If I look at people 40 and under, those

in their 20 and 30s, their number one

problem is they can't afford housing.

If you want to get housing back to some

more reasonable levels, you need to have

wages rising at about 7% a year, so it's

sort of doubling in 10 years. And then

you need to have the housing market be

flat in nominal terms, so falling in

real terms. So that requires you to have

a real rate of about 3%.

So people keep their money on deposit

rather than sticking to real assets.

>> So that gives you an interest rate

around 10%.

And that's still my target for the year

treasury is at 10% yield.

>> So the question you sort of ask yourself

is, you know, how far could wages go?

>> This episode of Other People's Money is

brought to you by the Tukrium Soybean

Fund, ticker SYB. Let's get into it.

Welcome to Other People's Money. I'm

Maxuy and I'm joined today by Russell

Clark, a hedge fund manager based in

London. Russell, thank you for coming on

the show.

>> Thank you for having me.

>> You write a Substack as well as as

managing a hedge fund and I have been

reading and following. You put out an

interesting piece in the last week

looking at the AI trade. A lot of people

are saying this might be the end of a

big speculative bubble in this AI trade.

But but you pointed to another asset

class that you think is far larger and

far more speculative. Tell me why you

think this other much bigger market is

really where there is a lot of risk

right now.

>> Yeah. So I think Max you're talking

about the treasury market. There are two

questions there. Is you know is the AI

market speculative and why do I think

treasury markets are speculative? If

that makes sense. So with a treasury

market, I mean

normally if you look at for me, if you

look at any big bear trade uh that I've

seen uh in my investing career and even

before it, normally there were pretty

good signs that things were going wrong,

but people just happily ignored it.

Partly because it's human psychology.

It's if there's a problem and you have

to do something about it, um it's always

more comfortable just to ignore it if it

hasn't been been a problem. That makes

sense. Um and that's, you know, just

natural sort of human sort of psyche.

So, you know, if you go back to like the

GFC for example, uh people people knew

there was a problem in the housing

market three four years before it

actually sort of blew up. Um and then

that started to be a problem and

everyone was like it's a problem but

it's a problem we can deal with. We've

dealt with it before. um you know and

then you had of course people saying

well look actually you know the balance

sheets of these banks are so bad that

this housing crisis is going to be a

bigger problem and then eventually

everyone sort of accepted it and I'd say

with you know US treasuries

uh in particular but you know government

bonds in general is that you know for

the last few years particularly since co

there's sort of been this understanding

by the electorate and by politicians

that governments will spend whatever it

takes to keep growth going if that makes

sense. So there's any problems

government come in. Uh and with the

Trump administration seem to have gone

to another, you know, even more extreme

version of that in that we will spend

what we need to spend and we won't tax

anyone uh either uh in particular the

large corporates. So we just want, you

know, we're going to have the spending,

but we're not even going to try and get

the taxation uh in. And so if you start

looking at, you know, uh the sort of

government,

what's the word? Profit and loss

statement if you like, you know, its

revenue now sort of barely covers its

sort of mandated expenses of like social

security, interest payments, and these

sort of things. I think we're about 90%.

So that's excluding other spending like

on defense, education, infrastructure,

whatever you want. So the sort of

fundamentals of the the government's

sort of spending

taxing, you know, tax and spend have

really broken down. And that's not just

in the US, it's also in Japan. Um and so

what's been interesting for me is that

uh you know I I sort of originally

became quite bearish on treasuries in

2022

mainly at that time and there were other

reasons but mainly because uh when

Russian foreign reserves were frozen so

they couldn't access them after they

invaded Ukraine. Uh, I thought to

myself, well, if you have foreign

reserves, you know, if you're a Russian

government with foreign reserves and

suddenly this money you're saving, you

can't access, why would you save it in

that place in the first place? And then,

you know, you take that sort of thinking

logic a couple more steps further and

you go, well, actually, why would any

country that could theoretically

disagree with the Trump administration,

which is basically everybody, you know,

why would anyone hold uh treasuries as

foreign reserves, if that makes sense.

Um, and so, you know, I I suspected we

were going to see a natural flow out of

treasuries into gold. For me, that was

one thing I thought would happen. But I

also suspected that we'd see buyers for

fixed income slowly, particularly

government sovereign fixed income,

slowly disappear. And that certainly, I

think, has been the case. Um, treasury

markets have held up re relatively well,

but if you look at markets, more

peripheral sovereign bond markets, Japan

is a big one, you know, that's one of

the biggest sovereign bond markets in

the world, and the yields there have

risen tremendously. uh but the UK as

well the guilt market remains uh very

unstable if that makes sense. the long

end keeps selling off and I think you

know the US treasuries have held up all

right but you know the the fundamental

buyers of that are slowly but surely

disappearing and I think the thing um

that I try and emphasize to people when

I'm talking about it is that you know so

I'm 52 so I'm getting old I know I look

much younger but hey I'm getting on on

um but this idea of you know massive

sovereign wealth funds massive foreign

reserves is actually a relatively ly new

one. Until 1980,

the idea of holding another country's

fixed income as a foreign reserve was

unknown if that makes sense. Uh all

foreign reserves were basically gold.

And then we have this long period where

Japan started buying treasuries because

they stop didn't want their currency to

appreciate. China did the same. Very

other nations did the same. So when you

see those like 500year charts that say,

well the the reserve currency used to be

the pound and before that it was another

European currency and we go all the way

back to the Portuguese and say that

people tie it to the strongest navy in

the world. So you're saying that that

that's not really how it worked going

back. We we weren't owning bonds or

currencies of other countries like we do

today.

