Transcription
I don't think people fully grasp it. The amount of need for AI is infinite. It will never end. It's like saying when will you have solved every problem.
We are literally plugging intelligence into every machine that has ever [music] been built to make it be more efficient. As you spend more money on the brain, getting smarter and smarter. It will come up with solutions that you didn't think about in your spendout. The faster we have intelligence grow, the closer we're getting to a deflationary spiral. They view this as an endgame for solving all the world's problems. So, it's not going to stop and people can keep fighting it if they want, but it's a mistake.
This episode is brought to you by Grayscale, your trusted gateway to more than 30 different crypto investment products. You'll hear more about them later in the episode. Nothing said on for guidance is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests, and the Blockworks team may hold positions in the company's funds or projects discussed.
All right, everybody. Welcome back to another episode of Forward Guidance. And joining me today is Jordy Visser, who I have been trying to wrangle onto the pod for a while. I know you've been a regular listener of of the roundup and gave us a couple shoutouts there. So, hugely appreciated, Jordy. I'm I'm very excited to have you on here. You've been doing a lot of work at the intersection of of exponential tech trends whether that's AI innovation paired with what's been going on in the digital asset world and all framed around your your very storied experience from from the macro global macro world. So very excited to have you on the show.
Felix, it's good to finally be here. I do not need to be wrangled. You guys. Uh I guess we just kind of passed each other on the highway, not not running into each other, but I I do listen to you guys regularly and I do reference a lot of what you guys say on uh on my uh my weekly. So, it's great to finally.
Yeah. Yeah. It's it's my own personal running joke. I'm like, man, I just love to get Jordy on. So, it's it's it's good to make this happen. For sure. Um, for those that don't know about your work, your your background, we would love to just hear a quick high-level summary of of of what was your your journey like because I think it's a pretty interesting shift from your your initial background and your initial career to where you stand today in the topics that you you think matter the most.
All right, let me go let me let me actually and this will this will be quick um or at least quick enough uh but I I I'll go back a little bit further because we're just getting to know each other. So um I I grew up in a household where my father uh literally at a young age told me not to believe anything I heard from anybody. So you know I I always say that when I speak on stage because I think he framed my viewpoint of the world that just everything that every human being says and everything that you read in a newspaper at the end of the day is someone's opinion. Um, there's no facts. Everything that we do in this business is about uh hearing people's opinions and putting it into our own probability distribution. So that intercedes with what my father taught me. My father did not graduate high school and he was a hustler uh in various card games, pool, darts, bowling, everything you can imagine. He was a first generation uh American and his mother died when he was young. So he had to kind of learn on the streets. and he taught me all about odds and probability, how to handicap a horse race at a very young age. And I used all of that not believing in anything and also probabilities to kind of end up in a position where I started at the bottom end of Morgan Stanley. I didn't focus on college, but I ended up in the exact right area of derivatives. Um, I have a very good math brain. I have a photographic memory when it comes to statistics and the ability of keeping things in my head. And I just ended up in a good position at Morgan Stanley. I rose the ranks very quickly. Um ended up opening an office for the firm only five years after being at the firm in Sa Paulo Brazil. So I moved to Brazil during 9798. Those were my formative years in this industry just because uh I was thrown into the middle of the emerging market crisis and we did very well. Um, the the firm made money during that which was a unique thing. Uh, and I was promoted and took over the S&P options book for the firm. Moved back to New York and uh, I was an entrepreneur and didn't really like managing people as my sole job. So, I left, started my own hedge fund, brought it into another hedge fund, managed a large macro portfolio for them, and then moved on to take over kind of running the business day-to-day. And I built out uh, in 2013, let's say, a data analytics framework on a very low budget with a few coders. And we built out this thing all based on the same theories I have which is um everything is a probability distribution. I try to find places where the odds on something happening are 20 to one uh on the board. Uh and I think they should be 5 to one or reverse. People are putting a high premium on quote unquote an AI bubble. I think it's a low probability outcome. So everything that I do and everything I believe in is not that there's absolutes. Um, I believe it's just uh an odds in on the board and I view everything in life as a as a as I said this weekend from Annie Duke uh thinking in bets.
I love it. Yeah. When I think about the past 5 years of of of traditional global macro quote unquote and it feels like it's been a very weird five years where a lot of these traditional indicators that you know were probably your your bread and butter back in the day um you know just a quick example of just looking at say a yield curve inversion that said many times now that a recession is imminent and and those have been for the most part wrong and I think it's I would love to just hear your perspective on when you contrast that old school global macro with this trend of how much has been either false signals or straight out wrong with this thesis and perspective you have of exponential tech growth trends like when you piece that all together where do you find are those hang-ups like what are people missing and what is useful from those traditional you know business cycle frameworks of global macro versus these very different trends that we're seeing today.
