Government debt crisis: why inflation is the only way out

0:00So that's exactly what we're seeing, right? They're injecting money and because the Fed isn't doing it quickly enough, the government is doing its own kind of money printing, which is they're buying back long-dated debt, and they're doing that by issuing short-dated debt. Which is just like you taking money here, you're giving it out here. It's a weird little circle that they're running there, and they're just trying desperately to keep borrowing costs low.

0:27Japan is the best example of this. They've done it since the 90s. Japan has a similar debt level. The Japanese government owns half of its own debt, which is a weird way of looking at it. And its institutions, so the pension funds and the banks own the other half. So that's just the way they've done it. They've basically made it a Japan-only bond market that only the Japanese government controls. And that's how they've actually quite successfully brought debt down as a percentage of the economy.

1:00But the value of their currency's plummeted and the people who paid for it, ordinary people pay for it through a tax that they didn't realise was actually there. And I think that's the playbook. The US is going to go down. It's just inevitable. So therefore, don't sit on a lot of cash. It's going to lose money. There is no other way out. I've yet to meet anybody who gives us a different way out. So that's the thing we got to be prepared for. Most people don't understand it because it sounds boring, it sounds complicated, it's not that obvious and therefore they just ignore it and get hurt.

1:36Hello everyone, my name is Anthony Faties and welcome to another episode of the What the Finance podcast. On this podcast, I have the pleasure of welcoming back Felix Prehn. It's been about 4 years since we last spoke. So Felix, thanks so much for coming back on the podcast.

1:48It's an absolute pleasure being back here, Anthony. Thank you.

1:51Never, all looking forward to the conversation. And as I say, it's been a while since we last spoke, but so much has happened. I feel like it's felt like decades when you look at the macro and everything that's going on around the world. So it'd be really interesting in hearing your high level overview of what you're currently seeing in the economy and markets at the moment.

2:07Well, that's quite a lot to unpack. I think it's a lot of stuff that people are getting kind of wrong and I was just looking at a lot of data this morning and I think a lot of people look at the economic data and there's a lot of stuff that's pointing in the negative direction. Like real estate agents are getting laid off which is always an early signal. Housing market is bad. Bond yields are high. So there's a lot of negative news out there. Oil prices are high, inflation's getting higher and so on. So people then go, well, that means the stock market's going to be bad.

2:36But actually if you look at the data historically the two have very little connection. So you can have an economy that's getting worse and that can be a wonderful thing for shareholders because now interest rates might actually start coming down and the housing data I think is a nice indicator for that. You've got money printing at the fastest rate I think in 4 years if I'm not mistaken on that. So what does that mean? Money is getting pumped back into the system and the money is always going to find returns. It's going to be good for assets if you ask me. Very bad for inflation, very bad for cash, and for people earning a salary, but the shareholders are probably going to have a pretty decent future ahead.

3:19So I'm not that bearish on that. I think a lot of people are just seeing the end of the world everywhere. And yeah, there's definitely risks, AI and Japan, and there's a lot of stuff we can maybe unpack, but I think right now people are so bearish that that's typically a point where things actually begin to improve. There is this AAII, American Association of Individual Investors survey and it's really bad and I always like it when it's really bad as a shareholder because everybody's kind of sold.

3:52Yeah, it makes a lot of sense. I feel like it's been one of those like the most hated rallies because bond yields are going through the roof. Everyone's really worried as you're saying. I think there was, I can't remember, it was a couple months ago lots of hedge funds and investors pulled out but then markets keep seeming to just go up and up and up. It's one of those things, it seems like there's lots of ammunition on the sideline where they're going to have to come in soon if these prices keep going up and then that's going to have a bit of a blowoff top.

4:17I think you might well be right on that. And if you look at the S&P 500, 82% of it right now is below all-time highs. So the vast majority of stocks haven't done that well, but the top end has done incredibly well. And that tells you a story that the main economy isn't doing that well, but AI is basically keeping the whole thing afloat and they're borrowing and they're leveraging. And you could say that's incredibly irresponsible and it could end in a bubble bursting. It will at some point but in the immediate future I'm still fairly bullish on it. So I would be cautious on just sitting on the sidelines completely.