>> So foreign reserve currency is very

novel. All right, that is a currency as

a foreign reserve is novel. Gold used to

be the only foreign reserve and

typically the country that had the

biggest army had the most gold for

various reasons. Basically, they went

took it from where whoever had it. So,

if you lost a war, reparations tended to

be big chunks of your gold reserve would

be sent to whoever won. That makes

sense. Uh, and so when you looked at

foreign, you know, I think you're

confusing foreign reserves with sort of

like the main trading currency or the

the currency that was used for

transactions if that makes sense. Uh,

and they often was backed by gold. So it

was like, you know, really until 7070s,

you was always backed by gold. uh you

know and once the once the you know

British Empire started falling apart

after World War I you saw the pound

sterling become weaker and weaker

because they couldn't they couldn't make

the the numbers work if that makes

sense.

>> Okay. So you think we're moving back

towards a more historical period where

where hard assets particularly gold make

up the bulk of of foreign reserves or

the concept of foreign reserves are are

really going to go away.

>> Yeah, I do actually because I think

there was this if you look at like this

and it's all a political argument. So uh

this is not empirical. Uh so people

often will argue with me with empirical

data saying this is what's happened last

30 years. Why are you saying it's going

to be different? And what I'm saying to

them is that we're moving in a changing

political environment and this is going

to be the outcome from the changing

politics. So

I think what we saw sort of post 1980

with like Reagan revolution was this

sort of move away from uh a focus on

full employment rising wages to more

free market let move wherever they want.

Their wages adjust and wages can adjust

in two ways. You actually cut them or

you let your currency devalue to make

your wages lower and you're more

competitive. And so I think from 1980s

through to maybe 2016 or something like

that,

the uh option most the option that most

countries took when they had a property

or a financial or a current account

crisis of some sort was they would

devalue and this would push down the the

wages of your domestic employees and you

could then export your way back to

growth. This was the model that was

existed. uh and Japan sort of took it to

another level where they they bought

treasuries to try and try try and keep

the yen weak to try and create you know

inflation and growth that way. Um and

part of those sort of arguments was also

free trade um removing removing barriers

uh moving away from sort of government

sponsored

uh industrial organizations. So, used to

be when I was a child, uh, governments

owned all the airlines, all the big

airlines, you know, they sold all of

those. They got rid of those unions were

moved off the books. Uh, if you look at

the states, you know, you used to have

the big three, GM, Ford, Chrysler were

all heavily eugenized and protected by

the government. Post 1980, they invited

the Japanese auto companies in and they

basically broke the unions within those

organizations. And so you had this sort

of very what is actually a globally very

deflationary environment and for

countries that are very competitive like

your Switzerlands or your Japan or even

your Germany's you know they would see

natural appreciation of their currency

which they try and offset by buying US

dollars mainly treasuries. So we had

this huge growth in capital uh driven by

basically trying to keep wages low um

one way or another. But now I feel like

the political environment's moved to

moving back to getting wages up, having

full employment. Very sort of post World

War II type environment. Not fully there

yet, but getting there. You can sort of

see it with US investments into

corporates.

uh you know you can see in a in a sort

of range of you know um a sort of range

of different activities by governments

now and the you know increase in tariffs

and other things like that and so you

know the way I look at it is we're

moving back to this inflationary

environment um and so governments are

actually if you look at Japan's a good

one it's it's uh JGV market continues to

sell off yields keep going higher but

they actually can't seem to get their

currency doesn't strengthen naturally

anymore. They're actually becoming under

more pressure to sell their dollar

reserves to try and keep the yen strong

because when they let the currency

weaken, it's actually causing real wages

to fall and the politics is sort of

turning against them if that makes

sense. And so my read of the world we

lived in lived in until let's say 2016

or 2020 this world world where we were

piling up bigger and bigger piles of

capital which pushed down the cost of

capital push down interest rates and now

instead of saving money we're sort of

spending it. growth is really good, but

inflation is much higher and these big

pools of capital are getting run down.

And so the the corollery of that is that

interest rates starting to rise and will

continue to rise until politics

intervenes again. And it's interesting

you if you look at all the sort of

populist politicians around there, they

always the biggest problem is always

cost of living. That's always the issue

that sort of comes back to bite them.

But they still get voted in. they still

stay maintain political power and we

haven't really seen uh a decisive move

away from that yet. I don't think

>> it is the number one voting issue it

feels like here in the United States is

the cost of living. Uh you did make an

analogy saying you know in the GFC we

kind of knew that these problems were

coming for 3 years before they really

started to to come to roost in the

markets. And I would argue that people

have been talking about this problem

with the Treasury market for much longer

than three years, but it is starting to

to come to fruition now. I mean, was it

just the inflationary period postcoid

that really opened the door despite the

fact that people have been talking about

the unsustainability of the debt

buildups for for so long? Was that the

moment that things changed?

>> It's a good question and uh you know,

one of the things that I think works to

my advantage. So I'm an Australian who I

live lived in Japan, lived in Hong Kong,

studied Japanese, uh you know, traveled

around the world a bit. So I tend to

come at things as like from a globalist

perspective rather than a US

perspective. So all the you're right

about people talking about treasuries

being unsustainable, but before we used

to talk about treasuries being

unsustainable, we used to talk about

JGBs

being unsustainable and people used to

talk about JGBs being unsustainable in

the 90s. Uh so a very famous economist

guy called I think Steve Roach you know

he said the 10-year JGB at a 4% yield

isn't in 1994 was the biggest short in

financial history of course was wrong

because it went down to a negative rate

eventually

>> JGBs was known as the widowmaker right

>> very very much so it's not anymore but

it was um so what I'm trying to say is

that people talked about Japanese debt

sustainability for nearly 30 years

before it broke. Now, what I found

interesting is I always thought the JGBs

are a pretty good leading indicator on

US treasuries. Um, and back in 2020 when

CO started to kick off, what was really

interesting was I think it was in March

of 2020. So, CO just started kicking

off. At that time, we didn't know if it

killed everyone or not. Uh, you know, we

didn't know how long it would last, but

the JGB market started to sell off. It

rallied a lot into that as it always

used to do and then started to sell off.

