Full Transcript for Ten31 Timestamp: Partly Cloudy

--> 00:01:55,080 Only evidence suggests that these methods have reduced the amount of data 41 00:01:55,080 --> 00:01:57,680 harvested by distillers by around 90 to 99 percent. 42 00:01:57,680 --> 00:02:01,680 So trying to protect what they deem to be their IP. 43 00:02:02,000 --> 00:02:05,880 But I think the all-in guys were talking about this over the weekend too. 44 00:02:06,620 --> 00:02:13,220 The whole business is built on a massive distillation attack of all the information that has ever been aggregated in human history. 45 00:02:14,640 --> 00:02:17,660 It is a bit ironic when you kind of step back and think about it. 46 00:02:17,660 --> 00:02:29,600 But, you know, I think like the, this is, I felt like a good lead off for the week because this is where, you know, this whole story, the AI complex is really where a lot of the themes that we talk about kind of meet most keenly. 47 00:02:30,000 --> 00:02:40,420 Everything from, you know, real resource demand to running it hot, to reshoring, to geopolitical competition, ultimately to, you know, the government's ability to fund itself. 48 00:02:40,420 --> 00:02:41,920 And then through that to Bitcoin. 49 00:02:42,120 --> 00:02:44,300 So all roads kind of run through this right now. 50 00:02:44,300 --> 00:02:45,980 And you can see that in markets last week. 51 00:02:45,980 --> 00:02:51,120 Um, yeah, as you said, this, the, the, um, testing the waters meeting or maybe just be, 52 00:02:51,220 --> 00:02:53,600 uh, maybe post testing the waters now, it may just be the actual roadshow. 53 00:02:53,740 --> 00:02:58,740 But in any case, the private investor meetings that Anthropic did last week failed to fail 54 00:02:58,740 --> 00:02:59,280 to impress. 55 00:02:59,420 --> 00:03:04,100 Uh, there was deceleration in Q3, which is the literal, uh, you know, worst, worst thing 56 00:03:04,100 --> 00:03:08,340 you can imagine as a, as a public markets investor, especially if you work at a massive 57 00:03:08,340 --> 00:03:10,520 platform shop, the one thing you can't do is decel. 58 00:03:10,880 --> 00:03:14,700 And there was deceleration, even though we're at, you know, numbers that a year ago probably 59 00:03:14,700 --> 00:03:17,960 would have been, you know, gotten you laughed out of a lot of rooms, at least on the East 60 00:03:17,960 --> 00:03:18,280 coast. 61 00:03:19,560 --> 00:03:22,980 And I just thought that, you know, the, I think there was a lot you can say about it. 62 00:03:23,060 --> 00:03:24,300 There are a lot of projections you could make. 63 00:03:24,600 --> 00:03:28,240 The distillation piece was interesting to me because, you know, I think there's some 64 00:03:28,240 --> 00:03:33,340 debate over how much impact that might've had on Q3 if they were kind of aggressively 65 00:03:33,340 --> 00:03:35,980 moving to, to reduce, you know, distillation. 66 00:03:35,980 --> 00:03:39,760 And now you kind of pass that headwind and maybe you see growth pick back up. 67 00:03:39,880 --> 00:03:43,360 You could also make the argument that, well, if a huge, if a meaningful amount of the business 68 00:03:43,360 --> 00:03:47,640 was built on distillation that they're not going to allow, then how much revenue growth 69 00:03:47,640 --> 00:03:52,860 was somewhat unsustainable. So, I mean, people can make their assessments on that. But either 70 00:03:52,860 --> 00:03:58,540 way, I do think you're getting into a point now of the numbers have gotten big enough that 71 00:03:58,540 --> 00:04:04,760 it's going to get harder and harder to sustain the level of optimism and constant bid and 72 00:04:04,760 --> 00:04:09,680 constant positivity around the story. If you're seeing any hint of things kind of slowing, 73 00:04:09,680 --> 00:04:18,400 I think the distillation element is interesting on a geopolitical perspective because, you know, on one hand, I can agree with all the all-in guys that, well, it's kind of like, it's kind of unfair. 74 00:04:18,540 --> 00:04:23,400 It's kind of ridiculous to be against distillation when, you know, all the IP was in some sense built on distillation. 75 00:04:23,540 --> 00:04:31,260 The flip side is, you know, I think we're going to see if it has a meaningful impact on kind of the delta between the frontier and open source, you know, and open weights. 76 00:04:31,260 --> 00:04:38,700 Well, that probably won't be answered until, you know, the next few months or through the end of the year as we see model releases and how they stack up. 77 00:04:38,700 --> 00:04:50,480 But from a national security perspective, from a winning the AI or the SI race, I guess, perspective, I do think that it'll be very interesting to see how much that actually matters to kind of the open model competition. 