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Carson Block: AI Could Trigger the Next Financial Crisis · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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Speaker 2: Welcome to Marin Talk to Money, the podcast in which
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Speaker 2: people who know the market explain the market. I am
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Speaker 2: Maren zum zep Web and this week I am speaking
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Speaker 2: with well known short seller and Muddy Waters Capital founder
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Speaker 2: and CEO Carson Block.
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Speaker 3: Carson, Welcome to Marin Talks Money.
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Speaker 4: Thank you, thanks for having me.
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Speaker 2: You have been talking a lot recently about AI, and
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Speaker 2: I wanted to just start on that straight away because
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Speaker 2: I think the core of your view is that AI
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Speaker 2: really is going to live up to everyone's expectations of
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Speaker 2: it. It is going to be spectacularly successful. All the worries
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Speaker 2: a lot of people have about the way that llms
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Speaker 2: have hit his ceiling and development is over and we
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Speaker 2: need a new path.
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Speaker 3: All this kind of thing doesn't come into your view.
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Speaker 2: I think that it's going to be very successful and
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Speaker 2: there will be an employment apocalypse as a result.
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Speaker 3: Am I over egging of you there?
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Speaker 4: Let me just state that as background, I was a skeptic.
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Speaker 4: So until February of this year, I refused to refer
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Speaker 4: to any of the models that are out there that
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Speaker 4: we're using as AI. They are large language models, and
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Speaker 4: so I said, Okay, these things are not going to
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Speaker 4: ever find the cure for cancer. They are not that intelligent.
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Speaker 4: It's not artificial intelligence. They're lllms. Now, the current generation
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Speaker 4: of LMS that was released in January early February of
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Speaker 4: this year changed my mind to some extent. They're not
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Speaker 4: going to independently develop the cure for cancers. They I
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Speaker 4: mean I used to term them the greatest search engines
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Speaker 4: ever developed, and that effectively they are. But the ability,
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Speaker 4: their ability to synthesize that information and order that information,
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Speaker 4: I mean there's real labor savings to be had right
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Speaker 4: now in certain areas of knowledge industries I mean such
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Speaker 4: as investment. I mean I immediately began using Claude to
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Speaker 4: run Monte Carlo simulations that I previously would have needed
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Speaker 4: somebody who was pretty young, recently graduated from a top
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Speaker 4: university strong in math to run the thing that's important
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Speaker 4: to really understanding or that change to change that changed
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Speaker 4: my view as to what lllms are going to do
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Speaker 4: to the labor market. Is that this generation was coded
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Speaker 4: and tested in large part by its predecessor generation. It
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Speaker 4: is coding and testing its successor generation. So you have
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Speaker 4: a situation where the leading users of this generation of
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Speaker 4: AI model, I mean they're in the technology industry. They
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Speaker 4: are able to supplant by using AI or displace multiple
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Speaker 4: members of a team. Now, vast majority of us are
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Speaker 4: not that skilled yet with the current generation of model.
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Speaker 4: But we extrapolate that we're going to be hitting a
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Speaker 4: point in the not too distant future in which we're
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Speaker 4: going to see exponential improvement in the capabilities of these models.
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Speaker 4: Because they are coding and testing their successors and so
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Speaker 4: on and so forth. Then you're going to see a
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Speaker 4: lot more capability. You're going to see more comfort in
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Speaker 4: understanding of how to use them. I think it's entirely
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Speaker 4: conceivable that within a few years three five two, you
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Speaker 4: could see within the US roughly fifteen percent of knowledge
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Speaker 4: workers displaced from their jobs. And unlike the GFS, see
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Speaker 4: it's not that you just need to grow your way
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Speaker 4: out of this and reallocate human and financial capital. It's
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Speaker 4: you know, those jobs are gone and the chairs, the
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Speaker 4: number of chairs for humans is going to continue shrinking.
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Speaker 4: So that's that's where I come out on on AI,
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Speaker 4: l ll ms, you know, whatever you want to call them.
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Speaker 2: Yeah, okay, so you lose a lot of jobs, but
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Speaker 2: also the remaining jobs, the quality of them degrades or
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Speaker 2: feels like.
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Speaker 5: That's the end game, that these knowledge jobs disappear, and
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Speaker 5: if people can get other jobs, they might not be
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Speaker 5: of the same quality and certainly not at the same
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Speaker 5: income level.
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Speaker 4: I mean, a number of these jests, a number of
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Speaker 4: these jobs will disappear. I'm a former attorney, I'm a
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Speaker 4: professional litigant effectively now and my current you know current,
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Speaker 4: you know, iteration of my career. And I got to
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Speaker 4: tell you, like, at present, claud can handle a lot
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Speaker 4: of tasks that I pay attorneys for. Now. We're all
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Speaker 4: familiar with the hallucination it makes up, you know, A
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Speaker 4: versus B. I'm not saying you remove humans entirely, but
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Speaker 4: I mean, if i'm you know, when you go through discovery,
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Speaker 4: you're paying some associate. I mean, depending on the law firm,
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Speaker 4: you're paying some associate somewhere between. You know, for good
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Speaker 4: law firm, junior associate five hundred dollars an hour to
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Speaker 4: fifteen hundred dollars an hour to review email after email
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Speaker 4: and text after text, and they make mistakes. Claude does
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Speaker 4: it one hundred percent better. So now you have to
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Speaker 4: ask you have to query it in the right way.
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Speaker 4: But you know, when you're talking about I mean financial
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Speaker 4: service related litigation, most of our outside attorneys, especially junior associates,
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Speaker 4: don't understand what we do anyway. So I think you're
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Speaker 4: much more effective having the client running these you know,
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Speaker 4: running the discovery in claude and querying in querying claude
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Speaker 4: at least to make your arguments and that's just saved.
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Speaker 4: That will save innumerable billable hours. So that's a profession
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Speaker 4: where that I think is going to shrink significantly in
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Speaker 4: the coming several years. And that's a very highly paid profession.
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Speaker 3: Yeah.
