supply can push up prices. Mike discusses dynamics around government deficits and loan creation that impact money supply.

💡Recession

A recession refers to an economic contraction. Mike suggests indicators are clearly signaling a recession despite low unemployment. He argues higher rates raise risks of a recession that forces the Fed to cut.

💡Nvidia

Nvidia is discussed extensively as an example of speculative excess. Mike suggests its extraordinary price performance is indicative of a market dominated by momentum and narrative rather than valuations.

💡Debt

Debt levels are mentioned as a risk factor if rates rise too quickly. Many companies may struggle to service debts at higher interest rates. This could cause a deterioration that forces the Fed to cut rates.

💡Yield curve

The yield curve refers to differences between interest rates on short and long-term debt instruments. Mike notes an inverted curve typically signals a recession. He argues disconnects from traditional signaling may be occurring.

💡Deflation

Deflation refers to falling price levels over time. Mike notes deflationary pressures from demographics, debt repayment, and the "italianization" of America (more multigenerational housing).

Highlights

The market has narrowed significantly to a few highly profitable tech companies leading the charge

There are similarities between current market conditions and the tech bubble in late 1990s

Passive investing amplifies price increases for stocks like Nvidia as more money flows in proportionally

There could be a bubble in AI and computing power that bursts if Nvidia overproduces and takes write downs

Higher interest rates reinforce inflation by increasing deficits and failing to invest in new capacity

Investing in young people through training and education raises quality of labor and productivity

The risk-free rate rising faster than expected puts many companies in danger of being unable to refinance

The Fed cutting rates is likely a sign the economy has already deteriorated sharply

This crisis appears less related to structural products and more to economic deterioration

Many companies simply cannot afford such large interest rate hikes to stay solvent

Global interconnectivity means a crisis in one country can spark a global banking crisis

Guest sees Fed funds rate likely around 3% in a year due to risk-off event hitting markets

TUA is a 5x leveraged ETF for gaining exposure to 2-year Treasury moves

The ideal scenario is a bull steepener with short-end rates falling

Being long TUA is advantageous if economic deterioration forces the Fed to cut rates

