저자: MichaelBatnick/BenCarlson · 외국인
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AI 안전 논쟁과 종말 확률 발언 이후, 반도체 조정과 S&P500 선방을 짚고 금리 상승 환경에서도 주식시장이 견조하다고 진단. 재정적자·국채 수요 우려는 과장이라고 보며, 장기적으로 AI가 디플레이션 요인이 될 수 있다고 봄. 반도체는 약 20% 조정 중이라고 언급.
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Welcome to Animal Spirits with Michael and Ben. It's Tuesday morning on the West Coast. 10:20 so I don't have to count. I don't do calendar math. It's 1:00. 1:20 Eastern Time. So, here's what we're going to do. We'll spend about 25-30 minutes on this and then we'll do a live show with Colin Roach where we'll talk about how to communicate with customers about Redalio.
OK. We opened the show last week. I started the show with a little mini- monologue about how I see the state of the market. I felt like the discussion was becoming repetitive. In fact, nothing new was happening, and then boom. Boom, boom, boom. We got the perfect internet discussion. An Anthropic employee resigned and said, “I can’t do this anymore.
"Everyone inside thinks there is a 10% or higher chance that civilization will be destroyed." And then Dario replied, "We really need to slow down." Sam Altman quoted the tweet and said, “Yes, Elon Musk agrees. Of course, Trump thinks this is a hoax and there's nothing to see here." But I say this is a perfect internet discussion because it's obvious that extinction will affect us all equally.
And of course, no one knows what will happen or what the motivation is. Although this is optimistic for the stock market because profits are distributed on a lower base. This is true. But the point is that anything is possible. There are no restrictions. Any opinion you have— express it, because who can prove you wrong?
Very extreme. That's the thing when you're estimating probabilities for something like this. No matter what number you call, it will cause a reaction. I think my initial thought was, and the funniest thing about this situation is that the guy quits and people say, "Hey, he worked at Anthropic for 6 weeks, nothing special." And then someone who still works at Anthropic on AI safety said, “ No, no, he’s right.
This is 10%." That was the funniest thing. Yes, he went against everyone. Everyone is like, "Oh, yeah." Actually, we agree with him. Uh, I don't know. It seems to me that the extreme sentiments about AI look like this. Some believe, like Ed Zitron, that AI is a useless technology. She is not working.
This is complete nonsense. Others say, "No, no, no, it will destroy humanity." And the third extreme option is that it will create a utopia with 20% economic growth. Nobody will have a job. She will cure cancer. I just, I guess, my main rule—keep me away from all these extreme opinions. I just don't think any of these extreme predictions will come true.
And I believe that extremes usually never happen. Well, let's hope not. One aspect that interests me is : well, of course, they're trying to scare everyone by saying that this is the most powerful technology in history because they're going public and they need to attract investment at a valuation of $2 trillion .
My question is: how does this help the fundraising strategy? Well, that's the hardest thing to grasp in these comments—it's like Charlie Munger said: show me the incentives and I'll show you the actions. What are the incentives for people who say such things? What do they get out of this? So some people say, "No, no, no , the reason the Anthropic people are saying this is because they want to put the ladder behind them and they don't want any competition." And this is very difficult to understand.
It seems like people, you know, venture capitalists have a certain opinion because they want their investments to pay off , and AI workers have a certain opinion because they want their stocks to be worth a lot, and so... But how, how does that increase their valuation? I just don't find it convincing.
I understand that everyone wants to have a cynical view. Maybe I'm a naive fool. But I tend to take it at face value. No, I think these people really, a lot of people really believe that. That's the thing. I think they believe it. So, Derek Thompson made an interesting observation. He quoted a tweet from this guy Jacob who got fired, and Derek said I'm really curious about what narratives get pushed through, when, and why.
People in and around labs have been warning about the risks of AI for years. And I think he's right. This is not some news. No. They've been talking about this for a long time, and as Derek points out, this gentleman is getting fired from Anthropic, and his post gets a hundred million views in 16 hours .
How and why narratives become popular when they do is a mystery. Just like this post Citrine. What the guy from Citrine said a few months ago wasn't new. Like, "Hey, AI is going to come and take away a lot of things ." People have been talking about it, but for some reason it goes crazy viral, and then they are also potentially bought because of it.
This... This... Someone wrote to us in the mail, and I thought he had a very valid point. He wrote: "Guys, come on, let me just read it." He said, "Even experts can get maniacal. You know important people in the financial world who get too carried away with something that's not worth it. The same thing happens with scientists and mathematicians." And that makes sense.
Even financial professionals are no less prone to bubbles and manic behavior than anyone else. And he says, "Why would you expect anything different from people in technology? They're also tempted by mania." I guess my only not-so-smart conclusion here is that these people, even if they're on topic, don't necessarily know what's going to happen.
I'm embarrassed to say that techies always make these big statements, but these are the same people who said that web 3, the metaverse, and crypto are the next big thing. Yes. But I'm just saying that they don't have the best reputation. Listen, techies are great at creating products that propel us into the future.
They are not very good at predicting what the outcomes of this future will be. Is this fair? Two things can be true at the same time. What you just said is true. That doesn't make me take these threats any less seriously. I don't reject them completely. How about this? I'm more worried about a cybersecurity incident happening within the next 10 years than the extinction of humanity.
To me, this is a much more likely event: AI bots attack something, we lose all our passwords, Dunkin' gets hacked again, and they lose... To me, that means people lose their banking information or credit cards or whatever. This is a much greater threat than artificial intelligence destroying humanity.
Duncan, would you like to come to the microphone? What are you laughing at? What's so funny? Technically, my parents were hacked. A. It was the same with my parents. My parents had $20,000 stolen from their credit card, transferred to their checking account, and then withdrawn. These are the things.
