Brace For Violent ‘Fourth Turning’ As 80-Year Generational Reset Begins | R. Patrick Kent
Summary
Market Liquidity: Emphasis on tracking global dollar liquidity (M2, TGA, QT) as a key driver of risk assets, with potential easing as QT ends and Treasury balances normalize.
Defense Spending: Secular rearmament continues regardless of Ukraine headlines, with focus on drones and cyber as future warfare vectors supporting sustained industry growth.
Nuclear Energy: A nuclear renaissance is highlighted, supported by policy (IRA, DOE), SMRs and potential fusion, and lessons from Germany’s deindustrialization after shuttering reactors.
AI Infrastructure: Large-scale data center buildouts and surging power demand seen as earnings drivers; near-term AI investment is inflationary as hyperscalers subsidize usage at a loss.
Cybersecurity: Rising nation-state hacking and active cyber warfare make cybersecurity an ongoing, strategic exposure within the broader defense theme.
Inflation Protection: Chronic deficits and monetization imply structurally higher inflation versus the prior cycle, favoring inflation hedges; long-run risk-free rates seen around 4–5%.
Energy Mix: Natural gas and nuclear are critical to meet AI-driven power needs; gas turbine order backlogs are rising, and utilities/power infrastructure require substantial capex.
Companies & Assets: Meta (META) cited for debt-funded AI capex, Microsoft (MSFT) tied to nuclear power interest, Rheinmetall (RHM.DE) as a defense beneficiary, and SMR/OKLO linked to SMRs; crypto remains high-volatility and liquidity-sensitive.
Transcript
Unfortunately for people invest crypto just became the easiest source of liquidity right it's just sitting there it can be easily sort of liquidated and in order to capture more liquidity and so when I look at it is anytime you have global dollar liquidity running below nominal growth you have to source it you either the growth has to come down to meet the liquidity or you've got to or you've got to liquidate something in order to to fund the the activity Germany shut down many of its nukes became incredibly dependent on Russian gas and and has now [music] had a a huge de-industrialization problem. >> The fourth turning may be one of the most important economic and investment themes of our generation. What is it? How will it impact our lives? How is this fourth turning going to change our civilization over the next 10 years and how do investors position for this revolution? We'll talk about this theme with our next guest are Patrick Kent. He is the portfolio manager of Hedgi Asset Management. Welcome to the show Patrick. Good to see you. Yeah. Hey, good to see you. Thanks for uh taking the time. >> I've had Neil How on the show before. So, he's the author of The Four Turning. People can check out our interview with Neil before. I've had Keith McCull on the show, CEO of Hedgei. Uh people can check out our Keith interview down below. And uh you're new on the program, but uh Hedgi is no stranger to the program. People love HedgeI. People love the work you guys are doing. So, welcome to the show. Let's start by talking about your current positioning rather than uh and then we'll transition into what the next 10 years is going to look like. I want to just paint a picture for the audience how our world will be different in 10 years and how our portfolios need to be different to match that change. Uh but first let's talk about tactical positioning in the next 6 to 12 months because you are also in law involved with um long short positioning as well. So talk about uh tell us about sentiment right now in the marketplace. There seems to be a lot of fear especially around uh risk assets and uh a lot of tech companies a lot of uh cryptos have been uh completely wiped out of their gains uh year to date and people are talking about whether or not this is the end of the correction or just the beginning. How do you see it? >> Well, I guess the answer is it depends, right? And I've been actually talking about this a lot on Twitter and if you follow ARX, if you follow me, you can kind of see this is the liquidity backdrop which um you know a thing that I look at very closely is just understanding what global dollar liquidity is doing, right? Dollar liquidity is ultimately the most important uh measure I think because there is not only is it the dominant, you know, currency for most trade, but there are enormous amounts of dollarated debt outside the US. So there is a constant need for dollars. Um, and this is actually we'll touch on this as a as a forth turning theme as well. But, uh, but just generally speaking, I I like to track very closely what happens with liquidity because it tends to tell you a lot about the risk environment, right? So, um, you know, you had Keith on the show, so you probably heard him or if you've consumed some of the research, you know, he talks about the machine, right? That the the market the machine is um, likes flows and it's like it wants it needs liquidity to feed that. Um and so when liquidity is tighter you got to sell something to make something else go up right when when liquidity is expanding everything can go up you know maybe now it's a relative game like some things go up a lot more and then others but uh but generally speaking it becomes a game where sort of everything can win but when liquidity is tighter it becomes a lot more choppy and you have an increase in volatility and interestingly what we saw is actually as the dollar started to increase and as the the treasury was um you know the the treasury account at the Federal Reserve uh ahead of the shutdown um began to expand. It went from about 300 billion in balance to about a trillion in balance u which is a huge um which is a huge drain on liquidity. Uh and so as the Fed balance sheet has continued to come down and in and QT uh and as some of the um the repos have come up have have sort of u been used up or the revolver's been used up there's now um it really tightened liquidity going into as we got into October sort of late September October you could see the annualized rate of dollar liquidity really started to decline and not surprisingly what we saw is um you know volatility spiking and interestingly you brought up crypto and I had actually talked talked about this that you know un unfortunately for people invested crypto just became the easiest source of liquidity right it's just sitting there it can be easily sort of liquidated and in order to capture more liquidity and so what I look at it is anytime you have global dollar liquidity running below nominal growth you have to source it you either the growth has to come down to meet the liquidity or you've got to or you've got to liquidate something in order to to fund the the activity and so that's been the backdrop today now as we s sit here the the treasur Treasury's balance at the reserve like that it will the treasury's bank account will likely come back down. The normal balance is probably about 300 to 400 billion and I would expect that that will actually bring some liquidity back into the market over the coming uh months. Now we'll see. Now on top of that the Fed is easing. On top of that we're looking at the probably the end of um QT. And so as we look out into the next year, especially if you know as you as you're familiar with Keith's terminology around sort of the quads and like whether growth is accelerating, inflation is accelerating decelerating. You know, he sort of talked about a lot in the the last couple months about this idea of sort of a a quad count of a 321, which is that we'll see inflation slowly decelerating and then and actual growth beginning to accelerate as we begin to year just on the on just on the year-over-year basis. And so and you know add to that the consumer is going to get a tax um uh rebate in the first quarter. So there could be some reasons why things could actually at the margin be better and liquidity could be better but you want to be cautiously uh aware of that as we look out um over the next few months. So I as I say we're start going back to where I started. I keep watching the liquidity environment because if liquidity begins to expand then it will be sort of an allcle um and I would expect that you'll get volatility coming back in perhaps and you'll see uh the market begin to to move again but um >> we shall see. >> Well, let's take a look at let's take a look at this chart here. So global M2 Money supply white line with the S&P 500 3month leg. So it it's clearly showing that the uh global M2 money supply is a leading indicator for price uh performance in the stock market. Is this a coincidence or is this causation? >> Yeah, I mean I think it's somewhat causation, right? Like it's it's available dollars to buy. >> Explain that. What is a transmission mechanism between higher money supply and into the stock market? >> Yeah. I mean the more money supply is available, the more things that can be purchased, right? So I mean more the more money supply around is actually increasing the amount of available liquidity to drive asset prices up. Um and so uh you know as I say I look at glo not only look at global money supply but I want to convert it convert it back. Oh, as you have it here, convert it back to in dollars. And so what happens, what I look at is not necessarily even the year-over-year because if you looked at year-over-year in this right now, it's actually looks quite good. It's probably up about 8% year-over-year. That that's not where what matters the most. What matters is what's happening at the margin. And when you look forward um you know, on a on a six-month annualized basis, that's now down to sort of probably under 5%. As you get out to the 3-month annualized, it's under 2%. And when anytime you're under nominal GDP, which is across the major economies is like 4 and a half%. It tends to bring in some I think some pressure to the markets. >> Can you just make a thesis then long-term investment thesis that global liquidity conditions will not dry up? There's no reason from the um for the money supply to to contract. Like you said, the end of QT is coming up in a couple weeks. The Federal Reserve is going to be even more dovish potentially after Jerome Powell leaves. And so the long-term positioning should just be long because if it's correlated to or at least even Yeah. Go ahead. >> Great. No, great great point and that's a good lead into some of the fourth turning themes. I mean, you've had Neil on the show, so you know how Neil thinks about this, right? Um, and I don't I'll probably paraphrase poorly, but the but the point being that, you know, his his view is that when you look at deficits, right, those will have to be monetized. How are you going to do that? like they're going I think he when he was even on your show probably talked about this that the history is would say that they're going to try to inflate away some of this right so to get that nominal growth you're going to have to um inflate away some of it so as we look about one of the key themes looking out you want to focus on like inflation protection is going to be something that's going to be chronically sort of needed and one of the key things that we're doing in the fund is sort of thinking about um you know how to protect your assets and in in that type of environment. So as we look over the next 10 years, we probably see pockets of higher volatility. We see increasingly sort of chronic needs for the the Fed to expand its balance sheet. Um and there will be um not to mention a re-industrialization policy that the that the um you know that we are currently sort of on um is uh will have to be monetized as well. So this is all something that like leads to the potential for chronic um inflation pressures. I mean even to your point like you brought up that we are looking at the Federal Reserve cutting rates. Well, inflation hasn't reached 2% yet. 2% was always the target that they talked about. We're kind of around 3% and we're talking about cutting rates, right? So, so already we've sort of let that sort of that bar of like what we should have um where inflation uh should be has already begun to move, right? They've now moved the bar from 2% to 3% which is telling you now structurally we're looking at um higher, you know, a higher potential inflation over time. Gold is one of the best assets of this year, and you already know