Transcripts

what would you pay for the last nuclear

shelter ahead of nuclear Armageddon the

answer is I would give every penny I

have to get inside that nuclear shelter

leading economic indicators coincident

economic indicators etc those are

signaling a very clear recession If the

Fed is forced to cut rates it's likely

because the economy has deteriorated

sharply what do you think the three

biggest downside risks are to the stock

market right now oh uh that it doesn't

go up um that no but that's actually a

an in-depth answer you might want to

elaborate I know well that's actually

part of that's that that unfortunately

is part of the problem right so um look

I I the the risks that I'm concerned

about is that we enter into a recession

we start to see unemployment the flows

into things like retirement funds begin

to reverse more

sharply and you know for what appears to

be no reason whatsoever we end up in

something that looks a little bit like a

China

situation where money just kind of drips

out right so it turns into effectively a

slow bleed um I think we've gotten used

to the idea that you know the market has

to crash right it's directly ahead of us

that the market is going to crash there

are unfortunately a lot of similarities

between now and late 1999 early 2000

where the market has narrowed

significantly a very few number of

extremely profitable companies are

leading the charge people will often

point to this and say well nothing like

the dot cycle you know those were all

unprofitable companies operating on a

hope and a prayer we live through that

we actually just had that experience in

2021 where we had all sorts of crazy

stuff move this feels like it's just a

much narrower version of something along

those lines where people um increasingly

we're seeing evidence that people are

basically saying oh I get the joke I

just need to buy technology right that

feels much more like the dynamic that

occurred in the aftermath of of the 1998

crash in Asia where people abandoned all

the ideas of you know I should be

invested in energy or I should be

invested in oil in uh metals or I should

be invested in you know old economy

stocks as we used to talk about

them those that gave way to a wholesale

Russian technology and we definitely are

seeing elements of that today and so you

know the the key risk is candidly that

you know an Nvidia disappoints in a way

that's not dissimilar to what we saw

with Cisco that's one of the reasons we

had such an extraordinary bid for

volatility around the Nvidia event the

the Nvidia earnings event we actually

saw more volatility stacked up into the

market for the Nvidia earnings report

than we've seen recently for Jerome

Powell's speeches for fed announcements

for CPI prints Etc like this was the

thing and fortunately for the market

Nvidia exceeded

expectations so you know a

disappointment on that and a change in

narrative I think becomes the thing we

should be watching for how does that or

how does passive play into that well

passive amplifies everything right

because the traditional way it would

work is an active manager let's just you

know let's pretend it's Kathy Wood this

is actually a good example right so the

arc investment ETF owned Nvidia shares

as the shares of Nvidia went higher she

made the discretionary decision that it

was overpriced that they were better

opportunities to invest elsewhere and as

much criticism as you may love at

somebody like Kathy Wood like that's a

normal human reaction to say well the

price has risen a lot in the absence of

anything else changing that means my

forward expected returns have to be

lower and therefore I'm going to sell

some shares creating liquidity in the

market right and providing liquidity for

those people who want to continue to

speculate and push it higher the problem

is Vanguard and black rock the passive

investors or State Street others who

play in that game there is no mechanism

for them to make that discretionary

Choice the only way they'll sell Nvidia

is if you fire them and then they will

sell in proportion to the market

capitalization but otherwise there's no

scenario under which they think the

price is too high and perversely in fact

as it goes higher in price the next

dollar that comes in buys more of Nvidia

than it does of the rest of the market

because it's outperformed the market and

so you get these positive feedback loops

that can cause prices to rise in a

manner that is again similar to the

Dynamics of 1999 where we decided to

throw valuation out the window and focus

on metrics like how many eyeballs did

you see forget how profitable you were

how many eyeballs did you see right in

the case of Nvidia like anyone looking

at their results has to say this is one

of the most extraordinary reports we've

ever seen we're seeing a company that

was already a sizable player in us

technology markets and the global

semiconductor

markets has now become one of the

fastest growing companies in history and

is expected to continue to grow but some

of the Staggering statistics that you

know come out is is that Nvidia didn't

spend any more on sales General and

administration on basically a you know

10 billion do sales jump It's really

extraordinary when you think about that

did they not have to compensate their

Salesforce Etc I mean it's it's really

something we've just never seen before

um whether that continues to be the case

I think is ultimately where the bold and

bare case rest right when we think about

something like apple which had a similar

period of growth from 2007 through 2015

with the growth of the iPhone and then

the iPhone

5 that growth was all going directly to

Consumers which is a dramatically larger

market right It's The End Market and

that growth was about half as profitable

as the video growth that is being

forecast or really has actually been

realized in the last couple of in the

last earnings report and it's expected

that that profitability is going to

continue going forward creating just you

know numbers that candidly defy the

imagination yeah yeah I did a video

earlier today that 28% of the S&P 500

gain over the last year I believe was

just strictly due to Nvidia just just

the price and people talk about the mag

seven but uh this article on Baron's

pointed out that now it's really just

the mag four right

because going down right I mean I'm look

I'm looking at markets today right and

if I look at the factors that are

working um I mean this is just one of

these crazy things right the momentum

factor is up 3%

today um while the S&P has barely moved

right it's it's you know again very very

similar in terms of its underlying

construction if I think about value

value is now down on a year to basis you

know we're all supposed to be value

investors right we supposed to be

thoughtful investors momentum strategies

are up 25% in the first two months of

the year and value is down

four right right the median stock is

down something like four to 5% I mean

this is just this is just an insane

component and by the way you talk about

nvidia's impact on the S&P 500 almost

more extreme are things like the

performance of Super Micro which it

really is just you know a company that

bu builds things that include Nvidia

chips do so they do so at relatively low

margins and their gains account for you

know the gain in super micro is the only

reason that the Russell doesn't look

absolutely awful on a year-to day

basis wow so it's it's just this uh like

this trickle down

effect it's it's not just uh Nvidia it's

it's everything trickle down or Bubble

Up

however yeah I'm not sure whether I

would call it trickle down or whether i'

