Hello, listeners.

Welcome to another episode of the Jacob Shapiro Podcast.

You got me and Marco talking for over two hours yesterday.

You've got me and Rob talking for over an hour today.

Almost three and a half hours of content on primarily the US election.

We also talk about the collapse of the German government, which I don't think should go underneath your radar.

If you want to talk about any of the things that we talk about here, you can email me at Jacobognitive Investments or JacobispokeAdvisory IO.

Those are both email addresses that reach me if you want to get in touch.

Lots of implications of everything that is going on, if I'm being honest.

Like, my phone has been ringing off the hook.

If you're looking at this on YouTube, you could tell my hair is a little bit disheveled because everything is all over the place.

But we're here if you have more questions or you want to talk about how to navigate this uncertain world.

So otherwise, take care of the people that you love.

Cheers.

And we will see you out there.

Last but not least, if you've expressed interest about Club CI and I haven't written you back, I'm sorry, we've had so much interest, I haven't been able to write everyone back directly.

Don't worry, you're all in a database and you're going to be getting information very, very soon.

If you're still Interested in Club CI and you have not expressed interest to me again, Jacobnitive.investments we will get you on the list.

Hopefully information coming out here very soon on next steps there.

So see you out there.

All right, Rob, you are separated from it, but we're not going to do anything too cutesy.

We'll talk about a little bit about what's going on in the world, but Donald Trump is.

Is the main news item and is probably what we need to tackle.

How is the mood there in Paris?

I would assume it's pretty depressed.

Is it?

I think depressed, but not surprised.

Not like in previous years when I've been here and people were sort of freaking out.

I think we've sort of become inured to what's going on to a certain extent, which, as we get into the discussion about Europe and how they react politically, I think is worth thinking about how this might impact all of that.

But, yeah, so far everything is fairly normal.

I've sort of felt that this way here, too.

It seemed like everyone was resigned to the inevitability of Trump returning.

Even folks I was talking to on the left, like going into the election or begrudgingly accepting that it was going to be him, which.

Which was also strange because the media was moving in the exact opposite direction.

Like, even some of the US Political podcasts that I listened to to try and keep my finger on the pulse of US Politics, they were all saying, it's going to be super tight, it's going to be super close.

Kamala's.

She's got.

The vibes are on her side.

And, you know, Trump said the thing about Porter, or the comic at the Trump rally said the thing about Puerto Rico, and.

And none of it was true as we get, you know, closer to all of the votes being counted up.

I mean, he won the popular vote, but it looks like he also probably won Nevada, probably won Arizona, too.

I mean, it really wasn't a race that was particularly close.

You and I haven't really talked about it yet.

So.

What?

And you had a chance to listen to some of my first reactions with Marco on the podcast we put out, I guess, Thursday morning.

So what are you thinking right now in terms of.

Well, I don't know if you want to start with your reactions at sort of a high level or whether you want to dive straight into what you think some of the market implications are.

Well, I do want to briefly mention this word vibes, that seems to be everywhere in the last year or so.

I'm struggling to understand how this is different from just my gut feel of what I want to be the case rather than data, because I see all these people talking about, oh, the vibes are this and the vibes are that.

Like, I don't think there's any basis to that.

And the fact that everyone's using this term so widely all of a sudden is a little bit weird.

But anyway, I digress.

I actually think that's.

I think that's an important point.

There was somebody I used to work with back in my Stratford days who was.

He worked at a lot of different newspapers in a very.

In a manager capacity.

He was started as a reporter, but then was high up in a couple of different prominent newspapers.

I can't mention who he is, but he used to always talk about the evolution of the word awesome over the span of his career.

Like when he began as a journalist, awesome was something that inspired awe that you would look at something, wow, behold this waterfall.

It is so awesome.

And that by the time it was the 90s and the early 2000s, it was like, yeah, dude, this is awesome.

Like, this is so cool.

And he, like, he could not compute like, how to translate that in his own writing for a couple of different words.

And I think, I mean, vibes is sort of.

Vibes never had the.

The awesome sort of connotation to it.

But I do think it was.

It was something that was taken from music or from something completely else, and it just seemed to get grafted on to what we're talking about right now.

But I think you're absolutely right.

It's about some kind of intangible gut thing that you're trying to describe that maybe it doesn't even work.

And I think it doesn't work because vibes depends a lot on whatever your immediate surrounding is.

So the people who were talking about vibes, they were talking about the vibes with the people that they were hanging out with, which is why I have such a problem with the media.

The media echo chamber felt the vibes because they were all just talking to each other.

Nobody was actually getting out into the field and talking to people on the ground.

To the extent that I was.

To the extent that I felt vibes, because I have a little bit of a better pulse, I think, on vibes because I'm speaking to so many different types of audiences and different types of people.

The overwhelming vibe that I got was just, are these really the best choices we have?

This sucks.

And I'm going to hold my nose and probably vote for Trump.

But, like, I hate every single option here.

And I think that's the bigger takeaway.

Like, on paper, I think this looks like a monumental Trump victory.

But my sense, at least if you look at the political identification data, when you.

When you actually talk to what people.

What is animating people's concerns?

I.

Concerns.

Concerns.

I think maybe there is something there about people were just fed up and that Trump was as he was in 2016.

He was the anti establishment.

He was the I want change, I am dissatisfied with the moment sort of vote, but remarkable how loud it became and remarkable that he is the standard bearer for that, considering who he is and what his background is.

Yeah, I think the point that you made last time, about 42% of the electorate identifying as independent, which is higher than it's been in recent decades, is pretty important in the sense that you're hearing on both sides.

And people said this about the Democrats the last time they swept two elections in a row, that, oh, it was inevitable.

It's a new era of Democratic dominance and all the Latinos are going to vote for them forever.

And now you're hearing sort of the same thing on the other Side, I mean, the reality is probably a majority or at least a plurality of people in the United States just don't.

Are just trying to get by and choose the least bad option.

And they're going to vote based on factors that aren't necessarily locked in polarity, which is good.