why people hold gold. Well, it's because it's real money. But what if your gold could do more than just sit in a vault? That's where today's sponsor, Monetary Metals, comes in. They offer a way for you to earn yield on your gold paid in physical gold. Through their leasing marketplace, you can earn up to 4% [snorts] yield per year in gold. Instead of paying storage fees, your bullion can now work for you. And because that yield is paid in gold, not cash, your stack grows, no matter what the dollar does. Thousands of clients already earn monthly interest in gold and silver through monetary medals. So don't just hold it, put it to work. Go to monetary-medals.com/lin link down below or scan the QR code here to learn more and get started. Let's take a look at this chart that you tweeted, though. So here you have uh which way liquidity. This is a retweet of Keith McCulla's um post here. credit spreads this recent move high shouldn't be ignored. Okay, tell us why. >> Yeah, well because ultimately we'll have a credit event. If you have credit spreads moving wider, then that's a function of, you know, um it makes obviously makes borrowing more difficult, right? >> It is still much lower than the historical average though, isn't it? >> Oh, totally. I mean, h high yield at this point is very close to the lows for spreads, not not the highs. Um, and as I say, if we don't have if liquidity begins to expand and as if the the Treasury account is comes back into the market, I would expect these yields to stay tight for a while. Um, now how much lower they can go, I guess we'll see. I mean, if you're already at sort of 200, you know, 80 over, um, historically they haven't gotten much lower than that. Uh, and so we'd expect to see, you know, we'll see where they uh, where they continue to be over time. Looking ahead then, so assuming liquidity doesn't doesn't falter, we don't we don't have a major liquidity event in the next 12 months. Then the question is how do we allocate capital because presumably all markets get lifted but some more than others. How do you define this problem? >> Um so well it's a it's becomes a relative game right so the capital go where it's treated as best. [laughter] So I think uh you know yeah so I think when we we look at I mean you certainly expect some areas of equities to be strong I would imagine. Um equities do have a history of being somewhat of an inflation hedge can depend on the different sectors as to how they do. Um certainly um you know I combined with the potential for a real uh AIdriven re-industrialization policy all of the buildout of the uh data centers that we are are being planned over the coming years are going to be significant for active for activity and on top of that the power demand from that and we're going to have to follow up building power demand behind that. So all of this is areas where you could see earnings revisions and positive earnings revisions are a driver of earnings prices when there is liquidity to support the price going higher. Full stop. >> So let's paint a picture for further out going back to my earlier question in the beginning. What does the next 10 years look like? How will the world change fundamentally in the next 10 years and then we'll talk about investment implications. >> Yeah. So I mean this is the one you need back on for, right? [laughter] He'll talk a lot about this if you if you wind him up and let him go. Um I mean you know he's been talking about this now for decades that um as to what's coming and some of it's you know somewhat obvious from an observational standpoint like like demographics right but what's less obvious and where Neil's insights are always really compelling is what that means for the outlook and like how how that might change society how it might change our behaviors how it might change what we value how it might change a lot of different things. um but faced with you know certainly the potential for chronic deficits given that there's offshore sort of offbalance sheet spending in the forms of healthcare liabilities, social security liabilities that are coming onto balance sheet effectively for the for the federal government in the in the foreseeable future. We are sort of faced with uh potential for chronic deficits, never mind also the the themes of potentially rearmament in a world that's become, you know, more dangerous than we've certainly been used to over the last 20 years or 30 years. And then in as we go um you know the aging of the populace in the US is causing some of that as social security demands become higher, healthcare demands become higher. Um so all of this is is tied together but it will create a backdrop where ultimately um it does lead to one I think more sort of chronic potential inflationary pressure um but also just a higher volatility. I mean just all the things that we have become used to like here's a way I sort of explain this David like think about if you've been around doing this a long time now and you've talked to a lot of investors and you look at lots of investment charts and things when people look at sort of a long-term chart on something right they talk in terms of like well this is ch stock has never been cheaper in the last 10 years last 20 years right you know you could throw up a chart of 30 or 40 years and people like whoa that's really And yet like think about that. It's like half the lifetime of one person, right? Like I mean all of our modern financial system is based on sort of these like extrapolating things that have happened over you know effectively 100 years, right? I mean it's like deep research to go back and do work on valuations pre900, right? It's just the data is just very hard to come by. And so most of our modern heristics around this are all built in a very short period of time, right? And they're all generally from the post the this turn this this turning this last turning right this sort of like post World War II to now um is basically most of the modern um you know financial history and certainly expands even longer than the period that most people have even been actively managing money in this environment. Right? One of the most fascinating things of watching inflation pick up post in COVID was the first time that we'd seen inflation at that level since literally the 1970s and there were almost nobody left working in the financial markets that had ever seen it. Right? So like this was totally novel to most people's lived experience. Um you know last time there was inflation like that I was a you know uh an infant. Um, so I just think it's it's fascinating to see how um how this could how it could be very different. The next 20 years could look very different than the last. >> So let's lay out the agenda for the rest of the conversation. You've got the three pillars, protectionism, reinflation, industrial policy, rearmment. Uh well, let's talk about rearmment first and then I want to talk about your work at the uh biopysics economics institute. Biohysical sorry biohysical economics. Very interesting work you're doing there that ties into the themes of energy as well. And we'll close on there. So let's talk about rearmment. Just today on the 25th of November, the uh the Trump administration has uh reported that Ukrainian delegation uh has agreed uh with the US on terms of a potential peace deal. So we'll see how this plays out. Uh US Army Secretary uh Dan Driscoll held a secret talk on Monday with the Russian delegation in Abu Dhabi and now it's been disclosed what the talk was about. Army, army generals and high ranking officials are being sent to Ukraine as we speak to further consolidated talks with Zilinski. Um I was thinking about this this morning and um some questions came to me privately. How does this change the investment landscape if the war in the Ukraine deescalate? What do you think? >> Yeah, I mean I think I think it doesn't quite frankly. Um I think it's going to be perceived to right and certainly you saw that with some of this news of the deal out right the arm um I think most of the defense stocks sold off on that day. No small irony that like Ryan Matal, you know, the German um arms company was out actually saying their their sales are going to 5x 2030, right? Um so this spending is happening regardless of what happens here. Like so the you know Europe's increase in defense spending that horse has left the barn. Like that's going to happen. You've seen some of the saber rattling between Japan and China recently. That's again we're seeing this crank up, right? like this stuff is all happening and even if there's a Ukraine deal, do we really think that that is like there isn't going to be a continued sort of military buildup within Ukraine to for potent to defend a potential another attack down the road? There's still the the the rebuild of our own arms, not to mention the modernization of our own military around building out drones and other things that are going to be needed um for the next way for the future ways in which we fight wars. So I I think that the the secular trend of the spend increasing here doesn't really change just the based on the fact that this deal has happened again that I think that perception can change in the short run but then I think we just have to wait and see fundamentals play out and as the as the funding continues to go up um and these companies revise you know revenue and earnings higher then you know this what happened to stocks usually follow >> no impact on commodities oil >> I mean certainly oil could potentially have an impact Um but I would argue that most of the it hasn't really restricted much coming to market right I mean um Russian oil has found its way into the market one way or the other Iranian oil when they were like understand coming to the market like this stuff was getting into market it's just a question of has to be sold at a discount through um you know through different trading houses that are willing to accommodate it but it ends up coming to market so there's no like supply that comes on that wasn't there in fact arguably you could actually even make an argument that if it leads to improved economic um you know conditions it would actually be bullish for demand right um so when I think about you know I mean in the near term certainly there's a lot of talk about over supply and oil and that type of thing but I think we all know that that anyone's observed the onshore shale story in the US knows that the break even for oil price production has gone up quite a bit over the last [snorts] few years I mean um you know I looked at this years ago that you could see that the the long-term inflation adjusted price of oil was about $20 over a hundred years and then uh and then basically ramped to 40 and now to close to almost 60 uh where you know activity falls off very quickly under 60. Rig count goes down. Um most of these companies will not expand projects when if it falls below sort of $60 to $50 to $60. >> So who are we rearming against in the next 10 years is the larger geopolitical question. if let's say things deescalate in the in the Eastern European front >> and uh who knows what's happening in the Middle East, what what what what who's the bigger enemy right now? >> We're into the future. >> I mean I mean certainly obviously I'm I'm not surprisingly will pull from the headlines, right? The the coal war that is is ongoing is between not only Russia, the US, Russia and Europe, but most importantly China and uh and the US, right? And the flash point of Taiwan is obviously a very key one. Um and but we're [clears throat] seeing I think that's where you see for the the most of this activity sort of this multipolar world where you do have big zones of influence across both you know um Europe US and Asia >> re rearmament in which sense the cyber sense or actual physical hardware because that >> impact that's a great that's a great point actually it's one of the things we're looking at both within the within the foring fund um we've kind of focused both on not only I we'd say overall a growth in defense spending within that focusing on the things that will have more of a the future way in which we fight wars, right? Which drones are a good example of that. Um but then uh also to your point like cyber um and I think you know if you look again if you're following the news closely which I know you do, there's been no shortage of um you