Ben Kizemchuk on fiscal dominance, financial repression, passive flows and fiat currency | S07 E28
Summary
Investment Philosophy: Ben Kismchuk, a portfolio manager at Wellington Altus, discusses his approach to wealth management, focusing on working with lawyers and a new clientele of cryptocurrency investors.
Market Dynamics: Kismchuk introduces the concept of the "4Fs"—fiscal dominance, financial repression, passive flows, and fiat money—as a framework to understand current economic conditions.
Fiscal Dominance: The discussion highlights how government spending, now at 25% of GDP, creates a scenario where the needs of the Treasury overshadow those of the central bank, reminiscent of post-World War II economic policies.
Financial Repression: Kismchuk explains how governments may intervene in markets to keep interest rates below inflation, effectively inflating away debt and reducing economic volatility.
Passive Flows: The rise of passive investment products is creating a feedback loop that disproportionately benefits larger companies, potentially leading to a bifurcation in market valuations.
Fiat Currency: The transition from a gold-backed to a fiat currency system allows for more flexible monetary policy, which Kismchuk argues has reduced the frequency of economic recessions.
Investment Implications: Kismchuk suggests focusing on sectors and companies that are benefiting from these trends, such as the MAG7, while expressing skepticism about bonds and emphasizing the potential of gold.
Market Outlook: The podcast concludes with a discussion on the implications of these economic frameworks for equities, particularly the lack of mean reversion and the continuation of current market trends.
Transcript
This meeting is being livereamed. I think that means that we are live and this is value after hours. I'm Tobias Carile joined as always by my co-host Jake Taylor. Our special guest today is Ben Kismchuk. He is a portfolio manager at Wellington Altus. How are you Ben? Thanks for joining us. >> Very well. I'm very well, thank you. Nice to see you again. Thanks very much for having me on today. >> Last time you and I caught up was 2017 in Toronto. uh possibly lamenting the massive underperformance of value at that point. It's hard to imagine now given how the massive outperformance that we've seen since then. >> Uh tell us a little bit about your practice and your philosophy. >> Yeah, thanks very much. So, uh as you said, I'm a portfolio manager at Wellington Private Wealth. I've been here since this was uh just in the initial inception phase of the business. It's been an absolute rocket ship of a business up here in Canada. Uh I've been a very lucky guy to work with a lot of extraordinarily talented people at our firm. Uh my job here is uh I'm a portfolio manager and investment adviser. That means that I work directly with clients uh in helping them manage their wealth. Uh most of my clients are are lawyers here in Toronto. Um I managed to get in early with them like in the early part of my career. Kind of >> Sorry, what was that? >> Condolences. >> Just teasing. It's really great working with them because, you know, they're um uh they they have a huge time constraint and they need outside professional advice and it just kind of fits really well. >> It's an ideal font. >> It is. It certainly is. Right. And so I've developed real expertise in working with them particularly through the career progression, you know, um starting off in the early phase of being a lawyer like being an associate all the way into, you know, self-inccorporating. uh some of them are partners at very large firms or or or managing their own firms. Um so that was kind of the the very first big kind of stage of my career and then I'll tell you just recently over the past I'll say six or seven months as my kind of Twitter profile has been getting bigger I have been taking on a whole new group of clientele of like crypto bros. >> I was going to say don't say doctors. >> Yeah. No, it's um again name my name's been getting shared more on Twitter and getting more of a profile and you'd be amazed at the kind of general gen generational wealth that's being built up here in Canada like you know like Canada always had like Ethereum right like that was always our big crypto kind of uh foundational moment but even beyond that um plenty of uh mostly young men you know who've been making generational wealth you know seven figures eight figures uh in a very short amount of time and and these people have been reaching out. They need the money managed. Um they're not looking to like, you know, ride this risk into the sunset. They want to kind of offload stuff and and and make sure that they're they're providing for their families and all. So, yeah, two big groups of clients that I've been working with uh o over the years. >> Do you find the crypto bros um what are they like as as clients? Are they uh macrobearish? >> No, I I I wouldn't say that. I'd say that um they have a real keen understanding of of markets. I'd say that because they're kind of they seem to be following stuff more. They're they're younger. They're around our age. Um even into like late 20s, I'll say. Um and these guys tend to be really plugged in like they're reading stuff. The one really interesting thing I'd say they all have in common as well is beyond the crypto idea is they have a real keen understanding of like the supply and demand of money and money operations. So, um I I I wouldn't name that like MMT specifically, but they seem to be more plugged into those ideas than your average investor. Um and maybe that's just because because supply and demand in the crypto world is kind of the whole thing, but for whatever reason, they seem to really be on that idea. >> What's what's MMP? >> MMP. Oh, >> MMC. MMT. >> Yeah. Yeah. Yeah. Yeah. >> Tony, you remember that? Is that is that dead now that idea or is that >> No, I don't think so. I I think if anything the last >> Have you looked at the >> that's what we're doing deficits. >> Yeah. Yeah. That's exactly what I was going to say, Jake. You know, if you look at the last like three years, like 2022 onwards, I mean, the only way you you got that entire thing right was by understanding the fiscal framework that we were working in. Um the idea that the Fed was going to raise rates, but that was also going to raise the amount of money that the Treasury kicked out to everybody through bond payments and interest payments. I mean, that was the saving grace of the economy through that whole period. Uh especially 2023. Um and you kind of needed to have a keen understanding of of that MMT framework in order to get that part right. Otherwise, otherwise you thought the yield curve was inverting and uh unemployment was shooting through the roof and you're going to get a recession, >> you know, and and exactly Jake, none of that happened because we had this huge fiscal spend. >> I confess that I believed all of that. So, please uh explain to us what has happened and what that means for the next 5 10 so on. >> Yeah. Okay. So, so that's actually really good because it kind of like fits in with the 4Fs kind of framework that I've been developing. Right? So, before I get into that, I'm just going to touch on the 4F's big picture idea and then we can dive into what that fiscal part means. Right? So, uh 4F uh stands for uh fiscal dominance, financial repression, passive flows, and fiat money. Okay? And um all of these things have existed on their own through history um in the US, outside of the US. Um but we're living through a really really interesting time where those four things are coming together at the same time right now. And that's never happened. We've never had those four things together at once. And what's unique about that in my opinion is it sets up like a foundation from which a post scarcity economy can bloom. Right? So host scarcity is a really fancy way of saying like an AI economy. Like if you're going to have uh an economy that was predominantly run by machines with machines, machine labor, um you would need a very specific kind of a springboard from which you could make that work. And my opinion is that 4Fs is that springboard economy. That's what we're in right now. >> Um >> can you unpack can you unpack each one of those just like >> Oh yeah. Yeah, definitely. Yeah. Yeah. I'd love to do that. So it's not quite like industrial capitalism. It's not quite AI machine economy. We're kind of right in the middle. This is what the transition from one to the other would look like because it's not a light switch. Like you're going to sort of slowly gradate your way through that. So um the first one fiscal dominance speaks exactly to uh uh Toby your your question right about what happens with this fiscal idea and where are we going? So, um, if you look at where we are right now, government spending in the US, federal government spending is up just shy of 25% of GDP. Okay? Now, if you look historically, and I'm talking all the way back, 25% of GDP is where you got to at peak government spending in prior recessions, prior crises. Um, apart from COVID, let's just do XCOV and you look at the whole way back, 25% is where you you're peeking out in government spending right now as well. >> Yeah. Yeah. That that's everything like the worst of the worst. You got to 25. That's our that's our normal right now. We're at 25% right now and there's like this is just the normal operating space of the of the economy. So um what that means is that um uh this huge amount of government spending is creating what's called a fiscal dominance. Okay? And that's where the needs of the treasury supersede the needs of the central bank. The central bank is kind of powerless. It can't really do too much uh about the Treasury. Um it becomes almost subservient to the Treasury. And we've seen this before um like in World War at the end of World War II um and sorry at the throughout World War II and then at towards the end of World War II you had the Fed at the time was specifically keeping rates low to help the Treasury pay for the war and they they did that as an explicit agreement. Okay. And then we had the Treasury Fed accord and they decided to make the Fed independent again. Um, and that's kind of the idea of central banking as we know it today stems from that 1951 agreement that the Fed is independent and gets to call its own shots. Um, what we have now is kind of a situation where no matter what the Fed does, in my opinion, they can't really change the course of the economy, right? Um, and so the example for that is I'll go back to the 2022 2023 example. They raise rates by by 5% in a year. you're supposed to be um restricting economic growth and the opposite happens, right? And u back in 19 back in the World War II, this was like a cooperated agreement. This is just kind of fiscal dominance almost by accident. Like I don't think any of this was planned where they raised interest rates and they caused the Treasury to start paying out a whole bunch of money which saved the economy. Um but even though it's kind of like emergent, it's still the case, right? We're still dealing with it. And I as time has progressed since then, I get the feeling and the sense that the Fed is kind of waking up to what's happening and what they've done and how their policy choices may be constrained. So, do you mean they're constrained in the sense that >> if they put rates up, you probably tip the federal government into I mean, I don't know if it can go into bankruptcy, but they're going to struggle to make the interest payments if the interest rates are too high because there's so much. >> No, the federal government can just print money however much money it wants. There's no cap to it. And this is where the fiat component comes in, right? So if we were dealing with a federal government pre-1971, right, when Nixon closes the gold window, um before then the federal government all that all the treasury had to be backed by gold, right? And um that meant that you could not print too much money because you had a very real um and and and almost instantaneous like inflation risk if you were to do if you were to print a huge amount of money back then. 1971 comes and now you're dealing with fiat and the government no longer has a backing to its currency. It's just the full faith and trust of the treasury, right? That means that your only constraint to print money is uh is uh the use of resources like inflation. So, um, right now you, if you were to print a huge amount of of money, it's really about can the economy absorb that money and put it into productive uses as opposed to is there some some gold backing or something else that's backing the currency that's going to give you that signal that that inflation is is running too hot or too cold for that matter. Okay, >> keep going. I'm I'm I'm I I >> want to know how it ends. >> I accept the proposition as a as it is, but I I don't I don't fully understand it. Keep going. So, we discussed fiscal dominance, right? This is >> so so so fiscal dominance. Okay. So, um so you have this idea that that the government can keep spending and will keep spending, right? Government spending has been growing by about five and a half% per year since like 1985 and pretty much on trend right now and there's nothing that really stops that. A lot of that is just automatic spending and a lot of that is just congressional spending. There's not a lot to be done with executive orders that can change that. Um and so you're on this kind of trajectory where that's that's just how it works, right? And and your your government is going to be spending about that much money growing at five and a half percent per year. Okay. Um, now if you uh now now switching gears to talk a little bit about the financial repression part, right? And I think this might also help answer your question, Tobias. We'll kind of work our way to the fiat part of it at the end, but I think this may help kind of um um illuminate that point. So um looking at the financial repression aspect of things, right? So financial repression is where the government steps in and actively intervenes in the market. Okay? Uh specifically the bond market. Um, but it also can can be, you know, related in stocks. But most of the time when you're talking financial repression, it's about putting your thumb on the scales of of of interest rates. Um, and specifically financial repression means that you trying to set your your risk-free rate, your benchmark rate below the rate of inflation or growth up here, right? Um, and what you're trying to do there is you're trying to artificially, you know, in quotes, keep rates low while growth and inflation is up here so you can inflate away inflate away the value of your debt. Right? Now, I don't think you actually need to do that, right? Or sorry, I should say that when would this apply? Why would you do this idea? Right? You would do financial repression if you are a policy maker and you thought that you had too much debt, right? If you think that you have too much debt, then you need to uh inflate away inflate away the nominal value of that debt, right? So that your economy can keep growing. So the way that you would do that is you would find somebody to own all your debt or buy all your debt so you can keep