It means there's a space for an entrepreneurial response on both sides from both parties in response to what people want.

Yeah.

Here's an anecdotal example of what you're talking about.

Again, somebody I can't mention, but someone in my life who, who I know is sort of your typical Reaganite Republican who shared with me that he was at the polls on Tuesday and he couldn't figure out what to do.

And so he decided since his vote didn't matter much anyway, cause he was in a red leaning state, that he was just gonna click the Jill Stein button and be done with it.

And like, my brain almost exploded.

I was like, okay, so like Reaganite Republican wants to participate in the process and thinks that the right way to do it is to vote for Jill Stein.

Okay, like, cool, that sounds cool.

Anyway, so let's talk a little bit about both markets and the economy on the, on the podcast with Marco.

I tried to divide it up into the economy, into markets, and into people's perception, which, you know, we've talked about all three of those things on the podcast literally, literally all year, and the gulf between them.

So which one do you want to tackle first or which one do you think is most important?

Well, I think they're all interconnected and it's usually a good way to begin with markets because that shows you the light, so to speak.

And I did listen, we're recording this on Thursday afternoon for me.

But I did listen to the Marco podcast and I thought it was very, very good.

So I'm sure everyone is going to listen to that.

But I think I would like this to be sort of a companion piece to a lot of what you discussed with Marco, because a lot of it, I think rings very true.

But some of the things I want to look at in a different light, specifically through the lens of markets.

And on one point, I do want to push back against part of the conversation that you guys had specifically on a company specific tariff policy like Marco was talking about.

And this idea of making a deal for perception's sake.

And.

But we'll get to that when we do.

So I think probably the way to start is you guys didn't really touch on this, but there was a really, really strong market response to this in many ways and I think you can see what that is on any media channel.

But what I would add is the key takeaways were risk assets behaving in the way they did.

Renewable energy stocks getting absolutely crushed.

First Solar at one point was down 20%, which we can talk about everything U.S.

industrial related up quite a bit.

And then in the bond market, obviously big jump in long term bond yields.

Gold actually went down quite a bit, presumably because it was moving in opposite direction from short term rates and bitcoin surging.

I'm just repeating, just so people are familiar in the back of their heads because I'm sure most people will know this.

The one observation I would make on the equity markets is this is, as you guys pointed out, a very different scenario than 2016, both from a macro perspective, fundamentally and in a market perspective.

So if you were to look at what markets or what the setup was like when Trump was elected the first time at that point, the 10 year treasury bond on the eve of the 2016 election had a 1.78% yield.

And if you remember, we were coming out of a long period of stagnation, sort of post global financial crisis, fighting off deflation, trying to figure out how do we get demand.

The topic du jour was the investment depression.

US companies weren't investing, they were just harvesting cash flow.

There was no capex being made.

That was the narrative of the time.

So to have a wild card election outcome was a positive event and you saw a 10 year yield spike just like they did back then.

But back then you were sopping up extra supply.

The economy needed a boost, a demand side boost and tax cuts and everything that juiced things a little bit.

And you can argue about how effective that actually was.

But the point is fast forward to today, which is what we're concerned about.

And the environment is very different.

On.

The risk asset side.

We're not in a stagnation where markets have been chopping around.

We're in the throes of a.

It's not a bubble, but it's a period of high risk appetite.

Let's say.

I would call it mania.

Do you think?

Is that too strong?

I wouldn't call it a mania because a mania there's.

You know, I hate to be too precise about this, a bubble has a very specific definition in my mind and that is where people are cynically buying even though they know that it's not worth what they're buying because the market is moving in such an exponential fashion that it's Logical for them to continue buying because the expected returns are still positive.

That's the definition of a bubble that Didier Sornett would give, who's written literally the book on bubbles.

It's called why Markets Crash.

It's a great book.

That's not the environment we're in now.

I would say we're in a period of high confidence by investors and everyone looking for the next easy buck because everyone has made a lot of money in especially US Markets, which is where most US Investors are located or where they're invested, I should say.

So if you look at the performance of risk assets coming out and the Trump trade, which I think has a meme sound to it, which makes it that much more appealing to people, the academic term that I would use for what we're seeing is stupid.

And what I mean by that is if you look at how some assets are behaving, it's clear that this is not based on actual understanding what the business does or what will impact its results, or even along the whole variety of scenarios of what Trump could do, how they could actually be impacted.

Let me give some specific examples.

First Solar was down 20% yesterday.

Just FYI.

This is going to be great for First Solar over the long term in two ways.

Number one, they are the US national champion of US Solar panel production.

So in a scenario where, and I want to talk about the two different scenarios that you and Marco went through, but in a scenario where you do get tariffs, they're going to be the winners.

They have almost 50% more production capacity than the second largest producer of solar panels in the U.S.

so you're selling the national champion of the rapidly deflating solar panel market that has been at the head of the utility scale solar boom of the last few years.

And yes, I understand some people are saying, oh well, he's going to pull all the money from the ira, which you can argue politically however you want, it's very unlikely that that's going to happen.

But even if it did happen, it's way outweighed by these other factors.

So you see, call it vibes, people puking out anything, renewable energy, regardless of what it is, which is stupid.

It's really stupid.

That's the only word I can think of.

It's thoughtless.

That's a better term.

It's thoughtless.

And then on the other hand, you have a lot of risk assets that don't stand to benefit at all.

So let's talk about the steel companies again, which we do almost every week now.

But there's a reason for that.

Nucor is coming.

I can feel it.

I knew Nucor was going to be in here.

And when, you know the 17th century English steel industry during the Civil War?

No, I'm finding, trying to find some way to bring all my obsessions together.

The steel industry is really important, though.

I know I talk about it a lot and we underestimate how important it is.

And I want to talk about this because steel is literally the lifeblood of everything in the physical economy.

Everything is made out of steel.

Everything.

All buildings, roads, bridges, construction, appliances, automobiles.

Don't underestimate how important steel is to everything outside of the services economy, everything that's physical.

So it's really important to talk about because it is very important.