78 00:04:51,500 --> 00:04:54,420 So everything right now, everything is AI. 79 00:04:54,600 --> 00:04:57,440 Everyone's an AI investor in one way or another, and everything kind of runs through this. 80 00:04:57,860 --> 00:05:00,640 And you flipped over to this next slide. 81 00:05:00,640 --> 00:05:06,280 You can kind of see that in the, let's say the cuspier parts of the market, the companies 82 00:05:06,280 --> 00:05:17,890 that are most levered to this trade and especially kind of on the riskier end or what perceived to be the riskier end So left side we got charts of the equity of a few of the big neoclouds I think some of them 83 00:05:17,890 --> 00:05:23,930 would object to that label, so they can forgive me, but the inference providers that have sprung 84 00:05:23,930 --> 00:05:29,370 up to fill the insatiable inference demands, taking a massive hit over the last week or two, 85 00:05:29,490 --> 00:05:33,330 largely, I think, in the last week on the growing consternation around 86 00:05:33,330 --> 00:05:40,350 Anthropic ARR, OpenAI's ARR. And you've seen that as well in some extent. Credit default 87 00:05:40,350 --> 00:05:44,570 swaps kind of blowing out for CoreWeave and some of the other players. I think it's a

little, 88 00:05:44,850 --> 00:05:50,990 I'm always a little wary of reading too much into credit default swap markets on a short-term basis, 89 00:05:50,990 --> 00:05:56,290 especially for kind of either smaller players or players that only just now recently got kind of 90 00:05:56,290 --> 00:06:01,510 CDS data that was being quoted. But nevertheless, it's clear there's, if you're looking at anything 91 00:06:01,510 --> 00:06:07,110 at all. Like it's clear there's growing concern about the sustainability of the build out and the 92 00:06:07,110 --> 00:06:11,750 economics of the labs. And then also the companies that are kind of rising up to fill inference 93 00:06:11,750 --> 00:06:16,330 demand. Um, and I think, you know, you're increasingly seeing one camp saying the demand 94 00:06:16,330 --> 00:06:20,110 for, for intelligence is effectively infinite. And so kind of none of this matters in a short 95 00:06:20,110 --> 00:06:24,630 term noise and another camp saying, well, that, that may be the case, but in the interim, uh, 96 00:06:24,630 --> 00:06:28,810 we, we have to find ways to actually find the Marshall, the real resources and the physical 97 00:06:28,810 --> 00:06:34,930 world atoms and the financing capacity to fill that demand for allegedly infinite intelligence. 98 00:06:35,330 --> 00:06:39,750 And you're seeing last week, you really saw those two things kind of run into a wall in a real way. 99 00:06:40,850 --> 00:06:48,830 Yeah. And a lot of additional concern in these markets, really for CDSs and all the credit going 100 00:06:48,830 --> 00:06:52,470 into the space is interest rates. What's going on with the rates? Are they going to say hi forever? 101 00:06:52,470 --> 00:06:58,890 What is the cost of capital for this build out, particularly for the non-IG rated players? 102 00:06:59,710 --> 00:07:05,050 And this is where we shift to the Fed and the conversations they're having around inflation. 103 00:07:05,350 --> 00:07:10,070 Inflation came in a bit hotter than expected for some sectors of the economy. 104 00:07:10,650 --> 00:07:18,090 Last week, obviously, the wars in Iran and between Russia and Ukraine are driving up oil prices, 105 00:07:18,090 --> 00:07:22,350 which is the input of the economy around the world. 106 00:07:22,470 --> 00:07:45,690 So it's having an effect on inflation. I think that's sort of parallel conversation going on with the build out of the AI infrastructure is what is the cost of capital for all these players going to be? And I guess that's where the Fed and the Treasury come in. And we have some headlines here, different comments from different Fed governors on inflation and how they're going to manage it moving forward. 107 00:07:45,690 --> 00:08:08,250 Yeah, it was really interesting to see last week when you had a lot of this consternation that we talked about really hitting a fever pitch and long-end rates getting as high as for the 10-year back over 5.3% briefly before, interestingly, a sharp intraday reversal back down to almost 5% even after hotter than expected inflation prints. 