rates low and you want the economy to be running up here so that um uh so that that that that growth differential just take basically grows that you grow your way out of all that debt. Okay. >> Yeah. Yeah, if you got a killer hangover coming, you you want to go ahead and hit that hit that crackpipe so you don't get so you don't get a hangover, right? That's just >> that's one way of putting it, Jake. Sure. Yeah. I mean, to to each their own, right? Um so, um so yeah, so so that's the idea there is is that's that's kind of the idea that that's kind of been put out there uh currently is that you have this kind of um big worry or this caution about the amount of debt. Now, I'm of the opinion that it doesn't matter. That the amount of debt that we have is totally fine. And because the government can print as much money as it needs to service the debt, there's no real such thing as having too much debt, right? Um the total amount of the government deficit is just all the money that is sitting in everybody's wallets, right? And if you are to eliminate the deficit completely, um that means specifically that you're taking money out of people's wallets to give it back to government and then there's no money. Like the deficit is just the grand total of all the money that's ever been printed. Okay. >> The debt. >> Uh yeah. Yeah. The the the total amount of the total deficit and the debt. Yeah. So if you were to remove all the government debt, right? That's all the money that's sitting out there in the public's hands. Then there's there's no money, right? So um you need that. That that's just a running total of all the money that's ever been printed. Okay. So um if you are the opinion like if you went to school before 1971, you went to university, you went to University of Chicago or Yale or Harvard or whatever, wherever these policy makers went to school and your professors uh certainly went to school before that time, you would have grown up with the idea of the economy operating on a gold standard where you had these constraints to money printing. That means that you would also have a constraint to the amount of debt that you could have. So you would necessarily if that's how your framework was operating, you would necessarily think that you had a deficit problem right now. But because we we're no longer under a gold standard, we don't actually have that problem. But the policy makers think that we do. Okay? Therefore, the solution is financial repression. And that's what we're getting right now. Okay? you're having government intervening in different parts of markets in order to try and keep interest rates uh uh um not not necessarily lower but stop them from rising. >> How are they intervening? What what does the intervention look like? >> Uh so there's a couple different ways that you could do that. Most of the time when you hear about financial repression, people automatically think yield curve control, right? And that's something where the Federal Reserve or a central bank would step in and start actively buying the government's debt. All right? To try to keep rates lower, okay? Um that's not happening. Okay? That that that's just uh that that that's not happening right now. Okay? So, just to be clear, that's not how this part works. Um one way that that is looking like this is happening is through stable coins, right? So if you if you have a growing uh body of stable coins out there, right, and you you say that all these stable coins have to be backed by government debt, well then you've just created a buyer of government debt. Okay, so that's that's one really big way. A second big thing is if you're going to expand uh bank lending, right? So if so, right now you have this thing called the supplementary leverage ratio. uh right now actually they're they're they're kind of debating and and it's in the comments period of of how are we going to remove the supplementary leverage ratio. This is one of the things like you know you hear a lot about um the oval office and the Fed kind of battling these days. This is one thing that everybody kind of agrees on which is that we have this thing called the supplementary leverage ratio that was put onto banks in the aftermath of the global financial crisis and that's when everybody was really mad about how much the banks lent out. So they kind of created this new thing to stop them from lending out as they were doing before. Well, it turns out that putting that on really did hamper the bank's abilities to lend and maybe that's not such a great idea anymore. And so the discussion now is how do we remove this and to what degree do we remove this? And uh Bessent was actually even on TV in April at some point saying he called it like a corset around around the the banks. And so the idea is that this thing should be removed. And back of the envelope math suggests that if you were to remove it, you could uh potentially open up uh or increase bank lending by something like 600 to 700 billion, right? Um that would require a whole bunch of of uh government debt to to back the reserves of the banks to let that part happen. Okay. So So there's there's another kind of pot of money that you could you could dump into treasuries right there. So the stable coins are like an increase in the money supply that doesn't get counted. >> Um, no. No. Okay. So, so, so stable coins are not actual dollars. They're just using they would be using existing uh treasuries or potentially buying treasuries from primary dealers to to to back the stable coins. They're not dollars. Stable coins are not dollars. >> Okay. Yeah, >> they're one for one with dollars. >> They trade like dollars, but they're not dollars. >> Okay. >> Right. Like, yeah. Like, for example, the stable coin. So, so the treasuries that are back in the stable coins, these treasuries all have interest rates associated with them. The stable coin holders don't get any of that, right? So, so it's not it's not it's not a one for one. They're meant to represent dollars. They're meant to to to trade at the level of a dollar, but they are not dollars. They are something new and different. So stable coin holders don't get the benefit of the any of the interest on it. So the issuer of the stable coin collects the interest and you just get a unit that trades one for one with the dollar. >> Yeah, that's my I I I can't speak for every single stable coin out there. Like there's all sorts of stuff that's that's getting invented and and put to market right now, but but yeah, that's my understanding. >> Yeah, that sounds like a bank. >> Yeah. >> Yeah. >> Okay. We're we've got fiscal dominance, financial repression. >> And so the financial repression idea, the reason you would do that, what what's actually happening there is you're lowering volatility, right? Because if if you can get all these people to own all of these treasuries, right? You're creating effectively an arbitrage for the economy. Okay? If you can borrow down here and you can invest up here, so borrow down here, whatever the risk-free rate is. Let's say it's four and a quarter, right? and you can grow the economy up at 5%. Right? Then you have 75 basis points of effectively free money out there for the economy to go wild on. Okay? And the economy doesn't need much, right? Like 75 bits is a lot to that that's a lot of growth, right? Somebody's going to go out there and harvest that. All right? Um so basically um um uh lower that the purpose of financial repression in this context of the 4S is it lowers the volatility of the system. Okay. Um >> ar but aren't we haven't we been running these deficits that are what like what is it like 6% or something of GDP? Is that roughly right? And but we're only seeing growth rates I don't know whatever one two I'm saying I think isn't there some diminishing returns that you hit on the amount of debt and is it actually converting into real economic progress for us? I get it when you like maybe you're an early country and you're borrowing to build railroads and all this infrastructure that's going to last your economy for a hundred years. But if you're really just borrowing to pretty much pay for health care expenses, which is I think what the real, you know, mechanism looks like that do you actually get what you're paying for there or is that just I don't know. I feel like something's kind of breaking down eventually. >> Yeah, that that's a really good question. So to answer that question, I'll kind of back up and um um economic growth comes from one of two sources. Okay. Uh there's only two places that can create money. The first is the federal government. The second are banks, right? Uh and so um when the government creates money um through the collective profit equation, which is just basically a rearranging of GD of the GDP equation um that necessarily supports corporate profits, right? So when government money goes up, corporate profits go up. Okay? Um and it kind of is one for one. Um, you know, previously I mentioned government spending has been growing by 5 and a half% on average for 1980 since 1985. If you look at the average GDP growth nominal over the same period, it follows the exact same trajectory like like almost literally the exact same trend line of GDP growth uh over that time frame. And so that's because um that rate of money growth is what's powering GDP higher. Okay. Now you do also have the component of of growth that's coming from banks and credit credit expansion right so when people are lending um that's the thing that everybody like since 1980 um everybody has kind of um come to this idea that the the primary uh way that economies grow are through credit because that's because interest rates went down and we had a huge 40 50 year period of of credit growth. um that kind of started to taper off in the mid2010s and then that really hit a low in uh 2022 when interest rates came up. So this is that transition period where we're moving now from that credit driven economy towards a government-driven economy. Right? So it's like that bonds been the the baton's been passed. And so there's a lot of I I'd call it like the the the ideology right now is that governments don't know how to do anything. all the the the economic growth comes from comes from credit growth which is a product of banks. But I don't think that that's necessarily true. If you look at the long history of world affairs, you'll see that the highest rates of economic growth in in history through different countries have always been when governments have been in charge of of creating money, not banks. Um uh even in the US's own history, you look at the the coming out of the 1930s was a massive wave of growth. Um and that was primarily that was a lot to do with government support and government money printing. And that is because um of the collective profit equation. When governments are printing money, that means that that you are basically providing a huge safety net to the economy. You're you're printing money. That money gets put to work. Businesses use that. That that's that's that's literally profits for businesses. As banks see that if as that banks see that safety net develop, then they start to lend again. That's when that's when lending starts to pick up. That's kind of the theoretical aspect of how it works. And we're actually seeing that playing out now in real time, right? We had government kind of pick up the baton in 2023, 2024. Now, in 2025, we're finally starting to see banks lend again. like like literally just in the past few months, we're seeing um loans and leases kind of start to start to accelerate higher. Um and various if you look within loans and leases, all the various subcategories are starting to look the same way. They're all starting to move higher. Um so I'd say that this is actually very characteristic of uh a pattern for for economic growth that we're kind of living through in this like little mini microcosm of the last uh five years, let's say. >> I think this is fascinating. I don't fully I don't fully understand believe but I want I want you to keep on going because we're we're two points through. So let's >> let's get through the Fs and then I want to understand the implications for equities for value you know the value podcast. So, so, uh, the third F is passive flows. And this is a, this is a pretty new dynamic. Um, uh, so right now, depending on who you ask, somewhere around 45% of market activity is, um, kind of represented by flows into passive investment products, right? So, like you can think about the Vanguard B or uh, SPY or or some sort of big index product that follows one of the big indices. Okay? Um, and this is primarily kind of channeled into these products through retirement accounts. So, generally on like the third week of the month at some point, the uh the money from everybody's paychecks for the automatic retirement contributions go into the market um and they get uh put into these uh uh index tracking products. Okay. Most of that's coming from younger people um because the they're they're working. They're the ones who are saving. All right. It tends to be the older generations who who are still more active investors, let's say, versus passive investors. Um, but this is starting to have kind of uh um u strange new effects on the market, right? Uh if you just do this once or twice, it's not a big deal. Like like if you just take a whole bunch of money like and you just plug it into um buying these index products, that's fine. It's not a big deal. But if you continuously do this over and over and over again, you start to introduce a feedback effect in the market. And that's because when you do this, um, let's say you put $1 into the market, um, disproportionately more of that dollar is going into the largest index waitings versus the smallest index waitings. Okay? And if you do this over and over and over again, you're buying more and more and more of the larger companies and less and less and less of the smaller companies and you kind of start this bifurcation happening. And uh I think we can see this right now. I don't think that's too much of a stretch to imagine that that's happening to the MAG7 versus the S&P 493 right now. Um it's not just about the cash flows, right? Like yes, the Mag 7 have way higher cash flows than everybody else, but that's not the whole story. there is more to it. Um there is this very real plumbing effect that is that is that that's it passive effect. Um now I've got this idea that um this is not just about either plumbing or valuation. This is also kind of a cultural shift in how we're looking at companies and uh I I'm calling it the enterprise owned state. Right? So everybody's familiar with stateowned enterprise. you know in China for example the US postal service you know in Canada post office is a stateowned enterprise >> um this is different this is where those companies are getting so big and so ingrained into the apparatus of the US that there is no US without those companies like the US does not exist without those companies and their influence and what they do to not only conduit policy but also receive benefit from policy and also to support policy. They are one and the same as the US government. um that idea if you think about it um kind of turns those companies into what I'm calling quasi