4:57Yeah, of course. And that definitely hasn't benefited people over the last 6 years when it seems like economic data has been going more negative and more negative. But you mentioned an interesting point there about the money supply seems to be growing, more liquidity in the system, and that's different to what a lot of our other guests have been saying where they actually think M2 is going down. So how do you analyse that and what are you currently watching to see that extra liquidity coming into the system?

5:20M2 is published by the Fed. It's public data and I think it went up 6, 7% or something last month which is quite staggering. I think it might even have been 8% actually, like a lot. So we're not in the crazy world post-COVID where they added 20 odd per cent of new money in a year but it's still pretty staggering. And why are they doing that? Well, it's bailing out the system, isn't it? There was a bank that just failed again, a small bank in the US. The government is doing what the Fed used to be doing, like they're actually putting money into the market.

5:56So I think it's a lot to do with keeping bond yields, so the cost of borrowing for the US government essentially down. And secondly, they're just stimulating the economy. And governments have done that now for many decades. And it's look, it's the cheapest way to be popular. You just give people the feeling that everything is wonderful. Now of course what it does do is it causes inflation. Like inflation is a choice, right? We had basically no inflation before the 1920s. Like the previous 100 years, it was like 0.2% a year or something like that. And now we're aiming for 2% and it's obviously a lot more than that.

6:37So why are they doing that? Because it's the one way to deal with the debt pile. We can obviously unpack the whole debt issue there, but how do you deal with massive government debt? Well, you can increase taxes, which means you get voted out of office. You can slash spending, which means you get voted out of office. Or you can do the third thing, which is print more money, cause more inflation, and that way the value of the debt overall goes down because you printed all this extra money now, and you're not printing debt. So that's essentially the way out. It's what America has done after World War II. It's what they did in the 70s. It's what Japan's been doing for the last couple of decades. It's the only way we know how to deal with it.

7:14And the danger with that is really that people don't see it coming because it's slow, it's gradual. But your money loses value. And I think probably most people are feeling that by now. In the last 20 years, a lot of things have gotten significantly more expensive. And it's just because they've printed more and more and more money.

7:34Yeah, there's obviously been a disconnect as well between CPI and the real depreciation of money as well. So I think that's why people are saying hang on a second, inflation apparently didn't go up between 2010 to 2020 that much but then actually the prices of everything went up a lot more while wages didn't increase much at all. So that's the struggle.

7:54Absolutely. Tremendously. And actually we do a bit of economic research and I'm just trying to pull it up actually to see what the real data was. But we have an institute called the Prehn Institute and we sponsor research and stuff like that. And one of the things we just put out is an index and I call it the hours of work index. And it basically shows you like same basket of stocks, gold and housing.

8:18How many hours does it take you to buy that basket? And since 2020, it went up like 50% I think. So basically to buy the same piece of the S&P took 10 hours of work in 2000 and now takes 23 hours of work. So it's just a doubling, right? So that's to me an important measure of inflation because asset prices is actually what determines your wealth really.

8:53So the government tells you okay eggs are going up or petrol or something, but really if you want to build wealth it's about how hard is it for you to acquire the SPY or a bar of gold or a coin or buy your first home. And if you look at those factors that are not part of CPI, it's a doubling just since 2020, which is pretty crazy.

9:15Yeah. And the gold one is a great point I've been seeing. If you look at, I don't know what the comparison would be, but I guess in 2000 the cost of a nice home in gold is probably the same as it is today. But if you look at it from a dollar perspective, it's probably gone up 4 or 5 times. Well, it's actually probably cheaper to buy a home now compared to gold because it's had such a run up.

9:41So yeah, I think that's, if people only watch this for a few minutes and take away one lesson, it's just like be in assets, not in cash. Like history shows us that cash is definitely going to lose value, especially the US dollar. So this feeling of, oh, I'm safe, I'm sitting on the sidelines, I'm going to wait this out, is probably the worst decision we can make because it's a guaranteed loss. Everything else can still create a loss, but there is an option of potential upside. With cash, you have only potential downside.

10:09Yeah, completely agree. And you mentioned there's economic weakness, I guess, across the world. Maybe it hasn't been as much in the US, but it seems like that's mainly been because of AI and the massive hyperscaler investment there. Do you see that as being a major, I guess, cover of the economic weakness in the US? And then how do you see this playing out in the next years? It's hard to predict, but yeah.