know news stories more just recently around the increase in hacking activity by nation state actors. Right. So the like this is this is happening now, right? We're already we're already in it. Um we're they're already seeing sort of cyber warfare going on. And so increasingly I think you know cyber security is a is an ongoing uh theme that we'll be exposed to at least to some degree inside the inside the strategy. >> All right, let's move on to uh some monetary issues now. So we talked about reinflation briefly, but to what extent will inflation reappear? Are we talking about 3 4%? we're talking about double digits like the Vulkar area. What what does the future look like? >> Yeah, that's a that's a that's a good point because I I think one of the things that got missed like if you take it back to 2008 2009 and the expansion of the Fed's balance sheet in the wake of the financial crisis, you actually didn't see like at the time there was a there were a lot of people calling for an inflation spike, right? because the Fed was was expanding the balance sheet so aggressively and introducing QE to offset the potential effects of the financial crisis that there were many pundits calling for inflation. Um, and it never really showed up. Right? So, there's a couple reasons why. I mean one of them is that obviously you know Chinese imports to the US continued to be a deflationary impact um on the economy but also um I think if you there was no real transmission mechanism. So the answer to to the consumption like to consumer price inflation. So what you had actually happening was that you saw I I would argue we did see inflation to some degree. We saw asset price inflation right? Um we've had you know huge returns uh across the market over that period over the last you know call it uh now what 15 17 years um 16 years and uh and that's you know in part that's been um a function of the expansion of the Fed's balance sheet right so um what I where I think you saw postcoid was the first time you saw a real transmission mechanism right so like you actually saw the money not only being sort of printed but then literally sent in checks to people to spend, right? And if they get money, they're going to spend it. And so certainly against the backdrop of supply chain constraints that were happening um you know due to COVID and and that you saw inflation take off pretty aggressively. So it'll be a little bit different I think this time, right? Um I think you have you know certainly the potential for um sort of energy costdriven inflation but that's a less it's less likely to spike the way um the way we saw in say like the vulkar era like to your point the vulkar era type inflation um but more of a more of a gradual dial turning right that like because it takes a while to bring on new say like new utility supply. It takes a while to build this out, right? It takes um so as you're and you know certainly new new mines, I mean any of this stuff takes a while to bring on more supply. Um and so those are longwave things. And I I think if you if you begin to see depending on how aggressively we both the Fed is expanding the the balance sheet but then also um how aggressively we try to finance this and push this push forward many of the either reshoring the um rearmment theme but obviously the bigger big elephant in the room AI and data center spending as if if we're going to spend that that kind of money um over the next few years and move that kind of material it could certainly have in energy and materials cost inflation and that and that'll bubble through to some degree in price increases. >> The biggest argument against long-term inflation or the reemergence of long-term inflation actually is AI. Some people claim that AI is inherently deflationary. Well, all technological progress is deflationary to some extent. What what's AI going to do to our overall costs? >> Yeah. I mean, massive supply output gap. I mean, yeah, that's that's one that's one argument against long-term inflation. Have you thought about this? >> I have. Well, I've tried to unpack it. I don't know that I have a perfect answer for it. I mean, right now it's an inflationary force, I would argue, right? Is it's because it is actually a subsidized it's subsidizing demand by selling at a loss. All these companies are effectively losing money in their AI endeavors. Um, nobody's turning a profit in AI right now. Um, now obviously that may change down the road as all of this become as like you know they deploy more services and agent AI and things that like they can actually monetize and finally see the value [clears throat] and ultimately has to right because these companies are not only spending their cash off the balance sheet they're also beginning to borrow money to do it right so they're now I mean Meta alone has gone from a net cash company to a net debt company right um over just the last year and so these companies are which means they won't be buying back stock like these things that they used to do like that's probably now going to not happen because they're continuing to add debt to these balance sheets um to finance this buildout. So I think you know again like the more aggressively they try to do this like it will and we're subsidizing the end customer demand um selling effectively below cost well then that's an inflationary force by itself because that demand is going to u create more power price increase not to mention the material increase cost increase across trying to build this much capacity. >> What's going to happen to the bond market then? Have you um taken a look at this? So long-term structural bull market kind of ending around 2021. If inflation reappears, can we see a long-term structural bare market for the bonds continue? This is the 10ear Treasury yield. >> Yeah, it's a good it's a good question, right? It'll it sort of depend I think largely on what the components of this are. So if [clears throat] you look at there's a great paper that I think the Bank of England did a couple years ago. I hope I'm citing that correctly. um that was looking at sort of the long-term average, you know, risk-free rate over like 300 years or something I thought or maybe it was 400 years, right? And they use they linked this by using not only sort of originally like in the LRA and then in in the pound and then in the US and like linking them across like what was the predominant risk-free rate um or underlying instrument that was um marked the risk-free rate for those periods. And what it comes back to is that it's roughly about kind of like call it four to 5% has been the average for um for literally hundreds of years. Um and it's not probably not that mysterious as to why. I mean ultimately it's it's growth plus inflation, right? get you to that yield. And so the question is like, you know, looking at the demographics, we'd argue, you know, I would say grow, the real component of growth will probably slow. If you have productivity increases, maybe the real component of growth goes up. Is inflation the same as it's been roughly 2% or 1 and a half to 2% or is it slightly higher? Is it go up to three? just stack these things up and it tells you like, well, this could put the bond yield at something closer to like four and a half, five, five and a half percent as um as we move forward. But I mean that's not that's not happening today, right? That's at 4% today as like you know some of the slight flight to safety around in this liquidity environment has actually driven the yields back to closer to four. Demographics you brought up several times that's probably one of the biggest changes that our society will face is an aging demographic aging population and lower growth in the population itself as the versatility rate for most developed countries falls below two certainly you've tracked [snorts] this Neil's talked about this how does this change finance >> yeah I mean not only that like right so not only do we see you know many countries where you're well below replacement rate right um and you know the US is somewhat better but still pretty low and especially without immigration are pretty quite low. Um most of the most of the countries around the developed world are are below replacement rate today. Um I'd argue even um you know Neil and I have gone back and forth on this. If you look at the UN projections for population growth, they've typically every time they revise their they revise their predictions down not up because and that's mostly because these um you know fertility rates around the world have actually come down quite a bit faster than even originally anticipated in most cases and some of the policies that were meant to drive uh improvement like say you know I think when China got rid of their one child policy and tried to incent um growth South Korea's tried to incent um more growth hasn't worked like you haven't seen a bounce Um there's a I think there's a lot of reasons why you could probably argue why that's the case, but it just becomes um becomes very difficult to actually see how that that you know demographics are a tanker, right? Like turning that takes a long time to actually see that really make a big long wave improvement and for now it's still moving in the same direction which is slower and that's just fewer people buying stuff, right? So I mean that's fewer people to consume um for for growth, right? to consume which fewer consumers means less growth, right? Unless they're consuming that much more per per capita. Um, >> a few trends I see emerging from this. One, a uh maybe healthcare stocks long-term bullish. I'll let you comment on that. Number two, depending on how the government finance more social security because of the aging population, potentially higher taxes and uh fill in the blanks here. What else am I missing? Yeah, I mean that's those you hit the the most important ones I think which is that you're seeing like you know a AI the jury's out on whether AI will like vastly increase productivity or not. I don't know. I mean I think so. I think it should have it should have some positive impact I would hope. Um and I think but if you're looking at the con the flip side of that is that an aging population right is got a higher sort of dependency ratio where you have more and more people who are you know over the age of 65 than there are people under the age of 65 or people over the age of 70 and 80 than there are people. And as that balance continues to shift like that burden of paying for both like healthcare, social security, these things kind of fall on that the group that the younger cohort and um so how will you do that? Well, I assume you know in part that has to be either through raising taxes or it has to be through monetizing the debt, right? I mean there's no there's no real or cutting the benefits. Like there's not really another way to slice it, right? You either have to like one something has to give across of these. Um, and so I think you know as Neil has talked about I think maybe even on when he was discussing with you like I think he brought up this concept of like because certain something he's talked about with me like that you know we could see almost like a change in in families like there may be more multigenerational family happening again because like taking care of elderly parents like having things in communities because the cost of the way we've done this is is is very very high right and so continuing to do that in the same way will be very difficult. ult and as you know again as the aging if the average age is increasing that's itself is kind of a drain on productivity and as like the and you know obviously personally we all want healthcare for our elderly parents but as a society that's a sort of a productivity drag right because spending on like the least productive people in the society is not exactly like a product it's a like a high productivity use of the obviously from a personal perspective, it's fantastic in the sense that you want to have your your parents around or your your family members around for longer, but from an economic standpoint, it's also like kind of a drag on productivity. What's the um energy andor commodities play for the uh long-term buildout of uh data centers, hyperscalers, and AI to infiltrate every corner of society? >> Yeah, it's a good question. I mean, it's everything, right? So, um, one of the great, one