And there's a big reason why a lot of the US Production capacity, manufacturing capacity for stuff that is still here, is sort of based on the steel ecosystem, because we still produce the vast majority of our own steel.

We don't import steel, very little of it.

And most of the stuff that we do import comes from just over the border in Canada and Mexico.

So it's a important bellwether.

And it also is sort of at the crossroads of all these issues.

But the steel companies were up dramatically, like 20% yesterday.

All of them.

And it's funny because if you read the Bloomberg coverage, so there's a headline today, steel stocks are back in vogue as Trump Victory Buoys Outlook.

But then if you actually read the article, they're asking one of the analysts to give like, okay, well, what's going to happen?

Why are the stocks up so much?

And one of the street analysts says there's the belief that he's better for steel companies than his opponent.

That was the catch all.

And he says there's clearly inflationary expectations for steel that's coming through, whether it's policy or tariffs.

And then the article goes on to say it wasn't immediately clear what actions Trump may take on steel imports given the existing 25% tariffs that have remained in effect, in effect since he imposed them in 2018.

But Gibbs noted that there's strong sentiment among investors that the president elect will take measures.

So in other words, sort of this vague vibes.

Yeah, I mean, that's vibes.

So just to just dive into that very briefly, tariffs are going to do nothing for the steel market.

The U.S.

as I mentioned, we only import about 20% of the steel we use.

The vast majority of that is coming from Mexico and Canada.

Cleveland Cliffs just bought the biggest producer of Canadian steel.

So this notion that we're being gouged by these Asian steel importers.

It's just false.

And actually, even on Bloomberg, there was a piece today saying Trump is elected.

And on the same day, China reports a big surge in steel exports.

Well, newsflash, none of that steel, or virtually none of it, is coming to the United States.

So this is a good example of just Vibes that ignore the underlying reality of this industry because it's completely irrelevant.

Ironically, Cleveland Cliffs just reported their Q3 results and they came out, this was the day before the election.

And on the call they said, we're reducing drastically our capital expenditure and our expansion.

And when asked why, they said, well, we were really taken aback by the automakers doing this 180 turn on EVs.

And they had previously signaled that they were going to go all out and build all this capacity, and now clearly they're pulling the plug on that.

And so we are essentially going to have to take in our own horns.

It's a little bit ironic that the one area of manufacturing growth and boom has been around these things that apparently the markets think are now going to get pulled, but yet at the same time they're bullish on the steel companies.

Yeah, I take your point on the irrationality of certain pockets of the market because you alluded to first solar, but the coal companies like Peabody were up 10%.

And then, I mean, I also, I didn't get a chance to talk to Marco about commodities, which is oil sold off, natural gas also sold off, even though the general assumption is that Trump will remove the roadblocks that Biden took in place to complete LNG export projects, which would mean exporting U.S.

natural gas abroad, which would mean the price of U.S.

natural gas is going to increase, especially as demand for LNG continues to rise in the rest of the world.

I don't, I don't really understand the commodity reaction to exactly what you're talking about.

And there was also.

Maybe you can explain this to me because I couldn't figure this out.

The US Banks just went to the moon.

Wells Fargo was up 13%, JP Morgan was up almost 12%, and they were higher during the course of the day.

I couldn't really understand that move either.

It's not like these are stocks that are accustomed to moving that much.

Unless you're in a serious crisis.

I think Vibes is the, the only answer I can give.

There was some talk about a reduction in regulation and specifically FTC control of M and A, and that that would help the investment banking fees of Companies like Goldman Sachs.

But it doesn't explain why banks that don't do investment banking or where it's not important were up so much.

I think it's just a market rotation into those names.

But anyway, I mean, I think the takeaway here is that the market is being a little bit stupid and cavalier after a period of easy money.

And that's something to be cautious about in general.

Well, and I also think something that's important to point out is that I was somebody who thought Trump was going to win.

We talked about this last week.

I had a pretty good scenario drawn up for it.

I don't know a single analyst or a single person who thought he was going to win the popular vote or that he was going to win by the margins that he won at.

So I think when you're looking across the board at investors, like nobody had this on the whiteboard.

So people are probably just throwing things at the wall because they got something that maybe felt completely unexpected, even though it was sort of Trump maybe at the top.

Well, before we get into some of the comments about tariffs and specific companies, because I have a feeling I'm going to agree with you, I was trying to push back on Marco against that because I think there are elements of his argument that I think are worthwhile thinking about.

And there's a contrarian to it that I like, but it also sort of fails, I think, certain basic tests.

But you know, in a Trump world, things, things happen strangely.

But I'll let's close the market section just by asking, what do you think markets will look like a week from now after the sugar high has worn off and then over the next 12 months?

Like, how does this Trump victory?

Does anything that has happened in the election results change our approach or your approach in thinking about this?

Does the Republican victory overall change how you think macro conditions are going to evolve or is it really just no, like, stay the course?

Like there was this little blip that's going to cause all these things, but everything's going to normalize out and the general trajectory is the same.

I don't think it's changed too much from the scenarios that we've outlined in the podcast right before the election and also previously when we talked about how do we, how are we actually positioning clients?

And those scenarios essentially are higher rates, number one, this notion that we're hearing a lot of advisors advising people to go out and buy long term bonds, which they've been doing for the last nine months, that that was the wrong thing to do.

And that's being proved out right now.

But I think that continues to be proved out almost regardless of the scenario of what he does with tariffs.

Tariffs I think are just adding gasoline on that fire if it happens.

So that's one thing then on the risk asset side and we'll get into this when we talk about the different scenarios.

I think very, very likely that this is not going to be sustained in terms of some mega bull move, some longer term appreciation in these markets as the data comes in.

And as you know, he begins to make clear what kind of policy he might actually do.

And obviously I'm sure he'll be reading the tea leaves as he does so, as is his want.

I think some of the realities of what I was just talking about are coming home.

And essentially I think he's in a very difficult position and I don't envy him as a president in terms of timing because we're coming off a massive stimulus boom and if you look at individual companies, you can see that this has flowed through their PNLs in a hugely stimulative way.