highlight it as bubble up but I mean

this is this is one of these really

extraordinary situations where we just

have to ask ourselves candidly like what

is ultimately being priced in here and

and I can create all sorts of narratives

right I mean that's one of the the

Specialties that we have as human beings

is creating narratives that explain why

things behave the way that they behave

um in the case of Nvidia you know we're

we're somewhat correctly responding to

the actual fundamentals but then also

creating a story for why this is going

to continue right and um I mean the

easiest story is just that you're you're

now actually trapped in something that

resembles you know a death cage match

where the first person or the first

corporation that gets to a truly viable

artificial general intelligence

theoretically could change the world

right um and if that's the case like

what would you pay for the last nuclear

shelter ahead of nuclear Armageddon

right the answer is I would give every

penny I have to get inside that nuclear

shelter because among other things

actually maybe not pennies but certainly

scrap dollar bills right because we know

those are not going to have any real

value um in the world that comes after

that and so what you know what is the

price that is too high now I don't

actually believe that I think that you

know what we're experiencing is a bubble

that is increasingly facilitated by the

Dynamics of passive investing as I

highlighted but the narrative is

compelling right nothing is Nar is

always compelling Mike it's always

compelling there there is always a good

story that is what people get paid for

yeah I know I don't know much about AI

at all or at least kind of how it works

I've used it and whatnot but I've heard

that it uh the gpus from Nvidia take

quite a bit of energy so is there a

limit to how much Nvidia can grow based

on how much electricity we have access

to right now so I think I think the

answer is that we don't know we right we

do think that there are limits around

that both in terms of the density of

processors that can ultimately be

achieved alongside you know similar

issues um you know around the actual

availability of power but this is the

same debate that we've gotten into in

Bitcoin and everything else and the

simple simple reality is is that digital

computation is exploding in its energy

demands yeah really no different than

you know if you think about it from the

context of well this is what they eat

right and so as human populations

exploded the demand for food exploded

right the demand for human food stuffs

exploded that's why domesticated animals

outnumber wild animals now you know

roughly n you know I think it's like 95

to5 or something like that um I I would

expect that we're ultimately going to

see something very similar here where we

have to figure out if we require

artificial intelligence if we actually

require these products to to allow us to

make that next stage of productivity

gains and next stage of wealth creation

we'll figure out how to get the power

going and this is B you know that's a

net positive right let's you know take

the Bitcoin argument that like oh we're

facilitating the creation of you know um

base load power or of opportunistic

usage of stranded assets Etc so we can

access stuff at a really low cost this

is really no different it's just saying

let's start investing in Basel load

right let's figure out the best ways to

to to increase the quantity of food that

is available for our robot overlords

yeah

right right so they there could be a

constrain there if maybe a temporary

constraint but I think maybe more so

what would be the constrain uh on their

price if we go into recession because I

was going to ask you about your ideas

around the yield curve because right now

people are either ignoring the curve or

just saying that it's

dead well I think is a combination of

the two right I mean you have to

somewhat ignore it and um I I again I

think that this is a challenge I I

encourage people to go to the conference

board and take a look at their most

recent reports on leading economic

indicators right that's always a great

resource by the way and so it's the

conference board they put out a monthly

report on leading economic indicators

coincident economic indicators

etc those are signaling a very clear

recession both that we've come through

and you know that is ultimately ongoing

in terms of the depth of the draw down

in leading economic indicators and

that's even more compelling when you

consider that a about three of the 10

leading economic indicators that are

used are things like the price behavior

of the S&P 500 or credit spreads which

are very tight or various other

components right and you know it it it

has been through a record contraction

without a designation of unemployment

and the the reason I would argue that

that's happening is because we have a

very different environment than we've

had for really the past 50 years the

Baby Boomers are finally making it into

retirement right or or at least in size

and so we're seeing a collapse in the

number of workers between 55 and 65 it's

actually falling for the first time

because my generation Gen X I think

you're the same generation George yeah

yeah you know the Gen X generation who

nobody even remembers to put on you know

various poles do we even they go right

from the Millennials to the Boomers

exactly no well I mean that's all that

matters right and so you know we're this

population BST as are our children so

you know my children range in age from

19 to 23 years old and they come through

a peri you know they were all born in a

period of relative population bust in

which there was also a relatively low

level of immigration and you're seeing

that impact all sorts of things but

among the most interesting one is again

we're seeing a contraction in the 18 to

24

um uh working

population you know a contraction in the

um 55 to 64 working population and then

right in the middle there you've got the

relatively productive I know that's not

the way we normally describe them but

you've got the Millennials that are

sitting right there in the center and

they're making the transition to you

know I think the technical term is

knowing what the hell they're doing in

the workforce right right they've kind

of made it past the point that they had

too many tattoos and worked too you know

too many hour hours or too few hours

perhaps at Starbucks as a barista and

now they're suddenly turning on their

entrepreneurial juices and recognizing

that you know the world may be a

slightly different place but all that's

happening at the same time is they're

struggling with the unaffordability of

housing the lack of having children

right their the facundity or the ferti

the fertility rates have just absolutely

collapsed as something I think you've

probably heard me talk about you know is

underway which is what I call the

italianization of America right we're

we're segmenting into a population that

doesn't relocate nearly as frequently

where the advantages of staying in the

local town where your family is from

because you have preferential access to

housing or you happen to know people in

the community better and that creates a

support network for you um that allows

you to get away with all sorts of stuff

that you otherwise might not be able to

do had you decided to hop into a

conastoga wagon and make your way across

the you know Western Plains uh you know

we're suddenly looking at a situation in

which it's just safer and more

profitable to stay in the same place

and it's interesting you say that Mike

because I live in Columbia in medine y

and that's exactly how people live here

you'll you'll go down to you know one of

the strata three places a neighborhood

and you'll have a family and the

grandparents live just right across the

street and their cousins live right

across that like the whole family lives

on the entire block and they wouldn't go

anywhere else and it's their form of a

financial safety net absolutely correct

this is I mean this is what most

Americans can't fathom about places like

Europe you know if you look at Italy or

Greece you saw periods of unemployment

where um unemployment rates would hit

20% right or youth unemployment rates

would be over 50% and in many ways we

look at that from an American

perspective and say how how could that

possibly be right how could half the

people not have jobs and the answer is

well that's just the same thing as a

stay-at-home wife right I mean half the

people in the household don't have jobs

right why because you've created a

personal social safety net a familial

safety net that allows people to get

away with that type of

behavior and and there's pros and

there's cons associated with it yeah so

you think that the low unemployment rate

is due to labor force participation I

think it's a combination of low

population growth and labor force

participation right it's just just not a

it's just not reasonable to expect 75

year olds or 80 year olds to work right

although um they might have you know we

would expect to see them take various

roles that we would describe as work for

other people right the easiest one would

be well just you know provide

babysitting services for grandchildren

so that your your um you know children

or even great grandchildren uh baby

Services you know babysitting services

so that they can actually you know your

your grandchildren can now go out to

work etc right um we see this across

communities that have high degrees of

unemployment and traditional measures of

instability the family Network steps in

