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Hi, I'm Ral Pal and welcome to my show, The Journeyman. The Journeyman, as you know by now, and I repeat the same words every single show, is my journey to that nexus of understanding between macro, crypto, and the exponential age of technology. Now, at Real Vision, we have a phenomenal stable of incredible talent, and particularly in the Pro tier, where there's myself and Julian Battel alongside Andreas and Mikuel from um Steno Research, who are incredible, and Jamie Coots. And periodically, I like to bring them on to my show so we can exchange ideas because we don't always get a chance to exchange our ideas, even though we're all within this Real Vision Pro tip. Andreas is, you know, one of my favorite business cycle people, and Mikl with his geopolitical analysis. It's really valuable. Sometimes it's different to my views. Often it complements because we use business cycle analysis. Um, and so it's great to sit down with Andreas. Andreas gets, unlike many macro people, he gets technology, he gets crypto, he gets the move to single stocks, but he also understands, you know, what drives dollar yen, all of this stuff. And so it's always a rewarding conversation. So, you get to peek behind the curtain of Real Vision Pro by listening to myself and Andreas Steno chatting, shooting the [ __ ] about macro. Enjoy.
Join me, Ral Pal, as I go on a journey of discovery through the macro, crypto, and exponential age landscapes. In The Journeyman, I talk to the smartest people in the world so we can all become smarter together. Andreas, good to see you, my friend.
Likewise. So, you've been crushing it this year in Real Vision Pro. What the [ __ ] are you up to? What's going on? What's working? Why is it working?
Um, you know, I think the combination of a business cycle framework, a liquidity framework, and a policy department looking into all of these political cases gaining traction at the moment. I think that's what's been working for us. You know, this interlink between an economy that is to a larger extent driven by policy decisions and um a framework that allowed us to turn upbeat in the aftermath of uh the liberation day panic. It's basically what u made us ace this uh cycle so far. I think we're up 70% without any major drawdowns this year. Um, not that I necessarily try to avoid these drawdowns, but we've managed somehow. Uh, so I'm pretty satisfied.
And so talk to me about business cycle first. Where are we? Because there's there's I you and I were just talking off camera about this weird perception that we're going into a recession and that we're late cycle. Talk me through how are you seeing it all right now?
Well, I guess if you look at labor market indicators such as the ADP report this uh this month, um various other labor market indicators, they they obviously look bad. Um the ISM index looks lukewarm at best. We're kind of sideways around 50ish, right? And nothing is really happening. Uh but if you look at the Standard and Poor's version of of the PMI, we're actually at plus minus 55. So pretty decent uptick in the cycle. Uh so that's the first conclusion I'd like to reiterate. Basically, we've told our Pro members this over and over that the Standard and Poor PMI is much better at predicting the actual cycle and the actual activity one or two quarters later.
Why is that? Because it's a newer index, so it's harder to have that long-term track record. But why is it better?
I've looked at the differences in in uh first of all the questionnaire, uh but also the sample um of the two surveys. And if you look at the questionnaire from the Standard and Poor's PMI versus the ISM PMI, it is much more focused on domestic trends and not as focused on cross-border trends. Uh so when you look at the questionnaire from the Institute of Supply Management, they're very focused on, okay, um how's the cross-border order book looking? Um how are how are operations running in all of your uh countries, etc. Uh while the Standard and Poor's PMI is very narrowed down to the domestic picture. I think that's a big difference given everything we've seen on tariffs etc. this year. Uh when you look at the sample size, it's it's much bigger in the Standard and Poor PMI as well. So they capture more of the say the theme segment, um and less of the blue chip old industrial base. So, so I think those are two key reasons. Um when you look at it empirically over the past handful of years, the Standard and Poor PMI is uh roughly two times better predicting actual services and manufacturing production one quarter later. It's much better. Uh and no one cares about it, which which is interesting, right? Uh you've covered hedge funds both on the sell side. We've also been in hedge funds on the buy side, right? Around, I know this from from my journey on the sell side as well. All major PMs, especially in the equity space, they look at ISM. That's all they look at. They don't really care a lot about macro. So that's kind of their their bellwether. They think it's forward-looking. It's not really anymore. So I I um I think you have a huge advantage versus your institutional peers just by, you know, creating some simple forward-looking indicators for this uh metric, and they all look fairly good right now.
So, so speaking of the cycle, um I I think first of all, it's it's it's been tempting quite a few times over the past 24 months to to turn negative. Um because you've seen a couple of employment scares, you've seen the tariff sentiment scare, and all of that. And by the end of the day, when you look at it, um nothing has really materialized. Uh and I think, uh for starters, it's relevant to look at the credit creation/money creation in the economy to explain why. Because it's actually true that the industrial base has been, you know, sort of wobbly for a couple of years running. It is true to a large extent.
Just a couple of observations is that there is a capex cycle going on that's raising GDP and government spending, but domestic ordinary businesses in the US are struggling because rates have been high, and so you've got this bifurcation, the domestic versus the international kind of thing, as you said. Um, and that's caught a lot of people off sides, just misunderstanding that whole process. When in fact, liquidity explains what n between 97 between 90 and 97% of pretty much everything. You have one macro factor. I've I've always said that it's the greatest and easiest macro risk-taking environment of all time because you have one macro variable that matters and nothing else really counts.