108 00:08:08,250 --> 00:08:21,070 So that's that's the market telling you something interesting, I think. But I thought even beyond that, the more notable thing was you've got this or at least at least as notable as you've got all of this this worry and, you know, Black Monday's coming kind of concern over the week. 109 00:08:21,330 --> 00:08:35,890 And against that backdrop, you've got all all of the unanimous kind of talk track of the Fed officials that decided to to talk last week, which this is an interesting way to not do forward guidance anymore, to be constantly talking about, you know, inflation expectations and the path of rates. 110 00:08:35,890 --> 00:08:40,330 But, you know, maybe maybe Kevin Warsh is still kind of working on the getting everyone in line. 111 00:08:40,330 --> 00:08:50,570 But in any case, all three of the, you know, the major Fed officials who spoke last week were basically telling you, well, actually, despite the hotter inflation prints you're seeing, expectations are well anchored. 112 00:08:50,710 --> 00:08:56,110 We don't necessarily need to do much more on rates or at the very least, we don't have to be super urgent about it, even though inflation is not where we want. 113 00:08:56,110 --> 00:09:09,050 And the inflation that we're seeing is either related to kind of the short term geopolitical events and headwinds or it's related to or and additionally, the growth, the rate path that we've seen in the last year or so. 114 00:09:09,170 --> 00:09:11,830 A lot of that is related to growth and capital competition. 115 00:09:11,830 --> 00:09:14,650 That's one of the things that Waller said in his comments. 116 00:09:14,650 --> 00:09:25,750 And so, yeah, very, I thought, noteworthy kind of lack of divergence on the rate path and the way that we should be thinking about inflation and its impact on rates and what the Fed's going to do. 117 00:09:25,750 --> 00:09:30,090 in a market environment where, as you said, everyone was going back to their models and 118 00:09:30,090 --> 00:09:34,690 trying to re-underwrite all this math against the backdrop of like kind of durably, durably higher 119 00:09:34,690 --> 00:09:39,610 rates. So, you know, I think that there's still a lot of, for all the talk of, you know, moving 120 00:09:39,610 --> 00:09:45,330 away from forward guidance, there's still a lot of, you know, pro market kind of jawboning going on 121 00:09:45,330 --> 00:09:49,050 as things start to get, you know, a little hairier, which I think tells you something. 122 00:09:49,050 --> 00:09:55,630 Yeah. And you put this slide up here, which basically tries to articulate the feedback loop 123 00:09:55,630 --> 00:10:02,410 that we're seeing with rates, with inflation rates and their effects on the cost of capital 124 00:10:02,410 --> 00:10:07,610 for this build out and how that in turn affects how you hedge in this environment. 125

00:10:08,950 --> 00:10:14,710 Yeah, this is a, I didn't actually get this into the timestamp this week. I saw the article going 126 00:10:14,710 --> 00:10:18,010 around on Twitter over the course of the week and I just forgot to get it down in my notes. 127 00:10:18,370 --> 00:10:34,920 But this is from I wanted to put this in here because we talked a lot at length over the past year or so about the move index So the treasury volatility index and this uh the stuff on the left comes from these are screenshots from a post by Harley Bassman on his blog at convexity maven and bass bassman is the 128 00:10:34,920 --> 00:10:39,200 one who originated the move index. And so, you know, I thought it was the, he's kind of the 129 00:10:39,200 --> 00:10:43,160 godfather of the, you know, the deep study of bond volatility. I thought it was that we've been 130 00:10:43,160 --> 00:10:47,660 talking about. I thought it was important to kind of have this in there. Um, it's definitely, it's a 131 00:10:47,660 --> 00:10:50,700 read. It's like six or seven pages. I think it's, it's reasonably accessible, although technical. 132 00:10:51,180 --> 00:10:58,340 It's something that, you know, it's beyond my, my major wheelhouse. It's as not a, not a credit guy, 133 00:10:58,340 --> 00:11:03,080 but I think it's worth going through. And there are a few kind of big things to point out here. 134 00:11:03,120 --> 00:11:07,820 And I think basically he's making the argument that we are kind of approaching a potential kind 135 00:11:07,820 --> 00:11:12,820 of event horizon in terms of negative bond convexity and bond volatility, where we've had 136 00:11:12,820 --> 00:11:20,260 Since 2007, since great financial crisis, we've had a rate environment where essentially we've been well below 5%. 