And almost no matter what he does, the outcome is going to get worse relative to what it was 12 months ago.

Whether he does the tariff route, whether he does the fiscal consolidation.

Oh, they're not going to like that, that's for sure.

So I don't see a lot of scenarios where we're starting a rip roaring bull market in US risk assets at least.

The one thing that I would note, just expanding the horizon more broadly.

So US interest rates, I think keeping duration super short is still the game plan no matter what US risk assets.

I think divesting away, taking money off the table and diversifying into international markets and other opportunities that we've talked about is a big thing.

But specifically I want to point out two things and the first is China.

Everyone seems to in a vibe sense be thinking China is screwed no matter what happens.

The Chinese sort of stimulus story was the story six weeks ago, eight weeks ago.

I mean when was it that that happened?

It was, it's in terms of media cycles, it feels like, you know, an age.

And yet I think it's worth pointing out that just today Both the Shanghai Shenzhen 300 index and the Hong Kong index closed at a two year high.

Let me repeat that.

Donald Trump gets elected two days later, both of those indices close at a two year high.

And I cite both of them because the Shanghai is predominantly driven by local investors because the US has limited access to invest there and the Hong Kong is much more international.

In terms of how it flows and who's buying and selling, that's a major data point for me.

And I'm not sure exactly what it says, if anything about what US policy is going to be.

But I think no matter what it says that something has drastically changed in this multi year stagnation bear market that we've seen in China.

And just to be clear, this isn't just stimulus, this isn't oh, the housing market.

Because if you look at the individual Chinese companies, a lot of the names that we're particularly interested in are these kind of world champion industrial capital goods producers that are selling into niche markets.

They've been growing like a weed and it's just been multiple compression this whole time.

So selling, if you were to take the same, like just take JD.com, i like to use this example because it's so similar to Amazon in terms of the physical infrastructure part of their business.

At least, you know, JD.com trades at a fraction of the price to sales multiple that Amazon does.

And arguably they have very similar competitive advantages in terms of logistics and you know, physical infrastructure build out in China as Amazon does in the US and they've just been shrinking, shrinking, shrinking, shrinking in terms of multiple.

And all of a sudden that Stock was up 40% in three weeks.

So people have moved on from talking about that story.

But I've been watching it very carefully as the market digests and it's not showing signs of just puking that back up.

And that's really, really important when you're thinking about international diversification.

So that's one thing.

And the second thing is the dollar rallied on these results.

I think that is a very short lived trend.

Almost no matter how you slice it.

The dollar rally I think is going to be difficult to sustain.

I think it's a knee jerk reaction based on markets or FX markets moving in line with short term rate expectations which jumped on the election results and not taking into account all the other implications of what's going on.

The dollar needs to weaken.

The dollar is way too strong and we can talk about why, but that's a major and multi year trend that I think is something that you can bet on with a pretty high degree of certainty.

So as you're thinking about diversifying into international markets, keeping that into account and thinking about how that dollar, you know, unwind starts to play out over the next few years is something that's going to be a key part of it.

Well, and what types of policies, unorthodox policies, the Trump administration will do to weaken the dollar because we don't have policy from Trump about what, how he wants to do that.

But he has certainly called that out and at the end of his first administration was calling out the strength of the dollar and going after not just China, but countries like Japan, like Vietnam, nominal US Allies, saying this dollar strength against your local currencies is not going to work.

And he started exploring all sorts of policy options for how to weaken the US Dollar.

And I think that maybe hasn't been talked about nearly enough.

Maybe that's as good as a way as any, Rob, to segue into the US China scenarios.

And to your point about China stimulus, it might be the big story of the news cycle literally tomorrow, because the Chinese are now promising, promising us that tomorrow is the day that they're going to unveil stimulus.

By the time this podcast publishes, we might have some new vice minister of something or other in the People's Consultative blah, blah, blah, talking about the new stimulus that's coming through.

I sort of have my doubts because it's happened three or four times now, but they do sound the vibe is a little more serious this time.

2025, maybe that's going to be the year of vibes.

I don't know.

Or was 2024 the year of vibes?

So let's talk about some of those scenarios because I do think in some ways this is the most, this is going to be the thing that is going to drive things the most.

Do you think that Trump is going to have some kind of deal with China where it's going to be a Nixon in China sort of moment where he lets bygones be bygones and gets China to, you know, as Marco was saying, build things in the United States with JVs, things like that.

Music to my ears.

And by the way, Chinese companies, I'm ready to help you form a JV to rebuild the port of New Orleans.

I'm sitting here.

It's wonderful.

Happy, happy to help you with that.

Just let me know if you're listening then.

You know, door number two, I think, is what the Harris administration would have done, which is an assembly of allies to push back against China trying to rebuild a, quote, unquote, liberal international order, a smaller one, but one that can compete against some of these spheres of influence that are resisting the United States and its allies.

And then number three is just we're going to take our ball home and play by ourselves.

And whichever countries Trump idiosyncratically has a good relationship with because he has a good relationship with their leaders there.

There will be some, you know, some important developments, maybe on a bilateral level, but that overall we're looking at a turn toward US isolationism that we arguably haven't seen since the early 1930s, or maybe you go back to the 1840s and the so called Tariff of Abominations, my favorite tariff of all time.

And you know, we've had episodes like this in US Politics.

But tell me where you land on the, on the scenarios because Marco was pushing very hard on the accommodation story and I have a really, really hard time seeing it.

And I also have a really hard time seeing Trump being the one who's going to build an alliance network against China.

So I have, by default, seem to be falling into the isolationist camp.

But that is such a dark camp and such so bearish for the US Overall that I hesitate to think that he'll actually do that once he sees the economic impact of some of the things that those policies will engender.

Anyway, so, so tell me where you are on the scenarios, because you can, you can hear the ambivalence in my voice as I'm looking for true north.

So there's really a lot to get into here.

So let me try to take it systematically.

Clearly, the building alliances thing, let's not even talk about that because that's not going to happen.