sovereign risk-free entities right so if you think about what like a sovereign bond is risk- free like a US government bond we call those risk-free bonds right this would be kind of like the idea of risk-free uh um uh companies and I don't mean to suggest that you should go out and and call these things low risk and pile them into your account just in case there's anybody who's you know thinking that's what I'm trying to suggest here but I'm thinking more of a conceptual basis like these things are like if we go back in time remember banks being too big to fail right this is like an economy that's too big to fail >> so would you say okay let's say we get to like five years from now and the revenues are nowhere near they need to be enough to justify all the spending that happened on AI Is the Fed going to like buy servers at, you know, inflated prices off of Microsoft or something to like prop up the Microsoft uh, you know, stateowned entity? >> Uh, no. I I don't think that I don't think you'll have to do that. Uh, I I I don't see a world in which in which um there I don't think we're spending enough on AI. Uh I I I don't think like like it's a huge um uh thing. You know, everywhere you look at you see the spending on AI, right? Um and and the comparisons being made to prior cycles. >> Is it going to look more than like uh the US government wanting 15% of sales of Nvidia's that are selling to China or or in taking uh you know Yeah. 10% of Intel? >> Yeah. So, I I do think that we're going to see more government intrusion into uh into these markets. I do think that that uh that's a that's a tax. When government's buying Intel, that's a tax. That's not supporting Intel. That that's buying Intel's profits and and keeping them for government. That that they become part shareholders, but because of the the government is a shareholder, that's the tax. That's just real. >> Yeah. Or Yeah. Yeah. Fair enough. We've done that with the GSC's too, right? With the um Fanny May and Freddy M. >> Yeah. Yeah. Yeah. >> Conservatorship and then the Feds bought the mortgage back securities. But sorry, that's we're we're getting a little bit off track. It's my fault. >> Yeah. Yeah. So, um so, you know, I'd use the example as well like if if you look at the Trump inauguration days, um um if you look up there who was up there with them, it was it was those mag seven companies. It wasn't like teachers, firefighters, you know, blueco collar workers. It was the CEOs of the world's largest comp world's largest public companies. Um, not even necessarily private company. You know, it wasn't the Koch brothers out there. It was the public companies. And that was a very real message, right? There's there's this um another thing, you know, this is like this is the stock market economy, right? like growing up investing uh you know we are all kind of in the same age bracket and and everything that we've been told about investing is there's a difference between the economy and the stock market but what if there isn't anymore right what if the amount of fiscal spending creates all this money that needs somewhere to go and it finds its way into the stock market where it's getting pumped up into these huge companies that become so huge and integrated into the into the US economic system that they literally can't go anywhere else and so you have to support them. And how would you support them? If you had to, you wouldn't you wouldn't go out and buy their servers. You would keep printing money and you would make those companies the very first stop of where that money goes. So the US government becomes their biggest client. Stuff like that, right? Look at Palunteer for example, right? >> Sounds rather >> dystopian. Yeah. Cancerous. I get that. >> I get that a lot. I don't think this is dystopian. I don't I don't see quality of life going down here. I don't I just I look around the world and I think everybody's living like like relatively the best lives that we've had in in decades. Um I don't think this is all to create some like control economy or some surveillance economy either. I mean there are aspects of that. You know data gets tracked etc. But I think quality of life's improving. Um but before we get too deep into implications let me back up and do the the the last F. Okay. The fiat part. I thought it was gonna be a different f word for all of us. >> I've got a fifth >> five today. >> Yeah, >> actually I might have a sixth one. >> Yeah. >> All right. So, um, so the last one is fiat money. Okay. So, uh, we've already kind of touched on this. In 1971, uh, Nixon closes the gold window and now the US government can in can expand and contract the money supply by the stroke of a pen or a keystroke more, you know, more aptly. Okay. um and that didn't exist before then, right? So, um that makes things a lot easier when you're dealing with periods of economic slowdown. If you look at the history of the US economy before 1971, you see it is absolutely riddled with periods of of inflation and deflation and sometimes in very rapid succession. Okay, that is really really hard for business owners and basically an economy to operate. If you have this kind of back and forth yo-yo effect. Yes. In you know that that that you know there's that website what happened in 1971 and everybody likes to say the world started you know falling apart when this happened. I think completely the opposite. Okay. If you look at post 1971, yes, inflation has been a one-way street going higher, but you have stepped massively away from the repeated frequency of kind of these massive economic recessions and depressions for that matter. All right. Um if not for 2020 um which itself was a very brief recession lasting what 2 months 3 months we would have been right now on the longest streak of US history without any recession from 2008 till present day right so but even counting that that 2020 recession we still have a massive win streak basically you could call it and I think that's a lot to do with fiat money because if you can expand the money supply when needed in when things are slowing down, you can help the economy. And again, that goes back to that collecti profit equation. >> Well, Ben, but wouldn't wouldn't you think though and what would be your counterargument to the idea that >> if a civilization can just print their way to permanent prosperity, we would have figured that out in the last 5,000 years. Um well we hadn't because I don't think that there was a good way of keep keeping track of that right um I I think this is the blockbuster 1971 was the blockbuster Netflix moment for for policymaking of currencies that was a real change in the way people thought about money supply where there where there's no tether and there won't be a tether right historically there was whenever we're dealing with these these periods of money big money printing The idea was always that we are going to return to to some sort of backing at some point. That was completely gone in in 1971. It took a while for it to kind of filter out and go through and and and kind of gain make its way into like the public common knowledge, but there was no intention to ever go back. And I think that's a big part of it. Um I do think that well in in a fiat money system you do still have the very real resource constraint where you you are still constrained by resources right um you can't just print your way into prosperity because you will run into the inflation boogeyman at some point who says you can't do it anymore right and then things will go very bad very quickly um but we've been able to manage it so far I think we've done a pretty good job of it Um, I don't see, you know, like we look at the deficit spending right now and I don't see that we have an inflation problem. Inflation's still been like trending lower. If you want to talk about government deficits being a problem, you know, let's look at Japan and look at like, you know, zero interest rates forever basically until recently. Um, the monetary operations under a fiat system are very different than under a gold system. They share the same terminology which gets everybody confused because you're talking about the you're using the same words to describe different concepts, right? Um like just to give a a good example of that, um under a gold standard, your interest rate on government debt is meant to stop you from taking gold out of the treasury. Right? So that's why when you're looking, you know, there's there's that very famous thing about um uh Nile Ferguson put it out there about um when uh spending on interest exceeds spending on defense uh something like that like like your government does cost. That's because that only works under a gold standard because under that standard, if if um uh um if your interest rates get too high, everybody's um you need to start um uh you need to have a lot of gold in your treasury in order to to make that happen and you don't have that much gold and the company or or and then the the the economy falls apart because everybody keeps trying to pull the gold out and it goes bust. But if there's nothing to pull out, right, if there's no gold to pull out, there's no gold backing under under any of this, then that whole analogy doesn't work anymore, right? The government interest rate is a policy rate. It's not meant to represent something um that you can pull out tangibly from the government to get your money back. So, that's a really big change. Okay. So, so, so, um, now the other thing too on that is like now we're talking about making currency programmable not just in this one way and I mean programmable in the sense of like you can expand it or contract it that's programmable and like in one way now we're talking about programming it in all sorts of different ways, right? So if you I I I read a lot of central bank literature stuff they put out there regularly their research and um you can see that they're talking about um different ways to make currency um well one one one thing they're talking about is um making it nonhoardable. Right? So, what if you had a dollar and after you spent that dollar, it could no longer be transferred? Okay, how would you do that? Well, you'd need something like a stable coin or some sort of contractbased crypto. And what if um after you or or what if you um had a dollar that was only available for six months and then it expired? Okay. So, why would you do something like that? Where would you use that idea? Well, if you were in a if you were in a big economic slowdown and the the economy obviously needed money, you as a government could provide that money to the economy, but you could put extra terms on it saying that, okay, we're going to print, you know, a 100red billion new space coins, but these space coins are going to expire in six months. And in doing that, you can now change the kind of runoff aspects of it, the follow on aspects of that being one of the big downsides about printing money every time you get into a recession is there's somebody on the other side of that hoarding it. And it kind of adds this huge inequality problem, right? Because all through history, when are the most number of millionaires and billionaires and possibly future trillionaires, when are these people created? When are these people minted? They're minted right after these massive crises because they're on the other side of receiving all that government money that's just been printed. So, what if one way to reduce that that issue of inequality was to make that currency that you just made non-hoable, non-transferable? >> So, you you buy a good with this money and then the the the storekeeper has this dollar >> that's going to expire. What do they do? They go back to the government and they say, "I'm going to buy a dollars worth of whatever that you're going to give me in exchange for this thing." >> Yeah. Who takes the dollar and the like when there's 10 seconds left on it? >> You can buy a government bond with it or something like that, >> right? >> So, and this isn't this isn't pie in the sky stuff. This is re This is stuff that's actually coming out of of the world's central banks. Like, >> you don't think this is dystopian? A little bit. I don't think it's just I I think dystopian is letting wealth inequality keep going on the same pace it has. If you do that, then you're in real dystopian kind of territory, right? I think that um I think that right now the solutions to to some of the biggest problems that we're dealing with are found in the idea of moving towards like an AI economy uh using these new tools. I mean, it's worth a shot at least. I mean, we've tried all sorts of things and this inequality problem is not going away, right? There's I think we owe it to everybody to try something new. >> That expiration sounds like the worst part of the cantillian effect where it's like the person at the very front of the line gets to use it at full strength and then like pull the ladder up in the Yeah. No one else gets to use it at that point. Like that seems that seems worse. >> Yeah. Well, I mean like that that's that's that's the STEMI check, right? Those are the stim checks in 2022 that went out. That's the cantellian effect. Those things went out. They got printed. They got right into the hands of people and they put them to work, right? Um and then so so so the idea there is what can we do to kind of limit the um the wealth inequality aspects of that money. So so those are the four F ideas, right? So those those are the four big things that are that are coming together now at this point in time that make this point in time unique. Um, and I think that um, they make it extraordinarily difficult to have a recession. We might have these kind of like parts of like some like tepid slowdown parts, if you even want to call it that, but not really. Uh, consumers keep consuming because there's there's this money that's being printed over and over and over again. It's making its way into companies. We have a lid on interest rates. It's making its way into the market. And the whole reason that we can operate this way is because of a fiat money system, not a goldback system. >> I think those are fascinating ideas. Let me let me just give a shout out. We'll do veggies, then let's come back and talk about the implications of this. >> Sounds good. >> Uh Pedika Israel, what's up? Senator Domingo, what's up? Winter Park, Florida. Warren Buffett's always in the house down in Winter Park lose Delaware. Tampa, Tallahassee. Brandon, Mississippi, what's up? Chabiza, don't know if I'm saying that right. Kennesaw, Georgia. Bethesda, Denver. Maxin, Valpare, what's up? Jupiter, Florida. Goththingberg, Sweden. Just jumped a bit. Hold on. Mina, streets of Gerard's Cross, what's up? Seraton, London, Suburbia. Jupiter, Florida. You've already won, Sam. Always say that. Madira Island, Portugal, Wilshshire, England. Boyisey, Tmacula. That's a good place, too. >> It's a good spread. Uh, thanks for the veggies, Slav. Ellenov tipped us. Uh, let me just scan down here a little bit. Okay. Uh, JT, do you have some veggies for this week? >> I do. Let's Let's do it. >> Let's hit the veggies. Mark it 11:16. We're a little bit late today. Oh, 16 minutes past the hour. >> All right. So you see a face in the clouds, a dragon in the wood grain, a Fibonacci signal