My read of that is that the Japanese s

bond investors looked at the political

environment looked at the political

uh sort of uh sort of solutions to co

that were being discussed which was like

huge

credit protection massive wage

protection lot of spending and went okay

the world's changed here and they was

trying to sell their JGBs JGB sold off

very early and if you look at JGBs

they've been much weaker US treasuries

the whole way through. Um, and my my my

feel is they still act as a lead, if

that makes sense. The weird thing about

the selloff, and this is what I think is

where it gets confusing, is that the

more you push up wages, the more nominal

growth you get, the better the actual

financials for JGBs look. So, if you

look at debt to GDP ratios, they're

actually falling now because nominal GDP

is growing. uh you know as you know they

you know as they as they get growth

going again uh and if you go back to the

70s you know when we had like 15 20%

interest rates in the states federal

debt to GDP was less than 20%. So it's

this sort of sustainability is not

really the issue. It's the politics of

wage inflation that's the issue that

drives I think drives where bond deals

go. I think the sort of market sit there

and go what do I think wages in the

states going to look like in 20 years

time? How much is this nominal

how much of the if I buy a 30-year bond

now what's going to be the buying value

of that uh principle when I get it back

in 30 years time am I getting

compensated for that and sort of you

know do you think wages are only going

to be four and a half 5% you know we're

only going to see four 5% wage inflation

for the next 30 years

is a it's a tricky one you know I

certainly think while you have President

Trump in power, you you would be

thinking wage inflation should be higher

than that. And I think the Japanese are

doing the same thing. You know, wages in

Japan are very low. They now have sort

of upward pressure. And they're sort of

saying, do you know is that a 10y year

JGB at three? Is that enough compet, you

know, compensation for where I think

wages are going to be in 10 years time?

And they're they're sort of saying no.

Um, and like I think you know the the

what people forget is like post World

War II, so FDR introduced the minimum

wage in uh the states in 1939. At the

time it was like 35 cents an hour. Okay.

40 years later in 1979 it was 3 bucks 50

an hour, right? So it' gone up you 10

times in four years. Now the federal way

minimum wage in the states now is still

only seven bucks 25 or something like

that. I know no one earns that anymore

except for some very sad people in you

know some places but

>> there are some states there are some

states that still have the federal

minimum wage.

>> Yeah. But I don't think many people earn

that anymore. Yeah. Like

>> McDonald's is gonna is more like 20

bucks now I'm pretty sure.

>> Uh you know it doesn't matter where you

are. So that world is you know sort of

changing. Um so the question you sort of

ask yourself is you know how far could

wages go right and that's the question I

ask myself um I try and come up and

answer that I don't know if it's a good

answer you can I I tell people my answer

I let them make their judgment my answer

is that um if I look at people 40 and

under if that makes sense so in in their

20s and 30s so those in their 20 and 30s

their number one problem is they can't

afford housing.

They either spend too much on rent or

they spend so much on rent they can't

afford to save a deposit. This sort of

thing. And so I think, you know, you're

going to get a generation of voters

coming through saying we want cheap

housing. And certainly you see, you

know, both sides of the political divide

are all pushing for more home building

or cheaper housing. Uh you know, and you

have rent controls coming back in New

York, that sort of thing. Um so I sort

of use that as a what I think is going

to happen. This is my view uh and why I

have I think treasuries and interest

rates go higher is that if you want to

get housing back to some more reasonable

levels you need to have wages rising at

about 7% a year. So sort of doubling in

10 years and then you need to have the

housing market be

flat in nominal terms. So falling in

real terms. So that requires you to have

a real rate of about 3%.

So people keep their money on deposit

rather than sticking to real assets.

That makes sense.

>> Yeah.

>> So that gives you an interest rate

around 10%.

>> Um and that's still my target for for

the year Treasury is a 10% yield.

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So 10%

3% real rate. So inflation running

around around seven basically around

wage growth, wage growth, keeping up

with inflation. Uh wow, that's that is a

very different world than where we are

today. Um, it's funny. You do see a lot

of people commenting on the level of

real interest rates right now and saying

that it is so high getting up above to

approaching approaching that 3% level

that you're talking about and and

largely saying that this is that level

of real interest rates is unsustainable.

So you believe that that will become the

new normal uh to to see really really

high real yields? Yeah, very high

because you you'll be have a government

spending and pushing wage growth,

pushing full employment which is not

what we've had for the last 40 years but

you have governments there you know and

you think about all the strategic

investment all the sort of investment

into semiconductors all the investment

into moving away from a Chinese supply

chain all these things so you have this

sort of very tight market government

pushing for that um but you know trying

to sort of keep prices under control

particularly housing prices which are

very sensitive to interest rates um you

know that's the world I see um you know

and that's where the politics is you

know when you look at populist parties

they also sort of want broadly speaking

that type of outcome and so that's sort

of the world I see um uh yeah you know

and here's a good uh you know here's a

good way of I think makes it easier to

conceptualize I thing for people and

I've written about this a long time ago.

I'll have to find that old note and

republish it. Um but uh so you ever see

Back to the Future 2?

>> Of course.

>> You sure? Okay.

>> I'm not that I'm not that young.

>> Oh, you look very young. Uh so anyway,

when they get to when they get to where

is it? Uh 2015. It's from 1985. They go

to 2015. 30 years into the future. And

then Doc Brown goes to Marty McFly,

"Here's a hundred bucks. Go buy yourself

a Coke." Right? And so people in 1985

>> thought that by n by 2015 a can of Coke

was going to cost

close to 100 bucks. Maybe it was 50. 50

or 100, something like that. Um, and if

you go back to sort of 1985 and look at

the long end of the bond market, it was

around sort of 78% because that's what

people thought inflation was going to

be. And actually, they were completely

wrong. Inflation collapsed below that.

They're already the politics for getting

inflation under control had already

changed. You had the WTO, all these

things. But people basically think

what's happened to them in the past

going to happen to them in the future.