Very scary. Hmm, okay . Ben Thompson, our source of truth about what's going on in the world, because basically the story is this: Dario and the industry are now saying we need regulation , we all need a level playing field. The problem is that China is not slowing down. So, this is a situation like the " prisoner's dilemma." Ben Thompson said this: “Sometimes it’s hard to shake the feeling that people in the tech world literally spend too much time online.” " Losing the internet can feel like extinction." I can totally understand that, but the important point is that this is a digital realm, which means that the ability of AI to "go out into the real world" depends on the physical infrastructure that is managed, produced, and controlled by humans.
And while that is the case, I find it difficult to agree to the introduction of an authoritarian regime based on an assumption that has not yet been proven." How about this? So, that was an instant response. Listen, if we slow down the development of advanced AI models, China will win. And this...so this is the initial reaction.
And I understand that reaction, but here's the thing. If we win the AI race, you know what? China will copy this. If China wins in AI, we will copy it. Why is this a game in which one country must win? I don't understand this. Yes, that's a valid observation. Um, but you know, Ben Thompson had valid arguments, valid criticisms, and I really think...
Listen, if you listen to techies talking, it seems like they live in a different reality. Because, let's say, 1% of people who use AI use it as agents that do all the work for them, or as personal assistants, and I personally haven't reached the point where I can say that AI has changed my life. Like, this is really cool technology.
She helped me do research that would have taken me hours and hours before, and now I can do it in minutes. Well, isn't that life-changing? I mean, that's a pretty high bar. Well, it's not the same as having children, but it seems to me that the technicians who use the most advanced models are simply delighted.
No, I think this gap between them and the rest of the world has never been so wide. Okay, I agree with you on this point . Ben Thompson said again that this is an attempt by a certain political movement in San Francisco, acting in conjunction with one of the major political parties, to interfere in the activities of every AI company, nominally pursuing a futile goal.
Um, I find the constant warnings about China often tiresome, but in this particular case it's absolutely justified. Quote: " Holding back progress in a world of geopolitical competition with China is pointless, it won't happen, and it should really end the whole discussion." So they're not going to slow down.
It's quite funny, as if the idea that China will slow down because we slow down—it's just a huge joke to them. I really think that if we're talking about the real risks of this. So, have you read or listened to a book about 1873? Yes, I finished it. Good. She is very good. So, the whole thing was a bit boring.
This is one of those financial panics, it was a little too long. But it's true. But this is one of those things I read about, about a "long depression" in the past, and this deflation lasted for 30 years. I don't know, it seems pretty serious. So there was more to it than I thought, but my main takeaway from that book was—yes, there was an economic downturn, but it wasn't that severe.
It was the policies that emerged as a result of that recession that created the problem. And I think the next big potential financial crisis will come about because of politics, because of a political mistake. And it would be the Fed or the government overreaching , or something along those lines, where the overreaction to an event would cause the error, not the event itself.
And I think it's potentially like... Duncan is going to throw a tantrum right now . Who even uses airplanes for marketing these days? trusted advisors. Of course, it's very funny. Very, uh, very timely. This is the banner flying behind us. But doesn't it seem like politics is scripted...I don't trust any political party to regulate this.
I have a lot...I, I'm a patriot, Ben. I completely trust the government. Yes. Hmm, I was thinking about that. So, I put this in the document last week, before all this mess started, it seems, on Wednesday. And I was thinking about the stock market. And, uh, two things I was thinking about. The discourse around the stock market would be much simpler if the market was constantly going either up to the right or down to the right.
And the stock market is having... it's having a good year. The S& P rose 12%. It's up 17% over... That's strange because valuations are falling while the stock market is rising. So, it's like ...it can be interpreted both ways. And...and I think that's what I have a problem with. I think this is one of my biggest "blind spots." I completely trust the stock market.
Maybe sometimes too much, because I told you about it. So, mortgage rates have risen from 6% to 7% this year. 10-year bonds rose from 4% to 5%. Inflation increased from 2.5% to 3.5%. This macroeconomic background makes you say: “Oh my God. "This...this is not good." But, hey, the stock market is up 13% in a year , so it's okay.
I think sometimes we financial professionals trust the stock market too much, when it says everything is fine , it means everything is fine. Well, he was...he was a pretty good indicator. That's right. He hasn't let us down lately. I mean, at some point, of course, he's going to make a mistake. But I was also thinking about what I wrote: I don't think we'll have a significant sale until some kind of event happens.
I don't think it will be...I think maybe it could be interest rates. Maybe 5% on 10- year bonds is not what is needed, maybe 5.3%. Who knows? Maybe, maybe, this is it. But I think that against the backdrop of accelerating profits, the market is holding at a fairly high level. And if there is some slowdown, that's fine.
Well, profits should still be OK as hyperscalers' free cash flow recovers, right? And it will be, it will be normal. Um, and again , we had that event. So people were thinking, "What the hell is the stock market going to do on Monday when it opens?" And semiconductors had their worst software day of all time.
It seems semiconductors are down 5%, software is up 5%. And I didn't know that until I checked a second ago. Semiconductors... people might think, "Mike, you're looking at the wrong stocks." Don't tell me the S&P is up 12%. Semiconductors are up 80% through July.” Okay, fine. But now that's not the case.
And guess what? Semiconductors are in a nearly 20 percent pullback . And the stock market fell by about 4%. Did you know this? Yes, by about 3%. Inside the market, uh, surprisingly strong, even despite the deterioration in market breadth. For now, there is still some support under the stock market. Um, okay, one of the complaints I had last week was about us being constantly fooled by AI.
