Scott Bessent's Treasury Move Could Change Everything w/ Andreas Steno | Raoul Pal The Journey Man

I think it's a big deal what Scott [music] Vessent has done over the past few weeks here. I think it started out as a nothing burger, but then slowly but surely [music] it has turned into something big. But now it's become so systemically massive that it is now an important part of the market that's too big to [music] fail and all the central banks have talked about it. It is now as you said it's like the core component part of the market here. [music] >> They also need a solution to the straight of a moose to really unlock all of this. But if we get that and I can easily say that we'll have maybe [music] three four months in a row with negative CPI prints on the month and that will really allow the Fed Reserve to do something right. [music] I'm struggling to see how the cycle can stop and we're not seeing inflation. So it's not like they're going to jack up rates in the middle [music] of this in any meaningful way. To me, this looks just like the '90s and we saw ISM go up a lot. It cooled off a bit. It then went [music] up again. It feels like this is what's going to play here. I don't see it playing any differently. Token 2049 Singapore, [music] the world's largest crypto event, returns to Marina Bay Sands on the 7th of 8th of October. On stage will be myself, Jeff Yan from Hyperlquid, Shane Copam from Poly Market, [music] and the Real Vision community gets 10% off tickets. Claim yours using the link below. See you there. I'm Ral Pal and welcome to my show, The Journeyman. The journey man is where we travel together to that nexus of understanding between macro crypto and the exponential age of technology. I'm a macro guy at heart. I've been doing it for 35 years and I love the opportunity to talk macro and I particularly like macro thinkers who have taken on board the new world and understand the impacts it's having. I can see many still trailing it saying it can't be so. But Andreas, who shares part of Real Vision Pro with me on the Real Vision platform and is a favorite there, really has been thoughtful about this and I always love talking to him because he has out of consensus ideas. He's generally very right. Uh he's a super nice guy to boot and is just a thought partner that I really enjoy spending time with. So let's chat with Andreas to figure out what he thinks is going on with the economy and markets. Join me, Ral [music] Pal, as I go on a journey of discovery through the macro, crypto, and exponential age landscapes. [music] In the journey, man, I talk to the smartest people in the world so we can all become [music] smarter together. So, it's time as ever for that conversation with the great Dne Andress. How are you, my friend? >> Good. It's slightly hot here in Copenhagen. We have nice Indian summer, so that's why I'm dinging my Hawaiian shirt. And um yeah, look a little bit moisty in my face, but uh other than that, I'm good. What What is hot for Denmark? It's what hit 22 degrees or something. >> Yeah, if we're talking Celsius, right? [laughter] Yeah. The thing about Danes, Ry, is that, you know, we complain all year about the weather and then as soon as we get sunshine and, you know, decent temperatures, we moan about that as well. So we're never satisfied with the weather here. You just got to >> It's the same as English people. >> Yes. [snorts] >> So what's on your mind? What you looking at? Because there's a lot going on as ever, right, in macro. >> Yeah. You know, I I think it's a big deal what Scott Bessant has done over the past few weeks here. It I think it started out as a a nothing burger, but then slowly but surely um it has turned into something big. And you know, everything he's done over the past few weeks relates to the management of the US Treasury debt. And I think it's more important than ever to stress the fact that it is increasingly difficult to get foreigners to buy the US debt, meaning that they're, you know, seeking alternative buyers. And that marginal buyer right now is mostly a hedge fund and that has you know altered the picture quite a lot in terms of >> put out about the uh the kind of carry trade that the hedge funds are doing and treasuries the ARB and stuff the repo market >> people talk about it bank of England's written about it the Fed have written about it but people don't really understand it and it's quite an important thing >> do you want to run through a little bit about it >> I'd like to yes I mean for First of all, a hedge fund is is not a patient classic investor, right? It it's not an investor that will just buy a US Treasury and then sit on it. So, what's the deal for a hedge fund when they buy a US Treasury? Well, currently there's a spread between the US Treasury yield curve and the interest rate swap curve. So basically the interest rate you get in a swap arrangement with a bank that's not usual at least it wasn't usual ahead of the great financial crisis. We've basically seen such a spread since 09 or thereabout as a consequence of uh regulatory changes making it a lot harder for banks to warehouse bonds and all of those things that were implemented after the great financial crisis. So that spread is interesting for a hedge fund at least if you can lever it up because that spread is knowly stable over time. There's maybe even a scope for that spread to compress now uh which I'll get back