It's it's just a human condition. And so

they couldn't they couldn't

conceptualize this idea that prices

wouldn't keep rising at a very elevated

rate. Even though they had voted in

Ronald Reagan and had Vulkar running

around, in their minds they just thought

inflation would always stay high. And

I'm saying that was for me that was a

good illustration of how humans

generally just sort of say what's

happened in the past going to keep

happening into the future. Um, and so I

think we're going back to we're going to

go through a period of a very long

period of above much higher inflation.

Um, and people are going to get used to

that and they're going to slowly demand.

So I think you already seen it in the

results. So if you look at like bank

results that just came out like last

week, loan growth is through the roof

because if people are going I think infl

I think price is going to go up 7 8% a

year and they they me borrow at you know

four it's a bargain right uh and so you

should see loan growth accelerating

we've seen that in Japan I expect we're

going to see we've seen in the states as

well you're going to see everywhere and

the only way to get loan growth down to

control the inflation will be higher and

higher interest rates.

>> How do you square this longer term view

with a lot of people in the Treasury

market are playing an extremely

short-term game of trying to figure out

whether is it going to be this meeting

or next meeting where they're going to

hike and it feels like uh Treasury rates

um are are really trading around and

even gold. I mean, you could argue that

this big sell-off in gold was that

people had had such high expectations

for rate cuts coming in this year, and

now we're potentially getting hikes and

and obviously gold for so long has has

traded off of that real interest rate

and we're just seeing it continue to go

higher when when people were expecting

um a a a big reversal in that and the

change in real rates has has driven

gold. So, so many of these asset classes

it feels like are being pushed by

short-term expectations. You have this

long-term view. H how do you work around

these short-term moves with still

keeping this long-term view in in front

of you?

>> Back in the old days when I used to

manage uh money sort of horsemen, the

way we had this sort of pro capital

world and the big thing that people

always misunderstood was that inflation

was going to be lower and they didn't

understand the metrics about that. But

we used to have this sort of beggar

neighbor devaluations used to happen

where wages would be dropped in

different parts of the world and it kept

wages relatively low everywhere and kept

uh sort of inflation in check and so you

know the way I used to think about was

okay I'd be looking at which exchange

rates looked mis most mispriced when

were they starting to show signs of

correcting and then you know manage

money around that because that's the way

politics worked these days. is I sort of

look at the world and I think about well

you know I think interest rates going to

be much higher than what the markets

expect you know where is that priced

incorrectly and where isn't that priced

incorrectly if that makes sense um and

you just sort of move from one place to

to another place and if I look at like

something like gold for me tends does do

well when you know the Fed is sort of

talking about cutting rates or doing

stuff like that because then people know

nothing's nothing's there to stop you

know assets rising with rising wages. Um

but you know it's you know it so the way

I try and do it is just have a number of

different assets all all fitting in with

this idea of higher rates and then

trying to manage around that you know

moving capital between where it's priced

incorrectly and where it isn't. Um, and

you know, generally that sort of works

for me. It's sort of just but you know,

it's the the opposite of how I used to

do it, which was always looking at where

currency risk was not priced correctly.

Now I look at where interest rate risk

is not priced correctly and try and stay

uh, you know, as close to that as

possible. You brought up the the housing

market before and you think we're going

to need housing prices to basically

remain flat nominally decre decrease

real um you did give the caveat that you

take a global view but I think a lot of

people think about the housing market

particularly in the US. you know, we

just had this bipartisan bill come

through uh trying to address these high

these high housing prices and Trump

basically refused to sign it and has

come out multiple times and said, "I

don't want to hurt all of these bas and

large older people who have huge amounts

of home equity." They're just one, they

vote more. It's a huge voting block and

and the American people have used home

equity value as a piggy bank for

decades. Um, and despite what the young

people want, lower housing prices,

there's a bunch of people who never want

their house prices to go down. I mean,

do you think there's going to be a

winner in that tugofwar? And will it be

the older or the younger people?

>> US is a difficult one because it's such

a huge country. Um, and there's so many

different dynamics going on there. Uh

but if I if I start with the UK and then

I can try and talk about the states. In

the UK for example, it's really

happened. So if you look at like

high-end property markets in London for

example, have done nothing in nothing in

in nominal terms for the last 10 years,

pretty much where they were pre-rexit.

Uh and that's even with the pound being

weak and you know growth being okay. you

know, you've just seen this sort of

ready decline in nominal rates in line

with also the UK guilt market has been

much weaker. Um, and you've seen wages

go up. So, you really had some

rebalancing going on there. Um, the

issue now is that they they're trying

to, you know, they're trying to push

through this sort of build more policy,

which is, you know, difficult because

you're taking on even more entrenched

interests. uh you know and uh Starama

talked about it but couldn't do it you

know maybe the new prime minister can um

but that I think that trend is is going

to be ongoing and in the US you know

certainly

again if you look at like sort of the

high-end markets like New York market

like the top end there I think is

probably trickier these days um you know

because I think you can see the

legislations coming in so in UK for

example high-end properties now in

London anyway you know attract extra

search charge uh I think a similar type

of policy is coming in the states um and

these things can get very dramatic um

you know if you London which is a very

old property market you know at a

certain point you know houses got broken

up into flats because they were would

avoid a lot of taxation issues and made

financial sense and then last you 20

years or so, the flats go amalgamated

back into h houses houses because it

made more financial sense. And so, you

know, where tax goes, property markets

and markets in general tend to follow.

Um, and so I sort of see that as an

ongoing process, but I certainly, you

know, Trump,

I think, you know, only really has two

years left. Um, you know, I just don't

see him going for a third term. uh even

though he probably thinks he can. The

question is the question is who who

replaces Trump on the right as a

standard bearer is an interesting one.

>> They're passing things like millionaire

you know pieta tear taxes here in in New

York City. So certainly what you're

saying about tax policy obviously we're

having um

you know millionaire billionaire taxes

being proposed in in places like

California and you're seeing capital

move but that is one of the differences

I would argue between the UK and the US

is that there are competing tax regimes

and it might be the thing that extends

it a little longer is that it's not

driven by national policy so much and in

the short term different jurisdictions

can compete for that high-end dollar uh

with more attractive tax policies.

