Hello listeners.

Welcome to another episode of the Jacob Shapiro podcast.

Uh, Rob and I recorded on Tuesday, not our normal recording time.

I think everything still holds, but if things feel even a

little out of date, that is why.

Um, this was a great episode.

Uh, we were both on our, we're, we're always trying to be on our A

game for you, but I think we were both on our A game this time and the

world is giving us plenty to discuss.

You can email me at jacob@jacobshapiro.com.

If you have any questions about anything you heard, any books you

wanna recommend, you wanna talk about the things we talked about in the

podcast, you wanna talk to me about anything else, that's the email address.

I read everything and try to reply to everything that comes through.

Otherwise, it's crazy out there.

Take care of the people that you love.

Cheers and see you out there.

All right, Rob, we're doing something very dangerous.

We're recording on a Tuesday, which is not our normal recording

slot, and we have ambitions.

Of keeping our cadence of posting this on Friday with the way that

things are developing the world.

That's a, that's a dangerous, uh, choice that we're making here.

And we'll, we'll push it out if we need to beforehand, but if you're

listening to this on Friday, it was recorded on Tuesday, so God knows what

could change in the world before then.

Rob, I saw the videos of that crazy hailstorm in Paris,

and you haven't mentioned it.

Were, were you around for

that?

Oh, it was totally wild.

There are huge chunks of ice and, you know, building on our windowsill.

I was there with the kids watching it and.

My son asked if we could open the window.

I said no.

Probably a good decision.

Yeah, well, massive hailstorms in Paris, you know, uh, feet of

snow in New Orleans this winter.

Who, who says that?

Uh, nothing interesting.

Dogs and cats living together.

Yeah.

Um, all right.

We've got a busy, uh, we've got a busy set today, and I actually, I

was supposed to be up early for an interview that canceled on me at the

last second, so I've had lots of time to prepare and many cups of coffee.

So, uh, I mean, I'm always on my a game with you, Rob, but I'm particularly

ready and rearing to go here.

Uh, if, if the listeners are afraid that I'm talking too fast, that's

why I am just, I'm really amped.

Um, we've got a couple different topics to dive into.

The first is the story about the Taiwanese dollar.

So I don't know if all of our listeners will be following this particularly

closely, but it's blown the Fin Twit community up on social media.

Um, and even some of the folks like Louis Gov and some of the others are

talking about this, like it's a really big deal and I, I wanted to talk.

Threw it with you.

Um, the, the short version of it is over the last couple of days, the

Taiwanese dollar has surged about 10 to 11%, um, on the US dollar.

It's not the only one.

There have been some other currencies.

So the South Korean one is up about 6.4%.

This is now over the last month.

The Thai bought up about 5.2% Malaysian ring.

It also up about 5.2%, the Singapore dollar, and they're at 4.6%.

So all of these different Asian currencies creeping upwards.

The Hong Kong dollar has been trying to do this.

Um, the Hong Kong monetary authority has been intervening to keep it.

It's at the upper.

Uh, edge of its band and so far they've been able to keep it there.

Um, you might have also seen, uh, China is intervening too, to

keep the u the yuan where it is.

That was a really interesting headline to me because it's the US that is the

chaos agent in China that is coming in stabilizing markets by keeping the

uan where it is and not devaluing.

Um, anyway, but the, the big story is the Taiwan, um, the Taiwanese dollar.

And I was listening to, um, a Louis Go podcast that we'll put, um, we'll

put a link to in the show notes.

And he was comparing it, Rob, as sort of the inverse of the

Asian currency crisis of 1997.

And I'm sure you have background here, but for the layman out there, um, in 19

97, 19 98, what was happening was that a lot of Asian currencies were pegged to

the dollar and there was a carry trade.

So you would.

Borrow dollars to purchase local currency, and then you'd get

higher yields in that local market.

The idea being the currency's gonna stay pegged to the dollar, so that's great.

Like the currency will stay the same and you get some extra yield in

these emerging markets, which is, you know, yielding a couple hundred basis

points or whatever it was, um, above.

What you would get in the United States.

That was all fine and good, except that there was a bubble, uh, in Southeast Asia.

It started in Thailand, and it eventually turned out that Thailand didn't

have the reserves to defend the peg.

And eventually speculators went at it, their currency collapsed.

It set off this whole thing.

Um, and it was really Thailand, South Korea, Indonesia, is my

understanding of the countries that, um, that were most affected.

Um, the way that, that Louis was talking about it was that this is sort of

an inverse here of what's happening.

So what's been happening in Taiwan and in some of these other Asian countries

over the last 10 to 15 years, um, is that you had weak Asian currencies

relative to the dollar and currencies that were declining in value against

the dollar by two to 3%, sort of annually, almost sort of like clockwork.

Um.

That you had Asian funds, uh, Taiwanese insurance companies, all these other

things, they were buying US treasuries.

So they were getting the yield off US treasuries, their assets were

increasing relative to their local currencies because their currencies

were, um, declining on the dollar and.

The idea is that this is a huge transfer of purchasing power from west to east.

So as these currencies appreciate quickly against the dollar, you know, suddenly

some of these Taiwanese insurance companies, which were not hedging as well

as they used to, because interest rates, interest rates were rising in the United

States over the last couple of years.

Um, they've basically lost like two to three years of profits

just over the last couple of days.

And could some of these insurance companies, should they be hedging

their positions, are they gonna have to sell more dollars?

Like what is this a, a reverse currency crisis?

Like that is the sort of setup that's being talked about, um, out there.

So that's the background, um, on our knowledge platform.

I saw that you thought that it really wasn't that big of a deal.

So I, I was seeing all of this chaos on Twitter and social media

and all these people freaking out.

And of course, you, the sober one over here talk, you know, thinking

about Oliver Cromwell and other things that are more important.

So break, break down for me.

What's signal, what's noise?

Like how, how are you thinking about this?

Yeah.

Um.

I, I think it's not a big deal in the sense that it doesn't signal anything

particularly bad and certainly not for these, uh, Asian currencies that are the

focus, um, which we'll get to in a second.

But I'm glad that Louis Gav brought up the Asian financial crisis.

'cause I think it's really important history and context for this.

Um, in large part because like, it's funny, markets are these reflexive

things where, um, something happens and then people respond to what's

happened and that creates some new set of conditions that, you know,

makes a response to the response.

Right?

And in the case of the Asian financial crisis, really what we've observed is

we've seen the after effects of the Asian financial crisis for the last 25 years.

And what I mean by that is the Asian financial crisis came about

because at that time, capital markets were working kind of the way that

they're supposed to, which was.

Capital from the rich world goes into the emerging markets.

And those emerging markets like Thailand was the poster child of this.

At the time they were running big current account deficits 'cause they were

absorbing investment capital and they were investing domestically and building hotels

and factories and all the sorts of things you know, that you, that you do with FDI.

And when you had a sudden stop during the Asian financial crisis,

you had a risk off move and risk off meant fleeing back into the dollar.

And because they didn't have the reserves built up because they

were running these current account deficits, they were vulnerable.

So their currencies, you know, it was an outsized response and

the Asian currencies collapsed.

And we all kind of know that story.

Um.

What you've seen since then has been a really deliberate move by, uh,

southeast Asian nations in particular.