in a candlestick chart. It's not really a hallucination. That's really just humanity. And what you're experiencing is something that researchers call periodolia. I believe that's how it said. And that's our brain's evolutionary knack for spotting patterns even when there's no real pattern to be found. And here's the mystery that I want to explore today. If this concept was meant to help us survive, why does it so often lead us into trouble? And we'll look to the humble pigeon for answers. So, little some fun pigeon facts that everyone was dying for. I know. Uh they have excellent color vision even beyond what humans can see. Uh they found that they can distinguish between different artistic styles like impressionist versus cubist paintings. Uh NASA before they sent humans into space were were training pigeons uh for potential space missions. Uh, and pigeons can remember human faces, even hold grudges. Uh, the studies have found that they can recognize individual people and will treat them differently based on past interactions, like whether someone fed them or shed them away. Uh, they have extraordinary ability to find their way home, of course, uh, you know, from hundreds hundreds of miles away, even if they were released in a place that that they'd never been before. Um, and they use a combination of the Earth's magnetic field, the position of the sun, and even these low frequency sounds that humans can't hear. And and they use all this to navigate. And during World War I and two, pigeons were used to carry crucial crucial messages uh across enemy lines and some even receiving military medals for bravery. And then of course uh oddly enough, uh Nikolai Tesla famously fell in love with a pigeon and reportedly said, "I love that pigeon as a man loves a woman and she loved me." So I I'll I'll leave that one where it goes. Uh so anyway, let's let's travel to a psychology lab and you know where we see people in white lab coats and they're training pigeons to peck at these screens. And at first the game is very simple like they have a Monae painting on the left key and a Picasso on the right. And these birds, you know, they're aren't just memorizing sets of images. They're actually generalizing patterns. And you could show them a Monae that they'd never seen before and they'd still get the classification correct. and and if you know if these pigeons had Bloomberg terminals, you know, they'd be like the original technical analysis uh analysts. Uh but then the experimenters up the ante. They introduce ambiguity. They start blurring the images. Maybe half a Monae mashed with a cubis, you know, fragments and it really turns into really a roar shack test. And oddly enough, the pigeons then double down. They they're the more distorted the image, the more confidently they're pecking. And the birds, they start seeing, you know, mones in in every smear of spilled ink basically. And and you know, they'll see a Picasso in a popcorn ceiling. Uh and if this sounds familiar, it's because uh you know, we humans also see patterns all the time where none exists. In our case, you know, the cost isn't just, you know, a mistime pec. It could be, you know, real dollars. And so, let's just imagine this kind of silly idea of a of a pigeon hedge fund manager. And, you know, he's he's trained on a very simple signal. Every time a little red triangle appears on the screen, it pecks the buy button and and voila, you know, the breadcrumbs of returns arrive on schedule every time. And you know, on a down day that's, you know, red, it buys and it gets its reward on the bounce. And after enough of this reinforcement, this association really starts to lock in. And but then things start to get a little bit messy. The triangles maybe get a little blurry or the red, you know, shifts to magenta. And maybe buying doesn't always lead to an immediate gain, but our little pigeon in his Armani suit, you know, just keeps pecking away. Uh, now why? It's because he remembers. He he remembers when the pecking worked and it it wants that dopamine hit of the breadcrumb again. Uh, but, you know, the environment changed and the the pigeon kind of didn't notice. And this is, you know, what data scientists might call overfitting. Uh, you know, a model is working well in historical data, but it collapses in the wild going forward. uh because it's also learned a lot of the noise along with the signal. So in investing we see overfitting all the time as as this like narrative addiction. You know the Uber for X, the next Amazon is XYZ, AI is the new electricity. You hear lots of different things. Uh we peck because it once worked or because we've seen others peck and win in that way. Um, and so let's just do like look at a real quick biological detour here where, you know, our brains evolved in these environments where false positives were very cheap and false negatives were fatal. So what does that mean? Like if you mistook the breeze for a predator, uh, you lost a moment of calm, but you lived to fight another day, no real harm done. But if it was the opposite and you thought that it was a gust of wind, but it was actually a lion, well, you became lunch and you didn't pass on as many copies of yourself. So, so we're built for overdetection of patterns. And in the jungle, you know, this wasn't evolutionarily adaptive, but now in in the modern world where there's a lot of sto stoastic chaos and zero sum competition, it's it's not so clear that that's good for us. So, we inherited this pattern recognition. Um, these story constructions, they're really they're calibrated for Savannah survival or we are, but but not really necessarily stock selection. So let's say, you know, we let's let's see if it's also not just visual, right? Like it's a lot of it is actually narrative patterns that we're looking at as well. So it's it's a little bit beyond the pigeons. Um so the pigeons weren't actually that dumb. They're just conditioned. And we do the exact same thing with our prior training that we get rewarded for. So every bull market has conditions a new class of investors to mistake luck for skill. Every meme stock cycle trains us to associate narrative and and virality with investment merit. Every era has its number go up technology. Um, and the market gives us this rewards for patterning matching until it doesn't. And then it can punish us until, you know, we're kind of like Twain's cat that won't sit on a c a cold stove either. U, so what do we do? Like throw up our hands, stop looking for patterns at all? Probably not. uh you know it could still be a very useful feature for the human OS and it's not like you can turn it off even if you wanted to. Um you know it goes when it's done well it actually goes by another name which is creativity. So perhaps we should try to use that creativity in the studio and not on stage. So what do I mean by that? In the studio you can generate patterns freely and AI is super helpful for this. Like it's incredible for helping you think through things on stage that is maybe in your portfolio. You should only act on signals that fit with rules that you wrote down in advance. Uh a little less ad living, a little less jazz. Um and and really, you know, so how do we do get less jazz? Ask yourself the base rate. You know, what happens most of the time for bets like this? If you don't know, you're improvising and and that's not really investing. Uh if you can't sketch the causal chain or thesis on the back of a napkin, it's likely that it's a story that might be leading you to trouble. Uh, you can run premortems and set trip wires, define in advance what would make you make this bet become signal versus noise. Uh, set price and time and thesis mile posts that you need to see in order to see if you're on track for your thesis. And when one of these trip wires hits, you don't negotiate with yourself. You just execute what your best played plans were. You don't talk yourself into the why you should change your course. Uh, sizing for a little bit of uncertainty. you know, smaller when something is potentially fragile, larger maybe when it's more robust, survive first and then optimize second like nature does. Uh, of course, you know, journal and keep score, time stamp hypothesis with, you know, your probabilities, brighter scores are amazing. Uh, red team the narrative, try to beat it up, you know, an AI is quite helpful at at arguing the bare case of something for you. Um, and and if it wasn't obvious, like basically this last minute is is all kind of a backdoor pitch to use journalytic. Everybody already knows that. But so, so to wrap this all up, you know, markets are these probabilistic jungles, but we carry this kind of stone age gear that's not that dissimilar from a pigeons, if we're being honest. And this mismatch explains why we overreact, why we chase heat, why we cling to stories and charts and gurus, and why we draw naively straight lines up and to the right. Uh, and maybe why the most successful investors often make it look very boring. Um, and that's I think there's some a clue in that and they don't need a story for every single tick in the market. Uh, so final words, be creative like an artist, verify like an engineer, and size like a bookie. >> Uh, brilliant. Good stuff. >> Thanks. Uh Ben, we've we've got about five minutes left, so we don't have a lot of time, but uh the the one question that came to my mind when the the thing that stands out to me, if we have this sort of unfettered money spending and we live in a world where resources still are, they have to be mined and things have to be manufactured and put together. Aren't we creating this uh massive inflation? And aren't we sort of seeing that in in lots of different respects? I think vegetables between June and July in the States were up 40% month over month, which is a which is a big jump. Meat's done something similar, 40% month over month. Those sort of things may not be showing up in CPI, but it's inflation that people are actually paying at home. got super high >> house prices relative to incomes. Isn't that sort of asset price inflation >> the consequence of all of this? >> The the house thing is is is is a little bit more to do with the supply of of of homes being built. Um but in terms of the general kind of CPI inflation story, I mean inflation has been coming down. I I think that's without a doubt. Um notwithstanding that you know vegetable prices may have been up 40% in the in the course of a month. Um, >> well, the rate of increase has been going down. We're never getting anything back. >> No, no, there's no deflation, but that's not the point. Deflation would be very, very bad. You don't want to live in a world where this goes in reverse. Um, >> I don't know about that so much, but yeah. Um, I kind of wish my dollar went further. When I went to the grocery store, >> when you buy a TV, you like deflation. when you buy a >> computer. The thing that you want to look out for here is that um the rate of government money spending is has a lot to do now with the amount of interest that the Treasury pays out. So even if the Treasury goes from four and a half to four and a quarter% as as you know the September cut is probably going to happen um that still means that the government is still going to be spend pushing out more money through the interest income channel or sorry the the interest payment channel to everybody else. And that's because if you look at the total composition of government debt, we went from a total, you know, weighted average coupon of about 1.89% at the end of 2020 up to just over 3% now. Um, what basically what we're doing there is we're replacing all of the low interest debt that we put out there 10 years ago in 2015 at like, you know, minimal rates. All of that is now getting um reissued now essentially at whatever the current rates are. Most of it's coming out of bills, which means it's going to be four and a half right now, and then after September, maybe four and a quarter. The idea there is that it's still dragging the the net interest costs for the government up. That's your new inflation rate. Um the the big difference is now the total amount of government debt is larger than GDP. So every 1% in increase in that in that coupon is 1% of GDP in terms of spending. So that's your new inflation rate. So I think that what's going to happen is CPI, whatever measure of inflation you want to use, is going to now gravitate towards whatever the weighted average coupon is of government debt. It has to mechanically in my opinion because the government, this is new money that the government is printing and sending out into the into the world, right? So that now forms that that's like the gravitational anchor now for inflation. So whatever that number is is what I think inflation will will kind of cling to. Um so I think that CPI is probably going to keep floating up higher until like three and three and a quarter maybe up three and a half into the end of the year possibly higher than that if we have some some tariff stuff that that happens right some some increase in cost from tariffs but that is kind of the new anchor point I believe. >> Um ju >> just before we run out of time we got about two minutes left. What are the implications for equities and for value? I mean, it sounds like this is just a continuation of what we've seen where there's no there's no mean reversion here. >> There is no mean reversion. There's only uh trend divergence, not convergence. Right? If you're going to keep the passive system going, uh this means that MAG7 equities are um in my opinion, these are are these these things just keep going higher. Uh market goes up and to the right. I'm not so sure about the rest of the S&P 493. Um I to me I I I don't know what that trade is. That trade is a lot harder in my opinion than owning the things that are going up and to the right. Um it's a pretty clean clear signal in my opinion. Um bonds I don't like them. Um there's, you know, if they were to turn up and go higher at some point, maybe I'd be interested, but not now. Um gold's been very interesting. I own a lot of gold in the portfolio. Um basically sticking to things that are that that that are working and proving themselves. Um, I don't I don't like mean reversion as a trade because in this environment, the 4s, it's very hard to tell with something is not working anymore if it's wrong or if it's just not ready yet. I'd rather stick with the things that I know are working and going up. >> Yeah, that's a it's a fascinating framework. I appreciate you uh coming in and outlining for us here today. Uh we are coming up on time, so please tell us uh how folks can get in contact with you or follow along with what you're doing. Yeah. So, uh, hop on my Twitter, Ben Kismchuck. Uh, um, K I Z E like Echo M like Mike Cu. Uh, or just type me into Google. I'm on the Wellington Altus website. You can get at me through there. >> He's a great follow on Twitter, folks. Uh, I really enjoy it. Uh, JT Journalyic, any other final words? >> No, just thanks Ben for coming on and, uh, sharing really interesting viewpoints. Appreciate it. >> Yeah, we'll have to have you back to uh, to air it out a little bit more. Uh, thanks folks. Uh, we'll be back. Uh, same bat time, same bat channel next week. We'll see everybody then.