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Speaker 2: The problem I suppose with that is that you you
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Speaker 2: need to train the young people to have the more
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Speaker 2: experienced people available to put in the correct queries. So
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Speaker 2: once your once your pipeline of educating young people disappears
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Speaker 2: or shrinks significantly, end up with a problem higher up
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Speaker 2: the tree.
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Speaker 4: Yeah, but that's I haven't seen businesses really think too
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Speaker 4: long term about you know there, you know for a
6:55
Speaker 4: long time, right, I mean, everybody's focused on, you know,
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Speaker 4: how much am I going to make this year? Maybe
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Speaker 4: they're thinking next year. So and the problem, you know, look,
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Speaker 4: one of the pushbacks to this idea that they're going
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Speaker 4: to see the level of labor displacements that you know,
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Speaker 4: I think you're going to see is that, oh, well,
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Speaker 4: the technology the adoption curve. You know, technologies are never
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Speaker 4: adopted at the rate at which they could theoretically be adopted.
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Speaker 4: And yeah, that's true. But the thing here is that
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Speaker 4: the cost savings for you know, for the the providers
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Speaker 4: of these services, the cost savings are going to be
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Speaker 4: so significant they're going to be able to massively underprice
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Speaker 4: their competitors. So you know, it's going to be an
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Speaker 4: existential problem for businesses that don't take advantage of this
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Speaker 4: technology and reduce their cost and pricing structures accordingly. So
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Speaker 4: that's why I think that the adoption curve argument here
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Speaker 4: is not going to or counter argument is not going
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Speaker 4: to win the day that there will actually be pretty
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Speaker 4: steep uptake of these technologies.
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Speaker 3: I mean, it hasn't happened yet.
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Speaker 2: We haven't really seen this happening yet, you know, I mean,
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Speaker 2: it's all still to come, right and that white collar workers,
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Speaker 2: a number of white color workers in the US and
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Speaker 2: in Europe is up since the first STEMP chat GPT
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Speaker 2: was released and you.
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Speaker 3: Know, there are more AI engineers than ever, etc. It's
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Speaker 3: not yet a.
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Speaker 4: Couple of things. Yeah, well, all right, So the current
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Speaker 4: generation of these models, which was at least in January February,
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Speaker 4: was the first This is the first generation where it's
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Speaker 4: you know, I said, these are not idiotic. You know,
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Speaker 4: they have flaws, they have limitations. But I mean previously, yeah,
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Speaker 4: it was it was a running joke. But you know,
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Speaker 4: what we extrapolated as humans is that the progress would
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Speaker 4: be linear, and it's not linear. It's going to be
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Speaker 4: exponential because of how they're able to develop their successors. Now,
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Speaker 4: just a little pushback. I'm not normally a macro person.
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Speaker 4: But one thing that you know, as far as the
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Speaker 4: know the great job success in the US, a lot
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Speaker 4: of that's been in healthcare. And you know, healthcare is
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Speaker 4: a really interesting sector in the US because look, on
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Speaker 4: one hand, okay, it's going to grow. And when you
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Speaker 4: go back to two thousand, information technology and look the
9:19
Speaker 4: way that the you know, uh, you know BLS. Clayer,
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Speaker 4: you know, classifies sectors as antiquated really should be updated.
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Speaker 4: But information technology and telecommunications and healthcare are the only
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Speaker 4: two sectors that have grown materially as a share of GDP,
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Speaker 4: and healthcare has grown significantly more as a share of
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Speaker 4: GDP than information technology. So, you know, is it driven
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Speaker 4: by innovation some? Is it driven by demographics some, But
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Speaker 4: a lot of it's driven really by the parasitic nature
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Speaker 4: of this healthcare system, at least in the US that
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Speaker 4: I mean, there's there's so much fraud, there's so much inefficiency.
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Speaker 4: So look, if you say the US has a healthy economy,
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Speaker 4: we have a healthy job market because we've added all
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Speaker 4: these healthcare jobs, you know, I think that's a misinterpretation.
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Speaker 4: So look, does that really go to whether AI or
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Speaker 4: llms are going to make a meaningful dent in employment
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Speaker 4: going forward? Now? Because as I said, we're really at
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Speaker 4: that point now where you're starting to see how these
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Speaker 4: can replace employees in certain situations, or at least prevent
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Speaker 4: the hiring of employees, and the next generation will be
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Speaker 4: even more powerful.
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Speaker 2: Okay, well, well we'll wait and see what happened in
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Speaker 2: five ten years if new jobs, new different types of
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Speaker 2: jobs that created you know, this whole business of jobs
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Speaker 2: we never thought would exist now ten years ago, job
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Speaker 2: being ever thought existing this, So who knows what will
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Speaker 2: happen in ten years. But let's take the base case,
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Speaker 2: your base case here that fifteen percent of knowledge jobs disappear. Now,
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Speaker 2: the interesting bit for the purposes of our listeners and
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Speaker 2: we discuss.
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Speaker 3: We are interesting podcasts, is what that does to the market.
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Speaker 2: And I think that's where this gets interesting, isn't it.
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Speaker 4: Yeah. And so again this has been a u turn
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Speaker 4: for me because there was actually a podcast I did
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Speaker 4: in January where I was talking about how we had
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Speaker 4: developed this systematic momentum strategy and house at Muddy Waters,
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Speaker 4: and you know, it's been compounding for us at north
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Speaker 4: of seventy I mean even I think most recently about
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Speaker 4: ninety percent per year. And I was completely sanguine about
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Speaker 4: the outlook for the market and why. And you know,
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Speaker 4: in the idea that momentum, as much as it shouldn't,
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Speaker 4: you know, as much as the fact that the stock
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Speaker 4: has gone up shouldn't determine that it'll continue to go on,
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Speaker 4: but it does.
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Speaker 2: I mean, it's a you know, momentum is one of
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Speaker 2: the greatest strategies.
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Speaker 4: There isn't, especially these days, and a lot of it
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Speaker 4: relates to market structure. Yeah, And so this is where
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Speaker 4: what I'm saying about job displacement due to AI becomes
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Speaker 4: a problem. So in January, I'm completely sanguine. You know,
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Speaker 4: question Carson, Well, when does you know when does it
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Speaker 4: become a bad idea to invest in momentum within the
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Speaker 4: S and P five hundred index when unemployment rises materially? Well,
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Speaker 4: when do you see that happening? And not anytime soon? Well, okay,
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Speaker 4: here's the issue. I now do see unemployment, particularly for
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Speaker 4: high wage earners, rising significantly in the next several years.