Um, you know, China is a unique example, but they're also, you know, the embodiment

of this, which is to run by, by default current account surpluses to accumulate

US dollar reserves because they're fighting the last war, essentially.

You know, you gotta build up those reserves so that if you have

another, uh, sudden stop outflow, then you can protect your currency.

And protecting currency, especially in these nations, is so important

because you don't want inflation, you don't want a currency crisis, and all

of a sudden, you know, rice prices are up 40% because you know, the bot

has collapsed, that sort of thing.

So that's sort of the background to this.

And what you had was because of this.

Accumulation of currency that because of the running of current account deficits

or, uh, current account surpluses in order to do that, and we've talked

about this many times, you know, they were directing accumulated capital

like a fire hose into the United States and accumulating that position.

And it's really important to remember, and this is why I say partly this

is why it's not a big deal, is.

These are not necessarily net assets.

These are not unencumbered, it's not wealth.

This is like a basis trade.

So set against those US dollar assets are local currency liabilities.

So some people call it carry trades, but carry trade to me implies like

something that a speculator is doing, deliberately borrowing in one currency

and buying in another currency.

That's not what's going on here.

These are institutions, mostly boring institutions like Taiwanese life

insurers, Japanese life insurers, you know, Korean life insurers, basically,

companies that manage big pools of assets, but they have no choice

because that's how the math works out.

If you're running a big current account surplus, someone has to be.

Taking that currency side of the of, of the trade and what you've seen in the

last few days, and this is getting to why, like the move is not a huge deal

from a financial, plumbing standpoint, is because of the sudden move in the dollar.

That's kind of thrown a big ripple in those offsetting assets and liabilities

because if the dollar starts to drop, then the value of your assets against

those liabilities, all of a sudden you get turned upside down 'cause your assets are

going down in value, your liabilities are going up, and then you have a, you have a

problem and you need to unwind that trade.

So what you've seen is all of these, you know, highly, highly levered players

who are running these massive balance sheets, massive balance sheets with

assets on one side and liabilities on the other, and not necessarily.

Equity, but running these massive balance sheets, having to unwind that.

And that's why you're seeing sort of a panic buy of Asian currencies and

it's exacerbating the sale of the US dollar assets 'cause you're selling your

assets to buy back your liabilities.

That's, that's hard to explain verbally without having like

a diagram, but hopefully.

That clarifies a little bit, sort of some of the movements you're seeing here.

No, I, it does to me.

But, so the question then to me is, so what happens next?

So is this just like a market, a brief moment of market turbulence

and things will equalize?

Are we, are we now gonna get a 23 year period where these countries

are gonna fight now this war where they're accu, where they're

accumulating the local currencies?

Um, what does this mean?

Like, I mean, we've been, you've been ahead of this on dollar weakness

here for the course of the year.

Um, you know, in our own, uh, strategies, we have heavy exposure in

particular to the Singapore dollar.

So this has been a nice pat on the back for us from that point of view.

So, I mean, I mean, maybe take it from that practical point of view.

Are you now looking at the Singapore dollar and saying, thumbs up, time

to think about the next thing?

Or are you more like, okay, like we are at the very early stages of a bigger move

that might have more to unwind before we get to some kind of, um, you know, stasis?

Yeah, it's a little of both.

Um, it's, it's the end of the beginning.

I think what we've seen in the last, um, in the last week or so is a very

strong signal that validates the thesis because like I just explained the

mechanics of what happened and why, like, it's not a crisis, it's not, you

know, the next Asian, like none of this.

It's fine.

Um, but at the same time it signals something very, very important.

And so I'm gonna take, put the mechanic side over here

and go to the analysis side.

The analysis is the US dollar is no longer the risk off asset.

You do not flee into the dollar when things are going bad.

Now the US dollar people are fleeing out of that and, and because things are

going bad and that's something that we've not experienced in the last 40 years.

That is a big, big, big change and what you're going to see in, in all

likelihood over time, this is not an overnight process, is the post Asian

financial crisis kind of playbook that I just described is going to

be unwound because these countries, first of all, can no longer rely.

On the United States to be the consumer, you know, into which

they export, you know, by choice.

Um, but also they can't rely on the value of the dollar like that, that

basis trade is no longer reliable.

It's moving in the opposite direction, or at least much of the time it will be.

So it's not so much that, oh, now they're gonna pile into something else.

I think it's an unwinding of this imbalance that had been growing over the

last 25 years post Asian financial crisis.

And what that means overall is just, you know, more variety in sort of

the, uh, surplus or deficit position of these nations based on, you know,

other factors rather than just, you know, we're gonna accumulate reserves

and plow them into treasuries.

Um, on the whole, most of these currencies will be stronger in part, and this

is getting to the Singapore dollar thing, you know, through the back door.

We have to remember that most of these currencies are managed floats.

Singapore dollar is a managed float, and it's not managed against the dollar, it's

managed against a basket of currencies.

So, um, one of the things that we've seen in the last week, so in the case of

Singapore, they had been really holding back the reigns on that initial move in

April when all of the currencies ran.

Um, in part because, uh, they're mindful of managing prices in the country.

So they don't like really sharp moves in any one direction.

But the other thing is, all these country, all of these currencies that

are sort of quasi pegged to the dollar, like Hong Kong for instance, Taiwan,

these are, you know, sort of soft pegs.

They're, they're dirty, dirty floats, right?

They're very managed by the, by the central banks.

Um, one of the things that they will worry about is this notion of being

tethered to a decline in currency.

So if you look, um, you know, the, the value of the Euro, for instance,

against the Singapore dollar, against the Taiwanese dollar has absolutely

searched in the last six weeks.

Um, and that's a problem because that's importing inflation, not from the us.

No one imports from there anyway, but from all these other countries.

So if you're, if you're anchoring yourself to this sinking ship, um, that causes

problems from an inflation standpoint.

So that's another factor that all of these nations have to take into

account is like, you can't have inflation rise because all of a sudden

the thing you were gonna import from, you know, Japan or the EU is 20% more

expensive in local currency terms.

Mm-hmm.

Man, I, I have a few more questions there.

So, I mean, I'll throw three questions at you and you take them in whatever

order or whichever way you want.

So the first is that, you know, you just said that these are,

you know, uh, what did you say?

Uh, soft peg, dirty floats.

Maybe that's the title of the podcast.

I don't know, title of your memoir.

Soft Peg, dirty Floats.

That sounds like bathroom humor right there.

Uh, but it's not, it's actually extremely sophisticated analysis

of, uh, financial markets.

Um.

So, you know, the, these banks don't like sudden moves, but, uh,

I, what's happened in the Taiwanese dollar over the past week sure.

Seems sudden to me it would seem to be the thing that they don't want.

So what's driving that?

Is it literally, like, were they okay with that?

There has been speculation that that's a signal to the Trump administration

for some kind of free trade deal or some kind of, you know, special dispensation

because it's Taiwan and blah, blah, blah.

Um, Chinese Yuan has only gone up less than a percent since April 2nd.

That seems to be the elephant in the room or the dragon in the room to me.

Um, do you think that we're gonna see a move in the Chinese yuan and

do you think that China might, is, is this part of the negotiations?

Are they holding back?

Like how do we think about Yuan here?