How annoying it is and will be. A great example. This Clay Matthews [ __ ]. First of all, it wasn't funny. Completely. Isn't that right? This stupid nonsense. That was, that was... you could have missed it. So, Clay Matthews, uh , got caught by TMZ and other outlets. His face looked like Gaston from Beauty and the Beast.
The chin just jutted out here. It looked completely ridiculous. And everyone was asking, "What the hell did this guy do to his face?" It was like he had implants in his legs. He looked completely ridiculous. And, uh ...And that, uh, was a fake. It was like a promo for, uh, Caesars or some nonsense. So, you guys got divorced?
Is that what you mean? Everyone was divorced. And it was n't even AI. It was just makeup, but it's just annoying. I...AI, someone also uploaded an AI video of me singing karaoke last night at a bar. This was not the case. So, Ben was...so, Ben, okay, Ben had a great time last night. I was asleep at 9:30.
Um, and Ben sings his song. Is this from " Cocktail" or... No, it's from "Top Gun." Everyone should have their own karaoke song. My karaoke song is "You've Lost That Loving Feeling," which Tom Cruise sings at Kelly McGillis' bar in Top Gun . This is my...this is my karaoke song. I remember that scene, okay.
Ahem. He touches her shoulder and tells Gus, and Gus says, “Don’t do that. "Don't do this, Maeve." And he...yes. This is a classic, incredibly 80s style . Yes. Ben, you told me you... Daniel, you have to dress Michael and me in the Navy uniforms from Top Gun . Is this... Oh, of course. No. No, put us in...I want to be in denim shorts.
Oh yeah, and volleyball. For the cover, yes, absolutely. You have some comical observations, Ben. Not comical, just a few observations I have about travel. Come on. Okay, first of all, a lot of people commented last night, someone even said, "Michael got a stylist because you improved your style?" Wrong.
It said: "Did Michael hire a stylist?" Yes. And I don't. I'm just self-taught. So, here's my problem with fashion. I think the best material for summer in good weather is a linen shirt. Okay. I think it's...some people... Oh yeah, but last night I thought: I have an idea about flax, I'll save it for tomorrow.
Come on. Some would say it's a seersucker. No, flax is the best. You have a nice pair of pants or shorts. Is this a seersucker? Do you know what seersucker is? Blue and white stripe. Oh, okay, okay. But here's the problem. You wear a shirt for 5 minutes and it looks like it was wrinkled in the corner.
And it's impossible to wear a linen shirt without it getting wrinkled. Is n't that right? Yes. I thought...I thought your idea would be a little more interesting than this one. Okay, I have nothing else. Hmm...Here's the question. Why does every body lotion in a hotel have a lemon scent? Lemon scent?
You know it's true. In any hotel in the world, except perhaps four- or five-star ones, everything has a lemon scent. Why is that? This is a valid observation. Is n't that right? Okay, one more thing . So, our airport, they're completely redoing it. And this is the first time I've seen this. Maybe you saw it in New York.
So, I'm going to drop off my luggage. I usually fly with hand luggage only, but we are here for a few days. Our airport now has self-service baggage terminals. You walk up, scan your boarding pass, put your bag down, scan the tag on your bag, or whatever, then it closes and takes your luggage. Someone is definitely doing something wrong.
I saw so much confusion on people's faces. You know how it is when you see baby boomers trying to use the self-service checkout at the supermarket? And they're like, "Why?" Why is that? » People at the airport who have never flown before. This is a terrible idea. Isn't that right? Yes. I mean, yes. Personally, it's fine for me because I'm getting through it faster, but it's a terrible, just a terrible idea.
Okay, anything else? I think that's all I had. Good. Hmm, we received an interesting letter. I have a great thought experiment for you both . First, what did you see at home as a child that was a sign of wealth to you? A good example for me: if you had a kitchen island, you were rich. Or if you had a water dispenser in your refrigerator—you were rich.
Not bad. Um, now try to think of something that indicates wealth today. For me, it's a built-in refrigerator—it means you're rich. What about you? So I replied to his letter: “What do you mean by a built-in refrigerator? Are n't they all built in ?" He meant the refrigerator, which is part of... It looks like kitchen cabinets.
Yes. Okay. And I said, "Ah, that looks really nice." So, I think, once upon a time...I think I thought that if you had a swimming pool, you were rich. For me it was HBO. If you had HBO as a kid , you were rich, because my parents never hooked us up to movie channels. And I could only watch it, remember, once a year, when there was a free weekend?
Yes, it was a good, wonderful weekend. So how did you watch The Sopranos? Were you in college? I had to catch up on that later. Okay, because I...that's why I missed it, because we didn't have HBO. Yes, I have too. I grew up in a house without HBO. Okay, here... So, but today, it seems to me, there are so many signs of wealth that you might not even be rich if you have them .
Okay, well, here's one thing that, in my opinion, costs money. I don't know if your friends are living beyond their means, but it costs money. Heated driveway. Uh, yes... Apparently, it's more common where you live. The largest house on our block has a heated driveway. I always, I always envy them so much because their driveway is perfectly clean in the winter , without these big chunks of ice and stuff.
But think about modern homes compared to the ones we grew up in. It seems to me that most homes have a kitchen island, or at least many of them do. Yes. This is not at all uncommon . Aha. That's the thing. There is, there is much more, it seems to me, now the signs of wealth have become more subtle.
And what about...how, how, how could I not mention the vestibule ? Yes, if you build your own vestibule twice, then you are rich. Uh , okay. The trailer for "Artificial," which is...er, a Sam Altman movie starring Andrew Garfield , gave off some serious "The Social Network" vibes. Have you seen him?