>> Yeah. But the big comparison is always

California and Texas. Um and what is

interesting about Texas is that they

have a far more uh relaxed building uh

code, if that makes sense. So they've

been able to build houses much more

readily and keep them cheap. Uh where

Californian housing is notoriously

expensive. Uh and you can see the sort

of California de Democrats are

definitely moving to a let's build more

housing type policy. Get rid of, you

know, restrictions on and regulations on

building. So you can see the politics is

sort of, you know, I have this view that

ultimately it doesn't actually matter

who you vote for. You're going to end up

with the same policies anyway. It's just

a matter of style. uh you know, you

know, it's like when people voted for

Biden after Trump, he didn't really get

rid of the tariffs. He didn't really

change a lot of the policies that Trump

had in place. Um, you know, and it's the

same in I think in the UK is that even

with the Labor government uh in place,

we haven't seen huge dramatic shifts in

the policies that the Conservative

government had in place because

ultimately all politicians are the same.

They just want to get reelected and they

just do whatever they think the public

want or say they want to be reelected. I

don't know if that makes sense or not,

but the shift is definitely

>> to the left.

>> In this world where real estate is is

doing nothing nominally, losing you

value in a real basis, treasuries

equally don't look super attractive.

Bonds don't look attractive. What What

is the investment behavior going to look

like? And are we maybe getting a little

preview of of what the future looks like

in in the form of of

rampant speculation on equity markets?

Um and and a reach for even more yield

in in private credit markets. Um how

much how much is the future going to

look like a supercharged version of what

we're seeing right now?

So if you go look at the 70s, the 70s

the markets were very up and down. Uh

but you know it's be and they really

moved on what they thought interest

rates going to do. Um particularly the

Fed you know Fed is going to be you know

looser on interest rates and the markets

soared and then very volatile but in you

know in real terms they were going

nowhere and sometimes I feel we're

getting close to that. The big sort of

issue that I'm struggling with a little

bit is that uh in the 70s if you owned

oil and gold, right, which was sort of

two related assets, you did fine. Those

were the two assets to own. But that was

because oil was the oil was the real key

to economic growth everywhere. And

supply was restricted not just with

OPEC. domestic US production was

restricted through the Texas Railroad

Commission which is an FDR type policy

and so once I've got deregulated oil

market became more stable I can't help

but feel that the modern modern growth

is actually all driven by semiconductors

or compute if that makes sense and so

that's why semiconductor prices are like

the new oil um or oil from the 70s

certainly we're starting to see that you

know Nvidia chips have been very highly

priced for a long time now, five, six

years. You know, they've looked very

expensive. And I thought, you know,

historically semiconductors don't stay

expensive because we just build new

ones, build new fabs. They haven't come

down. And now what we started to see is,

you know, the more, you know, generic

chips. I said, yeah, the generic like

DRAM, NAND now priced like Nvidia chips,

if that makes sense. Um and you know

there is a restriction on the supply

there. We basically don't let the

Chinese buy the high-end equipment to

make them you know and the Chinese have

been the marginal supplier for all

product all sort of productive equipment

for the last 20 years 20 30 years

almost. Um and so I sometimes wonder if

if you stripped out the sort of

semiconductors from markets would we

already be looking like the 70s? Uh and

there are certainly some signs of that.

you know I see you know profound

weakness in some areas uh you know

mainly driven by interest rates uh

whereas the sort of semiconductor area

keeps us up but you know it's already

affecting margins for like Microsoft you

meadow these other things so you've got

this sort of strange

you know it's not quite a perfect

analogy but it's not a terrible analogy

either don't if that makes sense but you

know we are edging towards a different

type of world I think.

>> So you have the businesses that rely on,

you know, cheap capital to to fund

themselves. The whole business is is set

on that and you think those businesses

are going to be harmed. You've got

financials basically hitting all-time

highs. They they benefit from these

higher interest rate environments. Um

and then and then you have the the mega

trend of semiconductors and AI

companies. Um you know there is

tremendous debate right now. very few

people sit in the middle on this about

whether um it's fair for the the prices

that we're seeing in in the AI supply

chain um and questioning whether it's a

bubble. I mean, do you have a view on on

the pricing of of these AI related

equities right now?

>> So, I have a view uh a lot of people

don't disagree with this view, which is

fine. I don't have a problem with that,

but I'll just say, you know, it's my

view. Um so I think what's happening

with with AI this is my my view of her

is that you know the sort of LLMs got

invented and I think very quickly you

know the big you know the CEOs of some

big companies worked out that this was

going to break down the moes of you know

the very profitable businesses

particularly for Google like I know I I

rarely Google search anymore I I tend to

search for everything in chat GBT first

because I get cleaner better answers.

Um, you know, so if I was say is Google,

I'd be thinking, okay, we might, you

know, we're going to our advertising

business is threatened. Um, and you

know, you start thinking about all the

other business, software business

getting threatened. So you start you go,

okay, these big companies with hugely

profitable businesses are going, okay,

we need to spend, you know, we need to

spend because we got to protect the, you

know, try and build a new moat, which is

fine. And, you know, I think that was

the first stage of it. I think the real

problem has been that uh Elon Musk with

SpaceX has basically sort of said I want

to be in the AI business as well. I'm

producing compute. I've got ideas for

making even cheaper compute. Uh the

satellite based data centers. Who knows?

You know, I know a lot of guys who fancy

themselves as

scientists of financial scientists say

it's impossible. And I'm like, "Yeah,

but he's already built about three or

four impossible businesses and destroyed

the incumbents." So, you know, I think

for me, like having Elon Musk uh come

into the data center compute business

has

probably got a lot of these sort of big

CEOs thinking we just have to spend and

spend to try and make it as expensive as

possible to try and keep them out. I

think a good analogy is, you know, he

launched Tesla

And a lot of companies were very slow to

get EV products. You know, they were

trying to protect their legacy products.