Ben Kizemchuk on fiscal dominance, financial repression, passive flows and fiat currency | S07 E28
Summary
Transcript
This meeting is being livereamed. I think that means that we are live and this is value after hours. I'm Tobias Carile joined as always by my co-host Jake Taylor. Our special guest today is Ben Kismchuk. He is a portfolio manager at Wellington Altus. How are you Ben? Thanks for joining us. >> Very well. I'm very well, thank you. Nice to see you again. Thanks very much for having me on today. >> Last time you and I caught up was 2017 in Toronto. uh possibly lamenting the massive underperformance of value at that point. It's hard to imagine now given how the massive outperformance that we've seen since then. >> Uh tell us a little bit about your practice and your philosophy. >> Yeah, thanks very much. So, uh as you said, I'm a portfolio manager at Wellington Private Wealth. I've been here since this was uh just in the initial inception phase of the business. It's been an absolute rocket ship of a business up here in Canada. Uh I've been a very lucky guy to work with a lot of extraordinarily talented people at our firm. Uh my job here is uh I'm a portfolio manager and investment adviser. That means that I work directly with clients uh in helping them manage their wealth. Uh most of my clients are are lawyers here in Toronto. Um I managed to get in early with them like in the early part of my career. Kind of >> Sorry, what was that? >> Condolences. >> Just teasing. It's really great working with them because, you know, they're um uh they they have a huge time constraint and they need outside professional advice and it just kind of fits really well. >> It's an ideal font. >> It is. It certainly is. Right. And so I've developed real expertise in working with them particularly through the career progression, you know, um starting off in the early phase of being a lawyer like being an associate all the way into, you know, self-inccorporating. uh some of them are partners at very large firms or or or managing their own firms. Um so that was kind of the the very first big kind of stage of my career and then I'll tell you just recently over the past I'll say six or seven months as my kind of Twitter profile has been getting bigger I have been taking on a whole new group of clientele of like crypto bros. >> I was going to say don't say doctors. >> Yeah. No, it's um again name my name's been getting shared more on Twitter and getting more of a profile and you'd be amazed at the kind of general gen generational wealth that's being built up here in Canada like you know like Canada always had like Ethereum right like that was always our big crypto kind of uh foundational moment but even beyond that um plenty of uh mostly young men you know who've been making generational wealth you know seven figures eight figures uh in a very short amount of time and and these people have been reaching out. They need the money managed. Um they're not looking to like, you know, ride this risk into the sunset. They want to kind of offload stuff and and and make sure that they're they're providing for their families and all. So, yeah, two big groups of clients that I've been working with uh o over the years. >> Do you find the crypto bros um what are they like as as clients? Are they uh macrobearish? >> No, I I I wouldn't say that. I'd say that um they have a real keen understanding of of markets. I'd say that because they're kind of they seem to be following stuff more. They're they're younger. They're around our age. Um even into like late 20s, I'll say. Um and these guys tend to be really plugged in like they're reading stuff. The one really interesting thing I'd say they all have in common as well is beyond the crypto idea is they have a real keen understanding of like the supply and demand of money and money operations. So, um I I I wouldn't name that like MMT specifically, but they seem to be more plugged into those ideas than your average investor. Um and maybe that's just because because supply and demand in the crypto world is kind of the whole thing, but for whatever reason, they seem to really be on that idea. >> What's what's MMP? >> MMP. Oh, >> MMC. MMT. >> Yeah. Yeah. Yeah. Yeah. >> Tony, you remember that? Is that is that dead now that idea or is that >> No, I don't think so. I I think if anything the last >> Have you looked at the >> that's what we're doing deficits. >> Yeah. Yeah. That's exactly what I was going to say, Jake. You know, if you look at the last like three years, like 2022 onwards, I mean, the only way you you got that entire thing right was by understanding the fiscal framework that we were working in. Um the idea that the Fed was going to raise rates, but that was also going to raise the amount of money that the Treasury kicked out to everybody through bond payments and interest payments. I mean, that was the saving grace of the economy through that whole period. Uh especially 2023. Um and you kind of needed to have a keen understanding of of that MMT framework in order to get that part right. Otherwise, otherwise you thought the yield curve was inverting and uh unemployment was shooting through the roof and you're going to get a recession, >> you know, and and exactly Jake, none of that happened because we had this huge fiscal spend. >> I confess that I believed all of that. So, please uh explain to us what has happened and what that means for the next 5 10 so on. >> Yeah. Okay. So, so that's actually really good because it kind of like fits in with the 4Fs kind of framework that I've been developing. Right? So, before I get into that, I'm just going to touch on the 4F's big picture idea and then we can dive into what that fiscal part means. Right? So, uh 4F uh stands for uh fiscal dominance, financial repression, passive flows, and fiat money. Okay? And um all of these things have existed on their own through history um in the US, outside of the US. Um but we're living through a really really interesting time where those four things are coming together at the same time right now. And that's never happened. We've never had those four things together at once. And what's unique about that in my opinion is it sets up like a foundation from which a post scarcity economy can bloom. Right? So host scarcity is a really fancy way of saying like an AI economy. Like if you're going to have uh an economy that was predominantly run by machines with machines, machine labor, um you would need a very specific kind of a springboard from which you could make that work. And my opinion is that 4Fs is that springboard economy. That's what we're in right now. >> Um >> can you unpack can you unpack each one of those just like >> Oh yeah. Yeah, definitely. Yeah. Yeah. I'd love to do that. So it's not quite like industrial capitalism. It's not quite AI machine economy. We're kind of right in the middle. This is what the transition from one to the other would look like because it's not a light switch. Like you're going to sort of slowly gradate your way through that. So um the first one fiscal dominance speaks exactly to uh uh Toby your your question right about what happens with this fiscal idea and where are we going? So, um, if you look at where we are right now, government spending in the US, federal government spending is up just shy of 25% of GDP. Okay? Now, if you look historically, and I'm talking all the way back, 25% of GDP is where you got to at peak government spending in prior recessions, prior crises. Um, apart from COVID, let's just do XCOV and you look at the whole way back, 25% is where you you're peeking out in government spending right now as well. >> Yeah. Yeah. That that's everything like the worst of the worst. You got to 25. That's our that's our normal right now. We're at 25% right now and there's like this is just the normal operating space of the of the economy. So um what that means is that um uh this huge amount of government spending is creating what's called a fiscal dominance. Okay? And that's where the needs of the treasury supersede the needs of the central bank. The central bank is kind of powerless. It can't really do too much uh about the Treasury. Um it becomes almost subservient to the Treasury. And we've seen this before um like in World War at the end of World War II um and sorry at the throughout World War II and then at towards the end of World War II you had the Fed at the time was specifically keeping rates low to help the Treasury pay for the war and they they did that as an explicit agreement. Okay. And then we had the Treasury Fed accord and they decided to make the Fed independent again. Um, and that's kind of the idea of central banking as we know it today stems from that 1951 agreement that the Fed is independent and gets to call its own shots. Um, what we have now is kind of a situation where no matter what the Fed does, in my opinion, they can't really change the course of the economy, right? Um, and so the example for that is I'll go back to the 2022 2023 example. They raise rates by by 5% in a year. you're supposed to be um restricting economic growth and the opposite happens, right? And u back in 19 back in the World War II, this was like a cooperated agreement. This is just kind of fiscal dominance almost by accident. Like I don't think any of this was planned where they raised interest rates and they caused the Treasury to start paying out a whole bunch of money which saved the economy. Um but even though it's kind of like emergent, it's still the case, right? We're still dealing with it. And I as time has progressed since then, I get the feeling and the sense that the Fed is kind of waking up to what's happening and what they've done and how their policy choices may be constrained. So, do you mean they're constrained in the sense that >> if they put rates up, you probably tip the federal government into I mean, I don't know if it can go into bankruptcy, but they're going to struggle to make the interest payments if the interest rates are too high because there's so much. >> No, the federal government can just print money however much money it wants. There's no cap to it. And this is where the fiat component comes in, right? So if we were dealing with a federal government pre-1971, right, when Nixon closes the gold window, um before then the federal government all that all the treasury had to be backed by gold, right? And um that meant that you could not print too much money because you had a very real um and and and almost instantaneous like inflation risk if you were to do if you were to print a huge amount of money back then. 1971 comes and now you're dealing with fiat and the government no longer has a backing to its currency. It's just the full faith and trust of the treasury, right? That means that your only constraint to print money is uh is uh the use of resources like inflation. So, um, right now you, if you were to print a huge amount of of money, it's really about can the economy absorb that money and put it into productive uses as opposed to is there some some gold backing or something else that's backing the currency that's going to give you that signal that that inflation is is running too hot or too cold for that matter. Okay, >> keep going. I'm I'm I'm I I >> want to know how it ends. >> I accept the proposition as a as it is, but I I don't I don't fully understand it. Keep going. So, we discussed fiscal dominance, right? This is >> so so so fiscal dominance. Okay. So, um so you have this idea that that the government can keep spending and will keep spending, right? Government spending has been growing by about five and a half% per year since like 1985 and pretty much on trend right now and there's nothing that really stops that. A lot of that is just automatic spending and a lot of that is just congressional spending. There's not a lot to be done with executive orders that can change that. Um and so you're on this kind of trajectory where that's that's just how it works, right? And and your your government is going to be spending about that much money growing at five and a half percent per year. Okay. Um, now if you uh now now switching gears to talk a little bit about the financial repression part, right? And I think this might also help answer your question, Tobias. We'll kind of work our way to the fiat part of it at the end, but I think this may help kind of um um illuminate that point. So um looking at the financial repression aspect of things, right? So financial repression is where the government steps in and actively intervenes in the market. Okay? Uh specifically the bond market. Um, but it also can can be, you know, related in stocks. But most of the time when you're talking financial repression, it's about putting your thumb on the scales of of of interest rates. Um, and specifically financial repression means that you trying to set your your risk-free rate, your benchmark rate below the rate of inflation or growth up here, right? Um, and what you're trying to do there is you're trying to artificially, you know, in quotes, keep rates low while growth and inflation is up here so you can inflate away inflate away the value of your debt. Right? Now, I don't think you actually need to do that, right? Or sorry, I should say that when would this apply? Why would you do this idea? Right? You would do financial repression if you are a policy maker and you thought that you had too much debt, right? If you think that you have too much debt, then you need to uh inflate away inflate away the nominal value of that debt, right? So that your economy can keep growing. So the way that you would do that is you would find somebody to own all your debt or buy all your debt so you can keep rates low and you want the economy to be running up here so that um uh so that that that that growth differential just take basically grows that you grow your way out of all that debt. Okay. >> Yeah. Yeah, if you got a killer hangover coming, you you want to go ahead and hit that hit that crackpipe so you don't get so you don't get a hangover, right? That's just >> that's one way of putting it, Jake. Sure. Yeah. I mean, to to each their own, right? Um so, um so yeah, so so that's the idea there is is that's that's kind of the idea that that's kind of been put out there uh currently is that you have this kind of um big worry or this caution about the amount of debt. Now, I'm of the opinion that it doesn't matter. That the amount of debt that we have is totally fine. And because the government can print as much money as it needs to service the debt, there's no real such thing as having too much debt, right? Um the total amount of the government deficit is just all the money that is sitting in everybody's wallets, right? And if you are to eliminate the deficit completely, um that means specifically that you're taking money out of people's wallets to give it back to government and then there's