Yeah. But I think, um, to add a bit of spice to that mix, what happened roughly two years ago as well was that the credit creation moved from the central bank balance sheet to the broader economy. Yeah. Uh, and and a lot of people completely missed that because if you look at the Fed balance sheet, it's it's basically flatlining, right? Um, we know the reason why, we have quantitative tightening running in the background. Then you have a couple of countering factors, but the balance sheet is flat, and um, net net liquidity measure is flat. Yes, exactly. Uh, and um, therefore, the money created since 2023, all of that credit creation has happened in the private sector and in, uh, the treasury deficit, basically. So, of course, if you run a huge deficit and private banks create money by lending out to households, corporates, uh, you're going to see an explosion in liquidity just from another source. Uh, so, essentially, three agents in an economy can create a dollar. The Federal Reserve can create a dollar. That's what we've been used to being the key driver. The US Treasury can create a dollar by running a deficit. And a commercial bank can create a dollar by lending out and increasing their leverage. Uh, and it's only two out of three agents that have added liquidity for the past couple of years. And the Fed is not one of those two. And that, I think, has caught a lot of people offside.
We looked at this and wrote a lot about it in GMI and Real Vision Pro. It seems that they're trying to move the game when people understand what the game is. So at first, it was the balance sheet from 2008 until 2012, 13, 14. Then it became Fed net liquidity, which is all of those measures. And now they've gone to total liquidity, which is really right now being entirely driven by the private sector, but it's still liquidity. And I I love the way you put it. There's three ways you can create a dollar. You need to keep your eye on all three ways. And there's also a certain amount of liquidity that comes from issuing short-end bills as opposed to long-end. It seems like that's a liquidity provider.
Yeah. Uh, indeed, you know, and it at at first, uh, the current administration, you know, tried to at least rhetorically, uh, lament the bill issuance of of the Janet Yellen Treasury. Uh, but they ended up doing the exact same thing, right? Uh, so they've they've utilized that as a um as a liquidity instrument without any doubt. Uh, and we've, by the way, also seen that um in in global yield curves, and I actually think this is an overlooked mechanism. If you look at Japan and Europe right now, we're also seeing a uh a large credit creation in those economies without the central banks really, uh, yeah, helping that trend, actually. Uh, and and interestingly, if you look at the Japanese case, you know, we've seen this massive steepening of the Japanese yield curve where long-term bond yields have been allowed to rise for the first time in a long, long while. Uh, and while it seems counterintuitive on the surface that when, you know, Bank of Japan has basically pulled back from intervening against long-term bond yields going up, um, it has ultimately released the animal spirits of the Japanese commercial banking system again, because they've they were stuck in one or two decades of no carry. So what they basically have a business model where they borrow short and lend out longer out the curve. Uh, and when the curve is flat as a pancake, they can't really make any money doing that. So, they don't lend out. Uh, and as soon as this shift happened very aggressively, they started lending out uh in a way that we haven't seen in a very long while.
It's always been my impression that the global central banks completely understand what they're doing. Japan is always the leader in this for some because of its population is older, I guess. You know, there's just. And there's signal in what they're doing, which is saying they've all seem to have gone away from using traditional methods to just going straight to the private sector and using the banking system. And Japan is doing the same thing by readjusting its yield yield curve.
Yeah, it is. Uh, and at the same time, we're obviously seeing this global trend towards um removing red tape, removing capital restrictions etc. for private banks, again, incentivizing them to do the heavy lifting on this uh liquidity creation. And I think that's essentially what a lot of people have missed over the past couple of years, that we've seen a move from central banks doing the heavy lifting themselves, to instead incentivizing the private system to do it instead. Why did they do it? At least my initial thesis was that, you know, they they were scared in the aftermath of that inflation spike in 2022 into asking someone else to do the dirty job. They can't be hung for it. So, it's like, well, we're not doing it. Therefore, they've incentivized uh the private system to do it instead. And I think that makes, as long as we're running inflation above their target range, that's probably how they're going to to maneuver this.
Oh, so their messaging looks consistent. It's like, we're not adding liquidity because we understand inflation. Meanwhile, they're like, "Hey, you guys over there, buy as many of these bonds as possible and create more credit on the back of it."
Yes, exactly. Uh, so ultimately, I think it's a result of of what happened in late '21, early '22 with that inflation spike. Um, and they're not willing to once again take the blame for inflation running a little bit above target, as we are right now. So they're they're asking uh the private system to do it. And that just tells you they know what they're doing.
Yeah. Everybody calls the Fed idiots, but I'm I've always figured that if you actually take the the framework of they know what they're doing, look at it through that eyes, it's much clearer.
Yeah. You know, I I don't get the chance to to sit down with Fed members that often, but I've I've had the chance to sit down with a lot of members of central banks in in Europe. Uh, and they know what they're doing. Uh, but of course, when you uh address the public, you have to do it in official ease, right? So they'll never admit to it straightforward as we're uh chatting about it here. Uh, but they know what's going on, of course, and of course, they do also track these, you know, private liquidity mechanisms, very closely, and their staff is on top of what's going on in the private banking system and the commercial banking system. No doubt about it.
I never forget my best ever central bank meeting was with the Swiss National Bank, and it was when I was still at GLG back in the day, and we were talking about deflation and the issues we're facing. And they're like, "The best thing about being the Swiss is like we know what's going on. We're behind every closed door in every meeting. We're too small to matter, so we can do anything we want." And then if you take that bit of information, and it took me a long time to understand this, a long time, is everyone's like, "What the [ __ ] are the Swiss National Bank buying equities for, particularly tech equities?" Yes. When everybody else is doing different stuff with their reserves, but they're buying tech equity when they were when they were printing money. And what they were doing was counteracting the debasement of currency, doing the trade that we're all doing now, well before we even understood it. They understood it straight off and bought equity, and nobody understood what they were doing, but they've done brilliantly, and it's kept the Swiss Franc quite strong because of it.