Yeah, it's a good question. I do um I do cover this a lot. When I was in Brazil uh ECRI was a very big kind of boutique research place that still is today and I really studied the work of Jeffrey Moore who was the person who was the founder and kind of everything was based on his work from LEI and the LEI year-over-year has been negative for the longest time in history. It's never been at the level it is. I think it's like minus 3.6% uh and not been in a recession. And so this has been going on for quite some time. And I think the easiest way for me to describe it is very simple which is if you look in your life and think about how much the iPhone has replaced the physical goods and you take all those apps on your phone and you go these apps are representative of software of an economy that Simon Kousnes who created the measurement of GDP did not anticipate. Um, and on the flip side, everything that it replaced, so every app you have, every the the camera, all of that, if you go back and look to how what the annual camera sales were back in 20, you know, 2006 before the iPhone, the smartphone took off, you'd realize that, okay, if that's the lei, the way it was before, which is physical goods, and now we have this software thing, can we measure this? And even Simon Kousnut said, this will never measure intangibles. And that's an intangible. Your life is getting better. you have access to things. You don't have to ship as much because now the cameras aren't on the ships or you're not using his oil as much. So, there's really a two-part economy, the digital economy and the old school industrial economy that Simon Ket's created an index for. And every year that's happened, the digital economy has become a greater portion of the overall economy. And the argument I like to use is that the easiest thing to say is how many people got the recession call wrong from 2022 to 2024. And one of the the things that they would always say, and I I still hear it today, well, they're going to drown out all the savings. You're eventually going to spend all the money, but no one ever included and no one does include the household net worth, which is now $178 trillion. So, it's six times the size of the economy, which means theoretically we could spend the total amount of the economy for the next six years with no income growth. So at some point the lack of income growth may matter but not if the wealthy people spend all their money. So you guys talk about this a lot. There is a um a problem that's been created by technology in the digital economy. And what it's done is it's it's created a concentration of wealth. That wealth allows us to still grow. I'll throw just two more stats out and then I'll I'll let you kind of ask follow-up question. Um, income growth in the nontransfer payment side. So, income growth x transfer payments is only 1.4% year-over-year. Transfer payments are up 8 and a half to 9% year-over-year. And they've become now a $5 trillion number where that income itself is 16 or 17 trillion. So, what you're dealing with is the transfer payments, which I call kind of the the bottom end of UBI, is growing rapidly, and then household net worth is kind of the top end of UBI. So the government is forcing assets higher at the same time that they're handing money out to people that can't participate. And then the anger is growing for the people that don't get the transfer payments and then don't benefit from QE, which is the majority of people in the country. And that's why we're seeing all this anger that's popping out of politics.
That totally makes sense. Yeah, definitely want to jump into the social aspects in a minute. But yeah, to your point about how we measure economic growth, i.e. GDP. It feels like the the catchall residual is people just say, "Okay, well, you know, if we have all this technological innovation, surely that'll lead to an uptick in productivity growth and and that's sort of the residual that tries to catch everything else because of just to your point, those indicators are so rooted in in this pre-service dominated era. It is tracking productivity the right way to go about try to track what's actually driving the economy in this day and age?
So I use profit margins more than that because profit margins actually have an accounting side which is is a better I'd say when you're dealing with hard dollars you can actually measure the productivity gains a lot more and productivity and profit in profit margin measurements regardless of the level has been going higher now for the last 40 years and 40 years is a critical point because if people want to gauge like when I hear AI is a bubble and I just posted something on X the other day on this I'm like well this is a 40-year bubble guys because coding started in the early 1980s. I can remember being in a senior in high school or no yeah a senior in high school and begging my father for Commodore computer so I could start my data analytics kind of birth. Uh I think people have mistaken just how important coding has been to the overall kind of part of the economy and how impossible it is overall to measure. So, I do think where we are with AI and where we are with kind of measuring this stuff from any uh indication or any ability for them to change, I don't think they ever will. And productivity is is just an output of GDP. So, if GDP is a bad measurement, then productivity can't work. Profit margins to me are absolutely the way to measure it. And even if you don't like kind of sit on the profit margin side, if you go through the breakdown of the S&P 500, we're right around 14% corporate prof or profit margins. But Nvidia are above 70. Uh the Mag 7 are up closer to 70. So if you take the non-coding part of the economy, it's very low. The profit margins are crappy. If you go to the higher tech side, they're enormous. And then when you start getting into private companies like Stripe and like uh Cursor and Replet, these companies have almost infinite profit margins because they're hiring less people than they did in the more traditional sense. So, it's happening at profit margins, not as much in the uh the GDP level at this point.
If you're thinking about crypto investing, but don't want to open a new account or manage keys and wallets, check out Grayscale. Grayscale has been offering trusted crypto investment products for over a decade with 30 plus counting, including single asset funds like Bitcoin and Ethereum, diversified portfolios, and thematic exposure to the broader digital asset space. Many of their products are available directly through your brokerage or IRA, just like a stock or ETF. Investing involves risks, including possible loss of principle. For more information and important disclosures, visit gayscale.com. As always, investments in blockchain technology involve risk terms and conditions apply. Do your own research.
Yeah. Okay. So, let's let's let's dig in and unpack this this AI thesis because it's all the innovation and the the AI data center capex buildout has been a pretty significant driver of of where the marginal growth has been in the economy in the last few years. And I want to I want to understand your framing of it. And I want to sharpen the question around two things. One is to your point, there's been a quote unquote 40-year bubble u in terms of just technological innovation. But I would say that the criticism in where you look at where we've been the last 30 years of that or maybe 35 years of that has been that that growth and that adoption has come it through a means of very friendly economies of scale. I would say where you know it's if you have more social media users on Facebook you know that the associated marginal cost with that is would stay subdued it wouldn't it wouldn't increase with the amount of network participants but now you look at where we're at now and you could see the the increased scale of it the costs are also scaling with it i.e. the data centers that need to be built out for this. So, I'm curious first off on that and then we'll get into the specifics of of how you know different businesses are using this AI innovation and disrupting labor markets. First off, I want to just understand how you think about how software and these network, you know, social media companies grew during that time where the cost would stay pretty fixed and now we're in this I don't know if I'd call a onetoone increase in costs with with the marginal increase in in participation from data centers. But yeah, just curious how do you think about that two those two contrasts?