10:30Yeah, I think you're spot on, Anthony, that the spending of your Metas and Amazon and OpenAIs and these guys is essentially keeping the economy somewhat afloat. And then secondly the massive government borrowing. I mean $2 trillion of a deficit to keep the economy afloat because people always think oh it's just spending, but actually the money pours into American businesses and they will then pay their suppliers and their staff and the stocks will go up. And so it creates actually some value. Not that I'm a fan of the deficit, but it does create some value.

11:03But yeah, the AI spending, is it too much? I think almost certainly. I think in every single big technological transition we've seen, we know we're going to waste a lot of money because we live in a system where companies compete to win, right? So Meta has to spend money, Microsoft has to spend money, Amazon has to spend money, X has to spend money. They all have to spend money because if they don't, they lose. So therefore they're all building the same thing. So they're almost definitely going to create too much capacity. So they're going to waste money.

11:33Now, who's that good for? Well, it's good for the chip suppliers and the copper guys and the memory suppliers and the data centre people and the power people. So it does trickle down somewhat, but there'll still be a lot of wastage. And at some point we're going to realise we don't need this much. And then we're going to see a big correction. And the correction is going to be so big, not because of the scale of the waste, but because those companies are the only thing that's holding up the index, the stock market.

12:01So when they take a dip, I said at the beginning, 82% of the market is below all-time highs. 18% is above. So those 18% are the AI companies. When they take a nose dive, well, suddenly you get a great big dip. And it's the system we live in. It's a feature, it isn't a bug. Like, we always get an overreaction. And you have to also ask yourself, when people start selling these AI stocks at some point on a bad headline, who's going to buy it? I mean, you have to have people out there who are not already heavily exposed to AI. And I don't know anybody.

12:36So the problem then is that you have to set up a big discount. So you get this pretty rapid drop and I think it's going to come. I don't know if it's going to come in 6 months or 12 months or 18 months or at some point. Nobody knows that. Nobody's got a crystal ball. But just history tells us that every time we had incredible technological innovation, we overinvest. We get over excited and then we get this pullback. The internet was a pretty good invention. It wasn't like that wasn't giving us any value and we went 78% down on the NASDAQ.

13:06Yeah, it's amazing because these companies, a lot of them, obviously they're borrowing a lot, but they have massive cash flow as well. So it's not even that they're going to lose money in the future. They'll still be great companies. They'll probably just cut back on capex, their free cash flow will be a lot better since they're not spending so much on this investment, but then the whole market will get freaked out as you're saying because it's not that easy.

13:25Yeah. It's going to be a great opportunity for people who have capital to invest at that moment because you can then buy these, as you say, great cash flow businesses. Google and Amazon and Microsoft, the underlying business is incredibly good. They will just, yeah as you said, cut back on spending, they lay off a lot of people which will suck for the people, and they will just run the same thing just leaner with a lot less money.

13:49And I also think chip prices are going to come down. That's going to hit Nvidia and those guys pretty hard because they're making like a 70-something per cent margin on a chip. It's just not sustainable. Like in the long run there's going to be a competitor. I mean Google and so on already cropping up. Intel is catching up and AMD and everybody because the margin is just so big, the incentive is there for everybody to try and develop something that's cheaper and that's going to cut.

14:15Yeah, of course. And you mentioned how the concentration in the market, 18% of the companies creating most of the gains. It does seem like that's not just a stock market thing. It's probably a global thing. Almost everything that I see, you could say wealth, you could say attention, you can say all these things just seems to get more concentrated, more concentrated. But then it's massive risk as you say. It's almost as if you're in a massive stadium, there's tiny doors. So once all the investors try to get out, it's going to be very difficult and there's going to be, as you're saying, a lot of blood on the street I think.

14:48Yeah. And that's a nice analogy actually, the stadium and the small door, because that's exactly what it looks like when you try to sell and nobody wants to buy it. So but I think there's ways to do it if someone is just not that active as an investor. Buying the index every month and doing it for 30 years is historically been a very good way to build wealth. You just have to realise that the vast majority of what you own there isn't actually building you any wealth. Like 80% of it isn't, the top 18% are. And you just have to accept that is therefore going to give you that hopefully historic 10, 12% return, no promise there, but that's what the history has done.