And then the other thing is the saving grace, and this gets to a topic we're

gonna back into later in the podcast, is yes, like, I guess you're worried

about some imports being more expensive, but oils hanging out below 60, like

OPEC plus is surging production.

Like some things out there are looking pretty, pretty deflationary.

So we'll get to oil in a little bit, but, but talk to me about the suddenness

of the Taiwanese dollar move and the yuan and, and whether there's enough

reprieve from deflationary forces for some of these commodities out there that

will help, um, I guess cushion the blow.

Yeah, so there's been some talk about, you know, oh, it's a new

plaza, accord or ti the Taiwanese are trying to put a shot across the US'

bows, or, or they're trying to signal, oh, we're gonna allow our currency to

appreciate, so therefore give us better treatment from a tariff standpoint.

Um, I don't really think any of that is what's going on.

I mean, this was way too sudden.

Um, if you look at the, the problem with Taiwan in particular is relative to the

size of the economy, which is tiny, the amount of balance sheet is enormous.

So, you know, this is like Luxembourg, like they're a very small economy.

That's why you saw this happen in Taiwan, this sort of sudden break,

I think relative to like a Korea or, you know, a, a larger economy because

the sheer volume of, uh, assets and liabilities that are matched against

each other is so huge relative to.

You know, the actual economic activity going on.

So what I'm getting at is like, this was market forces moving as an

unstoppable force in one direction, and they just had to let it go.

Because even though in this case it's like, it's, it's totally opposite.

If you're trying to defend your currency, like there you have to husband

your reserves and make sure you're not, like, that's a whole, that was

the Asian financial crisis scenario.

This is the opposite.

You're literally, it's just, well, how quickly can we sell Taiwanese dollars to

stop this appreciation from happening?

But when you have sort of a, basically a short covering situation, which is what

this is, um, it's, you know, at some point you just, you just have to let it go and

sort of, you know, let it, let the market find its place and then work it back.

So I think this is mostly kind of a boring mechanical explanation.

I don't think that the.

You know, the politicians who would be, have the authority to send a shot

across the Americans bows or whatever you, you know, you wanna call that

would even have had the wherewithal or the time to make that kind of decision.

Like, this is, this happened very quick.

So I wouldn't draw strong political conclusions from this.

I think the, but it doesn't take away from the sort of underlying reality,

which is this is representative of that major change in relationships.

And that's a much longer term, much bigger and, and honestly much more

important than any political signaling.

Like, it, it's, it's truly the tectonic plates of the global economy

lurching in a different direction.

And that's really big.

Hmm.

What about the, the, the Japanese have since walked this threat back,

but there was the hint of a threat last week to sell US treasuries.

Um, like I said, I, they've walked it back in the last day or two,

but how does that fit in here?

'cause Theen obviously not one of the currencies that I, I mentioned there.

It is a good question.

I think you'd need a, a specialist Japanese analyst to understand

all of the stuff at play there.

I think they're scared.

Um, I think, I think they realize that they have limited

cards that they can play.

They're under a lot of pressure to show that they're not bending over for the us.

Um, I don't really think that their treasury position is a weapon per se.

As we talked about before, the US is not dependent on foreigners to serve, to

finance its current account or to finance.

Its, its deficits.

It know, we, we had a big conversation about this like a

month ago, so, and Japan knows us.

They know if they see like maybe they'll have an impact on the short

term, but it's not really a weapon.

Um, so I think it's, I think it's more them searching

for some source of leverage.

Um, like what I just said, probably Trump doesn't know, or like he doesn't,

you know, the people around him aren't exactly other than Bessant.

Um, they don't really, uh, they, they probably might take that as a real

threat or, you know, it's perceived as, as a threat, but, uh, it's not,

they don't really have any true leverage and none of these countries

do, um, beyond the very short term.

So I wouldn't read too much into it other than kind of.

Verbalizing stuff for political reasons.

I appreciate your non descent being, uh, the, the smarter one

in the room, but I, I would say he's not covering himself in glory, uh, right

now with how he's, uh, with some of the interviews that he's given in the last

couple of days, kind of seems like he and may, maybe he knows things academically,

but like I, I don't know that he knows, uh, what's, what's going on either.

Um, last question on this.

This is not investment advice, but you know, we're sitting with big clients.

We were talking about institutions and pension funds and insurance

funds and things like that, but a lot of the listeners here

are not in that rarefied air.

If you're just a normal human being who's thinking about like your

account or something like that.

Is this just something, is it just a passing thing?

Like you're not gonna go out there and accumulate Singapore dollars, I assume.

Is it, is it really like no impact on, on the smaller investor or if

you're a smaller investor, like what are, what are some things

to think about in this context?

Well, I think the playbook for the smaller

investor is a version of what I.

We're doing for much, much larger investors, which is diversification away

from the US because much like you know, we talk about financial markets fighting

the last war, the investment industry is always fighting the last war because they

will sell you what has worked in the past.

So if you look at the average allocation from any US based

advisor, it's overwhelmingly us.

And that has worked for a very long time.

'cause the, the rubber band stretching between the US and the rest of the world

in terms of valuation and sentiment and all this stuff that we've talked

about, everyone kind of knows us now that is stretched to the limit.

But sort of the next step is to really look and think about,

okay, well what is my portfolio?

What is my exposure right now?

If you have 80% of your portfolio in the us, that's too much.

That's not representative of the world in any way, shape, or form.

And it's gonna put you on the wrong side of things as that rubber band

stretches back in the other direction and you get that reversion to the mean.

And ultimately what that probably looks like is overvalued US assets.

Kind of just chop that off over the course of years.

And it's not gonna be some collapse, it's not gonna be some dramatic event.

It's just gonna be sort of the boiling frog syndrome where they

just don't do very well and the rest of the world catches up,

you know, and continues to grow.

So if you don't have that exposure, if you don't have that diversification

to the rest of the world, which makes up, you know, 75% of the

GDP and 96% of the population.

Then what are you doing?

You have the ability to do that.

Just, that's not the default setting for most institutions.

And you know, many people are out there saying, oh, well China's not investible.

Um, someone I, I, I, someone was telling me about this gave Cal,

uh, interview and, and that he was talking about international and

some said, well, you can't put money into Europe 'cause they're dying.

Like, all, like that's nonsense.

And that is the consensus view and it's nonsense like in plain terms.

So international diversification, thinking globally, um, and this is

just like if you believe we're entering a multipolar world, which is, you

know, one of the main themes of what you've been talking about for years.

If you, if you're drinking Jacob's Kool-Aid, then you have

to do that from an investment standpoint to, to benefit from it.

'cause now events are proving a. That were right basically.

Yeah.

Don't, don't drink any kids, don't, don't do drugs and don't drink Kool-Aid.

I, I have to confess to you, I am so uncomfortable with the

move towards a multipolar world because I am a contrarian at heart.

And when things are happening that confirm what I thought, like

I wanna zag the other direction.

So I like literally am sitting here torturing myself about

all the ways I'm wrong and not, not being able to find them.

Anyway.

We don't need to do a, we don't, I don't need to get on the,

the psychoanalyst couch here.

Um, okay.

That was great.

Let's move on to our next topic.

Um, this is gonna start a little bit silly, but I, I

think it's actually serious.

I'm curious, um, how you'll react to this.

'cause we haven't talked about this yet.