to. Um and therefore these hedge funds to a larger and larger um extent buy these treasuries hedged against the interest rate swap curve and they do that over and over and over via the repurchasing market. Uh and to begin with I' I'd like to make it you know a very simple analogy for people to understand what it actually means when you make a repo transaction with a bank if you're a hedge fund. Um take take the simple example uh RL if if if you have something of value at home say a watch or something like that you you can go to I think it's called a porn shop not a pornography shop but a pawn shop I'm trying to pronounce it correctly [laughter] and um >> I don't know with that shirt on nobody's going to know >> which one you mean [laughter] >> but um the point here is Ral if you have something of value at home right uh these shops they do exist. These brokerages, they they they do exist. And you can go into such a shop and say, "Okay, I'll hand you my Rolex in return for a loan. And when I return the Rolex, I'll uh of course exchange that for the money again." And that's exactly the same exercise you do as a hedge fund. When you enter a repo transaction with the bank, you have a treasury. you say to the bank, okay, you can keep that treasury if you uh allow me to lend against it. Uh and then we'll reverse it uh after a short while. And you can actually do that exercise over and over and over again. There's only a tiny haircut on on the loan, right? Especially given that it's a treasury. It's a pretty stable collateral, right? [snorts] Uh so you go there with the treasury, you get maybe 98 97 cents on the dollar in return as a loan and you buy another treasury and you can just keep on doing that until you have levered up this trade say 10 20 times and then a spread of I don't know 30 50 basis points something like that actually turns into something meaningful uh if it's 10 20 times levered. The issue here is that it depends on this repo market being incredibly liquid and of course also contained from an interest rate perspective because there is a an interest rate on on this transaction as well called the repo rate. And now that hedge funds have become the marginal buyers of treasuries and it's actually been an ongoing trend for a couple of years at least. We can make a show the chart on >> because the interest rate swap market is driven by corporates and others, right? So they're two different markets. So one is the is the sort of private sector market and the other is the state sector and the hedge funds are in the middle making that market now when the banks used to in the past. >> Exactly. And you know if if we look at the trends say over the past two or three years um we haven't really seen a lot of buying of treasuries from Japan. We haven't really seen a lot of buying of treasuries from China. Uh it's on chart three in the in the slide deck. Um and we've seen a lot of buying from hedge funds. That is at least the conclusions I I get the conclusion I get to when I when I watch these um numbers out from from the US Treasury tick data. Uh we see a big tick up in holdings in the UK. And it's not like the UK central bank has bought all of these, right? Um we're talking funds doiciled in uh in the UK. Uh so it's it's a big deal for Scott Besson to ensure that this trade is on uh and how do you ensure >> just to remind people just a bit of context >> back in the late 90s very late 90s we all had the swap spreads on our screens all day and the reason being is that's what blew up long-term capital is they had this trade on >> and the central bank actually had to step in in the end and you know it was a big mess but now it's become so systemically massive that it is now an important part of the market that's too big to fail and all the central banks have talked about it. It is now as you say it's like the core component part of of the market here. >> Yeah. And I mean we're talking trillions now. So it it's not a niche market anymore. And these are the millenniums, the citadels, the you know these giant kind of risk arb funds or you know arbitrage funds or relative value funds as they're known in fixed income. >> Yes. Exactly. And I guess the reason why it's extraordinarily interesting is that you know the deficit of the US is now funded by borrowed dollars. It it's it's not a savings dollar. It's a saving dollar that is um yeah in a loop is is used to buy treasuries over and over and over right. Uh so it is very very important that you keep this market stable because otherwise um yeah things will turn very nasty. >> Why we had the repo hic hiccup in what 2018 2019 >> 19 >> the Fed move super fast because of this because the repo market is the bit that holds this together. Exactly. Uh and you know everything that Scott Bessant has done this year from the supplementary leverage ratio reform to the Treasury buyback announcement uh last week has to do with this. Um first of all the supplementary leverage reform allowed banks to warehouse more of these transactions. Um it essentially allowed banks to lever up their balance sheet in secured transactions and the repo is a secured transaction. You have a treasury and collateral for the loan. So it is it is seen as a lowrisk transaction for a bank from a regulatory standpoint. Uh and I have a chart on page six um showing how how big this market has become. Right? Uh this is just based on the primary dealers