Really, you're talking about door number one or door number three, which is, and again, I think the conversation with Marco was very good and very interesting back and forth that you guys had on this.

You know, is it going to be a 180 from the statements that he's made about tariffs and, you know, China specifically.

And he'll be, you know, pragmatic and deal making, which I want to speak specifically to some of the things that Marco said about that or will he follow through and do this?

And I think Marco's argument, which I think is a very powerful argument, is that Trump is, for all his quirks, he's politically very astute and he does what will be popular, not what's right.

I think that's kind of the only thing that you can count on him is that his ego will prevail.

So what will make him popular is what he will do, even if it's not consistent even with something that he previously said.

And so let's take that as the background and examine those two scenarios.

The way that I would view this first before examining each of the two scenarios is what brought us here in the first place.

And I think that's a part of the conversation that you guys kind of skimmed over.

And I think it's important to dwell on it a little bit here because why is Trump talking about weakening the dollar?

I think it's very important that he is.

No American president or presidential candidate has ever said the sorts of things that he said about Japan and China sort of getting rich on the back of two weak currencies.

That's extraordinary.

Every American president has repeated the mantra about oh we want a strong dollar and blah blah, blah.

And he's coming and saying hey, they're putting us over a barrel by manipulating their currencies.

And that's really the key thing here because ultimately the issue is that the dollar is too, too strong and it has been for a generation.

And because the dollar is too strong, the US cannot produce things for export in the way that they could before.

And I think you're seeing two major consequences of that that are really relevant to everything that we're talking about today.

The first consequence is the amount of debt in the United States economy is not going down.

It's going up, up, up, up, up every year.

So currently if you take the non financial sector, so forget about financial debt because that's not going to buy real assets and that's something a little bit different.

But just take the corporate sector and households and the government.

We have today 75 trillion dollars of combined debt against 29 trillion of GDP.

And if you were to look, you know in the mid 2010s that was like 40 trillion of debt against 20 trillion of GDP.

This started to diverge.

So today it's 259% of GDP and it's not gone down at all.

It's gone up in the last decade despite gangbusters economy, despite everything, despite the fact that we had a huge housing bubble in 2007 and mortgage debt by households exploded because they are all speculating on what could be considered a financial asset, which is houses.

And that debt has gone away.

So I'm including that huge multi year deleveraging in mortgage debt.

Even if you take that into account, the total debt has just gone up every year and the percentage to GDP has gone up every year.

Now why is that?

We sort of take that for granted.

Our whole lives have been like oh the debt, oh it's so high.

Oh we're just so lazy.

Oh we're just spendthrift, we just want to consume so much.

And people make these moral judgments about what's essentially a financial accounting issue.

And the moral judgments are lazy and they're not right.

Americans are not lazy.

It's the country that lionizes work more than any other to a fault.

Americans are not lazy.

Can I ask you a quick question though on your debt figure?

Public debt I thought was in the 30s.

So you're doing public and private debt.

Where's your figure coming from?

So 75, it's 33 public debt, 30 federal, 3.3 local and state.

And then it's about 20 business, 20 households.

Okay, okay, okay.

So 75 in total on 29 of GDP.

Okay.

And that's shifted around like it used to be.

Households had a lot more as I mentioned with the mortgages and corporates had less.

But in this latest period of binge, corporates have increased.

It doesn't matter.

The point is, if you don't have debt going up and up and up when the dollar is too strong and you can't produce for the rest of the world to consume, you have to produce for you to consume.

And the only way for Americans to consume as much as we can produce is by borrowing over and over and more and more and more and more and more.

So that's the first issue is this doesn't continue forever.

And as we talked about, if you look at the long term trend of interest rates, all this was fine.

While interest rates were just going lower and lower and lower every year.

And a lot of people were making that argument like, oh, they're just going to keep going lower because the debt is deflationary and Irving Fisher and blah blah, blah.

That's not the case anymore.

We just had a 40 year trend line break.

The year I was born was the top in yields.

And since I was born, yields have been going down every year on a trend basis.

And that changed a few years ago.

Now yields have broken and now they're starting an upward trend.

That's very, very bad if you have 259% of your economy in debt.

Right.

So this is not a problem that can be evaded forever.

And we forget about this because it's like a disease you've been living with your whole life.

You don't even think like, oh yeah, I forgot I'm missing that limb or whatever drastic thing that you've just become accustomed to.

So that's the first thing.

And the second thing is as a result of this inability to export, the whole United States economy has shifted.

And I mention this because it's very relevant to this tariff debate.

If you look at the composition of what we actually make in the US Forget about the service economy, which is not trade competitive.

And obviously the service economy has become a much, much larger part of the economy because it's not trade competitive.

And people, if you look at the number of people who used to work in manufacturing and now work in what's called leisure services, including fast casual restaurants, we literally went from having people in fash factories making widgets to having them in chipotles making burritos.

And that's not an exaggeration.

If you look at the numbers, that's literally what's happened because burritos can't be shipped in from abroad unless you're willing to have a pretty stale burrito.

But if you look at the composition of that and just look at the current industrial base of the US Getting back to steel, all of it is essentially based on the things that you can't ship in.

So the steel complex, fabricated metals, automobiles, aerospace, non steel, minerals.

So cement, cement you cannot make abroad and ship, it's too heavy.

Right.

IPhones, you can make anywhere in the world and ship them around to wherever they're going to be consumed.

So the whole US industrial base has shifted to the stuff that is not trade competitive and is also more capital intensive and uses less people.

So that's the background.

And by the way, it's also sort of shrunk in terms of the number of people working.

Currently it's 12.8 million people are working in manufacturing and that's the same as it was in 2018.

Despite population growth in the interim and despite the biggest boom in industrial production and construction and manufacturing capex that we've seen probably in our lifetimes, you still can't coax more people into that part of the workforce.

Just to show you how constrained it is, we're tapped out.

Well, and that's like what, that's like 4% generously of the US population.

I mean the US population has got to be around 330 million.

So it's such a tiny, tiny segment.

