June 22, 2026 • 43 mins
Carson Block believes investors may be underestimating the economic consequences of artificial intelligence.
The Muddy Waters founder and CEO joins Merryn Somerset Webb to explain why recent advances in AI have made him rethink its impact on the labour market—and why he believes widespread displacement of knowledge workers could eventually create a major challenge for financial markets.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:19):
Welcome to Marin Talk to Money, the podcast in which
people who know the market explain the market. I am
Maren zum zep Web and this week I am speaking
with well known short seller and Muddy Waters Capital founder
and CEO Carson Block.
Speaker 3 (00:31):
Carson, Welcome to Marin Talks Money.
Speaker 4 (00:34):
Thank you, thanks for having me.
Speaker 2 (00:35):
You have been talking a lot recently about AI, and
I wanted to just start on that straight away because
I think the core of your view is that AI
really is going to live up to everyone's expectations of
it. It is going to be spectacularly successful. All the worries
a lot of people have about the way that llms
have hit his ceiling and development is over and we
(00:56):
need a new path.
Speaker 3 (00:57):
All this kind of thing doesn't come into your view.
Speaker 2 (01:00):
I think that it's going to be very successful and
there will be an employment apocalypse as a result.
Speaker 3 (01:06):
Am I over egging of you there?
Speaker 4 (01:08):
Let me just state that as background, I was a skeptic.
So until February of this year, I refused to refer
to any of the models that are out there that
we're using as AI. They are large language models, and
so I said, Okay, these things are not going to
ever find the cure for cancer. They are not that intelligent.
(01:31):
It's not artificial intelligence. They're lllms. Now, the current generation
of LMS that was released in January early February of
this year changed my mind to some extent. They're not
going to independently develop the cure for cancers. They I
(01:54):
mean I used to term them the greatest search engines
ever developed, and that effectively they are. But the ability,
their ability to synthesize that information and order that information,
I mean there's real labor savings to be had right
now in certain areas of knowledge industries I mean such
(02:17):
as investment. I mean I immediately began using Claude to
run Monte Carlo simulations that I previously would have needed
somebody who was pretty young, recently graduated from a top
university strong in math to run the thing that's important
to really understanding or that change to change that changed
my view as to what lllms are going to do
(02:42):
to the labor market. Is that this generation was coded
and tested in large part by its predecessor generation. It
is coding and testing its successor generation. So you have
a situation where the leading users of this generation of
AI model, I mean they're in the technology industry. They
(03:03):
are able to supplant by using AI or displace multiple
members of a team. Now, vast majority of us are
not that skilled yet with the current generation of model.
But we extrapolate that we're going to be hitting a
point in the not too distant future in which we're
(03:25):
going to see exponential improvement in the capabilities of these models.
Because they are coding and testing their successors and so
on and so forth. Then you're going to see a
lot more capability. You're going to see more comfort in
understanding of how to use them. I think it's entirely
conceivable that within a few years three five two, you
(03:50):
could see within the US roughly fifteen percent of knowledge
workers displaced from their jobs. And unlike the GFS, see
it's not that you just need to grow your way
out of this and reallocate human and financial capital. It's
you know, those jobs are gone and the chairs, the
(04:11):
number of chairs for humans is going to continue shrinking.
So that's that's where I come out on on AI,
l ll ms, you know, whatever you want to call them.
Speaker 2 (04:24):
Yeah, okay, so you lose a lot of jobs, but
also the remaining jobs, the quality of them degrades or
feels like.
Speaker 5 (04:33):
That's the end game, that these knowledge jobs disappear, and
if people can get other jobs, they might not be
of the same quality and certainly not at the same
income level.
Speaker 4 (04:46):
I mean, a number of these jests, a number of
these jobs will disappear. I'm a former attorney, I'm a
professional litigant effectively now and my current you know current,
you know, iteration of my career. And I got to
tell you, like, at present, claud can handle a lot
(05:07):
of tasks that I pay attorneys for. Now. We're all
familiar with the hallucination it makes up, you know, A
versus B. I'm not saying you remove humans entirely, but
I mean, if i'm you know, when you go through discovery,
you're paying some associate. I mean, depending on the law firm,
you're paying some associate somewhere between. You know, for good
(05:28):
law firm, junior associate five hundred dollars an hour to
fifteen hundred dollars an hour to review email after email
and text after text, and they make mistakes. Claude does
it one hundred percent better. So now you have to
ask you have to query it in the right way.
(05:49):
But you know, when you're talking about I mean financial
service related litigation, most of our outside attorneys, especially junior associates,
don't understand what we do anyway. So I think you're
much more effective having the client running these you know,
running the discovery in claude and querying in querying claude
(06:09):
at least to make your arguments and that's just saved.
That will save innumerable billable hours. So that's a profession
where that I think is going to shrink significantly in
the coming several years. And that's a very highly paid profession.
Speaker 3 (06:28):
Yeah.
Speaker 2 (06:28):
The problem I suppose with that is that you you
need to train the young people to have the more
experienced people available to put in the correct queries. So
once your once your pipeline of educating young people disappears
or shrinks significantly, end up with a problem higher up
the tree.
Speaker 4 (06:47):
Yeah, but that's I haven't seen businesses really think too
long term about you know there, you know for a
long time, right, I mean, everybody's focused on, you know,
how much am I going to make this year? Maybe
they're thinking next year. So and the problem, you know, look,
one of the pushbacks to this idea that they're going
to see the level of labor displacements that you know,
(07:11):
I think you're going to see is that, oh, well,
the technology the adoption curve. You know, technologies are never
adopted at the rate at which they could theoretically be adopted.
And yeah, that's true. But the thing here is that
the cost savings for you know, for the the providers
of these services, the cost savings are going to be
so significant they're going to be able to massively underprice
(07:33):
their competitors. So you know, it's going to be an
existential problem for businesses that don't take advantage of this
technology and reduce their cost and pricing structures accordingly. So
that's why I think that the adoption curve argument here
is not going to or counter argument is not going
to win the day that there will actually be pretty
(07:57):
steep uptake of these technologies.
Speaker 3 (08:00):
I mean, it hasn't happened yet.
Speaker 2 (08:02):
We haven't really seen this happening yet, you know, I mean,
it's all still to come, right and that white collar workers,
a number of white color workers in the US and
in Europe is up since the first STEMP chat GPT
was released and you.
Speaker 3 (08:15):
Know, there are more AI engineers than ever, etc. It's
not yet a.
Speaker 4 (08:19):
Couple of things. Yeah, well, all right, So the current
generation of these models, which was at least in January February,
was the first This is the first generation where it's
you know, I said, these are not idiotic. You know,
they have flaws, they have limitations. But I mean previously, yeah,
it was it was a running joke. But you know,
(08:40):
what we extrapolated as humans is that the progress would
be linear, and it's not linear. It's going to be
exponential because of how they're able to develop their successors. Now,
just a little pushback. I'm not normally a macro person.
But one thing that you know, as far as the
know the great job success in the US, a lot
(09:02):
of that's been in healthcare. And you know, healthcare is
a really interesting sector in the US because look, on
one hand, okay, it's going to grow. And when you
go back to two thousand, information technology and look the
way that the you know, uh, you know BLS. Clayer,
(09:23):
you know, classifies sectors as antiquated really should be updated.
But information technology and telecommunications and healthcare are the only
two sectors that have grown materially as a share of GDP,
and healthcare has grown significantly more as a share of
GDP than information technology. So, you know, is it driven
(09:44):
by innovation some? Is it driven by demographics some, But
a lot of it's driven really by the parasitic nature
of this healthcare system, at least in the US that
I mean, there's there's so much fraud, there's so much inefficiency.
So look, if you say the US has a healthy economy,
we have a healthy job market because we've added all
(10:05):
these healthcare jobs, you know, I think that's a misinterpretation.
So look, does that really go to whether AI or
llms are going to make a meaningful dent in employment
going forward? Now? Because as I said, we're really at
that point now where you're starting to see how these
can replace employees in certain situations, or at least prevent
(10:28):
the hiring of employees, and the next generation will be
even more powerful.
Speaker 2 (10:34):
Okay, well, well we'll wait and see what happened in
five ten years if new jobs, new different types of
jobs that created you know, this whole business of jobs
we never thought would exist now ten years ago, job
being ever thought existing this, So who knows what will
happen in ten years. But let's take the base case,
your base case here that fifteen percent of knowledge jobs disappear. Now,
the interesting bit for the purposes of our listeners and
(10:55):
we discuss.
Speaker 3 (10:56):
We are interesting podcasts, is what that does to the market.
Speaker 2 (10:59):
And I think that's where this gets interesting, isn't it.
