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Hello listeners.
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Welcome to another episode of the Jacob Shapiro podcast.
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Rob Laity and I are back at it for our biweekly chats.
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Um, I would say if, if you're thinking of my chats with Rob
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on the spectrum of big ideas and abstract versus tactical and wonky.
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This one definitely leans more towards the wonky side.
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We talk about record high gold prices.
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We talk about problems in private equity and what that means, uh, for
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both wealthy and retail consumers.
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We talk a little bit about artificial intelligence because you can't have
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a podcast that not talk about AI at least a little bit these days.
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And then close out with, uh, a fun little conversation about coffee.
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Not so fun 'cause coffee prices are increasing dramatically
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up 33% so far this year.
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Um, if you have any questions, comments, concerns, anything that
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you heard in this podcast or you want to tell me something else, you can
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email me at jacob@jacobshapiro.com.
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Otherwise, take care of the people that you love.
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Cheers.
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I will see you up.
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All right, listeners, we are back at it.
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It is Wednesday, October 8th.
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This will come out Friday.
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Uh, Rob, it's been a minute.
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How are things going in Paris?
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Everything fine.
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I assume it's cooler than the 95 degrees and 80% humidity I'm still
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dealing with here in New Orleans.
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It is not 95, believe it or not.
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Um, but yeah, pretty, pretty quiet.
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You, you would never know there was quote unquote a crisis going on.
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Oh
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yes.
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You guys have a new, a new prime minister, right?
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Yeah.
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Uh, I was talking with, with my wife and she's like, but, but
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that's never happened before.
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Like that, that you have such a quick turnover in prime ministers.
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And I, I suggested to her gently that maybe she hasn't looked far
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back enough in French history.
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Yeah.
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Not, not exactly a, well, I guess I mean periods of political instability
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and then, uh, and then punctuated by intense periods of instability.
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Um, well, how's this for a segue?
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Speaking of periods of intense instability, the first thing I thought
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we would talk about, 'cause it's in the headlines and, and you and I have not
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really talked about this on the podcast.
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Is gold.
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And I, I know, I know to talk about gold because, uh, my sister geopolitical risk
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index asked me about gold the other day and I was like, wow, if it's getting down
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to you, people must be thinking about it.
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So we're up over $4,000, uh, in terms of the price, um, which
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is, uh, the, the price per ounce, I should say it's a new high.
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Um, there, there's a lot of interesting data out there to, to cite.
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I think the, the most interesting ones that we could cite is that, um, gold is
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now a, is now a greater share of foreign currency reserves than US treasuries.
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Um, it's surpassed it in this past year.
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Gold now makes up 24% roughly of as a percentage of international reserves.
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US treasuries are down at 23%.
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Now if you look, if you zoom back at the chart and you look to the 1970s
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gold peaked somewhere around 60% and US treasuries were down somewhere around 13%.
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Um.
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Or even roughly lower around there.
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So we've been here before, of course we were here during the stagflation era.
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Um, if you look at just a chart from say, um, the World Gold Council about
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where, um, money when it come, when it comes to gold is going, um, it's actually
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relatively interesting if you look at sort of investment per ton, it's not
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like, it's not stagnant, but it's in the same band over the past 15 years.
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Same for jewelry, fabrication, same for technology, but central banks really
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have been vacuuming up a lot of gold.
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Um, the amount of gold that central banks, for example, added um, in 2024 was
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almost quadruple what they did in 2020.
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Um, and it's well over double what they did basically from 2010 to 2020 if
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you took an average sort of annually.
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Um, and then to complete the story, which makes it something
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that everybody wants to cover.
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The countries that have added the most gold reserves over the last
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10 years, I'm sure you can guess.
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Rob, what do you think the top four countries that have added the most
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gold reserves over the last 10 years?
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I would guess China, Russia.
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India and someone else.
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Who is it?
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Ding, ding, ding.
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You got one, two, and four.
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China, Russia, India.
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So it plays into the whole, oh, the bricks are coming.
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Oh, the unipolar world is collapsing, blah, blah, blah, blah, blah.
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Coming at number three is Turkey, which makes sense with
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inflation and everything else.
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Um, I think the surprising one on the list is Poland.
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Poland is at number five, and Poland has been adding significant, uh,
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relative to their previous purchases.
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Their central bank has been adding quite a bit of gold over the past couple of years.
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Maybe we could read into the Rush Ukraine War there in general.
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Um, the last thing I'll, in my litany of, uh, of stats here, uh, it related to gold.
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There's also been a lot of passive inflows into gold, into ETF holdings, which has
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always seemed a little bit strange to me.
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Like if, if the, if the point of gold is to have your hands on something physical
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that you could barter with when the world ends, oh, I, I own this much of a gold
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ETF is not really gonna help you when the zombies are beating down the door
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and you need to trade it for penicillin.
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So, um.
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You know, that's also interesting.
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So it's, so it's in the zeitgeist and it's part of all of it.
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Um, where do you wanna go with this?
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I know that, you know, there's been a lot of talk about the behavior of gold
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is breaking down on the one hand and then you've got Ray Dalio saying, no, this
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is just the seventies and stagflation and we're gonna go back to that thing.
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So Lidar way a little bit, Rob.
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It's, it's easy to get, it's easy to get overwhelmed and to think I should just
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buy a bunch of gold and stash it under my mattress based on the headlines right now.
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Well, what you shouldn't do is run out and buy a bunch of gold, I guess is
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the, the, the one, you know, we don't give financial advice here, but that
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is, that is simply what we're telling our clients right now because we've had
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people inquiring about adding to gold positions and, and access to physical
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gold is a big part of, of what we do.
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And, uh, we've been advising against that right now.
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Um, and it's interesting what's happened in the gold market.
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Like if you look, if you look at the gold price, um.
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And I think this partly explains why the value of gold in foreign currency
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reserves has increased so much.
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You know, a lot of this is simply appreciation.
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Um, 18 months ago, the gold price was $2,000 an ounce.
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So gold has doubled in value in a very short amount of time.
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Um, the other thing to, to note is that gold has really, has really run in line
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with the Trump administration's, you know, rise in the polls ahead of the election.
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And then post-election has just been kind of going straight up into the right.
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So you had sort of, um, geopolitical, uh, tailwinds that
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has had been flowing through.
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But the, the thing that's interesting and, and the reason why I think things have
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gotten really frothy here is that other assets that usually move around with gold.
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Like silver, for instance.
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They didn't do anything earlier in the year, and it's only in the last month or
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two that you've had sort of a frenzy in, in the whole precious metals complex.
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And to me, that suggests, you know, a different dynamic in, in what's
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driving gold away from sort of true geopolitical hedging and buying, and
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the sort of central bank buying that, that you're referring to and toward,
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you know, your sister taking a flyer because everyone's talking about it.
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Um, and that's, that's usually when things are due for a good
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long reset or a digestion period.
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Um, incidentally, golds, if you look on a monthly basis, so just look at
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momentum just, and, and as a reminder, momentum is, is an oscillator.
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So momentum, you know, reaches a certain point beyond which it really cannot go.
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Uh, and then it oscillates back toward some mean over time.
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If you look on a monthly momentum basis, gold has never been this overbought,
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this extended this, this on fire, um, going back at least 40 years.
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So, um, yeah, it's been a, it's been a huge winner.
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Um, and, and the drivers behind that aren't going away, which we can
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talk about with the fundamentals.
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But in terms of tactics and timing, you know, it's, no, it's, no, uh, it, it
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is no surprise that we're talking about gold 'cause everyone is talking about it.
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But that's exactly when you don't want to be jumping in with both feet.
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You know, caution is, is the word of the day, and, and you'll most likely
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get an opportunity to, um, to allocate there, uh, at a, at a better place.
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Well, I mean, let's get right into it.
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So what are the drivers, um, that you're seeing?
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I, I also neglected to say, um, you know, the last time that go, that gold as a
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percentage of international reserves, um, the last time it was equivalent with
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US treasuries was 1996, which is also an interesting year to sort of think
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about and bookmark as when treasuries were overtaking gold and now we're
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sort of back to where we were like, I don't know, are we headed back in that
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direction or are we headed someplace new?
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I have, I have trouble, um, dealing with that, but, but what are those drivers
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that you're thinking about that are gonna continue to, in the long term?
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I think what you're saying drive price appreciation.
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Um, I mean, some of them are pretty obvious.
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Uh, money printing is, is, you know, not to, not to, uh, beat a dead horse, but
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that that is real and it is happening.
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We were joking about the French government being in crisis.
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You know, that's what it looks like when a government actually tries to,
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you know, balance its budget and, and make some effort to do that.
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The US is just, that's not really on the table at the moment.
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Um, and that shows up in, in the gold price.