I'm not going to watch this. I won't be watching this new Mark Zuckerberg movie. Sorry. Um, you don't have to apologize. This is your right. They...they're trying to make it look like "The Social Network." I ...it...it seems to me that they are trying too hard. Maybe so. Um, a new trailer for M. Knight's new movie, which ...
Wait, wait. I thought you were against trailers. Now we're back to the trailers. Well, that's a valid observation. That's a valid point, Ben. There are some trailers that are impossible to avoid. So, here are the trailers I still avoid. Independents, like " Obsession", "Backrooms" . I was watching "blindly." "Invitation", had no idea what he was talking about.
But there are trailers that you can't avoid when you go to the cinema, because they are shown before the films, right? Stop. M. Night Shyamalan made a movie with Nicholas Sparks? Who is Nicholas Sparks? This is the guy who did...What the... Oh, is that him "Split"? No. Yes, he filmed a love story...What was the name of that love story with Ryan Gosling?
No, he made a "Diary of Memory." For me, this is a strange combination. Wait, is he an actor? No, he...he's an author who wrote the book " Diary of Memory," he made the movie " Diary of Memory." Okay, whatever. I...I love M. Knight. I can't leave him, even though his movies are very, very... The movie with Hartnett was unbearable to watch.
" Trap", I liked it. Terribly. I liked it. Horror. Very good. Extremely, extremely worth watching. Worth a look. So, a new movie with Jake Gyllenhaal , and I... Okay. I, I, uh... I mean, I watch all his movies. its. He looks pretty, pretty bad. Okay. Ben, you've been saying this for a long time , and we've received several emails saying that Apple has really raised the bar.
Someone actually said that. So... I thought you said that. I, I said it. Someone else wrote to us about this too. Apple is turning into HBO. The quality of the content they are currently producing, "Bunker" is a very good series. So... But their marketing is complete crap. I do n't even know what's on the website.
So, my wife and I watched "Mayday," and I, as you know, am a Ryan Reynolds fan. Uh, he had, he had... every time you say that, I die a little. There were ups and downs in his career. Let's say this. Reynolds fan? So, there's this movie called "Mayday." It came out on Apple. My wife and I are looking for something to watch.
We're like, "Wait, there's a new Ryan Reynolds movie on Apple?" He is very entertaining. I ...he...he has...so there are a lot of references to "Top Gun" in the movie. The action takes place in the 80s. It's like Top Gun plus Behind Enemy Lines plus any other Ryan Reynolds movie where he jokes and smiles sarcastically.
And it's very entertaining. For a movie that's coming out on streaming right away, I tell you, give it a chance. It's called "Mayday." This...my wife and I finished watching it and we're like, "I can't believe how interesting that was ." Uh, I don't think I will. Okay. So, my daughter moved on to the Twilight movies.
But wait, wait. Sorry, short. As for Apple, I mentioned it because they just blew it last night at the Emmys. They collected all the awards. Certainly the most titled network. This is logical. This is very... Ahead of Max, Netflix, Prime and all the others. They obviously spend a lot of money because they have so many big names.
Okay, what did you say about your daughter ? So, she's watching Twilight, which I've never seen before. I remember the books were very popular. Kristen Stewart and Robert Pattinson. It's actually amazing that Robert Pattinson became such a great actor and didn't get stuck in that role, but... So, you've seen that meme where the guy stands and watches.
This is the same arrogant meme . Is this, um, Michael Sheen, I think that's this guy's name? Uh-huh. He looks like Jason Pereira, the financial advisor, but with hair. I never knew this meme came from one of the Twilight movies. My daughter is watching this, he's a vampire, and I'm like, "That's the meme." Oh, I was like Leo in the movie, saying, "That's the meme ." I had no idea either, and I have to admit, I don't even understand what this meme means.
I'm not, I'm not entering. This is someone we could use this meme for, this is someone who acts arrogant and has a lot going for them. Got it. Like "I'm better than you." Got it. OK. Um, so I watched Aliens for the first time in a very long time after hearing about it on the Rewatchables podcast. Yes, I also watched it with my son a week ago.
And I listened, I watched the extended version because Rewatchables said it was a good option, so I watched it. And it's a pretty important gap that in the extended version you learn that Sigourney Weaver is, by the way, two things. Sigourney Weaver was just incredible in that movie. Incredible. Number one.
Number two. Sigourney—that's not her real name, is it? I can't imagine this. This is the kind of thing I've been thinking about. I was in the kitchen and said, " Wait a minute." "That's not your real name, is it?" You know, there are no more Sigourneys. I...anyway, when she was away...( snorts) Daniel.
So she was in a capsule, uh, in cryonics or something for 57 years, and her daughter died while she was in space. And so her maternal instinct towards Newt, who is definitely the weak link in the film, was a huge part of the story. So, after... cut it out. I didn't know that either. After watching the movie, my son fell in love with Bill Paxton.
And all week he kept saying, "That's enough, man." Everything he said ended with "dude," my son kept telling me, "Come on, dude." So, that movie, can you imagine seeing it in 1986? It was...I mean, some of the flights did n't look great, obviously, but it's amazing. So, I watched the last 20 minutes with my kids and they were just amazed.
That film has predecessors to "Avatar ." With this royal theme, yes. I...I know you're an Aliens fan. I still think the original Alien is much better than the sequel, but... Well, we can stand by our opinions. You could be wrong. This is normal. So, Alien is a great movie, but "much better" is, well, crazy.