Yeah, I think this is this is an important um topic and I just I I was trying to think as you were asking the question um a good way for people to hear this in a way that isn't um I guess gets their brain to think differently. Um, so when we think about companies spending money, and I think this is one of the criticisms I have for the people that have been out there saying it's a bubble, they'll never get the revenues, is that they're thinking about it um, first in, you know, if you take the aggregate and you go there's going to be $5 trillion of of of spend, we're never going to get the money. Okay, that I can argue all day is is ridiculous. We will get the revenues. It's not even a question. Um, and I can go through the different frameworks as we go through this conversation as to where it'll come from. But then there's the other problem which is I don't think people are looking at AI in the way that it should which is again back to railroads electricity and all the benefits that come down the line. These are brains. So instead of saying a data center and the buildout, these are just gigantic brains that get smarter and smarter the builder the data center. The bigger the brain, the more likely we are to solve the world's greatest problems. And we're entering a stage now where the buildout is transitioning from uh text. So LLMs is something everyone fully grasps. Well, now people are going to start to understand the difference between an LLM and a VLM. And a VLM is a visual language model. So that's taking not just the text, but it's taking the text that you've learned. So think of it as what you got from going to school, and then the visual, which is everything that we learn from every day in terms of intuition crossing the street, figuring out how to duck from a bird flying into us, how to hit a baseball, all of those different components, is the next thing. And the amount of compute necessary to interact with the world is anywhere from you know 50 to a thousand times more compute needs to be able to integrate the textual learning side with the visual learning side. Eventually we'll get into visual uh language action which is for humanoids and for military. So as people think about that and they go through the journey of all we've done so far is basically set our our brains to college. Now, we're about to go through learning everything and going through the visuals, and it takes a tremendous amount of information. The most powerful part of the revenue streams are going to come from the interaction with the actual event, seeing things, going through it. Whether it's on the medical side, first we're going to have drug discovery, but eventually we'll have PE humanoids doing surgery. To do surgery, they have to have perfect hand movements. They have to know exactly where things are. They have to be able to see things, make decisions on the fly. And it's not just the amount of compute necessary for their brains floating from the um from satellites because right now what we have is LLMs are on our phone meaning we have the we're getting information in chat GPT through Wi-Fi or through cellular eventually for robots to work and humanoids to fight on the battlefield they need to have a brain that doesn't depend on satellites. They need to have a brain that depends on what they're looking at right now. That takes a tremendous amount of batteries and compute. So, we're at a a very important stage for people to recognize that when you hear people say this is a bubble, we'll never get the revenues. I wrote a piece yesterday for 22V on AI drug discovery. And I said, I just asked Chad GPT what the value is of curing cancer. Like what revenues if every pharmaceutical company has Eli Lilly is breaking out right now. It's a trillion dollar company. Google's breaking out because of Labs and Gemini 3. The health care side is probably to me the place where the bubble gets the biggest, but it's also where the revenues are infinite. Uh 50% of our entitlements are related to aging and we're going to solve aging as a problem the next five years. So whatever people think about AI, they don't have enough work. And if you listen to someone above the age of 60 who never uses it, who goes to Michelin star restaurants every day as their lifeblood, doesn't sit in front of a computer, why would you listen to them on what's happening on artificial intelligence? It's way above their pay grade. You wouldn't ask them to do surgery on you. Don't ask them what AI is going to mean because all they're doing is taking the dot bubble and going, "This is the same thing I saw in the dotcom bubble. It's a big buildout. It's going to end badly." One more thing on your buildout, and I I included this in my weekend report this time, but on the capex side, the capex for the dot bubble was funded by the telecom companies, which were low margin companies that are barely still alive. This one is done by the people who are the experts in artificial intelligence. They are the global experts using the cash that they've made over their lifetime in domination to spend the money on it. Will will there be casualties? Yes. Will every company get the revenues they need to justify the spending? No. But they're actually in a race for both the military supremacy, their own legacies, and solving cancer. And that's a very different thing than trying to grow your revenues. They view this as an endgame for solving all the world's problems. So, it's not going to stop. And people can keep fighting it if they want, but it's a mistake.
Yeah. And on that point too, in the contrast between dot and this modern day and age, I think it's really important to just double click on the fact that these companies that are funding this right now have some of the most obscene amounts of free cash flow we've ever seen from huge companies in the world. And so a lot of this has been self-funded. And what what's interesting now and I'm curious your take on this is as you look at forecasts it looks increasingly likely like the the key marginal drivers of this buildout are you know the mag 7 and their forecast for next year in terms of the percentage of free cash flow to fund these we're going to be getting up to 80% likely in 2026 and and due to that we're starting to see the shift towards the credit market to to continue to fund this and I heard you mention that the fact that yes right now that the amount of debt being issued on here is is pretty it's pretty small stuff right now. I think it's, you know, 100 billion or so. And when you when you contrast that with just the huge amount of of free cash flow these companies have and how unlevered they are generally, it's it's still small piece, but as investors and and and forecasters, we have to look at where things are going next. And so, I'm curious, how do you think about this current transition from this self-funded free cash flow regime we've been in for the last couple years towards starting to tap credit markets more often?