Speaker 4 (11:03):
Yeah. And so again this has been a u turn
for me because there was actually a podcast I did
in January where I was talking about how we had
developed this systematic momentum strategy and house at Muddy Waters,
and you know, it's been compounding for us at north
of seventy I mean even I think most recently about
ninety percent per year. And I was completely sanguine about
(11:26):
the outlook for the market and why. And you know,
in the idea that momentum, as much as it shouldn't,
you know, as much as the fact that the stock
has gone up shouldn't determine that it'll continue to go on,
but it does.
Speaker 2 (11:38):
I mean, it's a you know, momentum is one of
the greatest strategies.
Speaker 4 (11:41):
There isn't, especially these days, and a lot of it
relates to market structure. Yeah, And so this is where
what I'm saying about job displacement due to AI becomes
a problem. So in January, I'm completely sanguine. You know,
question Carson, Well, when does you know when does it
become a bad idea to invest in momentum within the
(12:03):
S and P five hundred index when unemployment rises materially? Well,
when do you see that happening? And not anytime soon? Well, okay,
here's the issue. I now do see unemployment, particularly for
high wage earners, rising significantly in the next several years.
(12:26):
The problem that that creates for markets is that, especially
with the S and P five hundred, so much of
that is driven by flows, so especially for one K
retirement plan contributions from these knowledge workers and that you know,
and look when you look at the S and P
five hundred index, I mean, it's it's kind of ridiculous
(12:47):
that we use that as a proxy for the stock
market because you know, generally, you know, two thirds of
the stocks are underperforming the mean of the index, and
the mean of the index is really driven by small
number of companies that are out forming. But what has
happened and so here I reference work that a friend
(13:07):
of mine named Michael Green or Mike Green of Simplify
asset management has done on passive investing, and he's been
banging this strung since probably twenty nineteen or twenty twenty
about how passive has warped markets. So it's created this
virtuous cycle whereby money goes in from paychecks every month.
(13:28):
And what happens is these index funds they buy stock
at any price. They're completely priced and elastic. They remove
supply of stock, and so for the largest names in
the index or the indices, and if you look at
Nasdaq one hundred, same thing. Those get the greatest share
of every dollar that's allocated to the index, and so
(13:49):
by removing supply, they create this situation in which the
stocks that receive the largest allocations, the impact on their
prices becomes parabolic versus linear, and that gets turbocharged with
stock buybacks. So this has been great for the most part.
I mean twenty twenty two, there was you know, there
(14:11):
was like a little bump in the road, but we're
well past that. So this has been fantastic for investors.
But the thing is, if you have say fifteen percent
of knowledge workers lose their jobs and they're not going
to be able to replace that income they have credit
card debt, they have mortgages, they have car loans, a
(14:34):
student debt. This is going to massively impact the flows
into the markets, and so probably the way it plays
out on a micro level at first is a person
who's lost his or her job will sell the taxable investments.
A lot of the taxable investments are in the largest
(14:54):
names in the S and P five hundred index, so
you get selling there, but you've already had a situation
where that laid off person is no longer making the
contributions to the four one K plan. So you get
to a point where those contributions go net zero, especially
because from a demographic perspective, you do have people now
who are also redeeming just because they've retired. And then
(15:18):
you get to a point where on a net basis,
the flows go negative as people have to sell you
redeem their retirement accounts because they've been unable to replace
their income and the issue. So, while passive has been
this very virtuous cycle on the way up, it's built
(15:38):
this significant fragility into the market, and so when those
flows go in reverse, there's really not nearly enough active
management out there to catch the following knives, especially because
if you were looking at the valuations of some of
the largest companies in the indices. In trying to look
(15:59):
at them on a purely fundamental basis, it's hard to
justify the evaluations in some cases. So that's where you get,
in my view, the GFC type events. It has to
do with the fragility that's been created in the equity
markets through passive investing. So if you really want to
(16:20):
understand my view, it's my own view on AI displacing
labor layered on top of Mike Green's work on passive
investing and in the vulnerabilities that creates in the equity
markets and.
Speaker 2 (16:34):
That reduction in demand frequity, so that reduction and flow.
It coincides with the period an unusual period over the
last decade of an increase in the supply of equities
as well, because we have these big IPOs coming through
at the same time.
Speaker 3 (16:48):
It SpaceX and then we'll get open eye, we'll get
down tropic.
Speaker 2 (16:50):
And of course on paper, we're thrilled by this right
because it shows the stock market doing and the stock
market is supposed to do, which is be a place
where people putting new money into growth companies as opposed
to an investor extracturn machine, which has effectively being for
the last decade, the most of the money has been
coming out in buybacks, dividends, etc. So you get at
the same time as if you're right, of course, that
(17:11):
the flows for the supply is coming up at the
same time right now.
Speaker 4 (17:17):
The other question there, and I don't I don't have
a view on this. You know, at least to the
extent that it remains independent of labor displacement. But to
what extent are the hyper scalers going to be going
to continue to be able to issue credit to fund
their AI buildouts because they need to issue that credit
(17:40):
in order to maintain the stock buybacks. So if they can't,
if they can't issue paper at yields they consider to
be attractive, then they're going to have to divert resources
that would be used for share buybacks to scaling out
data centers, et cetera. So you could start to see,
you know, to me, either scenario is equally probable going
(18:04):
into when we have this, you know, when these streams
start really showing up in the labor markets and the
flows start to go toward net zero, can have this situation,
you know, can like I said, equally probable to me
at this point where companies are still engaging in share buybacks,
so maybe it hits you know, this impact hits more suddenly,
(18:26):
or companies have to taper the share buybacks because they're
not able to fund in the credit markets, and so
you start to see you start to see less upward
pressure on stock prices as a result of that. Anyway,
So either scenario, you know, at this point, I'm coin
flip on those two.
Speaker 2 (18:45):
Yeah, and on the demographics, I mean, this was a
scenario that everyone expected to happen anyway, just a little
further out, as the baby boomers work their way through
the system and start to sell out fund their retirements,
we would have expected to see those flows reversed. Anyway,
This just brings that forward by well, probably a decade.
Speaker 4 (19:05):
Yeah, yeah, I mean, look, I think you know, my
impression of that question has been that there are people
will argue, well, it's not going to be that bad
because you're gonna have a great wealth transfer and you know, YadA, YadA, YadA,
and you know money will be reallocated from credit to
equities and younger. But you know, no view in a
(19:25):
world that doesn't go through an AI disruption. No view
on the timing of that. But but yeah, as I said,
I think that we're you know, I think that question
is not really going to be that relevant compared to
what's okay.
Speaker 2 (19:39):
So let's say we have a GFC style disaster in
the markets. It's quick, it's huge, very unpleasant. How do
the play out after that? And we're very used to thinking, well,
we don't really worry about this stuff over the long time.
Speaker 3 (19:53):
We just hang on because there'll be a government response.
Speaker 2 (19:55):
There'll be a fiscal response or a monetary response, so
we'll make everything absolutely fine.
Speaker 4 (20:00):
Yeah, no, I'm look, there will be all of that.
I mean. The one thing is the playbooks are now
very well developed for you know, unlike the GFC, where
a lot of the responses theoretical it took a long
time to implement. Governments had to get authorities to do it.
The authorities exist, they've been expanded during COVID. So from
(20:24):
a monetary perspective that you know, I mean rates, you know,
real rates will go zero or negative you know over well,
the interesting thing those AI is going to be very
is going to be deflationary. So maybe maybe it's a
little bit stepping on a land mine if I talk
about real rates, but nominal rates you know, will be
(20:46):
I mean, you know, well below on the short you know,
short end well below one hundred basis points, I mean,
probably zero to ten BIPs, you know, very quickly. And
there's going to be a lot of the going to
Governments are going to have to buy. The central banks
are going to have to buy you know, the entire
curve basically to keep it really you know, to keep
(21:08):
rates you know, long end rates low. Now there will
be fiscal issues. I think fiscal is going to be
a lot more interesting because the monetary playbook is well established.
You know, the United States has the blessing of being
able to borrow in the currency that it prints, and
so I think, you know, q E forever is the
(21:30):
future here effectively, but it'll be you know, one of
the third order effects. And where I think it's also
interesting to look at some trades setting up will be
what happens in the US to state in local governments
you know there, I mean, especially if you look at
(21:51):
you know, the states that are going to have their
tax bases the hardest hit are the ones that are
the most prolific issuers of debt. So California, California is
I mean, it's because so much of its tax base
comes from income taxes, any individual income taxes. Anyway, this
(22:11):
is going to be you know, like Armygeddon for California.
From a fiscal perspective, so how quickly does the federal
government step in in bailac California, Illinois, New York, New Jersey, Connecticut.