no money. Like the deficit is just the grand total of all the money that's ever been printed. Okay. >> The debt. >> Uh yeah. Yeah. The the the total amount of the total deficit and the debt. Yeah. So if you were to remove all the government debt, right? That's all the money that's sitting out there in the public's hands. Then there's there's no money, right? So um you need that. That that's just a running total of all the money that's ever been printed. Okay. So um if you are the opinion like if you went to school before 1971, you went to university, you went to University of Chicago or Yale or Harvard or whatever, wherever these policy makers went to school and your professors uh certainly went to school before that time, you would have grown up with the idea of the economy operating on a gold standard where you had these constraints to money printing. That means that you would also have a constraint to the amount of debt that you could have. So you would necessarily if that's how your framework was operating, you would necessarily think that you had a deficit problem right now. But because we we're no longer under a gold standard, we don't actually have that problem. But the policy makers think that we do. Okay? Therefore, the solution is financial repression. And that's what we're getting right now. Okay? you're having government intervening in different parts of markets in order to try and keep interest rates uh uh um not not necessarily lower but stop them from rising. >> How are they intervening? What what does the intervention look like? >> Uh so there's a couple different ways that you could do that. Most of the time when you hear about financial repression, people automatically think yield curve control, right? And that's something where the Federal Reserve or a central bank would step in and start actively buying the government's debt. All right? To try to keep rates lower, okay? Um that's not happening. Okay? That that that's just uh that that that's not happening right now. Okay? So, just to be clear, that's not how this part works. Um one way that that is looking like this is happening is through stable coins, right? So if you if you have a growing uh body of stable coins out there, right, and you you say that all these stable coins have to be backed by government debt, well then you've just created a buyer of government debt. Okay, so that's that's one really big way. A second big thing is if you're going to expand uh bank lending, right? So if so, right now you have this thing called the supplementary leverage ratio. uh right now actually they're they're they're kind of debating and and it's in the comments period of of how are we going to remove the supplementary leverage ratio. This is one of the things like you know you hear a lot about um the oval office and the Fed kind of battling these days. This is one thing that everybody kind of agrees on which is that we have this thing called the supplementary leverage ratio that was put onto banks in the aftermath of the global financial crisis and that's when everybody was really mad about how much the banks lent out. So they kind of created this new thing to stop them from lending out as they were doing before. Well, it turns out that putting that on really did hamper the bank's abilities to lend and maybe that's not such a great idea anymore. And so the discussion now is how do we remove this and to what degree do we remove this? And uh Bessent was actually even on TV in April at some point saying he called it like a corset around around the the banks. And so the idea is that this thing should be removed. And back of the envelope math suggests that if you were to remove it, you could uh potentially open up uh or increase bank lending by something like 600 to 700 billion, right? Um that would require a whole bunch of of uh government debt to to back the reserves of the banks to let that part happen. Okay. So So there's there's another kind of pot of money that you could you could dump into treasuries right there. So the stable coins are like an increase in the money supply that doesn't get counted. >> Um, no. No. Okay. So, so, so stable coins are not actual dollars. They're just using they would be using existing uh treasuries or potentially buying treasuries from primary dealers to to to back the stable coins. They're not dollars. Stable coins are not dollars. >> Okay. Yeah, >> they're one for one with dollars. >> They trade like dollars, but they're not dollars. >> Okay. >> Right. Like, yeah. Like, for example, the stable coin. So, so the treasuries that are back in the stable coins, these treasuries all have interest rates associated with them. The stable coin holders don't get any of that, right? So, so it's not it's not it's not a one for one. They're meant to represent dollars. They're meant to to to trade at the level of a dollar, but they are not dollars. They are something new and different. So stable coin holders don't get the benefit of the any of the interest on it. So the issuer of the stable coin collects the interest and you just get a unit that trades one for one with the dollar. >> Yeah, that's my I I I can't speak for every single stable coin out there. Like there's all sorts of stuff that's that's getting invented and and put to market right now, but but yeah, that's my understanding. >> Yeah, that sounds like a bank. >> Yeah. >> Yeah. >> Okay. We're we've got fiscal dominance, financial repression. >> And so the financial repression idea, the reason you would do that, what what's actually happening there is you're lowering volatility, right? Because if if you can get all these people to own all of these treasuries, right? You're creating effectively an arbitrage for the economy. Okay? If you can borrow down here and you can invest up here, so borrow down here, whatever the risk-free rate is. Let's say it's four and a quarter, right? and you can grow the economy up at 5%. Right? Then you have 75 basis points of effectively free money out there for the economy to go wild on. Okay? And the economy doesn't need much, right? Like 75 bits is a lot to that that's a lot of growth, right? Somebody's going to go out there and harvest that. All right? Um so basically um um uh lower that the purpose of financial repression in this context of the 4S is it lowers the volatility of the system. Okay. Um >> ar but aren't we haven't we been running these deficits that are what like what is it like 6% or something of GDP? Is that roughly right? And but we're only seeing growth rates I don't know whatever one two I'm saying I think isn't there some diminishing returns that you hit on the amount of debt and is it actually converting into real economic progress for us? I get it when you like maybe you're an early country and you're borrowing to build railroads and all this infrastructure that's going to last your economy for a hundred years. But if you're really just borrowing to pretty much pay for health care expenses, which is I think what the real, you know, mechanism looks like that do you actually get what you're paying for there or is that just I don't know. I feel like something's kind of breaking down eventually. >> Yeah, that that's a really good question. So to answer that question, I'll kind of back up and um um economic growth comes from one of two sources. Okay. Uh there's only two places that can create money. The first is the federal government. The second are banks, right? Uh and so um when the government creates money um through the collective profit equation, which is just basically a rearranging of GD of the GDP equation um that necessarily supports corporate profits, right? So when government money goes up, corporate profits go up. Okay? Um and it kind of is one for one. Um, you know, previously I mentioned government spending has been growing by 5 and a half% on average for 1980 since 1985. If you look at the average GDP growth nominal over the same period, it follows the exact same trajectory like like almost literally the exact same trend line of GDP growth uh over that time frame. And so that's because um that rate of money growth is what's powering GDP higher. Okay. Now you do also have the component of of growth that's coming from banks and credit credit expansion right so when people are lending um that's the thing that everybody like since 1980 um everybody has kind of um come to this idea that the the primary uh way that economies grow are through credit because that's because interest rates went down and we had a huge 40 50 year period of of credit growth. um that kind of started to taper off in the mid2010s and then that really hit a low in uh 2022 when interest rates came up. So this is that transition period where we're moving now from that credit driven economy towards a government-driven economy. Right? So it's like that bonds been the the baton's been passed. And so there's a lot of I I'd call it like the the the ideology right now is that governments don't know how to do anything. all the the the economic growth comes from comes from credit growth which is a product of banks. But I don't think that that's necessarily true. If you look at the long history of world affairs, you'll see that the highest rates of economic growth in in history through different countries have always been when governments have been in charge of of creating money, not banks. Um uh even in the US's own history, you look at the the coming out of the 1930s was a massive wave of growth. Um and that was primarily that was a lot to do with government support and government money printing. And that is because um of the collective profit equation. When governments are printing money, that means that that you are basically providing a huge safety net to the economy. You're you're printing money. That money gets put to work. Businesses use that. That that's that's that's literally profits for businesses. As banks see that if as that banks see that safety net develop, then they start to lend again. That's when that's when lending starts to pick up. That's kind of the theoretical aspect of how it works. And we're actually seeing that playing out now in real time, right? We had government kind of pick up the baton in 2023, 2024. Now, in 2025, we're finally starting to see banks lend again. like like literally just in the past few months, we're seeing um loans and leases kind of start to start to accelerate higher. Um and various if you look within loans and leases, all the various subcategories are starting to look the same way. They're all starting to move higher. Um so I'd say that this is actually very characteristic of uh a pattern for for economic growth that we're kind of living through in this like little mini microcosm of the last uh five years, let's say. >> I think this is fascinating. I don't fully I don't fully understand believe but I want I want you to keep on going because we're we're two points through. So let's >> let's get through the Fs and then I want to understand the implications for equities for value you know the value podcast. So, so, uh, the third F is passive flows. And this is a, this is a pretty new dynamic. Um, uh, so right now, depending on who you ask, somewhere around 45% of market activity is, um, kind of represented by flows into passive investment products, right? So, like you can think about the Vanguard B or uh, SPY or or some sort of big index product that follows one of the big indices. Okay? Um, and this is primarily kind of channeled into these products through retirement accounts. So, generally on like the third week of the month at some point, the uh the money from everybody's paychecks for the automatic retirement contributions go into the market um and they get uh put into these uh uh index tracking products. Okay. Most of that's coming from younger people um because the they're they're working. They're the ones who are saving. All right. It tends to be the older generations who who are still more active investors, let's say, versus passive investors. Um, but this is starting to have kind of uh um u strange new effects on the market, right? Uh if you just do this once or twice, it's not a big deal. Like like if you just take a whole bunch of money like and you just plug it into um buying these index products, that's fine. It's not a big deal. But if you continuously do this over and over and over again, you start to introduce a feedback effect in the market. And that's because when you do this, um, let's say you put $1 into the market, um, disproportionately more of that dollar is going into the largest index waitings versus the smallest index waitings. Okay? And if you do this over and over and over again, you're buying more and more and more of the larger companies and less and less and less of the smaller companies and you kind of start this bifurcation happening. And uh I think we can see this right now. I don't think that's too much of a stretch to imagine that that's happening to the MAG7 versus the S&P 493 right now. Um it's not just about the cash flows, right? Like yes, the Mag 7 have way higher cash flows than everybody else, but that's not the whole story. there is more to it. Um there is this very real plumbing effect that is that is that that's it passive effect. Um now I've got this idea that um this is not just about either plumbing or valuation. This is also kind of a cultural shift in how we're looking at companies and uh I I'm calling it the enterprise owned state. Right? So everybody's familiar with stateowned enterprise. you know in China for example the US postal service you know in Canada post office is a stateowned enterprise >> um this is different this is where those companies are getting so big and so ingrained into the apparatus of the US that there is no US without those companies like the US does not exist without those companies and their influence and what they do to not only conduit policy but also receive benefit from policy and also to support policy. They are one and the same as the US government. um that idea if you think about it um kind of turns those companies into what I'm calling quasi sovereign risk-free entities right so if you think about what like a sovereign bond is risk- free like a US government bond we call those risk-free bonds right this would be kind of like the idea of risk-free uh um uh companies and I don't mean to suggest that you should go out and and call these things low risk and pile them into your account just in case there's anybody who's you know thinking that's what I'm trying to suggest here but I'm thinking more of a conceptual basis like these things are like if we go back in time remember banks being too big to fail right this is like an economy that's too big to fail >> so would you say okay let's say we get to like five years from now and the revenues are nowhere near they need to be enough to justify all the spending that happened on AI Is the Fed