Yeah, there's 150 million people, give or take, with jobs in the U.S.

and of that 12.8 work in the manufacturing sector.

So it's 8%.

And that includes all of the, like this is the, this is the payrolls number.

So that includes all the secretaries, all of the accountants.

Like these are people who work for manufacturing companies.

It's not people working in factories.

That's separate.

Right.

So it's tiny, it's a rump.

And this is just getting to the tariff issue.

And all I want to say is even if you had the sort of crazy burn the house down tariffs to the moon scenario.

If that were to happen, what would be the impact?

You're talking about putting a huge tax on 70% of the economy in exchange for hoping that the stuff that we do import, someone will decide, oh yeah, we'll build a factory to do that.

We'll import plastic widgets.

I mean, we'll build our own plastic widgets.

I mean, it's just not, it's not a realistic scenario.

And I think that makes me sort of of the mind that Marco might, might end up being right because it's just so obviously stupid.

Marco being right, that there will be some kind of broader deal.

But isn't your point also that even if China did that, that there's not really an industrial base in the United States to absorb that and it doesn't make sense in the first place?

Or am I misreading you?

Well, I want to get to the second part of what he said because I think he's right that the tariff scenario is not very likely and that it will be something that's more symbolic or it will be, you know, and just to speak specifically to that, because what he pointed out was, okay, well, they're going to go after specific companies and they're going to have them come to the US and produce here or, you know, essentially do tariffs, but on a sniper rifle basis, not on a, you know, flamethrower basis.

And the problem is really twofold.

The first is if you do that in a very small way, then it's symbolic and nothing has changed.

Right?

Yeah, that's literally what you described is literally the Biden administration policy.

It's literally they took Trump's sledgehammer tariffs and said, no, we're going to be very, very surgical and we're going to.

My favorite example is when they hiked the tariffs on ship to shore cranes and needles.

Very, very, very specific things.

That's all the bide it.

Yeah, exactly.

So like, okay, maybe that makes for a good photo shoot, but for the stuff that we care about as analysts, like, whatever, it doesn't matter.

It's not worth even thinking about.

And nothing changes.

It's the status quo policy.

Or if you do it at a sufficient sort of magnitude and degree, then it has the same effect as a blanket tariff would.

So I don't think that it's really an explanation.

And so to take the example that Marco specifically gave BYD first of all, that's a weird example because we don't import cars from China.

We make our own cars.

And it's not clear that we need more manufacturing capacity for cars.

But I think at the end of the day you're sort of like you're trying to say, oh well, the alternative to this broad policy is going to be these anecdotal stories.

But if it's just an anecdote, then it doesn't matter.

And if it's lots of anecdotes, then it's the same as the broad policy.

I think is one point.

But at the very broad level, if we did that in a major way and we said to China, hey, you better put 100 billion of manufacturing capacity into the US and you run it yourself.

Aside from the fact that we don't have the workers to man that remotely, not even close.

We already don't have workers for what we have.

There's a labor shortage for the rump that we currently have.

Never mind, we're going to start building lots of other stuff here.

But at the accounting level, it's the same as what we're experiencing now.

It's just instead of China buying US financial assets in the portfolio account, it's FDI and they're buying US physical assets.

@ the end of the day, the dollar is too goddamn strong and it doesn't fix anything.

I think that's the key thing.

Yeah, it's funny too, because it's so hard to parse what the Trump administration is actually going to do because I don't even think they know what they're going to do yet.

I mean, doesn't even have the team assembled around him.

But one other counterfactual that I didn't get a chance to bring up, I'm just going to quote Now Vice President J.D.

vance in a speech that he gave on the Senate floor, April 19, 2023.

There's a whole C span clip of this if you want to see the whole, the whole speech.

But here's just the quote that I think is that stuck out to me the most.

The Chinese have a foreign policy of building roads and bridges and feeding poor people.

We should pursue a foreign policy of, and diplomacy of respect and foreign policy that is not rooted in moralizing.

So there's two things that I read in there from Vance.

Number one, you know, a real realist statement of foreign policy.

So not about moralizing, but, you know, let's.

A pure interest based strategy.

But the first part of that is the Chinese have a foreign policy of building roads and bridges and feeding poor.

I don't think it's too much to Infer that he thinks that that's a good type of foreign policy and that maybe what Vance would be pushing inside the White House is, well, maybe the United States should have a policy of building roads and bridges and feeding poor people.

And rather than bringing China to its knees, maybe the bigger thing that the United States should be doing is building its own Belt and Road Initiative.

And maybe it doesn't have to be moralizing.

It doesn't even have to be allies.

Maybe it can be the most odious people you can possible think of, but that the United States should start outsourcing and exporting all these things, and that the United States government should exist to support all of these different nascent industries in doing these things.

And if that involves some kind of migration deal so that we can get cheap labor to come in, or if it's part of the usmca, as we get to build all of this stuff inside of Mexico, you can start to see, like, a weird, populist, protectionist, like policy coming out of that.

But that's very, very speculative.

And who knows if Vance will have any pull inside the White House.

I think he earned the ire of Trump more than a few times on the campaign trail because he overshadowed Trump at different times.

But when I hear you talk, it's funny you wrote off scenario number two at the beginning, but I can't help but think that door number one doesn't work and door number three doesn't work.

Both of those scenarios, for different reasons, will create an economic situation that Trump can't tolerate.

The one, the door that makes the most sense is door number two, and that's the one where the United States really could use all of these different networks of relationships to carry its strength so on things like innovation and technology, and then also use its strength to negotiate either bilateral deals or smaller multilateral deals that allow them to have the labor that produces these things at a competitive way and gives the sticks and carrots as they need to be given to the countries that they want to forge relationships with.

So maybe that's where I'm landing, now that I hear you talk.

Because the more I think about doors number one and three, they don't make sense because I think that they will create bad economic data.

But then again, this is the biggest pitfall of the type of analysis that I do.

Just because one door makes the most sense does not mean that that is the door the policymakers will go through.