And now, you know, Tesla's worth

multiples of the entire old sort of

internal combustion engine producers. I

feel like the the tech space of going

through a similar sort of okay, if we

don't spend, we're toast. Um, you know,

because a lot of the sort of push back I

get on AI, a lot of the negative

research I read is no one's ever going

to make any money uh on AI with this

much investment. I'm sort of saying I

don't think the investment is going in

because of the AI. It's going in to

protect the existing hugely profitable

businesses that Google, Microsoft, even

even Amazon have. you they're trying to

you're trying to stay, you know, with a

cutting edge and try and keep uh Elon

Musk at bay. That's my read of it. And

and I think all of these guys also

remember the dotcom bust. They remember

it very differently to how investors

remember it. Investors remember it as oh

buying all these whisbang companies and

then went bust and zero. The guys that

survived to run the big tech companies

now, the ones that kept investing all

through the downturn, you know, and they

remember all they remember is the guys

that stopped investing disappeared,

right? So, you know, and the Soft Bank,

he kept investing the whole way through,

you know, he's now richest man in Japan.

That's so the mentality is totally

different. uh which is why I'm I'm

skeptical on the uh I'm going to come in

tomorrow and read that Microsoft, Meta,

Google, Amazon have all cut a AI capex

by 50% and all the semiconductor stocks

are down 50%. I'm very skeptical

skeptical of that possible future

headline because I feel like the first

one to cut spending loses. It's almost

like in the States when you have a civil

lawsuit, the first one to come to their

senses loses. That's the sort of

condition we're in now. I think

>> another difference is we don't have the

the ghost fiber or anything. The the

fiber that's being completely unused in

the 2000s. I mean, you look at these

charts of GPU availability and uh you

know, we just had a big new model come

out um in China and everyone's talking

about how uh deflationary it is for the

pricing of AI. um but they don't have

enough compute to support the demand for

the model, right? Um that that even if

we get these cheaper, more efficient

models, um then we just don't have

enough compute and we're right back

where we were. Um it does bring doubt

about the potential profitability of

the, you know, Frontier Labs who who's

going to be the model provider that

makes any money. But um I I don't think

it it bodess bodess negatively for for

uh capex in any way these developments

that we're seeing. What about the

potential for these developments uh to

impact your view on labor and wages?

Arguably a big reason that that people

are spending so much on this is they do

see perhaps the same world that you do

in terms of labor and these companies

that are by and large reliant on on

labor to to maintain their profitability

see that as a risk and and they see this

as a potential out. I mean do you do you

believe that AI is going to throw a

wrench in this higher wage greater value

of labor world that you see? I don't

think so because I think the AI

is mainly negative uh to be honest with

you mainly negative with sort of the

professional classes have had their

wages move in line with asset prices. So

you know so people who aren't priced off

minimum wage or you know that sort of

thing. It's more the sort of

accountants, lawyers, fund managers, uh

high-end doctors, you know, these these

sort of people who sort of price

relative to, you know, whatever the

market value is. I think AI is most

vulnerable for them, uh, is my read. Um,

which I think is sort of part of will

fit in naturally with the politics that

we're going into of like, you know, how

much should a CEO be earning relative to

the lowest paid worker in their in their

company, right? That's an old discussion

that's, you know, and that ratio has

been going up and up and up for years. I

can see that turning and AI could be

part of that, you know, in that, you

know, it sort of more narrowly defines

what is actually worthwhile and what has

value. Um, yeah. So, I don't think it

affects it. I mean, you got to remember

like uh

in the postw World War II period, right,

the big technology that suddenly came

out, you know, suddenly in 1945 was

nuclear, right? in nuclear and jet

engines and you the car you know the car

became much more common post World War

II. You had much more huge technological

transformations but at the same time

wages went up a thousand% over that

period. Um so sometimes you know the

technological change and wages are

actually two separate discussions. It's

a political discussion. Um it's the

technology is more who who gets the

money and who doesn't. Um but you know

the the the whether wages are going up

or not it's a political discussion at

least at least in my view.

>> If that just makes labor unp

profofitable relative to digital labor

for for lack of a better word. um you

know we'll just see in unemployment will

will remain extremely low but labor

labor participation is is going to drop

like do you don't think that that's a

possibility where wages are high

unemployment is low and this is a

problem I mean we've seen falling labor

participation you could argue it's a

demographic trend more so than a un you

know lack of demand for for labor but uh

you know that that's a trend that has

been going really since the GFC

>> it's hard to find an example where

technology has suddenly caused you know

a huge increase in unemployment tends to

be financial factors. Uh normally with

technology at least to my read of it is

you get new technology comes in

companies do a process a bit better.

They tend not to fire that many people

but they sort of and then you get new

technology new companies coming through

that using new technology much better

and then they sort of expand massively

their employment. um you know and they

you know that tends to be the way it

works. Um I mean it just if you look at

like how much technologies improved and

how many jobs that used to exist to

disappear. You know normally we just

move move somewhere else. I I know

people are worried about but I've yet to

you know see a real example of it

working that way. And certainly AI I

think what I see with AI sort of from

from my perspective is as it gets used

more and more people are sort of

recognizing AI

products more easily. Oh they go that's

slop that's a AI generated substack or

whatever and they instantly devalue it.

You know that makes sense. sort of what

my sense of it and and this is true of

my on my substack I don't use AI for any

of the writing because the way it writes

is very generic PowerPointish

uh not always logical loves to use a lot

of dashes it doesn't it's sort of it's

nice if you're a really terrible writer

it's great uh but I don't think it adds

much value and I think people get turned

off by it so what I feel like is with AI

it's sort of it makes very easy

low-level stuff easier to do, but the

high-end stuff, it adds a value to the

high-end stuff because it's like, oh,

you know, you need to have a lot of

skill now. I can see you need to have a

lot of skill to ride that way. And I

think that's always been the way. Um,

once something becomes more mass-

prodduced, you you tend to sort of put

more value on high quality stuff.