So, I'll take it back to the profit margin side. I think you're going to see profit margins um come down. I mean, when I see everyone talking about debt to cash flow and debt to IBD, I make I laugh because it wasn't that long ago that we cared about debt to equity, but we don't talk about debt to debt to equity anymore because their equity is massive. So, it's like, okay, let's just talk debt to cash flow. Let's I mean, this is a bearish argument to go through on stuff. So I do believe that we're at a point where people can focus on it from a profit margin perspective. Not all these companies are going to be justified in spending this much money and your job as an investor is to try and find out when the point in time is to your point this risk will grow. It is zero risk today. Is it a a risk in three years? Uh I think any risk in AI spending out three years becomes a significant risk for one important reason. As you spend more money on the brain getting smarter and smarter, it will come up with solutions that you didn't think about in your spend out. So maybe we won't need as many data centers in three years, but we're not at that intelligence point yet to get there. So at some point, the amount of innovation that we end up spending gets a brain that's so good that we have thousands of Einsteines. You're going to solve problems in power. You're going to solve problems in chip efficiency. You're going to solve problems in that. We can't do that yet. We can't get the scaling of it yet. But when you add another three years of just exponential intelligence, we're going to get closer to it. So I I I don't want to ever sound like a person that doesn't believe there's any risk. I actually believe there's an enormous amount of risk the faster this goes and the bigger the buildout goes because we just get closer to a world where deflation becomes the major issue. That is the one thing I will say to everyone going through this is eventually the faster we have intelligence growth, the closer we're getting to a deflationary spiral, not an asset crisis because profit margins will still be growing for the S&P 500 or for public companies. But you will reach a point that it will be a competition where there are the lose the amount of losers speeds up dramatically over time. Just remember Nvidia is a $5 trillion company. The Russell 2000 market cap is a total three trillion or just over three trillion. That was not the case back in 2010 when this whole thing kind of accelerated. So you've already had a disruption to not only the median voter in in the United States of America and across the globe, you've also had a disruption in concentration from small companies versus big companies.
I heard you mention that and correct me if I'm wrong here that you are marginally bearish on a lot of the MAG 7 names over the next few years, but you think Nvidia is dirt cheap at this stage. Is it do I have that right? And if so, why do you think that way?
Yeah, when when when you say dirt cheap, I use Nvidia as a gauge for when the market has gotten too over its skis on artificial intelligence in general. I actually don't think Nvidia is ever going to get quote unquote expensive. The simple reason, if you look out five years, right now we have total spend that's going to happen around the globe, including China, of about $5 trillion. the way it looks right now. Nvidia and the data center buildout of $5 trillion, Nvidia right now has a moat around the data center buildout uh despite what people are talking about today in TPUs and I'll go I'll go through that but compute as a percentage of the spend for a data center is anywhere from 30 to 60%. So let's take the conservative side and say it'll go down to 30 over time. So that's $1.5 trillion in compute spend of which Nvidia right now has about a 90% market share on data centers. The reason they have such a big uh moat on data centers is until today when Meta basically is going to get some TPUs from from Google, there's really no experience with any competitors for Nvidia other than TPUs on these clusters that are massive. So, if you're in a race, a five-year race, and you've got to do this for uh or risk obsolescence, the last thing you're going to do is buy semiconductors from some company that's never been successful in a data center. So, let's assume their market share goes down to 50% from the 90 and that Google TPUs take over the balance of it. Well, then you're talking about 50% of 1.5 trillion. So, their revenues would be 750 billion in 2030. And right now the estimates are for 425 billion. So they've continually outperformed what people think. They're still growing their revenues at 67% year-over-year as of the last earnings report. And quarter over- quarter it was over 20%. So they're even going at a faster pace right now. So it's dirt cheap relative to everything I just said on a 5-year lookout.
Yeah, it's interesting to to contrast that with how to think about this as an investor trying to get exposure to the to the AI adoption trade. And it one I'm thinking about two things in my head at the same time. One is that okay well perhaps if we use the analog of the docom world which is we we spent all this money to literally lay wire internet wires across the ocean so that we could build these amazing applications and and innovations on top of it and the buildout of putting those wires across the ocean was was not very accreative or or profitable for where we ended up. Um so so perhaps the same analog here is that okay you know building out all these GPUs all these data centers that you know can can need to be replaced there is an immortalization schedule associated with them perhaps that's not where the marginal you know accretion of value is going to be at it's going to be what we build on top of that so I should be focused on investing in the things that going to be built on top of that that's that's one framing I'm thinking about but then the other framing is that you what you just mentioned around Nvidia and around just the demand for chips And I've heard you say that you think, you know, the demand for for for GPUs and just compute is basically limitless. So perhaps that isn't as much of a risk as it was for for the internet build out where, you know, you only need a finite amount of wires to really get things working. So yeah, how do you think about those two schools in terms of when you have your investor hat on?