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The other one is, um, just on the reserve situation.
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I, I think that's the more interesting conversation 'cause it's less obvious,
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like the other one is very important, but everyone kind of understands this,
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you know, even at a, at a basic level.
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And sometimes you just don't wanna overthink it.
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Like that is happening.
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It's going to continue unless something drastically changes.
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But on the balance of payment side, um, I think it's interesting to look
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at what specific players are doing.
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You mentioned like a China for instance.
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Um, they're in an interesting situation because a lot of countries in some form.
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Have been pegged to the US dollar because it has been the linchpin
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of the global system and they find themselves in an interesting situation.
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'cause the US dollar has been a, um, sort of an outlier on the negative side against
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a lot of currencies, but not all of them.
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So if you look at the Chinese Renmin B for example, over the last year,
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um, it's really sort of a mixed bag.
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Uh, it's down, um, 7% against the Euro because it's tied to
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the dollar and it's following the dollar down against the Euro.
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Um, but it's up about 5% against the Indian Rupe and it's about flat against
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Brazil and Australia's currencies.
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So if you think of it, the former as, okay, China's biggest export
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market at the end of the day, um.
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Is the US and Europe.
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So they're, they're looking pretty good in, in, in terms of, you know, their
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European exposure, at least on exports.
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And then they're importing a lot from Brazil.
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They're importing a lot from Australia.
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That's fine.
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It's not changing very much.
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'cause those currencies have actually stayed pretty steady against the
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dollar on the Renmin B by extension.
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But then they've lost ground against India, which is sort of
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this emerging competitor trying to move in and take export markets.
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So it's not, um, it's not a big surprise that they might feel like they have
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some freedom to loosen up that peg a little bit to shift their reserves.
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Like those tectonic plates are shifting in terms of the role that the dollar
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has played, um, in that system.
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And, and it's interesting to see how some of these different players
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are responding in different ways.
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How much can a country like China realistically do that though?
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I mean, like, they can't, there can't be a gold backed remin be, right?
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Or, or can there be.
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Um, not practically there, there wouldn't be enough gold to do that.
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I mean, it would, it would be putting China into a situation that it has no
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interest in, in getting itself involved in, in terms of, you know, hard money and,
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and strapping itself to the mast of gold supply and, and all those sorts of things.
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Um, no, it's, it's, it's not really that, I mean, China uses, China uses its foreign
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reserves to manage its currency exposure for the most part, um, because it needs
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to have some kind of foreign reserves in order to, because it's running this still
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a significant current account surplus.
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So it has an excess of foreign assets.
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It has to hold them in in something.
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Um, mm-hmm.
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So it's not really a change in the underlying mechanics of the
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monetary base in China or what they're trying to do there.
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It's more within that portfolio.
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How do you shift between, between different assets?
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Um, I would not be surprised if they, um, if they diversified across some more
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currencies based on, you know, which countries they're doing more trade with.
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Um, but yeah, that's, that's really sort of the change is that the US
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is not really the only game in town.
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And that weakness in the dollar relative to a lot of things is, is making things
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a little bit tricky for the Chinese because, you know, for example, if
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you wanted to import from India, all of a sudden that got meaningfully
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more expensive in the last mm-hmm.
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Three months.
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Um, or, you know, import from, uh, uh.
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Uh, import from the European Union or whatever.
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So yeah, that's,
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I I take your point on China's size being prohibitive, but as a thought experiment,
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could you imagine in the next couple of years that a there, um, there might
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be a country out there that decides to move back to a gold peg currency like
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El Salvador has, has, has talked about doing this with Bitcoin and has make,
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you know, has made waves about trying to Bitcoin to use Bitcoin in their economy.
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Could, could she see like some small state, like trying
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to do that sort of thing?
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Or do you think that's crazy?
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No, I think it's quite the opposite.
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Like El Salvador is a unique case because they're a tiny country with
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no credibility as institutionally.
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Uh, really.
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So it's, and with no currency, like they've been dollarized since
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like the nineties or whatever, so,
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yeah, exactly.
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So I don't think they're a model for anything that matters in
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terms of size or importance.
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The big countries are, are really what matters.
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Um, and really the, the question is when you go into these situations where
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everyone is basically printing debt levels are gonna be rising for everyone,
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and they are rising for everyone.
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You know, the, the corollary is to look at something like the early 1930s and
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not necessarily, oh, the great depression and that background, forget about that.
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But really more the, the adjustments that different countries made at
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different times in response to what other countries are doing.
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So, like, I didn't explain it super well, but this notion that the weakness
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of the dollar opens up pathways for countries like China for, you know,
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the European Union for India to do different things with their currencies.
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I think that's kind of the takeaway.
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Like the, the, the great book on this subject is called Who Adjusts, um.
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By Beth something or other.
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I forget.
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I don't have enough.
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You would think I would prepare these things before these talks.
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Thanks Beth.
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We appreciate you.
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Yeah.
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With that Beth, she's great.
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That's Simons Beth Simmons.
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You can, you can edit that out, put in, uh, uh, the actual name.
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But, uh, but the key thing about this was that the pressure that builds up on all of
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these major nations is to follow the lead of what the largest nations are doing.
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So if you were to look back at the thirties, like even countries that
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were determined, like you asked about hard money and countries trying to
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back their currencies with hard assets.
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Even the countries that were had the most trauma from, like the first world war that
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had the largest incentives, the strongest desire to retain strong currencies,
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they all gave up the ghost eventually.
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So France was the last one in 1935 to basically say.
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You know, we, we can't do this.
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We're, we just have just lost too much competitiveness.
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We're suffering at the expense of all these other nations that have already
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devalued and now we have to devalue.
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And I, and I think probably you see some version of that over time
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with most of the large countries.
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So you wanna find these nations, and we've talked about places like Switzerland or
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Singapore, which operate under a different logic and are small by definition, and
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have very unique sets of incentives, um, relative to those big countries.
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00:17:09
If you're looking for currencies that are likely to remain tough.
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00:17:16
Yeah.
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00:17:17
Um, it's Beth, Beth Simmons or, or Beth Simons.
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00:17:19
Um, and it's weird.
Speaker:
00:17:20
You can buy, you can buy who adjusts used on Amazon for $2 and 22 cents, but the,
Speaker:
00:17:26
the Kindle version is $81 and 65 cents.
Speaker:
00:17:30
So quite, I, I dunno if it's printed in Gold leaf or, or what's going on there
Speaker:
00:17:34
for the Kindle version, but that, that seems a little exorbitant, doesn't it?
Speaker:
00:17:37
For a Kindle version.
Speaker:
00:17:38
It's an arbitrage opportunity right there.
Speaker:
00:17:42
Um, well, so maybe one of the last things to, to ask you about this, um,
Speaker:
00:17:47
when you, when you look at who the top holders of gold, just in terms
Speaker:
00:17:51
of, you know, in metric tons, it's the United States and it's not even close.
Speaker:
00:17:55
The United States has more official gold holdings than the
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00:17:58
next three countries combined.
Speaker:
00:18:00
Um, and those three countries, by the way, are not Russia or China.
Speaker:
00:18:02
They've been adding considerably, but the next three countries, at least
Speaker:
00:18:04
as of February this year, I know if China's maybe broken into the top five
Speaker:
00:18:07
with some of their recent purchases, it's, it's Germany, Italy, and France.
Speaker:
00:18:10
To your point, um.
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00:18:12
But if you think about the dollar is down roughly 10% on the year next
Speaker:
00:18:18
to a basket of currencies, whereas gold, as you mentioned earlier,
Speaker:
00:18:21
it's up 50% just this year to date.
Speaker:
00:18:23
And over the last two years, you know, has more than doubled.
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00:18:25
Um, I mean, so did the United States just shave off a, can it shave off
Speaker:
00:18:29
a trillion dollars off the deficit?
Speaker:
00:18:31
'cause the value of gold just continues to appreciate up into the right.
Speaker:
00:18:34
I don't know.
Speaker:
00:18:35
It's, it seems like the US is almost hedging on itself there, doesn't it?
Speaker:
00:18:39
Well, I don't know offhand how much gold the US has, but if you look at the
Speaker:
00:18:44
government's balance sheet, I mean, it is, you know, basically what you're saying
Speaker:
00:18:49
is do, does it have sufficient assets on its balance sheet that are appreciating
Speaker:
00:18:53
to offset the rising amounts of debt?
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00:18:56
And the answer is not in a million years, like, not by a long shot.
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00:19:02
Like, I don't even need to have the numbers in front of
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00:19:03
me to, to make that conclusion.
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00:19:07
Yeah.
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00:19:07
Well, I mean, if.