Uh, Rob, um, so President Trump, uh, this is two days ago now, on May the fourth.

May the fourth be with you, uh, had a truth social post in which he talked

about the movie industry capitalized.

I don't know why he capitalized those letters in America

dying a very fast death.

And he said that he wanted, I. The Department of Commerce and the US Trade

Representative to immediately begin the process of instituting a 100% tariff on

any and all movies coming into the United States that are produced in foreign lands.

We want movies made in America.

Again, Howard Lutnick responded.

We're on it.

Uh, I don't need to say anything else about Howard Lutnick.

Um.

It, it seems silly.

And, and by the way, when I was looking at sort of the

background of this, I missed this.

Did you know that in January he appointed some special envoys to Hollywood?

Uh, John Voight, Sylvester Stallone and Mel Gibson were tasked with

bringing Hollywood back bigger, better, stronger than ever before.

I'm not kidding.

This is an actual thing that happened.

I just totally missed it.

Um, so like there, there's sort of that thing in the background.

There's also the larger like entertainment piece where I know for

a fact that you know, lots of movies.

Either get made or don't get made based on whether they can

be sold in China in the future.

Like China in particular has become a very big player in this.

Like there's a reason in Top Gun Maverick China is not the bad guy.

It's like some unnamed country somewhere far away.

Like if you start putting China as the bad guy, like you're not gonna sell in China.

And then like, all this math doesn't work.

So there are things like that.

Um, I also confess to you, I've been reading on Protracted War by Mao at night.

'cause the Chinese, uh, the People's Daily said You should be reading that more.

So I'm listening to 'em.

Actually, my, my 2-year-old picked up the package from Amazon and was reading on

protracted war on our living room floor, uh, budding communist that she is, I

guess, or whatever, whatever mount was.

Anyway.

Um, but it's funny 'cause in the very introduction, Mao uses

propaganda not as a dirty word.

He talks about propaganda being a force for good, a force for uniting the country

together and that the Chinese Communist party's propaganda was not good enough.

And that was an interesting flip in my mind, but I'm bringing it up

because Hollywood and the US music industry, they are extremely powerful.

Back when I was at GPF, one of my favorite pieces that I wrote, um,

I was talking about propaganda around the Russian interference

claims, and I compared sort of the.

You know, Russia, today's YouTube channel, which had 800 million views over 10 years.

That was back in 2015 when I wrote this.

And I, I compared that to Justin Bieber having 2.5 billion

views on just one of his songs.

So it's like, okay, like, yes, there is propaganda, but like, really if

you just like, listen to American music or watch American movies, like

that's always been much stronger than authoritarian propaganda.

I, I will remember vividly, I was in, um, Bucharest in Romania at an event

years ago now, and I was seated next to this guy and he had heard on a

podcast or something that I liked, um, you know, led Zeppelin and Pink Floyd.

And he told me this story about how he used to pay smugglers at the port

to lift Alice Cooper and Led Zeppelin like records off the ship so that

he could listen to it in his house.

And he was worried that his parents would get taken to the Gulag if they knew that

he was listening to this forbidden music.

And it's because like this, like America centric, but also Western music

and I, all these ideas were really, really attractive to most of the world.

All of which is, so there is like something in there.

But the problem with that is like Hollywood and music and all those

other things, it's effective propaganda because it's not propaganda.

It's not the president telling you make a song that makes people feel

things about the United States.

It's literally just musicians like making things that they feel and people wanting

to associate with those feelings and then wanting to be in a society where

they can have those feelings freely.

So if like you're really, like, there's that sort of, uh, rabbit

hole that I wanted to go down here.

But then the second thing I wanted to ask you about, and this

I took from Justin Wolffer, who I've only recently discovered.

He's a, a economist I think at U Michigan.

Um, he's been doing some great interviews lately.

I've.

Found 'em really entertaining and I invited him on the podcast.

Hopefully he will come on.

But he raised the idea that this might actually be a backdoor into tariffs on

services because it doesn't really, like what is a tariff on movies actually mean?

It's not clear that it's legal.

Is that a good, is that a commodity?

Is it a service?

Like are we talking about the actual like camera work and

things like that that go into it?

Um, and here is sort of something I think that we haven't talked about very much.

We've talked about it a little bit, but services account for more

than 70% of US economic activity.

And last year the United States exported over a trillion dollars worth

of services to the rest of the world.

And it might be more than that.

Um, the US Bureau of Economic Analysis had a whole report about how it's kind of

hard to track services and their estimate might be that it was over $2 trillion for

services that the United States exported.

We import roughly, um, a little less than a trillion, so around 800 billion.

In the same way that there's this leverage, um, you know, the United

States maybe has leverage or not.

You know, if, if you're thinking about goods, tariffs on goods,

the opposite is the case, uh, when you're thinking about services.

So what is to stop, for example, countries from coming out and saying, okay, in

response to Liberation Day, we will now have retaliation day and we will impose

tariffs on all of these US services and we will support European and Chinese, and.

Singapore investment, uh, professionals and insurance professionals and

accountants and everything sort of else.

So it, it just seems like Trump is opening a Pandora's box here with the service.

Like, I don't even know if he realized it.

Maybe just, you know, Sylvester called him one night and said, yo, man, I, I really

need a truth social post about how we need to make movies in America again, again.

So anyway, uh, riff any way you want on that.

Maybe take the, the, the services thing, whether that's something to be scared of

and if you wanna riff on, on Hollywood and things like that, feel free to,

well, what you're describing is really, um, in some ways this notion

of soft power that everyone talks about.

Um, as an American who does not live in America, I can tell you it's hard to find

really good examples of soft power, at least here in France, which is an outlier

in terms of its own cultural production and its view of America for sure.

But when you think.

Just to give you an example, like people in our generation, most of them know

lots and lots of American music and they don't even know what the words mean,

but they know the music by heart, right?

That's not really the case for the younger generation is my impression.

Like for reasons that are specific to music that are specific to MO movies, you

know, just from a bottom up standpoint, I think there's been just less clout anyway.

Um, so that's kind of a factor that's been going on in the background.

Anyhow, sort of, uh, irrespective of all the sort of tariff stuff, the other

thing to keep in mind with services is.

Not only is the US more exposed in terms of its actual balance, like

yes, part of the reason why the US has 4% unemployment and, you know,

our manufacturing sector has shrunk dramatically in terms of how many people

work there, as we've talked about is because everyone works in services.

So by definition that's where your exposure is.

And a lot of those services are directed abroad and it's easy to forget

how that's a form of soft power too.

Um, it's not just movies, it's not just cultural productions

and things that we think of.

It's also, you know, consulting firms and, um, you know, technology firms

and everything, you know, professional that is exporting their work abroad.

It's not like a a something you put on a pallet and put in a container

and ship it across the sea and no one ever sees you or interacts with you.

Services are by definition.

In many ways, much more personal.

They are a form of soft power.

They're a form of engaging with the world.

So yeah, I mean, from an economic standpoint, it's really stupid because

we are exposed, we're vulnerable.

It's like, you know, bringing a, throwing a rock and you live in this glass house.

I mean, that's essentially what we're doing.

But it also just kind of accelerates the withdrawal.

And I know some people have this view that American soft

power has never been greater.

Like I don't really know that I buy that.