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Speaker 4: The problem that that creates for markets is that, especially
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Speaker 4: with the S and P five hundred, so much of
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Speaker 4: that is driven by flows, so especially for one K
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Speaker 4: retirement plan contributions from these knowledge workers and that you know,
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Speaker 4: and look when you look at the S and P
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Speaker 4: five hundred index, I mean, it's it's kind of ridiculous
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Speaker 4: that we use that as a proxy for the stock
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Speaker 4: market because you know, generally, you know, two thirds of
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Speaker 4: the stocks are underperforming the mean of the index, and
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Speaker 4: the mean of the index is really driven by small
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Speaker 4: number of companies that are out forming. But what has
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Speaker 4: happened and so here I reference work that a friend
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Speaker 4: of mine named Michael Green or Mike Green of Simplify
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Speaker 4: asset management has done on passive investing, and he's been
13:14
Speaker 4: banging this strung since probably twenty nineteen or twenty twenty
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Speaker 4: about how passive has warped markets. So it's created this
13:21
Speaker 4: virtuous cycle whereby money goes in from paychecks every month.
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Speaker 4: And what happens is these index funds they buy stock
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Speaker 4: at any price. They're completely priced and elastic. They remove
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Speaker 4: supply of stock, and so for the largest names in
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Speaker 4: the index or the indices, and if you look at
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Speaker 4: Nasdaq one hundred, same thing. Those get the greatest share
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Speaker 4: of every dollar that's allocated to the index, and so
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Speaker 4: by removing supply, they create this situation in which the
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Speaker 4: stocks that receive the largest allocations, the impact on their
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Speaker 4: prices becomes parabolic versus linear, and that gets turbocharged with
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Speaker 4: stock buybacks. So this has been great for the most part.
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Speaker 4: I mean twenty twenty two, there was you know, there
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Speaker 4: was like a little bump in the road, but we're
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Speaker 4: well past that. So this has been fantastic for investors.
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Speaker 4: But the thing is, if you have say fifteen percent
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Speaker 4: of knowledge workers lose their jobs and they're not going
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Speaker 4: to be able to replace that income they have credit
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Speaker 4: card debt, they have mortgages, they have car loans, a
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Speaker 4: student debt. This is going to massively impact the flows
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Speaker 4: into the markets, and so probably the way it plays
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Speaker 4: out on a micro level at first is a person
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Speaker 4: who's lost his or her job will sell the taxable investments.
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Speaker 4: A lot of the taxable investments are in the largest
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Speaker 4: names in the S and P five hundred index, so
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Speaker 4: you get selling there, but you've already had a situation
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Speaker 4: where that laid off person is no longer making the
15:03
Speaker 4: contributions to the four one K plan. So you get
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Speaker 4: to a point where those contributions go net zero, especially
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Speaker 4: because from a demographic perspective, you do have people now
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Speaker 4: who are also redeeming just because they've retired. And then
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Speaker 4: you get to a point where on a net basis,
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Speaker 4: the flows go negative as people have to sell you
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Speaker 4: redeem their retirement accounts because they've been unable to replace
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Speaker 4: their income and the issue. So, while passive has been
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Speaker 4: this very virtuous cycle on the way up, it's built
15:38
Speaker 4: this significant fragility into the market, and so when those
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Speaker 4: flows go in reverse, there's really not nearly enough active
15:49
Speaker 4: management out there to catch the following knives, especially because
15:53
Speaker 4: if you were looking at the valuations of some of
15:56
Speaker 4: the largest companies in the indices. In trying to look
15:59
Speaker 4: at them on a purely fundamental basis, it's hard to
16:02
Speaker 4: justify the evaluations in some cases. So that's where you get,
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Speaker 4: in my view, the GFC type events. It has to
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Speaker 4: do with the fragility that's been created in the equity
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Speaker 4: markets through passive investing. So if you really want to
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Speaker 4: understand my view, it's my own view on AI displacing
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Speaker 4: labor layered on top of Mike Green's work on passive
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Speaker 4: investing and in the vulnerabilities that creates in the equity
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Speaker 4: markets and.
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Speaker 2: That reduction in demand frequity, so that reduction and flow.
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Speaker 2: It coincides with the period an unusual period over the
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Speaker 2: last decade of an increase in the supply of equities
16:44
Speaker 2: as well, because we have these big IPOs coming through
16:47
Speaker 2: at the same time.
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Speaker 3: It SpaceX and then we'll get open eye, we'll get
16:50
Speaker 3: down tropic.
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Speaker 2: And of course on paper, we're thrilled by this right
16:52
Speaker 2: because it shows the stock market doing and the stock
16:54
Speaker 2: market is supposed to do, which is be a place
16:58
Speaker 2: where people putting new money into growth companies as opposed
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Speaker 2: to an investor extracturn machine, which has effectively being for
17:04
Speaker 2: the last decade, the most of the money has been
17:05
Speaker 2: coming out in buybacks, dividends, etc. So you get at
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Speaker 2: the same time as if you're right, of course, that
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Speaker 2: the flows for the supply is coming up at the
17:15
Speaker 2: same time right now.