the extended family Network steps in as

a social safety net and again we're just

seeing extraordinary evidence that this

is the case in the United States what do

you think that means for

housing well I think it means a couple

of things right I mean if you're going

to create a multigenerational household

that house very well may never hit the

market but if it does it may very well

never find a buyer right and I'm sure

you see this again you said Columbia

Maine and that it's very similar to

Italy you know the irony is is if you go

to Italy and if you were to try to buy a

home a nicer home in a tourist

destination Tuscany or Rome or Milan or

even Naples you know you'd likely find

that that's extremely expensive but if

you go to the more rural areas of Italy

they've been under depopulation

pressures for decades and as a result

you know you have abandoned Farmhouse

properties that they are begging people

even in some City areas right some

formerly robust cities that have seen

this depopulation characteristic in

Maine by the way I think has been

experiencing depopulation in one form or

another since I think it was 1850 or

something um it's gone through waves

where it's increased and decreased but

Maine was one of the very first places

whereas you know the West Was won and

the American continent was taken over

from the Native Americans you know you

saw people in main be like well why

would I Scrabble a you know farming

existence out of this rocky soil and you

know very short growing season when I

can go to Nebraska and get Wide Open

Fields right um you know you very

rapidly found that Maine was an

unattractive place from an agricultural

standpoint it then had a turn you know

turn due to Water Resources as a bit of

a textile Factory and then you know now

it's basically tourism as I understand

it yeah I

think and LLB and boots but yeah yeah I

think the key is when we look at the

real estate market we're always looking

at inflows and outflows of population as

one of the main drivers but people also

need to realize that if their incomes

just aren't keeping up with the cost of

living you'll have the same Dynamic play

out by people moving in with one another

yes so even though the population isn't

going down there's more people per

square foot and therefore that could

increase Supply above and beyond demand

yeah I mean that's the traditional model

of of an increase in in um you know how

members per household has been a

function of the number of children but

that's actually changed right in the

past 20 years really since the global

financial crisis we've begun to see a

tremendous rise in multigenerational

households and it is meaningfully

impacting it um the other thing that I

think is really important for people to

understand is you know we talk about

home prices and we talk about how much a

home sold for we don't pay any attention

to the house that will never sell right

the decrepit abandoned house you I'm

sure you have one you know somewhere in

Columbia Maine that you drive by you're

like wow what a shame that that house

has been allowed to fall into that

disrepair well the reason why that

happens is because you know your child

leaves you don't have the younger people

there you have an older person who's on

a fixed income who just can't afford to

maintain the house or doesn't have the

physical capability to maintain the

house as the community deteriorates

around them so nobody's there to offer

the services and say hey I'll do it for

you just because and then the other

thing to remember is is that when you

have an area that has lower income and

I'm thinking about you know areas that

are forly agricultural or rural in their

construction if I'm going to buy Windows

for my home windows are sold across the

country at roughly the same price in in

institutions Like Home Depot so if I'm

in a poor Community I can't afford to

replace the window whereas if I'm in a

really wealthy community my only thought

is like wow how badly am I being screwed

by the you know semiskilled labor that's

coming to make this installation the

window itself ceases to be the issue

whereas in the rural or exurban

Community formerly agricultural or lower

income Community the actual Hardware

itself the physical window the new door

the paint can actually become real

barriers to maintaining the housing

stock and that deterioration in turn

then means that you when somebody does

want to move somewhere or move into

those communities they have to build new

and perversely that building new is

going to cost just as much in Maine if

not more because it has fewer uh you

know has less history or less uh

resources in terms of a deep building

base in terms of Labor

resources um meaning that it actually

gets even harder right and so you know

like this is what you've seen in Italy

this is what you're beginning to see in

the United States and again there there

can be Pros there can be an improvement

in quality of life and we are seeing

some evidence of that from Millennials I

will tell you as a a gen xer um you know

my wife and I are now empty nesters

we've actually sold our home we're

traveling around the country and and

debating where we want to be next and

one of the fun things to do is actually

go and look at the homes that have been

designed by Millennials in terms of

their interior design capabilities Etc

man these guys know how to live they've

got great design taste it's a heck of a

lot better than our generation had yeah

yeah it's funny I I used to uh be into

air these uh airst streams I don't know

if you know what those are I know yeah

the the trailer yeah back in 2016 17 I

had a couple of them and I was uh

remodeling them and I noticed on eBay

the people that were flipping them that

were remodeling them and flipping them

almost all were kind of millennials yes

and they they they just made him

spectacular inside really really

impressive but anyway taking a step back

here you know when we talk about the

stock market at all-time highs in the

United States people forget that the

stock market correct me if I'm wrong I

think is at all-time highs in the UK in

Germany in Japan and all three of these

uh countries are in recession absolutely

correct and so it why are those stock

markets at all-time high is it my point

is is it the same passive Dynamic at

play over there or are there different

reasons like uh bad news is good news

you know they're going to drop rates and

therefore let's just buy stocks well I

mean my argument would be that it's

largely tied to the Dynamics of passive

so if you if if you think about what

happens in the United States think about

a Target date fund right so a Target

date fund which is what people default

into when they go into when they get a

job and they get a

401k that's going to automatically put

money into to these International

markets and just like in the United

States you know where you look at an

index fund if you're putting your money

with that Index Fund there is nobody

pausing and saying is it a good

valuation is it a bad valuation should I

be buying more of this should I be

selling some of this Etc none of those

conversations happen because it's

presumed that everybody else is capable

of taking care of them but the world

that we've moved to is one in which all

of the money is now coming into passive

vehicles in fact more than 100% of the

net flows are coming into passive

Vehicles because money is Flowing out of

the active and discretionary managers

you can argue that's tied to

underperformance and but by the way I'm

the very first person to aede that

passive has outperformed active

management the question is why and

that's where a lot of my work is very

very different from the work of others

who think about passive Investments it's

it's not a function of the costs

actually the evidence for this is

remarkably clear it's not a function of

the costs it's a function of the flows

so when that money is constantly coming

in and buying things in proportion to

the market capitalization of the name

this is a very complex topic a very

difficult concept but I just want to

really try to bring it home to your

audience when you think about buying in

proportion to market capitalization you

are presuming you're making an assump

assumption that the liquidity scales

with market capitalization what matters

when you're buying or selling something

is it's liquidity and what we actually

know in academic study and empirical

study one after the other they all tell

us the exact same thing that liquidity

does not scale with market

capitalization liquidity scales with

volume and the spread between the bid

ask that ultimately determines the

profitability of Market making

operations in an individual security if

I'm Citadel Securities some of your

listeners I'm sure have heard reference

to Citadel Securities and Ken Griffin

this is not the hedge fund this is the

market making operations that have taken

over for the traditional entities that

would have existed on the New York Stock

Exchange the physical floor etc those

have all been replaced with electronic

Market making opportunities or uh market

makers but those market makers the

profitability of the money that they put

up to facilitate trading is driven not

by market capitalization but instead

volume and how why that bid ask spread

is right because every time you do a

trade you want to capture a portion of

that so assume that reduces their risk

and increases their profit it reduces

their risk and increases their profit

the more volume is the less there's a

risk that they're going to get trapped