Now it kind of depends on who. I mean a
big part depends on who's in the White House and
which party controls Congress. But you know, the from the
(22:33):
fiscal perspective, you know, I think the US will be
okay because of the potential for q E. You know,
the Eurozone countries that's going to be very tough, you know,
but but that's where but you know, I so so look,
I think we go through, we go we know what's
(22:55):
going to happen in terms of on the monetary side,
and they will have to try to reinflate assts and
that will eventually happen. Assets will be you know, reinflated.
But this will this will reorder society significantly because I mean,
the the politics, the amount of turbulence that we're going
to have to go through, you know, to really figure
(23:16):
out how we how we structure societies. It's going to
be significant. And you know, look, I do think on
the on the back end of this, on the back
end of a lot of turbulence, and I don't you know,
this is a number of years to get there. The
good news is, you know, I think I think most
people will be will live reasonably comfortable lives. Okay, I
(23:39):
think you know, the you know, a lot of the
private sector will be there to serve the government. Governments
will be massive employers, massive consumers of highly inefficient products
and services from the private sector. So I think a
lot of your private sector ends up looking like Chinese
state owned enterprises. Then there's another part of the private
sector that focuses on the private sector. It's gonna be
(24:00):
the leanest, most efficient companies ever. But you know, I
think a lot of people, you know, will be working.
Your middle class people be working two or three days
a week. They'll have disposable income. This will be great
for small businesses, you know, leisure businesses, travel, et cetera.
You know, I think there will be you know that
(24:21):
our underclass will receive you know, universal basic income, you know,
but that's and they won't have to work at all.
And I hope there will still be room for people
to achieve if they really want to. I don't. I
don't know, but I've I've got a couple of kids,
and I'm raising them with that expectation that you know,
(24:42):
if they if they're willing to, you know, if they're
willing to put in the work and they have the
ambition that they can achieve more than you know, just
owning a cafe. But you know, I think it'll be
great for cafe owners. And in a way, it's interesting
because you know, certainly when it comes to I mean scale,
you know, I would think will remain everything. But in
(25:05):
so many industries, this is going to be anti oligopolistic
ye this technology, So that would be a nice you know,
if I'm correct about that, that'll be a nice outcome
on the back end where small businesses don't have so
much of a cost disadvantage to large businesses.
Speaker 3 (25:41):
It sounds that you're expecting a massive expansion of the state.
That's the net result of this.
Speaker 2 (25:46):
Every crisis in the West brings us closer and closer
to a state that takes up over fifty percent of GDP.
Speaker 4 (25:54):
Yeah, I don't see an alternative to that, you know,
I mean, otherwise we'll just have tremendous societal instability.
Speaker 2 (26:04):
Okay, I was about to say to you, what is
the alternative? What are you alternative view? What are the
risks to your view?
Speaker 3 (26:10):
And it sounds like the answer is very unpleasant instability.
Speaker 4 (26:15):
Well, I guess you know which view. I mean, are
you challenging that AI will displace as many people as quickly?
I mean you alluded to one of the counter arguments
that Jevin's paradox right, like new technologies always create new jobs.
I don't think this folds this time because the rate
of change is going to be so for a long time.
(26:36):
I'm talking fifteen years. Maybe this is just because I'm
really cynical, but I've been fond of saying that humans
are able to innovate and invent technologies faster than we're
able to adapt to them. You know, whether these are
financial technologies such as financial derivatives or deep sea drilling technologies,
(26:59):
you name it. So we invent and innovate. I think
we understand the risks and how to manage them. Find
out we don't. We have some kind of calamity. But
on the back end we say, okay, now we've learned.
But the problem is when you have these you know,
when you have these machines building the next generation of machines,
(27:20):
the rate of change is going to be and it's
it's going to continue. The rate of change will increase
in terms of the improvement of capability. We are, in
my view, just not going to be able to adapt
ourselves quickly enough to to catch up. So there will
(27:41):
be new jobs created, and there will be people, you know,
I think a small number of people who are at
the forefront of understanding how to use these technologies, and
you know, they'll be okay, But you know, for the
rest of us, I you know, I just don't think
that's going to be the case. So I don't think
jevins paradox. I mean, look, I've kind of made a
(28:02):
career out of laughing at it's different this time anyways,
it never has been, but I think it's different this
time different.
Speaker 2 (28:11):
Okay, So how does the ordinary investor prepare for this?
So honestners are a lot of ordinary people, ordinary investment
portfolios listening to you talking and going, well, what an
earth do I do about this.
Speaker 3 (28:27):
I don't know what the timeframe is.
Speaker 2 (28:28):
I don't know whether this is a two year thing
or a three year thing, or a five year thing.
Speaker 3 (28:32):
Maybe it's a ten year thing.
Speaker 2 (28:33):
I mean, who knows, who knows, but it sounds like
it's something I really need to be ready for.
Speaker 3 (28:37):
What do I do.
Speaker 4 (28:39):
Well? I mean right now, I think you keep doing
what you've been doing, right I mean so, I mean
one of the best trades has just been to be
long the index, you know, in the S and P
five hundred. But you have to be very vigilant and
look at what's happening to unemployment, look at what's happening
to flows, and at some point the only place to
(29:04):
you know, to hang out is is cash. I mean
maybe gold. You know, I don't have a view in
dollar terms whether that goes up or down. You know,
I think it's you know, it's going to hold its
value relative to you know, other assets much you know,
much better. But but you know, I think the you know,
(29:25):
to me, that's you know, that's really what you just
need to be vigilant. You need to expect that this
is coming. And you know, right now you could argue
that we're seeing signal. I mean, you've had a number
of companies announced layoffs and you know, some of it's
due to AI investment, but others are saying efficiencies from AI,
you know. But I don't know how much signal versus
(29:48):
noise there is right now in these layoff announcements. But
you know, at some point, I mean, if this keeps up,
like you know, fifty million ele US fans can't be wrong, right,
So that's you know, that's something to pay attention to.
I mean, if you keep seeing layoffs and you keep
hearing it's because we're automating and becoming more efficient, you know,
at some point it's going to be meaningful. And look,
(30:10):
maybe it all maybe there already is signal here. Again,
I don't you know, I don't know, but but yeah,
I think you just you have to watch. You have
to watch employment, unemployment and flows very very closely. And
the you know, the irony of this whole thing, I
mean of my thesis, you know, should it play out,
(30:31):
you know, again, the AI thesis, This is mine the
market fragility, this is Mike Green convincing me. But the
companies whose stocks have benefited the most on the way
up here are the ones that have the furthest to
fall just because of that dynamic, that reversal and flows.
Now they were in terms of businesses, they will obviously
(30:54):
be left standing and somewhat thriving, you know, in the
wake of all this. And look, one thing we didn't
touch on, but I think it's implied obviously when you
see and if you see that kind of mass high
end labor displacement that I'm talking about, it's not just
an issue of flows. I mean, you have an issue
(31:16):
with aggregate demand, and so that's going to you know,
so we're talking recession anyway, that'll that will certainly impact
financial results. But in the aftermath, these businesses will you know,
will still be standing. But you know, I think the
way like you want to you want to be able
to protect yourself on the way down, probably cash. You know,
(31:36):
we've set up a book in you know, in in
our you know, we've set up a strategy, uh that's
looking to protect principle on the way down. So I
think a lot of how if you were going to
try to actually make money on this, I do think
a lot of the action isn't credit. And one of
the things is that you know, that's interesting about the
(31:58):
post GFC environment is that imply volatility and credit is
so low because you have these structural bids for credit
that are also part of the retirement you know, flow
pick story. But you know, if you get and if
you get this type of scenario playing out, I mean,
vall is going to blow out on credit and obviously
(32:18):
you're going to have a lot of credit events, you know,
not I mean corporate as well as I'm saying government
court credit events. So there is money to be made
on the way down here.
Speaker 2 (32:28):
I don't think it's quite hard for retail investad for
retail the average access. So for the average investors, like
what you're saying is you just keep buying and Julius,
the unemployment you really begin to see these announcements wraps
it up. Then you get out competing, you go into cash,
and then you wait and then.
Speaker 4 (32:47):
Right and then if you really really want to make
the multi generational money we do along in the aftermath.
Speaker 3 (32:53):
You go along on. But how do you know when
to buy and the aftermath?
Speaker 2 (32:56):
Do you wait until you start seeing the policy anno
announcements from the state. You wait until you see QI
forever announced again, you wait until.
Speaker 4 (33:05):
Yeah. I mean, look, I so for UK market, it's
hard for me to speak to that, okay, because I think,
you know, the the US is going to be you know,
I think we're singularly blessed in this dystopian world that
we're you know, we're heading toward. So from from a
(33:25):
US investor perspective, you know that assets will be reinflated.
