Credit Freeze: The guest argues the U.S. is in a credit “polar vortex” for the bottom 40–50% of consumers, spreading to the middle class, with rate cuts unable to help subprime borrowers.
Financial System Risks: Systemic crises originate in financials, not tech; counterparty trust is eroding, funding is retrenching, and the next credit “cockroach” could appear within months.
Regional Banks: Persistent weakness in regional banks versus the S&P 500 highlights stress, with syndications tied to subprime and consumer exposures creating vulnerabilities.
Private Credit: Alternative asset managers like APO, OWL, ARES, BLK, and BX have supplanted banks in lending but lack a Fed backstop, representing a key fault line if funding freezes.
Banks & Liquidity: Large banks (JPM, BAC, C) retain Fed support for liquidity runs, while MS and GS became banks in 2008 precisely to gain that protection; illiquidity, not insolvency, is what kills financials.
AI Buildout: A multi-trillion AI data center expansion could strain power, capital, and labor, pushing cost inflation and causing electricity shortages that crowd out the real economy.
Gold: The surge in gold, with rare two-month spikes akin to 1979–82, reflects a safe-haven bid as traditional currencies (USD, JPY) fail to comfort, even if 1970s-style inflation is not the base case.
Path Forward: The guest favors manufacturing reshoring and energy infrastructure as job-rich, real-wealth drivers, arguing AI investment should be subordinated to grid and factory buildouts to stabilize the economy.
Transcript
Hello and welcome to the Stansbury Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and the Ferris Report, both published by Stanberry Research. And I'm Cory Mclaclin, editor of the Stanberry Daily Digest. Today we're talking with Ben Hunt of Epsilon Theory. Ben is a brilliant guy. We haven't talked to him in way too long. He has a totally different way of looking at the world for many investors. So, let's do it. Let's talk with Ben Hunt. Let's do it right now. All right, Ben Hunt, welcome back to the show. It's been a while. >> It's been too long, Dan. It's great to be back. Thanks for having me. >> Yeah. Um, you are especially someone I feel I need to check in with here in the latter part of 2025. Um, we've been through two tariff tantrums. April 8th, October 10th. Um, New York City elected a Democratic socialist mayor who says he wants free uh, you know, free everything. Um, and and other weird things which I'm sure you've kept better track of than me. Uh, I don't even know where to start. You're when I read what you write, it covers so much. I almost don't know where to begin with you. I feel like I should ask you what is it right now? What is consuming your mind today? >> What's consuming my mind right now today is not um not tariffs. I think we're very much past tariffs, right? It's not even the midterms and Mumani and the like. I think he's a uh a specific issue for New York City. Look, every once in a while you need a major American city to burn itself on the hot stove of socialism or communism as a as a cautionary tale. So that's all fine. What's concerning me very much today is that we are in the middle of I'm not even going to call it a credit freeze. I'm going to call it a credit polar vortex for you know we call them for the poors for subprime uh really which is and and that's spreading so it's spreading up to the middle class uh the canaries in the coal mine the precipitating events were the bankruptcies of triricolor the subprime auto lender and also first brands the auto parts uh supplier bad actions, bad all. So, so the the point being is with when those companies went out, what what everyone in Wall Street, everyone in the financial world did is they cut off the credit spigot to any companies like Tricolor or First Brands. All credit to, let's call it the the bottom 40% of the American economy has been shut off. So every every company that faces that bottom 40% is under extreme distress right now. We don't see it or feel it, but that's what's happening right now in the real economy is that credit has been just completely shut off. And credit is the oxygen to any economy. So this feels very much to me like Q4 of 2007 when autos rolled over, home activity at least rolled over coming after real financial crisis in the summer of 2007 around countrywide, you know, all the the uh mortgage back security originators and lenders. That's what really worries me right now, Dan. Uh because the Yes. And I've done a lot of work on AI and the the AI data center buildout and the like. That's getting a lot of the press and all the news for good reason. But what's really concerning me right now is the real economy, our K-shaped economy, where that bottom leg of the K is moving up and up and up. So credit is increasingly being cut off to middle class. Uh refinancings are being rejected. Credit's going up. I tell you the last thing, Dan, that really concerns me about this is that cutting interest rates by 50 basis points, 100 basis points, it doesn't it doesn't impact this, right? If you're if you've got a subprime credit card, you're paying the the maximum rate allowed by law. You're paying whatever that is, 24.99. It's not going down if the Fed cuts rates by 100 basis points. Credit's been shut off to the bottom half of the US economy. There's enormous distress here. And at the same time, you've got cost push inflationary pressures coming out of energy, labor, insurance. So, it's not tariffs. Tariffs aren't driving those cost push inflation issues. It's utility bills, insurance bills, food, which is energy. That's what's driving the inflation. At the same time, you've had credit cut off to about half of the American economy. That is what is concerning to me. >> Sounds like a big concern. 40% um with no access to credit. Um knowing what we know about developed economies. >> Yeah, exactly. >> As you say, it's oxygen. Um, and this reminds you of the fourth quarter of 2007. As I recall, some bad stuff happened in 2008. Um, you know, so maybe 2026. Sounds like you're not expecting 2026 to be a great year. >> Uh, I'm not I'm really not. Again, everyone's focused on tech and I get it, right? So the MAG 7 or whatever, I mean, Nvidia loans what 8% of the S&P 500. So I get it while we're >> focused on that. >> What I'm saying though is that this a financial crisis always happens in the financial sector, right? That's where systemic crisis happen. They don't happen out of tech. They happen out of financial sector. They happen out of the banks and the financial sector because illliquidity which happens when things go belly up. Illi liquidity is death for a financial. So this reminds me very much of you starting in August and September of 2007 when you had a couple of bare bare Sterns funds go out for their mortgage back securities. They were the canaries in the coal mine where funders of financial instruments pulled back enormously. Financials stopped working from August of 2007 onwards, right? It didn't wait until Bear Sterns going out in April of 2008 for financials to start really taking a leg down. And that's what I think is happening today. It's the financial system we've got to worry about. Credit is the oxygen for any economy. And we are seeing a a credit freeze in the bottom half of the US economy and that's going to spread. >> You know, I I actually saw this yesterday without having your eloquent description of it in my in my mind. I just looked at a chart of um KBWR, the regional bank ETF, RTY, Russell 2000, right? And um and a couple other things. And I compared it, of course, to to the S&P 500, but also the the equal weight S&P. >> Yep. >> Right. All the rest, in other words, besides the top 10 or whatever. Um and you know, all much weaker. Much weaker. you know, with the S&P within just call it 3% or so, three or four or whatever it is as we speak of a of an all-time high and the others are as much as double digits down um much weaker and of course the regional banks haven't made a new high in what it's it's been a couple years I think at least one year at least 2024 if not 2023 so so you can see that weakness like it's sort of the uh you know the Stan Drunken Miller inside of the stock market kind of view of that weakness 100% Dan. So, you know, I look a lot at the the alternative asset managers, right? We used to call them shadow banks. I guess we don't call them that anymore, but you know, they've they've, you know, it's the there will be blood, you know, uh reference. They've they've been drinking the milkshake of commercial banks for a long time. This is private credit. So the lending into the real economy has shifted from commercial banks into the alternative asset managers, the private credit funds, CLOS's, BDC's, all of that, right? And what always happens is that commercial banks, particularly the regional banks, play catchup. So, as much as the Apollo and the Blue Owls and the Aries and Black Rocks and Blackstones, as much as they've been, I think, stretching in their credit quality and covenants and all like that as they're putting money out there into the real economy, the regional banks are as bad or worse. They always are. They're always playing catch-up in this sort of respect. So it's not surprising to me for example when you saw thericolor go out and the first brands go out you know the people who were mostly on the hook there these were mostly syndicated loans and there's mostly a lot of the regionals and super regionals who were left holding the bag here. So it's Jamie Diamond, you know, talking about, you know, there's always these cockroaches. There's never just one. And it's not just that you're that it's the cockroach itself. You have to worry about the the management team that double pledges collateral or the like. It's the tenement house you're or the neighborhood you're all living in, right? that has a lot of cockroaches and everything else in it because that's how neighborhoods develop in financial world over time. This is this is how it always plays out and here we are again. >> Let's be a little more specific about this because it's true. you're you're actually you're you're describing just the nature of a of how systemic crises, you know, start in one area and spread >> and and um let's I I feel like we should sort of make that a little more concrete for our listeners. Um actually you did a reasonably good job there wi with with um you know it the the syndicated loans wind up in the regional banks and you know before you know it dozens of regional banks are are are having issues. >> Another example. >> Yeah. So, so Dan, the reason that that they're all financial institutions are will will ha will have issues from this whether they are infested with cockroaches or not, it doesn't matter, right? Because if you are if you are a funer, right? So funding takes lots of sources. One of the great strengths of the American financial system is that funding for commercial banks happens through deposits. Uh so there are two ways that a that a financial institution can fund itself right you can have deposits if you're a bank bank or you can borrow right you can issue securities to fund yourself or as a lot of these uh alternative asset managers have discovered you can buy acquire partner with insurance firms right to find funding through their premiums and and their issuance. So there there's nothing new under the sun. All financial institutions are trying to do is they're trying to find ways to fund themselves to have capital available that they can then lend out. And what's what always happens in these situations when something goes wrong, the Bear Sterns going belly up in August of 2007, these two big consumer-facing uh auto firms going under just a couple of months ago, is that all the funders, right? Whether it you are a pension fund who's giving money to this, whether you are a, you know, an insurance firm, you've got your funding arrangement with a alternative asset manager. Uh whether you're a a financial advisor uh and you know the CLLO manager comes to you say, "Hey, give us money." You're you're trying you step back. The problem always happens in the funding because these companies, they're they're like these financial companies, they're like sharks, right? They have to keep swimming. So is it that they're not keeping the loans on their books. That's not how a financial institution works. You find the company to lend to. You originate the loan. In 2007, it was mortgages, right? So you you find the the person who wants to borrow money from you. You lend them money and then you sell that loan. You securitize it. You put it off to another manager. You don't want to hold it on your books because you want to make more loans. So the the the way it always happens with finance companies is that they it starts with uh we're going to make these good loans and they're going to pay us a nice rate of return. We're going to hold them on the books. we're going to be this financial institution and you realize that the way to make money is not to keep the loan on your own books. It's to put it off the books, right? Get it get it off your balance sheet so you can make more loans and make more money. They become these transaction machines. And that all works out great until the real world intervenes where, oh, a couple of these loans start to go bad. So the funders, the people who are giving you money to keep going, they say, hang on a second. And it doesn't matter if you haven't if you haven't made bad loans. It doesn't matter if you have cockroaches or not in the portfolio you've sold. The fun doesn't know this. The fun is just saying, "You know what? I've seen this movie before. I'm full up with this stuff. You trust no one." That's what happened in ' 07 and '08. You didn't trust the book. And so, you stop funding it. And and and you're you're defenseless if you're a if you're a financial company. can't come out and say if you if you come out and say uh here's transparency on our book, you'll get hammered for that because there will be something that can be arguably wrong in your book. If you don't give transparency, if you say, "Oh, no, no, everything's fine. Believe me, trust me." Nobody's going to trust you. So this this is counterparty risk that always leads to people not putting money into the system. That's what happened in ' 07. That's what happened in '08. You didn't trust your counterparty. And that same thing is happening today. You see it in repo rates. You see it in the what what and you're just getting glimmers of this right now. I think we've got a few more months before the next shoe drops from the next company that can't pay its debt because it faces this consumer economy that isn't spending, is under incredible stress. We're a couple of months off from the next shoe dropping. But right now, what I'm telling you, I'm seeing out there is the players on Wall Street are saying, "I don't trust And when trust fails, it it goes bad really fast throughout the entire financial system. >> I'm glad you I'm glad we went right to hear this topic because and I saw you were writing about this and and tweeting about it and whatnot and because the crisis, right, it's always in credit, right? It's it's always that's >> always >> that's what it is. >> Always. story. >> Um, what do you make of, and this happened relatively under the radar to most casual people, this recent injection from the Fed, $125 billion um into the market? I mean, is