Clothes is a good example. The clothes

used to be very expensive and now we

massproduce it in China and India and

places like that. But we still pay, you

know, a few thousands for like an

Italian suit, you know, because it is

>> noticeably better.

>> It is noticeably better. And the

argument has always been that an ounce

of gold is what uh what buys you a suit

these days.

>> Yes. that throughout

>> throughout history, an ounce of gold and

the price of a of a well-made men's suit

are about the same. And I can tell you,

having just been in the market for a

suit, uh $4,000 is about what it it'll

run you to uh to pick up a a nice

Italian, you know, handmade suit. Um so

the it has held. It has certainly held,

at least for right now. Um

so, so it's interesting. You don't see

it going that way. and and arguably this

might fit in with your political view. I

mean, do you think that that there is a

risk to the AI spending trade that could

come from politics? You know, I live in

New York State. We just banned data

centers for a year. It's by and large

extremely unpopular. Both the technology

and the infrastructure buildout around

it. Whether those arguments are are

uninformed um is another debate to be

had, but it's an extremely unpopular new

technology that people are very scared

of. Are you concerned at all that that

the spending could be um hit a roadblock

that's political?

>> It could do, but I think the politics I

think the politics is much more

supportive. So, generally speaking, uh

the one unifying characteristic of

Americans is they love to win. they love

to win everything, you know, and they're

sort of in an AI race with China. So, I

can understand New York State blocking

development, this sort of stuff. But if

uh if it becomes perceived that uh US is

falling behind China in any way, shape

or form, then you know the political

will will be there to because no one

will want to look weak on China. Uh

would be my observation. uh neither

leftwing or right-wing politicians. Uh

and you know, I'm pretty sure, you know,

if you look at the way the Trump

administration talks about AI, they you

know, it's a technology they want to own

and dominate. So I I I I struggle to see

the politics negative there. In fact,

you know, if anything, it becomes a

strategic asset like nuclear. So

everyone's trying to get it, you know,

um and so the spending should be there.

uh you know the only the only thing that

could really slow it down I think is a

big recession and that would be again a

political decision. though getting the

Fed to jack rates to like 10% to try and

stop every and and I guess the the real

issue you know I think a lot of people

have because of the past we grew up in

or lived through they sort of where they

have a big problem with my arguments is

like we've had recessions before going

to come back again I go the thing for me

is I think austerity where governments

come in and they suddenly stop spending

is as a political policy dead in the

water. I just don't see it. Um, and

without that, you know, the growth will

be good, inflation will be strong, uh,

and these things will continue for the

foreseeable future. I just don't see a

political environment right now where we

all sort of go, do you know, we'll take

some austerity because we want to get

interest rates lower, inflation lower,

and we're tired of this boom days that

we've had. I don't I just don't see that

politically. Uh I don't see any

politician pushing that because they're

all terrified

uh of the of the populace both on the

left and the right. So the spending will

be there and if the spending is there

inflation will be there too.

>> So you think that AI will broadly be put

into sort of like the military spending

category where it doesn't really matter

what um the people want? I mean you

could argue here in the US people have

said we want lower military spending for

a long time and it has never happened.

Um, so you think it's just one of those

one of those categories that's just

going to be unaffected by the populous

will of the people?

>> Yeah, I think at the moment because

it's, you know, it's too strategic of an

asset. You know, I just can't see any US

politician being the one to say they

lost the AI war with with China. I just,

you know, I just don't feel like that's

something that's conceivable. We've seen

a pretty strong momentum unwind right

now. Just because the capex doesn't stop

and the spending continues doesn't mean

that asset prices can't react negatively

to

some headlines or just you know there's

no rule that says that stock prices have

to follow fundamentals and and that has

played out many times in history. Um you

know people are very exposed to this

trend. The punch bowl tends to get

pulled away after people have some pain,

right? Uh, nobody wants to to take it

away while the party is going on. I

mean, do you do you have any concerns

about the the level of exposure that

people have, the the triple levered

ETFs, the the speculative fervor that we

have around these stocks and and the

potential for um pain there despite

robust strong fundamentals.

triple levered ETFs is like uh

fundamentally a bad idea. Uh you know,

you know, just you know, my experience

with these types of structured ETFs,

they tend to cost retail investors a lot

of money. Um you know, and they're

you're primarily targeted at them. Um so

yeah, I could see an unwind there. Uh

you know, it's like with everything, if

it's like the old saying, you know, if

as long as you don't get too greedy,

you'll be fine. But I think the rise of

triple levered single stock ETF like an

SKH Highex or Micron is really it's

about being greedy. And the problem

you've got as we've seen in financial

markets before is like when you get

unwind in these types of products. So

you have to sort of they don't they do

move away from fundamentals they move to

basically the the pain point where

people are forced to capitulate. Um I

think we're sort of seeing that in the

in the sort of memory trade at the

moment. I mean uh I think I I was

pointing out on my substack it's uh yeah

the memory stocks are very weak but

memory pricing has actually been very

strong this month. um you know so it

sort of points to you know excessive it

was excessive greed excessive long

positions and the markets just sort of

decide to come and to take your money

from you if that makes sense how long

that goes on I don't know but go you

know as you've seen before it can go on

for a while essentially the LTCM blow up

was very similar they got too levered

the market realized they were levered so

they came and took all their money from

them uh And so you do get these blowups

from time to time.