Um, okay. So, anything else, Ben? Any final thoughts? No, Future Proof is just incredible again. There are 5,600 people here, and we did, we did our shot. We will send our photo to the film crew. We always take our shot at the opening cocktail party. I mean, it's one of the best parties of the year, and it's the first night party.
This is something unreal. The atmosphere is simply impeccable. The sun is setting. There are thousands of people in one place. Music is playing. There's Monday Night Football. It's really hard to explain how cool this event is unless you come here. That's right. That's right, Ben. Um, okay. Here's our conversation with Kelen Roche.
And we returned. Um, so after the camera went off, Duncan asked me if I wanted to apologize to Matthew Rhys, because apparently he did a pretty good job at the Emmys last night for "Widows Bay" and what else, Duncan? " The Beast Inside Me." Okay, I thought he was exceptional in "Widows Bay," but I didn't like him in "Beast Inside Me," so...
I thought he was great in that. He also... I want to apologize. " Americans". But, but come on, you... "The Americans" is also one of the most underrated series of the last 15 years, and it's awesome there. I highly recommend that if you are looking for something to watch, watch this series. So, sometimes you have to be a strong person to admit your mistake.
And the scene is over. Greetings. Let's go. Let's make some noise. Wow, this guy almost fell. That would be something. A. Okay. I feel like we're sitting on the same side of a table in a restaurant right now. You are very close to me. Ah, closer here. Closer . Oh, okay. So this is Animal Spirits for those in the room who don't know us, my name is Michael and Ben's name is Ben.
Well, and thinking about what we were going to do for this event, uh, I was struck by a bolt of inspiration. This is the second time I'm using this analogy at this event. Here's what happened. Well, 2 weeks ago, an advisor wrote to me on Slack: "Hey, one of my clients is asking about interest rates.
Uh, you know, just wants to know what we think about our fixed income allocation." Um, and, uh, so I gave him some talking points. Um, he said, "Hey, let me just, I'll just send you the article he was talking about." So, uh, okay, I gave him theses on what we should say, how we think. I saw the article, clicked on the headline, um, and the headline was...is someone smoking marijuana?
Do you smell that? The headline was this. This is Time magazine, this is Time. Only, only on Future Proof, I guess. This is Time magazine. Okay, this is Time magazine, a very mainstream article, er , publication. And the title is " The Problem of Supply and Demand in the Bond Market" by Ray Dalio. And I read the introduction, and Ray Dalio said, "The great degenerative process of the debt cycle that follows this dynamic can be easily seen and understood by studying historical cases in many countries, and it is as predictable as demographic change." Seriously?
Is it that simple, Mr. Dalio ? Anyone who has studied monetary history should know that all monetary orders eventually collapsed, and blah blah blah. I called my consultant. I said, "I demand to be on this call. I can't take it anymore . Mr. Ray Dalio has been scaring our clients for over 10 years, and I won't take it anymore." Is n't that right?
Enough already. So, wait. I actually received an email from one of our customers. That was a month ago. He said, "Okay, Ray Dalio is worth over $20 billion, so he definitely knows something. I mean, he ran one of the most successful hedge funds in history." He said, "A lot of people definitely believe in his thinking." I'm not saying he's wrong, but do you agree with his current views, or at least some of them?
"And so Michael and I thought, 'Well, who better to talk about macrodynamics than someone we've learned a lot from .'" So, Cullen Roche, founder of Pragmatic Capitalism, who is now retired. Now in Discipline Funds. So, Cullen, come out. We learned more about macroeconomics from Cullen, so welcome to Cullen Roche.
Let's go. He's local, from California. So, okay. The title of today's episode: how to talk to clients about Ray Dalio. We have a problem. Cullen has some ideas. OK. So, yes, 10-year bonds have crossed the 5% mark for the first time since 2023 . I'm not saying that all his fears are completely unfounded.
But I think I'm going crazy. Of course, bonds carry risks. But why aren't we talking about the reward? It's finally time, I would say , the highest time, to enjoy fixed income. Cullen, am I crazy? There are nuances to this discussion that, first of all, I think it would be difficult to ... Well, Ray is obviously brilliant in many ways.
When you write a book about how countries go bankrupt, I think you get into a situation where you naturally have to defend that position. retreat from one's words. That's literally the title of one of his books, "How Countries Go Bankrupt." You know, I've written an incredible, embarrassing amount of content on this topic, because I went through a lot of this process after the financial crisis, when the Fed was doing quantitative easing and the government was spending a lot of money, and a lot of my clients were asking this very question.
He said that this would either lead to hyperinflation or the country would go bankrupt. And that period was very interesting to me because I talked to a lot of people in Japan at the time, because Japan had been doing all this for 20 years, and I talked to people like Richard Ku and famous macroeconomists who had been having these conversations in Japan for 20 years, where the Japanese thought the same thing.
The country prints a lot of money, we do quantitative easing, the country goes bankrupt. And I learned a lot during that period, mostly because the way countries go bankrupt is very specific and very nuanced. And I think the most important thing about the United States is not only that the United States can print its own currency, but also that the United States very specifically does not borrow in foreign currency.
And that's really the crucial aspect that I think separates the United States from many countries that are actually going bankrupt. One thing that worries most people is, " Okay, the debt has gone up, I don't know, from $25 trillion before the pandemic to $40 trillion now." Interest rates are rising, which means that, of course, borrowing costs are getting higher.
Interest rates as a percentage of GDP have become higher. Debt to GDP is now as high as it has been since World War II. And this is not happening during a crisis, this is happening in an economy that is not exactly thriving, but growing. Yes. Is n't that right? So, the budget deficit is very high, and it seems that none of the political parties is ever going to change their course.