you said we're seeing glimmer, you know, glim cracks here and there. Um, what do you make of that? I'm curious for your take on that part. So financial institutions can be insolvent forever. meaning, you know, Bank of America and we all saw these charts when we're having the runs on First Republic and Silicon Valley Bank and the stuff and, you know, and a lot of this was was all of this honestly was kind of silliness saying that, oh, Bank of America is insolvent because their their big holdings of treasuries were underwater, right? So what? So what right you can a financial institution can be ins you know technically insolvent these treasuries we hold you know they're they're trading below par so you know you can put whatever chart you want up on it doesn't matter right a financial institution can be insolvent forever they can't be illquid >> for a second >> Hank Greenberg I'll never forget it I'll never forget it he said we're not insolvent were illquid and that's that's it. And I thought, what's the at that moment? What is the difference really? You know, >> well, and and for a financial institution, the moment you're illquid, you're done. And and that's exactly what happened with Bear Sterns. >> And it is a moment, isn't it? It's a moment. You literally come to work the next day, you pick up the phone or whatever, get and and they say, "No, it's done. We're done. >> It's done." That's exactly right. So this this and this so Beer Sterns is the perfect example of this. I mean, I was So, the way that Bear Sterns funds itself, remember I'm talking about how do you how do you get the capital to lend out to people, the way that Bear Sterns funded itself was from mostly deposits from its hedge fund clients. So, they ran so all of the big investment called a prime brokerage. So, they don't have retail clients. They don't have, you know, a savings account. what you do if you're a a hedge fund. And I Bear Sterns was my prime broker for my for my hedge fund. I loved Bear Sterns. Bear Sterns was great. I loved those guys. And we had a lot of money on deposit with them because they were our prime broker. Now, when you start worrying about the the book, the book of loans that Bear Sterns had on their on their book, you can't wait to be the last one out the door. And so that there was a run on the bank at Bear Sterns and the the run on the bank was hedge funds like me saying, "Sorry guys, I love you, but I'm out. I'm out." So we pulled our money from Bear Sterns. I you know, for you know, I saw this coming and was able to get out early before you had to. But this is what this is what a run on the bank looks like. Sometimes a run on the bank looks like it did with Silicon Valley Bank or First Republic where it's ordinary depositors pulling their accounts. Sometimes it's like Bear Sterns where you fund yourself through hedge funds and the hedge funds pull their money and you're done. When that happens, it's over. Now, to your point, Corey, the way you stop a run on the bank is like, you know, it's the one of it's like the old movies, right, where you you have to get new money that comes in in just a dump truck full of new money so that nobody has to worry about getting their money out. And that's what the Fed does, right? So the Fed says, "All right, your deposits are safe." Bear Sterns wasn't safe because the Fed wasn't the back stop for Bear Sterns, right? Because Bear Sterns wasn't a commercial bank. By the way, this is why Morgan Stanley and Goldman Sachs became commercial banks in October of 2008 so that they could have the backs stop of the Federal Reserve. So when you're talking Corey about putting money, the way that that the the reason that the Fed makes money capital available is to prop up and alleviate any funding concerns for commercial banks. That's why they do it. But here's who doesn't have that backs stop today. In 2007 and 2008 it was Bear Sterns, Morgan Stanley, Goldman Sachs, they did not have that backs stop. Lehman, no backs stop from the Fed. Today the groups that doesn't have the backs stop is these alternative asset managers. So the ones without the back stop >> proliferated like crazy. >> They've been drinking the milkshake. They're the ones that have making making all the loans into the real economy. And look, it's not like this is, >> let me be really clear, right? I think that what like Apollo did is phenomenal. And I think Mark Rowan's incredibly smart. He's incredibly right when he says, "Look, here's the opportunity. Here's the business opportunity. commercial banks like JP Morgan Chase and BFA and City, they're not making loans into the real economy. Okay, we can do that. And they did. It's a great business. That's why Jamie Diamond is saying he's been complaining for years. We're highly regulated. We all have these capital constraints. The alternative asset managers, they can come in and take this business. And so there's this back and forth, right? It's it's it's competition. That's wonderful. But where Jamie Diamond is right is that the alternative asset managers are not regulated like the commercial banks. On the flip side, they also don't have the backs stop that the commercial banks do. So you're right, Corey, about what that the Fed is there. The Fed exists to provide liquidity to the to the banking system. The risk today honestly is that just like in ' 07 and '08 there were major players in the financial system that did not have a Fed backs stop because they weren't banks. They weren't commercial banks. Bear Sterns, Lehman, Morgan Stanley, Goldman Sachs. Today you've got that same issue with the alternative asset managers. They don't have that Fed back stop. So big picture, that's that's kind of where I see these fault lines developing. Corey, the Fed will always support the banks. Always. And they should, right? That's what they're there for. That's the reason we have a Federal Reserve, honestly. I mean, it's less interest rates than it is prevent runs on the freaking banks. Y >> from time immemorial, it's the currency on one side and the banks and the bond market on the other. >> And you got it. >> And guess which one always has to give? Guess which one is always sacrificed for the other, right? As you're as you're pointing out. >> Correct. which is not which is not to say, you know, I'm not I'm not one of these sort of dollar doomsday guys, but um you know, certainly for for us in America, we can see that we can see the weakness. Certainly weak versus gold. >> We we can Dan, so I'm glad you brought this up, right? So, so historically and I think still the US currency and you're right, it's always the currency that gives in these situations, but the US always been kind of the the best house in a bad neighborhood. Again, it's the the issue of, you know, well, you know, Exactly. It's not it's not just that we all have cockroaches, right? Because we live in a cockroachinfested neighborhood. It's kind of where we are now. Right. Right. Right. Now, it feels maybe a little different to me today. Uh well, different in this sense. I I I mean, when you look at what's happening in Japan, you you don't get any you don't get any um warm and fuzzies there for sure. Uh you don't get any warm and fuzzies really when you look at Germany. It's it's look this is why gold's done so well. It is. It's why gold's done so well. And because the yen's not a safe haven, the dollar sure not a safe haven. So you look to something like gold. After I was looking at those charts, um I just went in Bloomberg and got the daily um gold prices and the the dailies start I think in 1975 >> and I wanted I wanted daily up to now because I did these rolling two-month performances from then to the present because I I and I said this at our conference a couple weeks ago in Vegas. I was like, if you want something to worry about, gold going up 30% in two months, not normal. And I didn't really know it when I said it. Okay. >> So, rolling two-month periods since January 1975, 74 times, 30% or more in a rolling two months. >> Is that right? >> Yeah. Listen to this, though. This year, the ones that ended on um October the 16th and October the 20th, that's two. the other 72 all 72 of them between I forget the months 79 and 82 1979 1982 right when people were terrified people were terrified at that time gold was like you know people didn't care like what the performance they they were just say buy me gold buy me you know it was a frenzy and that was like around the peak of the biggest you know inflationary certain the moni modern inflationary crisis in our history. And I'm thinking, wow, that's that's the vibe right now. >> Yeah, >> it's it's wild, right? >> Yeah. Really wild. I think like wilder than I'm seeing people make out of it. Like I'm not seeing anybody freaking out. Like you can hear I'm semifaking out because I saw what the data showed me. You know, the data showed me. Oh, this is when the world is melting down. Just so you know, Dan, this is that's what this means. And I think it's like it's like it's discounting I feel as though it's not discounting, you know, out andout inflation, but an inflationary response to a deflationary, you know, debt blow up or something like that. What do what do you what how does that sound to you? >> Well, it feels it feels a couple things to me. One, it it I think there's a slower fuse here, honestly. Right. And I also think that if if we continue to have this credit freeze in the real economy, again, starting with the the subprime spreading up now through the rest of the consumer economy, you know, I I that's there's no there's it seems to me it's very difficult to get out of a recession in that in that scenario. Very difficult. It's very difficult for me to see how we get out of a a real financial crisis because of the overextending of lending just just like we've been talking about. Right. I also think that there are significant debt issues. Obviously, we're aware of them. I also think that we've got significant I say cost push inflation that happens if we continue with this AI data center buildout. I think all of that I also think though that when your economy goes in the crapper in inflation's not inflation's not really happening right. So, so you know, oil prices ain't going up. >> No. >> You know, right. >> Yeah. Yeah. >> So, I I don't get I honestly don't get so worked up because I don't I don't see the sort of 7982. >> No, it's not that. >> Supply inflation. It's not that, right? >> No, >> it's not that. It's something different. It's not >> a vagger sort of rhyming in the data that I was talking about. Just it's a vagger sort of rhyme. crisis, you know, big crisis and now the action. I didn't mean to suggest that because >> No, no, no, no. And I didn't take it that way, but you asked me what I think. I It's like it's there there there's a rhyme here, but I think the the confluence of issues we've got to deal with are pretty different from the 7982 period. >> Yeah. Yeah. We didn't just um you know, cut the last tie of gold in the dollar. So, it's a little different, right? But this is the all the things you're talking about since I asked you what's on your mind. Um this is what you get in a world of you know that's run by that that runs on debt and frankly you know fiat right when when you get fiat that's you know debt becomes more widely used and avail it's just the way of things. It's this happens >> the way of things. >> Exactly right. >> Yeah. >> Exactly right. And and it it makes me wonder, you know, we we um we go through these things periodically and on the other side of it, there is always I I dare say a brave new world. You know, there's there's always um thing things get seem to get a little more twisted, right? And what you described today, you sort of made the common refrain of of the um you know the wealth gap. You put it in in more stark terms for this moment, didn't you? Because you said they're they're cut off. The bottom is cut off from from borrowing. They you know, they're just >> So, um you know, I um gosh, maybe I shouldn't have spoken to you on my birthday, Ben. Maybe I should have waited till after the birthday to do this one. But but it just it it it you know I project past you know whatever it is 2026 or seven or eight or nine or whenever all this >> um comes to a head and then resolves in whatever way it is. Um I wonder because you know before before the great financial crisis um came to a head in 2008 um for example just one data point you know that we all can sort of that we all get you know the Fed's balance sheet was much smaller. Yeah. >> Right. It was it was it was not this multi-trillion dollar thing. And now and then and and mortgage back security, they own mortgage back securities, you know, tons of them in an environment where house prices are just out of reach of that bottom half >> and a lot and a lot into the middle. Frankly, they're out of the reach of a lot of people right now. >> Well, they are. But Danny, you know, let me let me So, I I know I've kind of brought us down, but let me try to to to paint a a picture of where where I think it's a long putt. It's it's a it's a narrow path, whatever metaphor you want to use. But I but I think there is a way forward. And I'll point out a couple things. One, mortgage back securities going in 2008, that was a $10 trillion asset class, right? So just the sheer size of this is and look the private credit CLOS's BDC's all this stuff. I mean it's big don't get me wrong but it's not a10 trillion dollar global asset class. So, um, I'm I'm hopeful that there are there's a deflation of the bubble that can happen without the bubble blowing up. Now, that means assigning losses. That means, you know, it'll be it'll be unpleasant but not catastrophic. where what I'm hopeful is that we can have some some pricks of the bubble let let air out sign losses and like won't be fun but it won't be this sort of catastrophic disaster. What I'm also hopeful for is that I actually believe very much in I'll say two aspects of this administration's policies. One is reshoring of manufacturing in the United States and the other is energy generation, energy production. If the difficult thing, right, is that right now we're putting all of our capital towards AI data centers which are going to soop up all the energy generation we build and more. Uh, and they're sapping up all the capital that otherwise you'd be using for the manufacturing, reshoring the like. Why do I think the manufacturing resuring is so important? Because that's jobs. When we talk about a job boom, it's not going to come from the AI data centers, right? So, generative AI, it's a it's a job killer, if not I mean, at best, it's like net neutral on jobs. >> It's also real wealth, isn't it, Ben? >> It's it's real wealth. >> Yes. >> It's not trading. It's not, you know, George Gilder talks about the hypertrophy of finance and we've all you've talked about the financialization that we are living through. Yep. >> Uh >> 100%. Dan, I want >> energy generation, manufacturing, reshoring, it's it's it's it's real. It's jobs. It's human, right? And it's it's it's the issue of course is how do we get from here to there? It is the next couple of years where I'm really concerned we're going to devote our capital, our energy to the AI data centers that don't have a payoff in terms of the real as you're as you're describing Dan. I think what we need right now is or the thing that gets us through and this is why it's such a long putt is really