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00:19:09
If the value went up 50% every year for the next 10 years, like
Speaker:
00:19:13
maybe you could eat a chunk of it.
Speaker:
00:19:15
But I, I think to your point, that we're not gonna see 50.
Speaker:
00:19:17
Well, I don't know.
Speaker:
00:19:18
I mean, do you think we're gonna see 50% annual increases on the
Speaker:
00:19:21
price of gold over the next 10 years, even with money printing and
Speaker:
00:19:25
geopolitical risk and everything else?
Speaker:
00:19:28
No.
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00:19:28
And that's why getting back to the start of the conversation, which I
Speaker:
00:19:32
know sounded very like tactical and investing, but it's important to
Speaker:
00:19:37
think about those numbers critically.
Speaker:
00:19:38
There's no way that gold is going to appreciate by 50% per year over 10 years,
Speaker:
00:19:45
because that is ex like exponential, exponential increase over that period.
Speaker:
00:19:51
Just, just for context, if something grows at a 15% rate for
Speaker:
00:19:55
10 years, that is a multi-fold.
Speaker:
00:19:58
That's like a six bagger.
Speaker:
00:19:59
I don't, I don't know the numbers off the top of my hand, but that's huge
Speaker:
00:20:02
because of the power of compounding.
Speaker:
00:20:04
So to have something.
Speaker:
00:20:07
You know, where gold is up 50% year to date, it's doubled in 18 months.
Speaker:
00:20:13
As I say, it's never maintains that it's way too hot, like it needs to cool down.
Speaker:
00:20:18
You could have a two year period where gold does nothing.
Speaker:
00:20:21
That's totally plausible.
Speaker:
00:20:22
Like the US isn't Weimar Germany, like, we're not at that stage in terms of
Speaker:
00:20:29
the amount of money printing going on.
Speaker:
00:20:31
I mean, there's, there's issues, but let's not get ahead on
Speaker:
00:20:36
the, on the narrative here.
Speaker:
00:20:38
Um, so, you know, if we're in a situation where Gold does do that,
Speaker:
00:20:42
then we'll have, we'll have the zombie I issue, you know, knocking
Speaker:
00:20:46
on our doors and much bigger problems to, uh, to deal with at that point.
Speaker:
00:20:50
Um, but yeah, so you know, fundamentally it's sort of a slow grind.
Speaker:
00:20:56
Gold should grow in line with the growth of US money supply and how much demand
Speaker:
00:21:02
US money supply plus some risk premium.
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00:21:06
How much do people wanna own gold?
Speaker:
00:21:07
'cause they're scared of owning other things.
Speaker:
00:21:10
You know, the thing that people forget about gold and real assets in
Speaker:
00:21:12
general is they don't yield anything.
Speaker:
00:21:14
They have negative yields you have to pay to, to store them.
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00:21:18
Mm-hmm.
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00:21:18
Which is expensive.
Speaker:
00:21:20
Um, and it's a pain, which is why, you know, under normal circumstances, the
Speaker:
00:21:25
negative yield scares most people away.
Speaker:
00:21:28
So you need to balance that risk premium against the storage costs, against, you
Speaker:
00:21:33
know, the underlying drivers in terms of M two money supply and all of those things.
Speaker:
00:21:38
That's, that sounds really boring.
Speaker:
00:21:40
Um, but that's sort of the, the slow math that will just grind out over
Speaker:
00:21:45
the course of years as we, you know, shift from one narrative to the next.
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00:21:49
But
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00:21:51
yeah, that's, that's a long-term view.
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00:21:53
Yeah.
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00:21:53
I mean, while you were talking about it, I was, I was just looking
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00:21:55
at the amount of, of US reserves and I mean, it's over 8,000.
Speaker:
00:21:59
Metric tons.
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00:22:00
But there's also, there's also a wrinkle here, which is the US values,
Speaker:
00:22:04
the official value of US gold is pegged at a $42 22 cents announced price
Speaker:
00:22:11
that was set by Congress in 1973.
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00:22:13
So technically the value is at 11 billion.
Speaker:
00:22:16
Even though as we're saying today, prices have gone to $4,000 an ounce.
Speaker:
00:22:20
And apparently there was even speculation, um, earlier this year when Scott Besson
Speaker:
00:22:24
said something offhand about, uh, you know, marking the government's gold market
Speaker:
00:22:29
to, to market, um, which suggested, okay, that 11 billion could become 800 billion,
Speaker:
00:22:35
900 billion, a trillion, which to your point, is not gonna cover us deficit.
Speaker:
00:22:39
But I mean, it's a meaningful chunk.
Speaker:
00:22:42
And if we're talking about money printing, um, I mean, that seems like
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00:22:45
a pretty novel way to print money.
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00:22:47
Like the US government has not been shy about trying to find
Speaker:
00:22:51
pennies under the couch cushions.
Speaker:
00:22:52
So if we, if we really are headed to that.
Speaker:
00:22:54
Sort of space.
Speaker:
00:22:55
I, you could imagine the White House being like, well, we have this
Speaker:
00:22:59
quote unquote $11 billion worth of gold, let's mark that to market.
Speaker:
00:23:02
Like, like let the good times roll.
Speaker:
00:23:04
I don't know, I guess you would need Congress to weigh in there too.
Speaker:
00:23:06
I'm, I'm sort of new, um, when it comes to these gold regulations,
Speaker:
00:23:09
but I mean, may maybe we'll see the government try to play with that.
Speaker:
00:23:12
You could imagine that sort of happening if, if you're getting desperate, you know,
Speaker:
00:23:17
well, what would they do with it?
Speaker:
00:23:18
Like, this gets back to, uh, you know, I think at some point we were
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00:23:23
talking about the, the government monetizing its other assets.
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00:23:26
In the last year we had a conversation about this.
Speaker:
00:23:29
I guess the question is, what, what do you think the government
Speaker:
00:23:31
would do with the gold?
Speaker:
00:23:33
Is it gonna sell the golds and what is it gonna do with the dollars?
Speaker:
00:23:37
Like it can print dollars times at once.
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00:23:39
Mm-hmm.
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00:23:41
I mean, I, I guess if, you know, if you were a normal fiscal
Speaker:
00:23:43
conservative, you could sell some gold and pay off some debt, but that's
Speaker:
00:23:46
probably not what they would do.
Speaker:
00:23:47
I mean, president Trump is talking about giving, uh, stimulus
Speaker:
00:23:50
checks to people based on the tariff revenue that he's getting.
Speaker:
00:23:52
So probably more bread and circuses if we're getting to the point
Speaker:
00:23:55
where they're, they're doing those things, it just, it just
Speaker:
00:23:57
underscores what you're talking about.
Speaker:
00:23:59
I don't, I also have no sense of what that would do to gold prices.
Speaker:
00:24:03
Um, I guess theoretically it would increase them.
Speaker:
00:24:06
I, I don't know.
Speaker:
00:24:07
Uh, you would be putting a lot more supply theoretically on the market
Speaker:
00:24:10
though, or would you even, and then there's, of course, this all gets
Speaker:
00:24:12
into conspiracy theory land because all of these metric tons are in Fort
Speaker:
00:24:16
Knox and there's a lively community out there that says they don't exist.
Speaker:
00:24:20
And Elon wanted to get into Fort Knox in order to, to make sure
Speaker:
00:24:23
that the gold was actually there.
Speaker:
00:24:24
So, I mean, this gets us down to some very shady rabbit holes Very quickly
Speaker:
00:24:29
I thought Goldfinger irradiated all of that.
Speaker:
00:24:31
No.
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00:24:32
Um, uh, yeah, I mean.
Speaker:
00:24:37
If it is, call it a trillion dollars.
Speaker:
00:24:39
Like, just to put these numbers into context, say the US government owns a
Speaker:
00:24:44
trillion dollars worth of gold, that's 3% of the current government debt.
Speaker:
00:24:49
That's outstanding.
Speaker:
00:24:50
Mm-hmm.
Speaker:
00:24:51
So put another way, that's about six months of the current rate of deficit
Speaker:
00:24:57
accumulation by the government.
Speaker:
00:25:00
So you could take all that gold, assuming it didn't move the market
Speaker:
00:25:03
at all to sell a trillion dollars worth of gold, which I think you might
Speaker:
00:25:07
wanna dribble that into the market over time, uh, to say the least.
Speaker:
00:25:11
Um, you know, you buy yourself six extra months of, of the current rate.
Speaker:
00:25:17
So, yeah, I mean, I'm not sure if it's gonna move the needle all that much.
Speaker:
00:25:23
Yeah.
Speaker:
00:25:24
Well, it's, it sounds like as, as, as we close the, the gold chapter of the
Speaker:
00:25:27
conversation, we, we should, we should rename the, the podcast sober bullishness.