137 00:11:20,260 --> 00:11:25,620 And as a result, the effectively, and this gets like very kind of jargony and inside baseball, 138 00:11:25,740 --> 00:11:35,280 but the generic bond that has gone into bond futures contracts has had a duration of roughly 11 for the cheapest to deliver bond that flows into those contracts. 139 00:11:36,180 --> 00:11:40,480 And duration is a bond prices sensitivity to changes in interest rates. 140 00:11:40,480 --> 00:11:55,740 And what he's arguing is that as we've drifted much higher in recent months, not just drifted, actually ripped much higher, we're kind of getting to a point where increasingly you're getting close to the cheapest to deliver bond being one of longer duration. 141 00:11:55,740 --> 00:12:03,800 So having moving from that 11 number that you see in green to potentially something more like 17 and a half down in red for various kind of mechanical reasons. 142 00:12:03,800 --> 00:12:17,480 And so as a result, the thing that he's highlighting here, the cycle that he's highlighting is if the cheapest deliver contract starts shifting longer duration, then you end up with the trades being made with portfolio managers looking at their their exposure and their allocations. 143 00:12:17,680 --> 00:12:24,160 And they will increasingly have more duration exposure than they want to have from a portfolio management and kind of risk management perspective. 144 00:12:24,160 --> 00:12:28,320 So they will, in some cases, mechanically have to sell duration to manage that. 145 00:12:28,440 --> 00:12:33,340 That obviously has a negative feedback loop impact then on yields and the price of bonds. 146 00:12:33,720 --> 00:12:36,080 And so you could get into at higher and higher levels. 147 00:12:36,200 --> 00:12:40,900 And I think he calls out kind of 6% as the real nightmare scenario for the 20-year. 148 00:12:41,640 --> 00:12:49,580 You could get into this really negative feedback loop that then has the basis trade will also potentially start to unwind with treasuries. 149 00:12:49,680 --> 00:12:50,960 And then that adds more fuel to the fire. 150 00:12:50,960 --> 00:12:54,080 So specifically, he's calling out the 20-year here, which I think is interesting. 151 00:12:54,160 --> 00:13:07,420 Because as we talked about last week, Besant had allegedly, I think, I don't know if he's confirmed this, but the Citigroup had a note out saying that Besant would maybe cut or even just eliminate 20-year issuance altogether. 152 00:13:07,860 --> 00:13:13,660 And we're now up here at five and a half, and we were at as high as like five, six, five, seven a week or two ago. 153 00:13:13,660 --> 00:13:19,060 And so it's interesting data point, interesting timing as it relates to kind of that rumor floating around. 154 00:13:19,060 --> 00:13:35,420 I think it's like, from what I understand, from what I gather, kind of reading it, also listening to Matt Dines, as everyone should, on Mindprint Hash, kind of looking through this over the past weekend, this is not an insurmountable problem. 155 00:13:35,420 --> 00:13:40,720 It's ultimately kind of a mechanical problem that the Treasury can, you know, has tools to deal with. 156 00:13:40,780 --> 00:13:47,840 But I think it's another iteration of the theme that we've talked about that you've got to be able to kind of fix the plane while it's flying. 157 00:13:48,200 --> 00:13:58,700 And what are the like little fixes and things on the margin you have to change to avoid like the sudden nonlinear blow up of the whole system while you're trying to kind of re-architect it. 158 00:13:59,120 --> 00:14:01,640 And I think this is a big one to watch. 159 00:14:01,640 --> 00:14:12,700 And I, you know, I guarantee you that this is not listening to this episode is not the first time that Scott Besson has heard this argument, nor, you know, it probably also wasn't, you know, reading the Besson paper. 160 00:14:12,880 --> 00:14:15,780 I believe it's probably well understood within the Treasury. 161 00:14:15,780 --> 00:14:22,340 But worth worth watching and thinking about that, again, this is like of the theme where this is this is like long term. 162 00:14:22,340 --> 00:14:24,480 The