good leadership which is in you know really short supply right now to be honest. So, so I I think it's a long putt, but I but I think the way out of this is manufacturing resurgence domestic in the US together with massive energy production which makes it all possible. So, that's what I'd like to see. The problem is we've got capital going, I think, into less productive uh modes and we've got to deal with capital not going to the real economy and the overextension of credit that we've had over the last 15 years. Long putt, but that's where I hope to come out of it, Dan. Right. It's it's getting from here to there over the next three years. Can we get to that point where we've got real energy generation here in the United States and a manufacturing resurgence? >> You brought me back up. >> Did I? I'm not so sure. I'm not so sure I did, but uh but I but but I >> Well, no, that was more that was Yeah, I would think even if we had some sort of um not blueprint, but like a road map that we're headed in the right direction in terms of that energy capacity and generation like even that would I think satisfy some of this fear out there. >> I I do too. It would be fantastic, Corey. And the again the problem is the AI blueprint that you know the effective altruist the Sam Alman's of the world are are are pushing for. I mean the numbers are just are just ridiculous and staggering. Uh you know we're talking about three4 trillion dollars spent on AI data centers in the United States over the next couple of years. is. And when you look at the energy requirements of that, the electricity requirements of that, you can't get from here to there without real shortages for the rest of the economy. You just can't get there. We're talking about by 2028 using a thousand terowatt hours for data centers, my friends. That's that's freaking crazy. That is nuts. That's nuts. I mean, in 2024, I'm thinking, you know, our total the entire economy used about 4,000, you know, a little over 4,000 terowatt hours. The entire economy, and I don't care how many, you know, gas turbines and gas lines you build right next to your data center in Louisiana or whatever Meta is doing. You know, where are you going to get these these turbines? you know, CAT and and you know, gee, they can't make enough of these. So there there's no way to get from here to there if we're going to go forward with 4 trillion dollars on AI data centers over the next three years and a thousand terowatts of electrical consumption in 2028. We're screwed if that happens or the rest of the economy is screwed. What we need is I'll call it not to not an AI backlash but we need call it AI subordination to the blueprint Corey that works which is manufacturing reshoring and yes you know build out the the energy infrastructure as much you can but don't just push it all then into AI data centers it's nuts it's crazy >> right yeah the energy grid needed upgrade ating before and now I mean now now it's I mean yeah I just looked up something I wrote like a couple months ago on like AI's power problem just to look up this stat because you what what you were running off reminded me of it just for people so they can understand too it's uh like the environmental and energy study institute said US data centers could require as much as a 130 gawatts of power every year by 2030 and then that day I was looking I was like that's okay let me I'm not like you know proficient and gigawatt and whatever else. But >> yeah, >> 114 million homes for a year. That's the equivalent. >> Yeah. >> And there's 148 there's 150 million housing units in the entire country. >> Like it's >> right. We're dropping a new country on our country. That's right. >> Yeah. I mean, we're talking, you know, rolling brownouts so we can keep, you know, the AI data centers going. Ed, electricity is one of those things. Capital shortages is another one. Labor shortages is another one that drives what I'm describing as cost push inflation. And it's so like I say it's not the tariffs but when when your input for everything you do which is electricity which is labor when when you've got shortage is there inflate costs are going up and either you as a small medium business you either pass those along or you go under. Those are your options. because we're looking at, you know, in the next couple years a couple of hundred a couple hundred terowatt hours shortage. It's got to come from somewhere, right? We can either allocate it to the data centers or we can allocate it to the real economy. And if we allocate to the data centers, yeah, all these problems that we're describing just about the the K-shaped economy, they all just got a lot worse. >> I'm up. Sorry to bring you down again, Dan. No, no, no, no. We We've got to we got to have we've got to have a we've got to have a push back against the AI data center buildout without resorting into political populism without ending up with, you know, >> right? Yeah. And you're seeing that already, right, with the >> President Manni. Yeah. >> Yeah. We're seeing the political blowback a bit already. I think just starting. >> We are. It is just starting, but we've also got, you know, putting in poker terms, the guys pushing for the AI data center buildout, they've got a big stack, >> right? So, it's, you know, Larry Ellison and Sam Alman and we know the crew. >> Yeah. They've uh they've got they've got a big stack in poker terms and they've got a lot of represent a lot of let's say influence in this White House. >> Yeah. And unlike unlike the fiber buildout of the dot era, the companies doing the the big companies doing the buildout gushfree cash flow. They've used their balance sheets up, but they've got plenty of balance sheet and the demand like the the data centers are 100% utilized that you know day one. It's not like they're building you know 90% dark fiber or anything. So when you get lots of demand and it's not world commer global crossing I don't think you know Microsoft and Alphabet aren't going to disappear like that. You know >> it's nothing like that. >> It's different. It's different. Exactly. Exactly right. And the and there is a shortage of processing. I mean, our company, you know, we've processed 250 billion tokens over the last couple of months. I mean, we're a big user um because we read everything in the world and we analyze it for the narratives in the world. weep say, you know, you get these little plaques, these little discs from Open AI for every whatever 100 billion tokens you you process. So, we got our we got our 200 billion token plaque the other day, our little trophy. So, we're big users, huge users of this stuff. And uh yeah, there's not enough to go around. We get rationed out, you know, we get there there are bottlenecks for us. So yeah, I I I get it. Uh there we could use a lot more AI processing power out there to your point, Dan, but at what cost for the rest of the economy. We we we've got to have a balance here and right now we don't have a balance. >> Ben, I'm so glad that you broached the topic of your process because it's so different. You know, when we talk overwhelmingly we talk to sort of fundamental bottom-up investors and they are worried about cash flows and balance sheets and competitive advantages and and then we talk to traders who are, >> you know, worried about entry and exit and and risk management overwhelmingly. >> Um, you're a different animal, aren't you, as a firm? >> Yeah. Yeah. I I tell you I I you know I like I think most of us in this business I was raised in the church of value investing and so you know we were we were of value with a catalyst you know hedge fund and very typical and we we did great with that. Uh and then we stopped making money. We never lost money for our clients, but we really flatlined on our returns. You know, we had a great ' 08 and then 09 our returns really they just flatlined. And again, lost money, but it just doesn't it wasn't working. The fundamentals, they didn't matter. What mattered was the Fed forward guidance. What mattered was the the narrative, the story that a CEO could tell. And so, you know, I ended up giving all the money back to investors, which was the smartest thing I ever did because in this business, this business works by you need to always make money for your partners. And if you can't make money for your partners, you need to give it back because they'll be your partners again in the future. Just don't just don't lose money for people. So, gave all the money back to try to figure out, well, how do you invest here? And you I became really convinced that it's it's storytelling that and and as I got into it right I I at first I was a weak form I'll call it a weak form narrativist. Yes. It's it's narratives in the short term but you know in medium to long term it's fundamentals. >> The weighing machine. Yes. >> Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Um, by the way, Benjamin Graham never said that, right? It so, so what I what I've come to believe, right, is that it's a voting machine forever and ever. I'm in, right? I'm now a strong form narrativist that, you know, a what is a m a multiple is a story. >> A multiple is a story. What multiple do you put on this cash flow or this? It's just a story. >> Yep. >> Uh, you know, value itself is a story. Yeah. >> So I I'm >> and a prediction. I mean it's it's a prediction or at least a hope >> possible future. >> It's a hope is a hope of what the future is. It's saying that that you have identified something about the future that the rest of the world doesn't >> and where you get paid for that view is when the rest of the world comes to believe your story. >> Yeah. >> So what I'm what I'm interested in doing is tracking the stories. I want to see when stories hit and develop because if the story is never if your if your value insight your story is never believed by markets you're not going to make money with that position. What I'm interested is when when does the story break on the manias and the on the upside, but when does the story click for value investing and the like? So, so all we do is track stories. That's all we do. I I'm I'm I'm giving up on trying to have a fundamental view. I mean, of course, I've got fundamental views, but so does everyone else. So, what I want to do is want to do something that I think can be additive and valuable. And for me, that's tracking the stories. >> I find this inspirational because I have I laying all my cards on the table. Um, I have been a frustrated fundamentalist. I was unfrust for years and we did fine and and the readers of of our extreme value newsletter have done really well. Um, but something is happening to me and it's, you know, I think I'm just coming late to the party that you arrived at, you know, years ago. And and I, you know, I look at things like I I used to talk about the cape ratio and then I looked at that on, you know, it's it's a 10-year inflation adjusted average. >> Yeah. >> And and and and I looked at that average on a roll on a 10-year basis and I noticed like before late 90s, rarely above 20 on that rolling average that I made. You know, it just smoothed it and showed me the data from 1871 to the late 90s better. after that never below 20. Y >> so we're in we're obviously in a different world for the >> different regime right and and so where where these capital markets become a political utility where the the storytelling takes over and I'm not saying that fundamentals don't matter right so that is still my religion right I was I'm I still believe what I'm saying is to make money in this regime in this market it's it's fundamentals And you've really got to know what's happening with the story, >> right? You're not buying any piece of garbage because some because people are excited about it. That's not the point. I I I I'm starting to get this more and more and and I'm we have some new guys that we brought into the firm that are helping me with it, too. Um it's you don't just buy any piece of garbage. you you but you you recognize the importance of what everyone sort of believes about everything and what they react to and respond to and and and then you become then you realize one day you probably realize this years before me you're looking at all this fundamental data and you got your models or whatever it is and then you realize all the stuff that's a fact is history. >> Yeah. and and the story that's happening today will generate the f that is fundamental data for the future that hasn't happened yet. So the story is happening now. The fundamental data isn't coming in the future, right? That that's right. And so that the important thing though, Dan, is to is to keep your faith, right? And this is the the old saying about investors and it's so true. You can't you you can't and you shouldn't change your stripes. You're a value investor. Stay. You're a value investor. That's who you are, right? The the the the the trick is to not, oh, I'm become this Momo guy and start, you know, doing meme stock. It's not about that at all. It's about adjust. I'll say coping with just the way of the world. And and it's totally legit if you say, you know what, it's just not not it's not fun for me or it's not rewarding enough for me, so I'm just going to get out. That's totally legit. But just to stay in and to stay true to yourself, it's a matter of how do I arm myself with the the monitor, the way of seeing the world so that what I do can still matter, right? And so that that I can still be in the world without being of this crazy world. >> Yeah. I didn't I I'm >> I I I won't say I'm I won't go a Milan I'm alone and afraid in a world never made or was that EE Cummings I forget. I >> think it was E Cummings but that's that's awfully good. >> Yeah. Um, I I don't know if I'll go quite that far, but um, you know, I I didn't I didn't make this I didn't make those multiples go up over, you know, since the late 90s. And I, you know, I have to adjust to it. And it's like you say, you're allocating capital or you're publishing ideas that, you know, for that purpose. So, you have to do it in the world that you're in. Tony Deeden wrote a neat piece recently. He talked about um you know he's he's hardcore. He says we live in a world where he says I I we need value not valuation. >> Yes. >> Right. >> And and that's true. >> Yeah. >> I think what you're saying what I'm saying is that um you need to understand the influences of that valuation. You need to understand what keeps those multiples high in the past 30 years. And you need to understand um all those are you know they're great businesses sometimes yeah they're going to trade for 40 times earnings or 50 times earnings like you don't we don't we recommended Costco a while back and it hit like 50 or 60 times earnings recently. We don't say sell it. I would have done that 15 years ago. Yeah. >> I would have said Costco is over 60 times earnings, right? You know, >> right? >> But but we don't do that now. You know, >> so I I love that, Dan. So So valuation is story. >> Value is >> exactly >> your north star, >> right? So and and you know, you've got to you got to have a code. You got as an investor, as a human being, you got to be true to that. And you'll find other people who share that those values, the values of value. So it's I love the differentiation between value and valuation. Valuation is story. Just need to be aware of it. You need to be aware of the world in which we live if you're going to if you want to