Speaker:
00:25:31
Is that I, I think that's a way of describing what you're talking in about.
Speaker:
00:25:35
Yeah.
Speaker:
00:25:36
I, I mean, it's, it doesn't make for good audio or good podcasting, I guess.
Speaker:
00:25:40
But I mean, that's, that's the analysis, unfortunately.
Speaker:
00:25:44
Um, sober bullishness, well, don't I have it on?
Speaker:
00:25:47
Good.
Speaker:
00:25:47
Don't, don too bullish right now, though.
Speaker:
00:25:49
Rain.
Speaker:
00:25:49
I have it on.
Speaker:
00:25:50
Good
Speaker:
00:25:50
authority, Rob, that from one of my very good friends.
Speaker:
00:25:52
Shout out to you, Harrison, that he listens to the podcast to fall asleep.
Speaker:
00:25:55
So for that sober bullishness might be really, really effective.
Speaker:
00:25:58
So this is a, a two stop shop.
Speaker:
00:26:01
You can get, you can get help sleeping by listening to the podcast,
Speaker:
00:26:03
and you can also get insights about what's going on with gold.
Speaker:
00:26:05
So, there you go.
Speaker:
00:26:07
Um, second part of the conversation that I, I wanted to jump into and here
Speaker:
00:26:10
I, I really just wanna let you riff, but I'll say a couple of things, um, on
Speaker:
00:26:14
our internal platform and listeners, if you're looking at our internal platform.
Speaker:
00:26:18
We rank things in, in numbers of importance of a one, two or a three.
Speaker:
00:26:22
Three is, eh, you should look at this sometime this week.
Speaker:
00:26:25
Two is you should probably stop at some point today and check this out.
Speaker:
00:26:28
And a one is meant to be stop what you're doing and read this.
Speaker:
00:26:31
This is important.
Speaker:
00:26:32
Um, it's very rare that we throw ones on the screen.
Speaker:
00:26:36
Uh, but Rob threw a one for an article about, um, basically, um, private equity
Speaker:
00:26:42
captive insurer portfolios, which I will let you get into the sort of wonky part
Speaker:
00:26:46
of using insurance capital for data center deals and, and other things like that.
Speaker:
00:26:50
Rob, the other thing that I wanted to point out though, um, a friend of
Speaker:
00:26:54
the podcast, Beth McLean, actually had a big piece in the WA in the
Speaker:
00:26:57
Washington Post about this, about private equity, uh, wanting normal
Speaker:
00:27:02
Americans to be able to invest in them because the industry needs cash.
Speaker:
00:27:05
And this goes back also to a White House executive order.
Speaker:
00:27:09
Um.
Speaker:
00:27:10
From August, which you can read also if you're having trouble sleeping.
Speaker:
00:27:13
Even the title of it is relatively boring.
Speaker:
00:27:15
Uh, president Donald Trump democratizing access to alternative
Speaker:
00:27:18
assets for 401k investors.
Speaker:
00:27:20
Um, but one of the things that is in, um, that executive order from August
Speaker:
00:27:25
is that President Trump wants, um, more than 90 million Americans who
Speaker:
00:27:30
participate in employer sponsored defined contribution plans to be
Speaker:
00:27:34
able to invest in alternative assets such as private equity, real estates,
Speaker:
00:27:38
digital assets like cryptocurrency, because they offer more competitive
Speaker:
00:27:42
returns and diversification benefits.
Speaker:
00:27:45
You can read that as mag, that, oh, president Trump is allowing, you
Speaker:
00:27:50
know, these things that were the province of qualified investors and
Speaker:
00:27:53
the uber rich to come into your 4 0 1 Ks or to Bethany McLean's point.
Speaker:
00:27:57
Uh, these guys have soaked up all the money they can from them
Speaker:
00:28:01
and they need to go after retail investor because they're in trouble.
Speaker:
00:28:04
So this is something we've talked about once or twice on the
Speaker:
00:28:06
podcast this year already, but.
Speaker:
00:28:08
Rob, I think you should beat the drum a little bit.
Speaker:
00:28:10
And I also think what you said about the insurance capital and the data
Speaker:
00:28:14
center deals is interesting 'cause I'm also seeing that in general with
Speaker:
00:28:18
just how insurance funds are trying to do this and how it's all just
Speaker:
00:28:22
kind of this, it, it makes me feel dirty when you start to interact with
Speaker:
00:28:26
this part of the financial system.
Speaker:
00:28:27
So there's your softball, knock it outta the park.
Speaker:
00:28:31
I will bang the drum a little bit.
Speaker:
00:28:33
Um, the, the background to remember on all this, and the thing that really
Speaker:
00:28:38
matters is that when you're entering a volatility spiral, which I don't know
Speaker:
00:28:44
how many times we've used that term on, on the podcast, maybe 42 at this point.
Speaker:
00:28:49
But when you're entering a volatility spiral, which is
Speaker:
00:28:51
what we've been experiencing, um, liquidity rises in value.
Speaker:
00:28:57
It, it becomes more important to have liquidity, to have the ability to shift
Speaker:
00:29:02
your plans, shift your assets, uh.
Speaker:
00:29:06
That's coming home to roost in a, in a major way.
Speaker:
00:29:09
And the group that's in the crosshairs is the private equity complex,
Speaker:
00:29:14
private equity and private debt.
Speaker:
00:29:15
'cause that is another major growth, much smaller than private equity,
Speaker:
00:29:19
but also, you know, you can lump them in into the same bucket.
Speaker:
00:29:23
Um, but you know, the thing, uh, a lot of people have talked about this and
Speaker:
00:29:31
to say it's a slow motion car wreck, I don't think is an exaggeration.
Speaker:
00:29:35
Um, these groups are exhibiting just the classic signs of
Speaker:
00:29:42
needing to find the greater fool.
Speaker:
00:29:45
Um, and if anyone is out there saying that they want to give
Speaker:
00:29:49
retail access to something where they didn't have access before, and
Speaker:
00:29:53
they're doing so for magnanimous reasons, you know, run the other way.
Speaker:
00:29:57
'cause it really means that they're looking for the next patsy
Speaker:
00:30:00
and they're getting desperate.
Speaker:
00:30:01
And that's, that's exactly the case here.
Speaker:
00:30:04
I saw a stat the other day someone on Twitter posted, which I thought was
Speaker:
00:30:07
pretty funny, that there are now more private equity funds in the United States
Speaker:
00:30:11
than there are McDonald's restaurants.
Speaker:
00:30:13
Something on the order of 8,500, um, which is just like an
Speaker:
00:30:19
anecdote that reveals the issue.
Speaker:
00:30:22
And you know, what you're seeing now is you're seeing the liquidity dry up
Speaker:
00:30:28
demand is going away even as they're trying to get retail into these things.
Speaker:
00:30:32
Large money endowments, real asset investors are trying to shift
Speaker:
00:30:37
away because they need liquidity.
Speaker:
00:30:40
I just read a, an annual report from a large family office, uh, yesterday.
Speaker:
00:30:47
In that report, they invest all in private equity, and they said something
Speaker:
00:30:52
in the, like, the official glossy report.
Speaker:
00:30:55
Hopefully this year we will get more liquidity for our, for our LPs
Speaker:
00:30:59
because, you know, clearly that's a, a pretty urgent thing that they're,
Speaker:
00:31:05
that they're talking about internally and, and that's clearly happening.
Speaker:
00:31:07
So what you're seeing is you're seeing a lot of kind of pass the buck, kick
Speaker:
00:31:13
the can down the road financing schemes.
Speaker:
00:31:15
So, um, trying to raise money for secondaries, continuation funds, basically
Speaker:
00:31:20
things where you're not even making new investments, you're just raising money
Speaker:
00:31:23
to shift the old investments into a new structure, into a new holder, to give
Speaker:
00:31:29
liquidity to the people who want out.
Speaker:
00:31:32
So that is growing in a huge way and against a backdrop of enormous demand.
Speaker:
00:31:38
'cause all these funds are out there and they've raised all this money
Speaker:
00:31:41
and now they need to roll it over.
Speaker:
00:31:43
The thing that caught my eye, and the reason that I put it as a
Speaker:
00:31:46
number one with a little, you know, police siren alert, uh mm-hmm.
Speaker:
00:31:51
In our, in our knowledge platform, um, was this rev re revelation that
Speaker:
00:31:57
the, um, buyout funds who have captive insurance companies, uh, that they
Speaker:
00:32:05
run lots of corporations of captive insurance companies, but the buyout
Speaker:
00:32:10
funds, uh, have their captive insurance companies investing in their own funds.
Speaker:
00:32:16
So you have leverage, uh, on top of leverage because insurance is leverage.