going to like buy servers at, you know, inflated prices off of Microsoft or something to like prop up the Microsoft uh, you know, stateowned entity? >> Uh, no. I I don't think that I don't think you'll have to do that. Uh, I I I don't see a world in which in which um there I don't think we're spending enough on AI. Uh I I I don't think like like it's a huge um uh thing. You know, everywhere you look at you see the spending on AI, right? Um and and the comparisons being made to prior cycles. >> Is it going to look more than like uh the US government wanting 15% of sales of Nvidia's that are selling to China or or in taking uh you know Yeah. 10% of Intel? >> Yeah. So, I I do think that we're going to see more government intrusion into uh into these markets. I do think that that uh that's a that's a tax. When government's buying Intel, that's a tax. That's not supporting Intel. That that's buying Intel's profits and and keeping them for government. That that they become part shareholders, but because of the the government is a shareholder, that's the tax. That's just real. >> Yeah. Or Yeah. Yeah. Fair enough. We've done that with the GSC's too, right? With the um Fanny May and Freddy M. >> Yeah. Yeah. Yeah. >> Conservatorship and then the Feds bought the mortgage back securities. But sorry, that's we're we're getting a little bit off track. It's my fault. >> Yeah. Yeah. So, um so, you know, I'd use the example as well like if if you look at the Trump inauguration days, um um if you look up there who was up there with them, it was it was those mag seven companies. It wasn't like teachers, firefighters, you know, blueco collar workers. It was the CEOs of the world's largest comp world's largest public companies. Um, not even necessarily private company. You know, it wasn't the Koch brothers out there. It was the public companies. And that was a very real message, right? There's there's this um another thing, you know, this is like this is the stock market economy, right? like growing up investing uh you know we are all kind of in the same age bracket and and everything that we've been told about investing is there's a difference between the economy and the stock market but what if there isn't anymore right what if the amount of fiscal spending creates all this money that needs somewhere to go and it finds its way into the stock market where it's getting pumped up into these huge companies that become so huge and integrated into the into the US economic system that they literally can't go anywhere else and so you have to support them. And how would you support them? If you had to, you wouldn't you wouldn't go out and buy their servers. You would keep printing money and you would make those companies the very first stop of where that money goes. So the US government becomes their biggest client. Stuff like that, right? Look at Palunteer for example, right? >> Sounds rather >> dystopian. Yeah. Cancerous. I get that. >> I get that a lot. I don't think this is dystopian. I don't I don't see quality of life going down here. I don't I just I look around the world and I think everybody's living like like relatively the best lives that we've had in in decades. Um I don't think this is all to create some like control economy or some surveillance economy either. I mean there are aspects of that. You know data gets tracked etc. But I think quality of life's improving. Um but before we get too deep into implications let me back up and do the the the last F. Okay. The fiat part. I thought it was gonna be a different f word for all of us. >> I've got a fifth >> five today. >> Yeah, >> actually I might have a sixth one. >> Yeah. >> All right. So, um, so the last one is fiat money. Okay. So, uh, we've already kind of touched on this. In 1971, uh, Nixon closes the gold window and now the US government can in can expand and contract the money supply by the stroke of a pen or a keystroke more, you know, more aptly. Okay. um and that didn't exist before then, right? So, um that makes things a lot easier when you're dealing with periods of economic slowdown. If you look at the history of the US economy before 1971, you see it is absolutely riddled with periods of of inflation and deflation and sometimes in very rapid succession. Okay, that is really really hard for business owners and basically an economy to operate. If you have this kind of back and forth yo-yo effect. Yes. In you know that that that you know there's that website what happened in 1971 and everybody likes to say the world started you know falling apart when this happened. I think completely the opposite. Okay. If you look at post 1971, yes, inflation has been a one-way street going higher, but you have stepped massively away from the repeated frequency of kind of these massive economic recessions and depressions for that matter. All right. Um if not for 2020 um which itself was a very brief recession lasting what 2 months 3 months we would have been right now on the longest streak of US history without any recession from 2008 till present day right so but even counting that that 2020 recession we still have a massive win streak basically you could call it and I think that's a lot to do with fiat money because if you can expand the money supply when needed in when things are slowing down, you can help the economy. And again, that goes back to that collecti profit equation. >> Well, Ben, but wouldn't wouldn't you think though and what would be your counterargument to the idea that >> if a civilization can just print their way to permanent prosperity, we would have figured that out in the last 5,000 years. Um well we hadn't because I don't think that there was a good way of keep keeping track of that right um I I think this is the blockbuster 1971 was the blockbuster Netflix moment for for policymaking of currencies that was a real change in the way people thought about money supply where there where there's no tether and there won't be a tether right historically there was whenever we're dealing with these these periods of money big money printing The idea was always that we are going to return to to some sort of backing at some point. That was completely gone in in 1971. It took a while for it to kind of filter out and go through and and and kind of gain make its way into like the public common knowledge, but there was no intention to ever go back. And I think that's a big part of it. Um I do think that well in in a fiat money system you do still have the very real resource constraint where you you are still constrained by resources right um you can't just print your way into prosperity because you will run into the inflation boogeyman at some point who says you can't do it anymore right and then things will go very bad very quickly um but we've been able to manage it so far I think we've done a pretty good job of it Um, I don't see, you know, like we look at the deficit spending right now and I don't see that we have an inflation problem. Inflation's still been like trending lower. If you want to talk about government deficits being a problem, you know, let's look at Japan and look at like, you know, zero interest rates forever basically until recently. Um, the monetary operations under a fiat system are very different than under a gold system. They share the same terminology which gets everybody confused because you're talking about the you're using the same words to describe different concepts, right? Um like just to give a a good example of that, um under a gold standard, your interest rate on government debt is meant to stop you from taking gold out of the treasury. Right? So that's why when you're looking, you know, there's there's that very famous thing about um uh Nile Ferguson put it out there about um when uh spending on interest exceeds spending on defense uh something like that like like your government does cost. That's because that only works under a gold standard because under that standard, if if um uh um if your interest rates get too high, everybody's um you need to start um uh you need to have a lot of gold in your treasury in order to to make that happen and you don't have that much gold and the company or or and then the the the economy falls apart because everybody keeps trying to pull the gold out and it goes bust. But if there's nothing to pull out, right, if there's no gold to pull out, there's no gold backing under under any of this, then that whole analogy doesn't work anymore, right? The government interest rate is a policy rate. It's not meant to represent something um that you can pull out tangibly from the government to get your money back. So, that's a really big change. Okay. So, so, so, um, now the other thing too on that is like now we're talking about making currency programmable not just in this one way and I mean programmable in the sense of like you can expand it or contract it that's programmable and like in one way now we're talking about programming it in all sorts of different ways, right? So if you I I I read a lot of central bank literature stuff they put out there regularly their research and um you can see that they're talking about um different ways to make currency um well one one one thing they're talking about is um making it nonhoardable. Right? So, what if you had a dollar and after you spent that dollar, it could no longer be transferred? Okay, how would you do that? Well, you'd need something like a stable coin or some sort of contractbased crypto. And what if um after you or or what if you um had a dollar that was only available for six months and then it expired? Okay. So, why would you do something like that? Where would you use that idea? Well, if you were in a if you were in a big economic slowdown and the the economy obviously needed money, you as a government could provide that money to the economy, but you could put extra terms on it saying that, okay, we're going to print, you know, a 100red billion new space coins, but these space coins are going to expire in six months. And in doing that, you can now change the kind of runoff aspects of it, the follow on aspects of that being one of the big downsides about printing money every time you get into a recession is there's somebody on the other side of that hoarding it. And it kind of adds this huge inequality problem, right? Because all through history, when are the most number of millionaires and billionaires and possibly future trillionaires, when are these people created? When are these people minted? They're minted right after these massive crises because they're on the other side of receiving all that government money that's just been printed. So, what if one way to reduce that that issue of inequality was to make that currency that you just made non-hoable, non-transferable? >> So, you you buy a good with this money and then the the the storekeeper has this dollar >> that's going to expire. What do they do? They go back to the government and they say, "I'm going to buy a dollars worth of whatever that you're going to give me in exchange for this thing." >> Yeah. Who takes the dollar and the like when there's 10 seconds left on it? >> You can buy a government bond with it or something like that, >> right? >> So, and this isn't this isn't pie in the sky stuff. This is re This is stuff that's actually coming out of of the world's central banks. Like, >> you don't think this is dystopian? A little bit. I don't think it's just I I think dystopian is letting wealth inequality keep going on the same pace it has. If you do that, then you're in real dystopian kind of territory, right? I think that um I think that right now the solutions to to some of the biggest problems that we're dealing with are found in the idea of moving towards like an AI economy uh using these new tools. I mean, it's worth a shot at least. I mean, we've tried all sorts of things and this inequality problem is not going away, right? There's I think we owe it to everybody to try something new. >> That expiration sounds like the worst part of the cantillian effect where it's like the person at the very front of the line gets to use it at full strength and then like pull the ladder up in the Yeah. No one else gets to use it at that point. Like that seems that seems worse. >> Yeah. Well, I mean like that that's that's that's the STEMI check, right? Those are the stim checks in 2022 that went out. That's the cantellian effect. Those things went out. They got printed. They got right into the hands of people and they put them to work, right? Um and then so so so the idea there is what can we do to kind of limit the um the wealth inequality aspects of that money. So so those are the four F ideas, right? So those those are the four big things that are that are coming together now at this point in time that make this point in time unique. Um, and I think that um, they make it extraordinarily difficult to have a recession. We might have these kind of like parts of like some like tepid slowdown parts, if you even want to call it that, but not really. Uh, consumers keep consuming because there's there's this money that's being printed over and over and over again. It's making its way into companies. We have a lid on interest rates. It's making its way into the market. And the whole reason that we can operate this way is because of a fiat money system, not a goldback system. >> I think those are fascinating ideas. Let me let me just give a shout out. We'll do veggies, then let's come back and talk about the implications of this. >> Sounds good. >> Uh Pedika Israel, what's up? Senator Domingo, what's up? Winter Park, Florida. Warren Buffett's always in the house down in Winter Park lose Delaware. Tampa, Tallahassee. Brandon, Mississippi, what's up? Chabiza, don't know if I'm saying that right. Kennesaw, Georgia. Bethesda, Denver. Maxin, Valpare, what's up? Jupiter, Florida. Goththingberg, Sweden. Just jumped a bit. Hold on. Mina, streets of Gerard's Cross, what's up? Seraton, London, Suburbia. Jupiter, Florida. You've already won, Sam. Always say that. Madira Island, Portugal, Wilshshire, England. Boyisey, Tmacula. That's a good place, too. >> It's a good spread. Uh, thanks for the veggies, Slav. Ellenov tipped us. Uh, let me just scan down here a little bit. Okay. Uh, JT, do you have some veggies for this week? >> I do. Let's Let's do it. >> Let's hit the veggies. Mark it 11:16. We're a little bit late today. Oh, 16 minutes past the hour. >> All right. So you see a face in the clouds, a dragon in the wood grain, a Fibonacci signal in a candlestick chart. It's not really a hallucination. That's really just humanity. And what you're experiencing is something that researchers call periodolia. I believe that's how it said. And that's our brain's evolutionary knack for spotting patterns even when there's no real pattern to be found. And here's the mystery that I want to explore today. If this concept was meant to help us survive, why