of the authors that was really influential to me is, um, uh, Voslav Smile. Um, if you've ever read any of his books or you familiar heard his name before, he's written a ton of books on energy, energy transition, energy in the world. Um, I would recommend, you know, any and all of them. Uh, but I think one of the things he talks about, you know, one of his books is that, you know, we've never like stopped using an energy source, right? like when we discover an energy source like we burn more firewood today than we did like the hundred years ago it's just decreased as a percentage of the energy mix right but like we actually we don't stop using anything and it's actually one of the biggest issues with um I think when I you know look back at kind of how we approaching sustainability when people were talking even just 5 years ago how we were going to be sort of off of fossil fuels within you know five six seven eight year and you're like it's just not realistic is like we these are high density the high energy return on energy invested fuels they are um they drive they you know are the reason we have like all of our sort of modern lifestyle um that replacement is not as easy to to do as I think you know many would have people believe and what we're seeing now is you bring in AI which is enormous power use then uh you know we've seen not only this resurgence in looking at nuclear power but also even natural gas which will be needed to balance this. And so I think when you talk about the two things that I would say probably have I think pretty you know a pretty strong good outlook is nuclear energy will continue to ramp um and uh and natural gas will continue to utilization will go higher and certainly we're seeing all the signs there. I mean like if you look at the tur gas turbine companies are seeing massive orders into their backlogs. We're seeing um you mean we're bringing three Mile Island back online right? I mean I wrote this piece so back at BMY Melon we did a frontier themes piece about six seven years ago and my piece that my contribution to that future frontier themes idea was the return of nuclear um nuclear renaissance um and my argument was that if they were really serious about doing a zerocarbon grid uh then there's absolutely no way to shut down your nuclear in fact you have to build more because a nuclear is the most reliable lowest carbon intensity, highest energy density source we have. Um, so one of the so there's no this idea that you know I mean you saw what happened in Europe. Germany shut down many of its nukes became incredibly dependent on Russian gas and then has now had a m a huge de-industrialization problem where the costs of uh running their economy have increased dramatically because of the um cost of energy. who's building out these uh nuclear facilities. You're right, but they're also very high capex. Are we going to see them coming out from the state or private utilities or the tech companies? Microsoft recently restarted an old nuclear reactor, for example. >> Yes. Yes. And yes. [laughter] Uh so I think you're I think you're spot on, right? Like so um the government's going to be helping to finance some of this. They've already out they're already out talking about this in the news. I mean that part of the policies u of the Trump administration are actually quite supportive as was uh the Biden administration for nuclear. I mean they had they were the first ones to actually bring this back as part of the um the the the uh was it what was it called? It was the inflation beating bill or something. I remember what they called >> inflation reduction act. >> Inflation reduction act. Thank you. I was like it's part of those things. I was like the most uh kind of absurdly named uh bill considering the contents of it. But um but that was you know as far as part of that um legislative agenda they had brought back credits and approved credits for nuclear energy and began to you get to sew the seeds of what's coming now and so and certainly that the Trump um department of energy has been um actively looking at not only traditional nuclear to your point but also um you know new new possible possibilities inside of nuclear like small modular reactors um like companies like I think you know Oaklo and um and new scale and and any number of other ones and opt and and the interesting skunk works thing that's happening in the background too is uh many private companies that are working on fusion um you know many of which I've talked to over the years um and that you know that's whether that will end up working or not I mean those exper those projects are ongoing and we'll know within a few years whether some of them are potentially have a pathway to being viable sources of energy but I I'm a strong believer that the future is nuclear for both fision and fusion Um it is just it's the most reliable base power that we um that we can uh at the highest energy density, highest reliability, lowest emissions um power that we have. Okay. Well, let's close off on some um out of the box ideas that you've accumulated through working with the biohysical economics institute. You've brought some interesting concepts to me offline and it's not something that we as investors typically think about. Tell us about what you guys are looking at right now. Yeah. So really the idea behind the biohysical economics institute is just really focus on you know what I think is really a misunderstood component of like the pro of um the economic sort of production function right if like most most people who've been to business school or taken an undergrad economics class can cite you know capital and labor as the inputs to the economy and it treats energy as if it's a um a completely uh substitutable good when in fact you know to quote uh economist Steve Keane. Um, you know, capital without energy is a sculpture and, um, you know, labor without energy is a corpse, right? Like none of this works without energy. And I think before we got on, I mentioned to you the sort of thought experiment of [clears throat] like if you know the energy companies disappeared tomorrow, it would be riots in the streets, right? like no one could get to work, no one could do anything. Lights would go on, like all the like the entire economy would crater very quickly, which is surprising considering it's like, you know, um 3% of the or less of the of most indices. Um and yet, you know, by comparison, there are companies that have much more market cap than the entire sector that could vaporize overnight. You'd never notice, right? [clears throat] You'd be like, "Yeah, all right, life goes on." Like, you okay? Like I mean it's like I I was I was doing this thought experiment even on like the you know something like Mag 7, right? Is like you know if Amazon disappeared I'd be like severely disrupted in my daily life, right? Like if if Netflix disappeared I'd be kind of like annoyed but but I'd get over it. And if Mag speaks to my consumption of social media, but meta disappeared I was like I don't even know if I notice like it would take me a few days. Maybe my daughter my daughter would care. I um but it would take me a little while to even notice. Um, so I just it's like it's um it's just an interesting thing and how we treat some of these crucial uh inputs to our economy are not accurately assessed and it's led to some wrong thinking about um I think to for example like the one I gave it that we could shut down nuclear power and somehow also get to uh you this carbon-f free grid and it was all going to be done on the back of intermittent renewables which at that was somehow going to drive cost lower for energy and all that became you know I would argue is bunk like and and I could have told you that like based on the work we did around energy return on energy invested for many of the renewables especially when you adjust for intermittency um and so uh I think you just you know you have to look at um the sort of the total cost of the system for many of these things >> this is an interesting topic and I just as you were talking I was thinking about this so the the idea of multiplying force so you have here let's say one unit of gasoline or one unit of raw material input. And then in the olden days before the internet, you had some manufacturing company or production company using that one unit to generate XY to to generate X unit of input versus Y unit of output. I believe in the tech age that YU of output is significantly higher than before. So therefore, it's a lot more efficient how they're the tech companies are able to utilize output using one unit of input. And so just think about meta. Let's take Meta for example. You have Meta consuming relatively small amount of electricity and energy compared to the amount of GDP that they and all the companies around their ecosystem are generating using that technology. It's just incredible how tech >> Yeah. Yeah. No, that's a great point. I mean, I would say Yeah, totally. And we actually I did some work around this a couple years ago where we looked at kind of trying to look at the underlying energy return on energy invested sort of by um so I won't get into all the the way with the conversions we're doing but we're looking at sort of like the energy intensity of the economy converting that back to sort of the energy component of the dollar and then looking at the revenue to the energy input cost to look at different sectors to understand their relative like sort of efficiency at converting energy to sort of energy GDP and software was a very high euro ROI um uh area as you can imagine. >> Okay, I want to finish off on digital assets. How do digital assets fit into the uh forth turning narrative in the next 10 years? Blockchain, tokenization, uh stable coins. How does that have a place in this in this in this future? >> Yeah, I mean certainly I mean I think it's something we track and as if you're familiar with ADI's work, right? And you know um one of the things we are integrating into the strategy quite closely is not only the top down macro work that's done by uh hedgeis um you know the the rolling outlook of the quad outlook for growth and inflation but also um the risk management that we uh they use to sort of signal when it might be worth owning something when they're not. Hedgi has been very vocally bearish on crypto recently. Um you know so we are it's it's proven itself to be a very high volatility asset. Um it's it's not clear to me whether that's a feature or a bug. Over time perhaps that become that volatility comes down. It has not so far and it has led to, you know, these crypto assets, Bitcoin in general, but all of them in general being highly correlated to things like the NASDAQ, not necessarily something like gold where like their correlation is kind of less obvious where to me that always seems like it should be. If they're really just stores of value and have a low um supply growth, then they should kind of track each other at least some degree, right? They should rhyme even if they don't totally overlap. and um that has not been the case. So I think there's a lot of speculative activity that happens in these which leads them to being more a highly volatile asset class and highly volatile asset class is fine but I think you want to manage that volatility carefully and so we will probably intermittently look at these um and could possibly have them involved in the the portfolio over time. >> Thanks very much uh thank you so much. Yeah, I really appreciate where where can we learn about you? Uh where can we follow you and uh follow you and hedge as Yeah, I mean you could check out uh obviously you can check out the hedgei am uh website um there'll be there's certainly some information about funds and for us up there uh if you want to anyone wants to follow me on uh on X you can find me at RPKent very easy to remember um and uh yeah I think uh and obviously and I pop up if you're a subscriber of hedgei research or you follow sometimes I popping up sometimes on the on the call or uh on different uh parts of that uh to do some of the uh media as All right, excellent. Thank you very much for your time today and uh we'll follow you in the links down below. So check that out. See you next time, Patrick. Good to see you. >> All right. Excellent. Thanks, David. Appreciate it. >> Thank you for watching. Don't forget to like and subscribe.