15:28But I think the more active investors, people buying stocks or buying an AI index fund or a chip index fund or robotic index funds and so on, they're taking a lot more risk because they still own the index which is typically their pension fund, their 401k or something. And then they're piling on top tech stocks, AI stocks that already make up all the gains in their main portfolio, their pension portfolio. So they're just narrowing down on this risk at a moment where valuations are the highest they've ever been. Like, we're way beyond 2000. We're way beyond 1929 valuations.

16:01And people are just still going, well, it could go a lot higher. I think it could go a lot higher. The money printing is going to help for sure. And AI is a marvellous piece of technology. It's just we don't know if it will be profitable. You can have very very good technology, but you don't necessarily make that much money out of it because these LLMs, these AI companies, well, they all do more or less the same thing. So if somebody comes along and does it very very cheaply then your margins get compressed and therefore where is the return on investment?

16:37Investment, and at that point valuations might start to tumble. Look at Anthropic. What did they bring in last year in revenue? What is that, $60, $70 billion or something? And they have a $2 trillion valuation. That's a bet on the future being exactly as rosy and wonderful as Anthropic would like it to be. And I hope it'll turn out that way, but it's a massive risk.

17:00Yeah. I think their losses were similar as well, $40 to $50 billion.

17:03Most of that's a loss. Yeah.

17:05And then you can buy Amazon, same valuation, but what is it, $200 billion revenue or whatever it is. Don't quote me on that. And obviously very cash flow, very very profitable. So yeah, you have to make those decisions of where you want to put your money.

17:19Yeah. And I think the market understands that, but it's like, well, we've been trying to fight it for so long. Prices keep going up. I'd prefer to be exposed to this. So it's almost like nihilism of, well, I just have to be in it to outperform the market. So there's this extra leverage, and it works.

17:35And I hope that we'll always get bailed out, right? Which is the way we've been getting bailed out since 2000 in every single crash. So we just think they're going to cut rates and they're going to spend more money. It's like, yeah, but at some point, how big a deficit can you actually run? How much money can you actually print without the system collapsing? Because at some point it becomes a Ponzi scheme, doesn't it?

18:00Yeah. And that links quite well to where I want to take the conversation, which is you mentioned early on about that debt crisis, what we're currently seeing in government debts. It just seems unsustainable. US are close to 120% debt to GDP, deficits of 5, 6% a year, yields blowing out as we mentioned before, debasement of the currency. So it seems like all these things are unsustainable. So how are you currently analysing this debt issue and what are you seeing?

18:30Well, like I mentioned at the beginning, I think that we have in the US two parallels, after World War II and in the 1970s, where we had very high debt. Obviously World War II was very expensive. US paid for a lot of it. And the 1970s was a lot of the entitlement programmes came about and the Vietnam War was also very expensive. So what did they do? Well, they didn't cut spending and they didn't raise taxes because we live in a system where you have to be popular to be in office. So you are not popular if you do those two things.

19:00So they just let inflation run wild. And so what you do is you keep interest rates artificially low and you let inflation go above interest rates. And that means that money loses value. The dollar loses value just a couple of per cent every year. But if you do that for 10 years, it could bring you from 120% debt to say 60% debt as a proportion of the economy because you've artificially increased the economy through the inflation. And the fastest way you achieve inflation is printing money, and that's something the government can basically control, or the Fed can control, but the government appoints the people running the Fed.

19:38So that's exactly what we're seeing, right? They're injecting money and because the Fed isn't doing it quickly enough, the government is doing its own kind of money printing, which is they're buying back long-dated debt and they're doing that by issuing short-dated debt. Which is just you taking money here, you're giving it out here. It's a weird little circle that they're running there and they're just trying desperately to keep borrowing costs low.

20:01And Japan is the best example of this. They've done it since the 90s. Japan has a similar debt level. The Japanese government owns half of its own debt, which is a weird way of looking at it. And its institutions, so the pension funds and the banks, own the other half. So that's just the way they've done it. They've basically made it a Japan-only bond market that only the Japanese government controls. And that's how they've actually quite successfully brought debt down as a percentage of the economy.

20:37But the value of their currency has plummeted and the people paid for it. Ordinary people pay for it through a tax that they didn't realise was actually there. And I think that's the playbook the US is going to go down. It's just inevitable. So therefore, don't sit on a lot of cash. It's going to lose money. There is no other way out. I've yet to meet anybody who gives us a different way out. So that's the thing we got to be prepared for. Most people don't understand it because it sounds boring, it sounds complicated, it's not that obvious, and therefore they just ignore it and get hurt.