You you brought up a lot in there and I I don't want to forget the the point you you said uh on my views on the MAG7 in general, which and and their profit margins. So I I think it's important for people first to start with the since we're using the.com bubble and I made a joke that you know if we didn't have the.com bubble there'd be nothing to compare this to. So instead we're picking the one data point we have and we're using that as it could be the dot bubble. I think Gavin Baker did the best job of kind of isolating that and saying, "Hey guys, um, think of there there was a huge amount 97% dark fiber, meaning they were building it before we actually had the demand for everything that was going to happen." And I think the best way to to convert that into something that's very visual for people to realize, everyone has heard about the China ghost cities. The ghost cities were built and I visited them and they were empty buildings and stuff that had already been purchased but in some cases they never filled out. Eventually all that dark fiber was used. So the dot was not a bubble. It was it was way ahead of the the demand for it being necessary but eventually it all got used and moved up to higher levels. You made the point which is 100% accurate and I don't I I don't think people fully grasp it. The amount of need for AI is infinite. It it will never end. It's like saying when will you have solved every problem. If we solve going to Mars, we'll try to solve going to Saturn. We'll try to solve like there's infinite amounts of electricity that's needed to put it into into that category. And right now we have capacity constraints showing up at every company level. There's not one company that either provides the the cloud for it. So they all say, Google says it, Microsoft says it, Oracle says it, Oracle stocks getting hit because they can't meet the revenue demand that's coming. It is infinite. Palunteer just talked about the growth and the adoption that they're seeing in their business spreading to over 200 clients uh in one quarter that many increases like it's happening at every level. So the demand side will never be the issue. Particularly when you go back to what I said about transitioning from LLMs to VLMs. uh it is literally infinite and whatever we come up with there'll be more needs for it. We are literally plugging intelligence into every machine that has ever been built to make it be more efficient. So this process is going to continue as an investor. There's really the reason I think the electricity argument works is there's really no way to monetize where this is. I do think the MAG7 to some degree are going to look and feel as a group a lot like utility companies. Um, we haven't talked about it yet, but I'm going to bring it up here. I'll be doing this weekend spending a lot of time on the Genesis mission, which the administration signed as an order last night, which to me is so important. And just so you can hear this before I move on to kind of the the margin side, this is the government merging the public and private sector together. This makes AI untouchable as as a like a buildout. So if you were worried about the things you were hearing on the buildout, the government basically signed an order saying this is critical for our survival relative to China. It's no longer just about rare earth. It's about everything in this VLM moment. Meaning it's for biology. It's for science. It's for advanced materials. Everything everything that they signed is opening up the 17 national labs, their data, their supercomputers to the private sector, to the foundation models. like it's a major major thing to get around the states which I thought were the ones that could delay everything also to make power not an issue or at least a focal point uh we can talk about that as well but in my opinion the power market just became owned by the government to some degree too because once you put this importance on AI at the top level meaning this is for the survival of the country it gives the president a lot of flexibility which he likes to use uh and drive things to courts to defend people that are trying to stop something. So, this was a maneuver specifically uh put in place to make sure that we can compete with China on their advancement in power and all these other issues where they really are the leaders at this point. So, that whole theme when you when you go through it, Felix, it's such a complex issue and this is why I don't minimize it. When I listen to people talk about the macro side, if they can't talk about what I just talked about, I find zero value in it because it's such a critical part of everything going on and it is challenging for investors. My focal point right now is on drug discovery and longevity and allowing people to live forever because I think we're at the beginning stages of that. I always believe that that would be the time that the stock market is the most euphoric is when people focus on that part of AI.
If you're thinking about crypto investing, but don't want to open a new account or manage keys and wallets, check out Grayscale. Grayscale has been offering trusted crypto investment products for over a decade with 30 plus counting, including single asset funds like Bitcoin and Ethereum, diversified portfolios, and thematic exposure to the broader digital asset space. Many of their products are available directly through your brokerage or IRA, just like a stock or ETF. Investing involves risks, including possible loss of principle. For more information and important disclosures, visit gayscale.com. As always, investments in blockchain technology involve risk terms and conditions apply. Do your own research.
Yeah, to your point about just how I've been thinking about this a lot is, you know, I would say a lot of macro thinkers and commentators and and I'm plenty guilty of this myself overlook into the the granular, you know, weekly economic data prints or whatever or or just using the these archaic ways of of thinking about macro, for example, just, you know, looking at what's going on in the labor market and then applying that to short-term monetary policy. And you you bring up this important point about just how you know it it if you don't understand these big drivers and and they end up being as significant as you say they will be you know we have to throw out all the ways that we were thinking about this before. And then you know you mentioned earlier about how you think one of the biggest risks is is deflation over the next few years. And I think all that's a good segue into how to appropriately think about the impact of this on a macro perspective. like how do you even begin to think about monetary policy in this age where you know there's there's high potential for something like like UBI, there's high potential for AI to start laying off a lot of different job sectors and seeing that rotation. How how do you even begin to unpack all that?
Yeah, it's tough. And and I I I I don't want to um kind of put the message out there that economic data releases that they don't matter for people that are trading day-to-day and kind of going through things, they matter. I mean, 2022 was a horrible year to be to be bullish, but eventually it ended up being completely right. And everyone that says, "Well, yeah, I got 2022 right, being bearish." I'm like, "Okay, but we raised rates up. You thought there'd be a recession. We didn't get one." and stocks eventually wait to went to new all-time highs when we had the fastest rate hike ever and the SAM rule kicked in last year. It's still going that way and yet we didn't get a recession. So I don't I don't want to say it doesn't matter in the short run because a lot of people trade off that data and they still believe it matters and so for people trying to make money sitting there watching it does matter. now that I'm not sitting in front of the screen looking at it all the time. And that really stopped for me in 2013. That's when I stopped managing money officially and started managing people completely. I I I've cared less about it. Now, that being said, I I do think the way to navigate this thing is to kind of keep in the back of your mind that all the things that you said and let me link it this way. If you go back to when code started, I have followed a uh let's say something that happened to me as as someone who believed that the only thing to focus on was Jeffrey Moore and leading economic indicators. That all changed for me in 2013 partly because I realized China had peaked. So I knew that Europe was now in steady decline. Japan was in steady decline. China was in steady decline. And when I say steady decline, I mean there was no growth left. And it was just demographics kind of taking over. And I believed in the whole rule that demographics drove rates lower and they drove rates lower because when people get too old and we're not replacing people, all the things you've heard about and that immigration was meant to offset that and try to get population growth. So I'm a student of kind of macro governments trying to keep this going. But in 2013, Amazon never going down at the same time that Mario Draghi basically did something I didn't think was possible, which is the Germans bailing out the Portuguese, the Italians, the Greeks, and Spanish. I didn't think that was ever going to happen, but it did. Um, I realized that number one, everyone has a printing press, so they'll find ways to do UBI in some form. Every country will be different. Number two, what the hell is going on with Amazon, that this stock, which has infinity pees, but continues to grow market share and it's a book company that is talking about doing retail, this spending can't work. This can't work. And I went out to Silicon Valley. I went to Singularity University and I realized at that point it changed me forever. And I started writing papers on the fact that I have to forget the daily numbers and just not care. I think people are going to have to wait the daily numbers as a sentiment thing. Where are we in terms of sentiment regarding a recession or inflation because that seems to be the only pendulum. The pendulum is either we're going into a recession or we're going into some form of inflation. The Fed's either going to be cutting rates because there's a problem or they're going to have to not cut rates and they might have to raise rates. And I believe that the majority of the time we're spending in between these two, I think inflation is completely limited on the upside and it's unlimited on the downside. And so because I believe that that's the next five years is that it's limited on the upside to maybe 4% in core CPI, but we could go to zero very easily. Um I'm not worried about the inflation side. I actually am focused more on kind of the deflation side. And that's what brings me back to it. But I think if you follow the LEI and you follow monetary policy and you get in that and again your show is called forward guidance so I understand this might not be the you know thing but I think what you guys do is you straddle the line and you talk about these issues and I think it is important for traders. I just don't think it's important for the endgame for the macro world.