Brace For Violent ‘Fourth Turning’ As 80-Year Generational Reset Begins | R. Patrick Kent
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Unfortunately for people invest crypto just became the easiest source of liquidity right it's just sitting there it can be easily sort of liquidated and in order to capture more liquidity and so when I look at it is anytime you have global dollar liquidity running below nominal growth you have to source it you either the growth has to come down to meet the liquidity or you've got to or you've got to liquidate something in order to to fund the the activity Germany shut down many of its nukes became incredibly dependent on Russian gas and and has now [music] had a a huge de-industrialization problem. >> The fourth turning may be one of the most important economic and investment themes of our generation. What is it? How will it impact our lives? How is this fourth turning going to change our civilization over the next 10 years and how do investors position for this revolution? We'll talk about this theme with our next guest are Patrick Kent. He is the portfolio manager of Hedgi Asset Management. Welcome to the show Patrick. Good to see you. Yeah. Hey, good to see you. Thanks for uh taking the time. >> I've had Neil How on the show before. So, he's the author of The Four Turning. People can check out our interview with Neil before. I've had Keith McCull on the show, CEO of Hedgei. Uh people can check out our Keith interview down below. And uh you're new on the program, but uh Hedgi is no stranger to the program. People love HedgeI. People love the work you guys are doing. So, welcome to the show. Let's start by talking about your current positioning rather than uh and then we'll transition into what the next 10 years is going to look like. I want to just paint a picture for the audience how our world will be different in 10 years and how our portfolios need to be different to match that change. Uh but first let's talk about tactical positioning in the next 6 to 12 months because you are also in law involved with um long short positioning as well. So talk about uh tell us about sentiment right now in the marketplace. There seems to be a lot of fear especially around uh risk assets and uh a lot of tech companies a lot of uh cryptos have been uh completely wiped out of their gains uh year to date and people are talking about whether or not this is the end of the correction or just the beginning. How do you see it? >> Well, I guess the answer is it depends, right? And I've been actually talking about this a lot on Twitter and if you follow ARX, if you follow me, you can kind of see this is the liquidity backdrop which um you know a thing that I look at very closely is just understanding what global dollar liquidity is doing, right? Dollar liquidity is ultimately the most important uh measure I think because there is not only is it the dominant, you know, currency for most trade, but there are enormous amounts of dollarated debt outside the US. So there is a constant need for dollars. Um, and this is actually we'll touch on this as a as a forth turning theme as well. But, uh, but just generally speaking, I I like to track very closely what happens with liquidity because it tends to tell you a lot about the risk environment, right? So, um, you know, you had Keith on the show, so you probably heard him or if you've consumed some of the research, you know, he talks about the machine, right? That the the market the machine is um, likes flows and it's like it wants it needs liquidity to feed that. Um and so when liquidity is tighter you got to sell something to make something else go up right when when liquidity is expanding everything can go up you know maybe now it's a relative game like some things go up a lot more and then others but uh but generally speaking it becomes a game where sort of everything can win but when liquidity is tighter it becomes a lot more choppy and you have an increase in volatility and interestingly what we saw is actually as the dollar started to increase and as the the treasury was um you know the the treasury account at the Federal Reserve uh ahead of the shutdown um began to expand. It went from about 300 billion in balance to about a trillion in balance u which is a huge um which is a huge drain on liquidity. Uh and so as the Fed balance sheet has continued to come down and in and QT uh and as some of the um the repos have come up have have sort of u been used up or the revolver's been used up there's now um it really tightened liquidity going into as we got into October sort of late September October you could see the annualized rate of dollar liquidity really started to decline and not surprisingly what we saw is um you know volatility spiking and interestingly you brought up crypto and I had actually talked talked about this that you know un unfortunately for people invested crypto just became the easiest source of liquidity right it's just sitting there it can be easily sort of liquidated and in order to capture more liquidity and so what I look at it is anytime you have global dollar liquidity running below nominal growth you have to source it you either the growth has to come down to meet the liquidity or you've got to or you've got to liquidate something in order to to fund the the activity and so that's been the backdrop today now as we s sit here the the treasur Treasury's balance at the reserve like that it will the treasury's bank account will likely come back down. The normal balance is probably about 300 to 400 billion and I would expect that that will actually bring some liquidity back into the market over the coming uh months. Now we'll see. Now on top of that the Fed is easing. On top of that we're looking at the probably the end of um QT. And so as we look out into the next year, especially if you know as you as you're familiar with Keith's terminology around sort of the quads and like whether growth is accelerating, inflation is accelerating decelerating. You know, he sort of talked about a lot in the the last couple months about this idea of sort of a a quad count of a 321, which is that we'll see inflation slowly decelerating and then and actual growth beginning to accelerate as we begin to year just on the on just on the year-over-year basis. And so and you know add to that the consumer is going to get a tax um uh rebate in the first quarter. So there could be some reasons why things could actually at the margin be better and liquidity could be better but you want to be cautiously uh aware of that as we look out um over the next few months. So I as I say we're start going back to where I started. I keep watching the liquidity environment because if liquidity begins to expand then it will be sort of an allcle um and I would expect that you'll get volatility coming back in perhaps and you'll see uh the market begin to to move again but um >> we shall see. >> Well, let's take a look at let's take a look at this chart here. So global M2 Money supply white line with the S&P 500 3month leg. So it it's clearly showing that the uh global M2 money supply is a leading indicator for price uh performance in the stock market. Is this a coincidence or is this causation? >> Yeah, I mean I think it's somewhat causation, right? Like it's it's available dollars to buy. >> Explain that. What is a transmission mechanism between higher money supply and into the stock market? >> Yeah. I mean the more money supply is available, the more things that can be purchased, right? So I mean more the more money supply around is actually increasing the amount of available liquidity to drive asset prices up. Um and so uh you know as I say I look at glo not only look at global money supply but I want to convert it convert it back. Oh, as you have it here, convert it back to in dollars. And so what happens, what I look at is not necessarily even the year-over-year because if you looked at year-over-year in this right now, it's actually looks quite good. It's probably up about 8% year-over-year. That that's not where what matters the most. What matters is what's happening at the margin. And when you look forward um you know, on a on a six-month annualized basis, that's now down to sort of probably under 5%. As you get out to the 3-month annualized, it's under 2%. And when anytime you're under nominal GDP, which is across the major economies is like 4 and a half%. It tends to bring in some I think some pressure to the markets. >> Can you just make a thesis then long-term investment thesis that global liquidity conditions will not dry up? There's no reason from the um for the money supply to to contract. Like you said, the end of QT is coming up in a couple weeks. The Federal Reserve is going to be even more dovish potentially after Jerome Powell leaves. And so the long-term positioning should just be long because if it's correlated to or at least even Yeah. Go ahead. >> Great. No, great great point and that's a good lead into some of the fourth turning themes. I mean, you've had Neil on the show, so you know how Neil thinks about this, right? Um, and I don't I'll probably paraphrase poorly, but the but the point being that, you know, his his view is that when you look at deficits, right, those will have to be monetized. How are you going to do that? like they're going I think he when he was even on your show probably talked about this that the history is would say that they're going to try to inflate away some of this right so to get that nominal growth you're going to have to um inflate away some of it so as we look about one of the key themes looking out you want to focus on like inflation protection is going to be something that's going to be chronically sort of needed and one of the key things that we're doing in the fund is sort of thinking about um you know how to protect your assets and in in that type of environment. So as we look over the next 10 years, we probably see pockets of higher volatility. We see increasingly sort of chronic needs for the the Fed to expand its balance sheet. Um and there will be um not to mention a re-industrialization policy that the that the um you know that we are currently sort of on um is uh will have to be monetized as well. So this is all something that like leads to the potential for chronic um inflation pressures. I mean even to your point like you brought up that we are looking at the Federal Reserve cutting rates. Well, inflation hasn't reached 2% yet. 2% was always the target that they talked about. We're kind of around 3% and we're talking about cutting rates, right? So, so already we've sort of let that sort of that bar of like what we should have um where inflation uh should be has already begun to move, right? They've now moved the bar from 2% to 3% which is telling you now structurally we're looking at um higher, you know, a higher potential inflation over time. Gold is one of the best assets of this year, and you already know why people hold gold. Well, it's because it's real money. But what if your gold could do more than just sit in a vault? That's where today's sponsor, Monetary Metals, comes in. They offer a way for you to earn yield on your gold paid in physical gold. Through their leasing marketplace, you can earn up to 4% [snorts] yield per year in gold. Instead of paying storage fees, your bullion can now work for you. And because that yield is paid in gold, not cash, your stack grows, no matter what the dollar does. Thousands of clients already earn monthly interest in gold and silver through monetary medals. So don't just hold it, put it to work. Go to monetary-medals.com/lin link down below or scan the QR code here to learn more and get started. Let's take a look at this chart that you tweeted, though. So here you have uh which way liquidity. This is a retweet of Keith McCulla's um post here. credit spreads this recent move high shouldn't be ignored. Okay, tell us why. >> Yeah, well because ultimately we'll have a credit event. If you have credit spreads moving wider, then that's a