Certainly, it seems that nothing will stop this train of public spending. So is there anything about the national debt that worries you? Yes. And I think that's where the nuance comes in: when you have these discussions with people, I think the first thing you need to clarify is, what is the risk? Because when we talk about the bankruptcy of countries, when a country goes bankrupt, it affects the entire debt.
This means that you are defaulting on every obligation the government has. And that creates an emotion where you feel like you have to completely get rid of that asset in your portfolios. And I think that in the United States, it's just not the right risk. The risk is not that the country will go bankrupt.
The risk is that a significant portion of this government spending could cause inflation. And we all know, you know, the interesting thing about COVID is that when we see the government really trying to create inflation, the government succeeds. They spend, you know, one of my favorite metrics from that period was that government spending as a percentage of GDP went up to 40%.
And on average over the last 25 years they have fluctuated between 20 and 25% , and we are back to that 25% range. So we know that when the government tries hard enough, it can cause significant inflation. So if default is not a risk in the United States, then the conversation you need to have with clients is: OK, so what is the risk?
The risk is inflation. And inflation affects different assets very differently. And I think that's where the nuance lies, and there are elements of Dalio's argument that are very valid in the sense that the longer the term, especially on the Treasury bond curve, the further you go, the more you are exposed to less and less protection from inflation.
And I think in that environment today it gets really interesting because the dynamics have changed even post-COVID, because when you look at things like 10-year Treasurys or 10-year TIPS, they're yielding 2.6 % today. This is really attractive. This means that if inflation averages 5% over the next 10 years, the client will receive approximately 7.6% nominal return over a 10- year period on an asset that is effectively risk-free throughout that time.
Is n't that good? This is really attractive. So I think there's a point where you can still ask yourself: is it worth buying 30- year Treasury bonds? To me, it's still a little crazy, and this is where Dalio may have been right, but for God's sake, I mean, a Treasury bill yields 4.6% today. Hallelujah.
So, if you have a one- year commitment and you're trying to explain to a client that, say, you're buying a new car in 12 months, and we'll put that money in a one-year promissory note, and you'll get 4.6% for that entire time, that's the obvious choice. You are actually getting the return on that asset, adjusted for inflation.
And you have zero probability that this asset will depreciate to zero due to default. So this is where nuance is very important in this conversation . OK. Let me move away from the nuances and get back to the point. I'm sure this annoys you as much as it does me. There are even more of you, because you know this topic better than I do, but Dalio is addressing a broad audience, right?
Time magazine is a publication for a general readership. And he said, "To understand the current position of the United States, imagine that you run a big business called the United States government." I 'm sorry, what kind of big business is this, I don't know about it? Does Apple print its own money?
I don't think so. He then goes on to say that the federal debt held by the public is six times the annual income. And what does that matter? $240,000 for every American household? What? Okay. Yes. What does this even mean ? Colin, Colin, you always emphasize that you need to look at assets too. There has to be a denominator.
But I think one of the things I've learned is that I think to be a hedge fund manager, you have to be generally pessimistic in a way. If you listen to people like Paul Tudor Jones or Stanley Druckenmiller, I think they are pessimists by nature. Whereas most advisors, in my opinion, have a more optimistic mindset.
And I think it's worth considering their personalities, as well as the fact that he's a salesman. He was always a salesman, but how do you get people to invest in a hedge fund? Scare them. Yes. Yes, that's a valid observation. I mean, as a hedge fund manager, you're probably more concerned with risk management all the time , and you're most concerned about the things that could lead to a crash.
So for the average family, what is really their biggest risk? Probably long-term inflation and the ability to meet your short-term needs. So this is the view that, generally speaking, most of us who help households hold: we probably have a significant equity advantage, simply because most of our liabilities are in the future.
They probably lean towards stocks to some extent, which means there is some balance in how you will manage your asset allocation. But in the long run, if you're helping households, there's a lot of logic in the default optimistic position , where you just say, " Hey, we have to be optimistic to some extent because the stock market is the best hedge against the long-term risks that most of us face." Cullen, you think a lot about asset allocation.
You are an advisor to your own clients. In the aftermath of the global financial crisis, I really feel that interest rates and the Fed have pushed people to be more risk averse. This is not just an opinion. Everyone has been talking about it, and it's true. Especially as an advisor, it was difficult to have a conversation about giving clients a 1.4% nominal yield on bonds while charging 75 basis points in commission.
It was a difficult conversation. And so, step by step, the 60/40 portfolio turned into 65/35, then 75/25, and in some cases, 80/20. And it worked out very well for everyone who took the risk . Now the 60/40 model is back. People say she's dead? She came back, and how. You can provide a very attractive real after- tax return.
Here is the objection I heard. Okay, so today you can get, say, 5% per annum in quality bonds. What, 10 years ago, people were willing to go over their heads, right? Because in 15 years, these are the highest profitability rates we've seen in probably 17 years, or something like that, since before the financial crisis.
Now the main argument against it is, of course, that no one wants to own bonds in a bull market. Like, why do I need this 5% when the stock market is growing by 15% per year? But then people say: well, if I get 5%, subtract inflation, subtract taxes—what's left? Which is obviously market behavior. because, obviously, this is in a "bear" market.
Of course, you pay taxes on the stock market as well, and you also deduct inflation from it. But it seems like people are just looking for an excuse not to own bonds. Well, I mean, this is also typical behavior for a " bear" market: when the stock market drops sharply, people react the same way and start looking for all other alternatives.
And what we've been seeing in the bond market lately, essentially since the beginning of COVID, is exactly the same phenomenon where prices have fallen sharply, and now everyone is just afraid. Although, of course, there was reason to be afraid in 2019, when the 10-year Treasury bond had a modified duration of 8.5 and a yield of 1%.