Um, Tyler Cowen has said that many times in the last three or four years, for

example, he's a very highly followed, you know, commentator on these things.

So there's definitely a counter thesis out there, but I don't really see it.

Um, and, and this is not gonna be good for it, you know, no matter what happens.

So, yeah.

Um, it's, uh, it's definitely an own goal and it's also

kind of another confirmation.

Not only from an economic standpoint, but just in terms of cultural

integration, people interacting with each other, that that tide is receding.

Um, and you know, local services emerging to take its place.

Um, yeah, that's multipolarity.

There's your catchphrase.

Yeah, I guess so.

Um, I, I wish I had a different catchphrase.

I really don't like that word and I still can't find a word to replace it.

One, one thing that was interesting, um, if you look at China, China's

services, PMI, it fell to its lowest in September, 2024.

Um, and it's at the weakest level in the last seven months, even while in

the United States, the services sector has actually picked up, um, despite

the threat of tariffs, despite all of the pol, despite all the policy

volatility coming outta the White House.

So there is an underlying strength here for the United States, and I

do get the sense that maybe a lot of these countries aren't talking about

services in part 'cause they want deals with the United States and they know

that if they threaten services, like things might actually get real or I

don't know, maybe they don't have the ecosystems yet ready to replace them.

But, um,

well, well just to, just to jump in on that, because

like we have to remember, for most countries, services are not an export.

Like services in China are like picture the little, the guy with the little

crappy shop on the corner, like he's not exporting to the United States.

Um, and that's the case in most countries in the world.

Like here in France, most services are small business, serving, domestic

in many cases, just local markets.

Um, that is the norm.

So those two things are not, those are two very different things.

Um, in terms of the tradable services sector, which is

very specific and very small.

And where countries like the US really dominate because they have these

huge organizations, big businesses that are performing work abroad.

You know, KPMG is doing, you know, accounting and audit work

in 200 countries or whatever, you know, they can boast about like

that is what we're talking about.

Versus most other countries, they just don't have that developed yet.

And maybe they will over time.

Like that's kind of what we're, what we're talking about.

Yeah.

And, and this notion of us soft power never being stronger.

I, I don't know.

I, I would push back against that.

I mean, some of this.

You know, beauty is in the eye of the beholder.

So like, I'm obviously gonna think that us soft power is not good if

you're appointing people like Mel Gibson and Sylvester Stallone to

rec to represent what is supposed to be best about the United States.

Like, uh, Mel Gibson's just an easy one.

Like I hope, I don't need to tell you all the reasons that I would be,

Jacob Shapiro would be uncomfortable with Mel Gibson being a representative

here of United States soft power.

Um, but, you know, all that said, I, I, I think I would also try and be

serious for a second and, and say that my impression from being around the

world and talking to people around the world is, is not that us soft power.

Um, is that any kind of zenith?

I'm not saying it's gone and I'm sure there were Nas before.

I'm sure if you were talking to people in the immediate aftermath of the Vietnam War

or even the later stages of the Vietnam War, that opinions about the United

States would've been extremely negative.

But it seems to me that, you know, the, the companies or the things

that have their, their finger on the pulse this way are these large.

Tech companies that are associated with things like AI and social

media and, and all these other things, like, it seems to me that

that's where the real soft power is.

Um, not in the form of the US government and the US representing a better way

of life because demonstrably like, whether it's in education outcomes

or health outcomes or all these different things, the United States

can't make that argument anymore.

And even in terms of freedom, like, okay, like we, the United States invaded.

A Iraq and, and deposed a dictator on false terms.

It's now picking a trade war after it profited from globalization for however

many, like all these different things, like these things add up over time.

Now most of those tech companies are US companies and are, you know,

the benefactors of US innovation and research and things like that.

But the United States is cutting that out from underneath itself too.

So I, I have a hard time wrapping my mind around the idea that US

soft power, um, is ascending.

It seems to me that soft power has actually sort of transferred

to these larger companies.

And, and this is something you and I talked about years ago,

like when, when the first Trump administration was going after Huawei.

I sort of made the argument at the time, Huawei has more in

common with Microsoft than it does with any other Chinese company.

Like those are the, the peers and, and in and in fighting Huawei to like

improve the situation of US companies, you actually kind of delinked like

an interesting sort of network.

Anyway, I'm rambling a little bit there, but, um, I, I would push back against

the notion that US soft power, um, is, is it, is that a zenith right now?

Yeah.

And just, uh, a final thought on soft power.

I mean, obviously it's very difficult to measure and people can argue

both ways of like, there's no way to judge, but one thing that you said

earlier was soft power is not forced.

Like, and I think that's a really important thing, like America is

squandering so much of its soft power here by just disengaging with the world.

Like soft power is being the beacon on the hill.

That was what the Soviets could never match, was, you know, as, as all the

former, you know, Soviet people will say when interviewed like the blue

jeans, the fucking blue jeans killed us.

Like, but you know, that wasn't like a CIA op, it was just, it was

just, it just wasn't what it was.

And it was open and it was, it was there for everyone.

And this notion that, you know, we're gonna somehow increase America's soft

power by doing what we're doing from a policy standpoint, it's clearly

gonna have the opposite effect.

And I think you're, you're seeing that in a major way.

Like, let me tell you what soft power is.

To me.

Soft power is, you know, I live in Paris, I see TAs come here from all over

the world, and they have like their, what I call their Paris experience.

Like, you could just see them like women, they dress in a, they, I don't know,

they don't dress like this at home.

That's true.

But they put on like what they think is like the, the, the Paris thing to wear.

And they're walking around and they're like, eyes are big and they're taking

selfies and oh my God, for some of them it's like the experience of a lifetime.

It's a dr. Like that soft power is like to have the allure, the o Yeah.

That's kind of a silly example, but you know, that's not

something that you can dictate.

Um.

Even though Macron, I'm sure has a, has a 40 point PowerPoint

plan to, to increase it.

But yeah,

I'm sure he does.

Did.

There was an article in the New York Times over the weekend about how Macron

is trying to be more personable talking to local shopkeepers and things like that.

Probably sharing his 40, his 40 point deck and you know, and it's been a few episodes

since we referenced, uh, blade Runner.

But I will say, like I, I'm gonna be really curious to see if Asian soft power

rises here in the next couple of decades.

Like if you, if you think back to the original Blade Runner and the intermix

of specifically Japanese a little bit.

Chinese of, of like, you know, futuristic, dystopian la like, I

wonder if China will have soft power.

Uh, I've turned on Chinese movies before 'cause I think they're kind of fun.

Um, especially like the shitty action ones, but some of the other, like, there's

a lot of good stuff coming outta China.

I don't think that's a mainstream thing, but it, it'll be interesting to see if

China can grow any soft power right now.

'cause really China doesn't have much, or at least it doesn't have

much in most areas of the world.

It might in places like Singapore, like some of these other places,

but it's, it's pretty restricted.

Um, okay.

Last big topic we should talk about.

Um, and this is something I'm a little confused about, so I'm gonna give you

some scenarios and then ask you to think about, or at least tell me what you're

thinking about this right now, Rob.

Um.

Oil prices, um, continue to flounder.

I think we're below 60 a barrel, Brent Crude here on, uh, Tuesday, May 6th.