But uh Ra, I actually had an interesting observation this week. Um, you know, the guy Muhammad el-Erian, very known economist, right? So he he um tweeted uh on X that I think it was JP Morgan and another big investment bank in the US now label the gold and Bitcoin trade the "basement trade." Yeah, saw that. It took him, I don't know, two or three years to get there, but it it's actually quite interesting because that probably leads us to the part of the cycle where, you know, the broad participation will gain uh speed. We'll see advisors, you know, slowly but surely, um sending money in that direction, etc. So I think it's a really, really interesting juncture when these banks start to admit to the trade. I wrote about this on X recently. I'm like, it's amazing because I went and searched via Grok or whatever to go and find any use of the word debasement by any media. There was none. And what's what's also incredible about the whole debasement trade, it was a bunch of [ __ ] crypto people who figured it out well before everybody else. The gold people are kind of got confused with inflation because they were very stuck in the '70s idea. And it's the crypto people who figured this all out before everybody else. And finally, people are starting to realize that this is the thing. And as I think, as you say, it's still early because I still have to explain it to everybody. And by the time we even get to next cycle, I think it becomes the all-in, everybody knows what the game is.
Yeah, I think you're right. Um, and, you know, speak, we started out by discussing the business cycle and and where we are in the business cycle. Um, if you look at at the best forward-looking evidence for labor, for example, uh, temporary hiring, of course, you do not hire people permanently when you think the outlook is slightly muddy still, which is, you know, for sure still the base case, um, at sea level. Um, but we're starting to see, you know, a mild uh acceleration in the temporary hiring, while we don't see the hiring elsewhere, and that's the first clue of every acceleration of the hiring ing cycle. Um, so I think in in a couple of quarters from now, we'll probably start talking about scarcity in various sectors again, and from an employment perspective, also given what's going on with the labor force, right? Uh, so my biggest bet actually right now is that the capex cycle that we see in data centers, AI, etc., will spill over to a massive capex cycle in automation. Uh, and those two themes are obviously interlinked.
The kind of robotics idea that everybody gets efficient in manufacturing. Exactly. Um, so, so look at it this way. If if you see a decline in the foreign-born labor force as we do right now, and you you send a lot of low-skilled workers home, if you're a farmer, if you're a uh, warehouser, if you're in logistics, etc., you simply need to spend now to be on top of this. And, you know, ultimately, you're more into this than me. I don't think it's out of this world to think about, you know, a humanoid robot controlled via AR in India. So you you can still hire, but not in the US. And I guess that's kind of what the the administration is trying to incentivize early here. Um, so I think it was really, really interesting. Um, when I did a study, and typically I hate looking, you know, five, 10 decades back for comparisons because nothing is kind of that like that anymore. But but I had a look at the last time we had tariffs implemented in size, and what happened in the aftermath of that was actually a huge capex cycle because by implementing the '50s, '50s, and then you had um an implementation of tariffs just um around the 1890s as well. So, you know, you have a couple of empirical uh studies, and both led to capex because you simply force the local manufacturers to do capex even though they don't want to, be especially if you shrink the labor force at the same time. And, you know, we can discuss the morals of everything that's going on. I don't really care about that when we talk about investments, right? Um, and I I think it's crystal clear that you're forcing the domestic manufacturers in the US into a capex cycle now. And that is certainly not a theme that a lot of people subscribe to. And also, while everybody fears AI and robots taking our jobs, the the actual problem is there's not enough workers because of the aging populations. So if you look five years ahead, you got a big [ __ ] problem on your hands because the labor participation rate collapses over time because you can tell it by birth deaths leads it. And so you're going to have to fill in that gap. And it's going to take time, I think, but you have to fill in that gap with robots and AI. There's no way of doing it or the economy grinds to a halt. Yeah. Um, it's as simple as that. And you basically, you know, you bring that date forward when you shrink the labor force via migration policies on the top on top of it. That's right. You force you force it to happen. Yes. Uh, and I I I think the administration is fully aware of this, and I think it's part of the plan.
Yeah. I I agree. And and you hear the administration, it's really interesting to hear this administration because a they've talked about, even Trump was out yesterday, he's like, "We need to grow our way out of the debt." Elon, when he was around the administration, was like, "Yes, it's the robots and the AI. It's the only answer." Meanwhile, Scott Besson is basically talking about keeping the dollar weak, getting rates as low as possible. And he's openly talking about refinancing the debt, which is the whole debasement trade. And they're openly talking about what they're doing now. It's in plain sight.
Yeah. Uh, and, you know, e even the presidential family is involved in the trade, right? So, I mean, uh, it seems like it's a good idea to listen here. Let me put it like that.
Yeah. And that's why, you know, I write frequently in GMI. This is the greatest macro risk-taking opportunity of all time because we now know the game. It's clear, and they're telling us it's the game. And that drives your asset allocation decisions so clearly. It makes it super interesting.
Now, I just want to run through with you, uh, a bit more about the Japan thing because there's a lot of, you know, fear-mongering again, Japanese rates, the whole world's going to blow up. So, does it matter the Japanese rates are going up, apart from the fact it's creating credit in Japan?
Um, you know, by the end of the day, uh, the Japanese yield curve is a global bellwether, uh, due to the fact that Japanese, uh, life and pension funds are big investors in in, uh, in global bond markets. But I don't necessarily think it's a biggie, uh, given that, uh, the Japanese life and pension funds are, first of all, big enough to buy more than local bonds. Secondly, they have to buy global stuff due to investment policies. It's not like they can buy just local stuff. Uh, it wouldn't be allowed in any, um, European pension fund either. You obviously have to diversify due to a lot of political reasons. Um, but sure, I mean, it it will spill over, uh, to to the shape of the yield curve, not least elsewhere. Uh, and that's the important word here. So a global steepening continues.