absolute level of rates matters long term. 163 00:14:24,640 --> 00:14:27,600 The interest burden on on the federal government matters. 164 00:14:27,700 --> 00:14:31,620 Absolutely. And I think it has ultimately one kind of pathway to. 165 00:14:31,640 --> 00:14:36,440 to resolve. But in the short term, I think it's a lot more interesting and important to focus on 166 00:14:36,440 --> 00:14:42,840 kind of these like plumbing issues that can pop up and need to be managed. So I think this is a 167 00:14:42,840 --> 00:14:47,400 good place for people to focus. Yeah, it is a rock and a hard place because if Scott Bessent 168 00:14:47,400 --> 00:14:51,560 and the Treasury come out and say, hey, we're aware of the situation, here's how we're going 169 00:14:51,560 --> 00:14:56,520 to manage it. That sends a signal to the market like, oh, they're doing some emergency facility 170 00:14:56,520 --> 00:15:01,800 or something like that. Like something must be wrong. So definitely we'll be watching this and 171 00:15:01,800 --> 00:15:07,160 we'll be monitoring the situation. I think it's a fight club situation, right? Where the first, 172 00:15:07,160 --> 00:15:11,160 the first rule of any of this is you don't talk about any of it publicly, or you do it like very 173 00:15:11,160 --> 00:15:16,040 indirectly, maybe, and you do it through press releases or you do it through, you know, changes 174 00:15:16,040 --> 00:15:19,880 in, you know, buyback plans or whatever. But yeah, I don't, I don't necessarily expect that we're 175 00:15:19,880 --> 00:15:24,360 going to, anyone's going to come out and cite all this kind of directly from, from treasury. 176 00:15:24,360 --> 00:15:29,540 You're not going to see Scott Besson come out and say the 20 years approaching the 177 00:15:29,540 --> 00:15:45,550 Carnelian and Jasper lines and we need to fix this before it hits the event horizon It the Jasper lines that got him He saw that and he was just like yeah we gotta do something Moving on I mean we mentioned it earlier I think one of the thorns in the side of this administration 178 00:15:45,550 --> 00:15:49,050 is the wars that are driving up oil prices, 179 00:15:49,050 --> 00:15:52,690 particularly for diesel, which is extremely important 180 00:15:52,690 --> 00:15:56,630 for global supply chains and getting end goods 181 00:15:56,630 --> 00:15:58,750 to consumers at the end of the day. 182 00:15:58,750 --> 00:16:03,810 And it looks like the uncertainty around these markets is only increasing. 183 00:16:04,390 --> 00:16:08,050 Well, maybe the first headline is a bit of certainty about what the price is going to do. 184 00:16:08,570 --> 00:16:13,410 Next year, we see diesel squeeze set to last well into 2027 as a round war disrupt supply. 185 00:16:13,410 --> 00:16:20,110 The IEA says there's been attacks on Riyadh's airport, which killed 12 and wounded more than 300. 186 00:16:20,390 --> 00:16:23,170 We discussed that briefly last week. 187 00:16:23,190 --> 00:16:27,110

And then you have Yemen's Houthis are going to continue to attack. 188 00:16:27,110 --> 00:16:38,670 The uncertainty around the oil and gas supply chains in the Middle East is, at the very least, where it was last week and in previous months and arguably higher right now. 189 00:16:38,770 --> 00:16:43,290 And so I think this is definitely top of mind for the Trump administration. 190 00:16:43,610 --> 00:16:55,270 In fact, I'm not sure if you saw it, but President Trump sent out a true social post this morning trying to drive the narrative that he's working very hard on a peace deal between Russia and Ukraine specifically. 191 00:16:55,270 --> 00:17:09,670 Yeah, I skipped over the Russia stuff this week just for time, but no doubt an interesting shift in the interesting way to apply the the Lindsey O. Graham sanctioning Russia Act in two weeks after it was passed. 192 00:17:09,910 --> 00:17:14,870 But I think it's all tied up with this slide or a lot of it is tied up with what you're seeing on the slide. 193 00:17:15,210 --> 00:17:22,870 The left side of the chart is or the left side of the page is obviously like the diesel situation remains remains tough, even as flows pick back up in Hormuz. 194 00:17:22,870 --> 00:17:37,830 And, you know, it's, you know, we're, I think, probably going to see more headwinds rather than less, or at least the same amount in the very short term when you look at attacks kind of ramping up, you know, sadly around the Gulf and even going so far as, you know, a direct attack on the headquarters of Aramco in Saudi Arabia. 195 00:17:37,830 --> 00:17:41,430 But I think what's interesting, too, is that on the right side is what you have. 196 00:17:41,530 --> 00:17:53,950 What you have there is a chart that's trying to plot demand for oil products, gasoline, distillate, jet fuel, other oil in the U.S. over the last five years. 197 00:17:54,030 --> 00:17:56,590 And it's the one you want to focus on is the solid yellow line. 198 00:17:57,130 --> 00:17:59,650 That's actually at a five-year high is what that's telling you. 199 00:17:59,650 --> 00:18:07,550 So despite all of this, despite much higher prices, all the disruption, you're in a place where you have not yet seen if, you know, this is one data point. 