function of, you know, um it makes obviously makes borrowing more difficult, right? >> It is still much lower than the historical average though, isn't it? >> Oh, totally. I mean, h high yield at this point is very close to the lows for spreads, not not the highs. Um, and as I say, if we don't have if liquidity begins to expand and as if the the Treasury account is comes back into the market, I would expect these yields to stay tight for a while. Um, now how much lower they can go, I guess we'll see. I mean, if you're already at sort of 200, you know, 80 over, um, historically they haven't gotten much lower than that. Uh, and so we'd expect to see, you know, we'll see where they uh, where they continue to be over time. Looking ahead then, so assuming liquidity doesn't doesn't falter, we don't we don't have a major liquidity event in the next 12 months. Then the question is how do we allocate capital because presumably all markets get lifted but some more than others. How do you define this problem? >> Um so well it's a it's becomes a relative game right so the capital go where it's treated as best. [laughter] So I think uh you know yeah so I think when we we look at I mean you certainly expect some areas of equities to be strong I would imagine. Um equities do have a history of being somewhat of an inflation hedge can depend on the different sectors as to how they do. Um certainly um you know I combined with the potential for a real uh AIdriven re-industrialization policy all of the buildout of the uh data centers that we are are being planned over the coming years are going to be significant for active for activity and on top of that the power demand from that and we're going to have to follow up building power demand behind that. So all of this is areas where you could see earnings revisions and positive earnings revisions are a driver of earnings prices when there is liquidity to support the price going higher. Full stop. >> So let's paint a picture for further out going back to my earlier question in the beginning. What does the next 10 years look like? How will the world change fundamentally in the next 10 years and then we'll talk about investment implications. >> Yeah. So I mean this is the one you need back on for, right? [laughter] He'll talk a lot about this if you if you wind him up and let him go. Um I mean you know he's been talking about this now for decades that um as to what's coming and some of it's you know somewhat obvious from an observational standpoint like like demographics right but what's less obvious and where Neil's insights are always really compelling is what that means for the outlook and like how how that might change society how it might change our behaviors how it might change what we value how it might change a lot of different things. um but faced with you know certainly the potential for chronic deficits given that there's offshore sort of offbalance sheet spending in the forms of healthcare liabilities, social security liabilities that are coming onto balance sheet effectively for the for the federal government in the in the foreseeable future. We are sort of faced with uh potential for chronic deficits, never mind also the the themes of potentially rearmament in a world that's become, you know, more dangerous than we've certainly been used to over the last 20 years or 30 years. And then in as we go um you know the aging of the populace in the US is causing some of that as social security demands become higher, healthcare demands become higher. Um so all of this is is tied together but it will create a backdrop where ultimately um it does lead to one I think more sort of chronic potential inflationary pressure um but also just a higher volatility. I mean just all the things that we have become used to like here's a way I sort of explain this David like think about if you've been around doing this a long time now and you've talked to a lot of investors and you look at lots of investment charts and things when people look at sort of a long-term chart on something right they talk in terms of like well this is ch stock has never been cheaper in the last 10 years last 20 years right you know you could throw up a chart of 30 or 40 years and people like whoa that's really And yet like think about that. It's like half the lifetime of one person, right? Like I mean all of our modern financial system is based on sort of these like extrapolating things that have happened over you know effectively 100 years, right? I mean it's like deep research to go back and do work on valuations pre900, right? It's just the data is just very hard to come by. And so most of our modern heristics around this are all built in a very short period of time, right? And they're all generally from the post the this turn this this turning this last turning right this sort of like post World War II to now um is basically most of the modern um you know financial history and certainly expands even longer than the period that most people have even been actively managing money in this environment. Right? One of the most fascinating things of watching inflation pick up post in COVID was the first time that we'd seen inflation at that level since literally the 1970s and there were almost nobody left working in the financial markets that had ever seen it. Right? So like this was totally novel to most people's lived experience. Um you know last time there was inflation like that I was a you know uh an infant. Um, so I just think it's it's fascinating to see how um how this could how it could be very different. The next 20 years could look very different than the last. >> So let's lay out the agenda for the rest of the conversation. You've got the three pillars, protectionism, reinflation, industrial policy, rearmment. Uh well, let's talk about rearmment first and then I want to talk about your work at the uh biopysics economics institute. Biohysical sorry biohysical economics. Very interesting work you're doing there that ties into the themes of energy as well. And we'll close on there. So let's talk about rearmment. Just today on the 25th of November, the uh the Trump administration has uh reported that Ukrainian delegation uh has agreed uh with the US on terms of a potential peace deal. So we'll see how this plays out. Uh US Army Secretary uh Dan Driscoll held a secret talk on Monday with the Russian delegation in Abu Dhabi and now it's been disclosed what the talk was about. Army, army generals and high ranking officials are being sent to Ukraine as we speak to further consolidated talks with Zilinski. Um I was thinking about this this morning and um some questions came to me privately. How does this change the investment landscape if the war in the Ukraine deescalate? What do you think? >> Yeah, I mean I think I think it doesn't quite frankly. Um I think it's going to be perceived to right and certainly you saw that with some of this news of the deal out right the arm um I think most of the defense stocks sold off on that day. No small irony that like Ryan Matal, you know, the German um arms company was out actually saying their their sales are going to 5x 2030, right? Um so this spending is happening regardless of what happens here. Like so the you know Europe's increase in defense spending that horse has left the barn. Like that's going to happen. You've seen some of the saber rattling between Japan and China recently. That's again we're seeing this crank up, right? like this stuff is all happening and even if there's a Ukraine deal, do we really think that that is like there isn't going to be a continued sort of military buildup within Ukraine to for potent to defend a potential another attack down the road? There's still the the the rebuild of our own arms, not to mention the modernization of our own military around building out drones and other things that are going to be needed um for the next way for the future ways in which we fight wars. So I I think that the the secular trend of the spend increasing here doesn't really change just the based on the fact that this deal has happened again that I think that perception can change in the short run but then I think we just have to wait and see fundamentals play out and as the as the funding continues to go up um and these companies revise you know revenue and earnings higher then you know this what happened to stocks usually follow >> no impact on commodities oil >> I mean certainly oil could potentially have an impact Um but I would argue that most of the it hasn't really restricted much coming to market right I mean um Russian oil has found its way into the market one way or the other Iranian oil when they were like understand coming to the market like this stuff was getting into market it's just a question of has to be sold at a discount through um you know through different trading houses that are willing to accommodate it but it ends up coming to market so there's no like supply that comes on that wasn't there in fact arguably you could actually even make an argument that if it leads to improved economic um you know conditions it would actually be bullish for demand right um so when I think about you know I mean in the near term certainly there's a lot of talk about over supply and oil and that type of thing but I think we all know that that anyone's observed the onshore shale story in the US knows that the break even for oil price production has gone up quite a bit over the last [snorts] few years I mean um you know I looked at this years ago that you could see that the the long-term inflation adjusted price of oil was about $20 over a hundred years and then uh and then basically ramped to 40 and now to close to almost 60 uh where you know activity falls off very quickly under 60. Rig count goes down. Um most of these companies will not expand projects when if it falls below sort of $60 to $50 to $60. >> So who are we rearming against in the next 10 years is the larger geopolitical question. if let's say things deescalate in the in the Eastern European front >> and uh who knows what's happening in the Middle East, what what what what who's the bigger enemy right now? >> We're into the future. >> I mean I mean certainly obviously I'm I'm not surprisingly will pull from the headlines, right? The the coal war that is is ongoing is between not only Russia, the US, Russia and Europe, but most importantly China and uh and the US, right? And the flash point of Taiwan is obviously a very key one. Um and but we're [clears throat] seeing I think that's where you see for the the most of this activity sort of this multipolar world where you do have big zones of influence across both you know um Europe US and Asia >> re rearmament in which sense the cyber sense or actual physical hardware because that >> impact that's a great that's a great point actually it's one of the things we're looking at both within the within the foring fund um we've kind of focused both on not only I we'd say overall a growth in defense spending within that focusing on the things that will have more of a the future way in which we fight wars, right? Which drones are a good example of that. Um but then uh also to your point like cyber um and I think you know if you look again if you're following the news closely which I know you do, there's been no shortage of um you know news stories more just recently around the increase in hacking activity by nation state actors. Right. So the like this is this is happening now, right? We're already we're already in it. Um we're they're already seeing sort of cyber warfare going on. And so increasingly I think you know cyber security is a is an ongoing uh theme that we'll be exposed to at least to some degree inside the inside the strategy. >> All right, let's move on to uh some monetary issues now. So we talked about reinflation briefly, but to what extent will inflation reappear? Are we talking about 3 4%? we're talking about double digits like the Vulkar area. What what does the future look like? >> Yeah, that's a that's a that's a good