Yeah, it does. Uh, but you ultimately need to remember that not a lot of issuance is going on in the 30 to 50 year space. I mean, it's it's more it's more of a, you know, it's it's it's what you have on the screens more than more than something that matters in practice, right? Uh, and we've seen this global trend of moving inwards as a consequence of of this, right? Uh, the US Treasury has done it, uh, very openly, by the way. Uh, and we've seen it elsewhere. Um, so I think the the only place where it matters a little bit, uh, is in the mortgage space, obviously, due to the link to the uh 30-year Treasury yield. Uh, and we've seen some issues, uh, around what I typically label the golden handcuff syndrome in the US due to long-end yields moving as much as they've done, uh, incentivizing people to stay where they are. Uh, so the, you know, the lack of of movement, um, is something that could potentially be an issue, uh, in the US because people can't sell, people can't sell a house and refinance because the new mortgage comes at higher interest rates and they're locked in at low rates.
Yeah. And I I honestly think it's one of the reasons why we've seen the remote trend being much more pronounced in the US than elsewhere. Um, it's this golden handcuff syndrome leading people to just seek remote work instead of moving.
Super interesting. Now, before we get on to US rates, um, give us the view on Europe. Because Europe, what's going on with this with the with the French spreads? What, you know, what's happening there? Seems to be some dislocations starting to play out in Europe. How do you see that?
France feels a bit like the Italian case to me, just a handful of years back, right? They they have an election every year. They end up in sort of a lame-duck situation every time they hold an election because the, uh, the center of the political space keeps keeps blocking, uh, both the right and left wing from from coming into power. Meaning that nothing happens in France. And I I know you like stating that nothing happens, but that's really the case in France. Nothing happens outside of a, you know, they they basically roll forward the budget every year, and they cannot really agree on anything reform-minded. So, uh, that's why investors are getting tired of France. You can also see France disappointing in the equity space versus all of their peers in Europe, whether it's Spain, Italy, Germany. They they're running behind in any, uh, in any measurable way. Um, so, you know, of course, um, you know, that's kind of annoying me being here, um, trying to at least pitch the European case from time to time, but I don't think there's a lot of good to say about it. You have a couple of niches that are interesting in Europe. Um, first of all, defense. I still think that's an interesting trade.
You nailed that really early before it was on anybody's screen. You were like, "Well, if you listen to what's going on geopolitically, they're going to have to ramp up defense spending." Yes. And especially, um, a lot of people missed the train when Trump told Europe to do it. They thought he was bluffing again, and he wasn't. I mean, uh, look at the results, uh, coming out of the NATO summit. Was it in June or July? You know, every single, uh, member country, I think, outside of Spain, uh, signed this, uh, new treaty to to bring us to 4% of of GDP per year in in military spending, plus a couple of add-ons. That's a lot. And it's a big step forward for NATO compared to, yeah, just a handful of years ago where, you know, Biden struggled to convince everybody to to meet the 2% target. Um, so I I think this is an an um, a sector that will see a lot of lot of demand over the next, uh, three to four years. And lately, it's it's been pretty interesting to um, you know, to follow developments, uh, the developments both in Denmark and in Germany, in Poland, in all of the countries surrounding where I, uh, where I live. We've seen probably Russian drones flying over the airport here in Copenhagen. We saw over Munich yesterday.
Really? Yes. I didn't see the story. And, you know, the Munich's airport was closed for a couple of hours yesterday because of, you know, hostile drones, uh, in in the airspace just above. And the interesting thing was that the Danish administration went on air, you know, live television, the world was watching, as a consequence of this drone u flying over the Copenhagen airport, stating that, well, to be honest, we don't have any way to detect this outside of watching it with binoculars, um, and we don't know how to shoot it down. So I think especially on, you know, the war from home story is is incredibly undersubscribed from an investment perspective because you simply need to be able to defend yourself against, um, you know, smaller units, uh, and things that are remote controlled from wherever in Russia. Uh, I I think that's a big, big trend, and we've nailed a couple of single names there, and, you know, returns are absolutely through the roof. Uh, I just lament that I didn't buy more, but that's always how it is when you have a good trade, right? You're never satisfied. I, at least, I'm never satisfied. No, I could have done better.
Right. So, a quick break in your regular programming. If you're serious about your future, grab my free report called Prepare for 2030. I think you've got five years to make as much money as possible, and this guide will help you navigate what's coming. The link is in the description. Download it now.
And, um, what about European rates and European liquidity? The two things that really matter in the global equation. Where, where's that trend going?
Yeah. So if if you look at the narrow liquidity picture in Europe, uh, it's incredibly tight. It's even tighter than it is in in the dollar market. You've seen that in, uh, in various spreads that you refer to, both French government bonds versus the swap curve. So, you know, a measure of, uh, the interbank liquidity, essentially, and and that liquidity is still incredibly tight. So it's mostly an issue for sovereign markets, sovereign bonds, right? While the broader liquidity landscape is actually fine, since private banks, commercial banks have also, um, increased their balance sheets amidst this. We're seeing the first signs during my adulthood of the European Commission looking into rolling back red tape for European banks, as you and I very are very well aware of. That trade, European banks, was, you know, it was just a debt patient for, I don't know, the better half of two decades, at least since since '08, it was just a terrible trade, 15 years running, and now it's actually showing signs of life. And I I actually think there's some merit to that trade here, European banks doing better since they've, you know, just been stuck in the mud for years, and now we're seeing the first signs of of the European Commission moving in the right direction on this. And to be honest, I think you have to credit Trump with this. He he's pushed Europe into taking some decision. So for the first time, uh, during my entire life as an investment professional, I actually think there are pockets of Europe that you can buy. And let me just stress, pockets of Europe, like defense, banks, there are some trades to be made there, um, after having, you know, watched the continent go sideways for a decade.