Um, I don't know where it's jumped and maybe it'll be different on Friday.

Um, but over the weekend, um, OPEC Plus said they were gonna add, I. Almost half

a million barrels of oil a day in June.

Uh, so you've basically got OPEC Plus saying we're gonna pump more.

Um, and it's a little bit confusing, um, why they would wanna do that,

because if you're putting more supply on the market, that means you're

gonna drive the price of oil down more, and that's gonna be really bad.

In particular for Saudi Arabia.

Um, I was trying to find the breakeven price for Saudi Arabia's

budget, what they need oil to be at in order to balance their budget.

And the numbers are all over the place, but I found a range

from about 80 to $96 a barrel.

As I said, we're sub 60 right now, so Saudi Arabia is nowhere

near balancing their budget.

They actually just posted their biggest fiscal deficit since

2021 on a quarterly basis.

That's, uh.

Roughly, I mean, they've had consecutive deficits now, 1, 2, 3,

4, 5, 6, 7, 8, 9 quarters in a row.

I mean, it's not looking particularly good.

Um, their, their, their deficit for just Q1 was almost $16 billion.

That's half the government's expected gap for 2025.

Um, and that you've got Goldman Sachs saying their deficit could sort of 67

billion this year because of oil prices.

So it's a little bit strange that Saudi Arabia is the one pushing this.

Um, there are a couple different theories out there about

what Saudi Arabia is doing.

The first idea is that, um, the rest of OPEC and OPEC is always a

prisoner's dilemma, has not been following through with production cuts,

uh, specifically Kazakhstan in Iraq.

Uh, so Saudi Arabia is saying, okay, enough of this.

Like if you're gonna continue to not abide by what we all agreed

on to cut to keep prices up.

So you're selling oil, uh, when you shouldn't be, and we're

the ones taking it on the chin.

Fine.

You want to get into an oil price war with Saudi Arabia.

We can do this for a couple of quarters.

You can't, by the way, I should have said their most recent

deficit seems like was funded by borrowing, which is an interesting

sort of wrinkle to throw in there.

Not going back to reserve.

So maybe they can borrow more than they used to be able to.

Maybe that's a really negative sign.

Uh, just, just put that in the back of your mind too.

So option one is punishing Kazakhstan in Iraq.

Uh, option two.

Is they just decided that they wanted more market share.

And this is actually what was happening in global markets,

right before Covid Lockdowns.

It was really big.

You had Saudi Arabia and Russia engaging in an oil price war because Saudi Arabia

was like, fine, let's cut it to 20.

Like, how low do you want to go?

Russia, we wanna squeeze you out.

We wanna seize market share.

The idea being Saudi Arabia can last longer than some

of these other competitors.

So that argument is, it's much, it's more, it's about much

more than Kazakhstan in Iraq.

It could be about Russia, it could be about the US shale producer.

It's about saying, no, let's drive oil really, really low.

See who's left standing after, I don't know, $40 barrel

oil a couple months later.

And let's see, you know, Aramco will be up to the task.

We'll figure it out.

Um, and then the last theory out there is this is really about aligning with

the United States that President Trump wants lower oil prices, and Saudi

Arabia and the UAE in particular are in a, are in a position to deliver that.

And in return, they will get all sorts of defense goodies

and, and maybe other things.

And maybe they won't have to be so hard on the Palestinians too, in

order to get their defense deals and security contracts and shiny weapons

from the United States as well.

And maybe even other considerations that we're, that we're really not thinking of.

Um, I don't know why this flash in into my mind too, the, the rejoinder

to the American soft power thing.

Rob, you probably remember in the first Trump administration when, you know,

president Trump was in Saudi Arabia and Toby Keith, uh, may he rest in peace, uh,

you know, playing, playing a concert in Saudi Arabia and dancing with the Swords.

There's soft power.

Jacob stick that, uh, where, uh, Toby, Keith told the terrorist to put it.

Anyway, so I'm, I'm, you can tell that I've had a lot of coffee today.

I'm feeling great.

So talk to me about oil.

Rob.

Are, are you like.

Because I, I'm a little befuddled here, like it makes sense that oil prices

would be low if we're headed towards recession and everybody's worried about

the global trade war and things like that.

But Saudi Arabia cutting like this and like really, I mean, their, their balance

sheet looks really ugly here, um, in this month ahead, you know, maybe an

Iran deal lurking behind the corner too.

What if Iranian barrels are back on the market in any kind of meaningful way?

Like it, a lot of these things are not quite lining up to me.

Are any of those explanations convincing or, or do you have others?

Um, I don't find the last explanation convincing that

they're doing this to please the us.

I think that's implausible.

Um, the way I would think about this is sort of taking

a company bottom up analogy.

Like we've been talking about this recently with, um, last time we talked

about US profit margins and how a lot of these companies have been riding

on very high margins, and yet I.

Have signaled that they're willing to eat the tariffs to give up margin in

order to protect and gain market share.

And this is what happens with cartels.

Um, you know, what I just described is sort of a very soft cartel,

you know, price competition.

How intense is it, you know, or not?

And cartels are always easier to do when fundamentals are moving in your favor.

Like, look at when OPEC first emerged, like global oil demand

was just secularly increasing.

Like that was a great backdrop.

The problem right now is really twofold.

Um, the first is you have the secular issue, which is that the largest country

in the world in terms of, you know, population and number of cars on the road.

Um, eight out of 10 new cars is now a battery electric car.

And like.

Oil consumption in China is already peaked.

Um, so anyone who's paying any attention is looking at what BYD is doing is looking

at the fact that Toyota just released a $15,000 ev, uh, vehicle, that it will not

be selling in the us but it's selling, you know, everywhere else in the world and

looking at the amount of capacity that's getting built in the battery supply chain.

And you're not feeling super enthusiastic about the long term,

uh, outlook for crude oil demand.

So that's sort of in the back of everyone's mind.

In the short term, you have a major cyclical problem, which we didn't

talk about this, but you know, the, this inventory cycle, all the

cyclical indicators are not good.

You know, for reasons that are, that are obvious and you know, compiling those two

things, or compounding them I should say, is that you have this cartel dynamic.

And the cartel dynamic is when things are bad, cartels break and things are bad.

In most parts of the world right now, Russia, they don't give a

shit about maintaining the cartel.

They need revenues.

And this is the same thing with companies.

Like if you do any analysis of like, especially cyclical companies,

companies that have high fixed costs and relatively low operating expenses,

they will produce the shit out of whatever they're making when they

need to protect their market share.

And if they have financial distress, especially like this is just textbook

finance, if a company is levered, they will cut price to keep the

revenues flowing and keep the volumes flowing because absorbing that

fixed capital, that fixed cost base.

Overwhelms all of their considerations.

And I think that's what you're hap what you're seeing here is things are

not good for many of these countries.

Um, you know, a country like Nigeria is hanging on by a thread.

They have major, major issues.

Do you think that they're thinking long term?

It's just like, you know, it's just human behavior.

When things are bad in the short term, you think about the short term and you

prioritize, Hey, you need a dollar in your pocket today and forget about costs.

We'll figure it out later.

Oh, it's just depreciation.

What does that matter?

That's not a cash cost.

Oh, you know, whatever.

We can scrap those assets and, and sell it.