200 00:18:07,550 --> 00:18:09,670 But this, I think, generally is affirmed by others. 201 00:18:09,670 --> 00:18:12,850 Like you're not really seeing demand destruction yet in the U.S. 202 00:18:12,850 --> 00:18:19,730 And so I guess we've talked about I'm not really sure that you can afford to have demand destruction to keep the whole train spinning. 203 00:18:19,730 --> 00:18:31,850 But, you know, you look at that chart on the right, I think, tells you like why, you know, the Russia deal is becoming more of a focus and getting peace in Ukraine and getting refineries back online in that region. 204 00:18:31,850 --> 00:18:43,530 And we don't have it on here, but there was another kind of a PR this week from Prime Minister

Carney in Canada saying that he's, you know, happy to continue to maximize production and shipments of diesel to the U.S. 205 00:18:43,530 --> 00:18:56,730 And so, again, it's just like managing all these little fires at the same time, keeping as much of a lid as you can on diesel prices while not having that yellow line, you know, suddenly gap like way below all of its counterparts on the right side. 206 00:18:56,730 --> 00:19:04,950 And, you know, I think it's we can we'll see in some other slides here, maybe there's a reason to think it, you know, there's still a lot of cards to play and it can work out. 207 00:19:04,950 --> 00:19:21,090 But this is no doubt the a good illustration, I think, of the real resource constraints that that we're running into here as we try to manage the combination of the first major industrial growth impulse that the U.S. has seen in like, you know, 20 plus years with an historic disruption to global energy infrastructure. 208 00:19:21,970 --> 00:19:22,050 Yeah. 209 00:19:22,050 --> 00:19:35,490 And I mean, that gets to the next slide, which is our boy Javier Blas shifting attention to Iran specifically and highlighting their GDP projections for this year. 210 00:19:35,590 --> 00:19:42,470 And it's like we're approaching negative 10% GDP growth within Iran, which would be the lowest since 1985. 211 00:19:42,470 --> 00:19:57,490 And so the blockade and the attempt to squeeze Iran to the negotiating table by making their economy, putting their economy in dire straits and sort of forcing the issue. 212 00:19:57,650 --> 00:20:03,910 And so I think that's what Javier is saying here is the chart of the day, which is Iranian GDP growth. 213 00:20:03,910 --> 00:20:17,610 And so is this enough of an economic contraction to – is the stress enough to get them to the negotiation table to stop and to draw less of a hard line and make some concessions on the Iranian side of things? 214 00:20:19,150 --> 00:20:33,050 Yeah. I mean, we'll see. But it certainly – I think it encapsulates nicely in just one chart the headlines we've been talking about over the last – especially month where you're starting to see even kind of mainstream outlets like The New York Times acknowledge their kind of meaningful economic disruptions in Iran. 215 00:20:33,050 --> 00:20:38,050 that are causing significant problems for the IRGC. 216 00:20:38,050 --> 00:20:41,150 And I think it remains kind of a push and pull 217 00:20:41,150 --> 00:20:43,430 and tough to make an exact call. 218 00:20:43,430 --> 00:20:46,390 But I think every time I look at a slide like the last one 219 00:20:46,390 --> 00:20:48,390 where I see, okay, we've got these diesel disruption issues, 220 00:20:48,390 --> 00:20:49,970 we've got widening attacks, 221 00:20:49,985 --> 00:20:52,885 against, you know, still we haven't had to demand destruction in the U.S. 222 00:20:53,305 --> 00:20:55,225 Those are headwinds. That's, you know, a problem. 223 00:20:55,385 --> 00:20:58,105 I also

look at, you know, a chart like that from Javier, 224 00:20:58,285 --> 00:21:02,065 and I say, like, that's kind of the dynamic you're looking at 225 00:21:02,065 --> 00:21:03,365 with this game of chicken, right? 226 00:21:03,405 --> 00:21:06,225 It's always important to kind of keep that in mind with these stories. 227 00:21:06,225 --> 00:21:11,025 Yeah, and then shifting to the other superpower in the world, China, 228 00:21:11,165 --> 00:21:12,045 and what's going on there. 229 00:21:12,085 --> 00:21:15,885 It seems like they're benefiting massively right now 230 00:21:15,885 --> 00:21:18,645 with everything going on in AI and disruptions 231 00:21:18,645 --> 00:21:20,785 in the global economy in other parts of the world. 232 00:21:20,965 --> 00:21:24,625 So it looks like they're propping up stocks with buybacks, 233 00:21:24,905 --> 00:21:27,825 Xi's superpower ambitions, fuel, dangerous debt spiral in China. 