We have no choice. I mean, all all of our economies, right,
all the Western all the developed economies have so much
debt in them that you absolutely the playbook is to
absolutely reinflate assets. You know, in the US. I think
that's you know, I think you know, we've seen that
(33:46):
accomplished a number of times. They will do that again.
So yeah, I mean, if you wait for the first announcements, like,
you're not going to miss the opportunity. You know, if
you if you buy after you know, the FED analysis
is that they've cut rates to know ten basis points
and the you know and the FED funds rate, I mean,
you're not you know, you can you can wait until
(34:06):
after that the buy You'll be fine. But look, it
could it could take a while, I mean, but eventually,
you know, the reinflation of assets will happen, you know,
at least in relative terms.
Speaker 3 (34:19):
And do you think this is going to kill the
passive industry?
Speaker 2 (34:22):
So when we're buying back in, you know, we're sitting
in cash well waiting and we see whatever signal says
we think gives us not by signal, do we then
are we going to go back into ETFs or is
this the return of the active manager?
Speaker 4 (34:36):
Yeah, that's that's an interesting question. Look, passive will be
to blame for a lot of the market calamity, but
how much you know, if we were talking about a
financial crisis in isolation, then yeah, obviously you know, all
legislative guns would be focused on the passive investing industry.
(35:00):
But we're going to have bigger fish to fry because
we're going to be wrestling with this these existential questions
about humanity. What is our role in a world that's
you know, where our work is increasing increasingly being performed
by machines. How do we solve that? So? You know, again,
so I think so given that, we're going to have
(35:23):
some much bigger questions to answer, and they're not totally unrelated,
but I think most the intention will be on that.
But yeah, look passive Mike. Mike has been warning, he's
been lecturing policy makers, you know, like you know, shouting
from the mountaintops for years about what Passive is doing.
(35:43):
And I think the response that he's gotten at the
policy level is like, Wow, that's really interesting. But you know,
there's zero political will to do anything about that right now.
So you know, we just have to wait and you know,
if your crisis ever materializes, then that's when we'll do something.
So I think there's awareness of the problem, but it's
just a political will problem, you know, Like right now,
(36:06):
you'd be taking away the you know, the punch bowl
in the middle of the party, and that's just not
that's just not how we run things, you know, post
GFC anymore, not at all.
Speaker 3 (36:16):
Yeah, ask you this.
Speaker 2 (36:17):
You're obviously thinking about lots of existential things at the moment,
as am I.
Speaker 3 (36:22):
What are your kids going to study at college?
Speaker 4 (36:26):
Yeah, it's a good one. Look, I do believe that
math and so my kids are not near college age,
I mean twelve and eight. I'm I mean math and science.
I'm very big on that regardless, Like, even though I
know these things will be able to do all of
your math, I think you still need to understand how
(36:47):
to do math. So if you what the end goal here,
as I put it to them, is, look, you want
to be in a position to use these technologies as
a tool, not to have to compete with them. So
I do think that understanding the underlying functions that they
are performing will give somewhat of an edge the math
(37:11):
and science and look reading, So what do you actually study.
The world is going to need salespeople.
Speaker 3 (37:20):
It's going to be communicated.
Speaker 4 (37:22):
Yeah, so I've got one kid who'd be a great
salesperson and the other who probably won't wouldn't be. But
you know, there can be lots of jobs in government
as well, so I don't know, maybe for maybe foreign relations,
and you can be a diplomat, you know, trying to
control the last, you know, vestiges of what humans actually
(37:42):
can control.
Speaker 3 (37:43):
All right, let me take you back to gold.
Speaker 2 (37:45):
Briefly you said you thought that might hold hold its
value relative to other assets. Anyway, what about bitcoins? Oh
my god, on ever, we always asked about golden bitcoin.
Speaker 3 (37:58):
That's what we do in this podcast.
Speaker 4 (38:00):
The same one exists and one doesn't.
Speaker 3 (38:02):
That not the same, They're completely different.
Speaker 2 (38:04):
But for me, you know, we go right back to
the early days when people used to tell us that,
you know, bitcoin with digital gold, and that made us
lave and we would call gold physical bitcoin just for
the giggles, right, and we'd ask everybody at the end
of each podcast, if I gave you a choice of
holding bitcoin of gold for a decade, which one would
you take?
Speaker 4 (38:25):
Yeah? Gold? I mean, look, okay, so bitcoin. When my
when my older kid was five and he asked me, oh,
what's bitcoin? I said, listen, crypto bitcoin. These are currencies
without countries. Okay, they don't matter. I mean, you know
that there is an intrinsic value to them, which is
(38:48):
just the gas fees as they call it. But these
things trade obviously well above intrinsic I've looked at bitcoin
at times in the past as a barometer of speculative
acts at excess in the markets as well as you know,
I think there's I think there's a recursive effect as
well on speculative activity, and more valuable bitcoin becomes, so on,
(39:11):
you know, the more froth there is in some other markets.
So barometer as well as cause. But yeah, look, I
understand the I think it was Warren Buffett who said
that if aliens observed our behavior toward gold, pulling it
out of the ground, you know, treating it like it
has some tremendous value, they'd be completely puzzled. Yeah, I
(39:32):
mean I understand that. But the thing is, I think
it's so deeply embedded. You know, for millennia of human cultures,
you know, every culture, gold wasn't the store of value.
Gold was value itself. Could cryptocurrency supplant that or join
that in status? I'm not an anthropologist, I'm not a
(39:55):
certainly not a futurist anthropologist. So take my view with
a great of salt. But I don't I don't think so.
I mean, gold is pretty, you can touch it, it
has weight, It's not an intangible asset. Yeah, exactly.
Speaker 2 (40:08):
So I can escape with bitcoin too, And I'm like, well, yeah,
but're just still going to need electricity if you want
to escape with your base point, still.
Speaker 4 (40:15):
Still gonna need Look, I mean, in a really, really,
really bad situation, the ultimate store value is cans of tuna.
So you know, I'd rather have cans of tuna stockpile
than a USB drive at bitcoin.
Speaker 2 (40:26):
Okay, Well, in when the great crisis comes, can I
swap some of my gold for some of your tuna.
Speaker 4 (40:33):
Can you eat gold? I don't know, you're.
Speaker 3 (40:37):
Something else.
Speaker 2 (40:40):
All right, thank you so much. I'm gonna ask you
one last thing. It's you know, quick fire around this.
Speaker 3 (40:44):
What are you reading at the moment?
Speaker 4 (40:48):
Right now? I'm reading, I'm switching between two books. I'm
reading a book on the dysfunction in the art market,
and I'm also reading a book about Leonardo da Vinci.
That's Walter Isaacson book.
Speaker 3 (41:04):
Okay, that's interesting. We should all read that. I think
that's on my list too.
Speaker 4 (41:08):
You know, I can tell it's not that compelling so far.
I'm finding it a bit of a slog and I
don't I don't think that's Isaacson's fault. It's just there's
not you know, there's a paucity of information, so he's
kind of it's it's kind of like a book report
on you know, during this year of Leonardo's life. He
worked in this shop, and he worked on this sketch
and here's the picture of it. It's it's kind of
a book report on his life so far.
Speaker 3 (41:29):
So I hope it picks up kind of made some
stuff up.
Speaker 4 (41:33):
It would have been yeah, it would have been better.
I have to, would have perused I have perused my
bookshelf looking for fiction to kind of because I'm not
it's just not grabbing me here.
Speaker 2 (41:43):
So all right, well, you know, maybe we won't recommend
that one to everybody. Stick for the first one. The
first one dysfunction in the art market. That's a lot
more fun.
Speaker 4 (41:51):
Uh yeah, yeah, that that could be. So that's written
by Matt Campbell, Bloomberg journalist.
Speaker 2 (41:57):
So okay, yeah, so we can read that while we
wait for the great market collapse, and we'll be keeping
a very close eye on unemployment numbers on this blog.
Thanks to Hugh, Thank you so much for joining us today.
Speaker 4 (42:09):
Oh, thank you.
Speaker 2 (42:21):
Thanks for listening this week's Marin Brogs Money. If you
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Speaker 3 (42:35):
If you are, You've got to be on X right.
You are definitely at your ex.
Speaker 4 (42:39):
Yeah, I mean mostly most of the time is at
muddy waters ree are okay.
Speaker 3 (42:45):
Everyone's going to follow that.
Speaker 2 (42:46):
Now, I'm Mariness w and John is John Underscore Stepack
and now you know where Carson Is. This episode was
hosted by me marrin zunsep Web. It was produced by
Samasadi and Moroses and sound designed by Blake maybe Up
and Aaron Casper and of course special thanks to
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:19):
Welcome to Marin Talk to Money, the podcast in which
people who know the market explain the market. I am
Maren zum zep Web and this week I am speaking
with well known short seller and Muddy Waters Capital founder
and CEO Carson Block.