with something the easier it is for them

themselves to act to to engage in

activity okay so here's where the

problem comes now imagine a thousand you

put ,000 into a Vanguard S&P 500 fund

that means you're going to be buying

somewhere in the neighborhood of $75

worth of Microsoft and about 25 cents

worth of Delta

Airlines right now if I actually think

about the liquidity of those two so the

market capitalization there in that

example is somewhere in the neighborhood

of 30 times differ but if I look at the

liquidity which is determined by those

factors I was talking about before the

volume

and effectively the

volatility Microsoft is only about five

times more liquid than Delta Airlines

and so perversely what that means is I'm

affecting the price of Microsoft far

more than I am the price of Delta aines

when I buy that index fund that pushes

Microsoft higher as long as money is

going in and this is true for NVIDIA or

anything else and it becomes

particularly true if you create

conditions under which the discretionary

Traders just start to throw any form of

negative reaction out of the window

because they simply can't afford to not

own those positions and so to get

somebody to sell Nvidia it's exactly you

know you you were talking about this

before you were saying you know people

ask how can I protect myself against a

fall in the S&P well the obvious answer

is you short the

S&P but that's a terrifying Prospect in

this market right and we've seen this

we've seen the number of shares that are

shorted shorted of the mag 7 has fallen

precipitously over the past couple of

years the losses in the short selling

Community have exploded and as a result

there's just not that much Capital out

there they can even fight against this

move yeah and to be clear for the

viewers what Mike is describing there

the lack of liquidity if uh if you got a

huge market cap is that's going to drive

the price a lot higher um but it's going

to drive the price a lot lower because

there isn't going to be anyone there to

buy

if you want to sell yeah I I I think

unfortunately that's you know that

that's what I refer to when I say if the

flows reverse then it really becomes a

question of who's going to step into buy

right who's the marginal buyer there's

no one there because there's no active

yeah there's no active and and and

candidly you can get to a point where

the disconnect is so huge right um you

know Nvidia I think is a really good

example of one where there's still some

debate is it worth it right is it

growing fast enough is it profit is is

it profitable enough that even on a

fundamental basis I can make a case for

it you overlay an element of fear right

I can't afford to let this thing get

away from me because how do I explain it

right think again of a Cathy wood who's

been castigated for selling Nvidia

despite the fact that she is a you know

uh an investor who's very focused on a

Future Vision sort of thing

right um but when you think about that

type of dynamic it perversely means that

there's nobody there to buy on a 5%

correction because like how do you make

the argument that Nvidia down 5% as a

generational buying opportunity down 10%

or down 20% or for that matter down 50%

does it become a generational buying

opportunity down 50% you know which

would put Nvidia Just In traditional

terms uh I'm just looking at the the PE

Ratio here you know it was down 15 50%

company yeah so so well on a forward

basis it's 33 right so if they deliver

the extraordinary results that are now

expected by the analyst Community for

the end of this year then they'll be

actually it's January 2025 earnings that

it's a 33 times you know that 100%

earnings growth if that's realized then

it'll be trading at 33

times when Apple went through a similar

process and grew by a similar amount

they ended that time period tra it 13

times right when Cisco went through

something similar it did Cisco to be

fair did not have this last year and did

not experience this extraordinary I mean

just insane level of profitability that

we're seeing out of Nvidia but part of

the reason why that happened was because

the Doom Bubble Burst they suddenly

found that they produced far more

networking equipment than anyone

actually had demand for and as a result

they took massive writeoffs and write

downs and their growth was compaired and

in the case of some competitors That

Grew even faster than Nvidia right JDS

unase grew 17 times its sales over the

course of the three years from 1998

until 2001 so a 1700% growth a far

exceeds what we saw with

Nvidia the irony is of course that that

surplus of networking equipment meant

that JDS unase was swamped with

inventory they could not sell except by

taking horrific horrific

markdowns and those horrific markdowns

are what actually enabled the finishing

of the buildout of the internet and the

Fantastic growth that we've all relied

on so I you I look at what's happening

with Nvidia and I'm like man the best

thing that could happen to answer your

question like how far could this go is

if it actually turns out that this is a

bubble and Nvidia massively overproduces

and then everything gets written down by

90% because when you've got a

$30,000 GPU

well what suddenly becomes possible if

that drops to 3,000 right right that

starts to get really interesting

although you still face some of the

constraints that you're highlighting

with the energy components Etc but the

these things don't really manifest

themselves until you're on the other

side of this type of phenomena when does

the music stop like I remember my

favorite investors Jim Rogers I've had

the opportunity to talk to him a couple

times and I love his ability to make

things very simple for people to

understand and we are talking about

bubbles we were talking about buying

panic and selling hysteria and he said

you know the reason why a bubble Fizzles

out is just because there's no more

buyers right it's pretty simple you're

the last buyer you're the sucker holding

the bag and if there's no more buyers

the only thing you got left are are

sellers so when did the buyers run out

for not just Nvidia but for Passive for

an S&P 5 00 index I mean I try to look

at it in terms of money people have to

have the money so okay they can take

100% of their income but we've got

negative real wages uh they can borrow I

guess but that's there's a limit to that

as well so when do we get to that point

where there's just no more dollars to

put into these funds to make them buy

the shares well I I think that's part of

the challenge right because when you

have the performance of something like

Nvidia perversely you can actually will

the dollars into

existence be banks will be more willing

to lend them into existence so new

dollars are created to go into that uh

stock both for the product right if the

product becomes a no-brainer absolutely

everybody has to have this then

financing is easier to find if you're

saying well you know what I'm going to

securitize or I'm going to SEC offer

this on a secured basis and the I'll

tell you what I'm going to secure this

loan by I'm going to secure this loan by

Nvidia gpus oh my God gosh that's better

than gold right you know I'm

collateralized by depreciating

semiconductors and graphic processing

units oh where do I sign up to lend to

you come on this is fantastic right but

it does feel like there's such a

shortage and there's so much demand that

that is incredibly liquid and again

we're seeing Nvidia engage in the same

Shenanigans the JDs uniface and Cisco

engaged in which is various forms of

vendor financing where they're creating

entities that are being basically

designed just to buy Nvidia chips and

figure out what to do with them whether

that's profitable anytime soon seems to

be somewhat of a secondary issue I heard

that the military the US military was

actually buying a lot of these uh gpus

and then just putting them in storage

knowing that in a year they're going to

be obsolete because of Technology but

they're doing it like just in

case and they they don't want to behind

be behind China or whoever their compe

competitors are have you heard anything

like that yeah I I I I have heard

stories like that and speaking of

operations that don't need to worry

about running on profitability the US

Army right at the top of them right um

and that's said with full respect for

our military my son's actually at the US

Naval Academy I'm I'm a big proponent

and a big supporter of military and of

uh military service in this country but

the simple reality is is that if you

have entities that are buying and

hoarding because they are are scared of

the possibility that well maybe these

gpus are like toilet paper in 2020 and

we just get enough so that we really

feel comfortable right um well that's

you know that you're you're creating the

equivalent of

hyperinflation in a small area right so

hyperinflation the examples are are

legion where you see people choose to

trade out of dollars and into Goods

because they're so it doesn't have to be

dollars just to be clear but you know

they they are so focused on the idea of

avoiding the deflation that they'll pay

any price to get the goods that they can

then just stick into storage because

well the the paper is going away right

the paper is going to be worthless and I

I I really it feels that way when you

actually look at what's happening to

Nvidia I mean to see this type of growth

on a relatively concentrated customer

base and even more so a sophisticated

customer base right I mean I like I've

got lots of problems with wearing

is trading because among other things i'