234 00:21:28,365 --> 00:21:32,545 But then China's exports surged by 36% in September, 235 00:21:32,865 --> 00:21:34,025 riding a wave of tech demand. 236 00:21:35,265 --> 00:21:37,925 Yeah, so I think this whole page, this whole discussion 237 00:21:37,925 --> 00:21:39,145 is a bit of a Rorschach test. 238 00:21:39,885 --> 00:21:43,365 And I've seen people comment that these MAGA slot bros, 239 00:21:43,485 --> 00:21:46,445 which I resent that, but if these MAGA slot bros 240 00:21:46,445 --> 00:21:50,865 only read American sources, and that's why they think what they do. I'll have you all know the 241 00:21:50,865 --> 00:21:55,565 top left-hand headline is from the South China Morning Post. So let it be known that we look 242 00:21:55,565 --> 00:22:01,045 beyond our shores. But in any case, I think I saw this headline hit, and there was some victory 243 00:22:01,045 --> 00:22:05,945 lapping from different individuals that, oh, well, so much for Liberation Day, so much for 244 00:22:05,945 --> 00:22:12,345 what Trump's trying to do with trade, China's still ripping exports. But I think if you look at, 245 00:22:12,345 --> 00:22:17,325 There's the chart below that, the various charts below that from Robin Brooks, and he 246 00:22:17,325 --> 00:22:20,505 has a million more like this on a sub stack you can go look at, but basically showing 247 00:22:20,505 --> 00:22:25,725 like there's been disruption to US exports from China to the US. 248 00:22:25,725 --> 00:22:37,603 And it kind of back near Liberation Day levels but still like clearly way off long trend But you seen like ripping in basically every other market in the world And we talked about you know it ripped in the EU and what kind of impact that had 249 00:22:37,603 --> 00:22:40,483 on, you know, what EU governments are going to do to China. 250 00:22:40,483 --> 00:22:43,683 And I think if you go and look at like someone like Michael Pettis, who's a great 251 00:22:44,883 --> 00:22:49,203 China analyst, has been for a while, you know, his argument is and would be, and I think quite 252 00:22:49,203 --> 00:22:54,963 logically is like the whole model is just based on industrial production and aggressive exports. 253 00:22:54,963 --> 00:23:01,643 And so if the U.S. is not going to be available as a market, you know, aggressively try to find offtake valves for production elsewhere. 254 00:23:01,803 --> 00:23:08,123 And you see that across even all these smaller markets, the EU, their emerging economies that Robin Brooks points to in this data. 255 00:23:08,623 --> 00:23:13,203 So I think like you see this export surge and it's very easy to say, oh, well, like more exports good. 256 00:23:13,283 --> 00:23:21,963 That must mean things are going great. But I think there's there's more nuance to it, suggesting that this is I think this is exactly what the, you know, 257 00:23:21,963 --> 00:23:25,783 the plan with something that Liberation Day has been, which is to basically force, you know, 258 00:23:25,843 --> 00:23:29,903 dumping in a bunch of other markets and lead to a lot of kind of local displeasure with 259 00:23:29,903 --> 00:23:35,363 the Chinese trade relationship. And it's interesting, too, that that's happening at the same time as 260 00:23:35,363 --> 00:23:42,783 there's been an increase in debt to fund a lot of this industrial expansion that this Wall Street 261 00:23:42,783 --> 00:23:47,043 Journal article talks about. And that's been against the backdrop of, as this bottom right 262 00:23:47,043 --> 00:23:52,463 hand chart shows more industrial firms now are losing money than five years ago. Right. So you're 263 00:23:52,463 --> 00:23:56,283 ramping up debt, you're ramping up production against the backdrop of unit economics, like 264 00:23:56,283 --> 00:24:01,983 meaningfully degrading. And, you know, I think that goes to Pettis's point that this is fundamentally 265 00:24:01,983 --> 00:24:07,383 like not a sustainable model and it requires a lot of it requires, you know, an unsustainable 266 00:24:07,383 --> 00:24:20,200 kind of debt burden to be built up and you know propping up the stock market et cetera to kind of keep this running And so you know this can as we we seen in the US things like this can go on for a long time And so it not a call that China collapses tomorrow or anything 267 00:24:20,340 --> 00:24:25,120 But I actually think the export headline is interesting because a lot of people read it 268 00:24:25,120 --> 00:24:25,900 kind of the positive way. 269 00:24:25,960 --> 00:24:29,780 And I think it actually flows much more into kind of the Michael Pettis view of things. 270 00:24:29,780 --> 00:24:30,060 Yeah. 271 00:24:30,380 --> 00:24:31,140 Very interesting. 272 00:24:31,840 --> 00:24:33,300 Thank you for the nuanced take on that. 273 00:24:33,380 --> 00:24:35,460 We're going to end here. 274 00:24:35,660 --> 00:24:36,540 I saw this last week. 275 00:24:36,540 --> 00:24:43,360 really interesting, essentially, of Congressman Jim Himes, who is the ranking member of the House 276 00:24:43,360