And do you think therefore, if we zoom out again, and we're seeing Europe and the US not using the kind of official sector for liquidity, but they're all using the private sector. Japan is using the private sector. Again, it's telling you that they've agreed that this is the only way is you have to allow the banks to take the slack because they hamstrung the banks so badly after 2008 that the the government had to finance everything. And now they've said, "Okay, that can't work any longer because everyone knows the game, so we're just going to move the whole thing out to the private sector."
Yeah. Uh, I I think that's spot on. Uh, and on top of it, I actually think that the capital allocation will prove to be more efficient when you do it like this. So it's actually to prefer compared to a central bank just expanding its balance sheet to provide liquidity because banks are better credit assessors than, uh, than central banks are in many ways. Not that I say that they have a perfect credit assessment system, but but they're better. So in many ways, this, uh, everything that's happening right now with the credit creation moving from, uh, official institutions like the central bank to the private sector is is preferable. But the the bottom line is is very much the same for the whole debasement notion. But therefore, in Europe, if you're going, and Japan, if you're going to allow private sector credit creation, that's got to be finally good for the equity markets because most of those were stagnant for since the financial crisis, and it was only the US that was doing this because of the debasement and their technology advantage. But I I, you know, take the simple anecdotal study on this. Nikkei, the Japanese main index, is through the roof this year. It's doing really well because of this factor, maybe it's the factor, while it moved nowhere while they were buying ETFs and equities and what have you, um, in in the Bank of Japan. So when they when they leaned back a little bit and allowed the private market to, uh, do the heavy lifting, we've actually seen a breakout to the top side. So yes, for once, I think we'll have global equity returns. It doesn't exclude returns in the US, and especially in in the technology sector outperforms the US. It's hard not to. Yeah, exactly. But but, um, for once, you can actually invest in the Euro area, in the, uh, Japanese equity market, in the Korean equity market, and make money. And I think that's interesting because that, you know, that will lead to an accumulative snowball effect in terms of wealth effects globally, where we've seen a lot of people left on the platform if they had too much exposure to non-US tech stuff. Look, look at a lot of active managers across the globe, you know, trailing global benchmarks. They they haven't had 100% allocations to US tech for in the past decade. So they've just, you know, trailed benchmarks as a consequence of that. And now we're actually seeing those people making money. They're still trailing benchmarks, but they're making money. Meaning that a lot of these passive investments from, you know, Boomers not really interested in their portfolios, they will actually see returns for the first time in in many years.
And do you think it this is happening now because the banks have all roughly repaired their balance sheets? That that was the thing that the central banks went, "They're good enough to lend again"?
Yeah. Uh, I think that's a big, um, important lesson here, that uh, central banks will not allow private credit creation in size unless the stress tests of banks look good. Uh, and it took a while for them to get the banks, uh, to to where they are today. Especially the big banks look incredibly solid, uh, from a balance sheet perspective, and, uh, I even think households look very solid from a balance sheet perspective, despite high bond yields and all of that. One one thing is fair enough, you see this calculation all the time. Oh, it's very difficult to buy a home. But that of course rests on the assumption that you need to borrow, say, 95% of the purchase price. But, you know, all of the households involved in in the housing market over the past couple of decades, they don't need to borrow to buy more or less, right? So they have an incredibly strong balance sheet, uh, given this. I know it's a very different question if you're new to the market, you haven't bought a home, and all that, all of that, but those already involved in the real estate trade, they have tremendous balance sheets.
The swing factor to me is okay, we've outlined that globally it seems as a shift from the net liquidity measure which was government and central bank moved out to this total liquidity where they're using the balance sheets. We see it in Japan, Europe, US. Okay, so we've established that the liquidity comes via that mechanism. But the next phase of that to make that freeing up of the balance sheets has to be lower interest rates because if not, we've got we go back to our conversation we were having about the ISM. It's super low because rates are too high for the average company. M it doesn't matter to [ __ ] Google, Microsoft, Meta, Tesla. Oh, in Tesla it does a bit, but most of it doesn't matter to because they're just cash flow positive machines and so they just make more money when rates go up because they put their treasury into into it. But surely they've still got to get rates lower.
It brings me back to the question you asked about the Japanese yield curve and whether it had, uh, global implications. The one way that you can ensure that foreign investors, institutions like life and pension funds, sovereign wealth funds, etc., can buy longer-dated US Treasuries is to ensure that the short-end bond yields are very low. That's the most important thing for an administration to, uh, to, uh, to orchestrate. Because if you're a life and pension fund in Japan, it's written in your policy that you need to, uh, for an exchange hedge your exposure between the US dollar and the Japanese yen. And this becomes slightly technical, but let me try and explain why it matters. If if, uh, short-end bonds alone, um, when you look at the equation seen from Japanese soil, if you want to buy, say, a 10-year Treasury, you need to take into account that you need to hedge the dollar exposure back to Japanese yen when you buy this 10-year Treasury, and the cost of doing so is roughly equivalent to the spread between 3-month bond yields in the US and 3-month bond yields in, uh, in Japan. So if you orchestrate a situation where long-end bond yields are at, say, at 4%, and short-end bond yields are at 1%, you have the sweet spot for foreign buyers to go into the US Treasury market because the spread to the the spread you pay to hedge the FX cost is very low, but there is actually a premium in buying 10-year bond yields. So the steeper the curve, the better. And you and I know very well, if you cut rates a lot, you'll get a steep curve, and that's essentially what they need. Um, so I think you're spot on that, you know, currently they all they even have like the the they have the labor market as an excuse to keep cutting in the US, right? Um, so I don't think they need a lot of political pressure to to just continue cutting, but, um, who knows whether, uh, he'll appoint a complete joker as the next Fed chair, willing to bring interest rates to 1% or whatever. In the end, you kind of understand if you if you were the Treasury Secretary and you've got $9 trillion of debt to roll, you all know the game is this is the game that has to be done. Then you can't have an independent central bank.