point out that about 40% of their sales

are going to about four players all of

whom are fantastically wealthy and

sophisticated buyers themselves and the

idea Google Amazon just basically the

other mag s right and so so so the idea

that you're going to end up with this

like you know you know Monopoly they can

charge whatever they want for this stuff

I just don't think it's I don't think

it's a reasonable long-term

hypothesis with one possible exception

which is you know we wake up tomorrow we

discover that AGI is here artificial

general intelligence is here and that

artificial general intelligence is then

redeployed into making itself even

faster the first person who actually

steps in and and has ownership of that

AGI is going to become the world's

wealthiest man or or woman for that

matter perhaps dog who

knows yeah but it's still at the end of

the goes back to energy that's where my

mind just reverts back to that but let's

talk about uh rates what do you think

about interest rates uh and then maybe

also the fed's balance sheet I know we

were talking about that before we hit

play do you think the fed's balance

sheet plays into potentially the stock

market being at alltime highs of that

liquidity component that we were

referring to earlier even if it's just

Janet Yellen taking the TGA from 700

down to 200 therefore you got another

500 billion in Bank Bank Reserves or I

think there's 500 in RRP maybe that goes

into Bank Reserves and the argument

there I don't buy it but the argument

would be there's more liquidity to pump

up stock

prices well I think that can definitely

be true right so so ironically I

actually put far less emphasis on the

fed's balance sheet than I do on kind of

what caused it to get there right or the

components that contributed to it um

obviously the buying of the Securities

was an important component to but far

more important and this is something we

I talked about you know in a

contemporaneous fashion so in April of

2020 I was highlighting this underlying

Dynamic that you know we lent money

freely in the paycheck Protection

Program and told people you know we'll

pay for you to keep your workers right

we'll pay for you to stay open so not

everybody loses their jobs and then

we're all trapped in a cycle of

unemployment Etc we basically bought

people jobs with the with the

subsidies um that money doesn't go away

simply because and and it well when that

money is lent it theoretically goes away

when you repay the loans but if you then

equitized the loans as we did we

basically said all right we're going to

forgive every PPP as long as at least

one person smelled something that looks

like a job somewhere along the way right

right yep so when you wipe that out now

you've actually turned it into cash as

washing around in the economy it's

effectively a a giant tax refund that

was handed out there and that money is

going to circulate until it gets

destroyed right it has to get destroyed

in one form or another it can get

destroyed through

taxes right it can get destroyed through

actual credit losses and I think there's

some interesting stuff that's developing

there as we look at the overinvestment

that may or may not be happening we

certainly are seeing it in commercial

real estate and this is just be like

just think about the dynamic imagine

you're a wealthy real estate developer

fresh off your tour as president of the

United States you decide that you need

to refinance one of your

buildings you go to refinance and the

appraisal comes back and says yeah I got

bad news for you this building is worth

$150 million less than you thought it

was worth or the last time we we we

financed it and you've paid off no debt

yeah right so the only way that we're

going to let you do a commercial real

estate loan and maintain a similar level

of Leverage is by actually saying you

know what um we need to effectively

adjust the price lower right we need

additional security and therefore the

appraisal comes in below what you would

need and in order to close that loan you

then have to show up with cash yeah

right that's actually a way that you're

destroying cash it's not like that cash

that you pay to facilitate that

refinancing is somehow or another making

it up to the next player it's actually

literally just being burned right just

let me let me explain that for people

Mike what what what we're talking about

here guys is really it's just are more

loans being created on net or more loans

being paid off that's all that's the

only thing you got to look at it so if

you got a $100 million loan well they

just created $100 million of additional

M2 but if you refy that loan and now

they say well we're only going to give

you 50 million uh well now all of a

sudden you have to come up with

additional 50 you pay that off and that

decreases M2 money supply by $50 million

right that's exactly right so you know

the the story of the huge growth in M2

money supply around covid was tied to

companies seeing the crisis emerge and

immediately responding to that by saying

oh my gosh we're going to take out as

much money as we possibly can from our

lines of credit because we lived through

this experience in 2008 where lines of

credit got pulled so let we're going to

act first right before they can tell us

we can't have the money we're going to

take the money legally but we're going

to take it um if you then have to use

that money that you've taken out to

preserve control of the assets that the

other assets that you own you own so you

know just say for example you own your

home you go to refinance that home and

the bank says yeah we can't let you do

that because it's now trading at you

know 105% of loan to value whereas

before before we were willing to

refinance you at 80 80% of loan

value so that means that that 200 that

100 that 25% I'm sorry it's just gone

right I mean literally it's exact same

thing as if you had to pay taxes Etc

people who spent a lot of time talking

about this differentiate between the two

the government created money and the

private sector created money you know

what they typically refer to it as um

Fiat money or money that is created

vertically by the government and then

the horizontal money creation is what's

coming out of the banking system that

effectively is just a way of being

flexible and expanding it in response to

supply and

demand we just haven't had one of the

you know net Supply periods in a very

very long time that's really what it

means when you see interest rates

increase is it saying there's less cash

available to meet those needs and a

portion of that cash has to go to

preserving your optionality to hold this

uh this piece of real estate and so I I

I think one of the things it's so

fascina is everybody's very focused on

this idea that there's all this cash

that's out there and then I look at a

number of asset classes and I'm like wow

they're going to be burning a lot of

cash right that's a very interesting

angle Mike and I I've never given that

any thought I always just look at the

the balance sheets involved in the

mechanics so as an example if the fed's

buying from a non Bank through the

primary dealers it's going to increase

M2 or do your point if you're drawing up

a line of credit there's more uh loans

being extended by Banks that's going to

increase M2 but then I asked myself okay

is that just an asset swap because if

you're an individual a non-bank that has

that treasury uh it's a cash asset cash

equivalent and if they're just replacing

that with savings that savings is most

likely going to be very low velocity as

well so even though M2 didn't increase

um or did increase did it really matter

because that money isn't circulating or

if the government comes in and let's say

the fed's not even involved and they

deficit so Janet Yellen issues that

treasury that is from a non-bank so she

takes that money out of M2 but then she

recirculates it back into the economy so

on net M2 is the same but the economy

has an additional asset in the form of a

treasury which you could add increases

purchasing power and I would argue

increases velocity because you're taking

M2 that's effectively savings Z Z

velocity and turning it into checking

which is much higher velocity until

eventually that goes back into savings

so but it's just a different way of

looking at the same thing yeah I mean

there there's an element of moving

across what's called high powered versus

lower powered money right um I I'm

fairly certain though that M2 actually

does include checking accounts no no it

absolutely does yeah it absolutely does

I'm just saying it that if they're

pulling if Jan elen is selling a

treasury to a non-bank entity uh most

likely that's coming out of savings

which is M2 so that's going to reduce

savings but then it's going to go to the

TGA she's going to spend it right back

out into the economy which is going to

bring M2 back up to the level where it

started but the difference there is that

velocities change because you've taken

savings and basically turned it into

checking yes I think that's fair I think

that's correct and I I again you know

when you see a government that is

running this degree of deficits yeah and

has accumulated debt to these levels in

interest rates perversely actually

become fiscal policy and this is this is

clear you know I think we have a mutual

friend in Warren Mosler who I know is

the the you know um many people who are

concerned about monetary policy will

react to the idea of modern monetary

Theory which Warren helped uh create and

facilitate from a trading standpoint

they react to it with horror right you

can't just print money into existence

that's not how money works well

unfortunately that is exactly how money

works yeah right um and what you're

complaining about is how the money is

being spent and I think that's really

critical like when you you brought this

up earlier when you talked about energy

if we were to decide to spend government

resources quintupling the quantity of

electricity that is available in the

United States and lowering the price on

it just literally writing it off in the

same way they did with the PPP loans

right like just remember what a p p p

loan was it was a gift to your neighbor

right it was just you know if you happen

to be wealthy enough that you're

employing and hiring people and those

people are going to lose their jobs

we're going to send you loans that allow

you to continue to service the the

obligation you owe to your employees

right oh and by the way you know as long

as you do this for a short period of

time you get to keep a large fraction of

that yourself somewhere in the

neighborhood of 30% or so or you could

use it to increase your 401k

contributions um you know these types of

Dynamics are playing through and and

candidly I look at our monetary policy

right now and I know everyone is going

to scream at the screen when I say this

but higher interest rates are actually

reinforcing a higher inflationary