point because I I think one of the things that got missed like if you take it back to 2008 2009 and the expansion of the Fed's balance sheet in the wake of the financial crisis, you actually didn't see like at the time there was a there were a lot of people calling for an inflation spike, right? because the Fed was was expanding the balance sheet so aggressively and introducing QE to offset the potential effects of the financial crisis that there were many pundits calling for inflation. Um, and it never really showed up. Right? So, there's a couple reasons why. I mean one of them is that obviously you know Chinese imports to the US continued to be a deflationary impact um on the economy but also um I think if you there was no real transmission mechanism. So the answer to to the consumption like to consumer price inflation. So what you had actually happening was that you saw I I would argue we did see inflation to some degree. We saw asset price inflation right? Um we've had you know huge returns uh across the market over that period over the last you know call it uh now what 15 17 years um 16 years and uh and that's you know in part that's been um a function of the expansion of the Fed's balance sheet right so um what I where I think you saw postcoid was the first time you saw a real transmission mechanism right so like you actually saw the money not only being sort of printed but then literally sent in checks to people to spend, right? And if they get money, they're going to spend it. And so certainly against the backdrop of supply chain constraints that were happening um you know due to COVID and and that you saw inflation take off pretty aggressively. So it'll be a little bit different I think this time, right? Um I think you have you know certainly the potential for um sort of energy costdriven inflation but that's a less it's less likely to spike the way um the way we saw in say like the vulkar era like to your point the vulkar era type inflation um but more of a more of a gradual dial turning right that like because it takes a while to bring on new say like new utility supply. It takes a while to build this out, right? It takes um so as you're and you know certainly new new mines, I mean any of this stuff takes a while to bring on more supply. Um and so those are longwave things. And I I think if you if you begin to see depending on how aggressively we both the Fed is expanding the the balance sheet but then also um how aggressively we try to finance this and push this push forward many of the either reshoring the um rearmment theme but obviously the bigger big elephant in the room AI and data center spending as if if we're going to spend that that kind of money um over the next few years and move that kind of material it could certainly have in energy and materials cost inflation and that and that'll bubble through to some degree in price increases. >> The biggest argument against long-term inflation or the reemergence of long-term inflation actually is AI. Some people claim that AI is inherently deflationary. Well, all technological progress is deflationary to some extent. What what's AI going to do to our overall costs? >> Yeah. I mean, massive supply output gap. I mean, yeah, that's that's one that's one argument against long-term inflation. Have you thought about this? >> I have. Well, I've tried to unpack it. I don't know that I have a perfect answer for it. I mean, right now it's an inflationary force, I would argue, right? Is it's because it is actually a subsidized it's subsidizing demand by selling at a loss. All these companies are effectively losing money in their AI endeavors. Um, nobody's turning a profit in AI right now. Um, now obviously that may change down the road as all of this become as like you know they deploy more services and agent AI and things that like they can actually monetize and finally see the value [clears throat] and ultimately has to right because these companies are not only spending their cash off the balance sheet they're also beginning to borrow money to do it right so they're now I mean Meta alone has gone from a net cash company to a net debt company right um over just the last year and so these companies are which means they won't be buying back stock like these things that they used to do like that's probably now going to not happen because they're continuing to add debt to these balance sheets um to finance this buildout. So I think you know again like the more aggressively they try to do this like it will and we're subsidizing the end customer demand um selling effectively below cost well then that's an inflationary force by itself because that demand is going to u create more power price increase not to mention the material increase cost increase across trying to build this much capacity. >> What's going to happen to the bond market then? Have you um taken a look at this? So long-term structural bull market kind of ending around 2021. If inflation reappears, can we see a long-term structural bare market for the bonds continue? This is the 10ear Treasury yield. >> Yeah, it's a good it's a good question, right? It'll it sort of depend I think largely on what the components of this are. So if [clears throat] you look at there's a great paper that I think the Bank of England did a couple years ago. I hope I'm citing that correctly. um that was looking at sort of the long-term average, you know, risk-free rate over like 300 years or something I thought or maybe it was 400 years, right? And they use they linked this by using not only sort of originally like in the LRA and then in in the pound and then in the US and like linking them across like what was the predominant risk-free rate um or underlying instrument that was um marked the risk-free rate for those periods. And what it comes back to is that it's roughly about kind of like call it four to 5% has been the average for um for literally hundreds of years. Um and it's not probably not that mysterious as to why. I mean ultimately it's it's growth plus inflation, right? get you to that yield. And so the question is like, you know, looking at the demographics, we'd argue, you know, I would say grow, the real component of growth will probably slow. If you have productivity increases, maybe the real component of growth goes up. Is inflation the same as it's been roughly 2% or 1 and a half to 2% or is it slightly higher? Is it go up to three? just stack these things up and it tells you like, well, this could put the bond yield at something closer to like four and a half, five, five and a half percent as um as we move forward. But I mean that's not that's not happening today, right? That's at 4% today as like you know some of the slight flight to safety around in this liquidity environment has actually driven the yields back to closer to four. Demographics you brought up several times that's probably one of the biggest changes that our society will face is an aging demographic aging population and lower growth in the population itself as the versatility rate for most developed countries falls below two certainly you've tracked [snorts] this Neil's talked about this how does this change finance >> yeah I mean not only that like right so not only do we see you know many countries where you're well below replacement rate right um and you know the US is somewhat better but still pretty low and especially without immigration are pretty quite low. Um most of the most of the countries around the developed world are are below replacement rate today. Um I'd argue even um you know Neil and I have gone back and forth on this. If you look at the UN projections for population growth, they've typically every time they revise their they revise their predictions down not up because and that's mostly because these um you know fertility rates around the world have actually come down quite a bit faster than even originally anticipated in most cases and some of the policies that were meant to drive uh improvement like say you know I think when China got rid of their one child policy and tried to incent um growth South Korea's tried to incent um more growth hasn't worked like you haven't seen a bounce Um there's a I think there's a lot of reasons why you could probably argue why that's the case, but it just becomes um becomes very difficult to actually see how that that you know demographics are a tanker, right? Like turning that takes a long time to actually see that really make a big long wave improvement and for now it's still moving in the same direction which is slower and that's just fewer people buying stuff, right? So I mean that's fewer people to consume um for for growth, right? to consume which fewer consumers means less growth, right? Unless they're consuming that much more per per capita. Um, >> a few trends I see emerging from this. One, a uh maybe healthcare stocks long-term bullish. I'll let you comment on that. Number two, depending on how the government finance more social security because of the aging population, potentially higher taxes and uh fill in the blanks here. What else am I missing? Yeah, I mean that's those you hit the the most important ones I think which is that you're seeing like you know a AI the jury's out on whether AI will like vastly increase productivity or not. I don't know. I mean I think so. I think it should have it should have some positive impact I would hope. Um and I think but if you're looking at the con the flip side of that is that an aging population right is got a higher sort of dependency ratio where you have more and more people who are you know over the age of 65 than there are people under the age of 65 or people over the age of 70 and 80 than there are people. And as that balance continues to shift like that burden of paying for both like healthcare, social security, these things kind of fall on that the group that the younger cohort and um so how will you do that? Well, I assume you know in part that has to be either through raising taxes or it has to be through monetizing the debt, right? I mean there's no there's no real or cutting the benefits. Like there's not really another way to slice it, right? You either have to like one something has to give across of these. Um, and so I think you know as Neil has talked about I think maybe even on when he was discussing with you like I think he brought up this concept of like because certain something he's talked about with me like that you know we could see almost like a change in in families like there may be more multigenerational family happening again because like taking care of elderly parents like having things in communities because the cost of the way we've done this is is is very very high right and so continuing to do that in the same way will be very difficult. ult and as you know again as the aging if the average age is increasing that's itself is kind of a drain on productivity and as like the and you know obviously personally we all want healthcare for our elderly parents but as a society that's a sort of a productivity drag right because spending on like the least productive people in the society is not exactly like a product it's a like a high productivity use of the obviously from a personal perspective, it's fantastic in the sense that you want to have your your parents around or your your family members around for longer, but from an economic standpoint, it's also like kind of a drag on productivity. What's the um energy andor commodities play for the uh long-term buildout of uh data centers, hyperscalers, and AI to infiltrate every corner of society? >> Yeah, it's a good question. I mean, it's everything, right? So, um, one of the great, one of the authors that was really influential to me is, um, uh, Voslav Smile. Um, if you've ever read any of his books or you familiar heard his name before, he's written a ton of books on energy, energy transition, energy in the world. Um, I would recommend, you know, any and all of them. Uh, but I think one of the things he talks about, you know, one of his books