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Speaker 4: The other question there, and I don't I don't have
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Speaker 4: a view on this. You know, at least to the
17:22
Speaker 4: extent that it remains independent of labor displacement. But to
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Speaker 4: what extent are the hyper scalers going to be going
17:31
Speaker 4: to continue to be able to issue credit to fund
17:36
Speaker 4: their AI buildouts because they need to issue that credit
17:40
Speaker 4: in order to maintain the stock buybacks. So if they can't,
17:44
Speaker 4: if they can't issue paper at yields they consider to
17:47
Speaker 4: be attractive, then they're going to have to divert resources
17:52
Speaker 4: that would be used for share buybacks to scaling out
17:56
Speaker 4: data centers, et cetera. So you could start to see,
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Speaker 4: you know, to me, either scenario is equally probable going
18:04
Speaker 4: into when we have this, you know, when these streams
18:06
Speaker 4: start really showing up in the labor markets and the
18:09
Speaker 4: flows start to go toward net zero, can have this situation,
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Speaker 4: you know, can like I said, equally probable to me
18:17
Speaker 4: at this point where companies are still engaging in share buybacks,
18:21
Speaker 4: so maybe it hits you know, this impact hits more suddenly,
18:26
Speaker 4: or companies have to taper the share buybacks because they're
18:31
Speaker 4: not able to fund in the credit markets, and so
18:33
Speaker 4: you start to see you start to see less upward
18:36
Speaker 4: pressure on stock prices as a result of that. Anyway,
18:40
Speaker 4: So either scenario, you know, at this point, I'm coin
18:43
Speaker 4: flip on those two.
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Speaker 2: Yeah, and on the demographics, I mean, this was a
18:48
Speaker 2: scenario that everyone expected to happen anyway, just a little
18:52
Speaker 2: further out, as the baby boomers work their way through
18:54
Speaker 2: the system and start to sell out fund their retirements,
18:57
Speaker 2: we would have expected to see those flows reversed. Anyway,
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Speaker 2: This just brings that forward by well, probably a decade.
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Speaker 4: Yeah, yeah, I mean, look, I think you know, my
19:08
Speaker 4: impression of that question has been that there are people
19:12
Speaker 4: will argue, well, it's not going to be that bad
19:14
Speaker 4: because you're gonna have a great wealth transfer and you know, YadA, YadA, YadA,
19:18
Speaker 4: and you know money will be reallocated from credit to
19:20
Speaker 4: equities and younger. But you know, no view in a
19:25
Speaker 4: world that doesn't go through an AI disruption. No view
19:27
Speaker 4: on the timing of that. But but yeah, as I said,
19:30
Speaker 4: I think that we're you know, I think that question
19:34
Speaker 4: is not really going to be that relevant compared to
19:37
Speaker 4: what's okay.
19:39
Speaker 2: So let's say we have a GFC style disaster in
19:43
Speaker 2: the markets. It's quick, it's huge, very unpleasant. How do
19:48
Speaker 2: the play out after that? And we're very used to thinking, well,
19:50
Speaker 2: we don't really worry about this stuff over the long time.
19:53
Speaker 3: We just hang on because there'll be a government response.
19:55
Speaker 2: There'll be a fiscal response or a monetary response, so
19:58
Speaker 2: we'll make everything absolutely fine.
20:00
Speaker 4: Yeah, no, I'm look, there will be all of that.
20:03
Speaker 4: I mean. The one thing is the playbooks are now
20:07
Speaker 4: very well developed for you know, unlike the GFC, where
20:12
Speaker 4: a lot of the responses theoretical it took a long
20:15
Speaker 4: time to implement. Governments had to get authorities to do it.
20:18
Speaker 4: The authorities exist, they've been expanded during COVID. So from
20:24
Speaker 4: a monetary perspective that you know, I mean rates, you know,
20:29
Speaker 4: real rates will go zero or negative you know over well,
20:33
Speaker 4: the interesting thing those AI is going to be very
20:35
Speaker 4: is going to be deflationary. So maybe maybe it's a
20:39
Speaker 4: little bit stepping on a land mine if I talk
20:41
Speaker 4: about real rates, but nominal rates you know, will be
20:46
Speaker 4: I mean, you know, well below on the short you know,
20:48
Speaker 4: short end well below one hundred basis points, I mean,
20:51
Speaker 4: probably zero to ten BIPs, you know, very quickly. And
20:55
Speaker 4: there's going to be a lot of the going to
20:59
Speaker 4: Governments are going to have to buy. The central banks
21:02
Speaker 4: are going to have to buy you know, the entire
21:05
Speaker 4: curve basically to keep it really you know, to keep
21:08
Speaker 4: rates you know, long end rates low. Now there will
21:12
Speaker 4: be fiscal issues. I think fiscal is going to be
21:14
Speaker 4: a lot more interesting because the monetary playbook is well established.
21:20
Speaker 4: You know, the United States has the blessing of being
21:22
Speaker 4: able to borrow in the currency that it prints, and
21:27
Speaker 4: so I think, you know, q E forever is the
21:30
Speaker 4: future here effectively, but it'll be you know, one of
21:36
Speaker 4: the third order effects. And where I think it's also
21:38
Speaker 4: interesting to look at some trades setting up will be
21:43
Speaker 4: what happens in the US to state in local governments
21:48
Speaker 4: you know there, I mean, especially if you look at
21:51
Speaker 4: you know, the states that are going to have their
21:53
Speaker 4: tax bases the hardest hit are the ones that are
21:57
Speaker 4: the most prolific issuers of debt. So California, California is
22:03
Speaker 4: I mean, it's because so much of its tax base
22:06
Speaker 4: comes from income taxes, any individual income taxes. Anyway, this
22:11
Speaker 4: is going to be you know, like Armygeddon for California.
22:14
Speaker 4: From a fiscal perspective, so how quickly does the federal
22:18
Speaker 4: government step in in bailac California, Illinois, New York, New Jersey, Connecticut.
22:24
Speaker 4: Now it kind of depends on who. I mean a
22:26
Speaker 4: big part depends on who's in the White House and
22:29
Speaker 4: which party controls Congress. But you know, the from the
22:33
Speaker 4: fiscal perspective, you know, I think the US will be
22:37
Speaker 4: okay because of the potential for q E. You know,
22:41
Speaker 4: the Eurozone countries that's going to be very tough, you know,
22:48
Speaker 4: but but that's where but you know, I so so look,
22:52
Speaker 4: I think we go through, we go we know what's
22:55
Speaker 4: going to happen in terms of on the monetary side,
22:57
Speaker 4: and they will have to try to reinflate assts and
23:00
Speaker 4: that will eventually happen. Assets will be you know, reinflated.