environment right we're not building the

ca the facilities that we need to build

we're not changing our behaviors in a

way that actually will solve a lot of

these problems but what we are doing in

Spades is we're basically saying you

know oh well you know let's uh increase

the government's fiscal deficit by

another two to 3% so that we can hike

interest rates by another 2 to

3% you're not actually controlling

inflation there that should be fairly

straightforward and obvious you're just

giving more people to people who spend

less of their incomes the wealthy is

compared to the lower income but the

other thing that is ultimately happening

is is that we're failing to invest in

new capacity

right or at least lower than we

otherwise would have and so you know

we're still like I've still got a screen

open to Taiwan and China Etc to monitor

how things are going in those countries

because we're not yet building it in the

United States we're slowly starting to

but it's G to be a long time in coming I

think that takes us straight into rates

and inflation disinflation deflation so

do you want to walk us through your view

on those two topics that are obviously

critical sure so um rates have

historically the level of rates have

historically come close to something

like the level of nominal GDP growth

right and the reason for that is pretty

straightforward if in order to um buy an

asset that allows me to participate in

the economy you know I have to

spend 3% of my net wealth on it um my

question as to whether or not that's a

good idea is a question of how much can

I get out of that um you know that uh

money that I've spent in terms of

capacity development if the answer is it

turns out to be really profitable and

really positive then you've

simultaneously solved inflation and

you've potentially raised economic

outcomes for everybody that's involved

because you're creating more goods and

services what's up you're creating more

goods and services you're creating more

goods and services but if on the flip

side of that you basically use that

money to pay an already expected level

of income for older people yeah right

right and I'm not picking on older

people per se it's just that who rece

that's who receives the lineon share of

the benefits if if you're creating a

condition under which you know they're

going to receive additional money and

they've got nothing to do with it other

than spend it it's not like they need to

pay off College tuition so they have to

pay for you know uh child care for their

grandchildren and by the way I know that

some of you out there actually are in

that situation in part because we have a

widely bifurcated economy but the the

simple reality is it's not productive or

meaningfully productive to pay old

people there's an argument you can make

about it being really productive to make

investments in young people whether

that's training or that's uh general

purpose education all of those things

raise the quality of Labor that's

available in your country and positions

you to move up the value added chain in

the United States like I I would just

point out that it's relatively

straightforward we're not moving up the

value chain that much we're actually

moving back down the value chain you and

I are here talking about you know steel

and copper and um you know the prices of

um electricity n gas electricity n gas

Etc the things we think of is like the

basic accurs of life right if you're

worried about those prices that means

you're not out there self-actualizing

with fantastic you know avocado toast

that you're dining in uh you know right

on the edge of the zanz falls right like

you know like there there just is a

difference right there's a huge

difference I like and I'm not arguing

that we should be doing High-Speed Rail

and everything else but like just do

something for God's sakes go out and

actually try to build something new and

change the rules to make it easier for

people to do so if we had an American

president that legitimately came out and

said the opportunity for America is not

to be great again but to grow and raise

living standards for all Americans we're

going to have to make some hard choices

along the way we're going to conduct

ourselves in a diligent and honest

fashion as we invest to make our country

better for our

grandchildren than we were before right

I I actually think we would all be so

much happier than the current world that

we inhabit which is some variant of well

you know did you get yours I feel like I

got short changed on mine right how how

do I fix that who who do I grift how do

I convince people to let me get rich

today as compared to we all grow richer

together so do you think that's an

inflationary pressure because more

demand less stuff being produced well I

I I think the irony is is that it's

manifesting itself in that

italianization right it's meaning that

we're having fewer kids because we can't

afford them it means we can't move to

the locations that we want to move to

pursue jobs therefore we're making hard

choices on the other side right we're

choosing the relative safety and

stability of of being part of an

extended nuclear family as compared to

go west young man in a Horus grey

framework saying strike out try to get

rich give yourself your best opportunity

and oh by the way this is the 19th

century we're going to be modern and

pragmatic about it if you screw up we're

going to call this thing personal

bankruptcy or even business bankruptcy

through limited liability corporations

and you're going to get a chance to do

it again we'll give you a second chance

right I mean what an incred like just

but the the risk-taking involves um

borrowing and spending where the Italia

the Italian model is uh less borrowing

more paying off debt which means fewer

currency units which means deflationary

pressure is that that that would be the

that that would be the argument the

unfortunate reality is if you keep up

the Italian model for too long you know

as Maggie Thatcher put it very well the

problem with socialism is you run out of

other people's money yeah then you're

forced to just print more of it right

then you have then you have the

inflation and so I think that's the

unfortunate you know we we are in

between silin caribdis if we decide to

make the hard choices that allow us to

make productive outcomes there will be

pain in the form of lower employment

there will be lower corporate

profitability because there is less

consumption and there's more reduction

of the leverage components to it um on

the flip side of that you know if work

are getting paid more if we recognize

that we can't just willy-nilly ship all

of our intellectual property

overseas um you you're setting up

conditions for the labor share to

actually grow and improve the harmony

that we've experienced we you know we

had a really unique period in the United

States in the aftermath of World War II

where an incredible number of

individuals in the US economy had Direct

experience with each other in the most

difficult of conditions right and that

actually created a level of cohesion

that ultimately manifested itself in the

reforms of of civil rights it manifested

itself in a recognition that women

should have the opportunity for

self-actualization right we behaved in a

way that was largely helpful for

everybody and now we've kind of it

really does feel like we've lost sight a

lot of that and we're basically you know

marching around and pointing at things

and putting stickers on them and saying

well that's mine that's mine that's mine

nobody else gets to touch that you know

uh let's make sure the government

doesn't get its grubby hands on those

things and in the meantime we then turn

around and we're like you know can't

have the government taxing us we can't

can you believe that civil servants are

getting paid as much as they're paid and

then we wonder why corruption seems like

you know uh you know the centerpiece of

the American experience at this point

where public officials are choosing to

enrich themselves in ways that their

their predecessors couldn't even have

imagined you

know you kind of get what you you vote

for yeah so it sounds like we're

grinding to a halt from the standpoint

of the real economy uh but there's a lot

of deflationary pressures due to the

macro stuff the demographics and just

the the changing of uh what people

prioritize uh and then there's

inflationary pressures from government

deficit spending a whole heck of a lot

more and then deficit spending to

consume as opposed to

produce and that deficit form of that

defit spending takes the form of the

government borrowing because that

borrowing is no longer really available

for the

individual right I think that's actually

really important to understand what

you're really seeing going on is the

government is ultimately saying we don't

really care we can always come up with

the money to pay in our own terms

therefore we're going to do all sorts of

things that you in the broader economy

might look at and be like well I I would

definitely classify that as nice to have

not need to have

right and when you have a lot of nice to

have but not need to have nobody's

really happy right I mean any anyone I'm

sure there's members of your audience

that have discovered the underlying

phenomenon of once you have everything

you want actually want you basically

start filling your life with things that

aren't all that meaningful and nobody's

really happy in that your house is

cluttered you're like why did I buy that

you know it's like what was I thinking

what what what made me think that what

would really make make me happy we're

round ice cubes in my freezer right

um you know but like this is the world

we inhabit we all want you know 2inch

ice cubes that look fantastic in our in

our scotch glasses and round ice cubes

that optimize the surface area to melt

ratio like we're basically Romans eating

peacock tongues for all

intention Mike tell me about the

two-year where do you think that's going

to be in a year and then please tell me

about your product that you have I

believe it's uh

Tua yeah so T Tua is one of the more

interesting products that's out there it

is actually one of the very few ways

that someone who wants to gain exposure

to the directional price move in a

two-year Bond can actually do so so Tua

is a um five times leverage exposure to

the US 2-year treasury future contract

it allows you to actually create a level

of volatility that's about half that of

the US Stock Market whereas a 2-year

Bond on its normal basis has so little

volatility like it just doesn't even

matter from a from a trading standpoint

right okay um and so that's really an

important tool if you think that the FED

is going to start cutting rates do two

features to it one it'll capture the

price move and then the second component

is once the yield curve

normalizes and so the front of the curve

is less than the 2year that leverage