the amount of trillions that we have in repo transactions in treasuries. We're close to three trillion now and it was you know around 1 trillion just a handful of years ago right so it's a big change and as far as I can calculate given these changes that they've made to the regulatory framework around how balance sheets works uh in balance sheets work in banks they have probably a trillion um worth of additional capacity just because of the ESLR reform uh and that's big you know that that is a way of funding the deficit it's a way of monetizing the debt in a sense >> I mean they've made it clear that what they're trying to do is now move the marginal buyer towards the banking system >> um because the banking system recycles that into the market and the whole economy moves with it um and that was the whole Steve Mirren idea um and the Bessant idea of they want to repeat what the world looked like in the late 90s and mid '9s where the banking system was the main creator of dollars >> and we're slowly but surely getting there, right? Um, if you look at the liquidity creation from banks, uh, especially outside of the US, we've seen a big move towards the private system doing the heavy lifting. Japan is a good example of it. And, you know, you and I always have that discussion. You know, it's it's always worth watching Japan for like early monetary trends and everything that's happened in Japan over the past couple of years rhymes very well with what we're seeing in the US now. Um and that whole wave of private credit creation in Japan has unlocked a you know a whole new world for the asset market in Japan. Japanese have got and you and I have talked about this is they've got a more positively sloping yield curve which has really ignited it and allowing this to happen. the US, we haven't seen a massive uptake in the treasuries held and um by the banks because the yield curve's not been steep enough. And that feels like that's what Besson is trying to do here is kind of anchor the long end a bit by a bit of increasing a bit of liquidity and just kind of stay stressing that he doesn't want that to get out of control and hopefully wash at the other side ends up lowering the short end and then they end up with a like Japan had for a long time an anchored yield curve which is somewhat of a yield curve control but not ultra control. Yeah, it's it's a light >> curve guidance. Let's call it that. >> Yeah. And having said that, initially this buyback operation, you know, felt like an operation twist to me. >> Yeah. >> That initially I had the view that they would probably issue a lot more T bills to fund these buybacks of 20 year plus bonds. But then I think it was on Monday a couple a couple of Treasury officials hinted to CNBC that well we could also use the money that we've already issued. Uh and that would be a pretty decent liquidity addition, right? Because they hold yeah little less than a trillion dollars idle at the Fed. And if they use those dollars to buy back loads and loads of bonds, then it is pretty much QE practice, right? Uh especially if it's not just a temporary liquidity addition. if they communicate, okay, well, we've issued these dollars. We now intend on spending them, buying back debt, that would be a pretty decent cycle prolonger in my opinion. Um, and I think that's everything that they're currently trying to orchestrate is is an environment that allows the credit cycle to continue into next year, right? Because they know that admittedly there are some late cycle dynamics going on out there and Scott Bessin is very well aware of that. Uh so this is liquidity gymnastics aimed at prolonging the cycle >> and the other side of this equation because again Bessant is good. He knows what he's his job is his job is to is basically issue US treasuries and then find buyers and he's a bond salesman right trying to clear their book and there is subtle things of what he did when he went to Southeast Asia before going to China. He went to see the Koreans, the Japanese, and prior to that, he kind of reached this swap agreement with Abu Dhabi. Now, all of these people had swap lines, but what he's trying to make them do is somewhat more special. The orchestration that he went into China with, I believe, is for a weaker dollar. and to let the Euro dollar banks which are the South Koreans, the um Japanese and increasingly Abu Dhabi to have plenty of Euro dollars to lend to China. So he went with a solution to China's problem is like I'll get you backdoor dollar access because 50% of their I mean most of their private sector debt is in dollars and in exchange will weaken the dollar because when you weaken the dollar everybody wins because it it boosts global demand for goods and services. But the other thing is that's when the central banks acquire treasuries. They need a weak dollar to do it. don't do it in a strong dollar environment because they're recycling their own strong currencies and buying dollars with them. And so that solves everything for Besson. He can issue more. He's got the, you know, the hedge fund trade there. He's got the banks now as a marginal buyer domestically. And then he's got the uh um the foreign central banks via this mechanism with the most important ones being Japan. So that that's why he intervened in in the Japanese currency. It's all part of a big picture that people haven't really put together yet that it's clear that