Yeah I I I could not agree more. Um just to paint a little bit more color around this idea of of of deflation I I totally see the logic for things that are not fixed you know. So services um and and the like and just what technology could do say for of course like one of the biggest drivers of inflation these days is healthcare costs and if we can unlock that that's going to be hugely accreative to to disinflation perhaps out deflation how let's use the example of electricity because that's something that's been surging because of the demand and I think it represents something that has no not a fixed supply but it's something that's you know more commodity like and difficult to to scale up if the demand increases, you know, likely the price will will also increase unless you can really scale up the supply very quickly. So, just using an example like that, do you see any sort of inflationary risk to those fixed supply or or or more fixed versus something like unpacking healthcare? How do those all net out for you?
Let me just start with the utility side because to me, this is a non-issue and it's something that's going to get a lot of hype. The reason it's a non-issue is because it's already being recognized completely by the states and the hyperscalers are going to pay for it. So there was a realization I had when I went through and I I forget which one of the guys running an LL uh one of the the frontier model companies said basically electricity is barely it's not even a cost for us. Meaning the the the money we get from selling intelligence on a margin basis is infinite. So electricity is just not a cost. Compute is a cost. Like there's the build out of the data centers is a cost, but the actual electricity is nothing. So that's the first point is that if they had to, they'll just cover above a certain amount of the inflation. If they're driving it, which is what matters, they'll have to pay for it. They're trying to find solutions where they're doing it off-rid. So there'll be more solutions on off-rid where they're not actually using it. They're building their own supply connected to the data center. So, I think people have extrapolated the recent costs um and kind of said, "Well, this is going to be a problem." It's not going to be a problem. They're not going to let it be. Utilities are also not like a major part of the CPI. And if gas at the pump isn't going higher, and this is one of the things that like if I was someone on the inflation side looking for the Fed to raise rates, I don't know how you can ever raise rates if housing costs are coming down and affordability is an issue, meaning they're trying to find ways to make it go lower. at the same time that gas at the pump doesn't go higher and oil's below $60. Uh, and at the same point, wages are coming down. Like, if those three are coming down, I don't even know the argument to make about being worried about inflation at this point. And then trying to nuance the service side has moved up a tenth and this has gone through. It's just silly to me if those three are going down.
And that's the simple side. And I look further ahead. So, when the labor market's weak, I just think that becomes an issue. So I wouldn't worry about the utility about the utility side from from that basis. I wouldn't worry about inflation in general and the deflationary argument that people are just going to have to get through and I think this is important.
I don't know if you had a chance to did you see Michael Green's um substack that went viral. I thought it was excellent. Um, and and I think if you read through it, you know, the point that stood out the most to me is just how much the government's [snorts] QE and the government's spending and forcing and financializing the economy has led to one of the greatest problems that he didn't spend a lot of time on there, but when you go through his poverty line, probably the most important change was the child care portion. And the reason the child care portion was so important is because we have a demographic issue. We have a we have a uh a wealth discrepancy or inequality issue. We have an obesity issue and we now have an immigration issue. That's child care. I mean basically if if you're unhealthy at the age of 50, well then you can't take care of kids and you can't do any of these service-based jobs. If you don't have immigration come in, you're losing it. If demographics, you're not replacing young people and everyone's getting older and the age is getting older. And then if you have wealth concentration where people don't need to work, this is one of the reasons why the labor participation rate has gone down. If the labor participation rate hadn't gone down since the GFC, our unemployment rate would be closer to 7 to 8% than where it currently is.
So I think in general when he wrote that paper, the most interesting part to me is how the poverty line has gone higher just at a time and when you combine it with the AI kind of deflationary pressures coming a that are driven by the job at a minimum the lack of hiring the lack of upside in your job the lack of monetary you know upside for an individual it's it's a very deflationary kind of um 70% of the people are trapped in the country in this world of just not being able to get out. And I think that's why Michael Green's piece was so important. And I think that's why socialism is starting to rage in the US and the cities.