Speaker 3 (00:31):
Carson, Welcome to Marin Talks Money.
Speaker 4 (00:34):
Thank you, thanks for having me.
Speaker 2 (00:35):
You have been talking a lot recently about AI, and
I wanted to just start on that straight away because
I think the core of your view is that AI
really is going to live up to everyone's expectations of
it. It is going to be spectacularly successful. All the worries
a lot of people have about the way that llms
have hit his ceiling and development is over and we
(00:56):
need a new path.
Speaker 3 (00:57):
All this kind of thing doesn't come into your view.
Speaker 2 (01:00):
I think that it's going to be very successful and
there will be an employment apocalypse as a result.
Speaker 3 (01:06):
Am I over egging of you there?
Speaker 4 (01:08):
Let me just state that as background, I was a skeptic.
So until February of this year, I refused to refer
to any of the models that are out there that
we're using as AI. They are large language models, and
so I said, Okay, these things are not going to
ever find the cure for cancer. They are not that intelligent.
(01:31):
It's not artificial intelligence. They're lllms. Now, the current generation
of LMS that was released in January early February of
this year changed my mind to some extent. They're not
going to independently develop the cure for cancers. They I
(01:54):
mean I used to term them the greatest search engines
ever developed, and that effectively they are. But the ability,
their ability to synthesize that information and order that information,
I mean there's real labor savings to be had right
now in certain areas of knowledge industries I mean such
(02:17):
as investment. I mean I immediately began using Claude to
run Monte Carlo simulations that I previously would have needed
somebody who was pretty young, recently graduated from a top
university strong in math to run the thing that's important
to really understanding or that change to change that changed
my view as to what lllms are going to do
(02:42):
to the labor market. Is that this generation was coded
and tested in large part by its predecessor generation. It
is coding and testing its successor generation. So you have
a situation where the leading users of this generation of
AI model, I mean they're in the technology industry. They
(03:03):
are able to supplant by using AI or displace multiple
members of a team. Now, vast majority of us are
not that skilled yet with the current generation of model.
But we extrapolate that we're going to be hitting a
point in the not too distant future in which we're
(03:25):
going to see exponential improvement in the capabilities of these models.
Because they are coding and testing their successors and so
on and so forth. Then you're going to see a
lot more capability. You're going to see more comfort in
understanding of how to use them. I think it's entirely
conceivable that within a few years three five two, you
(03:50):
could see within the US roughly fifteen percent of knowledge
workers displaced from their jobs. And unlike the GFS, see
it's not that you just need to grow your way
out of this and reallocate human and financial capital. It's
you know, those jobs are gone and the chairs, the
(04:11):
number of chairs for humans is going to continue shrinking.
So that's that's where I come out on on AI,
l ll ms, you know, whatever you want to call them.
Speaker 2 (04:24):
Yeah, okay, so you lose a lot of jobs, but
also the remaining jobs, the quality of them degrades or
feels like.
Speaker 5 (04:33):
That's the end game, that these knowledge jobs disappear, and
if people can get other jobs, they might not be
of the same quality and certainly not at the same
income level.
Speaker 4 (04:46):
I mean, a number of these jests, a number of
these jobs will disappear. I'm a former attorney, I'm a
professional litigant effectively now and my current you know current,
you know, iteration of my career. And I got to
tell you, like, at present, claud can handle a lot
(05:07):
of tasks that I pay attorneys for. Now. We're all
familiar with the hallucination it makes up, you know, A
versus B. I'm not saying you remove humans entirely, but
I mean, if i'm you know, when you go through discovery,
you're paying some associate. I mean, depending on the law firm,
you're paying some associate somewhere between. You know, for good
(05:28):
law firm, junior associate five hundred dollars an hour to
fifteen hundred dollars an hour to review email after email
and text after text, and they make mistakes. Claude does
it one hundred percent better. So now you have to
ask you have to query it in the right way.
(05:49):
But you know, when you're talking about I mean financial
service related litigation, most of our outside attorneys, especially junior associates,
don't understand what we do anyway. So I think you're
much more effective having the client running these you know,
running the discovery in claude and querying in querying claude
(06:09):
at least to make your arguments and that's just saved.
That will save innumerable billable hours. So that's a profession
where that I think is going to shrink significantly in
the coming several years. And that's a very highly paid profession.
Speaker 3 (06:28):
Yeah.
Speaker 2 (06:28):
The problem I suppose with that is that you you
need to train the young people to have the more
experienced people available to put in the correct queries. So
once your once your pipeline of educating young people disappears
or shrinks significantly, end up with a problem higher up
the tree.
Speaker 4 (06:47):
Yeah, but that's I haven't seen businesses really think too
long term about you know there, you know for a
long time, right, I mean, everybody's focused on, you know,
how much am I going to make this year? Maybe
they're thinking next year. So and the problem, you know, look,
one of the pushbacks to this idea that they're going
to see the level of labor displacements that you know,
(07:11):
I think you're going to see is that, oh, well,
the technology the adoption curve. You know, technologies are never
adopted at the rate at which they could theoretically be adopted.
And yeah, that's true. But the thing here is that
the cost savings for you know, for the the providers
of these services, the cost savings are going to be
so significant they're going to be able to massively underprice
(07:33):
their competitors. So you know, it's going to be an
existential problem for businesses that don't take advantage of this
technology and reduce their cost and pricing structures accordingly. So
that's why I think that the adoption curve argument here
is not going to or counter argument is not going
to win the day that there will actually be pretty
(07:57):
steep uptake of these technologies.
Speaker 3 (08:00):
I mean, it hasn't happened yet.
Speaker 2 (08:02):
We haven't really seen this happening yet, you know, I mean,
it's all still to come, right and that white collar workers,
a number of white color workers in the US and
in Europe is up since the first STEMP chat GPT
was released and you.
Speaker 3 (08:15):
Know, there are more AI engineers than ever, etc. It's
not yet a.
Speaker 4 (08:19):
Couple of things. Yeah, well, all right, So the current
generation of these models, which was at least in January February,
was the first This is the first generation where it's
you know, I said, these are not idiotic. You know,
they have flaws, they have limitations. But I mean previously, yeah,
it was it was a running joke. But you know,
(08:40):
what we extrapolated as humans is that the progress would
be linear, and it's not linear. It's going to be
exponential because of how they're able to develop their successors. Now,
just a little pushback. I'm not normally a macro person.
But one thing that you know, as far as the
know the great job success in the US, a lot
(09:02):
of that's been in healthcare. And you know, healthcare is
a really interesting sector in the US because look, on
one hand, okay, it's going to grow. And when you
go back to two thousand, information technology and look the
way that the you know, uh, you know BLS. Clayer,
(09:23):
you know, classifies sectors as antiquated really should be updated.
But information technology and telecommunications and healthcare are the only
two sectors that have grown materially as a share of GDP,
and healthcare has grown significantly more as a share of
GDP than information technology. So, you know, is it driven
(09:44):
by innovation some? Is it driven by demographics some, But
a lot of it's driven really by the parasitic nature
of this healthcare system, at least in the US that
I mean, there's there's so much fraud, there's so much inefficiency.
So look, if you say the US has a healthy economy,
we have a healthy job market because we've added all
(10:05):
these healthcare jobs, you know, I think that's a misinterpretation.
So look, does that really go to whether AI or
llms are going to make a meaningful dent in employment
going forward? Now? Because as I said, we're really at
that point now where you're starting to see how these
can replace employees in certain situations, or at least prevent
(10:28):
the hiring of employees, and the next generation will be
even more powerful.
Speaker 2 (10:34):
Okay, well, well we'll wait and see what happened in
five ten years if new jobs, new different types of
jobs that created you know, this whole business of jobs
we never thought would exist now ten years ago, job
being ever thought existing this, So who knows what will
happen in ten years. But let's take the base case,
your base case here that fifteen percent of knowledge jobs disappear. Now,
the interesting bit for the purposes of our listeners and
(10:55):
we discuss.
Speaker 3 (10:56):
We are interesting podcasts, is what that does to the market.
Speaker 2 (10:59):
And I think that's where this gets interesting, isn't it.
Speaker 4 (11:03):
Yeah. And so again this has been a u turn
for me because there was actually a podcast I did
in January where I was talking about how we had
developed this systematic momentum strategy and house at Muddy Waters,
and you know, it's been compounding for us at north
of seventy I mean even I think most recently about
ninety percent per year. And I was completely sanguine about
(11:26):
the outlook for the market and why. And you know,
in the idea that momentum, as much as it shouldn't,
you know, as much as the fact that the stock
has gone up shouldn't determine that it'll continue to go on,
but it does.