stay a participant to make money. Uh and valuation story value is your code your north star and you got to be authentic to that. So let's talk like how how do you there have to be some steps or an outline or a point or a recipe. How do you go about finding the story that you know what what stories work is what I want to say how you how you do this apply this yeah >> there are thousands of stories guys I mean it's um >> we're bullish on financials I'm not I'm not I'm not embarrassed on financials but let's say you know say say the story is bullish on financials there's a million way or no they're not a million ways there like a dozen scripts for any kind of story that's a fascinating thing right I mean that that whether you're talking about movies, whether you're talking about TV shows, whether you're talking about books, any sort of storytelling, they're typically about a dozen scripts for any genre. and and so it's it's the same script just applied to a different ticker or a different set of actors if we're you know or or a different plot uh device if we're talking about movies or or books. So it's there is a constancy to what we call the semantic signature, the arc, the story arc. There is a consistency to a couple of dozen scripts about anything you want to talk about. And so the the trick is to identify well what where are we in the script? Where we are we in the story arc? which story is in heavy rotation, which story is popular right now, uh, oil prices, right? There'll be periods of time where you'll see in the media, the story is what's OPEC doing? What's OPEC doing? What's OPEC plus doing? Then there will be periods of time where the story around oil is, oh, what's what's demand? what's what's you know what's what's the marginal demand coming out of China for oil and that's the the story that drives it there'll be periods of time where oh well everyone knows that you know strong dollar that there's this this inverse relationship between oil and the dollar trick is again it's it's it's not losing your north star what you think is important is understanding what what story is the market valuing right Now, are you in favor or out of favor with your views? And when you're out of favor, you lay low. When you're in favor, your view is going to work. So that that's what we track. We try to track what story arc, whether you're talking about a commodity, whether you're talking about equities, whether you're talking about a sector, whether you're talking about credit, uh whether you're talking about a currency. What are the stories that matter right now? What are the stories that you want to be looking for? Because when when your story starts to work, that's when you want to be able to press your position. So, that's the kind of stuff we do. And it it really involves reading everything in the world and then analyzing it for the presence of these story arcs. Again, we call them these semantic signatures. It's not word search. It's not sentiment. That stuff just doesn't work. It really doesn't work. But what's possible today is to really look at meaning, to look at the underlying story and the arc of that story, beginning, middle, and end. And you could really track where you are on these stories. Track what's waxing, what's waning, and then figure out, well, this story is good for me. This story isn't, and react to that. That's what we do. It's to to track stories in the manner you describe sounds insanely complicated to me. >> Um it's it's it's it requires massive scale which is why we process hundreds of billions of tokens because we're taking in tens of millions of documents. And the the the key to running this on any LLM is you have to take that genie, and that's what these AI programs are. They're genies, but you have to stuff it in the bottle. You cannot let it go out on its own. The the the way to make this really meaningful, meaning you ask it the same question with the same data and you'll get the same answer, which doesn't happen when you just do AI chat. You'll get different answers at different, you know, does it right? You've got to stuff it in a bottle. You've got to carefully give it the amount the the text it's allowed to look at. You have to tell it how to think. This is the crazy one. You can't let it just go off on its own in any way, shape, or form. You've got to keep that bottle that that genie tightly contained inside the bottle. If you do that, you can apply it at massive scale. It's actually not that complicated, Dan. You're basically just looking for all the ways you could say the word, you know, say I'm bullish. And that's what that's what these AI programs are really good at. All the different ways you could say something is a probabilistic approach. The issue is it's just massive scale, unbelievable scale, which is why we process hundreds of billions of tokens. >> I see. So, in other words, hypothetically speaking, you might, you know, you feed your uh your AI bot, your LLM with all the news that you sort of like and wanted to know and all of the financial data that you wanted to know. And when you're talking about stuffing the genie into that bottle, you're and and not letting it just do it. You're not letting it run free around the internet, right? Because as you said, >> oh my god, that's the worst possible thing you can do. The the crucial thing, Dan, is is think of an AI as an operating system. Think of it as an operating system. It's not the application. You're not asking it any sort of open-ended questions. You want to treat it like a linguistic calculator. So, you don't give it lots of information. You give it little bitty snippets of information at a time. And you, again, this is the weirdest one to kind of wrap your head around. You only allow it to think certain thoughts. And that that's really weird to say. And it and it's and it takes a while to program the operating system where it is only allowed to think certain thoughts. But if you can do that, you feed it like a chunk of text at a time. You only allow it to think certain thoughts about that chunk of text and then you have a whole another system that goes back and judges how it did to make sure it didn't somehow sneak off on its own and do some thinking on its own. If you can do that, you can actually get at scale precise measurements of how loud these different story lines are at any given time about any given financial thing. It's wild. Any language, right? So, we do Chinese domestic language and this one of the cool things is, >> you know, the AI doesn't care what language if it's trained on a language. It's not translating the language. it's actually reading that text for meaning in Mandarin or in, you know, German or whatever. So, it's it's incredibly powerful. Incredibly powerful. You can read everything in the world for meaning, but you got to keep that genie in the bottle or it'll go off on its own and give you all sorts of crazy stuff. you you determine for it what constitutes meaning like >> exactly the human that you do you never ask the AI what's the story or what's the narrative a human tells the AI here are the stories and you break it down into these little components again this is what I mean by telling the AI what it is allowed to think about and that comes from the human and that's the whole crux of this >> all right >> um Ben, we're we've actually u arrived at at time for our final question. I feel like we should have done a special twohour Ben Hunt episode here, but um it's been fascinating. I realize I'm I'm a little behind in my epsilon theory, so I'm I'm going to have to uh just spend a half a day on on your site. >> Come on. I uh the the the question that that I'm going to ask is the same final question for every guest no matter what the topic. Occasionally we have a non-financial guest and they get this identical question and it's simply it's for our listeners benefit. Um if you could leave them with one takeaway or one thought today, what what would you like that to be? >> I think about this a lot honestly. I do. I do. Um what I would ask every reader to do is to main we are all inundated with people giving us messages and stories. We are immersed in storytelling and it doesn't mean they're a lie, right? It but it means that people are intentionally telling us a certain story to try to get us to believe. This happens in politics. This happens in certainly in markets. We are we are told stories all the time and that's fine. That's just the way of the world. What I'm asking everyone to do and it's not easy is to maintain some critical distance to recognize that you're being told a story. So I think the most important question that anybody can ask whenever they read a story, whenever they read anything in the news is to ask themselves why am I reading this now? It just it just gives you a little bit of critical lets you step back a little say is you're not saying it's a lie. You're not saying it's a you know they're they're they're telling me this lie. It's just your narrative man. Now, just accept that these are all going to be stories, but it's maintaining a critical distance so you don't take it into your heart. Why am I reading this? Now, if you just ask yourself that story, that question about everything you read, I find that helps a lot to stay true to your own north star, your own value and values, and not get sucked into the storytelling. That's That's what I would like everyone to do. >> Perfect. I love that. Why am I reading this now? I've I've heard you say that before. I If I If I thought about it, I would have kind of nudged you, but that's perfect. Yeah. Why am I reading this now? Thanks for that. And thanks for being here, Ben. We have We are not going to wait years till the next time we have you back. >> Fantastic. Look forward to it, Dan. Really appreciate it. >> Yeah. Thank you. Well, that was great. I love that guy. He's brilliant and he looks at the world a totally different way. And to really like milk a good interview with Ben, I I feel like we should have a two or threearter, you know, just do an hour two or, you know, and put it out three weeks in a row or two weeks in a row or something because there's a lot there. >> Yeah, I totally agree. I mean to ha to hear from somebody who really is um leaning into narrative as a strategy in in the market is something you don't hear >> very often >> and he's been doing it for years. >> I know. But but it's still you don't you don't you don't hear people uh kind of admit that or get to where he is >> uh too much. So, um that's that was fascinating to hear uh from me and and >> the important part couple important things stood out to me, but the the risks in credit um the AI you know power uh deficiency I'll call it and um >> and then just his approach to markets overall beyond that. But, you know, the two things now, I mean, the credit the credit stuff is you see it you you're seeing it a little bit more. I don't know. It feels like more frequently. Um, the the risks popping up. So, yeah, it's definitely it's on my radar, >> right? Ben was saying, well, it probably be a few more months till the next, you know, cockroach creeps out of the woodwork and credit. But, >> um, I I tried to, you know, interject there and make the point like literally the stuff happens overnight. He's talking about funding. And funding is such a benign, you know, soft kind of a word, isn't it? Funding. Oh, it sounds sounds like, you know, your dad's gonna send you on a nice vacation or something, you know, funding. And and yet it's like it's brutal. It's absolutely doggy dog brutal. You show up for work, you're you work for Bear Sterns in March of 2008, and you show up for work, and you pick up the phone, and they say, "You're done. Not another penny." And you're out of business. It's um you know and and for those you know those shoes to drop they can drop any moment any day any day you can wake up and see that story um >> right and the thing about it now is you know and he was talking about how private credit or you know private markets are where um you know to look for some of this and the thing is with them though the public's not like primed for doesn't generally have uh exposure to that. So when you hear of some private company or private firm going bust for whatever reasons, um it's even more shocking to like the everyday person at that point. And I don't know, it's I I'm just thinking about how this could play out in, you know, in the next if it in the the private world. Um because it's all it's all credit related but in different forms. It seems, you know, he talked about 08 and 09 and and then now. Um, so >> yeah, be interesting. But hopefully that, you know, we had a little uplift there towards the end too about I I >> how to navigate this. >> Yeah. Yep. And I didn't mean like when I said, "Geez, you're bringing me down." I was I was really kind of half joking or whatever. Um it's sort of been you know Ben took up the challenge too and helped us out. >> U because my thought now is that >> you know I used to worry a lot about a bare market a steep bare market followed by a big sideways market and you know I've beat the history of that to death for anybody who reads the Stanbury Digest or the Ferraris report. Uh and and uh now I'm thinking, well, what if things play out sort of like the.com bust, which wasn't a major systemic financial crisis that was threatening to wreck the world. It was just a a tech bubble that blew up and you know, it was a big bubble, but it was a tech bubble and and you know, tech telecom and then there was also a there was a credit component to it. It was like the best moment in the world in 2002 or so to buy junk bonds. Um, but it didn't wreck the financial system. You know what I'm saying? And and maybe we get more, you know, these targeted sort of blowups and maybe the market just kind of doesn't o overwhelm us with 20% a year for the next, you know, three out of five years or whatever it's been for the last five or so. um rather than, you know, being a big uh a big crisis and a big bare market. I'm ready for anything. you know, I've always been ready for I've counseledled readers to be ready for anything, but um Ben was inspiring to me and I will admit to anybody that I've been floundering a bit because I've staked my whole life on doing you know financial focused fundamental research like balance sheets and in you know financial statement research basically and saying well this is a good business and I can prove that because it has a great financial history and it's trading waiting for, you know, 18 times earnings instead of 22 or whatever. So, let's buy it. But now, um, I'm changing and talking to people like Ben helps me through that. It really does. And I think we've got some other guests coming up who are going to talk also about AI and how they use it in their business to to find investments and stuff. So, I'm I'm excited and inspired and I'm going to I'm going to take all that excitement and inspiration and try to do something with it for our listeners and for readers of the Ferris Report and I know you'll probably, you know, put it in the digest yourself. Um, but that was awesome. I love talking with Ben Hunt. The guy's brilliant. Um, so that's another interview and that's another episode of the Stanberry Investor Hour. I hope you enjoyed it as much as we really, really, truly did. Opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stanbury Research, its parent company or affiliates.