No. The question is whether we've ever had an independent central bank, obviously.
Yeah. I mean, Yellen's move from the Fed to the Treasury made it [ __ ] clear that it was never independent.
Yeah. And and, you know, I watched a documentary from, uh, the Vietnam War on on Netflix. Uh, and it had a quite a few of recorded conversations between Lyndon B. Johnson and, um, a couple of members of his administration. And he was talking like Trump, just behind closed doors. The issue with Trump is that he's talking like that in front of cameras. And that's, I think, what surprises, uh, a lot of people and a lot of investors, that oh no, it cannot be like that. It's always been like that, just behind the curtains, right? Uh, you can rest assured that, uh, a lot of Democrats put pressure on on the Federal Reserve behind closed doors in the last administration. Of course, they did. Um, a lot of it's just in front of rolling cameras right now, which is admittedly a big change, but I don't think it's it's a big change in practice, if you know what I mean.
No, that's right. So, we've talked about the macro picture, liquidity going forwards. So, what are the trades? How have you made money this year? What, what did you do to leverage these macro trades? Because I think people like to learn from that. And what kind of things are you looking at?
So I I try to combine the thematic views, both in in relation to this discussion on how liquidity has moved from from one part of the system to another part of the system, with my business cycle framework and liquidity framework more broadly speaking. And I've kind of defined 10 themes for for the coming years that I, you know, move in and out of, given my business cycle analysis and and liquidity analysis. And this year, we've made a lot of money in AI, obviously. Um, but I think, uh, one of the things that I've managed to do very well is to look at, um, the next AI theme within the broader, uh, theme of AI. And what has happened, especially since the middle of the summer, is that we've seen the Mac 7s, the big players, looking for capacity further down the supply chain. The best example of it is the deal made between Microsoft and Nbius, where they basically, um, purchase, uh, free, uh, high computing capacity from from Nbius if needed. Right. So a lot of these players like Nbius, Mara, Irene, they've they've started leasing out their high computing capacity.
So this is the Bitcoin miners?
Yes, exactly. Um, so that's been an interesting case, right? Um, we could all see the capacity constraints coming during during the first half of the year, and now they're solving it via buying capacity from, uh, other parts of the supply chain. I think the next interesting AI trade in many ways is, um, is the energy trade. And I I think it was actually this week, I can't remember the name of the executive from Alphabet, but but a guy went on on on air saying that the bottleneck for them right now was not GPUs. It was a reliable grid next to the data center. And you've been highlighting the solar case here, and I think that's a really, really good place to look right now because I I looked at that with solar, and solar is a weird thing because it's politicized. But forget all of that [ __ ]. You have a very urgent need to have a massive increase in in energy. China has just done this with solar. It's doubled the entire world's solar production in one year by its own expansion. So it shows how fast it can be, how much energy it generates. Yes, it's not perfect because you have nighttime and you have cloud, but Elon's battery situation is ramping up spectacularly, as are battery situations around the world. So that helps. And so even if you're still using the grid, you use a lot less of the grid. So you take pressure off the grid. People don't understand this is like you can put a data center, you can put solar in, some batteries in, you use a lot less of the grid. So that is sustainable, and then you need about two or three years to build a gas plant alongside it. And those two, that's great. It's the only thing you can do at this scale fast enough.
Yes. And that was exactly the point I wanted to make. Um, I've heard this argument of reliable energy equals a good AI bet, but every investor I talk to end up saying nuclear to me. And fine, I, you know, I've invested in nuclear as well, but nuclear is too slow. Yes. Period. It will take a handful of years, maybe a decade for for us to get there, and we don't have that time. When you look at how geopolitically important this is, this is the most important technology the world has ever made. And he who wins this wins the world. It's that big a technology. And China is scaling electricity via solar at an unprecedented rate. There is no choice but the US to do the same. There is no choice. No. It's essentially an arms race, by the end of the day.
Right. That's right. And, you know, David, Matt, and myself look at this. It's it's a flywheel. And the whole game is basically intelligence per unit of energy. That is the whole game we're in now. Everybody is on that game. And that's driven by energy, compute, intelligence, energy, compute, intelligence. And that thing keeps spinning. And energy is the base layer. And people, yeah, it's it's hilarious because you see long-term oil and gas people saying, "Well, it's definitely going to drive."
"up the price of oil." It's just not, um, because it's not fast enough to scale oil. We don't, we can't use the grid. The grid is not able to cope with this. So, we have to have decentralized grids, and the only way of doing that until small nuclear turns up in 10 years' time is it has to be solar and gas.