Speaker 2 (11:38):
I mean, it's a you know, momentum is one of
the greatest strategies.
Speaker 4 (11:41):
There isn't, especially these days, and a lot of it
relates to market structure. Yeah, And so this is where
what I'm saying about job displacement due to AI becomes
a problem. So in January, I'm completely sanguine. You know,
question Carson, Well, when does you know when does it
become a bad idea to invest in momentum within the
(12:03):
S and P five hundred index when unemployment rises materially? Well,
when do you see that happening? And not anytime soon? Well, okay,
here's the issue. I now do see unemployment, particularly for
high wage earners, rising significantly in the next several years.
(12:26):
The problem that that creates for markets is that, especially
with the S and P five hundred, so much of
that is driven by flows, so especially for one K
retirement plan contributions from these knowledge workers and that you know,
and look when you look at the S and P
five hundred index, I mean, it's it's kind of ridiculous
(12:47):
that we use that as a proxy for the stock
market because you know, generally, you know, two thirds of
the stocks are underperforming the mean of the index, and
the mean of the index is really driven by small
number of companies that are out forming. But what has
happened and so here I reference work that a friend
(13:07):
of mine named Michael Green or Mike Green of Simplify
asset management has done on passive investing, and he's been
banging this strung since probably twenty nineteen or twenty twenty
about how passive has warped markets. So it's created this
virtuous cycle whereby money goes in from paychecks every month.
(13:28):
And what happens is these index funds they buy stock
at any price. They're completely priced and elastic. They remove
supply of stock, and so for the largest names in
the index or the indices, and if you look at
Nasdaq one hundred, same thing. Those get the greatest share
of every dollar that's allocated to the index, and so
(13:49):
by removing supply, they create this situation in which the
stocks that receive the largest allocations, the impact on their
prices becomes parabolic versus linear, and that gets turbocharged with
stock buybacks. So this has been great for the most part.
I mean twenty twenty two, there was you know, there
(14:11):
was like a little bump in the road, but we're
well past that. So this has been fantastic for investors.
But the thing is, if you have say fifteen percent
of knowledge workers lose their jobs and they're not going
to be able to replace that income they have credit
card debt, they have mortgages, they have car loans, a
(14:34):
student debt. This is going to massively impact the flows
into the markets, and so probably the way it plays
out on a micro level at first is a person
who's lost his or her job will sell the taxable investments.
A lot of the taxable investments are in the largest
(14:54):
names in the S and P five hundred index, so
you get selling there, but you've already had a situation
where that laid off person is no longer making the
contributions to the four one K plan. So you get
to a point where those contributions go net zero, especially
because from a demographic perspective, you do have people now
who are also redeeming just because they've retired. And then
(15:18):
you get to a point where on a net basis,
the flows go negative as people have to sell you
redeem their retirement accounts because they've been unable to replace
their income and the issue. So, while passive has been
this very virtuous cycle on the way up, it's built
(15:38):
this significant fragility into the market, and so when those
flows go in reverse, there's really not nearly enough active
management out there to catch the following knives, especially because
if you were looking at the valuations of some of
the largest companies in the indices. In trying to look
(15:59):
at them on a purely fundamental basis, it's hard to
justify the evaluations in some cases. So that's where you get,
in my view, the GFC type events. It has to
do with the fragility that's been created in the equity
markets through passive investing. So if you really want to
(16:20):
understand my view, it's my own view on AI displacing
labor layered on top of Mike Green's work on passive
investing and in the vulnerabilities that creates in the equity
markets and.
Speaker 2 (16:34):
That reduction in demand frequity, so that reduction and flow.
It coincides with the period an unusual period over the
last decade of an increase in the supply of equities
as well, because we have these big IPOs coming through
at the same time.
Speaker 3 (16:48):
It SpaceX and then we'll get open eye, we'll get
down tropic.
Speaker 2 (16:50):
And of course on paper, we're thrilled by this right
because it shows the stock market doing and the stock
market is supposed to do, which is be a place
where people putting new money into growth companies as opposed
to an investor extracturn machine, which has effectively being for
the last decade, the most of the money has been
coming out in buybacks, dividends, etc. So you get at
the same time as if you're right, of course, that
(17:11):
the flows for the supply is coming up at the
same time right now.
Speaker 4 (17:17):
The other question there, and I don't I don't have
a view on this. You know, at least to the
extent that it remains independent of labor displacement. But to
what extent are the hyper scalers going to be going
to continue to be able to issue credit to fund
their AI buildouts because they need to issue that credit
(17:40):
in order to maintain the stock buybacks. So if they can't,
if they can't issue paper at yields they consider to
be attractive, then they're going to have to divert resources
that would be used for share buybacks to scaling out
data centers, et cetera. So you could start to see,
you know, to me, either scenario is equally probable going
(18:04):
into when we have this, you know, when these streams
start really showing up in the labor markets and the
flows start to go toward net zero, can have this situation,
you know, can like I said, equally probable to me
at this point where companies are still engaging in share buybacks,
so maybe it hits you know, this impact hits more suddenly,
(18:26):
or companies have to taper the share buybacks because they're
not able to fund in the credit markets, and so
you start to see you start to see less upward
pressure on stock prices as a result of that. Anyway,
So either scenario, you know, at this point, I'm coin
flip on those two.
Speaker 2 (18:45):
Yeah, and on the demographics, I mean, this was a
scenario that everyone expected to happen anyway, just a little
further out, as the baby boomers work their way through
the system and start to sell out fund their retirements,
we would have expected to see those flows reversed. Anyway,
This just brings that forward by well, probably a decade.
Speaker 4 (19:05):
Yeah, yeah, I mean, look, I think you know, my
impression of that question has been that there are people
will argue, well, it's not going to be that bad
because you're gonna have a great wealth transfer and you know, YadA, YadA, YadA,
and you know money will be reallocated from credit to
equities and younger. But you know, no view in a
(19:25):
world that doesn't go through an AI disruption. No view
on the timing of that. But but yeah, as I said,
I think that we're you know, I think that question
is not really going to be that relevant compared to
what's okay.
Speaker 2 (19:39):
So let's say we have a GFC style disaster in
the markets. It's quick, it's huge, very unpleasant. How do
the play out after that? And we're very used to thinking, well,
we don't really worry about this stuff over the long time.
Speaker 3 (19:53):
We just hang on because there'll be a government response.
Speaker 2 (19:55):
There'll be a fiscal response or a monetary response, so
we'll make everything absolutely fine.
Speaker 4 (20:00):
Yeah, no, I'm look, there will be all of that.
I mean. The one thing is the playbooks are now
very well developed for you know, unlike the GFC, where
a lot of the responses theoretical it took a long
time to implement. Governments had to get authorities to do it.
The authorities exist, they've been expanded during COVID. So from
(20:24):
a monetary perspective that you know, I mean rates, you know,
real rates will go zero or negative you know over well,
the interesting thing those AI is going to be very
is going to be deflationary. So maybe maybe it's a
little bit stepping on a land mine if I talk
about real rates, but nominal rates you know, will be
(20:46):
I mean, you know, well below on the short you know,
short end well below one hundred basis points, I mean,
probably zero to ten BIPs, you know, very quickly. And
there's going to be a lot of the going to
Governments are going to have to buy. The central banks
are going to have to buy you know, the entire
curve basically to keep it really you know, to keep
(21:08):
rates you know, long end rates low. Now there will
be fiscal issues. I think fiscal is going to be
a lot more interesting because the monetary playbook is well established.
You know, the United States has the blessing of being
able to borrow in the currency that it prints, and
so I think, you know, q E forever is the
(21:30):
future here effectively, but it'll be you know, one of
the third order effects. And where I think it's also
interesting to look at some trades setting up will be
what happens in the US to state in local governments
you know there, I mean, especially if you look at
(21:51):
you know, the states that are going to have their
tax bases the hardest hit are the ones that are
the most prolific issuers of debt. So California, California is
I mean, it's because so much of its tax base
comes from income taxes, any individual income taxes. Anyway, this
(22:11):
is going to be you know, like Armygeddon for California.
From a fiscal perspective, so how quickly does the federal
government step in in bailac California, Illinois, New York, New Jersey, Connecticut.
Now it kind of depends on who. I mean a
big part depends on who's in the White House and
which party controls Congress. But you know, the from the
(22:33):
fiscal perspective, you know, I think the US will be
okay because of the potential for q E. You know,
the Eurozone countries that's going to be very tough, you know,
but but that's where but you know, I so so look,
I think we go through, we go we know what's
(22:55):
going to happen in terms of on the monetary side,
and they will have to try to reinflate assts and
that will eventually happen. Assets will be you know, reinflated.