they're aiming for a steeper yield curve um a weaker dollar so that they can keep this liquidity flowing. Yeah, I've been banging the drum on this short dollar trade since mid July. It's starting to work. >> Uh we've also seen spillovers to gold and Bitcoin and and other such short dollar bets and I still think there's more juice in that trade. the the issue uh and you know interestingly I think less than 24 hours after this is released we we'll get the Jackson Hole speech by by Kevin Wars right we're yet to see the Fed truly playing ball with Scott Bessent on all of this in my opinion um Kevin Wars has been radio silent on everything related to productivity and all of that since he actually took office right he he toured with that message throughout the whole audition uh period but he's been very silent on everything basically since taking office. But if you look at the theme for Jackson Hole, uh I think it's called financial innovation and how it impacts payments and inflation and policy something like that. >> Uh to me that sounds like AI, blockchain, stable coins clearly is another big demand. That's why Besson wants stable coins at scale. He thinks it can get to three trillion. Well, that's three trillion of bills that can be held by the stable coins. Exactly. Um, but maybe it's also an opportunity for WS to talk about productivity, right? >> That's what I that's that's what I think is coming here. He has to talk about because he's got a job. Besson's got a job and it kind of it's kind of an agreement as we said and his job is to say productivity is going to rescue us and we need to reframe inflation to something that works for the modern age and that but beneath that means we can have lower front end rates. and maybe he'll give us the first few hints into the work groups that look at the current inflation measurements and and how to update them to the modern world and all of that. Uh I think you're absolutely right that they're trying to find a new way of measuring it also a much more live way of doing it so that we don't have to wait you know six seven weeks for lacked information that moves the market and all that. I actually think it's a pretty good vision that he's laid out. Um, but we need the details and Friday is obviously a great occasion to to deliver the first few details. >> Yeah. I mean, they've got the committees going out to actually [clears throat] do it, but he needs to talk about why he's doing it. >> Um, and not to say, I want to lower rates, but it's like, you know, we need to update the system and this is the way of doing it. So, yeah, I think it makes a lot of sense to see what Walsh is going to do. I think, you know, everybody's got a role to play here and it's going to be really interesting to see what plays out. >> But admittedly, Ral, say a week and a half ago when Bessend announced this Treasury buyback um change and all of that. I I found it to be, you know, material, but but not something that would necessarily alter the asset market trajectory a whole lot. But oh boy, we've seen a rotation since, right? I I mean uh we've seen a rotation out of out of capex trades into duration trades. Uh so everything that needs you know compressed yield curves and all of that to to work. Uh gold has done well. Bitcoin has done tremendously well since this announcement and you know all of the AI hardware bets have been sort of since right because they I don't necessarily think that those two traits go hand in hand as they did prior to all of these yield curve gymnastics. Uh and I've also been fairly vocal about that uh over the past uh couple of quarters that the capex trade uh all of the hardware names and AI, they need a steep yield curve, but they're also okay with a bare steepening yield curve, the stuff that we've seen for for a while. U that's not a good environment for software and Bitcoin and gold and and all of that. Um, so of course in in in the scenario that that you laid out where Kevin Walsh ends up cing interest rates while Scott Besson is sort of in charge of the long run, both will work in tandem, right? You can both buy hardware and you can buy Bitcoin. >> Yeah. >> But now that we're kind of in between stools here in a sense where either it's kind of a compression scenario for interest rates or it's a scenario where the yield curve will steepen in a more aggressive way, in a more hostile way. I think it's a bit more either or capex or or Bitcoin in in those two scenarios. But I'm I'm personally positioned for the tandem scenario where both can work in tandem because of a a bull steepening yield curve where interest rates move lower from the front and outwards. >> Yeah, I agree. I mean, I do think there is a catch-up trade. I wrote an article called the great rotation in GMI about this and saying look you know the front end of all of this is the semis and they're probably going to slow down because the the next tier goes up stuff like the applications layer. So I think about healthcare and biotech and stuff like that that's really worked uh well and that and crypto was the really undervalued part of that whole kind of tech ecosystem and it's likely to play catch up the moment liquidity starts returning. Now, liquidity is not fully returned yet because, you know, we've just not seen the banks taking on the treasuries in any size yet and stuff like that. Um, but that's when they're trying to orchestrate. So, the