Speaker:
00:32:23
In other words, you're borrowing from claimants in the future.
Speaker:
00:32:28
So you're taking that leverage to invest in these leveraged
Speaker:
00:32:31
LBO funds, continuation funds.
Speaker:
00:32:34
And then the thing that really killed me after that was now in addition
Speaker:
00:32:39
to investing in their own funds.
Speaker:
00:32:41
They're using their craft of insurance asset pools to invest
Speaker:
00:32:44
directly in data center assets.
Speaker:
00:32:48
And that is, like I can tell you right now, gonna be the biggest
Speaker:
00:32:52
cluster of the next five years really for, for two points.
Speaker:
00:32:56
You know, for two reasons.
Speaker:
00:32:57
I mean, the number one thing is it is a classic case of overestimating and
Speaker:
00:33:03
being over optimistic about, uh, how much demand will emerge for something where
Speaker:
00:33:08
capacity is exploding exponentially.
Speaker:
00:33:10
Mm-hmm.
Speaker:
00:33:10
And I mean demand for AI oriented data centers.
Speaker:
00:33:13
And the second thing is underestimating how bad it is to lend money
Speaker:
00:33:19
against a depreciating asset that's also levered against the demand.
Speaker:
00:33:23
So, for example, the value of these GPUs is leveraged to how
Speaker:
00:33:29
much use you get out of them.
Speaker:
00:33:31
So it's a depreciating asset.
Speaker:
00:33:34
Um.
Speaker:
00:33:36
Both because it's, it's, it's highly levered to the end demand,
Speaker:
00:33:40
but also because of technological, uh, change and disruption.
Speaker:
00:33:45
Like you're literally lending against an asset that's at the heart of all
Speaker:
00:33:48
of the innovation and, and things happening every six months in new AI
Speaker:
00:33:53
related asics and, and chips coming out.
Speaker:
00:33:56
Like, these things are gonna be obsolete in like three years.
Speaker:
00:33:59
And yes, you can use them for inference and people have argued that, that
Speaker:
00:34:02
there's less that you can do with them.
Speaker:
00:34:04
But just the amount of over optimism, the amount of sort of blithe disregard
Speaker:
00:34:11
for what is on the other side of the hill, like this is setting up to be
Speaker:
00:34:16
a problem of massive proportions.
Speaker:
00:34:20
And captive insurers are investing in those, the captive insurers are
Speaker:
00:34:26
leveraged on the private equity funds.
Speaker:
00:34:28
The private equity funds are then borrowing to continuation funds,
Speaker:
00:34:32
their own stuff that's out there.
Speaker:
00:34:34
And they're desperate for real money investors to keep writing the checks.
Speaker:
00:34:39
Like all of this is coming together to be, to be a big problem.
Speaker:
00:34:44
So that's, that's my story.
Speaker:
00:34:46
Yeah.
Speaker:
00:34:47
To, to, to, uh, quote it was Elisa Wood who said this, uh, who's at KKR?
Speaker:
00:34:51
She said, quote, there are 19,000 private equity funds in the United States.
Speaker:
00:34:55
There are 14,000 McDonald's in the United States.
Speaker:
00:34:57
How are there more private equity funds than McDonald's?
Speaker:
00:35:00
That's actually crazy.
Speaker:
00:35:01
Right.
Speaker:
00:35:02
Um, and it's a nice metaphor too, too in terms of the relative health
Speaker:
00:35:05
of, uh, of eating at McDonald's versus, uh, dining off the buffet
Speaker:
00:35:08
of these, uh, 19,000 private equity firms that you're talking about.
Speaker:
00:35:12
Also, I mean, in the, in the article that you posted on the
Speaker:
00:35:14
platform, I mean, it talked about how, you know, there were insurance
Speaker:
00:35:17
fund managers who were investing.
Speaker:
00:35:19
Or who are buying debt from data centers that had several years worth of
Speaker:
00:35:24
operations and performance behind them.
Speaker:
00:35:25
But one of the big shifts is that they're now deciding to invest in
Speaker:
00:35:29
data centers that will be built.
Speaker:
00:35:31
So it's not even that they have any sort of data about, you know,
Speaker:
00:35:34
operations or anything beforehand.
Speaker:
00:35:36
They're saying, no, these things are going to, we're gonna need
Speaker:
00:35:39
them, so we need to build them.
Speaker:
00:35:40
I'm and invest them now, and we have capital and they need the
Speaker:
00:35:43
capital to build the data center.
Speaker:
00:35:44
So it's a match.
Speaker:
00:35:45
It's a match made in heaven there.
Speaker:
00:35:47
And that, I mean, we can get into sort of data center demand
Speaker:
00:35:50
and, and what that means.
Speaker:
00:35:51
But before we leave, um, private equity, I mean, I imagine we
Speaker:
00:35:55
have two class of listeners.
Speaker:
00:35:56
We probably have listeners who are like, okay, so what, like I wasn't investing
Speaker:
00:36:00
in private equity in the first place.
Speaker:
00:36:02
And then we may have listeners who have significantly more assets and
Speaker:
00:36:05
maybe did invest in a, in a PE fund or fund to funds or something like that.
Speaker:
00:36:09
Or maybe they're even bigger than that and they've invested
Speaker:
00:36:12
significantly in a private equity fund.
Speaker:
00:36:13
So Rob, if you were talking to each one of those people in front of us, like.
Speaker:
00:36:16
Should the, should the consumer retail investor, aside from running for the hills
Speaker:
00:36:20
from these things, be worried about what this might mean for markets in general.
Speaker:
00:36:25
Um, or is this really just a problem if you're already exposed to these things
Speaker:
00:36:29
and is there anything you can do if you're already exposed to these things?
Speaker:
00:36:32
So if you are already invested in private equity, um, I mean, this is an issue that
Speaker:
00:36:39
we're dealing with at bespoke right now where we're helping clients work their way
Speaker:
00:36:43
out of either funds where you have limited options because you, you've signed a
Speaker:
00:36:49
legal document to, um, to provide capital, um, or direct investments in companies
Speaker:
00:36:57
where you have a lot more leeway.
Speaker:
00:36:59
So, um, there's a lot of sort of asset value there if you go and,
Speaker:
00:37:07
and seize it now and sort of work on the assumption that new capital
Speaker:
00:37:11
is gonna be hard to come by.
Speaker:
00:37:13
Um, so a lot of our work on the private side has been sort of.
Speaker:
00:37:17
Battening down the hatches on companies that clients own directly.
Speaker:
00:37:21
Um, you know, that sort of thing.
Speaker:
00:37:23
So if you are in that situation, I, I think thinking about how
Speaker:
00:37:28
you can do that is gonna be a key part of the, the playbook.
Speaker:
00:37:32
Um, more generally, you know, I think there's a, the complacency is going
Speaker:
00:37:39
away 'cause I think a lot of private companies are finding it difficult to
Speaker:
00:37:41
raise capital in the last few years.
Speaker:
00:37:44
Um, but there is sort of this complacency that private equity is
Speaker:
00:37:48
just going through a rough patch or you just have to wait it out.
Speaker:
00:37:52
I think what is not really being envisaged, envisaged by most people is the
Speaker:
00:37:57
notion that this is a multi-decade wave of liquidity, risk being, being a good
Speaker:
00:38:05
thing that is now turning the other way where you could have years and years of.
Speaker:
00:38:13
Liquidity shortages, difficulties managing private businesses that
Speaker:
00:38:17
aren't self-funding, um, asset valuations declining significantly,
Speaker:
00:38:23
um, in the private markets, you know, just like in the public markets.
Speaker:
00:38:28
Um, and that is a scenario that I think many have not planned for.
Speaker:
00:38:32
And even if you are stuck in a lot of these illiquid vehicles or liquid
Speaker:
00:38:36
companies right now, you can still start planning for that longer term
Speaker:
00:38:41
kind of outcome and, and building liquidity and resilience against that.
Speaker:
00:38:46
That would be the, the advice that I would give more generally.
Speaker:
00:38:50
Is that gonna play out in public markets though?
Speaker:
00:38:52
Do you think?
Speaker:
00:38:53
Like it's that big of a will the ripples extend out that far?
Speaker:
00:38:58
Yeah, I mean, risk assets are connected at the hip everywhere you go.
Speaker:
00:39:02
Um, you know, it's, it is a tricky thing because private markets are, or I'm
Speaker:
00:39:07
sorry, public markets are in a weird barbell sort of situation now where.
Speaker:
00:39:13
There are areas of great froth and valuation excess, but it's mostly
Speaker:
00:39:18
concentrated in large companies, companies perceived as quality
Speaker:
00:39:23
and the AI bubble, the AI trade.