You know, we need to produce volumes.

We need to have money flowing in.

And in many cases, you know, this is how a lot of these more shitty

regimes finance themselves is like, you need to have cash flow.

The cashflow then needs to be sent out to all of your cronies and all

of the people who are supporting your regime come hell or high water.

'cause if that cashflow dries up, then you have coups and political upheaval

and all this stuff that, um, that a lot of these, I'm not talking about Saudi

Arabia, but lower quality regimes, you know, that's a major consideration.

So, you know, all of this applies and it's just going to probably get worse.

I mean, cyclical deviations, not withstanding, like if we have a

rebound, it'll get better for a while.

But this is, I think, kind of the long-term trajectory of what we're seeing.

And, and Saudi, you know, I think they're in a very tough spot.

Uh, they, they, they talk about Dutch disease.

You know, we talked about that a while ago.

Like they've been living with Dutch disease for 70 years, which is.

They made all this easy money on oil, and it's very difficult to diversify

your economy away when it's so small.

You know, Neo or whatever ain't gonna do it.

I wouldn't be holding my breath for the line, let's just say that much.

Um,

no.

Although, you know, to, I, I, uh, I'll, I'll take the s opposite

side for devil's advocate.

I mean, at least they're trying.

Uh, they are, they are meaningfully trying to diversify and to get away from this.

And there have been some big cultural changes in Saudi Arabia

over the last couple of years.

I mean, you, you said the thing about high quality regimes, I

mean, there basically was a coup in Saudi Arabia a couple years ago.

Just 'cause you put the, the targets of your coup in the Ritz-Carlton

doesn't make it not a coup.

So like, there's a very,

very nice coup,

lovely coup.

Like we should all be so lucky.

Uh, but, you know, Saudi Arabia is also not the worst off here because

they are, you know, the, it, their break even for oil is expensive.

Not because it's expensive for them to get oil out of the ground.

It's because they have all of these grand commitments and things like that, but

they're still one of, if not the cheapest country to get oil out of the ground.

They've got a war chest of hundreds of billions they can rely on good credit,

like all these other different things.

It's not like a, a Nigeria as you referenced, or, or some of these others.

So they at least have some.

Like they have enough, they have a, an ambition to get away from

this and enough resources to where it's not completely unrealistic.

It's, I think you and I are both skeptics on it, but hey, like

maybe there's a positive scenario.

Yeah.

And just, but if you're, if you're a Kazakhstan though, or in Iraq,

like, geez, this sucks, doesn't it?

Sorry, go ahead.

It is worth, 'cause it, it is a little unfair from me, uh,

with regard to Saudi Arabia because the other Gulf states have shown that

it is possible to bridge that gap.

Like, look at Dubai.

Dubai by any standards where Abu Dhabi have been success stories in terms of,

um, becoming these entrepreneur nations.

And I think that's what Saudi Arabia is trying to recreate

with a lot of these things.

Like, and maybe that could work.

And a lot of them, like if you look at a country like Dubai,

Dubai used to be based on pearls.

Like the whole economy was just pearls, like literally getting pearls

out of the ocean and selling them.

And then I. And then you had artificial pearls and they were fucked and they,

they found a way and they pivoted to oil.

Like, so these smaller nations, like, you know, I talk about the Dutch disease

and stuff, but one of the benefits of being small is that you can pivot

like that and sometimes, you know, if you're lucky and you're thoughtful

about it, it can be successful.

So I don't want to be, um.

I don't want to be unfair to the Saudis, but they do have a difficult task.

And part of the problem is they're competing now with the other Gulf states

who have already sort of taken that playbook and established themselves.

So it is a different situation.

And yes, Kazakhstan, Iraq, Nigeria, you know, ju just for everyone to know

in our internal notes, we have like notes on every individual company or

country, and Jacob's notes for Nigeria are just dumpster fire, stay away.

Is that what they were?

I I maybe, I don't remember.

'cause I, I thought I was a little kinder.

I thought I put poor man's India, which is really saying something

that is much kinder.

Yeah.

I'm, I'm a diplomat.

What can I say?

Um, well Rob, who do you think is.

Has the most to lose or is going to feel the pain the worst from low oil prices.

Is this like the US shale producer's going to take it over the barrel, if you will?

Is this, like we said, these Iraq, Angola's, Nigerias,

are these gonna be the worst?

Um, I mean, you know, there are also, you know, there are Norwegian oil companies

out there, Brazilian oil companies.

Like the, who do you think is, because I don't think the Saudis are gonna be hurt.

The worst.

They're gonna be hurt, but they're pushing this right now because they

know that they have way more to fall back on than some of these other

countries that they're going after.

May, maybe it's Russia too, with all the sanctions.

Like where would you be watching for negative impact of low oil prices if this

continues on for months and quarters?

Um, I mean, not to be too simplistic about it, but the higher

cost producers like Saudi will be the last man standing because they're the

lowest cost producer in the world.

Um, and US Shale, you know, all else equal is, is pretty low down the stack as well.

So, you know, really I think you're looking at.

Offshore areas with, in, in, in lower quality geologies, like anything

that's gonna be negatively impacted by inflation more than others.

Like, it's easy to look at the, the price of West Texas crude, which is right now

just below $60, which is where it was five years ago on an inflation adjusted basis.

That is a 20, that's like the lowest since 1999, I would reckon.

I don't have an, I don't, didn't do the calculation, but it's way lower in real

terms than it's been for a generation.

So there's gonna be ramifications and, um.

You know, you're gonna see marginal production, uh, drop in cases

where, um, it's not overwhelmingly a political decision to keep

producing come hell or high water.

Um, so yeah, I mean, everyone kind of knows the, the countries that are oil

dependent and lower quality and, and at the margin, um, those will be the first

ones to really have major, major problems.

Uh, and that'll probably give a lease on life to a nation like, like Saudi, because

that's gonna be production that, you know, over some time period is gonna, is

gonna decline or go away, but it's gonna be a rocky road between here and there.

And don't forget Guiana, uh, ever.

My, uh, one of my emerging markets that if you could get access to would be fun.

Uh, we should probably do a whole episode on artificial pearls and things like that.

Like I, I went down this rabbit hole once upon a time 'cause my wife's

wedding ring is an artificial diamond.

And I was convinced that the diamond industry would completely collapse once

people realized that you can literally make a diamond in a lab and not worry

about, you know, where it came from and who died to get it and which child, you

know, slave labored it out of the ground.

Um, but yeah, maybe we should have a whole episode just on why,

or, I don't know, maybe you think diamonds are gonna die a slow death.

Just like, just like, uh, pearls.

I don't know.

They

are dying a slow death.

They're diamond.

Yeah, diamond prices are down like 20% year over year because of.

Emerging competition from Lab Grown.

Look at, we were short signet, uh, at off Wall Street, um, at the end of last year.

And they're in a tough spot, uh, with this artificial diamond

business, that's for sure.

All right, there you go.

Um, last thing, just, and we can do this really quick.

Um, this is on my, you know, uh, uh, sort of radar in terms of we've had Liberation

Day, tariffs have been in place for a while, but now we're starting to see the

actual impact in terms of either ships not arriving or empty ships, things like that.

Um, port of Los Angeles, um, if you're looking at the data, which I

just had in front of me, but which just went away, hold on, listeners.