market's sniffing that out. You know, the financial conditions are easing again. >> Yeah, they are. Uh, and to some degree I think a deal that solves the lack of oil products coming out of the straight of Amuse unlocks all of this during the autumn, right? >> Totally agree. >> So, and that feels like they've got to do something in the next two or three weeks before the electioning starts for the for the midterms. >> So, a quick break in your regular programming. If you're serious about your future, grab my free report called Prepare for 2030. I think you've got 5 years to make as much money as possible. And this guide will help you navigate what's coming. The link is in the description. Download it now. Because, you know, we've seen a wave of disinflation coming from the flat oil market, but it's just not disinflation at the pump yet because of the very, very elevated crack spreads. If you look at the diesel price, it's still very elevated. If you look at the gasoline price, it's it's also higher than it should be given where oil trades, right? Uh and the reason is that we have a lot of refiners capacity kind of locked in in the Middle East because of a lack of shipping transits, right? So, by the end of the day, they also need need a solution to the straight of a moose to to really unlock all of this. Uh but but if we get that we'll and I could easily say that we'll have maybe three four months in a row with negative CPI prints on the month and that will really allow the Federal Reserve to do something right. Yeah. And they they've got to be aware of it. It's gone on longer than they expected for sure. I think they were very close to a deal. I don't know what the hell fell apart, but something fell apart. I think it's old regime versus new regime in Iran. And now Besson's got his nuclear war, you know, from the Treasury on them. I don't know if that's going to work or not. It never stopped the Russians, so I don't see why it's going to stop the Iranians, but >> um but in the end, yeah, they have to find a solution here. They have to walk away from this and get the sort of deal that they want out of it. >> Yeah. So you know my take on it is that this first 30 60day memorandum of understanding that allowed for you know a decent amount of exports out of the straight of moose kind of allowed both the US and the Iranians some more patience in these negotiations and that was probably why we we ended up in a round two. Um the Republican Guard in Iran they're you know their income source is basically exports to China through the straight right uh so it bought them a couple of quarters of time at max uh the the income that they could take in during that first mirando of understanding because they're currently not exporting anything at all more or less right so um that's also why both sides do have some strategic patience right now but they also need a solution both sides right by the end of the day because the Iranians cannot essentially they cannot fund their operations and you know even though the Republican card is is very ideologically founded also religiously founded uh they also need to be able to pay their soldiers right uh and they cannot keep paying their soldiers at with with a closed straight uh we also know that all countries surrounding Iran are building solutions to avoid the strike now so they obviously they they also need to strike a deal some point because otherwise the straight will become irrelevant, right? Uh so I I I simply cannot, you know, I I look at this through, you know, a very cynical game theoretical um setup and I simply cannot imagine a Syria where they don't end up striking a deal because both sides need a deal. >> Yeah, exactly. I just think there's a very high chance and China wants a deal. Everybody wants this deal to happen because it removes the last choke point in the global oil market and therefore oil just doesn't become a geopolitical issue anymore. It just becomes straight supply and demand and it all goes away and OPEC kind of falls apart and everything just >> clears. Venezuelan oil starts coming to market. You know, you get decent refiners to be able to clean up the heavy crude and before you know it, oil doesn't become an issue for the markets ever again. H and that is a very likely scenario >> and it's incredibly desirable for everybody. >> Yes. >> Yeah. So, I've got that. Here's another interesting thing uh that I looked at is I've been thinking through this productivity thing and the data is slow and it's not great >> and it dawned on me recently. So, what are we trying to look for? Right? We're trying to look for the application of >> AI and robotics on an economy. And it dawned on me that there is a perfect example of this that has led since about 201 18 was Amazon. >> So Amazon have been the forefront of everything. So they have now almost more robots than humans that will cross next year. So they've scaled like an economy, right? The size of an economy as well. I a gigantic company. They've implemented AI. They've got self-driving fleets. They've got drones. They've got I mean, every component part of the exponential age that you can possibly install and they're running it. So, I went back and looked at it in a big article I did for GMI and what you saw is their profit margins trough. They they put their big investment into all of this and out the other side is their margins just been increasing all of the