Speaker:
00:39:27
Whereas a lot of smaller companies and sort of the, the majority of stocks
Speaker:
00:39:32
never have recovered from the 2021 bubble and are still like clanking along
Speaker:
00:39:39
at the bottom in terms of sentiment and valuation and things like that.
Speaker:
00:39:43
So I think you're starting to see that flow through, not in, you know, the s
Speaker:
00:39:47
and p 500 index or the things that most people look at when they look at markets.
Speaker:
00:39:52
Um, but there's signs of that valuation premium starting to
Speaker:
00:39:56
melt its way out of the market.
Speaker:
00:39:59
Hmm.
Speaker:
00:40:01
Um, I don't know if you also saw this, uh, like there was a story in the Wall
Speaker:
00:40:05
Street Journal just a couple weeks ago about how like Microsoft or even a.
Speaker:
00:40:10
Microsoft in particular, but has lower borrowing costs in the US government
Speaker:
00:40:13
that people are, are willing to like buy Microsoft bonds, um, over treasury bonds.
Speaker:
00:40:18
Um, because Microsoft, I guess, is seen as a little bit more reliable,
Speaker:
00:40:22
which backs us into, I mean, all, all roads lead to AI here.
Speaker:
00:40:25
And you, you mentioned the data center example as well, and I wanted
Speaker:
00:40:29
to to pick your brain a little bit about that because the, I, I threw a
Speaker:
00:40:32
number one on the knowledge platform myself last week, which, which was
Speaker:
00:40:35
this Jerry Newman article about ai.
Speaker:
00:40:37
Um, and he's actually agreed to come on the podcast in a couple weeks, so we'll
Speaker:
00:40:40
have a more in depth conversation with him to rehash, um, what he talked about.
Speaker:
00:40:44
But, um, to, to sum up his point very succinctly, he says not to
Speaker:
00:40:48
think of AI in terms of, say, the semiconductor revolution or as a
Speaker:
00:40:51
revolutionary new industry that's gonna create all these investment winners.
Speaker:
00:40:54
But to think of it as.
Speaker:
00:40:56
Similar to something like containerization or to railroads, which if you invested
Speaker:
00:41:00
in containers when containerization was created, uh, you didn't do very well.
Speaker:
00:41:04
The companies that did well were downstream.
Speaker:
00:41:06
It was Ikea that was the, you know, the best investment in that world, not
Speaker:
00:41:10
the actual company that came up, that came up with containerization itself.
Speaker:
00:41:13
And he talks about AI in that context.
Speaker:
00:41:16
Um, and I bring that up just because, um, you know, you're, what you're
Speaker:
00:41:20
talking about is that we're, we're.
Speaker:
00:41:23
Probably building too much capacity in these data centers, which seems hard to
Speaker:
00:41:27
imagine the narrative for the past couple of months that we can't have enough data.
Speaker:
00:41:31
Everybody's using ai, electricity prices are skyrocketing.
Speaker:
00:41:33
'cause the amount of power that we're gonna need to power the AI models that
Speaker:
00:41:36
are gonna take all the jobs away from us and our children and, and everyone else.
Speaker:
00:41:40
Um, am I right in reading you that what you're saying is that this is, this is
Speaker:
00:41:43
inevitably going to be a data center bubble that we're building too much
Speaker:
00:41:47
capacity for what we're talking about?
Speaker:
00:41:49
Or do you cut the other direction?
Speaker:
00:41:50
I mean, uh, we, we haven't caught up about this in the last few
Speaker:
00:41:52
weeks, but the, the narrative on AI is also changing so quickly.
Speaker:
00:41:56
I mean, like even in, in the course of the last eight months, like go
Speaker:
00:41:59
back to where we were in January.
Speaker:
00:42:00
Nobody was talking about AI the way that they're talking about it right now.
Speaker:
00:42:03
Nobody was talking about data centers and power prices and everything else.
Speaker:
00:42:07
Um, the way they're talking about it right now.
Speaker:
00:42:08
So how do you see that?
Speaker:
00:42:11
I think the, there, there's two things that people commonly mistake.
Speaker:
00:42:17
The first is the timing.
Speaker:
00:42:19
Um.
Speaker:
00:42:20
I have no doubt that there's gonna be exponential growth in demand
Speaker:
00:42:24
for AI and, and all of the tools that people are building right now.
Speaker:
00:42:29
How quickly it takes that growth to, to emerge, I think is the real question.
Speaker:
00:42:35
You know, we've talked about this notion of the trough of disillusion.
Speaker:
00:42:39
You know, this is just the natural course of events with every technology.
Speaker:
00:42:43
But like, you could look at railroads, canals, you know, semiconductors, electric
Speaker:
00:42:50
capacity, build out, like whatever it is.
Speaker:
00:42:53
There's always over optimism at the beginning.
Speaker:
00:42:56
And then, you know, the trough of disillusion and then sort of you
Speaker:
00:43:00
get into realistic expectations.
Speaker:
00:43:04
Um, I think this is no different.
Speaker:
00:43:06
So that's one thing in terms of timing.
Speaker:
00:43:09
Um, the other thing which is more related to, uh, Newman's, uh, uh,
Speaker:
00:43:14
piece that he wrote is, is just this notion of value capture.
Speaker:
00:43:18
So.
Speaker:
00:43:20
It's wonderful if demand for AI services grows exponentially.
Speaker:
00:43:24
If people aren't paying you for that or they're not paying you what you
Speaker:
00:43:28
thought you were gonna get paid for that, then you have a problem in terms
Speaker:
00:43:32
of generating a return on these very expensive assets that you're building
Speaker:
00:43:36
and you're raising capital to build.
Speaker:
00:43:38
And I think that's, that's the main thrust of his argument, which, you know,
Speaker:
00:43:43
he's very much preaching to the choir.
Speaker:
00:43:46
Um, in June of 2024, we had a whole conversation about this.
Speaker:
00:43:51
I think you called the episode, let's talk about artificial intelligence.
Speaker:
00:43:55
But at that time we were talking about at this notion of centralized
Speaker:
00:44:00
value capture versus diffuse decentralized value capture.
Speaker:
00:44:04
Um, and you know, at that time I was saying that I thought.
Speaker:
00:44:10
You know, as new one is, is saying now that a lot of the value
Speaker:
00:44:14
accrual is not gonna go to the central infrastructure builders.
Speaker:
00:44:18
That this is sort of, um, you know, the apotheosis of the computing revolution
Speaker:
00:44:24
in the sense that, you know, as, as he points out in the piece, in the
Speaker:
00:44:28
early stages, building the initial infrastructure to enable compute was a
Speaker:
00:44:34
very centralizing thing where you had a lot of value creation by companies.
Speaker:
00:44:38
And now we're reaching the point where the benefits are diffusing and the
Speaker:
00:44:43
competition is already established and the players are there, they're
Speaker:
00:44:47
competing along the same channels.
Speaker:
00:44:49
So a lot of this build out is going into the, into the system to enable this.
Speaker:
00:44:54
But there's enough competitive, uh, uh, sort of pressure established
Speaker:
00:45:01
that consumers are gonna be able to not have, like, they're not gonna
Speaker:
00:45:04
be captive to any of these guys.
Speaker:
00:45:06
I think that's, that's the way to think about it.
Speaker:
00:45:09
Um.
Speaker:
00:45:11
It's similar to the electric grid build out.
Speaker:
00:45:14
Like if you look, I, I always find it shocking if you actually go back
Speaker:
00:45:17
and look at the 1920s, which was really the, the heyday, you know,
Speaker:
00:45:21
similar to today, consolidated Edison had operating margins of 27%.
Speaker:
00:45:28
They were hugely profitable business, hugely profitable.
Speaker:
00:45:32
And they spent the next like 50 years seeing those margins just get squeezed
Speaker:
00:45:36
down, squeezed down, squeezed down.
Speaker:
00:45:38
'cause the benefits of electricity once it reached a certain
Speaker:
00:45:41
maturity, um, were diffuse.
Speaker:
00:45:45
And it, the, the value was created by the companies using electricity to do
Speaker:
00:45:49
new and creative and innovative things.
Speaker:
00:45:52
And you could use a similar, uh, kind of framework to think about ai.
Speaker:
00:45:57
I think, um, where this is, this is gonna be great.
Speaker:
00:46:01
It's gonna be really, really great for lots of people, but it's gonna be limited.
Speaker:
00:46:05
Um.
Speaker:
00:46:07
In terms of the amount of value that's gonna be accrued and captured and
Speaker:
00:46:11
squeezed by, you know, by a smaller number of people because the scarcity
Speaker:
00:46:16
is, is not there in the same way as it was during the early days of compute.
Speaker:
00:46:23
Yeah.