The Next Financial Crisis Is Forming Right Now
Summary
Transcript
Hello and welcome to the Stansbury Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and the Ferris Report, both published by Stanberry Research. And I'm Cory Mclaclin, editor of the Stanberry Daily Digest. Today we're talking with Ben Hunt of Epsilon Theory. Ben is a brilliant guy. We haven't talked to him in way too long. He has a totally different way of looking at the world for many investors. So, let's do it. Let's talk with Ben Hunt. Let's do it right now. All right, Ben Hunt, welcome back to the show. It's been a while. >> It's been too long, Dan. It's great to be back. Thanks for having me. >> Yeah. Um, you are especially someone I feel I need to check in with here in the latter part of 2025. Um, we've been through two tariff tantrums. April 8th, October 10th. Um, New York City elected a Democratic socialist mayor who says he wants free uh, you know, free everything. Um, and and other weird things which I'm sure you've kept better track of than me. Uh, I don't even know where to start. You're when I read what you write, it covers so much. I almost don't know where to begin with you. I feel like I should ask you what is it right now? What is consuming your mind today? >> What's consuming my mind right now today is not um not tariffs. I think we're very much past tariffs, right? It's not even the midterms and Mumani and the like. I think he's a uh a specific issue for New York City. Look, every once in a while you need a major American city to burn itself on the hot stove of socialism or communism as a as a cautionary tale. So that's all fine. What's concerning me very much today is that we are in the middle of I'm not even going to call it a credit freeze. I'm going to call it a credit polar vortex for you know we call them for the poors for subprime uh really which is and and that's spreading so it's spreading up to the middle class uh the canaries in the coal mine the precipitating events were the bankruptcies of triricolor the subprime auto lender and also first brands the auto parts uh supplier bad actions, bad all. So, so the the point being is with when those companies went out, what what everyone in Wall Street, everyone in the financial world did is they cut off the credit spigot to any companies like Tricolor or First Brands. All credit to, let's call it the the bottom 40% of the American economy has been shut off. So every every company that faces that bottom 40% is under extreme distress right now. We don't see it or feel it, but that's what's happening right now in the real economy is that credit has been just completely shut off. And credit is the oxygen to any economy. So this feels very much to me like Q4 of 2007 when autos rolled over, home activity at least rolled over coming after real financial crisis in the summer of 2007 around countrywide, you know, all the the uh mortgage back security originators and lenders. That's what really worries me right now, Dan. Uh because the Yes. And I've done a lot of work on AI and the the AI data center buildout and the like. That's getting a lot of the press and all the news for good reason. But what's really concerning me right now is the real economy, our K-shaped economy, where that bottom leg of the K is moving up and up and up. So credit is increasingly being cut off to middle class. Uh refinancings are being rejected. Credit's going up. I tell you the last thing, Dan, that really concerns me about this is that cutting interest rates by 50 basis points, 100 basis points, it doesn't it doesn't impact this, right? If you're if you've got a subprime credit card, you're paying the the maximum rate allowed by law. You're paying whatever that is, 24.99. It's not going down if the Fed cuts rates by 100 basis points. Credit's been shut off to the bottom half of the US economy. There's enormous distress here. And at the same time, you've got cost push inflationary pressures coming out of energy, labor, insurance. So, it's not tariffs. Tariffs aren't driving those cost push inflation issues. It's utility bills, insurance bills, food, which is energy. That's what's driving the inflation. At the same time, you've had credit cut off to about half of the American economy. That is what is concerning to me. >> Sounds like a big concern. 40% um with no access to credit. Um knowing what we know about developed economies. >> Yeah, exactly. >> As you say, it's oxygen. Um, and this reminds you of the fourth quarter of 2007. As I recall, some bad stuff happened in 2008. Um, you know, so maybe 2026. Sounds like you're not expecting 2026 to be a great year. >> Uh, I'm not I'm really not. Again, everyone's focused on tech and I get it, right? So the MAG 7 or whatever, I mean, Nvidia loans what 8% of the S&P 500. So I get it while we're >> focused on that. >> What I'm saying though is that this a financial crisis always happens in the financial sector, right? That's where systemic crisis happen. They don't happen out of tech. They happen out of financial sector. They happen out of the banks and the financial sector because illliquidity which happens when things go belly up. Illi liquidity is death for a financial. So this reminds me very much of you starting in August and September of 2007 when you had a couple of bare bare Sterns funds go out for their mortgage back securities. They were the canaries in the coal mine where funders of financial instruments pulled back enormously. Financials stopped working from August of 2007 onwards, right? It didn't wait until Bear Sterns going out in April of 2008 for financials to start really taking a leg down. And that's what I think is happening today. It's the financial system we've got to worry about. Credit is the oxygen for any economy. And we are seeing a a credit freeze in the bottom half of the US economy and that's going to spread. >> You know, I I actually saw this yesterday without having your eloquent description of it in my in my mind. I just looked at a chart of um KBWR, the regional bank ETF, RTY, Russell 2000, right? And um and a couple other things. And I compared it, of course, to to the S&P 500, but also the the equal weight S&P. >> Yep. >> Right. All the rest, in other words, besides the top 10 or whatever. Um and you know, all much weaker. Much weaker. you know, with the S&P within just call it 3% or so, three or four or whatever it is as we speak of a of an all-time high and the others are as much as double digits down um much weaker and of course the regional banks haven't made a new high in what it's it's been a couple years I think at least one year at least 2024 if not 2023 so so you can see that weakness like it's sort of the uh you know the Stan Drunken Miller inside of the stock market kind of view of that weakness 100% Dan. So, you know, I look a lot at the the alternative asset managers, right? We used to call them shadow banks. I guess we don't call them that anymore, but you know, they've they've, you know, it's the there will be blood, you know, uh reference. They've they've been drinking the milkshake of commercial banks for a long time. This is private credit. So the lending into the real economy has shifted from commercial banks into the alternative asset managers, the private credit funds, CLOS's, BDC's, all of that, right? And what always happens is that commercial banks, particularly the regional banks, play catchup. So, as much as the Apollo and the Blue Owls and the Aries and Black Rocks and Blackstones, as much as they've been, I think, stretching in their credit quality and covenants and all like that as they're putting money out there into the real economy, the regional banks are as bad or worse. They always are. They're always playing catch-up in this sort of respect. So it's not surprising to me for example when you saw thericolor go out and the first brands go out you know the people who were mostly on the hook there these were mostly syndicated loans and there's mostly a lot of the regionals and super regionals who were left holding the bag here. So it's Jamie Diamond, you know, talking about, you know, there's always these cockroaches. There's never just one. And it's not just that you're that it's the cockroach itself. You have to worry about the the management team that double pledges collateral or the like. It's the tenement house you're or the neighborhood you're all living in, right? that has a lot of cockroaches and everything else in it because that's how neighborhoods develop in financial world over time. This is this is how it always plays out and here we are again. >> Let's be a little more specific about this because it's true. you're you're actually you're you're describing just the nature of a of how systemic crises, you know, start in one area and spread >> and and um let's I I feel like we should sort of make that a little more concrete for our listeners. Um actually you did a reasonably good job there wi with with um you know it the the syndicated loans wind up in the regional banks and you know before you know it dozens of regional banks are are are having issues. >> Another example. >> Yeah. So, so Dan, the reason that that they're all financial institutions are will will ha will have issues from this whether they are infested with cockroaches or not, it doesn't matter, right? Because if you are if you are a funer, right? So funding takes lots of sources. One of the great strengths of the American financial system is that funding for commercial banks happens through deposits. Uh so there are two ways that a that a financial institution can fund itself right you can have deposits if you're a bank bank or you can borrow right you can issue securities to fund yourself or as a lot of these uh alternative asset managers have discovered you can buy acquire partner with insurance firms right to find funding through their premiums and and their issuance. So there there's nothing new under the sun. All financial institutions are trying to do is they're trying to find ways to fund themselves to have capital available that they can then lend out. And what's what always happens in these situations when something goes wrong, the Bear Sterns going belly up in August of 2007, these two big consumer-facing uh auto firms going under just a couple of months ago, is that all the funders, right? Whether it you are a pension fund who's giving money to this, whether you are a, you know, an insurance firm, you've got your funding arrangement with a alternative asset manager. Uh whether you're a a financial advisor uh and you know the CLLO manager comes to you say, "Hey, give us money." You're you're trying you step back. The problem always happens in the funding because these companies, they're they're like these financial companies, they're like sharks, right? They have to keep swimming. So is it that they're not keeping the loans on their books. That's not how a financial institution works. You find the company to lend to. You originate the loan. In 2007, it was mortgages, right? So you you find the the person who wants to borrow money from you. You lend them money and then you sell that loan. You securitize it. You put it off to another manager. You don't want to hold it on your books because you want to make more loans. So the the the way it always happens with finance companies is that they it starts with uh we're going to make these good loans and they're going to pay us a nice rate of return. We're going to hold them on the books. we're going to be this financial institution and you realize that the way to make money is not to keep the loan on your own books. It's to put it off the books, right? Get it get it off your balance sheet so you can make more loans and make more money. They become these transaction machines. And that all works out great until the real world intervenes where, oh, a couple of these loans start to go bad. So the funders, the people who are giving you money to keep going, they say, hang on a second. And it doesn't matter if you haven't if you haven't made bad loans. It doesn't matter if you have cockroaches or not in the portfolio you've sold. The fun doesn't know this. The fun is just saying, "You know what? I've seen this movie before. I'm full up with this stuff. You trust no one." That's what happened in ' 07 and '08. You didn't trust the book. And so, you stop funding it. And and and you're you're defenseless if you're a if you're a financial company. can't come out and say if you if you come out and say uh here's transparency on our book, you'll get hammered for that because there will be something that can be arguably wrong in your book. If you don't give transparency, if you say, "Oh, no, no, everything's fine. Believe me, trust me." Nobody's going to trust you. So this this is counterparty risk that always leads to people not putting money into the system. That's what happened in ' 07. That's what happened in '08. You didn't trust your counterparty. And that same thing is happening today. You see it in repo rates. You see it in the what what and you're just getting glimmers of this right now. I think we've got a few more months before the next shoe drops from the next company that can't pay its debt because it faces this consumer economy that isn't spending, is under incredible stress. We're a couple of months off from the next shoe dropping. But right now, what I'm telling you, I'm seeing out there is the players on Wall Street are saying, "I don't trust And when trust fails, it it goes bad really fast throughout the entire financial system. >> I'm glad you I'm glad we went right to hear this topic because and I saw you were writing about this and and tweeting about it and whatnot and because the crisis, right, it's always in credit, right? It's it's always that's >> always >> that's what it is. >> Always. story. >> Um, what do you make of, and this happened relatively under the radar to most casual people, this recent injection from the Fed, $125 billion um into the market? I mean, is you said we're seeing glimmer, you know, glim cracks here and there. Um, what do you make of that? I'm curious for your take on that part. So financial institutions can be insolvent forever. meaning, you know, Bank of America and we all saw these charts when we're having the runs on First Republic and Silicon Valley Bank and the stuff and, you know, and a lot of this was was all of this honestly was kind of silliness saying that, oh, Bank of America is insolvent because their their big holdings of treasuries were underwater, right? So what? So what right you can a financial institution can be ins you know technically insolvent these treasuries we hold you know they're they're trading below par so you know you can put whatever chart you want up on it doesn't matter right a financial institution can be insolvent forever they can't be illquid >> for a second >> Hank Greenberg I'll never forget it I'll never forget it he said we're not insolvent were illquid and that's that's it. And I thought, what's the at that moment? What is the difference really? You know, >> well, and and for a financial institution, the