time, which is productivity essentially. Um, and I thought it's just fascinating to see, well, look, there's an obvious example that it's going to work and people don't believe it yet. No, they don't. And of of course, if if you look at, you know, some of the official productivity statistics, which I, by the way, don't really buy. Um, it doesn't look like we've had a revolution, but if you look at the micro cases, we've clearly had a revolution already. >> Yeah. Um we've we have record high profit margins everywhere. It's not even only in technology. Uh and yet the statistical bureau tells us that is that it has nothing to do with productivity. I I don't really buy that because >> and considering we've had the economyy's not been growing super fast. Household spending has not been great. So where the hell are these profits coming from? And it has to be productivity. Has to be. >> It has to be. Uh I I perfectly agree with that. The the thing that probably also wrongfooted a couple of the IPO pitches from uh the big LLM companies is that we haven't seen a big impact across the labor market yet. But my point is, and you have decades [snorts] of evidence for this, is that when profits go up as aggressively as they do now, you don't see layoffs, even though you could lay off people without probably harming your business, you'll see them once the profit cycle rolls over. And that's where you'll harvest the productivity for the next cycle. One thing we have noticed is that people won't hire as aggressively. >> So the labor market doesn't expand in line with GDP or the business cycle, >> but you don't see that divergence because as you say, if people are making record profits, yeah, sure, some of the tech companies have laid off a lot of people, but overall people won't do it until they're forced to do it and then they'll really dig in. And that's where productivity almost accelerates. Once you get an economic downturn, everyone realizes you can operate with half the number of staff. But uh there was an an amazing interview uh [laughter] with the business line manager in uh in Scandinavia and he said that well he he basically he's basically instructed all of his employees to automize their tasks with AI and he [snorts] you know aggressively just said use AI use AI use AI every time they had a new task but then he got the question why haven't you laid off your employee if they have automated everything and it took him a little while but then you kind of indirectly admitted to well it's actually a pretty nice thing to be a manager for like 20 people right so and and I think that's exactly why you need to force those outcomes top down in organizations because a line manager he he's not incentivized to lay off people even though they've automated a lot of stuff it will only happen once the CEO is forced to >> say because managing people is power and ego >> in the end. I mean you should be if you're ruthless want to man manage the least number of people possible but then you don't feel powerful because what people like to say is oh yes I have you know 500 reports >> in my business area as opposed to saying I've got 5,000 agents reporting to my AI and I'm orchestrating that at top level. People haven't got to that yet. They will do it. Yeah. At some point, I guess you can um brag about managing 5,000 agents in the bar when you're trying to hook up in town, right? Uh I I there's a big, you know, generational cliff uh in in that question, I guess, because I guess millennials and Gen C's, they they'll end up bragging about how many agents they have pretty soon, right? Um, but I also see the same thing related to digital art versus physical art, right? Uh, I've had quite a few employees who, you know, when they were like five, seven units of alcohol D, they started showing me their weird coins in their wallets on their phones, right? Uh, as some sort of art, right? See, I have this shitcoin, right? And they they kind of loved talking to me about that. Uh, I'm even too old for that, you know? I I I would do that. I mean, my one of my biggest investments that I have is my digital art collection. >> Yes. >> So, even though I'm not quite a boomer, but I'm Gen X, but I've I've gone down that rabbit hole deeply. But yes, I mean, dig digital things can have value in this world. And yeah, other people just don't get it yet. >> No, >> you're right. So yeah, it's going to be it's going to be fascinating to see how companies adapt to all of this and how the economy adapts to this. The other thing is I don't know if we even measure it in GDP. >> Yeah. Yeah, cuz I mean if we look at the sort of if you've got record profits and they're accelerating, you've got record capex, you've got, you know, sort of records of everything, yet the economy is not really growing, we're just not measuring something. >> But it's a really good question, right? Because if if you hire a bureaucrat, it's very easy to measure that in GDP terms, right? because you pay that bureaucrat a salary and that pays slip will directly go into the GDP calculation as his output, his or her output. Um, how do you measure an agent? I know >> I I don't think it's easy. Uh, and I'm not sure I have the answer, but I mean look at uh look at the statistic put out by uh by Open AI. I mean the amount of agents live in the open AI ecosystem has quadrupled I think over the course of two months. So I mean something is clearly