But this will this will reorder society significantly because I mean,
the the politics, the amount of turbulence that we're going
to have to go through, you know, to really figure
(23:16):
out how we how we structure societies. It's going to
be significant. And you know, look, I do think on
the on the back end of this, on the back
end of a lot of turbulence, and I don't you know,
this is a number of years to get there. The
good news is, you know, I think I think most
people will be will live reasonably comfortable lives. Okay, I
(23:39):
think you know, the you know, a lot of the
private sector will be there to serve the government. Governments
will be massive employers, massive consumers of highly inefficient products
and services from the private sector. So I think a
lot of your private sector ends up looking like Chinese
state owned enterprises. Then there's another part of the private
sector that focuses on the private sector. It's gonna be
(24:00):
the leanest, most efficient companies ever. But you know, I
think a lot of people, you know, will be working.
Your middle class people be working two or three days
a week. They'll have disposable income. This will be great
for small businesses, you know, leisure businesses, travel, et cetera.
You know, I think there will be you know that
(24:21):
our underclass will receive you know, universal basic income, you know,
but that's and they won't have to work at all.
And I hope there will still be room for people
to achieve if they really want to. I don't. I
don't know, but I've I've got a couple of kids,
and I'm raising them with that expectation that you know,
(24:42):
if they if they're willing to, you know, if they're
willing to put in the work and they have the
ambition that they can achieve more than you know, just
owning a cafe. But you know, I think it'll be
great for cafe owners. And in a way, it's interesting
because you know, certainly when it comes to I mean scale,
you know, I would think will remain everything. But in
(25:05):
so many industries, this is going to be anti oligopolistic
ye this technology, So that would be a nice you know,
if I'm correct about that, that'll be a nice outcome
on the back end where small businesses don't have so
much of a cost disadvantage to large businesses.
Speaker 3 (25:41):
It sounds that you're expecting a massive expansion of the state.
That's the net result of this.
Speaker 2 (25:46):
Every crisis in the West brings us closer and closer
to a state that takes up over fifty percent of GDP.
Speaker 4 (25:54):
Yeah, I don't see an alternative to that, you know,
I mean, otherwise we'll just have tremendous societal instability.
Speaker 2 (26:04):
Okay, I was about to say to you, what is
the alternative? What are you alternative view? What are the
risks to your view?
Speaker 3 (26:10):
And it sounds like the answer is very unpleasant instability.
Speaker 4 (26:15):
Well, I guess you know which view. I mean, are
you challenging that AI will displace as many people as quickly?
I mean you alluded to one of the counter arguments
that Jevin's paradox right, like new technologies always create new jobs.
I don't think this folds this time because the rate
of change is going to be so for a long time.
(26:36):
I'm talking fifteen years. Maybe this is just because I'm
really cynical, but I've been fond of saying that humans
are able to innovate and invent technologies faster than we're
able to adapt to them. You know, whether these are
financial technologies such as financial derivatives or deep sea drilling technologies,
(26:59):
you name it. So we invent and innovate. I think
we understand the risks and how to manage them. Find
out we don't. We have some kind of calamity. But
on the back end we say, okay, now we've learned.
But the problem is when you have these you know,
when you have these machines building the next generation of machines,
(27:20):
the rate of change is going to be and it's
it's going to continue. The rate of change will increase
in terms of the improvement of capability. We are, in
my view, just not going to be able to adapt
ourselves quickly enough to to catch up. So there will
(27:41):
be new jobs created, and there will be people, you know,
I think a small number of people who are at
the forefront of understanding how to use these technologies, and
you know, they'll be okay, But you know, for the
rest of us, I you know, I just don't think
that's going to be the case. So I don't think
jevins paradox. I mean, look, I've kind of made a
(28:02):
career out of laughing at it's different this time anyways,
it never has been, but I think it's different this
time different.
Speaker 2 (28:11):
Okay, So how does the ordinary investor prepare for this?
So honestners are a lot of ordinary people, ordinary investment
portfolios listening to you talking and going, well, what an
earth do I do about this.
Speaker 3 (28:27):
I don't know what the timeframe is.
Speaker 2 (28:28):
I don't know whether this is a two year thing
or a three year thing, or a five year thing.
Speaker 3 (28:32):
Maybe it's a ten year thing.
Speaker 2 (28:33):
I mean, who knows, who knows, but it sounds like
it's something I really need to be ready for.
Speaker 3 (28:37):
What do I do.
Speaker 4 (28:39):
Well? I mean right now, I think you keep doing
what you've been doing, right I mean so, I mean
one of the best trades has just been to be
long the index, you know, in the S and P
five hundred. But you have to be very vigilant and
look at what's happening to unemployment, look at what's happening
to flows, and at some point the only place to
(29:04):
you know, to hang out is is cash. I mean
maybe gold. You know, I don't have a view in
dollar terms whether that goes up or down. You know,
I think it's you know, it's going to hold its
value relative to you know, other assets much you know,
much better. But but you know, I think the you know,
(29:25):
to me, that's you know, that's really what you just
need to be vigilant. You need to expect that this
is coming. And you know, right now you could argue
that we're seeing signal. I mean, you've had a number
of companies announced layoffs and you know, some of it's
due to AI investment, but others are saying efficiencies from AI,
you know. But I don't know how much signal versus
(29:48):
noise there is right now in these layoff announcements. But
you know, at some point, I mean, if this keeps up,
like you know, fifty million ele US fans can't be wrong, right,
So that's you know, that's something to pay attention to.
I mean, if you keep seeing layoffs and you keep
hearing it's because we're automating and becoming more efficient, you know,
at some point it's going to be meaningful. And look,
(30:10):
maybe it all maybe there already is signal here. Again,
I don't you know, I don't know, but but yeah,
I think you just you have to watch. You have
to watch employment, unemployment and flows very very closely. And
the you know, the irony of this whole thing, I
mean of my thesis, you know, should it play out,
(30:31):
you know, again, the AI thesis, This is mine the
market fragility, this is Mike Green convincing me. But the
companies whose stocks have benefited the most on the way
up here are the ones that have the furthest to
fall just because of that dynamic, that reversal and flows.
Now they were in terms of businesses, they will obviously
(30:54):
be left standing and somewhat thriving, you know, in the
wake of all this. And look, one thing we didn't
touch on, but I think it's implied obviously when you
see and if you see that kind of mass high
end labor displacement that I'm talking about, it's not just
an issue of flows. I mean, you have an issue
(31:16):
with aggregate demand, and so that's going to you know,
so we're talking recession anyway, that'll that will certainly impact
financial results. But in the aftermath, these businesses will you know,
will still be standing. But you know, I think the
way like you want to you want to be able
to protect yourself on the way down, probably cash. You know,
(31:36):
we've set up a book in you know, in in
our you know, we've set up a strategy, uh that's
looking to protect principle on the way down. So I
think a lot of how if you were going to
try to actually make money on this, I do think
a lot of the action isn't credit. And one of
the things is that you know, that's interesting about the
(31:58):
post GFC environment is that imply volatility and credit is
so low because you have these structural bids for credit
that are also part of the retirement you know, flow
pick story. But you know, if you get and if
you get this type of scenario playing out, I mean,
vall is going to blow out on credit and obviously
(32:18):
you're going to have a lot of credit events, you know,
not I mean corporate as well as I'm saying government
court credit events. So there is money to be made
on the way down here.
Speaker 2 (32:28):
I don't think it's quite hard for retail investad for
retail the average access. So for the average investors, like
what you're saying is you just keep buying and Julius,
the unemployment you really begin to see these announcements wraps
it up. Then you get out competing, you go into cash,
and then you wait and then.
Speaker 4 (32:47):
Right and then if you really really want to make
the multi generational money we do along in the aftermath.
Speaker 3 (32:53):
You go along on. But how do you know when
to buy and the aftermath?
Speaker 2 (32:56):
Do you wait until you start seeing the policy anno
announcements from the state. You wait until you see QI
forever announced again, you wait until.
Speaker 4 (33:05):
Yeah. I mean, look, I so for UK market, it's
hard for me to speak to that, okay, because I think,
you know, the the US is going to be you know,
I think we're singularly blessed in this dystopian world that
we're you know, we're heading toward. So from from a
(33:25):
US investor perspective, you know that assets will be reinflated.
We have no choice. I mean, all all of our economies, right,
all the Western all the developed economies have so much
debt in them that you absolutely the playbook is to
absolutely reinflate assets. You know, in the US. I think
that's you know, I think you know, we've seen that
(33:46):
accomplished a number of times. They will do that again.