Sometimes countries shoot themselves in the foot all the time.

Just look at what China did when Xi Jinping was a little too early on the wolf warrior diplomacy status and lost a lot of some of the gains that they made before then.

They're trying to make up for that right now.

We could just see policy error here from the Trump administration, but that's my reaction listening to you talk about that.

But I don't think it's speculation.

And part of what I've been trying to get at in a lot of our conversations recently is like, forget about the politics, forget about the election, forget about what Trump's going to say.

I don't know what he's going to do, who no one does.

But that getting to something that Marco points out, rightly, all the time.

It's about constraints and incentives.

And the constraints and incentives underlying all of this are the dollar is too high, the US current account deficit that's been persistent for 40 years needs to change.

Otherwise you're going to have very bad societal outcomes, or at least very bad financial outcomes as the inevitable limits of that are exposed.

And interest rates are the gasoline that ignites that fire or causes it to spread and get noticeably worse.

So it's no surprise that you're starting to see people like G.D.

vance say, hey, we should.

I mean, what he's describing is what the British did.

That's what the US logically should do.

If it were, you know, a true empire, you know, instead of like a really nice empire that just lets everyone park their stuff here and, oh, we don't have to, like, the British would go in and clobber you and make you buy their manufactured goods and they would send their current account surplus into your country to build the stuff and you'd have to buy everything from them and they would take your raw materials in exchange.

That's not what the US does.

We are the repository of everyone's excess savings.

And what J.D.

vance is describing is, I think, the most likely outcome over the medium term.

Like when we think about the US and its own sphere of influence and how they want to maintain power projection in the world and yet have that be consistent with the need to rebalance its position in the world, I think that's where we get to.

I just don't think that it's something that this current administration is really going to be capable of doing, given that they seem to be kind of groping around the problem and there's different views of how to handle it.

And at the end, you know, in order to do this effectively, you need to.

You kind of need to be a little more Atlanticisty if you know what I mean.

You can't be the isolationist, bashing the foreigners and then, oh, by the way, would you like to buy Boeing's new planes?

That's a difficult thing to square.

I think the harder thing is actually consistency, because if the second Trump administration is anything like the first Trump administration, he's going to put different people in different positions of power and he's going to literally run it like the show the Apprentice.

He's going to watch them fight against each other and one day he's going to pick one thing and then he's going to fire somebody and then John Bolton will come in from stage left like there was no focus or consistency.

So I don't even think you need the Atlanticist part.

It's easier if you do that because there's more capital and more interest there.

But it's really more about consistency.

And I'm just not convinced that he's going to manage an administration that can be consistent in that.

Before we leave this, because there are one or two developments elsewhere in the world that I think we should talk about, because there's more than the US election out there, do you have any thoughts about some of the things that Trump has said about bitcoin on the campaign trail?

Because as we're talking, I see our friend of the podcast, Matt Pines, quoting Trump's likely treasury secretary on how this is the greatest opportunity for bitcoin in a generation.

And this is the.

It's going to be about freedom and bringing young people into the market.

Bitcoin, as you noted, already had a sharp spike.

I saw some projections saying it's going to go to 100k before the end of the year on the election news.

So how does that work into what you were talking about with the dollar and risk assets and some of the things that we've already discussed?

I think the broader.

I don't care what they say about bitcoin.

I think a lot of that is just blathering and bullshit, basically to try to please people.

But the price action in bitcoin, I think, is one of the most interesting things this year.

And we talked about this on the last pod, and this only confirms it, that bitcoin has been strong, despite the fact that.

And of course, post election, small cap stocks and everything speculative absolutely ripped.

And so did bitcoin.

But bitcoin was doing well.

Before that, bitcoin and risk assets, or small cap speculative risk assets had been moving in lockstep.

It was sort of a small cap tech proxy for a Very long time.

And that changed earlier this year.

And I think rather than a reflection of, oh, Trump's going to do this or that to help Bitcoin, I don't think that matters.

It's marginal at best.

What matters is I think bitcoin is telling us the same thing that gold is telling us when it's breaking out to a new all time high earlier this year, which is, you know, there's $75 trillion of debt and Trump is going to be elected president.

Fair enough.

And this, I mean, we don't have to leave the other parts of the conversation, but I thought we should just note that in the midst of the coronation of a new US administration, the German government has fallen.

Well, the coalition is on the verge of collapse, I guess I should say so.

Chancellor Scholz fired his finance minister, Christian Linder, who was basically doing his best attempt to get fired.

He put out a paper last week talking about cutting social service payments, dropping a solidarity tax that's supposed to help fund German reunification, dropping a bunch of climate regulations.

Basically all things that the Green Party and that Scholz's party were not going to agree to.

So he's finally fired.

Scholz is talking about staying on to lead a minority government until elections can be called in January.

If you look at the opinion polling, I mean, the SPD and the Greens have been hemorrhaging support literally since the day the so called stoplight coalition came into power.

Right now it's the CDU, CSU is polling at about 32, 33% depending on what poll you look at.

And then Alternative for Deutschland, that favorite right wing bugaboo of most.

You say Alternative for Deutschland or AfD and it's like people can hear the Teutonic knights marching in the forest and the Panzer tanks rolling through the gardens.

Anyway, but so eight polling around 16 to 18%.

That's a clear center right coalition in the making.

And if cdu, CSU doesn't want to work with afd, you know, they still have spd, they still have the Greens, lots of options there.

That's just if elections were held today, who knows what's going to happen in the context of the election itself.

But I bring it up, and there was one other thing I wanted to bring up too, which was kind of remarkable.

I don't know if you saw this, that the German cabinet approved a draft law that would allow the army to gauge the readiness of 18 year olds to serve in the army as it looks to boost troop numbers for NATO obligations.

I've seen it reported in some places as, as reintroducing conscription.

That's not what it is.

It's the step that you take before you try to reintroduce conscription.

So they haven't even been surveying 18 year, 18 year olds about whether they would be interested in serving in the military.

Now they're talking about, we want a law that says we can survey them all and that we can hit them with information or, or gather data on their interests and things like that.