23:05
Speaker 4: But this will this will reorder society significantly because I mean,
23:10
Speaker 4: the the politics, the amount of turbulence that we're going
23:14
Speaker 4: to have to go through, you know, to really figure
23:16
Speaker 4: out how we how we structure societies. It's going to
23:21
Speaker 4: be significant. And you know, look, I do think on
23:24
Speaker 4: the on the back end of this, on the back
23:26
Speaker 4: end of a lot of turbulence, and I don't you know,
23:29
Speaker 4: this is a number of years to get there. The
23:32
Speaker 4: good news is, you know, I think I think most
23:36
Speaker 4: people will be will live reasonably comfortable lives. Okay, I
23:39
Speaker 4: think you know, the you know, a lot of the
23:42
Speaker 4: private sector will be there to serve the government. Governments
23:44
Speaker 4: will be massive employers, massive consumers of highly inefficient products
23:49
Speaker 4: and services from the private sector. So I think a
23:51
Speaker 4: lot of your private sector ends up looking like Chinese
23:53
Speaker 4: state owned enterprises. Then there's another part of the private
23:57
Speaker 4: sector that focuses on the private sector. It's gonna be
24:00
Speaker 4: the leanest, most efficient companies ever. But you know, I
24:04
Speaker 4: think a lot of people, you know, will be working.
24:06
Speaker 4: Your middle class people be working two or three days
24:09
Speaker 4: a week. They'll have disposable income. This will be great
24:12
Speaker 4: for small businesses, you know, leisure businesses, travel, et cetera.
24:19
Speaker 4: You know, I think there will be you know that
24:21
Speaker 4: our underclass will receive you know, universal basic income, you know,
24:27
Speaker 4: but that's and they won't have to work at all.
24:31
Speaker 4: And I hope there will still be room for people
24:33
Speaker 4: to achieve if they really want to. I don't. I
24:36
Speaker 4: don't know, but I've I've got a couple of kids,
24:38
Speaker 4: and I'm raising them with that expectation that you know,
24:42
Speaker 4: if they if they're willing to, you know, if they're
24:44
Speaker 4: willing to put in the work and they have the
24:45
Speaker 4: ambition that they can achieve more than you know, just
24:50
Speaker 4: owning a cafe. But you know, I think it'll be
24:53
Speaker 4: great for cafe owners. And in a way, it's interesting
24:57
Speaker 4: because you know, certainly when it comes to I mean scale,
25:01
Speaker 4: you know, I would think will remain everything. But in
25:05
Speaker 4: so many industries, this is going to be anti oligopolistic
25:09
Speaker 4: ye this technology, So that would be a nice you know,
25:12
Speaker 4: if I'm correct about that, that'll be a nice outcome
25:15
Speaker 4: on the back end where small businesses don't have so
25:18
Speaker 4: much of a cost disadvantage to large businesses.
25:41
Speaker 3: It sounds that you're expecting a massive expansion of the state.
25:43
Speaker 3: That's the net result of this.
25:46
Speaker 2: Every crisis in the West brings us closer and closer
25:49
Speaker 2: to a state that takes up over fifty percent of GDP.
25:54
Speaker 4: Yeah, I don't see an alternative to that, you know,
25:59
Speaker 4: I mean, otherwise we'll just have tremendous societal instability.
26:04
Speaker 2: Okay, I was about to say to you, what is
26:06
Speaker 2: the alternative? What are you alternative view? What are the
26:09
Speaker 2: risks to your view?
26:10
Speaker 3: And it sounds like the answer is very unpleasant instability.
26:15
Speaker 4: Well, I guess you know which view. I mean, are
26:17
Speaker 4: you challenging that AI will displace as many people as quickly?
26:21
Speaker 4: I mean you alluded to one of the counter arguments
26:24
Speaker 4: that Jevin's paradox right, like new technologies always create new jobs.
26:28
Speaker 4: I don't think this folds this time because the rate
26:33
Speaker 4: of change is going to be so for a long time.
26:36
Speaker 4: I'm talking fifteen years. Maybe this is just because I'm
26:39
Speaker 4: really cynical, but I've been fond of saying that humans
26:44
Speaker 4: are able to innovate and invent technologies faster than we're
26:49
Speaker 4: able to adapt to them. You know, whether these are
26:52
Speaker 4: financial technologies such as financial derivatives or deep sea drilling technologies,
26:59
Speaker 4: you name it. So we invent and innovate. I think
27:03
Speaker 4: we understand the risks and how to manage them. Find
27:07
Speaker 4: out we don't. We have some kind of calamity. But
27:10
Speaker 4: on the back end we say, okay, now we've learned.
27:13
Speaker 4: But the problem is when you have these you know,
27:16
Speaker 4: when you have these machines building the next generation of machines,
27:20
Speaker 4: the rate of change is going to be and it's
27:24
Speaker 4: it's going to continue. The rate of change will increase
27:26
Speaker 4: in terms of the improvement of capability. We are, in
27:32
Speaker 4: my view, just not going to be able to adapt
27:34
Speaker 4: ourselves quickly enough to to catch up. So there will
27:41
Speaker 4: be new jobs created, and there will be people, you know,
27:44
Speaker 4: I think a small number of people who are at
27:46
Speaker 4: the forefront of understanding how to use these technologies, and
27:50
Speaker 4: you know, they'll be okay, But you know, for the
27:53
Speaker 4: rest of us, I you know, I just don't think
27:56
Speaker 4: that's going to be the case. So I don't think
27:58
Speaker 4: jevins paradox. I mean, look, I've kind of made a
28:02
Speaker 4: career out of laughing at it's different this time anyways,
28:06
Speaker 4: it never has been, but I think it's different this
28:10
Speaker 4: time different.
28:11
Speaker 2: Okay, So how does the ordinary investor prepare for this?
28:16
Speaker 2: So honestners are a lot of ordinary people, ordinary investment
28:22
Speaker 2: portfolios listening to you talking and going, well, what an
28:25
Speaker 2: earth do I do about this.
28:27
Speaker 3: I don't know what the timeframe is.
28:28
Speaker 2: I don't know whether this is a two year thing
28:30
Speaker 2: or a three year thing, or a five year thing.
28:32
Speaker 3: Maybe it's a ten year thing.