>> In light of everything we we talked about when you when you mentioned that deflation is is the quote unquote risk, the first thing I think about is okay well death funding costs are going to come down for the government. And when I contrast that with what is I I would say, you know, is is maybe fighting the last war. that most of the hysteria right now is around this concern for debt sustainability, for this reflexive loop of higher inflation leading to higher bond yields leading to higher debt service payment costs leading to wider fiscal deficits. If you are a believer in deflation because of this innovation, I assume you're not as worried about the debt debt doom loop. Is is that true?
Yeah, mainly because of what I said before, which is, and this is something people just have to get their hands around on on their own time. They either believe this or they don't. And right now, I would say 95% of people don't. I truly believe that people are about to go through a stage where they're going to live technically forever. So, if you believe in the concept that AI is effectively going to allow us to monitor all disease at at a given time and we can stop it from going, people should read the work. uh they should really understand that Demisabus won the Nobel Prize last year. He runs probably the best frontier model in the world for Google DeepMind. Um and he won the Nobel Prize and all he's doing is fixated on saying I'm going to cure all disease in the next five years. It might take 10 years for it to be there. But if you're curing all disease and at the same time David Sinclair is doing insane work on epigenetic reprogramming which is just reprogramming aging in your body. So you actually never decay between curing all diseases and reversing aging. Technically people could live forever.
So if you get through what the debt is at the end of the day, the reason the debt has grown to the level that it has, number one driver has been that people have been disrupted and businesses have been disrupted. So let's go back to the beginning part of the conversation. Why is Ford still a business? Why is why are half the companies that are still around the government bailed them out continuously because they had voters and because they need they had pensions and they couldn't go out. This is not supposed to happen in a pure recession. So everyone that argues that we need a recession, it's not possible, guys. It can't happen. They won't allow it to happen. They have liquidity facilities. I thought it was great when you guys talked about, you know, the the way the repo facility has now been set up and changed and the fact that everyone gets on like it'll run out of money. They have so many easy ways to make sure there's tons of cash throughout the system. They created these facilities whenever they need them. So there's no way for that to happen.
But there is this issue that if you keep spending the money to save all these bad businesses, you're left with a lot of debt that's left from the private sector to the public. The other one that's happened is the health of and the wealth inequality has forced the government to continually put these policies in and COVID was a money grab. It was just, okay, while we have the chance and the world is blowing up, let's shove $9 trillion into the system. It wasn't just cash handouts. It was making sure that people that had always been in trouble that they were trying to get those votes. So, I'm a big believer that we've been using that money for the baby boomers to continue to get their votes. So, if everyone below the age of 45, I'm 50, turning 59 years old. I'm a longevity freak. I spend time. I've got my aura ring on. I've got my eye watch. I've kept my data for six years. I am 100% focused on not aging a single day because I believe that you will stay the same age you've been. And that would immediately, if you go through the numbers, help the debt situation along with the deflationary side because it would reduce the title growth, which is really the big thing going forward. And so I do believe that that's going to be the case.
>> Fascinating. Yeah, it that point I mean I don't want to go too deep into it, but yeah, I just feel like it's really understated that the Fed was directly buying corporate bonds in in 2020 and just like like we all kind of forgot about that, but that was that was a major moment of moral hazard to me and it just it's crazy how understated it goes.
>> Well, Felix, there's one thing about it and I remember this. So I I happen to know I would do a during COVID I would do a weekly call with three other people um in the marketplace who I think have great poker brains. I I don't talk to many people on Wall Street uh and never really have. I want like I said I I shut people out when I think they're bringing noise. I'm only looking for signal. And so my whole life is about isolating to the place where I think I want to focus on the signal. That's why 90% of what I listen to right now is Eric Schmidt. It's Dennis Habis. It's Sam Alman. It's the people in charge. I don't even care about the people that have been fired. I only care about the people that are in charge because the models that are happening today are greater in their demand needs than what can be supplied for the market. So you go through it. So I try to focus a lot more. And in 2020 when we were having these conversations and the government said we're going to buy all corporate bonds, they actually never bought almost anything. That's the thing that was so amazing is all they had to do was tell the market we're going to buy everything every bond and I mean Exxon bonds were yielding double digits and then all of a sudden in a month later they were back down to you know levels that made sense. So all they have to do is tell everyone they're going to do the support and immediately the market goes right back up. That's when you have a truly financialized economy.
>> So >> 100 yeah in that retrospect it makes so much sense that it's it's hard to get a true crisis when they can just they don't even have to buy the bonds. They can just say they're going to and then we're we're all we're off to the races. Credit spreads are tight again and it's just beautiful.
>> Yeah. Well, especially because what Bitcoin has done and we haven't talked about it, but what Bitcoin has done >> that. Yeah.
>> Yeah. My my son who's who's now a sophomore in college when he was 13 and I famously have told the story which he hates me telling all the time now is he turned $700 into 80,000. He wrote it back down towards 700. Um but the big thing was he knew a ton about trading at a very young age. And I realized that the younger people, especially the people connected to Bitcoin, it's like a video game. So trading and going through this, and the reason that's important is if the government says, "We're going to buy everything." Every young person knows to go buy stocks. It is only macro people above the age of 50 that go, "This is going to end badly. I'm going to short everything. This no way this will work." All of retail knows, of course, it's going to work. They're telling you they're not going to let it go down. So, it's very funny how everything is kind of flipped on its head that it's become a video game for people sitting at home trading things and that's why they're fine with Bitcoin. It's only people that are above the age of 50 that want some narrative around it that there's a fundamental story that justifies the level that it's at so they can value it with some base. The fact that it has no valuation is only good for people that don't believe anything has a valuation when you're in a world where the government has just turned it into a video game. So if you believe cynically that the entire economy has been financialized and it's a video game where they won't let it go down, it's much easier to justify kind of when they do come out and say buy everything. And I think that's the problem a lot of people have is they're overthinking this. This is not actually a fair market. This is the government saying we can't let it go down much. And that's why when I wrote the paper on April 8th called the light at the end of the turbulence, I'm like you guys are falling for this again. They might want it. He actually might want Wall Street to lose verse Main Street. But he doesn't realize that the tip of the spear is Wall Street because he's fin they've financialized the entire economy. So eventually if you let that go down then Main Street's going to get swallowed up too. So they eventually bailed out and said no MOS.