moment you're illquid, you're done. And and that's exactly what happened with Bear Sterns. >> And it is a moment, isn't it? It's a moment. You literally come to work the next day, you pick up the phone or whatever, get and and they say, "No, it's done. We're done. >> It's done." That's exactly right. So this this and this so Beer Sterns is the perfect example of this. I mean, I was So, the way that Bear Sterns funds itself, remember I'm talking about how do you how do you get the capital to lend out to people, the way that Bear Sterns funded itself was from mostly deposits from its hedge fund clients. So, they ran so all of the big investment called a prime brokerage. So, they don't have retail clients. They don't have, you know, a savings account. what you do if you're a a hedge fund. And I Bear Sterns was my prime broker for my for my hedge fund. I loved Bear Sterns. Bear Sterns was great. I loved those guys. And we had a lot of money on deposit with them because they were our prime broker. Now, when you start worrying about the the book, the book of loans that Bear Sterns had on their on their book, you can't wait to be the last one out the door. And so that there was a run on the bank at Bear Sterns and the the run on the bank was hedge funds like me saying, "Sorry guys, I love you, but I'm out. I'm out." So we pulled our money from Bear Sterns. I you know, for you know, I saw this coming and was able to get out early before you had to. But this is what this is what a run on the bank looks like. Sometimes a run on the bank looks like it did with Silicon Valley Bank or First Republic where it's ordinary depositors pulling their accounts. Sometimes it's like Bear Sterns where you fund yourself through hedge funds and the hedge funds pull their money and you're done. When that happens, it's over. Now, to your point, Corey, the way you stop a run on the bank is like, you know, it's the one of it's like the old movies, right, where you you have to get new money that comes in in just a dump truck full of new money so that nobody has to worry about getting their money out. And that's what the Fed does, right? So the Fed says, "All right, your deposits are safe." Bear Sterns wasn't safe because the Fed wasn't the back stop for Bear Sterns, right? Because Bear Sterns wasn't a commercial bank. By the way, this is why Morgan Stanley and Goldman Sachs became commercial banks in October of 2008 so that they could have the backs stop of the Federal Reserve. So when you're talking Corey about putting money, the way that that the the reason that the Fed makes money capital available is to prop up and alleviate any funding concerns for commercial banks. That's why they do it. But here's who doesn't have that backs stop today. In 2007 and 2008 it was Bear Sterns, Morgan Stanley, Goldman Sachs, they did not have that backs stop. Lehman, no backs stop from the Fed. Today the groups that doesn't have the backs stop is these alternative asset managers. So the ones without the back stop >> proliferated like crazy. >> They've been drinking the milkshake. They're the ones that have making making all the loans into the real economy. And look, it's not like this is, >> let me be really clear, right? I think that what like Apollo did is phenomenal. And I think Mark Rowan's incredibly smart. He's incredibly right when he says, "Look, here's the opportunity. Here's the business opportunity. commercial banks like JP Morgan Chase and BFA and City, they're not making loans into the real economy. Okay, we can do that. And they did. It's a great business. That's why Jamie Diamond is saying he's been complaining for years. We're highly regulated. We all have these capital constraints. The alternative asset managers, they can come in and take this business. And so there's this back and forth, right? It's it's it's competition. That's wonderful. But where Jamie Diamond is right is that the alternative asset managers are not regulated like the commercial banks. On the flip side, they also don't have the backs stop that the commercial banks do. So you're right, Corey, about what that the Fed is there. The Fed exists to provide liquidity to the to the banking system. The risk today honestly is that just like in ' 07 and '08 there were major players in the financial system that did not have a Fed backs stop because they weren't banks. They weren't commercial banks. Bear Sterns, Lehman, Morgan Stanley, Goldman Sachs. Today you've got that same issue with the alternative asset managers. They don't have that Fed back stop. So big picture, that's that's kind of where I see these fault lines developing. Corey, the Fed will always support the banks. Always. And they should, right? That's what they're there for. That's the reason we have a Federal Reserve, honestly. I mean, it's less interest rates than it is prevent runs on the freaking banks. Y >> from time immemorial, it's the currency on one side and the banks and the bond market on the other. >> And you got it. >> And guess which one always has to give? Guess which one is always sacrificed for the other, right? As you're as you're pointing out. >> Correct. which is not which is not to say, you know, I'm not I'm not one of these sort of dollar doomsday guys, but um you know, certainly for for us in America, we can see that we can see the weakness. Certainly weak versus gold. >> We we can Dan, so I'm glad you brought this up, right? So, so historically and I think still the US currency and you're right, it's always the currency that gives in these situations, but the US always been kind of the the best house in a bad neighborhood. Again, it's the the issue of, you know, well, you know, Exactly. It's not it's not just that we all have cockroaches, right? Because we live in a cockroachinfested neighborhood. It's kind of where we are now. Right. Right. Right. Now, it feels maybe a little different to me today. Uh well, different in this sense. I I I mean, when you look at what's happening in Japan, you you don't get any you don't get any um warm and fuzzies there for sure. Uh you don't get any warm and fuzzies really when you look at Germany. It's it's look this is why gold's done so well. It is. It's why gold's done so well. And because the yen's not a safe haven, the dollar sure not a safe haven. So you look to something like gold. After I was looking at those charts, um I just went in Bloomberg and got the daily um gold prices and the the dailies start I think in 1975 >> and I wanted I wanted daily up to now because I did these rolling two-month performances from then to the present because I I and I said this at our conference a couple weeks ago in Vegas. I was like, if you want something to worry about, gold going up 30% in two months, not normal. And I didn't really know it when I said it. Okay. >> So, rolling two-month periods since January 1975, 74 times, 30% or more in a rolling two months. >> Is that right? >> Yeah. Listen to this, though. This year, the ones that ended on um October the 16th and October the 20th, that's two. the other 72 all 72 of them between I forget the months 79 and 82 1979 1982 right when people were terrified people were terrified at that time gold was like you know people didn't care like what the performance they they were just say buy me gold buy me you know it was a frenzy and that was like around the peak of the biggest you know inflationary certain the moni modern inflationary crisis in our history. And I'm thinking, wow, that's that's the vibe right now. >> Yeah, >> it's it's wild, right? >> Yeah. Really wild. I think like wilder than I'm seeing people make out of it. Like I'm not seeing anybody freaking out. Like you can hear I'm semifaking out because I saw what the data showed me. You know, the data showed me. Oh, this is when the world is melting down. Just so you know, Dan, this is that's what this means. And I think it's like it's like it's discounting I feel as though it's not discounting, you know, out andout inflation, but an inflationary response to a deflationary, you know, debt blow up or something like that. What do what do you what how does that sound to you? >> Well, it feels it feels a couple things to me. One, it it I think there's a slower fuse here, honestly. Right. And I also think that if if we continue to have this credit freeze in the real economy, again, starting with the the subprime spreading up now through the rest of the consumer economy, you know, I I that's there's no there's it seems to me it's very difficult to get out of a recession in that in that scenario. Very difficult. It's very difficult for me to see how we get out of a a real financial crisis because of the overextending of lending just just like we've been talking about. Right. I also think that there are significant debt issues. Obviously, we're aware of them. I also think that we've got significant I say cost push inflation that happens if we continue with this AI data center buildout. I think all of that I also think though that when your economy goes in the crapper in inflation's not inflation's not really happening right. So, so you know, oil prices ain't going up. >> No. >> You know, right. >> Yeah. Yeah. >> So, I I don't get I honestly don't get so worked up because I don't I don't see the sort of 7982. >> No, it's not that. >> Supply inflation. It's not that, right? >> No, >> it's not that. It's something different. It's not >> a vagger sort of rhyming in the data that I was talking about. Just it's a vagger sort of rhyme. crisis, you know, big crisis and now the action. I didn't mean to suggest that because >> No, no, no, no. And I didn't take it that way, but you asked me what I think. I It's like it's there there there's a rhyme here, but I think the the confluence of issues we've got to deal with are pretty different from the 7982 period. >> Yeah. Yeah. We didn't just um you know, cut the last tie of gold in the dollar. So, it's a little different, right? But this is the all the things you're talking about since I asked you what's on your mind. Um this is what you get in a world of you know that's run by that that runs on debt and frankly you know fiat right when when you get fiat that's you know debt becomes more widely used and avail it's just the way of things. It's this happens >> the way of things. >> Exactly right. >> Yeah. >> Exactly right. And and it it makes me wonder, you know, we we um we go through these things periodically and on the other side of it, there is always I I dare say a brave new world. You know, there's there's always um thing things get seem to get a little more twisted, right? And what you described today, you sort of made the common refrain of of the um you know the wealth gap. You put it in in more stark terms for this moment, didn't you? Because you said they're they're cut off. The bottom is cut off from from borrowing. They you know, they're just >> So, um you know, I um gosh, maybe I shouldn't have spoken to you on my birthday, Ben. Maybe I should have waited till after the birthday to do this one. But but it just it it it you know I project past you know whatever it is 2026 or seven or eight or nine or whenever all this >> um comes to a head and then resolves in whatever way it is. Um I wonder because you know before before the great financial crisis um came to a head in 2008 um for example just one data point you know that we all can sort of that we all get you know the Fed's balance sheet was much smaller. Yeah. >> Right. It was it was it was not this multi-trillion dollar thing. And now and then and and mortgage back security, they own mortgage back securities, you know, tons of them in an environment where house prices are just out of reach of that bottom half >> and a lot and a lot into the middle. Frankly, they're out of the reach of a lot of people right now. >> Well, they are. But Danny, you know, let me let me So, I I know I've kind of brought us down, but let me try to to to paint a a picture of where where I think it's a long putt. It's it's a it's a narrow path, whatever metaphor you want to use. But I but I think there is a way forward. And I'll point out a couple things. One, mortgage back securities going in 2008, that was a $10 trillion asset class, right? So just the sheer size of this is and look the private credit CLOS's BDC's all this stuff. I mean it's big don't get me wrong but it's not a10 trillion dollar global asset class. So, um, I'm I'm hopeful that there are there's a deflation of the bubble that can happen without the bubble blowing up. Now, that means assigning losses. That means, you know, it'll be it'll be unpleasant but not catastrophic. where what I'm hopeful is that we can have some some pricks of the bubble let let air out sign losses and like won't be fun but it won't be this sort of catastrophic disaster. What I'm also hopeful for is that I actually believe very much in I'll say two aspects of this administration's policies. One is reshoring of manufacturing in the United States and the other is energy generation, energy production. If the difficult thing, right, is that right now we're putting all of our capital towards AI data centers which are going to soop up all the energy generation we build and more. Uh, and they're sapping up all the capital that otherwise you'd be using for the manufacturing, reshoring the like. Why do I think the manufacturing resuring is so important? Because that's jobs. When we talk about a job boom, it's not going to come from the AI data centers, right? So, generative AI, it's a it's a job killer, if not I mean, at best, it's like net neutral on jobs. >> It's also real wealth, isn't it, Ben? >> It's it's real wealth. >> Yes. >> It's not trading. It's not, you know, George Gilder talks about the hypertrophy of finance and we've all you've talked about the financialization that we are living through. Yep. >> Uh >> 100%. Dan, I want >> energy generation, manufacturing, reshoring, it's it's it's it's real. It's jobs. It's human, right? And it's it's it's the issue of course is how do we get from here to there? It is the next couple of years where I'm really concerned we're going to devote our capital, our energy to the AI data centers that don't have a payoff in terms of the real as you're as you're describing Dan. I think what we need right now is or the thing that gets us through and this is why it's such a long putt is really good leadership which is in you know really short supply right now to be honest. So, so I I think it's a long putt, but I but I think the way out of this is manufacturing resurgence domestic in the US together with massive energy production which makes it all possible. So, that's what I'd like to see. The problem is we've got capital going, I think, into less productive uh modes and we've got to deal with capital not going to the real economy and the overextension of credit that we've had over the last 15 years. Long putt, but that's where I hope to come out of it, Dan. Right. It's it's getting from here to there over the next three years. Can we get to that point where we've got real energy generation here in the United States and a