is that, you know, we've never like stopped using an energy source, right? like when we discover an energy source like we burn more firewood today than we did like the hundred years ago it's just decreased as a percentage of the energy mix right but like we actually we don't stop using anything and it's actually one of the biggest issues with um I think when I you know look back at kind of how we approaching sustainability when people were talking even just 5 years ago how we were going to be sort of off of fossil fuels within you know five six seven eight year and you're like it's just not realistic is like we these are high density the high energy return on energy invested fuels they are um they drive they you know are the reason we have like all of our sort of modern lifestyle um that replacement is not as easy to to do as I think you know many would have people believe and what we're seeing now is you bring in AI which is enormous power use then uh you know we've seen not only this resurgence in looking at nuclear power but also even natural gas which will be needed to balance this. And so I think when you talk about the two things that I would say probably have I think pretty you know a pretty strong good outlook is nuclear energy will continue to ramp um and uh and natural gas will continue to utilization will go higher and certainly we're seeing all the signs there. I mean like if you look at the tur gas turbine companies are seeing massive orders into their backlogs. We're seeing um you mean we're bringing three Mile Island back online right? I mean I wrote this piece so back at BMY Melon we did a frontier themes piece about six seven years ago and my piece that my contribution to that future frontier themes idea was the return of nuclear um nuclear renaissance um and my argument was that if they were really serious about doing a zerocarbon grid uh then there's absolutely no way to shut down your nuclear in fact you have to build more because a nuclear is the most reliable lowest carbon intensity, highest energy density source we have. Um, so one of the so there's no this idea that you know I mean you saw what happened in Europe. Germany shut down many of its nukes became incredibly dependent on Russian gas and then has now had a m a huge de-industrialization problem where the costs of uh running their economy have increased dramatically because of the um cost of energy. who's building out these uh nuclear facilities. You're right, but they're also very high capex. Are we going to see them coming out from the state or private utilities or the tech companies? Microsoft recently restarted an old nuclear reactor, for example. >> Yes. Yes. And yes. [laughter] Uh so I think you're I think you're spot on, right? Like so um the government's going to be helping to finance some of this. They've already out they're already out talking about this in the news. I mean that part of the policies u of the Trump administration are actually quite supportive as was uh the Biden administration for nuclear. I mean they had they were the first ones to actually bring this back as part of the um the the the uh was it what was it called? It was the inflation beating bill or something. I remember what they called >> inflation reduction act. >> Inflation reduction act. Thank you. I was like it's part of those things. I was like the most uh kind of absurdly named uh bill considering the contents of it. But um but that was you know as far as part of that um legislative agenda they had brought back credits and approved credits for nuclear energy and began to you get to sew the seeds of what's coming now and so and certainly that the Trump um department of energy has been um actively looking at not only traditional nuclear to your point but also um you know new new possible possibilities inside of nuclear like small modular reactors um like companies like I think you know Oaklo and um and new scale and and any number of other ones and opt and and the interesting skunk works thing that's happening in the background too is uh many private companies that are working on fusion um you know many of which I've talked to over the years um and that you know that's whether that will end up working or not I mean those exper those projects are ongoing and we'll know within a few years whether some of them are potentially have a pathway to being viable sources of energy but I I'm a strong believer that the future is nuclear for both fision and fusion Um it is just it's the most reliable base power that we um that we can uh at the highest energy density, highest reliability, lowest emissions um power that we have. Okay. Well, let's close off on some um out of the box ideas that you've accumulated through working with the biohysical economics institute. You've brought some interesting concepts to me offline and it's not something that we as investors typically think about. Tell us about what you guys are looking at right now. Yeah. So really the idea behind the biohysical economics institute is just really focus on you know what I think is really a misunderstood component of like the pro of um the economic sort of production function right if like most most people who've been to business school or taken an undergrad economics class can cite you know capital and labor as the inputs to the economy and it treats energy as if it's a um a completely uh substitutable good when in fact you know to quote uh economist Steve Keane. Um, you know, capital without energy is a sculpture and, um, you know, labor without energy is a corpse, right? Like none of this works without energy. And I think before we got on, I mentioned to you the sort of thought experiment of [clears throat] like if you know the energy companies disappeared tomorrow, it would be riots in the streets, right? like no one could get to work, no one could do anything. Lights would go on, like all the like the entire economy would crater very quickly, which is surprising considering it's like, you know, um 3% of the or less of the of most indices. Um and yet, you know, by comparison, there are companies that have much more market cap than the entire sector that could vaporize overnight. You'd never notice, right? [clears throat] You'd be like, "Yeah, all right, life goes on." Like, you okay? Like I mean it's like I I was I was doing this thought experiment even on like the you know something like Mag 7, right? Is like you know if Amazon disappeared I'd be like severely disrupted in my daily life, right? Like if if Netflix disappeared I'd be kind of like annoyed but but I'd get over it. And if Mag speaks to my consumption of social media, but meta disappeared I was like I don't even know if I notice like it would take me a few days. Maybe my daughter my daughter would care. I um but it would take me a little while to even notice. Um, so I just it's like it's um it's just an interesting thing and how we treat some of these crucial uh inputs to our economy are not accurately assessed and it's led to some wrong thinking about um I think to for example like the one I gave it that we could shut down nuclear power and somehow also get to uh you this carbon-f free grid and it was all going to be done on the back of intermittent renewables which at that was somehow going to drive cost lower for energy and all that became you know I would argue is bunk like and and I could have told you that like based on the work we did around energy return on energy invested for many of the renewables especially when you adjust for intermittency um and so uh I think you just you know you have to look at um the sort of the total cost of the system for many of these things >> this is an interesting topic and I just as you were talking I was thinking about this so the the idea of multiplying force so you have here let's say one unit of gasoline or one unit of raw material input. And then in the olden days before the internet, you had some manufacturing company or production company using that one unit to generate XY to to generate X unit of input versus Y unit of output. I believe in the tech age that YU of output is significantly higher than before. So therefore, it's a lot more efficient how they're the tech companies are able to utilize output using one unit of input. And so just think about meta. Let's take Meta for example. You have Meta consuming relatively small amount of electricity and energy compared to the amount of GDP that they and all the companies around their ecosystem are generating using that technology. It's just incredible how tech >> Yeah. Yeah. No, that's a great point. I mean, I would say Yeah, totally. And we actually I did some work around this a couple years ago where we looked at kind of trying to look at the underlying energy return on energy invested sort of by um so I won't get into all the the way with the conversions we're doing but we're looking at sort of like the energy intensity of the economy converting that back to sort of the energy component of the dollar and then looking at the revenue to the energy input cost to look at different sectors to understand their relative like sort of efficiency at converting energy to sort of energy GDP and software was a very high euro ROI um uh area as you can imagine. >> Okay, I want to finish off on digital assets. How do digital assets fit into the uh forth turning narrative in the next 10 years? Blockchain, tokenization, uh stable coins. How does that have a place in this in this in this future? >> Yeah, I mean certainly I mean I think it's something we track and as if you're familiar with ADI's work, right? And you know um one of the things we are integrating into the strategy quite closely is not only the top down macro work that's done by uh hedgeis um you know the the rolling outlook of the quad outlook for growth and inflation but also um the risk management that we uh they use to sort of signal when it might be worth owning something when they're not. Hedgi has been very vocally bearish on crypto recently. Um you know so we are it's it's proven itself to be a very high volatility asset. Um it's it's not clear to me whether that's a feature or a bug. Over time perhaps that become that volatility comes down. It has not so far and it has led to, you know, these crypto assets, Bitcoin in general, but all of them in general being highly correlated to things like the NASDAQ, not necessarily something like gold where like their correlation is kind of less obvious where to me that always seems like it should be. If they're really just stores of value and have a low um supply growth, then they should kind of track each other at least some degree, right? They should rhyme even if they don't totally overlap. and um that has not been the case. So I think there's a lot of speculative activity that happens in these which leads them to being more a highly volatile asset class and highly volatile asset class is fine but I think you want to manage that volatility carefully and so we will probably intermittently look at these um and could possibly have them involved in the the portfolio over time. >> Thanks very much uh thank you so much. Yeah, I really appreciate where where can we learn about you? Uh where can we follow you and uh follow you and hedge as Yeah, I mean you could check out uh obviously you can check out the hedgei am uh website um there'll be there's certainly some information about funds and for us up there uh if you want to anyone wants to follow me on uh on X you can find me at RPKent very easy to remember um and uh yeah I think uh and obviously and I pop up if you're a subscriber of hedgei research or you follow sometimes I popping up sometimes on the on the call or uh on different uh parts of that uh to do some of the uh media as All right, excellent. Thank you very much for your time today and uh we'll follow you in the links down below. So check that out. See you next time, Patrick. Good to see you. >> All right. Excellent. Thanks, David. Appreciate it. >> Thank you for watching. Don't forget to like and subscribe.