>> Yeah. Yeah. And to that point retail new and they're the ones buying the lows in April from the hedge funds that were degrossing. So yeah, totally great point. Um, okay, I want to wrap up this conversation on on Bitcoin and how it intersects with everything. you wrote a piece a bit ago talking about how Bitcoin was going through its IPO moment which went pretty wild and was very interesting way to frame it. So yeah, I would love to just hear how are you thinking about it today and how does it intersect with all these other trends we we've discussed so far?
>> Yeah, to me it's um I guess there's there's two things for people who who still don't understand it. Um, I I really do want people to think if you're talking about gold in some positive way, there's no difference between gold and bitcoin in one element, which is gold is the accepted store of value. It's not there. It's not a store of value. It is an accepted store of value. So, uh, I like to say that there's only three moes in the world, meaning three things that have survived for thousands of years. And one of them hasn't survived for thousands. But it's gold, it's religion, and it's Bitcoin. And Bitcoin is accepted. You don't have to like it, but because of the Bitcoin white paper and because of the fact that it has gone through the test of time, it reached a status of trillions of dollars while nothing else got even close, it is the only accepted thing right now, which to me is it's it's a store of value and it's the representation of the digital economy.
Now, as someone who I mentioned lived in Brazil, I have a very different viewpoint than most people on the way this works in the end, and this is the reason why when I finally decided to make a large investment into it back when my son was playing the video game of of crypto, uh it all started to make sense to me when Michael Sailor took me on a history lesson of money. And I com I combined that with the Sapiens book and just what I believed in kind of what was happening and realized that, oh, this government debasing won't stop. But one of the things Michael Sailor never gets credit for in his his description of this is the fact that the reason that he did this was not just the government debasement. It was the government debasement connected to what he was going through which is his business was now being zombified. He had become a zombie relative to the Mag 7, Microsoft in this case. And he basically said, "I have a billion dollars of cash, so I'm not going out of business, but I will be out of business based on the the government printing money and and reflating while I'm getting zero interest rates on my money sitting in on the balance sheet. So, I can't go out and buy stocks. I can't do anything. So, what am I going to do with this money? You will effectively destroy me. You and Microsoft combined." So, think of that as the Mag Seven destroying things at the same time. the government is printing money to offset the destruction that the MAG7 is doing to the rest of the economy. That is the way it connected a dot for me. And I said, "Oh, now I get why Bitcoin works because it has scarcity. It actually is something that was built to not have more of this. Let me understand where it fits in." And back in 2020, I just decided that the Paul Tudtor Jones argument, this will be the fastest horse in the race, made sense. And then I did my studies and I kept going and I realized that wait this fits in with my overall view of Joseph Shumper that eventually capitalism will cannibalize itself. And the only thing that will survive and this is the final part of it. The endgame is if you don't have a moat so if Michael Sailor had to do this because he didn't have a moat around his business eventually with artificial intelligence there will be no moes. So you want to invest in the only moes that are available which are religion, gold and bitcoin. Gold to me is an old person moat which is fine. I don't meet many young persons. My son has never traded gold. He's never bought gold and I don't think he ever will. He'll buy Bitcoin. So as the demographics play out as the moes are destroyed, I see Bitcoin as being the end result as the leader of the digital economy. I think tokenization is getting us closer to that. I think IBIT and the Eyesshares were getting us closer to that. And the IPO piece was really about Felix, the fact that I thought that we needed to eventually see a less concentration in this asset. It was the biggest weakness I saw. 10,000 people cannot own 33% of an asset that's going to be mature. It needs to be spread to where when you go look at the holders list, the number one holder has no more than 2% or 3% unless you're Elon Musk with Tesla. Um, basically over time, the distribution of the the the people who started it gets handed out to most of the people. And to finalize it, again, the poor people in the world need something to invest in. They don't believe in their governments. There's seven and a half people, billion people that will never participate in the Western world fiat system. And I believe that we're in a democratizing period where the poorest kid in Brazil now has free education from the best teacher in the world, Chad GPT. They are finally getting banking through DeFi. and they're finally going to get the ability of having remittances of selling uh entrepreneurial work that they can sell to anyone in the world via the same way I do content. I think there's a democratizing force which will take another 20 years and I think most of that money will end up migrating into Bitcoin. So that's my long journey into where it'll come and where it'll go.
>> Well Jord, that's all the time we have and I feel like we barely scratched the surface. So suffice to say we're going to we're going to need to get you to come back on again. I think we should do it in a roundup version. get get Quinn and Tyler involved as well. Get all four of us chatting. I think that could be a lot of fun. So anyway, thank you so much for for joining the show. And where can folks go if they want to see more of your writing and work?
>> Yeah, they can find me on YouTube and Substack. If they have trouble there, um I post everything on X and uh and everything on LinkedIn. So if they have trouble finding me, they can find me there. But every week a YouTube and every week a Substack. So
>> amazing. Well, thanks again for joining, Jordy. Loved it.
>> Thanks, Felix.