manufacturing resurgence? >> You brought me back up. >> Did I? I'm not so sure. I'm not so sure I did, but uh but I but but I >> Well, no, that was more that was Yeah, I would think even if we had some sort of um not blueprint, but like a road map that we're headed in the right direction in terms of that energy capacity and generation like even that would I think satisfy some of this fear out there. >> I I do too. It would be fantastic, Corey. And the again the problem is the AI blueprint that you know the effective altruist the Sam Alman's of the world are are are pushing for. I mean the numbers are just are just ridiculous and staggering. Uh you know we're talking about three4 trillion dollars spent on AI data centers in the United States over the next couple of years. is. And when you look at the energy requirements of that, the electricity requirements of that, you can't get from here to there without real shortages for the rest of the economy. You just can't get there. We're talking about by 2028 using a thousand terowatt hours for data centers, my friends. That's that's freaking crazy. That is nuts. That's nuts. I mean, in 2024, I'm thinking, you know, our total the entire economy used about 4,000, you know, a little over 4,000 terowatt hours. The entire economy, and I don't care how many, you know, gas turbines and gas lines you build right next to your data center in Louisiana or whatever Meta is doing. You know, where are you going to get these these turbines? you know, CAT and and you know, gee, they can't make enough of these. So there there's no way to get from here to there if we're going to go forward with 4 trillion dollars on AI data centers over the next three years and a thousand terowatts of electrical consumption in 2028. We're screwed if that happens or the rest of the economy is screwed. What we need is I'll call it not to not an AI backlash but we need call it AI subordination to the blueprint Corey that works which is manufacturing reshoring and yes you know build out the the energy infrastructure as much you can but don't just push it all then into AI data centers it's nuts it's crazy >> right yeah the energy grid needed upgrade ating before and now I mean now now it's I mean yeah I just looked up something I wrote like a couple months ago on like AI's power problem just to look up this stat because you what what you were running off reminded me of it just for people so they can understand too it's uh like the environmental and energy study institute said US data centers could require as much as a 130 gawatts of power every year by 2030 and then that day I was looking I was like that's okay let me I'm not like you know proficient and gigawatt and whatever else. But >> yeah, >> 114 million homes for a year. That's the equivalent. >> Yeah. >> And there's 148 there's 150 million housing units in the entire country. >> Like it's >> right. We're dropping a new country on our country. That's right. >> Yeah. I mean, we're talking, you know, rolling brownouts so we can keep, you know, the AI data centers going. Ed, electricity is one of those things. Capital shortages is another one. Labor shortages is another one that drives what I'm describing as cost push inflation. And it's so like I say it's not the tariffs but when when your input for everything you do which is electricity which is labor when when you've got shortage is there inflate costs are going up and either you as a small medium business you either pass those along or you go under. Those are your options. because we're looking at, you know, in the next couple years a couple of hundred a couple hundred terowatt hours shortage. It's got to come from somewhere, right? We can either allocate it to the data centers or we can allocate it to the real economy. And if we allocate to the data centers, yeah, all these problems that we're describing just about the the K-shaped economy, they all just got a lot worse. >> I'm up. Sorry to bring you down again, Dan. No, no, no, no. We We've got to we got to have we've got to have a we've got to have a push back against the AI data center buildout without resorting into political populism without ending up with, you know, >> right? Yeah. And you're seeing that already, right, with the >> President Manni. Yeah. >> Yeah. We're seeing the political blowback a bit already. I think just starting. >> We are. It is just starting, but we've also got, you know, putting in poker terms, the guys pushing for the AI data center buildout, they've got a big stack, >> right? So, it's, you know, Larry Ellison and Sam Alman and we know the crew. >> Yeah. They've uh they've got they've got a big stack in poker terms and they've got a lot of represent a lot of let's say influence in this White House. >> Yeah. And unlike unlike the fiber buildout of the dot era, the companies doing the the big companies doing the buildout gushfree cash flow. They've used their balance sheets up, but they've got plenty of balance sheet and the demand like the the data centers are 100% utilized that you know day one. It's not like they're building you know 90% dark fiber or anything. So when you get lots of demand and it's not world commer global crossing I don't think you know Microsoft and Alphabet aren't going to disappear like that. You know >> it's nothing like that. >> It's different. It's different. Exactly. Exactly right. And the and there is a shortage of processing. I mean, our company, you know, we've processed 250 billion tokens over the last couple of months. I mean, we're a big user um because we read everything in the world and we analyze it for the narratives in the world. weep say, you know, you get these little plaques, these little discs from Open AI for every whatever 100 billion tokens you you process. So, we got our we got our 200 billion token plaque the other day, our little trophy. So, we're big users, huge users of this stuff. And uh yeah, there's not enough to go around. We get rationed out, you know, we get there there are bottlenecks for us. So yeah, I I I get it. Uh there we could use a lot more AI processing power out there to your point, Dan, but at what cost for the rest of the economy. We we we've got to have a balance here and right now we don't have a balance. >> Ben, I'm so glad that you broached the topic of your process because it's so different. You know, when we talk overwhelmingly we talk to sort of fundamental bottom-up investors and they are worried about cash flows and balance sheets and competitive advantages and and then we talk to traders who are, >> you know, worried about entry and exit and and risk management overwhelmingly. >> Um, you're a different animal, aren't you, as a firm? >> Yeah. Yeah. I I tell you I I you know I like I think most of us in this business I was raised in the church of value investing and so you know we were we were of value with a catalyst you know hedge fund and very typical and we we did great with that. Uh and then we stopped making money. We never lost money for our clients, but we really flatlined on our returns. You know, we had a great ' 08 and then 09 our returns really they just flatlined. And again, lost money, but it just doesn't it wasn't working. The fundamentals, they didn't matter. What mattered was the Fed forward guidance. What mattered was the the narrative, the story that a CEO could tell. And so, you know, I ended up giving all the money back to investors, which was the smartest thing I ever did because in this business, this business works by you need to always make money for your partners. And if you can't make money for your partners, you need to give it back because they'll be your partners again in the future. Just don't just don't lose money for people. So, gave all the money back to try to figure out, well, how do you invest here? And you I became really convinced that it's it's storytelling that and and as I got into it right I I at first I was a weak form I'll call it a weak form narrativist. Yes. It's it's narratives in the short term but you know in medium to long term it's fundamentals. >> The weighing machine. Yes. >> Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Um, by the way, Benjamin Graham never said that, right? It so, so what I what I've come to believe, right, is that it's a voting machine forever and ever. I'm in, right? I'm now a strong form narrativist that, you know, a what is a m a multiple is a story. >> A multiple is a story. What multiple do you put on this cash flow or this? It's just a story. >> Yep. >> Uh, you know, value itself is a story. Yeah. >> So I I'm >> and a prediction. I mean it's it's a prediction or at least a hope >> possible future. >> It's a hope is a hope of what the future is. It's saying that that you have identified something about the future that the rest of the world doesn't >> and where you get paid for that view is when the rest of the world comes to believe your story. >> Yeah. >> So what I'm what I'm interested in doing is tracking the stories. I want to see when stories hit and develop because if the story is never if your if your value insight your story is never believed by markets you're not going to make money with that position. What I'm interested is when when does the story break on the manias and the on the upside, but when does the story click for value investing and the like? So, so all we do is track stories. That's all we do. I I'm I'm I'm giving up on trying to have a fundamental view. I mean, of course, I've got fundamental views, but so does everyone else. So, what I want to do is want to do something that I think can be additive and valuable. And for me, that's tracking the stories. >> I find this inspirational because I have I laying all my cards on the table. Um, I have been a frustrated fundamentalist. I was unfrust for years and we did fine and and the readers of of our extreme value newsletter have done really well. Um, but something is happening to me and it's, you know, I think I'm just coming late to the party that you arrived at, you know, years ago. And and I, you know, I look at things like I I used to talk about the cape ratio and then I looked at that on, you know, it's it's a 10-year inflation adjusted average. >> Yeah. >> And and and and I looked at that average on a roll on a 10-year basis and I noticed like before late 90s, rarely above 20 on that rolling average that I made. You know, it just smoothed it and showed me the data from 1871 to the late 90s better. after that never below 20. Y >> so we're in we're obviously in a different world for the >> different regime right and and so where where these capital markets become a political utility where the the storytelling takes over and I'm not saying that fundamentals don't matter right so that is still my religion right I was I'm I still believe what I'm saying is to make money in this regime in this market it's it's fundamentals And you've really got to know what's happening with the story, >> right? You're not buying any piece of garbage because some because people are excited about it. That's not the point. I I I I'm starting to get this more and more and and I'm we have some new guys that we brought into the firm that are helping me with it, too. Um it's you don't just buy any piece of garbage. you you but you you recognize the importance of what everyone sort of believes about everything and what they react to and respond to and and and then you become then you realize one day you probably realize this years before me you're looking at all this fundamental data and you got your models or whatever it is and then you realize all the stuff that's a fact is history. >> Yeah. and and the story that's happening today will generate the f that is fundamental data for the future that hasn't happened yet. So the story is happening now. The fundamental data isn't coming in the future, right? That that's right. And so that the important thing though, Dan, is to is to keep your faith, right? And this is the the old saying about investors and it's so true. You can't you you can't and you shouldn't change your stripes. You're a value investor. Stay. You're a value investor. That's who you are, right? The the the the the trick is to not, oh, I'm become this Momo guy and start, you know, doing meme stock. It's not about that at all. It's about adjust. I'll say coping with just the way of the world. And and it's totally legit if you say, you know what, it's just not not it's not fun for me or it's not rewarding enough for me, so I'm just going to get out. That's totally legit. But just to stay in and to stay true to yourself, it's a matter of how do I arm myself with the the monitor, the way of seeing the world so that what I do can still matter, right? And so that that I can still be in the world without being of this crazy world. >> Yeah. I didn't I I'm >> I I I won't say I'm I won't go a Milan I'm alone and afraid in a world never made or was that EE Cummings I forget. I >> think it was E Cummings but that's that's awfully good. >> Yeah. Um, I I don't know if I'll go quite that far, but um, you know, I I didn't I didn't make this I didn't make those multiples go up over, you know, since the late 90s. And I, you know, I have to adjust to it. And it's like you say, you're allocating capital or you're publishing ideas that, you know, for that purpose. So, you have to do it in the world that you're in. Tony Deeden wrote a neat piece recently. He talked about um you know he's he's hardcore. He says we live in a world where he says I I we need value not valuation. >> Yes. >> Right. >> And and that's true. >> Yeah. >> I think what you're saying what I'm saying is that um you need to understand the influences of that valuation. You need to understand what keeps those multiples high in the past 30 years. And you need to understand um all those are you know they're great businesses sometimes yeah they're going to trade for 40 times earnings or 50 times earnings like you don't we don't we recommended Costco a while back and it hit like 50 or 60 times earnings recently. We don't say sell it. I would have done that 15 years ago. Yeah. >> I would have said Costco is over 60 times earnings, right? You know, >> right? >> But but we don't do that now. You know, >> so I I love that, Dan. So So valuation is story. >> Value is >> exactly >> your north star, >> right? So and and you know, you've got to you got to have a code. You got as an investor, as a human being, you got to be true to that. And you'll find other people who share that those values, the values of value. So it's I love the differentiation between value and valuation. Valuation is story. Just need to be aware of it. You need to be aware of the world in which we live if you're going to if you want to stay a participant to make money. Uh and valuation story value is your code your north star and you got to be authentic to that. So let's talk like how how do you there have to be some steps or an outline or a point or a recipe. How do you go about finding the story that you know what what stories work is what I want to say how you how you do this apply this yeah >> there