28:33
Speaker 2: I mean, who knows, who knows, but it sounds like
28:36
Speaker 2: it's something I really need to be ready for.
28:37
Speaker 3: What do I do.
28:39
Speaker 4: Well? I mean right now, I think you keep doing
28:43
Speaker 4: what you've been doing, right I mean so, I mean
28:46
Speaker 4: one of the best trades has just been to be
28:48
Speaker 4: long the index, you know, in the S and P
28:50
Speaker 4: five hundred. But you have to be very vigilant and
28:55
Speaker 4: look at what's happening to unemployment, look at what's happening
28:59
Speaker 4: to flows, and at some point the only place to
29:04
Speaker 4: you know, to hang out is is cash. I mean
29:08
Speaker 4: maybe gold. You know, I don't have a view in
29:11
Speaker 4: dollar terms whether that goes up or down. You know,
29:15
Speaker 4: I think it's you know, it's going to hold its
29:17
Speaker 4: value relative to you know, other assets much you know,
29:20
Speaker 4: much better. But but you know, I think the you know,
29:25
Speaker 4: to me, that's you know, that's really what you just
29:28
Speaker 4: need to be vigilant. You need to expect that this
29:31
Speaker 4: is coming. And you know, right now you could argue
29:35
Speaker 4: that we're seeing signal. I mean, you've had a number
29:38
Speaker 4: of companies announced layoffs and you know, some of it's
29:40
Speaker 4: due to AI investment, but others are saying efficiencies from AI,
29:44
Speaker 4: you know. But I don't know how much signal versus
29:48
Speaker 4: noise there is right now in these layoff announcements. But
29:51
Speaker 4: you know, at some point, I mean, if this keeps up,
29:53
Speaker 4: like you know, fifty million ele US fans can't be wrong, right,
29:56
Speaker 4: So that's you know, that's something to pay attention to.
29:59
Speaker 4: I mean, if you keep seeing layoffs and you keep
30:01
Speaker 4: hearing it's because we're automating and becoming more efficient, you know,
30:06
Speaker 4: at some point it's going to be meaningful. And look,
30:10
Speaker 4: maybe it all maybe there already is signal here. Again,
30:12
Speaker 4: I don't you know, I don't know, but but yeah,
30:15
Speaker 4: I think you just you have to watch. You have
30:18
Speaker 4: to watch employment, unemployment and flows very very closely. And
30:24
Speaker 4: the you know, the irony of this whole thing, I
30:27
Speaker 4: mean of my thesis, you know, should it play out,
30:31
Speaker 4: you know, again, the AI thesis, This is mine the
30:34
Speaker 4: market fragility, this is Mike Green convincing me. But the
30:40
Speaker 4: companies whose stocks have benefited the most on the way
30:44
Speaker 4: up here are the ones that have the furthest to
30:46
Speaker 4: fall just because of that dynamic, that reversal and flows.
30:51
Speaker 4: Now they were in terms of businesses, they will obviously
30:54
Speaker 4: be left standing and somewhat thriving, you know, in the
30:58
Speaker 4: wake of all this. And look, one thing we didn't
31:00
Speaker 4: touch on, but I think it's implied obviously when you
31:04
Speaker 4: see and if you see that kind of mass high
31:09
Speaker 4: end labor displacement that I'm talking about, it's not just
31:14
Speaker 4: an issue of flows. I mean, you have an issue
31:16
Speaker 4: with aggregate demand, and so that's going to you know,
31:19
Speaker 4: so we're talking recession anyway, that'll that will certainly impact
31:23
Speaker 4: financial results. But in the aftermath, these businesses will you know,
31:28
Speaker 4: will still be standing. But you know, I think the
31:31
Speaker 4: way like you want to you want to be able
31:33
Speaker 4: to protect yourself on the way down, probably cash. You know,
31:36
Speaker 4: we've set up a book in you know, in in
31:40
Speaker 4: our you know, we've set up a strategy, uh that's
31:44
Speaker 4: looking to protect principle on the way down. So I
31:48
Speaker 4: think a lot of how if you were going to
31:50
Speaker 4: try to actually make money on this, I do think
31:53
Speaker 4: a lot of the action isn't credit. And one of
31:56
Speaker 4: the things is that you know, that's interesting about the
31:58
Speaker 4: post GFC environment is that imply volatility and credit is
32:02
Speaker 4: so low because you have these structural bids for credit
32:05
Speaker 4: that are also part of the retirement you know, flow
32:08
Speaker 4: pick story. But you know, if you get and if
32:12
Speaker 4: you get this type of scenario playing out, I mean,
32:15
Speaker 4: vall is going to blow out on credit and obviously
32:18
Speaker 4: you're going to have a lot of credit events, you know,
32:20
Speaker 4: not I mean corporate as well as I'm saying government
32:23
Speaker 4: court credit events. So there is money to be made
32:27
Speaker 4: on the way down here.
32:28
Speaker 2: I don't think it's quite hard for retail investad for
32:31
Speaker 2: retail the average access. So for the average investors, like
32:35
Speaker 2: what you're saying is you just keep buying and Julius,
32:37
Speaker 2: the unemployment you really begin to see these announcements wraps
32:41
Speaker 2: it up. Then you get out competing, you go into cash,
32:45
Speaker 2: and then you wait and then.
32:47
Speaker 4: Right and then if you really really want to make
32:49
Speaker 4: the multi generational money we do along in the aftermath.
32:53
Speaker 3: You go along on. But how do you know when
32:55
Speaker 3: to buy and the aftermath?
32:56
Speaker 2: Do you wait until you start seeing the policy anno
32:58
Speaker 2: announcements from the state. You wait until you see QI
33:01
Speaker 2: forever announced again, you wait until.
33:05
Speaker 4: Yeah. I mean, look, I so for UK market, it's
33:09
Speaker 4: hard for me to speak to that, okay, because I think,
33:13
Speaker 4: you know, the the US is going to be you know,
33:16
Speaker 4: I think we're singularly blessed in this dystopian world that
33:21
Speaker 4: we're you know, we're heading toward. So from from a
33:25
Speaker 4: US investor perspective, you know that assets will be reinflated.