I, I, you know, I've, I, I love the storytelling around small nuclear reactors. Um, I've, I've made a lot of money on nanuclear this year, but there's, you know, realistically, there's still a handful of years from from really scaling this, right? And we don't have that time, given what's ongoing in China. Not least, uh, you're absolutely spot on when you say that China has doubled its capacity just via solar in a year. Uh, and that chart looks absolutely magnificent. Uh, it's, it's, it's probably the macro chart of the year in my opinion. Yeah. Uh, and I don't think a lot of people have noticed yet. Uh, especially if you look at the domestic case for solar in the US, it, it, it's completely bummed out still. You know, some of the best names that I can think of, uh, they're still down 70, 80% since 2021.
So, we're very early in this story because the solar story before was basically about households. Yes. You know, the kind of redoing what Germany and Europe did, which was get households to use a lot of solar by giving them subsidies to bootstrap it. But they're missing the fact that the solar demand is actually going to come from data centers and it's not from households. Sure, households will adopt it over time because the cost of solar keeps falling. It's ridiculous. It's one of the best trends of all time is the collapsing cost of output per solar panel.
But I, uh, to mention one name, right? We're talking about solar and in in a broader, um, sense here. Uh, the company Next Tracker from the US is a really, really interesting case because they've, uh, they have more than 500 patents, uh, around how to optimize the yield from solar panels when the sun moves during the day. Uh, so they're one of the very few companies not, um, having to deal with this extreme price dumping on solar panels happening out of China. Uh, and I, I, I think that's, you know, a core play, uh, in the domestic US market when the, um, adoption of solar picks up speed in in the US because they, you know, you simply cannot avoid them if you want an optimized yield on your solar panels. I think for me, that's the key player.
It's really interesting because here's two macro people talking about equities and not in terms of broad sense, but we're in sectors and single stocks. It's interesting. A friend of mine works for one of the most famous hedge fund managers of all time who's now family office and he said, "Oh no, we turned into an equity shop years ago." Yeah. Because of the opportunity set that's happening because of technology and other stuff. So, you know, the amount of bond bets or currency bets that happen is very small now. It's kind of like it's been equities and and and crypto, which is what we've all got to. But, you know, you've seen it again this year. If you get the thematic play right, uh, and you square that with the liquidity cycle, you can find some 5-10x cases in solar, in nuclear, uh, in AI, in high-performance computing, in quantum, etcetera, right? Uh, so if you combine the thematic research with the liquidity and business cycle framework, uh, why would you trade dollar yen or whatever to try and squeeze 10% out of that? It doesn't really make any sense, not even from a sharp, not even from a sharp rate perspective, right? Because the sharp ratios on these cases is absolutely magnificent. Even the STO ratio where you only look at the, uh, you know, the upside volatility is amazing, right?
So I, I, I think you're absolutely spot on and I know, even know, I think I know which fund you're talking about. It's just so clean right now to take these bets. As I said, it's the, it's the easiest macro risk-taking cycle of all time because now we've got this two mega trends. Well, you know, technology, which is basically even we can take in the energy trade. It's, it's energy, it's solar, it's robotic, um, energy, robotics, AI. And then we've got the crypto mega trend. And then I think defense is probably a mega trend, as you said. Um, and it makes it super easy. And once you throw in liquidity, things move. I mean, we've made so much money in pro macro and GMI out of just options. Um, because the velocity of the moves is so much higher than the option market price in. We've made so much money from [ __ ] Robin Hood to Coinbase to Tesla to you name it. The other one that was really good for us was Rocket Labs. We did that trade twice and we've made like five or 10x every time we've done that trade.
I like to look theoretically at at stuff like that. And, um, I've always said that you probably pay too much for downside protection in in equity options, but you pay too little for the upside protection or the upside volatility wise. You typically see that skew, right, where it's more expensive to to protect yourself rather than to bet on an outsized move, uh, in the opposite direction. So I, I think you're right that that options are interesting when you look at these cases, even though, you know, upfront it looks a little expensive, but it, it's not priced expensively relative to, you know, this extreme right tail of the outcome space that we see in many of these cases that we've discussed.
Yeah, because, you know, we will, and I don't think we're there yet. We will shift into bubble territory, whether it's this cycle or next cycle. We'll probably have one of the biggest bubbles of all time. And that, what that tells me, and George Soros used to talk about this, basically, it tells you it's all right tail, and the market's going to underprice it, and it's going to give you a massive opportunity. I mean, bubbles are the most fun things if you can get them early. Yes, exactly. Uh, and if you keep calling one, uh, the next month, right, you'll probably miss the trade. Well, it's generally by people who've missed the trade. People are so cynical about the AI spend. Will we have excess expenditure at the end of it? Possibly, but maybe not. I mean, when you speak to Mark Zuckerberg, he's like, we're under spending. We simply can't build this fast enough. At least for now. Um, there's a big difference to, for example, the dot bubble, uh, in the sense that many of these names expanding very fast in equity space, they expand their earnings fast as well. That didn't happen in '98, '99, right? Um, so until at at the point where we see, you know, flatlining earnings but exponential returns, I'll start sounding completely different to now. But but as long as the two track each other, then I'm, you know, whether the multiple is 30 or 32, I don't really care. I mean, it's a matter of rate of change, and the rate of change is still positive.