--> 00:24:49,680 Intelligence Committee. I forget where he was speaking at some Warsaw city forum. It looks like, 277 00:24:50,180 --> 00:24:55,900 and shockingly, I think to many people, he's a Democrat and came out in sort of resounding 278 00:24:55,900 --> 00:25:01,720 support for the Trump administration's posture towards Europe and NATO, basically reaffirming 279 00:25:01,720 --> 00:25:06,320 what the Trump administration has been saying over the last couple of years, which is, hey, 280 00:25:06,540 --> 00:25:10,280 Europe, you need to get your economies and your military is in order. We're not here 281 00:25:10,280 --> 00:25:15,980 to hold your hand and do everything for you. And so actually, this is pretty interesting, 282 00:25:16,380 --> 00:25:22,100 considering the political polarity that exists here in the United States and the many questions 283 00:25:22,100 --> 00:25:30,380 that people have with what will happen moving forward if the executive, the House or the Senate 284 00:25:30,380 --> 00:25:33,380 that flips blue either here midterms 285 00:25:33,380 --> 00:25:38,060 or during the next presidential elections in 2028. 286 00:25:38,060 --> 00:25:43,060 And it seems like at least with this policy towards Europe 287 00:25:43,160 --> 00:25:46,160 and the need for them to really bolster themselves up, 288 00:25:46,160 --> 00:26:02,377 at least with Jim Himes it has bipartisan support Yeah I mean look it one guy one data point but there are a few others I think we could point to over the last few months as well And I think it just interesting to see it so explicitly that basically you know don 289 00:26:02,377 --> 00:26:06,237 expect Democrats to liberalize Trump's trade policies because we need to re-industrialize. 290 00:26:06,517 --> 00:26:07,417 Europe's got to get its act together. 291 00:26:07,617 --> 00:26:09,417 The free riding days are over, all this stuff. 292 00:26:09,777 --> 00:26:13,157 You know, if you just pulled the text out, it would look like anything that Trump or Besson 293 00:26:13,157 --> 00:26:15,657 have said, you know, ad infinitum over the last year. 294 00:26:16,057 --> 00:26:20,177 So I think it's an interesting rejoinder to, I think there's this view that among 295 00:26:20,177 --> 00:26:24,777 still a lot of capital allocators that, well, basically this is just, even if I agreed with 296 00:26:24,777 --> 00:26:29,477 some of the stuff Trump is saying, you know, if AOC is president in 2008 or Mamdani or something, 297 00:26:29,677 --> 00:26:33,437 like this is all going to reverse and go away. And so, you know, how seriously do I really need 298 00:26:33,437 --> 00:26:37,837 to take it? You know, I think this is telling you like under the hood, there are, whether you call 299 00:26:37,837 --> 00:26:41,697 it the deep state or the administrative state or, you know, the bipartisan consensus, whatever. 300 00:26:42,077 --> 00:26:45,497 I think there are a lot of actors at play here who kind of understand the same stakes that 301 00:26:45,497 --> 00:26:50,057 Trump is talking about and pointing out. And, you know, they're interested in kind of maintaining 302 00:26:50,057 --> 00:26:53,537 that same direction to travel. And I think, you know, the tweet points it out at the bottom, but 303 00:26:53,537 --> 00:26:58,577 a lot of Trump's original China trade policies were continued under Biden. And actually the 304 00:26:58,577 --> 00:27:03,557 certain export controls over like, say, sensitive semiconductor equipment were actually ramped up 305 00:27:03,557 --> 00:27:07,337 and really kind of initially put into place and specked out by the Biden administration. So 306 00:27:07,337 --> 00:27:13,277 I think there is a general appetite for this as the military industrial complex, Congress, 307 00:27:13,437 --> 00:27:17,337 et cetera, grow to slowly understand these dynamics. And I think it's, you know, the wrong 308 00:27:17,337 --> 00:27:21,657 move to say, you know, two years from now, it's all going to reverse. It definitely seems like a 309 00:27:21,657 --> 00:27:26,117 pretty clearly structural trend at this point. Yeah. That's the situation. It's been monitored. 310 00:27:26,337 --> 00:27:27,197 We'll be back next week.