happening there. Yeah. >> I mean AI bots are now by far and away the largest part of the internet. >> That is not far and away the largest part of the payment system. But they are creating economic value. You and I know because we run them. and creating huge economic value for us, but it's not captured. >> And they're even writing Stan Drunken Miller's opinion [laughter] letters now. So, I mean, they also write part of my stuff. I I perfectly admit to that. Why shouldn't I use the technology? It's I get that >> in my Yes. Why have you used CL to write this? Well, because then I can write about five topics for you instead of one. I mean, why wouldn't I? >> Yeah. It's not like you don't put your thinking aside to them. You still do your thinking, >> but they do the writing and the other stuff or putting together a bunch of thoughts that you put. They put them together into coherent way. That's just efficiency. >> You're not you're not outsourcing your thinking because they can't they don't they're not very good in that respect. Is very good if you want them to be a partner. >> And it's it's like, you know, this is not my first language, right? When I write an article in English, it's probably a good idea that I allow CL to work with it and improve it and and all of that, right? It's like telling me that I cannot use a dictionary when I'm not fluent. It's just nonsense, right? Calculating. When's the last time you did, you know, long division on a piece of paper? Nobody does anymore. >> No, >> it's like transitioning from pens to typewriters. Oh, that's cheating. It's like, no, it's just technology. is just how it works. But people are very weird about it all. So let's cuz I we haven't got long to go. But what what's your view for the US economy now going forwards in terms of the cycle liquidity the things that matter to markets because this is what everybody ever wants to know is when when's it going to stop? What's the risk here? What are you looking at? So if if you look at like a little bit more old school business cycle models, my best guess is that the PMI cycle will peak probably in November or December, something like that. Um but it doesn't mean that 2027 will be a negative growth year. I think would be, you know, slightly more sluggish from a rate of change perspective, but I don't think that we've seen sufficient tightening for me to really worry about the cycle into next year. And everything Bessant has done over the past couple of weeks. We obviously still need to see the details in in the coming weeks tells me that they're trying to prolong the cycle throughout Trump's remaining um period. Right. Rolling bills at the short issuing bills at the short end. That's more ongoing liquidity. The changes, as you say, sound like these are not short-term fixes. These are longerterm extension of the business cycle. We've got the largest capex boom in history and half this stuff, no 3/4 of the stuff hasn't been built yet. >> So, I'm finding it I'm struggling to see how the cycle can stop. And we're not seeing inflation. So, it's not like they're going to jack up rates in the middle of this in any meaningful way. >> So, to me, this looks just like the '90s. And we saw ISM go up a lot, it cooled off a bit, it then went up again, it cooled off a bit, then went up again before the final peak. >> Feels like this is what's going to play here. I don't see it playing any differently. Yeah, the the funny thing is that if you look at like forward expectations for many of the hardware companies, for example, everything related to the capex buildout, it seems like most people agree that 2027 will be slightly bigger than this year. And then if you look at 2028 and 2029, it's just a flat line from 2027. And that is the only scenario that won't happen, right? it it's it's not like we'll just plateau and then okay this was the exact amount of spending needed for the economy either we accelerate or decelerate right um and I still think it's it's vastly underpriced that we actually accelerate in nominal terms which is the point I've been making basically two or three months in a row yes we will peak in rate of change terms this quarter it's simple math I mean we cannot grow at 200% forever ever in capex terms because that would lead to numbers that even you and I could not imagine right so obviously that cannot um that cannot be the case so even if we grow capex 25% from this space it's massive in nominal dollars and I think that's likely what's going to happen the next few years that we'll grow maybe 15 20 25% something like that which is huge I It's a bigger capex increase in nominal terms than we've seen ever outside of the last 18 months. Right? So it it's still huge uh in nominal >> and capex have been so lackluster over the last decade or two >> that then the the rates of change looks large anyway >> but as you said it's actually going to be the nominal change in the end that's going to be >> bigger than people expect. And I just don't see what's interesting is everybody all the naysayers on the capex boom just like this all circular financing this is all nonsense and then you listen to and you know all the depreciation of this stuff and then you hear people like Andy Jasse at Amazon saying no we just keep using the same chips we need more and more and more and this is never going to stop. >> Um and all of them are saying it these guys aren't they're smart