2:20 Current assessment of the global economy:
  • Markets have priced in "soft landing nirvana" - like priced to perfection but even more extreme. Sets up room for disappointment. Markets have fully discounted soft landing idea.
  • Fed is not done yet. Higher for longer is intention. Could just manifest in Fed resistance to pivot.
  • We can fail on both expectations of good news factored into market: Fed pivot fails because inflation battle is not yet won, economy lands hard with recession instead of "soft landing".
4:50 Lags kicking in
  • Q3 GDP [an upside] surprise, but a lot of companies (notably $AAPL), disappointing on revenue.
6:46 reference to Howard Marks comments
  • HM: If we are exiting an era of ultra low interest rates (which began in 2001), we need to expect and price in slower economic growth, lower profit margins, higher default rates, less reliable asset appreciation, rising cost of borrowing, investor psychology that will no longer remain uniformly positive, and financing will be harder to obtain
  • JF: various investors are "seeing the same song" as HM. What worked for last 15 years may not work for next 15 years. Downtrend in interest rates, shift in inflation.
  • 3 main themes are changing:
    • Globalization: trend to bringing production costs down by offshoring labor. Lower cost of production. 
    • Demographics: Boomers in the workforce. Cost of production has been brought down dramatically. Trend is reversing, workforce is now shrinking.
    • Debt dynamics. Widening fiscal deficit is an inflationary dynamic 
~15:00 Investment cycles
  • Ken Griffin: World is facing structural unrest that is leading to deglobalization that can last for decades.
  • JF: people won't necessarily notice the shift right away [from globalization, inflationary shift]. Doesn't think people have noticed this yet. Semiconductors an example - domestic investment which is probably good for consumers because we will be producing more overall. Bad for investors because of oversupply. Maybe we are overinvesting in semis right now. Could be a bust in prices eventually.
  • Energy sector went through this cycle. Overinvestment led to supply glut, now there is underinvestment.
  • Possible commodity supercycle.
  • In the mid-2000s we may have underinvested in technology for a number of years.
  • Sees tech companies now competing head-to-head, which drives prices down.
  • 19:36 AT cites Rick Rule, who previously discussed lack of investment in commodity sectors. 
Greenspud: This part of the interview was interesting because it suggests eventual disinflation despite the deglobalization.

23:41 AI
  • During current tech investment VC boom, every startup needed to advertise their products on social media, buy cloud services, software, etc. That led to boom for the "magnificent 7" companies providing these services. Terrifically profitable.
  • Notes that with Microsoft / OpenAI relationship, $MSFT investing in OpenAI, which will turn around and buy cloud services, essentially cycling a lot of the same investment. Not necessarily sustainable "to recycle your own cash". Greenspud: I think he is misinterpreting the situation here. The products that OpenAI is building run on Microsoft infrastructure, but OpenAI's customers will be paying for the use of the AI tooling which is a benefit for both Microsoft and OpenAI.
  • 26:52 $NVDA valuation. AT mentioned Sam Altman of OpenAI working on an alternative to NVidia hardware. 50X multiple may not be a big deal for a company that is growing 30-50% a year free cash flow. But these companies are flat FCF y/y. Revenue growth for $AAPL has been its worst in 2 decades, but it's trading at a valuation of pre-iPhone days.
  • Valuations right now suggest AI boom will be massively profitable for these companies, like on the iPhone scale. He does not believe AI will be as profitable as the markets price it out to be

31:20 Zoltan Poznar rise of trading blocs for commodities. "Commodities increasingly encumbered" by other international bidders, USA will have to pay higher prices.

33:50 US debt pile surges. Cost of debt.
  • JF: Looked like the yield on the 10-yr was going to "break out". Something he was watching for - collapse in demand of Treasuries. Supplies are literally growing exponentially. Interest service cost of our debt is increasing. 
  • Ray Dalio says we are approaching the point of no return when it comes to debt cost acceleration. Bill Dudley of Fed also cites possible "turbulence" in Treasury market. Larry Summers cites potential for debt crisis. Paul Tudor Jones also warns of this. Many experts suggesting spiraling cost of debt.
  • Potential for higher long term interest rates over next several months.
There are conflicting views on the 10 year yield among smart investors. Some believe that 5% is a tipping point at which there will be a bear steepening of the yield curve. (That would be a disaster for $TLT.) Some like Lance Roberts are betting on $TLT and that the long duration Treasury yields will fall, reverting back to recent historical norms. I certainly think Lance Roberts and maybe George Gammon are in this camp.

39:00 AT: asks whether he thinks interest rate on long term Treasuries will explode higher or revert due to slowing economy.
  • JF: we are probably going to get to the point where the market forces [hard to know exactly what will happen]... Bill Dudley says "turbulence" in the market. This is why people are paying close attention to the Treasury auctions. That's a sign that these narratives are more - there's an actual supply/demand mismatch. We may see a time of very poor or failed Treasury auctions and spikes in long term interest rates. This will have to be "addressed".
  • If demand goes down because of a recession, tax revenues decrease, so amount of treasuries being issued will increase.
  • AT: cites how some people think this is a historically good time to buy long duration Treasuries because interest rates will drop during a recession. But, there's a flip side of the argument as JF cited here.
  • JF: We may be headed for yield curve control over the next several years. Very bullish for gold! Believes that Jay Powell will avoid yield curve control because of the inflationary implications.
  • JF: If you think Fed is going to pivot, better to buy precious metals than Treasuries.

Greenspud: how will yield curve control be implemented? To drop the rate on the long term Treasuries, they have to come up with the money to buy them off the market. Where will that cash come from without massive money printing and inflation.

48:00 AT: Peter Burnholtz: "In all cases of hyperinflation, deficit expenditures in excess of 20% are present" 
  • The condition [20% deficits] are there. Foreign central banks seem to be reacting by buying gold. They are not betting on it happening, but gold is one way of being prepared for it to happen which is why we are seeing record gold buying.
  • Monetary and fiscal policy has been insane over the years, we may be headed for a new gold standard.
  • Not predicting we are there [hyperinflation], but the risk is there and greater than its ever been before for a debt crisis and inflation problem for a prolonged period of time.
52:40 AT: Asked about his work showing valuation mismatch between 10-yr Treasury. Showed chart contrasting the PE ratio of S&P with Treasury bond yields. Stocks seem overvalued to stocks, which means stocks have to come down or bonds yields need to come up. This is something you see at the end of a bull cycle. Correction coming?
  • We've been in a bear market since 2021. $GME, $AMC speculative mania was mid 2021. We saw it in 1999, 1929, late 80s Japan. When people were trading stocks the way that they were crypto and the craziness and zero day options, the way that those always unwind is in a speculative bust. 2022 was the beginning of that. Jeremy Grantham may be most experienced bubble watcher, he has studied dozens of bubbles around the world. Every single one of them has deflated to a normalized valuation ratio over time, which would take the S&P 500 down. 
  • If interest rates stay where they are, valuations have to come down a lot. Investors betting on interest rates coming back down to 2.5% without a recession. He sees this as least likely outcome.
  • Stock prices fall even faster than the PE multiples because earnings also coming down in a recession.
  • 3-4 years before speculative mania unwinds.
  • AT: "All bear markets end in capitulation." Big wash out did not see that in 2022.
  • JF: We may see capitulation in bonds first.