So yeah, I mean, if you wait for the first announcements, like,
you're not going to miss the opportunity. You know, if
you if you buy after you know, the FED analysis
is that they've cut rates to know ten basis points
and the you know and the FED funds rate, I mean,
you're not you know, you can you can wait until
(34:06):
after that the buy You'll be fine. But look, it
could it could take a while, I mean, but eventually,
you know, the reinflation of assets will happen, you know,
at least in relative terms.
Speaker 3 (34:19):
And do you think this is going to kill the
passive industry?
Speaker 2 (34:22):
So when we're buying back in, you know, we're sitting
in cash well waiting and we see whatever signal says
we think gives us not by signal, do we then
are we going to go back into ETFs or is
this the return of the active manager?
Speaker 4 (34:36):
Yeah, that's that's an interesting question. Look, passive will be
to blame for a lot of the market calamity, but
how much you know, if we were talking about a
financial crisis in isolation, then yeah, obviously you know, all
legislative guns would be focused on the passive investing industry.
(35:00):
But we're going to have bigger fish to fry because
we're going to be wrestling with this these existential questions
about humanity. What is our role in a world that's
you know, where our work is increasing increasingly being performed
by machines. How do we solve that? So? You know, again,
so I think so given that, we're going to have
(35:23):
some much bigger questions to answer, and they're not totally unrelated,
but I think most the intention will be on that.
But yeah, look passive Mike. Mike has been warning, he's
been lecturing policy makers, you know, like you know, shouting
from the mountaintops for years about what Passive is doing.
(35:43):
And I think the response that he's gotten at the
policy level is like, Wow, that's really interesting. But you know,
there's zero political will to do anything about that right now.
So you know, we just have to wait and you know,
if your crisis ever materializes, then that's when we'll do something.
So I think there's awareness of the problem, but it's
just a political will problem, you know, Like right now,
(36:06):
you'd be taking away the you know, the punch bowl
in the middle of the party, and that's just not
that's just not how we run things, you know, post
GFC anymore, not at all.
Speaker 3 (36:16):
Yeah, ask you this.
Speaker 2 (36:17):
You're obviously thinking about lots of existential things at the moment,
as am I.
Speaker 3 (36:22):
What are your kids going to study at college?
Speaker 4 (36:26):
Yeah, it's a good one. Look, I do believe that
math and so my kids are not near college age,
I mean twelve and eight. I'm I mean math and science.
I'm very big on that regardless, Like, even though I
know these things will be able to do all of
your math, I think you still need to understand how
(36:47):
to do math. So if you what the end goal here,
as I put it to them, is, look, you want
to be in a position to use these technologies as
a tool, not to have to compete with them. So
I do think that understanding the underlying functions that they
are performing will give somewhat of an edge the math
(37:11):
and science and look reading, So what do you actually study.
The world is going to need salespeople.
Speaker 3 (37:20):
It's going to be communicated.
Speaker 4 (37:22):
Yeah, so I've got one kid who'd be a great
salesperson and the other who probably won't wouldn't be. But
you know, there can be lots of jobs in government
as well, so I don't know, maybe for maybe foreign relations,
and you can be a diplomat, you know, trying to
control the last, you know, vestiges of what humans actually
(37:42):
can control.
Speaker 3 (37:43):
All right, let me take you back to gold.
Speaker 2 (37:45):
Briefly you said you thought that might hold hold its
value relative to other assets. Anyway, what about bitcoins? Oh
my god, on ever, we always asked about golden bitcoin.
Speaker 3 (37:58):
That's what we do in this podcast.
Speaker 4 (38:00):
The same one exists and one doesn't.
Speaker 3 (38:02):
That not the same, They're completely different.
Speaker 2 (38:04):
But for me, you know, we go right back to
the early days when people used to tell us that,
you know, bitcoin with digital gold, and that made us
lave and we would call gold physical bitcoin just for
the giggles, right, and we'd ask everybody at the end
of each podcast, if I gave you a choice of
holding bitcoin of gold for a decade, which one would
you take?
Speaker 4 (38:25):
Yeah? Gold? I mean, look, okay, so bitcoin. When my
when my older kid was five and he asked me, oh,
what's bitcoin? I said, listen, crypto bitcoin. These are currencies
without countries. Okay, they don't matter. I mean, you know
that there is an intrinsic value to them, which is
(38:48):
just the gas fees as they call it. But these
things trade obviously well above intrinsic I've looked at bitcoin
at times in the past as a barometer of speculative
acts at excess in the markets as well as you know,
I think there's I think there's a recursive effect as
well on speculative activity, and more valuable bitcoin becomes, so on,
(39:11):
you know, the more froth there is in some other markets.
So barometer as well as cause. But yeah, look, I
understand the I think it was Warren Buffett who said
that if aliens observed our behavior toward gold, pulling it
out of the ground, you know, treating it like it
has some tremendous value, they'd be completely puzzled. Yeah, I
(39:32):
mean I understand that. But the thing is, I think
it's so deeply embedded. You know, for millennia of human cultures,
you know, every culture, gold wasn't the store of value.
Gold was value itself. Could cryptocurrency supplant that or join
that in status? I'm not an anthropologist, I'm not a
(39:55):
certainly not a futurist anthropologist. So take my view with
a great of salt. But I don't I don't think so.
I mean, gold is pretty, you can touch it, it
has weight, It's not an intangible asset. Yeah, exactly.
Speaker 2 (40:08):
So I can escape with bitcoin too, And I'm like, well, yeah,
but're just still going to need electricity if you want
to escape with your base point, still.
Speaker 4 (40:15):
Still gonna need Look, I mean, in a really, really,
really bad situation, the ultimate store value is cans of tuna.
So you know, I'd rather have cans of tuna stockpile
than a USB drive at bitcoin.
Speaker 2 (40:26):
Okay, Well, in when the great crisis comes, can I
swap some of my gold for some of your tuna.
Speaker 4 (40:33):
Can you eat gold? I don't know, you're.
Speaker 3 (40:37):
Something else.
Speaker 2 (40:40):
All right, thank you so much. I'm gonna ask you
one last thing. It's you know, quick fire around this.
Speaker 3 (40:44):
What are you reading at the moment?
Speaker 4 (40:48):
Right now? I'm reading, I'm switching between two books. I'm
reading a book on the dysfunction in the art market,
and I'm also reading a book about Leonardo da Vinci.
That's Walter Isaacson book.
Speaker 3 (41:04):
Okay, that's interesting. We should all read that. I think
that's on my list too.
Speaker 4 (41:08):
You know, I can tell it's not that compelling so far.
I'm finding it a bit of a slog and I
don't I don't think that's Isaacson's fault. It's just there's
not you know, there's a paucity of information, so he's
kind of it's it's kind of like a book report
on you know, during this year of Leonardo's life. He
worked in this shop, and he worked on this sketch
and here's the picture of it. It's it's kind of
a book report on his life so far.
Speaker 3 (41:29):
So I hope it picks up kind of made some
stuff up.
Speaker 4 (41:33):
It would have been yeah, it would have been better.
I have to, would have perused I have perused my
bookshelf looking for fiction to kind of because I'm not
it's just not grabbing me here.
Speaker 2 (41:43):
So all right, well, you know, maybe we won't recommend
that one to everybody. Stick for the first one. The
first one dysfunction in the art market. That's a lot
more fun.
Speaker 4 (41:51):
Uh yeah, yeah, that that could be. So that's written
by Matt Campbell, Bloomberg journalist.
Speaker 2 (41:57):
So okay, yeah, so we can read that while we
wait for the great market collapse, and we'll be keeping
a very close eye on unemployment numbers on this blog.
Thanks to Hugh, Thank you so much for joining us today.
Speaker 4 (42:09):
Oh, thank you.
Speaker 2 (42:21):
Thanks for listening this week's Marin Brogs Money. If you
like us, your rate, review and subscribe wherever you listen
to podcasts, and keep sending your questions or comments to
Merror Money at Bloomberg dot net. You can also follow
me and John on Twitter or ex. You're on egg Carson,
I'm not following you. I should be.
Speaker 3 (42:35):
If you are, You've got to be on X right.
You are definitely at your ex.
Speaker 4 (42:39):
Yeah, I mean mostly most of the time is at
muddy waters ree are okay.
Speaker 3 (42:45):
Everyone's going to follow that.
Speaker 2 (42:46):
Now, I'm Mariness w and John is John Underscore Stepack
and now you know where Carson Is. This episode was
hosted by me marrin zunsep Web. It was produced by
Samasadi and Moroses and sound designed by Blake maybe Up
and Aaron Casper and of course special thanks to
Host
Merryn Somerset Webb
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