I mean, the risk-reward ratio there was extremely low. Whereas today the same instrument still has a modified duration of 8.5, but yields 5%. So, your “margin of safety” in such conditions is much better, and the risk- reward ratio has changed significantly. And I think that's one of the reasons I like to talk to clients about time horizon investing: It's a very simple concept to explain—when you buy a 5-year Treasury bond, it has a modified duration of, well, how long?
Somewhere around 4.8. It gives a 5% return. The “ airbag” inside this instrument completely covers the interest rate risk for one year. And you can explain this concept like this: Look, we buy a five- year bond because we know that in five years your cushion will almost exactly offset the interest rate risk of that instrument.
What if we go 10, 20, 30 years? This is where we may be creating some behavioral risk: if you buy 10- or 20- year bonds, and the Fed decides to raise rates, and they go up another two or three percent—who knows what's going to happen in Iran or with all this crazy inflation. And suddenly you get more of these "swings" with Treasury bonds.
Well, you know, it's a risk that you have to communicate to people, but I think when you can communicate that, especially on a zero-to- five-year horizon, it's very easy to explain because they understand that people don't understand modified duration. They don't understand factor investing, styles, your spreadsheets and all that , but they do understand, "Hey, I'm buying a one-year Treasury bill.
I get 4.6% from this." Well, of course. This seems pretty convincing. Um, yes, I agree with you. I don't want to be too bold to say this, but I will. I think unless something goes wrong and Ray Dalio turns out to be right about the real risk. Okay, unless the 10-year bond jumps from five to eight, which would be really bad, here's what I'll say .
I don't think bonds can hurt us any more. As it was before. People are still traumatized by 2022, and that's understandable, but you can't say that about a stock where you show a client: here's what we know for sure. If the 10-year rate goes up by 150 basis points, yes , the price will fall by 3.8%, or whatever it is.
Yes. But people don't think about the other side of the coin, namely: not only about income, but also about what will happen if the economy does slow down? There will also be a benefit, an uncorrelated or hopefully a negatively correlated benefit, that didn't exist before, and I understand that people are kind of stunned, but I really believe, and you see it, that I'm repeating the same thing .
I think people are for Cohen on this issue. So the Fed raised rates today, right? My question is this. Does it matter as long as hyperscalers are spending so much money on AI? How far will the Fed have to go to slow the economy if the only thing that seems important is the development of AI? It seems that the only way to really slow down the economy is to slow down this development.
And just because the Fed raises rates won't stop the war in Iran. This won't stop hyperscalers from building, unless the debt burden becomes so high that they can't borrow. So what will actually slow down the economy? I mean, the irony of the situation with Warren raising rates is that the person who probably controls interest rates is now sitting in the White House.
I've actually been saying all year that the likelihood of them raising rates was very low, because I would be shocked if anyone continued to raise rates before the midterm elections. Did you think there would be a rate increase today? I mean, at the beginning of the year I didn't think there would be rate hikes.
I thought there would be more rate cuts. So we're dealing with variables that are a priori unpredictable, because no one can predict exactly... you're playing "3D chess" when you deal with inflation, interest rates and all that. You do n't know, right? That 's right, and no one thought the war would last as long as it has now.
So, who knows? Listen, here's the thing. If we really go all-out on Iran, let's say oil hits $300. What will happen to inflation under such conditions? Oh, it will probably grow, who knows, to 6, 7, maybe 8%? Who knows? Because oil has a huge impact on everything because it affects diesel, and diesel affects all the trucks around, and that affects everything that gets delivered, and who knows how long that will last.
So, that's the risk. You know, Mike, I tend to agree with you that this is an extreme risk. But you start talking about inflation forecasts, and I've spent most of my career trying to model and understand inflation, and I'll be the first to tell you that nobody knows what's going to happen to inflation over the next 6, 12, 24 years .
You know who knows? It's just that market experts like to say that the cure for high prices is high prices. And on the one hand, it obviously makes sense. I saw statistics today that the average price of gasoline, whatever it is , is somewhere around 4.60, I think, nationwide. Does it cost consumers 12.60?
Yes, uh, yes, 6.50, I think I saw it the other day. It costs consumers, I think, an extra hundred...or maybe a hundred billion? Ten billion? Whatever it is, it's a large sum. I don't know if it's ten billion or a hundred billion. It doesn't matter. My opinion is this, or my question is this. Is this enough to finally slow down the consumer?
Does gasoline even matter to the economy now? The strangest thing about interest rates, and this is something that is quite empirically clear, is that they work. The Fed's policy operates mainly through the real estate market. In essence, they slow down the consumption of debt funds. And the main way households consume debt is through mortgages.
And the real estate market was simply destroyed. Frozen ever since. Yes, it is completely frozen. Prices haven't fallen, but they've actually stagnated , which is quite surprising given the limited supply in the real estate market. And, supporting Ben's point, yes, the Fed has probably done everything it can to slow the economy with interest rates.
And how much more can be done? I doubt that this rate hike will have a significant impact on inflation in the coming years, especially if the huge spending on AI continues. The real problem with this whole AI thing right now is that these companies are obviously spending a lot of money on investments, data centers and all that.
And that causes a short-term spike in inflation because it affects electricity prices, and you're already starting to see the effects of that in the short term. I believe that in the long term, AI is incredibly disinflationary, meaning that the rate of inflation will slow down thanks to AI. Simply because once we get to the point where robots actually do a significant portion of the work in many sectors of the economy, unit labor costs will fall, and there will be so many deflationary effects that it's hard to imagine a world where AI isn't extremely disinflationary.