So it's, it's many steps away from the German army being, you know, rehabilitated, but it is a first step in that direction.

And in the context of what we're talking about, I think it's important if we put this also in a little bit of perspective.

You know, you're in France.

We already talked a little bit about Paris.

Emmanuel Macron immediately congratulated Trump and said he wanted to work with the United States on shared interests, and also said, boy, was it, Aren't I right about there being, like, European sovereignty and defense cooperation?

Don't we need this right now?

I'm paraphrasing, obviously, he said it in French and it probably sounded a lot better, which is just to say, you know, you and I have been very bullish on Europe for quite some time, and it's very striking to me that Trump is coming into power.

He is somebody who has thrown a lot of water on the, on the Atlantic transatlantic relationship, who's not interested in European excuses and things like that really derides them.

Just think about the way he treated Angela Merkel, and at the same time, the two countries that are supposed to lead the European Union, Germany is in political chaos.

And it's not like Macron is in a strong position either.

His election gambit left him much weakened, and he's also a lame duck.

He's going to be gone here in a couple of years because he can't run again.

And who knows if finally the right in France will put up somebody whose last name is not Le Pen and be able to challenge Macron in a meaningful way.

So putting all that on the table, number one, just to give listeners a sense that there is more going on in the world, like, the things that are happening in Germany are super important.

And we wrote a very long piece about how, you know, we thought that Germany was going to struggle economically until there was a shift in government, and that we expected a new government was going to be able to push through some of the reforms necessary to help the German economy weather its recent crises.

It's very similar to the rise of Angela Merkel and what happened in the early 2000s.

But also I think it opens up that conversation about how Europe's reacting and what you're hearing in Paris and how you're thinking about that.

So that's the setup.

Rob, how do you want to think about that in the context of everything else we've talked about today so far?

I'd like to attack that from two different angles.

The first is to consider that we might be entering a period where much like Charlemagne in the 9th century, France is unified and centralized and trying to project power and Germany is disunited, full of chaos and lack of direction, and that there's potentially an opportunity for the former to extend its influence over the latter.

The second prism that I would like to look at it through is through balance of payments.

So we were just talking about the United States and its problems with balance of payments and too strong dollar and current account deficits and debt.

Germany, I think you can almost think of it as a bizarro version of China.

If they were in a different scenario and had to deal with problems that China does not have to deal with.

And what I mean by that is a lot of the, how do I say Germany is sort of a China embedded within the EU in the sense that they run perpetual current account surpluses.

They're sort of lionized as this manufacturing export champion.

That's not always been the case.

And it's that way because they're stuck with effectively a two week currency, which is why they're export champions and why France, for instance, runs perpetual deficits much like the US And Germany runs perpetual surpluses.

So if you want to take China and the US and put them in the eu, then you're talking about Germany and France and similar issues.

Now the difference is Germany's export engine is sputtering and we're seeing the political ramifications of that.

And I think everyone talks about Germany as the strict taskmaster and you can't have any debt and government debt is only like 60% of GDP or something.

Absolutely crazy when you consider how it compares to other developed countries like the U.S.

i don't think that that is cultural.

I think we like to use cultural explanations, as I said, for financial outcomes that are based on policy.

And I think you might see that change if the export engine begins to sputter.

And that would be the thing that I would be looking for is new German coalitions moving away from the idea that, hey, we can take laissez faire, we're just so good at manufacturing.

We're going to have a liberal economy where we just kick ass.

And oh, by the way, it's really important not to take on too much debt, which is a luxury you can have when you're running a big export surplus and you're growing on the back of the demand of other countries.

When that starts to fail, then you need to generate your own demand, which means taking on more debt internally.

It means the German government building a defense capacity.

It means the German government spurring investment internally to build domestic demand and upgrade infrastructure.

And all the stuff that you pointed out in your piece that they've are the low hanging fruit for German investment.

So I think it's really interesting to watch Germany, the potential for sort of a new approach is quite ripe because they're going into their third year now of just dismal industrial results and dismal export results.

The rest of Europe is suddenly looking way better than Germany.

They were shitting all over Spain and Greece and Italy for years.

And hey, those countries are actually growing pretty well now because they're benefiting from the travel and tourism boom and those sorts of things which Germany is not a tourist destination as we know.

So I'm sort of throwing a lot of stuff in there.

But I guess the things that I would focus on are new sort of political programs coming out of Germany that are more receptive to taking on debt, to internal investment, to spending, to trying to drive domestic demand as opposed to kowtowing or kowtowing.

I never know how to pronounce that.

You always pronounce it correctly.

Kowtowing, kowtowing, cow towing.

I think kowtowing.

I believe that's an English bastardization of.

In China, when the barbarians would come, they would have to bow to the Chinese emperor.

Which is to say, I'm sure that that's a Chinese word that I'm pronouncing incorrectly.

I'm just pronouncing it the way that it got bastardized into English correctly.

So there you go.

Well, bend over backwards at any rate to the export oriented sector and sort of, you know, it's a big business.

And I think that's, that has the potential to be ultimately very good if it means a more balance of payments and a more balanced weight of demand drivers within the eu.

Good for Germany, good for France, good for the periphery and good just for the overall conversation.

Because when you take away these huge balance of payments imbalances within the single currency zone and you take away the scope to make these cultural arguments like oh, the Italians are lazy and the Spanish are pathetic and the Germans are virtuous and all this stuff.

I think it makes it easier to get on the same page, like we're looking to see.

Yeah.

Well, that's more than three and a half hours now of content from us over the course of the last two days.

Is there anything we didn't cover, Rob, that you think that we should cover?

For the listeners, between me and Marco, I think we covered every possible angle of this goddamn election.

Right.

And as I joked to Marco, so who do you predict will win in 2028?

Is it time to start the analysis?

I can't wait to start getting questions.

About whoever will fix the United States balance of payments problem.

That's my contribution.

Okay, so no one.

We'll have an empty White House.

All right, well, we'll see you all out there.