does it so often lead us into trouble? And we'll look to the humble pigeon for answers. So, little some fun pigeon facts that everyone was dying for. I know. Uh they have excellent color vision even beyond what humans can see. Uh they found that they can distinguish between different artistic styles like impressionist versus cubist paintings. Uh NASA before they sent humans into space were were training pigeons uh for potential space missions. Uh, and pigeons can remember human faces, even hold grudges. Uh, the studies have found that they can recognize individual people and will treat them differently based on past interactions, like whether someone fed them or shed them away. Uh, they have extraordinary ability to find their way home, of course, uh, you know, from hundreds hundreds of miles away, even if they were released in a place that that they'd never been before. Um, and they use a combination of the Earth's magnetic field, the position of the sun, and even these low frequency sounds that humans can't hear. And and they use all this to navigate. And during World War I and two, pigeons were used to carry crucial crucial messages uh across enemy lines and some even receiving military medals for bravery. And then of course uh oddly enough, uh Nikolai Tesla famously fell in love with a pigeon and reportedly said, "I love that pigeon as a man loves a woman and she loved me." So I I'll I'll leave that one where it goes. Uh so anyway, let's let's travel to a psychology lab and you know where we see people in white lab coats and they're training pigeons to peck at these screens. And at first the game is very simple like they have a Monae painting on the left key and a Picasso on the right. And these birds, you know, they're aren't just memorizing sets of images. They're actually generalizing patterns. And you could show them a Monae that they'd never seen before and they'd still get the classification correct. and and if you know if these pigeons had Bloomberg terminals, you know, they'd be like the original technical analysis uh analysts. Uh but then the experimenters up the ante. They introduce ambiguity. They start blurring the images. Maybe half a Monae mashed with a cubis, you know, fragments and it really turns into really a roar shack test. And oddly enough, the pigeons then double down. They they're the more distorted the image, the more confidently they're pecking. And the birds, they start seeing, you know, mones in in every smear of spilled ink basically. And and you know, they'll see a Picasso in a popcorn ceiling. Uh and if this sounds familiar, it's because uh you know, we humans also see patterns all the time where none exists. In our case, you know, the cost isn't just, you know, a mistime pec. It could be, you know, real dollars. And so, let's just imagine this kind of silly idea of a of a pigeon hedge fund manager. And, you know, he's he's trained on a very simple signal. Every time a little red triangle appears on the screen, it pecks the buy button and and voila, you know, the breadcrumbs of returns arrive on schedule every time. And you know, on a down day that's, you know, red, it buys and it gets its reward on the bounce. And after enough of this reinforcement, this association really starts to lock in. And but then things start to get a little bit messy. The triangles maybe get a little blurry or the red, you know, shifts to magenta. And maybe buying doesn't always lead to an immediate gain, but our little pigeon in his Armani suit, you know, just keeps pecking away. Uh, now why? It's because he remembers. He he remembers when the pecking worked and it it wants that dopamine hit of the breadcrumb again. Uh, but, you know, the environment changed and the the pigeon kind of didn't notice. And this is, you know, what data scientists might call overfitting. Uh, you know, a model is working well in historical data, but it collapses in the wild going forward. uh because it's also learned a lot of the noise along with the signal. So in investing we see overfitting all the time as as this like narrative addiction. You know the Uber for X, the next Amazon is XYZ, AI is the new electricity. You hear lots of different things. Uh we peck because it once worked or because we've seen others peck and win in that way. Um, and so let's just do like look at a real quick biological detour here where, you know, our brains evolved in these environments where false positives were very cheap and false negatives were fatal. So what does that mean? Like if you mistook the breeze for a predator, uh, you lost a moment of calm, but you lived to fight another day, no real harm done. But if it was the opposite and you thought that it was a gust of wind, but it was actually a lion, well, you became lunch and you didn't pass on as many copies of yourself. So, so we're built for overdetection of patterns. And in the jungle, you know, this wasn't evolutionarily adaptive, but now in in the modern world where there's a lot of sto stoastic chaos and zero sum competition, it's it's not so clear that that's good for us. So, we inherited this pattern recognition. Um, these story constructions, they're really they're calibrated for Savannah survival or we are, but but not really necessarily stock selection. So let's say, you know, we let's let's see if it's also not just visual, right? Like it's a lot of it is actually narrative patterns that we're looking at as well. So it's it's a little bit beyond the pigeons. Um so the pigeons weren't actually that dumb. They're just conditioned. And we do the exact same thing with our prior training that we get rewarded for. So every bull market has conditions a new class of investors to mistake luck for skill. Every meme stock cycle trains us to associate narrative and and virality with investment merit. Every era has its number go up technology. Um, and the market gives us this rewards for patterning matching until it doesn't. And then it can punish us until, you know, we're kind of like Twain's cat that won't sit on a c a cold stove either. U, so what do we do? Like throw up our hands, stop looking for patterns at all? Probably not. uh you know it could still be a very useful feature for the human OS and it's not like you can turn it off even if you wanted to. Um you know it goes when it's done well it actually goes by another name which is creativity. So perhaps we should try to use that creativity in the studio and not on stage. So what do I mean by that? In the studio you can generate patterns freely and AI is super helpful for this. Like it's incredible for helping you think through things on stage that is maybe in your portfolio. You should only act on signals that fit with rules that you wrote down in advance. Uh a little less ad living, a little less jazz. Um and and really, you know, so how do we do get less jazz? Ask yourself the base rate. You know, what happens most of the time for bets like this? If you don't know, you're improvising and and that's not really investing. Uh if you can't sketch the causal chain or thesis on the back of a napkin, it's likely that it's a story that might be leading you to trouble. Uh, you can run premortems and set trip wires, define in advance what would make you make this bet become signal versus noise. Uh, set price and time and thesis mile posts that you need to see in order to see if you're on track for your thesis. And when one of these trip wires hits, you don't negotiate with yourself. You just execute what your best played plans were. You don't talk yourself into the why you should change your course. Uh, sizing for a little bit of uncertainty. you know, smaller when something is potentially fragile, larger maybe when it's more robust, survive first and then optimize second like nature does. Uh, of course, you know, journal and keep score, time stamp hypothesis with, you know, your probabilities, brighter scores are amazing. Uh, red team the narrative, try to beat it up, you know, an AI is quite helpful at at arguing the bare case of something for you. Um, and and if it wasn't obvious, like basically this last minute is is all kind of a backdoor pitch to use journalytic. Everybody already knows that. But so, so to wrap this all up, you know, markets are these probabilistic jungles, but we carry this kind of stone age gear that's not that dissimilar from a pigeons, if we're being honest. And this mismatch explains why we overreact, why we chase heat, why we cling to stories and charts and gurus, and why we draw naively straight lines up and to the right. Uh, and maybe why the most successful investors often make it look very boring. Um, and that's I think there's some a clue in that and they don't need a story for every single tick in the market. Uh, so final words, be creative like an artist, verify like an engineer, and size like a bookie. >> Uh, brilliant. Good stuff. >> Thanks. Uh Ben, we've we've got about five minutes left, so we don't have a lot of time, but uh the the one question that came to my mind when the the thing that stands out to me, if we have this sort of unfettered money spending and we live in a world where resources still are, they have to be mined and things have to be manufactured and put together. Aren't we creating this uh massive inflation? And aren't we sort of seeing that in in lots of different respects? I think vegetables between June and July in the States were up 40% month over month, which is a which is a big jump. Meat's done something similar, 40% month over month. Those sort of things may not be showing up in CPI, but it's inflation that people are actually paying at home. got super high >> house prices relative to incomes. Isn't that sort of asset price inflation >> the consequence of all of this? >> The the house thing is is is is a little bit more to do with the supply of of of homes being built. Um but in terms of the general kind of CPI inflation story, I mean inflation has been coming down. I I think that's without a doubt. Um notwithstanding that you know vegetable prices may have been up 40% in the in the course of a month. Um, >> well, the rate of increase has been going down. We're never getting anything back. >> No, no, there's no deflation, but that's not the point. Deflation would be very, very bad. You don't want to live in a world where this goes in reverse. Um, >> I don't know about that so much, but yeah. Um, I kind of wish my dollar went further. When I went to the grocery store, >> when you buy a TV, you like deflation. when you buy a >> computer. The thing that you want to look out for here is that um the rate of government money spending is has a lot to do now with the amount of interest that the Treasury pays out. So even if the Treasury goes from four and a half to four and a quarter% as as you know the September cut is probably going to happen um that still means that the government is still going to be spend pushing out more money through the interest income channel or sorry the the interest payment channel to everybody else. And that's because if you look at the total composition of government debt, we went from a total, you know, weighted average coupon of about 1.89% at the end of 2020 up to just over 3% now. Um, what basically what we're doing there is we're replacing all of the low interest debt that we put out there 10 years ago in 2015 at like, you know, minimal rates. All of that is now getting um reissued now essentially at whatever the current rates are. Most of it's coming out of bills, which means it's going to be four and a half right now, and then after September, maybe four and a quarter. The idea there is that it's still dragging the the net interest costs for the government up. That's your new inflation rate. Um the the big difference is now the total amount of government debt is larger than GDP. So every 1% in increase in that in that coupon is 1% of GDP in terms of spending. So that's your new inflation rate. So I think that what's going to happen is CPI, whatever measure of inflation you want to use, is going to now gravitate towards whatever the weighted average coupon is of government debt. It has to mechanically in my opinion because the government, this is new money that the government is printing and sending out into the into the world, right? So that now forms that that's like the gravitational anchor now for inflation. So whatever that number is is what I think inflation will will kind of cling to. Um so I think that CPI is probably going to keep floating up higher until like three and three and a quarter maybe up three and a half into the end of the year possibly higher than that if we have some some tariff stuff that that happens right some some increase in cost from tariffs but that is kind of the new anchor point I believe. >> Um ju >> just before we run out of time we got about two minutes left. What are the implications for equities and for value? I mean, it sounds like this is just a continuation of what we've seen where there's no there's no mean reversion here. >> There is no mean reversion. There's only uh trend divergence, not convergence. Right? If you're going to keep the passive system going, uh this means that MAG7 equities are um in my opinion, these are are these these things just keep going higher. Uh market goes up and to the right. I'm not so sure about the rest of the S&P 493. Um I to me I I I don't know what that trade is. That trade is a lot harder in my opinion than owning the things that are going up and to the right. Um it's a pretty clean clear signal in my opinion. Um bonds I don't like them. Um there's, you know, if they were to turn up and go higher at some point, maybe I'd be interested, but not now. Um gold's been very interesting. I own a lot of gold in the portfolio. Um basically sticking to things that are that that that are working and proving themselves. Um, I don't I don't like mean reversion as a trade because in this environment, the 4s, it's very hard to tell with something is not working anymore if it's wrong or if it's just not ready yet. I'd rather stick with the things that I know are working and going up. >> Yeah, that's a it's a fascinating framework. I appreciate you uh coming in and outlining for us here today. Uh we are coming up on time, so please tell us uh how folks can get in contact with you or follow along with what you're doing. Yeah. So, uh, hop on my Twitter, Ben Kismchuck. Uh, um, K I Z E like Echo M like Mike Cu. Uh, or just type me into Google. I'm on the Wellington Altus website. You can get at me through there. >> He's a great follow on Twitter, folks. Uh, I really enjoy it. Uh, JT Journalyic, any other final words? >> No, just thanks Ben for coming on and, uh, sharing really interesting viewpoints. Appreciate it. >> Yeah, we'll have to have you back to uh, to air it out a little bit more. Uh, thanks folks. Uh, we'll be back. Uh, same bat time, same bat channel next week. We'll see everybody then.