And the strangest thing, going back to Dalio, is that this will probably lead to the government getting more involved. Because if you start seeing real job losses and real wages falling, the government will inevitably intervene in everything, because it is the compensator. This is the only structure that can intervene and pay people in the face of real significant job losses.
If you're trying to assess the risks of a recession now, how likely is it that for some reason there will be no return on investment, the cost of debt will become too high, and hyperscalers will cut costs significantly? In your opinion, is this the biggest recession risk that exists? Hmm, good question.
I mean, among the stupid things to predict, in my opinion, predicting recessions ranks first. But I'll be a fool and say that yes, hyperscalers are probably the biggest risk. Because if you look at what's been offsetting real estate lately—it's crazy, when you look at housing investment and corporate investment in general, it's actually been declining quite significantly over the last 5 years.
To a large extent, but the data centers have made up for all of this, which is just incredible. So if you start to see a real pullback in investment in data centers and AI in general, how will that affect GDP? Then you end up in Mike's world where suddenly real GDP is slowing down, and suddenly, in two or three years, the Fed is maybe faced with a situation where we get out of Iran, the economy is slowing down, and everyone is talking about cutting rates again.
Um, okay, let's give Dalio credit and say he's not stupid, and he's definitely, definitely not stupid. He said: “ Looking ahead, the situation is most likely to get worse , and I estimate that the projected deficits will cause the federal debt to grow to about $55 trillion to $60 trillion over the next decade.” Um, is there some kind of critical limit?
Let's say, let's assume that it really grows to $55-60 trillion. So, that's where he's headed, right? Yes, yes, that sounds like that's where we're headed, doesn't it? So what is the risk? What, seriously, is the risk? The risk is inflation. Will government spending lead to significant inflation? And, you know, I think part of the confusion or fear-mongering around this is just the sheer size of the numbers.
And I think when people see 40 trillion, they say, “Oh my God, that’s just a gigantic amount. How can this even be sustainable? But that's crazy because the United States has such a huge economy. I mean, when we talk about the total financial assets of the entire economy, we're talking about $450 trillion .
So, yes, the national debt is large, but all other assets are much, much larger. And so, yes, those numbers can change, and the stock market, or real estate, or prices would change that. But even so, the size of the government-issued assets still fits into the overall context. You are talking about an economy that is the richest economy that has ever existed in the entire world.
Louder so that all our customers who haven't heard can hear. And that's what I always try to convey, that this is a structure that can tax the richest society that has ever existed in the entire history of mankind. So when you talk about whether this structure can afford something, you're actually starting a discussion about whether you're actually or implicitly making a prediction about the wealth of the United States?
And will the innovative fervor of everyone in this room , and everyone who lives in the United States, fade, or will we suddenly stop innovating and creating the best products in the world? You're making a very macro- pessimistic argument in this sense, because that's where the government ultimately gets the ability to finance everything.
Can I ask you a question about inflation? The coolest person in the world just drove by. Let's pause for a second. So, I have a question about inflation. Okay, government spending, issuing debt, can theoretically cause inflation. My question to you is this: isn't all government spending going to just a few things?
For social services, for defense spending. So how does all this trickle down to the real economy and cause inflation? I don't see this mechanism. I mean, it works. This is because you have to consider a counterfactual model , where if the government weren't doing all this, these people wouldn't have the income and the ability to consume all the things they can, because the government is essentially enabling them to do so.
So there's this counterfactual scenario, but even in that environment, it's interesting that even with this debt dynamic, as big and bad as it supposedly is, we still have an overall CPI of 3.6%? In fact, it's not even that much in historical terms. Essentially, this is a long-term average. Yes. I don't want to embellish anything, and I understand that inflation affects different sectors of the economy and different people differently.
This is especially interesting in the case of those who receive social security, because I see it every day in my work. I mean, these people consume less and less as they age. This is part of the longevity debate: as people age, the economy ages as well , and they start to consume significantly less.
So theoretically they get more money from the government, but they are not the main drivers of consumer price inflation. One last question about Dalio, who is probably too busy at Burning Man. Obviously, he doesn't care what we think. But the biggest risk everyone is talking about is a possible bond "buyer strike." He said they would be too concerned about the US debt and deficit, which would lead to a boycott of Treasury bonds.
So my question is: No, people will go to any lengths for this. So my question is: What is the alternative to Treasury bonds? Or can't the government just say: you know what? The Fed will lower rates. We will finance the entire government through short-term borrowing. If there really were a crisis in the Treasury bond market, aren't there a million ways to overcome it?
This is the funniest part of the talk about the US going bankrupt, because if you look at any other government in the world, the situation is much worse there. So you could say that... they're just as indebted as we are, maybe worse, right? You could say we're a " dirty shirt," but the cleanest in the whole closet.
It's like with reserve currency status: we still hold 60% of all foreign exchange reserves, while the closest competitor is Europe. Somewhere around 22%. So there's nothing to even argue about here. And would anyone put European debt on the same level as US national debt? It's just not even close, and the closest competitor is Japan.
Japan accounts for about 4% of all reserves. And I could argue, maybe there's an argument that Japan's public debt, you know, is of the same quality as U.S. debt. But even so, look at their economy—it's much smaller and less innovative. Um, I just don't see where... What, what alternative , I guess?
In the relative world of currencies, what is the alternative? What is the alternative? I think we can end this. Colin, that was great. Thank you so much for helping us learn how to talk to our clients about Mr. Dalio. One ad. Um, we're having Animal Spirits happy hour at 5:45 p.m. We will be near the great location of State Street.
So see you there. Thank you all. Also, congratulations to the guys in the front row who attend every Animal Spirits Live event. Here are these guys. Thank you all.
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