Um, if you're looking at Port of Los Angeles data.

Um, you know, change from previous year for May 4th to May 10th, down 35% change

from previous week 16, almost 17%.

Um, next week down 10%, this is in terms of vessels that are arriving,

but then the week of May 18th, up 65% from the previous year.

Um, uh, my, my mother-in-law was one of the many people who, uh, you know,

went to the, the car, uh, the auto.

Uh, where do you buy cars?

Not the car shop dealership.

Auto dealer, Jesus Christ.

I need more coffee.

Like, went to the car dealership, uh, in order to get a car

because she was worried, oh my God, there's not gonna be cars.

This seems to be a thing that's happening throughout the United States where

people are stocking up on furniture and umbrellas and shoes and all those

things that are made in China that are not gonna be made in the United

States, uh, economically, guys, uh, but.

You had, I think you were the one who brought up to me, you know, Walmart and

Home Depot and all those guys coming to the White House and conferring with Trump.

And you've got some port data now saying, well, two weeks from now

it looks like some shipments are up and the Chinese are backing off.

And Bestin is out there giving bumbling answers that, oh, well, you

know, we're not talking, but this is unsustainable in the long run.

So, um, do you think this is gonna be a quick reprieve, that it's just

gonna be like a two week crazy period?

Um, or do you think that it's gonna last longer than that?

Because I was thinking it would be a longer gap than that, but that LA

Port data sort of made me sit up in my chair a little bit to think, well,

maybe, maybe there was just a two week blockage and maybe like, yes, for

two weeks, like there'll be no toilet paper on the shelves and you won't

be able to order things on Amazon.

But maybe things go back to normal after that.

I don't know.

Like, what do you think?

I think people are really underestimating the actual scale of the

damage, um, that's happened here already.

And I don't think markets are really pricing this in.

Um.

So there's a few misconceptions out there.

The first is people are thinking that there's been a lot of pull forward demand

ahead of these tariffs that were just announced, um, by like inventory builds.

I mean, so the tariffs were announced and oh, everyone's rushing.

All these businesses are rushing to buy stuff now.

There's no evidence of that.

And that's really concerning because you saw in January, through the, really,

through the back half of last year as we were heading into the election, and we

talked about this at the time, you started to see businesses were accumulating

inventory in advance of Trump's election.

Accumulating.

Accumulating.

This was growing throughout.

December and really peaked in January.

Like January was a huge blow off top.

And you know, we spoke with some members of the CI club who work for

industrial companies and they were saying, yeah, you know, we went out

in, in January and we bought a lot of inventory because we're dependent

on Canada, we're dependent on Mexico.

These tariffs are coming through and we needed to really, you know,

ramp up our inventory levels.

Like that was four months ago now.

And since then, the, uh, indicators of inventory build have been really bad.

And I think what people miss is that you're having the opposite effect, which

is almost spooky, is businesses are not building their inventories ahead of.

This tariff increase.

They're anticipating bad things and they're letting their inventories run out.

So that's number one thing.

Number two thing is everyone in markets are looking at these consumer

companies and they're saying, okay, first half of the year is gonna be

tough, but they're all, you know, for the most part, modeling improvement

in the second half of the year.

Well, the problem is a lot of these retailers aren't gonna have anything

to sell in the second half of the year.

And like we always forget, like we model out these different parts of the

economy and like we talk about freight a lot in shipping and inventories.

Well, like that's important because managing a retail business is a tricky

balance between having just enough inventory to drive sales, but not too

much inventory that you have to discount.

Mm-hmm.

And now we're totally swinging to the level of you're gonna see empty shelves

in the next I. You know, coming weeks, depending on where you are, like East

Coast, this is probably gonna happen soon because the numbers you just cited,

like it takes time for these ships to get, like everyone focuses on the long,

long beach and, and LA 'cause those are the, you know, the Western shipping hubs.

But it takes time for this stuff to reach the East coast, which is where most

of the population is consuming stuff.

And like all these analysts in New York are in Manhattan and they're like, oh

well Dwayne Reed has plenty of stuff.

So no big deal.

Like, it's coming like you.

It's very, we think people are so smart and observant, all these

finance guys, but like I think we give them a little too much credit.

So a little, I think there's, yeah.

Well.

I'm, I'm being diplomatic now.

Um, you go, but you know, there's, there's complacency there.

I think retail is really in a difficult spot.

Um, the damage has already been done, in other words.

And really the thing to watch is to what extent do you have this

ripple through into, okay, now you're starting to get job cuts.

There's some early indications of like large scale layoffs.

Um, not huge data points yet, 'cause it's early.

That's always the last thing to happen.

Like the employment cycle is always a lagging indicator.

So I wouldn't be looking there yet, but the inventory cycle is looking very bad

and that consequentially is bad for.

Consumer and retail, which is, as you pointed out, a huge part of the economy.

The other shoe to drop or thing to watch is what happens with

investment, fixed investment.

CapEx.

You know, meta came out and made a big thing, oh, we're gonna spend

$80 billion on CapEx next year.

We're not slowing down on ai.

And God bless 'em, because if that represents what all businesses are doing

and they're looking through it, then that will be definitely a mitigating factor.

But if businesses are turning around and saying, whoa, there's

way too much uncertainty here.

We don't know what this guy's gonna do from one day to the next.

We have to reign in our CapEx budget, reign in our consulting budget

reign in our software budgets.

That's a big sign.

And, and one data point on that in the last week, the information, which is

really good, uh, thing to read by the way, for, for people who are wondering.

It's, I, I love that.

Uh, they ran a piece where they kind of got the scuttlebutt

ahead of the annual, um.

There's a a period where all the advertisers get together and the, the

upfront they call it, and they kind of hash out their ad budgets for the

coming year and everyone gets together.

They have these, you know, they present like, what are the big

pieces of content in the coming year?

It's a big hoo-ha and the scuttle, but ahead of this was that TV and streaming

ad budgets we're gonna be down 10% year over year, which is a, that's a

worrying and that's a canary in the coal mine of business spending confidence.

All this stuff that we kind of know is getting hit, like now you're starting

to see some of this actually show up in the investment data That's very bad.

Well, on that Rosie note, I mean, honestly, we've only like

touched what's going on in the world.

Like Israel's talking about seizing Gaza and firing back

and forth with the Houthis.

Friedrich Merz failed in his first, uh, vote to be chancellor.

He got through and the second vote, but boy was that a, a shot to our Germany

thesis, at least on the, on the front end, uh, Australia elections, Canada elections.

The UK and India just agreed to a free trade deal.

So.

Lots of stuff out there, but I think What about

Pakistan?

India don't like, is that something we should be worried about?

Uh, you know, we had an India analyst on last week.

I'm talking to Kamran in two hours to tell him.

So why don't I give you the answer next time we talk?

I thought so.

'cause they, they were saying, oh, like they're, it's starting to feel like a hold

me back fight Ra rather than a real fight.

Doesn't look like both sides are, are willing to go at it.

But yes, anytime nuclear arm powers are threatening each other, we should probably

also be at least a little bit worried.

I would think.

So.

It's not great.

So lots of things to talk about going forward.

All right.

I gotta run.

Cheers.

Rob, I

thank you so much for listening to the Jacob Shapiro podcast.

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