>> I actually have concern about the way

that AI technology is impacting the

research that people do arguably in past

speculative bubbles. People kind of knew

that they didn't know anything that they

were playing with, you know, half of the

information. And now you've got this

machine that can tell you anything you

want to know. it tells you that you're a

genius and you can put in well this is

my thesis and it'll say that is a very

strong fundamental thesis max you you

you've really been thinking hard about

this I mean and and I think that that's

something that people don't quite get

that that the market doesn't care about

your knowledge of the technology or the

fundamentals or whatever that that it

can find that pain point and you've got

a lot of people out there who think well

I've done all this research I understand

where how important this thing is in the

supply chain and and they think that

that's enough um and that they deserve

returns because of that knowledge and I

I I just have a lot of concern that that

that will actually uh create some

serious negative feedback loops on on

any potential leg down.

>> I don't think you need AI for that. I

think is you know if you talk when I

talk to you know people I meet who like

invest into crypto not Bitcoin like

specky specky crypto I go how did you

find that how did you find that coin

like oh it's my WhatsApp group we all

talk about how great it is as the next

big thing and I'm like okay you know and

basically it's an echo chamber of like

oh this coin is going to be the next big

thing you know and you know I run into

them a few years you know a few months

later and go how's it going they go I

don't

I can't bear to look at my crypto

portfolio anymore. So I don't you know

and that is uh so you know AI maybe have

replaced WhatsApp groups but humans have

always

humans always rationalize positions. Uh

even I do it. It's why I like I prefer

managing other people's money because it

helps me stay disciplined because you

sort of have to think about oh I own

this asset. How do I explain it to this

person? you know, whoever, you know,

who's entrusted me. And you know, if you

can't explain it, then you like, well, I

can't own it. Whereas when I it's just

my own PA money, I might hold on to an

asset far too long because I think, oh,

I'm a genius. It'll come good at some

point, you know. So, having that third

party discipline is out there. But, you

know, people have done crazy stuff for

as long as there have been markets

before AI turned up and for random

reasons as well, you know. Uh, yeah. So,

it's like I maybe it makes it worse. I

think it just stays the same.

>> Let's close out with a little bit of

assessment of other risks maybe that we

haven't talked about. Um what are the

areas that you think you know people

should be the most concerned about um if

rates do continue to move higher? What

are the the areas of the market that are

sort of most mispricing this interest

rate risk that you talked about as being

sort of this new framework for you? I'm

amazed in the sort of private uh credit,

private equity space, private credit in

particular. You've seen like gated

redemptions, particularly in that Cliff

Water uh one. Um so I was just looking

at and what was surprising is yes, they

had large redemptions, they also still

had large subscriptions on the other

side. It was just that the redemptions

that sort of overwhelmed the

subscriptions for the first time and so

then they put in a you know a gate on

redemptions to try and manage that

process.

And I couldn't help but think, you know,

okay, so they got redemptions and they

had subscriptions. What happens when

there's no subscriptions at all? When

people suddenly go, oh, I'm getting, you

know, 7 8% in money market funds. Why am

I bothering with this illquid private

credit fund that I don't know anything

about, uh, where asset values are

already weak? Um, you know, these these

things are, you know, I think we

mentioned before how you can have

problems in something for two, three

years before they actually metastasize

into something worse. And certainly

private equity, private credits have

problems now for a year and a bit. Um,

which I found very strange, particularly

with private equity when they were

talking about liquidity issues. This is

they talk about liquidity issues with

credit spreads at all-time lows and

stock markets at all-time highs. I'm

thinking how can you have how can you

have liquidity issues in that

environment? That makes no sense to me.

I think it just shows that the quality

of the assets within those businesses

are very problematic. I think they are,

of all the sort of businesses I look at,

they're the ones most hopeful that the

Fed comes in and cuts rates back to zero

and bond yields fall back to sub 3% or

something like that because they've

built their whole model about ever lower

interest rates. Um, which they're not

getting. And you know that's an area

that you know I think it's like very

typical in my experience is like there's

a problem people get worried about

stocks fall for a while but then it sort

of doesn't become any worse and then

they forget about it and then but the

problems still work their way through

slowly but surely that would be the area

that I think you know much higher

interest rates could potentially cause

much bigger problems.

>> Okay. And specifically like the the

listed asset managers um you think that

they they are potentially at risk of of

continuing to drop. I mean they haven't

fared very well for the last year or so.

Financials are doing well but it's the

banks not the asset managers.

>> It's probably a good way to sort of

>> you know go full circle. You know when I

was talking about like pools of capital

sort of dwindling like sovereign wealth

funds. I also think like the pools of

capital that have ended up in private

equity because it private equity really

is like this pool of capital that is

going out and trying to make you more

money by buying a but not actually doing

anything. They're not making anything.

They tend not to be investing either.

They just buy firms financially rework

them and give you some money back. Uh

you know this idea of falling pools of

capital, shrinking pools of capital

should be extremely negative for

businesses like this because the cost of

capital rises that's negative and the

pool of capital upon which they've been

able to draw upon to raise these

phenomenal amounts of money should also

be getting smaller. Uh and so I see you

know if this sort of in the in the world

I think we're going to these are much

more problematic. you know that, you

know, private equity, private credit,

these businesses all turned up in the

80s after we sort of moved away from the

pro- labor uh policies that existed. You

know, they're really sort of for me big

vestages of a pro- capital era that I

think is coming to an end.

Well, and arguably just the amount of

money that's flown in flowed into the

sector has has narrowed the the

arbitrage that was available. Just the

the big difference between private

market valuations and public market

valuations that has completely closed.

And you know, if you look at the the

memory companies, you can get you can

get cheaper valuations, cheaper forward

valuations in the public markets now

with huge amounts of growth

>> potentially. Yes.

>> Yeah. Potentially. It's a big if. It's a

big if, perhaps the biggest if right now

in markets. Well, Russell, we will end

it right there. People can read your

Substack. What is the What is the URL

these days?

>> Uh, it's Russell2L's

clarky.com.

So, www.russellenclark.com.

>> Wonderful. Well, thank you so much for

joining us today and uh sharing this.

People, I highly recommend going to

subscribe to the Substack. We'll do it

again soon.

>> Thanks a lot, Max. Thanks for listening.

Interested in learning about the Tukrium

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ETFs. Until next time.