starts to work in your favor and it

turns into a much higher yielding

instrument and so there's some people

who are waiting for the yield to get

much higher and there's other people

like myself included that have positions

that are largely betting on the

directional move in rates as compared to

the carry characteristics of it when you

say the curve is no longer inverted are

and that gives you an extra pop is that

does that matter if it's a bull

steepener or a bare steepener I would

assume it has to be a bll steepener

right because then the uh yields are

going to go down price up well you're

going to benefit from a yield Point

whether it's a bull steepener or a bear

steepener all you care about is the

steepener component okay but from a

price Behavior standpoint you're 100%

correct if you have a bare steepener

then ultimately you're going to lose

money in the price Behavior you'll make

some of it back in terms of yield over

time okay got it so the ideal would be

uh steeper yeah the ideal is a bull

steepener particularly happening at the

front end easiest way to think about it

is just this is the the vehicle you want

to be in If the Fed is forced to cut for

any reason in the next two years right

like this is just the right place to be

and that's definitely my base case what

what's your uh view on that Mike what do

you think the two-year will be in a year

well so I think a year is probably the

right time to be thinking about that

forecast ultimately I think we'll

actually probably be in the threes but

that's because I have a relatively beish

outlook on the potential for a risk off

event particularly in credit markets to

hit

um what I'm really worried about is if I

talk to business people in the

commercial real estate space or I talk

to people in the industrial space or

even I look at something like Nvidia

which is engaging in large scale vendor

financing no different than Cisco did in

Prior Generations you know the real key

risk that you face anytime you're

engaged in levered lending of any form

uh shape or form is that the companies

that you're lending to experience

adverse economic outcomes

right it's not so much that interest

rates go up that historically has not

been a big risk the risk has been on the

fundamental deterioration right the

company's making less money because we

go into a

recession that makes servicing debt much

much harder particularly for the smaller

companies that tend to make up the high

yield space and candidly we haven't had

the opportunity or at least we had the

opportunity but we squandered it for

many of these companies particularly

those that are under the private Equity

umbrellas or other areas to have delived

themselves the speed with which the

interest rates have been hiked have

basically put us into a situation where

many many companies simply can't afford

to refinance and again it's not the

credit spread it's not the stuff that

happened in 2008 that matters it's

simply the underlying risk-free rate of

return yeah so the speed of the hike uh

ironically increases the probability uh

that the FED will have to drop yeah I

think the speed of the hike and then

ironically the longer the FED delays the

less you know what's referred to as

prophylactic Right Moving in advance

taking caution ahead of things again you

know prophylactic in in that context

also helps to explain the deterioration

our fertility rates but you know we're

not talking about something that's all

that different actually in this this

underlying phenomenon right if the FED

is forced to cut rates it's likely

because the economy has deteriorated

sharply yeah and the longer they put it

off the closer you get to the point that

it doesn't matter right so like right

now the debate is like well will the FED

cut by 50 basis points or 75 basis

points in 2024 and my reaction to that

is like who cares yeah right I mean the

companies that I'm looking at are

looking at their financing costs going

from four and a half to 5 and a half

percent to 8 n 10 11 and in many

situations they just can't afford to do

it yeah I always use the example 200 I

think it was seven uh when they started

cutting rates um and I said look just

let's assume that they would have

started cutting six months prior you

think we would have avoided the

GFC probably not I I think it would have

been hard because I think the GFC

ultimately was more about um just

fundamental errors in terms of the

construction of Structured Products

right we made assumptions about the

frequency with which people would

default on various instruments and the

biggest driver of why that mattered is

because we then built lots of large

levered structures that required those

levels of performance on the fixed

income

assets um I'm not seeing as much

evidence that that's the issue this time

around right the com the people who are

buying homes are rarely lying about

their financial condition they are

rarely planning on flipping the property

rapidly they're rare you know they're

really looking for places to live right

and so perversely this is a variant of

you know the magino line right the last

battle is almost never the one that

you're facing this time around no but

it's a banking crisis so that was a

banking crisis in the money center Banks

right when you allowed deman Brothers to

fail basically 50% of the hedge funds in

existence suddenly discovered that they

didn't have anywhere near as much cash

as they thought they had had a sizable

fraction of their cash was turned into

an unsecured claim against Leman

brothers that unsecured claim took

several years to pay out and ultimately

the recoveries were better than people

had anticipated but the simple reality

was that didn't help you then right if I

needed to make my mortgage payment and

that money didn't come in or if I was

trying to create a business and the

money doesn't come in that allows me to

make payroll then it none of it really

matters right the game is I've missed my

window of opportunity and that I think

is the real challenge we face this time

around are there tons of companies out

there that if they don't get much lower

rates really aren't going to be around

to see the next cycle yeah yeah yeah and

and then can they uh can they get credit

if rates are dropping because then you

argue that money's tight money's tight

it's not loose and that catalst for the

banking crisis it doesn't have to be

residential real estate be commercial it

could be China it could be Japan it

could be Germany it could be any of

these things because the banking system

itself so interconnected yeah no I I

think you're hitting on a really

critical point right I mean we remember

the global financial crisis because it

just happened but the resolution trust

Corp was created in the aftermath of the

1989 recession you know predicated on

the dramatic increases in interest rates

and the inability to distinguish their

deposit taking activities for the

Savings and Loan industry right they

were ultimately placed into a position

in which they had had to say okay um

we're going to have to let some of this

stuff fail that has been overbuilt that

was the condo and Northeast uh inner

city uh housing collapse that occurred

around 1990 it even hit out in

California as well although less severe

um this time around I would actually

argue that there's just so few homes

that are actually available that

perversely people are being forced into

all sorts of uncomfortable decisions

either spending more than they want to

um or choosing to live with their

parents and if they choose to live with

their parents there's a there's a

perverse Dynamic that's playing out

where people are just saying something

along the lines of well forget it I can

never buy that house I'm just going to

have to inherit my parents house so you

know what I really want a new pair of

skinny jeans because that'll make me

look really good and overcome the

objections from the young women in the

dance club who are like wait you live

with your parents and you can be like

yeah but I got skinny jeans right

so why didn't you say that at the

beginning

Mike

start the conversation with the skinny

jeans it would be helpful I'm not sure I

fit in them though

so oh Mike you're gonna be at Rebel

capitals live buddy that's awesome I I

sure appreciate it it's GNA be a

fantastic event Jeff Snyder is gonna be

there along looking forward to seeing

Jeff is he gonna shave I well the better

question is he gonna get a

haircut I they're they're actually the

same thing both involve cutting hair

yeah we'll have to see I wouldn't hold

your breath but it's be a fantastic

event so uh I can't wait to see you

there for people who want to find out

more about what you do where can they go

and then where can they go to check out

Tua uh so if you want to look up Tua you

want to understand it check out www.s

simplify us I would encourage you to

look across the range of products that

we offer simplify as an ETF firm that

was created in 2020 when the regulatory

rules changed and allowed a lot of

strategies that have traditionally been

reserved for the hedge fund world to be

brought into the ETF world that's really

what's been powering our growth it's my

background it's a lot of the rest of the

team is coming from a similar place um

if you want to uh follow either uh my my

random ramblings and writings you can

find me on Twitter atpr Plum 99 I know

you've probably got that listed on the

screen somewhere um and then I also put

out a substack called yes I give a

fig.com um it's in my Twitter profile

handle if you want to take a look there

I'm more than happy to to set up a

discounted membership George uh for your

subscribers so yeah I appreciate it Mike

and thanks again for your time it's

always a pleasure to talk thank you

George I appreciate you have me hey guys

I want to invite each and every one of

you to join me May 31st through June 2nd

in Orlando for Rebel capitalist live

this is the annual conference I do and

this year it's going to be absolutely

incredible we're have some of your

favorites there as speakers guys like

Jeff Snyder Mike Green the real estate

Kenny maroy we're gon have Robert Barnes

they're talking about freedom and

liberty even Rich Cooper is going to be

there discussing red pill issues this

event is all about giving you the Intel

The Insider information you need to not

only survive 2024 but Thrive the whole

reason I created this event was to give

you the tools you need to build the

future you deserve serve for yourself

and your family this is an event you are

not going to want to miss so to get more

information go to Rebel capitalist

live.com you can see a full list of

speakers speakers we've had in the past

you can see clips from past events and

most importantly you can get your

tickets as we get closer to the event

the tickets go up in price so you're

going to want to get those

ASAP Rebel Capital

live.com and will see you in Orlando May

31st through June 2nd