are thousands of stories guys I mean it's um >> we're bullish on financials I'm not I'm not I'm not embarrassed on financials but let's say you know say say the story is bullish on financials there's a million way or no they're not a million ways there like a dozen scripts for any kind of story that's a fascinating thing right I mean that that whether you're talking about movies, whether you're talking about TV shows, whether you're talking about books, any sort of storytelling, they're typically about a dozen scripts for any genre. and and so it's it's the same script just applied to a different ticker or a different set of actors if we're you know or or a different plot uh device if we're talking about movies or or books. So it's there is a constancy to what we call the semantic signature, the arc, the story arc. There is a consistency to a couple of dozen scripts about anything you want to talk about. And so the the trick is to identify well what where are we in the script? Where we are we in the story arc? which story is in heavy rotation, which story is popular right now, uh, oil prices, right? There'll be periods of time where you'll see in the media, the story is what's OPEC doing? What's OPEC doing? What's OPEC plus doing? Then there will be periods of time where the story around oil is, oh, what's what's demand? what's what's you know what's what's the marginal demand coming out of China for oil and that's the the story that drives it there'll be periods of time where oh well everyone knows that you know strong dollar that there's this this inverse relationship between oil and the dollar trick is again it's it's it's not losing your north star what you think is important is understanding what what story is the market valuing right Now, are you in favor or out of favor with your views? And when you're out of favor, you lay low. When you're in favor, your view is going to work. So that that's what we track. We try to track what story arc, whether you're talking about a commodity, whether you're talking about equities, whether you're talking about a sector, whether you're talking about credit, uh whether you're talking about a currency. What are the stories that matter right now? What are the stories that you want to be looking for? Because when when your story starts to work, that's when you want to be able to press your position. So, that's the kind of stuff we do. And it it really involves reading everything in the world and then analyzing it for the presence of these story arcs. Again, we call them these semantic signatures. It's not word search. It's not sentiment. That stuff just doesn't work. It really doesn't work. But what's possible today is to really look at meaning, to look at the underlying story and the arc of that story, beginning, middle, and end. And you could really track where you are on these stories. Track what's waxing, what's waning, and then figure out, well, this story is good for me. This story isn't, and react to that. That's what we do. It's to to track stories in the manner you describe sounds insanely complicated to me. >> Um it's it's it's it requires massive scale which is why we process hundreds of billions of tokens because we're taking in tens of millions of documents. And the the the key to running this on any LLM is you have to take that genie, and that's what these AI programs are. They're genies, but you have to stuff it in the bottle. You cannot let it go out on its own. The the the way to make this really meaningful, meaning you ask it the same question with the same data and you'll get the same answer, which doesn't happen when you just do AI chat. You'll get different answers at different, you know, does it right? You've got to stuff it in a bottle. You've got to carefully give it the amount the the text it's allowed to look at. You have to tell it how to think. This is the crazy one. You can't let it just go off on its own in any way, shape, or form. You've got to keep that bottle that that genie tightly contained inside the bottle. If you do that, you can apply it at massive scale. It's actually not that complicated, Dan. You're basically just looking for all the ways you could say the word, you know, say I'm bullish. And that's what that's what these AI programs are really good at. All the different ways you could say something is a probabilistic approach. The issue is it's just massive scale, unbelievable scale, which is why we process hundreds of billions of tokens. >> I see. So, in other words, hypothetically speaking, you might, you know, you feed your uh your AI bot, your LLM with all the news that you sort of like and wanted to know and all of the financial data that you wanted to know. And when you're talking about stuffing the genie into that bottle, you're and and not letting it just do it. You're not letting it run free around the internet, right? Because as you said, >> oh my god, that's the worst possible thing you can do. The the crucial thing, Dan, is is think of an AI as an operating system. Think of it as an operating system. It's not the application. You're not asking it any sort of open-ended questions. You want to treat it like a linguistic calculator. So, you don't give it lots of information. You give it little bitty snippets of information at a time. And you, again, this is the weirdest one to kind of wrap your head around. You only allow it to think certain thoughts. And that that's really weird to say. And it and it's and it takes a while to program the operating system where it is only allowed to think certain thoughts. But if you can do that, you feed it like a chunk of text at a time. You only allow it to think certain thoughts about that chunk of text and then you have a whole another system that goes back and judges how it did to make sure it didn't somehow sneak off on its own and do some thinking on its own. If you can do that, you can actually get at scale precise measurements of how loud these different story lines are at any given time about any given financial thing. It's wild. Any language, right? So, we do Chinese domestic language and this one of the cool things is, >> you know, the AI doesn't care what language if it's trained on a language. It's not translating the language. it's actually reading that text for meaning in Mandarin or in, you know, German or whatever. So, it's it's incredibly powerful. Incredibly powerful. You can read everything in the world for meaning, but you got to keep that genie in the bottle or it'll go off on its own and give you all sorts of crazy stuff. you you determine for it what constitutes meaning like >> exactly the human that you do you never ask the AI what's the story or what's the narrative a human tells the AI here are the stories and you break it down into these little components again this is what I mean by telling the AI what it is allowed to think about and that comes from the human and that's the whole crux of this >> all right >> um Ben, we're we've actually u arrived at at time for our final question. I feel like we should have done a special twohour Ben Hunt episode here, but um it's been fascinating. I realize I'm I'm a little behind in my epsilon theory, so I'm I'm going to have to uh just spend a half a day on on your site. >> Come on. I uh the the the question that that I'm going to ask is the same final question for every guest no matter what the topic. Occasionally we have a non-financial guest and they get this identical question and it's simply it's for our listeners benefit. Um if you could leave them with one takeaway or one thought today, what what would you like that to be? >> I think about this a lot honestly. I do. I do. Um what I would ask every reader to do is to main we are all inundated with people giving us messages and stories. We are immersed in storytelling and it doesn't mean they're a lie, right? It but it means that people are intentionally telling us a certain story to try to get us to believe. This happens in politics. This happens in certainly in markets. We are we are told stories all the time and that's fine. That's just the way of the world. What I'm asking everyone to do and it's not easy is to maintain some critical distance to recognize that you're being told a story. So I think the most important question that anybody can ask whenever they read a story, whenever they read anything in the news is to ask themselves why am I reading this now? It just it just gives you a little bit of critical lets you step back a little say is you're not saying it's a lie. You're not saying it's a you know they're they're they're telling me this lie. It's just your narrative man. Now, just accept that these are all going to be stories, but it's maintaining a critical distance so you don't take it into your heart. Why am I reading this? Now, if you just ask yourself that story, that question about everything you read, I find that helps a lot to stay true to your own north star, your own value and values, and not get sucked into the storytelling. That's That's what I would like everyone to do. >> Perfect. I love that. Why am I reading this now? I've I've heard you say that before. I If I If I thought about it, I would have kind of nudged you, but that's perfect. Yeah. Why am I reading this now? Thanks for that. And thanks for being here, Ben. We have We are not going to wait years till the next time we have you back. >> Fantastic. Look forward to it, Dan. Really appreciate it. >> Yeah. Thank you. Well, that was great. I love that guy. He's brilliant and he looks at the world a totally different way. And to really like milk a good interview with Ben, I I feel like we should have a two or threearter, you know, just do an hour two or, you know, and put it out three weeks in a row or two weeks in a row or something because there's a lot there. >> Yeah, I totally agree. I mean to ha to hear from somebody who really is um leaning into narrative as a strategy in in the market is something you don't hear >> very often >> and he's been doing it for years. >> I know. But but it's still you don't you don't you don't hear people uh kind of admit that or get to where he is >> uh too much. So, um that's that was fascinating to hear uh from me and and >> the important part couple important things stood out to me, but the the risks in credit um the AI you know power uh deficiency I'll call it and um >> and then just his approach to markets overall beyond that. But, you know, the two things now, I mean, the credit the credit stuff is you see it you you're seeing it a little bit more. I don't know. It feels like more frequently. Um, the the risks popping up. So, yeah, it's definitely it's on my radar, >> right? Ben was saying, well, it probably be a few more months till the next, you know, cockroach creeps out of the woodwork and credit. But, >> um, I I tried to, you know, interject there and make the point like literally the stuff happens overnight. He's talking about funding. And funding is such a benign, you know, soft kind of a word, isn't it? Funding. Oh, it sounds sounds like, you know, your dad's gonna send you on a nice vacation or something, you know, funding. And and yet it's like it's brutal. It's absolutely doggy dog brutal. You show up for work, you're you work for Bear Sterns in March of 2008, and you show up for work, and you pick up the phone, and they say, "You're done. Not another penny." And you're out of business. It's um you know and and for those you know those shoes to drop they can drop any moment any day any day you can wake up and see that story um >> right and the thing about it now is you know and he was talking about how private credit or you know private markets are where um you know to look for some of this and the thing is with them though the public's not like primed for doesn't generally have uh exposure to that. So when you hear of some private company or private firm going bust for whatever reasons, um it's even more shocking to like the everyday person at that point. And I don't know, it's I I'm just thinking about how this could play out in, you know, in the next if it in the the private world. Um because it's all it's all credit related but in different forms. It seems, you know, he talked about 08 and 09 and and then now. Um, so >> yeah, be interesting. But hopefully that, you know, we had a little uplift there towards the end too about I I >> how to navigate this. >> Yeah. Yep. And I didn't mean like when I said, "Geez, you're bringing me down." I was I was really kind of half joking or whatever. Um it's sort of been you know Ben took up the challenge too and helped us out. >> U because my thought now is that >> you know I used to worry a lot about a bare market a steep bare market followed by a big sideways market and you know I've beat the history of that to death for anybody who reads the Stanbury Digest or the Ferraris report. Uh and and uh now I'm thinking, well, what if things play out sort of like the.com bust, which wasn't a major systemic financial crisis that was threatening to wreck the world. It was just a a tech bubble that blew up and you know, it was a big bubble, but it was a tech bubble and and you know, tech telecom and then there was also a there was a credit component to it. It was like the best moment in the world in 2002 or so to buy junk bonds. Um, but it didn't wreck the financial system. You know what I'm saying? And and maybe we get more, you know, these targeted sort of blowups and maybe the market just kind of doesn't o overwhelm us with 20% a year for the next, you know, three out of five years or whatever it's been for the last five or so. um rather than, you know, being a big uh a big crisis and a big bare market. I'm ready for anything. you know, I've always been ready for I've counseledled readers to be ready for anything, but um Ben was inspiring to me and I will admit to anybody that I've been floundering a bit because I've staked my whole life on doing you know financial focused fundamental research like balance sheets and in you know financial statement research basically and saying well this is a good business and I can prove that because it has a great financial history and it's trading waiting for, you know, 18 times earnings instead of 22 or whatever. So, let's buy it. But now, um, I'm changing and talking to people like Ben helps me through that. It really does. And I think we've got some other guests coming up who are going to talk also about AI and how they use it in their business to to find investments and stuff. So, I'm I'm excited and inspired and I'm going to I'm going to take all that excitement and inspiration and try to do something with it for our listeners and for readers of the Ferris Report and I know you'll probably, you know, put it in the digest yourself. Um, but that was awesome. I love talking with Ben Hunt. The guy's brilliant. Um, so that's another interview and that's another episode of the Stanberry Investor Hour. I hope you enjoyed it as much as we really, really, truly did. Opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stanbury Research, its parent company or affiliates.