Speaker:
00:46:24
I think that the, I think the thing I'm stumbling on here is just that, I mean,
Speaker:
00:46:28
a lot of these data centers are being built and we're seeing the increase
Speaker:
00:46:33
in electricity prices as a result of the growth and demand for electricity
Speaker:
00:46:37
from these data centers as well.
Speaker:
00:46:39
But what you and and Newman are talking about is that okay, but we're built, we're
Speaker:
00:46:42
probably building too many data centers.
Speaker:
00:46:44
So like when we get five, 10 years into this process, like there's gonna be
Speaker:
00:46:48
so much competition and a lot of the people who built these data centers are
Speaker:
00:46:51
gonna be in trouble, including these insurers that you're talking about
Speaker:
00:46:54
who are investing in these things.
Speaker:
00:46:55
Does that mean that power prices are also gonna go down?
Speaker:
00:46:58
Does that mean that these data centers just become, um, as, as, uh, Marco
Speaker:
00:47:03
Pap said to me the other day that they just become pickleball courts.
Speaker:
00:47:06
I mean, do they, do they continue in the, like, I, I, I don't, I sort of get,
Speaker:
00:47:10
I have these two different paths and I don't understand where they intersect.
Speaker:
00:47:13
Can, can you help me?
Speaker:
00:47:16
Um, the data centers are not gonna be pickleball courts.
Speaker:
00:47:20
They're going to be used.
Speaker:
00:47:22
Um, the question is when and at what price.
Speaker:
00:47:25
And that, I think is, that's the key distinction.
Speaker:
00:47:28
So it's a good thing for society to put this, you know, pp and e into, into place.
Speaker:
00:47:37
It's just we're probably putting too much too soon.
Speaker:
00:47:39
And you're probably gonna have to restructure a lot of the capital that's
Speaker:
00:47:42
going into these and financing them because it's not set up to the actual
Speaker:
00:47:47
economics that are likely to result, you know, three years from now when.
Speaker:
00:47:52
We'll get the answers to the question of, well, how much demand was there in
Speaker:
00:47:55
2028 four for these services, and was it enough to sop up all of this at a price
Speaker:
00:48:01
that can sustain the returns that the captive insurer of Apollo requires to
Speaker:
00:48:08
lend money to this new build data center?
Speaker:
00:48:11
You know what I mean?
Speaker:
00:48:12
Yeah.
Speaker:
00:48:13
Does that mean that electricity prices though, are sort of participating in
Speaker:
00:48:17
the bubble in the sense that people are overestimating the amount of
Speaker:
00:48:20
electricity that is gonna be used by these data centers three to five
Speaker:
00:48:24
years from now, and that then we will see a reversion in electricity prices
Speaker:
00:48:27
rather than the sort of scary 20% year on year projections that even the
Speaker:
00:48:32
Department of Energy is talking about?
Speaker:
00:48:34
Or to your point, like if the data centers are gonna be used and they're gonna be
Speaker:
00:48:37
there, it's just when and at what cost?
Speaker:
00:48:39
Um, you're still gonna need the electricity to power the data centers.
Speaker:
00:48:42
So even if you figure out, even if the data part of that gets
Speaker:
00:48:46
resolved in the way that you're talking about the power part of it.
Speaker:
00:48:48
Sort of separate.
Speaker:
00:48:49
Does, does that make sense?
Speaker:
00:48:50
The, the question I'm asking?
Speaker:
00:48:52
Yeah, but I think it's really, there's so many moving pieces in there.
Speaker:
00:48:57
I don't think you can give a linear answer to that.
Speaker:
00:49:01
'cause you have like the demand side.
Speaker:
00:49:04
Yes.
Speaker:
00:49:04
Demand for AI workloads, if you wanna measure it that way, is
Speaker:
00:49:08
gonna grow exponentially, like guaranteed over what time period.
Speaker:
00:49:12
Like whatever.
Speaker:
00:49:13
We can argue about that, but it's gonna happen.
Speaker:
00:49:16
Um, energy efficiency is a huge factor in this.
Speaker:
00:49:20
The energy efficiency of the chips, the energy efficiency of the data centers
Speaker:
00:49:23
themselves like that is a huge unknown.
Speaker:
00:49:26
And that's only gonna get better and not worse, right?
Speaker:
00:49:29
So you have that factor.
Speaker:
00:49:31
Then you have the supply factor, which is right now energy prices are going
Speaker:
00:49:35
up not because of demand, but because you've had a marginal increase in demand
Speaker:
00:49:40
that hasn't been matched by supply.
Speaker:
00:49:42
'cause the permitting and the build out process is a giant cluster fuck.
Speaker:
00:49:47
For lack of a better word.
Speaker:
00:49:49
So do you have improvement on those issues?
Speaker:
00:49:51
You know, and then you have the energy mix shifting very drastically
Speaker:
00:49:55
to renewables and things that are deflationary in nature.
Speaker:
00:49:58
You have, you have, uh, energy storage starting to become a bigger
Speaker:
00:50:02
factor, which is, you know, going to also grow exponentially and help to
Speaker:
00:50:07
smooth out, um, you know, the duck curve in some of these renewables.
Speaker:
00:50:11
I mean, all of these things have to go into the soup of your analysis.
Speaker:
00:50:16
Um, I think generally speaking, an advanced society sees energy prices.
Speaker:
00:50:23
The cost of energy go down over time, and if you have bumps
Speaker:
00:50:27
in the road, that's one thing.
Speaker:
00:50:28
But I would be just shocked if we were here seven or eight or 10 years from
Speaker:
00:50:32
now, and energy prices were higher than they are today, regardless of any
Speaker:
00:50:39
exponential, crazy outcome on AI demand.
Speaker:
00:50:44
Okay.
Speaker:
00:50:45
Um, let's close out on something that is near and dear to both of our hearts and
Speaker:
00:50:49
something that, um, you and I have always looked at, um, sort of tangentially as
Speaker:
00:50:53
a hobby, Rob, which is coffee prices.
Speaker:
00:50:55
Um, I think eggs have made a lot of noise this year.
Speaker:
00:50:59
Uh, but the second highest annual inflation rate for any CPI
Speaker:
00:51:02
category, aside from eggs is coffee.
Speaker:
00:51:05
Um, up almost 15% year on year in July, it's up about 33%
Speaker:
00:51:10
from where it was a year ago.
Speaker:
00:51:12
Global coffee prices are hovering year of 50% high.
Speaker:
00:51:15
Um, some of that is related to weather, uh, both Brazil and Vietnam.
Speaker:
00:51:20
So the world's number one and two suppliers, um, had some
Speaker:
00:51:23
difficult weather recently.
Speaker:
00:51:24
You also, of course have the Trump administration tariffs
Speaker:
00:51:27
specifically on Brazil.
Speaker:
00:51:29
Um, this goes back to, you know, uh, Howard Lunik being questioned about
Speaker:
00:51:33
why there are tariffs on things like bananas and him basically implying
Speaker:
00:51:36
that you would, this would bring production back to the United States
Speaker:
00:51:39
and news flash to Mr. Lutnick.
Speaker:
00:51:40
We're not gonna be growing coffee and bananas inside the United States for
Speaker:
00:51:44
reasons that I should hope were obvious.
Speaker:
00:51:46
Um, you know, things are getting serious because, um, just a couple
Speaker:
00:51:49
weeks ago we had bipartisan legislation.
Speaker:
00:51:53
Being introduced to Congress that would exempt coffee products from any tariffs.
Speaker:
00:51:58
So both Republicans and Democrats joining hands to say,
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00:52:01
uh, this is a bridge too far.
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00:52:03
We must exempt Brazilian coffee from these tariffs that
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00:52:06
President Trump, um, has imposed.
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00:52:08
Uh, we don't have to spend too long on it, Rob, but I know that you, I know
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00:52:11
that coffee is a, is a, is a favorite of yours and it's a favorite of mine.
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00:52:14
So anything you wanna say about the chart or just coffee prices in general?
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00:52:17
I guess you're not, are you that affected sitting in France?
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00:52:19
How are things for you, do you have some special colonial
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00:52:22
relationship with the former Indochina to get the prices cheaper?
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00:52:25
I don't know.
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00:52:27
Well, the irony is that Brazil has been redirecting its exports
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00:52:32
from the United States to Europe.
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00:52:35
So we've, you know, sort of experienced the weather impact,
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00:52:40
which is not insignificant.
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00:52:43
I mean, the, the weather had been the main driver of coffee price increases up
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00:52:48
until really the Trump administration came in and, and made the decision on Brazil.
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00:52:54
Um, but yeah, for the most part it's, it's an interesting case study of how
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00:53:01
tariffs are decided unilaterally, but trade settles multilaterally because
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00:53:06
what the Brazilians have been doing is they're redirecting their own exports
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00:53:09
to Europe and to Columbia actually.