And what else do you make money? You made money in crypto this year as well. Yeah. I, I especially, uh, I managed to time the trade into ETH very well. Um, you know, I, you and I both have a background in in the old banking system. Uh, and I actually think, um, that we've seen a ChatGPT moment with the stablecoin legislation that was passed, the Genius Act. Um, since it will, you know, when you're JP Morgan, when you're City Bank, you simply need a legal framework that you can rely upon to take decisions. Uh, and, you know, all of these, uh, big banks, they will obviously, um, yeah, chase the stablecoin narrative fast now, as a consequence of the Genius Act, and I think that is mostly a good story for ETH. Uh, you could obviously also bet on it via Circle Group or other, you know, indirect, uh, bets via equity space, but, uh, that that was a good thing for me because a lot of people, you know, ridiculed the whole run-up to this Genius Act and ridiculed David Sachs for being the crypto saw and all of that. But it was actually a big, big moment because it was the, it was the moment where crypto became broadly accepted by the system as a better way, acknowledged and agreed by everybody from Visa to PayPal to all the banks. What? Yeah, this is better. Yes. Uh, and, you know, and most people working on this topic within the system already knew, obviously, but you just need that rubber stamp from the government to to really publicly chase it and and and that's the case though.
So, what do you think for the rest of the year? Oh, two questions, rest of the year and has the cycle extended or not? Uh, rest of the year, to begin with that, um, I think it's actually very simple. If you studied what happened in Q4 2024, you'll make a lot of money in Q4 2025. The setup is 100% similar. If you look at how the yield curve is moving, we see the butterflies or the twos, fives, 10, basically the fives of the curve moving in in in a fashion that is in complete replicate of what happened in September, October 2024. So I think the market will, you know, read, uh, the Fed policy reaction exactly as they did a year ago. Um, and that is typically very good news for macro surprises that you see this kind of behavior from from interest rate markets. Um, everything forward-looking also points to macro surprises generally being, uh, solid through the fourth quarter. Um, so I think that's a simple one. I think we'll see an explosion in, uh, in Bitcoin during the fourth quarter, just to be specific. Uh, I think we'll see a very, very solid risk-taking environment. Um, not because it always plays out in Q4. I don't really buy seasonality analysis. I buy into fundamentals backing up seasonality, and and and we simply see that now, very clearly see that.
Uh, I think the cycle is longer than usual, but also slower than usual, as a consequence of two things. Um, we postponed the peak of the cycle by at least a couple of quarters due to Liberation Day. I, I think it's fair to say that we've had uncertainty at sea level, uh, for a couple of quarters. So the whole capex cycle that I'm predicting, especially in in robotics and automation, uh, is not even, it hasn't even started yet. Um, and to put it very simply, um, you don't see a cycle peak with with ISM at 50. I mean, it's never happened. Um, of course, if the indicator is completely dead, uh, which I don't think is the case, uh, that conclusion could be different, but but you need to worry when we get to 60, then we can start discussing whether we're at a peak. Um, for now, it's accumulation zone, and it will remain the case for a couple of quarters, and then we'll have to see during '26. Um, I, I, I actually wouldn't be surprised if if the cycle was still alive a year from now. Yeah. And my probabilities are going that it's that it might be a year from now. Um, maybe even longer. Uh, from what I see, this the structure of everything, the forward-looking leads that we've got, like our financial conditions index leads by nine months. Um, all of this just suggests that it's going to be a lot longer than expected.
And what's interesting is long in an exponential thing like technology or crypto time means higher price. Yes, it does. Um, and, you know, what I'll conclude by saying is that if you look at this arms race going on in AI, data centers, quantum, high-performance computing, all of that between China and the US. Um, during such an arms race, you don't really care whether you pay too much. Meaning that we can probably extend further into bubble territory, whatever you want to call it, um, in this cycle compared to other cycles because it's a political cycle as well. It's not only a technology cycle, it's also a technology cycle fueled by politicians not willing to lose an armed price. Yeah. Which is what my working hypothesis now is that the end of this liquidity cycle will be mild, and then we're going to go into [ __ ] hyperspace because, as you said, it's geopolitics down to labor force needs, through to economic needs, through to corporate profits, all resting on this big [ __ ] technology bet. It's like, it's the big one. It's the biggest thing we've ever seen because it sorts out the aging population. It sorts out the slow growth of the economy. It sorts out the debts of GDP. It sorts out, you know, it's, it's vital for geopolitics. It's, it's corporations can smell the profit in owning this space. It sucks in a large part of the economy. It's like the biggest trade of all time. Um, and it's not going to play out in one year. It's going to play out over five or six years.
Yeah. And the final thing I'll say, um, which is a very interesting piece of anecdotal evidence for this year, is that, um, you remember early summer, I suffered from, I think it's called mono, but kissing disease is probably the, uh, you know, broad term for it. Uh, I visited the doctor and the hospital three or four times. They continuously sent me home. Then I asked AI, "What is this?" And it was the only one that had it right. So I think my generation, uh, you know, people thinking like you, will adopt this way, way, way faster than people think. After that, I'll never ask my doctor about any [ __ ] thing again. I'll ask ChatGPT what I'll double-check every doctor against ChatGPT. Not, not, but this was the first time I did it because normally people think of it the other way around. Oh, I'll check what ChatGPT says against my doctor. You won't. You'll do it the other way around. Yes. Brilliant. All right, my friend. Great conversation. Uh, well done on a great year. Um, let's see how the Q4 plays out now. Yeah, should be exciting one. Yeah, pop the champagne. Yeah, exactly. All right, take care.
Another great conversation with Andreas. I always love chatting with him, catching up. We haven't really caught up properly for a while. I really love how Andreas is so adaptable in his framework that he looks like myself for the bigger opportunity. So he looks for the returns, and as you can hear, a lot of his returns are coming out of equities and kind of single stock names based on a macro thesis, based on the business cycle thesis, and that's very unusual to have that skill set. And I always love seeing people as they develop their own opportunities that may be different to my own or may dovetail in with my own ideas. And anyway, I think you can see how having this broad knowledge base within Real Vision is something that really helps not only you but me in my journey of understanding. Anyway, I'll see you next time.
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