33:29
Speaker 4: We have no choice. I mean, all all of our economies, right,
33:32
Speaker 4: all the Western all the developed economies have so much
33:35
Speaker 4: debt in them that you absolutely the playbook is to
33:39
Speaker 4: absolutely reinflate assets. You know, in the US. I think
33:43
Speaker 4: that's you know, I think you know, we've seen that
33:46
Speaker 4: accomplished a number of times. They will do that again.
33:48
Speaker 4: So yeah, I mean, if you wait for the first announcements, like,
33:52
Speaker 4: you're not going to miss the opportunity. You know, if
33:55
Speaker 4: you if you buy after you know, the FED analysis
33:58
Speaker 4: is that they've cut rates to know ten basis points
34:01
Speaker 4: and the you know and the FED funds rate, I mean,
34:03
Speaker 4: you're not you know, you can you can wait until
34:06
Speaker 4: after that the buy You'll be fine. But look, it
34:10
Speaker 4: could it could take a while, I mean, but eventually,
34:13
Speaker 4: you know, the reinflation of assets will happen, you know,
34:17
Speaker 4: at least in relative terms.
34:19
Speaker 3: And do you think this is going to kill the
34:21
Speaker 3: passive industry?
34:22
Speaker 2: So when we're buying back in, you know, we're sitting
34:25
Speaker 2: in cash well waiting and we see whatever signal says
34:27
Speaker 2: we think gives us not by signal, do we then
34:31
Speaker 2: are we going to go back into ETFs or is
34:33
Speaker 2: this the return of the active manager?
34:36
Speaker 4: Yeah, that's that's an interesting question. Look, passive will be
34:42
Speaker 4: to blame for a lot of the market calamity, but
34:46
Speaker 4: how much you know, if we were talking about a
34:49
Speaker 4: financial crisis in isolation, then yeah, obviously you know, all
34:54
Speaker 4: legislative guns would be focused on the passive investing industry.
35:00
Speaker 4: But we're going to have bigger fish to fry because
35:02
Speaker 4: we're going to be wrestling with this these existential questions
35:06
Speaker 4: about humanity. What is our role in a world that's
35:09
Speaker 4: you know, where our work is increasing increasingly being performed
35:13
Speaker 4: by machines. How do we solve that? So? You know, again,
35:19
Speaker 4: so I think so given that, we're going to have
35:23
Speaker 4: some much bigger questions to answer, and they're not totally unrelated,
35:27
Speaker 4: but I think most the intention will be on that.
35:30
Speaker 4: But yeah, look passive Mike. Mike has been warning, he's
35:35
Speaker 4: been lecturing policy makers, you know, like you know, shouting
35:40
Speaker 4: from the mountaintops for years about what Passive is doing.
35:43
Speaker 4: And I think the response that he's gotten at the
35:45
Speaker 4: policy level is like, Wow, that's really interesting. But you know,
35:50
Speaker 4: there's zero political will to do anything about that right now.
35:53
Speaker 4: So you know, we just have to wait and you know,
35:56
Speaker 4: if your crisis ever materializes, then that's when we'll do something.
35:59
Speaker 4: So I think there's awareness of the problem, but it's
36:03
Speaker 4: just a political will problem, you know, Like right now,
36:06
Speaker 4: you'd be taking away the you know, the punch bowl
36:08
Speaker 4: in the middle of the party, and that's just not
36:11
Speaker 4: that's just not how we run things, you know, post
36:13
Speaker 4: GFC anymore, not at all.
36:16
Speaker 3: Yeah, ask you this.
36:17
Speaker 2: You're obviously thinking about lots of existential things at the moment,
36:20
Speaker 2: as am I.
36:22
Speaker 3: What are your kids going to study at college?
36:26
Speaker 4: Yeah, it's a good one. Look, I do believe that
36:30
Speaker 4: math and so my kids are not near college age,
36:33
Speaker 4: I mean twelve and eight. I'm I mean math and science.
36:39
Speaker 4: I'm very big on that regardless, Like, even though I
36:41
Speaker 4: know these things will be able to do all of
36:44
Speaker 4: your math, I think you still need to understand how
36:47
Speaker 4: to do math. So if you what the end goal here,
36:51
Speaker 4: as I put it to them, is, look, you want
36:54
Speaker 4: to be in a position to use these technologies as
36:57
Speaker 4: a tool, not to have to compete with them. So
37:00
Speaker 4: I do think that understanding the underlying functions that they
37:06
Speaker 4: are performing will give somewhat of an edge the math
37:11
Speaker 4: and science and look reading, So what do you actually study.
37:17
Speaker 4: The world is going to need salespeople.
37:20
Speaker 3: It's going to be communicated.
37:22
Speaker 4: Yeah, so I've got one kid who'd be a great
37:24
Speaker 4: salesperson and the other who probably won't wouldn't be. But
37:29
Speaker 4: you know, there can be lots of jobs in government
37:31
Speaker 4: as well, so I don't know, maybe for maybe foreign relations,
37:35
Speaker 4: and you can be a diplomat, you know, trying to
37:38
Speaker 4: control the last, you know, vestiges of what humans actually
37:42
Speaker 4: can control.
37:43
Speaker 3: All right, let me take you back to gold.
37:45
Speaker 2: Briefly you said you thought that might hold hold its
37:47
Speaker 2: value relative to other assets. Anyway, what about bitcoins? Oh
37:55
Speaker 2: my god, on ever, we always asked about golden bitcoin.
37:58
Speaker 3: That's what we do in this podcast.
38:00
Speaker 4: The same one exists and one doesn't.
38:02
Speaker 3: That not the same, They're completely different.
38:04
Speaker 2: But for me, you know, we go right back to
38:07
Speaker 2: the early days when people used to tell us that,
38:10
Speaker 2: you know, bitcoin with digital gold, and that made us
38:12
Speaker 2: lave and we would call gold physical bitcoin just for
38:15
Speaker 2: the giggles, right, and we'd ask everybody at the end
38:18
Speaker 2: of each podcast, if I gave you a choice of
38:20
Speaker 2: holding bitcoin of gold for a decade, which one would
38:23
Speaker 2: you take?