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00:53:12
And Columbia is redirecting its domestic consumption into exports to the US
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'cause they don't have the tariffs.
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00:53:20
Um, and all of this hasn't even really hit yet because roasters in
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00:53:25
the US are still working down their inventories and I think probably hoping
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00:53:30
that the tariffs will get pulled.
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00:53:32
But this is, you know, getting to some of the conversations we've had about
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00:53:36
the timing of how this flows through inventories and the length of the supply
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00:53:40
chain are, are something everyone forgets.
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00:53:43
You think, oh, the tariffs are announced and then the next day the prices go up?
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00:53:46
No, no, no.
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00:53:47
Like it takes months for the inventories to run down and for the inventories to.
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00:53:52
The higher priced tariff inventories to get into the
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00:53:55
inventories and then they get sold.
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00:53:57
So there's a lot of moving parts here and a lot of like chicken being played.
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00:54:02
Um, but yeah, it's uh.
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00:54:07
It's a, it's a, it's a, it's a nice encapsulation of a lot of the issues
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00:54:11
going on here in terms of tariffs not having the intended effect.
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00:54:16
Yeah.
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00:54:16
And I, it was on my mind in part because the, the small roaster that I buy my
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00:54:20
beans from down the street here in New Orleans, um, they had a sign just two
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00:54:24
to three weeks ago, um, and near the bags of beans where you buy 'em in the
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00:54:27
coffee shop that said, Hey, we've held off raising prices as much as we possibly
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00:54:30
can, but we can't wait any longer.
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00:54:32
And it was a pretty significant price increase, which I don't mind.
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00:54:35
Uh, they like roast incredible coffee and I love it.
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00:54:37
And it's one thing where like, you know, they could increase it another 20%.
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00:54:40
I'd still be buying 'cause I'm, I'm addicted.
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00:54:42
Um, but to your point, like they ran down their inventory and
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00:54:46
they could no longer push it off.
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00:54:47
Now they're a small artisanal roaster, so probably larger operations of your
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00:54:51
Starbucks are gonna have more inventory.
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00:54:52
But at least it's starting to show up there.
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00:54:55
And I know my, my, I, you know, I've, I've talked for a long time about if,
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00:54:58
if, if I ever was a complete and total bajillionaire, that I would just like
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00:55:01
source coffee beans from some, you know.
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00:55:05
Uh, grower down in Latin America and bring the beans in myself through New
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00:55:09
Orleans and, and roast them myself, which was never cost effective.
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00:55:12
Um, unless the market continues to go like this.
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00:55:14
If you continue to get bad weather because of climate change and more
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00:55:18
tariffs and more problems, especially between Brazil and the United States,
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00:55:21
which, which don't seem to go away.
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00:55:23
I don't know, maybe that idea's not so crazy anymore
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00:55:25
developing that sort of pipeline.
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00:55:26
And I, I think it's also an interesting, you know, you talked about it how
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00:55:29
tariffs impose unilaterally, but things.
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00:55:32
Settle, um, multilaterally, um, I, I think it's, it's also an an interesting case
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00:55:38
study and whether, and whether at what point, um, you start maybe not thinking
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00:55:43
of something like coffee as a commodity anymore, where you have to start thinking
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00:55:46
about it in terms of direct connections with growers and direct connections to
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00:55:50
consumers and consumers willing to eat those higher costs because they have,
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00:55:54
as I do with my coffee shop down the street, like some kind of appreciation
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00:55:58
for what they do or brand loyalty, uh, and willing to spend a higher amount of,
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00:56:02
of your disposable income on that thing.
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00:56:05
We talked about that Jerry Neuman article.
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00:56:06
One of the most incredible statistics in that article was
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00:56:08
you go back a hundred years.
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00:56:10
The average American was spending more than half of their disposable
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00:56:13
income on food and clothing, and that has declined to 16%.
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00:56:17
And we hear much wailing and gnashing of teeth when the price of eggs
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00:56:20
goes up and when coffee goes up.
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00:56:22
But beneath all the fetching, I'm going to the coffee shop and I'm buying
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00:56:25
the beans, or people are going to the grocery store and buying the eggs.
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00:56:28
They're bitching the whole time about it, but they're buying those things.
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00:56:31
Um, and I wonder if, if, if we're getting into this sort of part of the
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00:56:35
volatility spiral, if we're just gonna have to accept that these things are
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00:56:38
gonna cost more, um, and may, maybe they won't, like, maybe tariffs against
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00:56:42
Brazil will go to the wayside because of bipartisan cooperation in Congress.
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00:56:47
And maybe we'll get one or two good seasons going forward.
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00:56:50
And this will all seem silly by comparison.
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00:56:52
And everybody, or anybody who is dumb enough to listen to me and do
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00:56:55
their artisanal roasting operation will say, God damn Jacob Shapiro
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00:56:58
for saying that, uh, in, in 2025.
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00:57:01
But I don't know.
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00:57:01
It's, it's also just, just something percolating in my mind there.
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00:57:04
I don't know.
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00:57:07
Well, it's, it, it's interesting language that you use.
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00:57:09
'cause what you're describing is coffee, going from being a commodity,
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00:57:13
meaning something that flows and meets demand wherever it is.
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00:57:19
And you can't distinguish between coffee that comes from one place or another
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00:57:23
for the most part to, you know, place being more important to, to the market
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00:57:29
fragmenting to being less commodity like, um, and that's great when you
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00:57:34
have like something like coffee.
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00:57:36
It's fun.
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00:57:37
It's a nice thing to talk about.
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00:57:38
Yes, because it's a, it's an artisanal, you know, product and it's
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00:57:44
really cool to get it from different places and it tastes different.
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00:57:47
Cocoa is similar but you know, a lot of products you don't necessarily
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00:57:51
want that, like steel, uh, for example, I know that, I know Tomas
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00:57:56
is gonna say, oh, I just not, uh, sufficient to fix Neo of how wonderful.
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00:58:02
This type of Australian steel is for this, but for the most part, most of
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00:58:07
those markets you want to work as giant global machines that are getting things
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00:58:12
to you as efficiently as possible, and there is no differentiation.
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00:58:16
So, um, yeah, it's, uh, it has, its, uh, positives, but for the most part,
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00:58:23
breaking down the global trade system is
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00:58:27
not great.
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00:58:28
Well, and I joked about it with, with making fun of lutnick
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00:58:31
because he's the easiest person to make fun of in the world.
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00:58:33
But I know, and we won't have time to get in into this in depth in the
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00:58:36
podcast, but one thing that has been in the, on the front pages now, which
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00:58:39
has been sort of on my radar since the beginning of the year, is the plight of
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00:58:42
US farmers and particularly Midwestern row crop farmers with the tariffs on
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00:58:46
China and China not buying soybeans.
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00:58:48
And is President Trump gonna redirect tariff revenues to the farmers?
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00:58:52
Um, and what's gonna happen to all those soybeans being grown?
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00:58:54
Are they gonna become renewable diesel?
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00:58:56
Is it gonna be ethanol 2.0?
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00:58:58
Um, and you know, one of the things I've been banging on the table
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00:59:01
with for the past, you know, 10, 11 months is, you know, the, the US is
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00:59:04
no longer the low cost producer of lots of these different things that
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00:59:07
used to be treated as commodities.
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So either what is left of small to medium sized US farmers are gonna
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sell out to larger companies or operations that are gonna continue to
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00:59:17
treat these things and as commodities and move them around globally.
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Or you're gonna have to think of different ways in different markets that you're
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00:59:22
gonna sell different types of products to, rather than just like planting
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00:59:25
a bunch of, of soybeans in general.
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00:59:28
You can obviously probably tell which one I think would be better for
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00:59:31
society, but I think that, you know, um, based just on the way things are
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00:59:35
going, like we're moving in that, in that opposite direction, which
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00:59:38
is ironic 'cause everything about tariffs was supposed to be about,
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00:59:42
you know, the breakdown of trade.
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00:59:43
But what if we're here six months from now and there is some kind of US China
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00:59:46
deal and you've just got bigger and bigger corporations, whether it's in data centers
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00:59:50
or in big food or in any of these others that are actually just like trading more
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00:59:54
themselves and are figuring out exemptions to all the different tariff rules.
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00:59:57
And it's all about who's scratched my back lately and, and, and things like that.
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01:00:01
So, I don't know.
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01:00:02
It's, it's an interesting point that we're at in the cycle.
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01:00:05
Rob, anything else you wanna tell the listeners before we get outta here?
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01:00:07
Go, go, go drink some coffee.
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01:00:09
Go drink some coffee.
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01:00:10
I need to get my second cup so Cheers.