enough not to need to hype cycle. I can understand that Anthropic and OpenAI need a hype cycle, but these guys don't. >> No, they don't need a hype cycle. And by the way, if you look at the latest investor deck that was leaked um ahead of the IPO from Anthropic, they're they're close to live, I think they're close to $70 billion in annual recurring revenue. And 15 months ago, they barely had a client. That is a revenue journey that is second to none in history. uh also if you look at it in inflation adjusted terms it's the single biggest revenue machine ever seen and it will far outpace what we've seen from you know Google Microsoft etc when they were on their initial journey uh it is incredibly fast so sure do they need something like 250 billion 300 billion something like that to to be able to to pay for their future compute capacity Sure, but it's a company that went from zero to 70 billion in a year. And all they say is we are compute constrained. >> So what they're telling you is the demand for intelligence is outstripping the ability to provide that intelligence. >> And you've highlighted that as well. >> The air capacity there's not enough. There's still not enough data centers. There's not enough power. There's not enough. >> Look, look at the only the only, you know, subcategory in anthropics accounts that looks a little bit weak from a rate of change perspective right now is is called code revenue, but it happened when they became constrained. >> That's right. >> So, it it it it's the exact reason why they lost momentum. Uh, and there's a reason why they paid SpaceX 2 3x what everybody else pays for compute in this panic deal ahead of the summer because they were simply too late back on their compute needs. >> Because you had Dario talking about this and he was boasting like we're being really sensible at how we think about the compute and open AI was just like we'll take all the compute and then suddenly anthropic like we've got the world's hottest product that's ever been and we can't supply it. Yes. And that for that simple reason, I'm tempted to say that I'm more interested in investing in the OpenAI IPO than Anthropic right now because they have a super compute pipeline. And Anthropic still they're still behind on that question. Clearly behind. Well, you can see it in the models. >> OpenAI because they've got enough inference will deliver an answer much faster than Claude will. M >> and you know you're not getting rate limited and everything in the rate that you are with Anthropic because they just don't have the compute. >> Yeah. And I think that's a bigger deal than what most people anticipated 6 months ago because no one kind of dared to extrapolate that wave of demand into the future. But you know it's I still think it's very fair to extrapolate it. My base case is the demand for intelligence is the largest of any single product ever produced and it will never stop because it's going to intelligence is going to go into every single thing. Um people don't realize it and you know that chart of the average token price um that you first showed me and we looked at it in detail and realized you know what all this is going to show is Givvon's paradox. All it's going to show is you can bring in as much cheap intelligence as you want, but the entire pie is going to grow so fast that everybody can hold their margins. And that's proven true. I mean, the frontier models are holding margin against all of these cheap competitors because they're not competitors because the pie is growing too fast, but everyone can provide intelligence at different prices. >> Yeah. And how long did it take for uh the Ki company in China to tell [laughter] customers to stay away? I mean, no, no, stop, stop, stop, stop. We don't have any capacity for you. It took like 12 hours, something like that. It was very fast. I know. So, anyway, my friend, good to see you. And, uh, let's see how this plays out because I'm with you. I still remain steadfast bullish here. Yeah, you know, September's in mid-election years and never great. >> Maybe there's a hiccup on route, but feels that it's all systems go. >> I think the best guess would be that we rally hard into year end after the elections and then we have a better 2027 than most people project. >> Yeah, I think that's right. Fantastic. All right, my friend. I will see you soon. >> Take care. So great conversation with Andress as always and you can see we share this commonality of ideas of the potential for an elongated cycle with a few ups and downs on route. That this whole capex game is not over yet. That intelligence is scaling faster than anybody understood it to happen. That the Fed and Bessant are going to start trying to change the rule book to enable all of this to keep going. So fascinating times. We'll keep our eye on everything. And on Real Vision, we've both got dashboards where you can track all of the things we're talking about in real time. So enjoy those and I'll see you next time. Token 2049 [music] Singapore, the world's largest crypto event, returns to Marina Bay Sands on the 7th of 8th of October. On stage will be myself, Jeff Yan from Hyperlid, Shane Copam from Poly Market, [music] and the Real Vision community gets 10% off tickets. Claim yours using the link below. See you there. So, you obviously like this video enough that you've got to the end. 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