38:25
Speaker 4: Yeah? Gold? I mean, look, okay, so bitcoin. When my
38:30
Speaker 4: when my older kid was five and he asked me, oh,
38:33
Speaker 4: what's bitcoin? I said, listen, crypto bitcoin. These are currencies
38:41
Speaker 4: without countries. Okay, they don't matter. I mean, you know
38:45
Speaker 4: that there is an intrinsic value to them, which is
38:48
Speaker 4: just the gas fees as they call it. But these
38:50
Speaker 4: things trade obviously well above intrinsic I've looked at bitcoin
38:56
Speaker 4: at times in the past as a barometer of speculative
39:00
Speaker 4: acts at excess in the markets as well as you know,
39:04
Speaker 4: I think there's I think there's a recursive effect as
39:06
Speaker 4: well on speculative activity, and more valuable bitcoin becomes, so on,
39:11
Speaker 4: you know, the more froth there is in some other markets.
39:14
Speaker 4: So barometer as well as cause. But yeah, look, I
39:20
Speaker 4: understand the I think it was Warren Buffett who said
39:22
Speaker 4: that if aliens observed our behavior toward gold, pulling it
39:25
Speaker 4: out of the ground, you know, treating it like it
39:28
Speaker 4: has some tremendous value, they'd be completely puzzled. Yeah, I
39:32
Speaker 4: mean I understand that. But the thing is, I think
39:35
Speaker 4: it's so deeply embedded. You know, for millennia of human cultures,
39:40
Speaker 4: you know, every culture, gold wasn't the store of value.
39:43
Speaker 4: Gold was value itself. Could cryptocurrency supplant that or join
39:50
Speaker 4: that in status? I'm not an anthropologist, I'm not a
39:55
Speaker 4: certainly not a futurist anthropologist. So take my view with
39:59
Speaker 4: a great of salt. But I don't I don't think so.
40:01
Speaker 4: I mean, gold is pretty, you can touch it, it
40:03
Speaker 4: has weight, It's not an intangible asset. Yeah, exactly.
40:08
Speaker 2: So I can escape with bitcoin too, And I'm like, well, yeah,
40:11
Speaker 2: but're just still going to need electricity if you want
40:13
Speaker 2: to escape with your base point, still.
40:15
Speaker 4: Still gonna need Look, I mean, in a really, really,
40:18
Speaker 4: really bad situation, the ultimate store value is cans of tuna.
40:21
Speaker 4: So you know, I'd rather have cans of tuna stockpile
40:24
Speaker 4: than a USB drive at bitcoin.
40:26
Speaker 2: Okay, Well, in when the great crisis comes, can I
40:30
Speaker 2: swap some of my gold for some of your tuna.
40:33
Speaker 4: Can you eat gold? I don't know, you're.
40:37
Speaker 3: Something else.
40:40
Speaker 2: All right, thank you so much. I'm gonna ask you
40:42
Speaker 2: one last thing. It's you know, quick fire around this.
40:44
Speaker 3: What are you reading at the moment?
40:48
Speaker 4: Right now? I'm reading, I'm switching between two books. I'm
40:53
Speaker 4: reading a book on the dysfunction in the art market,
40:58
Speaker 4: and I'm also reading a book about Leonardo da Vinci.
41:02
Speaker 4: That's Walter Isaacson book.
41:04
Speaker 3: Okay, that's interesting. We should all read that. I think
41:07
Speaker 3: that's on my list too.
41:08
Speaker 4: You know, I can tell it's not that compelling so far.
41:11
Speaker 4: I'm finding it a bit of a slog and I
41:12
Speaker 4: don't I don't think that's Isaacson's fault. It's just there's
41:15
Speaker 4: not you know, there's a paucity of information, so he's
41:19
Speaker 4: kind of it's it's kind of like a book report
41:21
Speaker 4: on you know, during this year of Leonardo's life. He
41:23
Speaker 4: worked in this shop, and he worked on this sketch
41:25
Speaker 4: and here's the picture of it. It's it's kind of
41:27
Speaker 4: a book report on his life so far.
41:29
Speaker 3: So I hope it picks up kind of made some
41:30
Speaker 3: stuff up.
41:33
Speaker 4: It would have been yeah, it would have been better.
41:35
Speaker 4: I have to, would have perused I have perused my
41:38
Speaker 4: bookshelf looking for fiction to kind of because I'm not
41:41
Speaker 4: it's just not grabbing me here.
41:43
Speaker 2: So all right, well, you know, maybe we won't recommend
41:45
Speaker 2: that one to everybody. Stick for the first one. The
41:48
Speaker 2: first one dysfunction in the art market. That's a lot
41:50
Speaker 2: more fun.
41:51
Speaker 4: Uh yeah, yeah, that that could be. So that's written
41:54
Speaker 4: by Matt Campbell, Bloomberg journalist.
41:57
Speaker 2: So okay, yeah, so we can read that while we
42:01
Speaker 2: wait for the great market collapse, and we'll be keeping
42:03
Speaker 2: a very close eye on unemployment numbers on this blog.
42:06
Speaker 2: Thanks to Hugh, Thank you so much for joining us today.
42:09
Speaker 4: Oh, thank you.
42:21
Speaker 2: Thanks for listening this week's Marin Brogs Money. If you
42:23
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Speaker 2: to podcasts, and keep sending your questions or comments to
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Speaker 2: Merror Money at Bloomberg dot net. You can also follow
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Speaker 2: I'm not following you. I should be.
42:35
Speaker 3: If you are, You've got to be on X right.
42:37
Speaker 3: You are definitely at your ex.
42:39
Speaker 4: Yeah, I mean mostly most of the time is at
42:42
Speaker 4: muddy waters ree are okay.
42:45
Speaker 3: Everyone's going to follow that.
42:46
Speaker 2: Now, I'm Mariness w and John is John Underscore Stepack
42:50
Speaker 2: and now you know where Carson Is. This episode was
42:52
Speaker 2: hosted by me marrin zunsep Web. It was produced by
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Speaker 2: Samasadi and Moroses and sound designed by Blake maybe Up
42:57
Speaker 2: and Aaron Casper and of course special thanks to