21:09Yeah, it's a great point. I do wonder if the Japanese model is possible though, because you can say the last 20, 30 years while they've been doing it, you had the manufacturing deflation from China spreading around the world, you had positive demographics as well, you had increasing globalisation. So there's all these positive trends that actually meant that global inflation was extremely low. You could say most products were deflationary. Now with the geopolitical risk that we're seeing, it seems like that world is over, we've had a secular shift. So is it even possible potentially for other countries to do that if inflation is 5, 6%, if their yields are that high, because Japan were able to do it when yields were much lower?

21:51Yeah, that's true. They did it. They brought interest rates to zero and it cost nothing to borrow and the world borrowed in Japan, which is a whole other story, the yen carry trade, which is unwinding. But the US is basically the global financial market. They kind of control it. So yes, I do believe they can do it. I think they can do it.

22:11The test will always be does the bond market revolt, as in does the bond market demand higher and higher interest in order to buy the government debt, the new debt being issued. But you see what we did even during COVID, or all the time basically, is you can get the Fed to buy your own debt, and that's what Japan did, right? So they had their central bank buy the debt. So in theory, the government can borrow as much as it wants if the central bank buys the debt off them and then just prints money and gives it back. So it's just fresh money. So there's an unlimited supply of fresh money if you wish, but it's going to cause inflation.

22:47So they need to find this balance where the American public doesn't notice the inflation that much, because if they notice it too badly, it becomes unpopular. So I don't know where the exact sweet spot is. Inflation numbers are also heavily adjusted, whatever that means. So we don't really quite know. But yeah, they just need to keep inflation a couple of percentage points, 1 or 2 above the interest rate, and then the debt problem basically kind of goes away in a way that people don't notice.

23:22I guess they'd have to get their deficit down a little bit more though, because if they had 5, 6% deficit then that's a risk.

23:30The deficit is definitely, yeah, it is totally unsustainable. Of course it's unsustainable. And eventually, you'd think it is a Ponzi scheme in a way, isn't it? Because you're borrowing from yourself. How long can you do this for? Well, Japan has shown us you can do it for 30 years, but at some point you would think something would break. So you would create more and more and more inflation.

23:53I think the hope that people are pinning this on is AI again, that AI will be deflationary, a bit like globalisation was. Because if we can get services and manufacturing done much much more cheaply because AI will do it and robots will do it, then in theory that's true, it could make stuff cheaper again and therefore offset some of this inflation, at least in the way that the public feels it. So if your Amazon delivery gets cheaper because it's drones in the sky delivering it rather than a van and a driver and paying for petrol and all those things, then you will think, oh, my goods are cheaper. And that's what globalisation did for people. It kind of allowed governments to go really nutty with debt and spending.

24:41Yeah. I'd be interested to get your opinion on AI. But before we get there, how do you see this? Obviously it's going to be depreciation, devaluation of the dollar. You're saying it's going to be inflation. They're going to try and do that to reduce the debt. Do you see this as a whole monetary reset, potentially different currencies coming through, or do you see this more as, as you say, just the same playbook again?

25:02Well, I think the reset term is accurate in many ways. It is a changing of the system that we've enjoyed for the last 20 years or so. It's been very low interest.

25:14Rates. Money has been very cheap and that's sustained the economy and investments and your house prices and everything else because mortgages were cheap and car loans were cheap and so on, and that's definitely changing. Now the alternatives to the dollar, what are they? Well, the euro. The eurozone's a mess. They have the same problems and 27 governments and can't agree on very much. They also have basically no innovation and no tech startups and lagging the whole AI thing terribly.

25:40Wouldn't really pin my hopes on that one except for the arms manufacturers who will probably benefit. That's a bit of a cynical take, but I think it's true. BRICS currencies, yes, they will play a part for trade between those countries, but no one's signing a big commercial contract in rubles. The US dollar is still the currency for international trade and international agreements, and we haven't really got an alternative.

26:08Even though it is a very imperfect system, people will always go with the least imperfect system and at this point that's the dollar. So yes, the dollar will lose a lot of value. Will it lose importance? Gradually and a little. It won't collapse overnight in my humble opinion. But there are obviously things chipping away at it and then we have to see how the whole digital dollar stablecoin madness plays out, and that's obviously an American attempt to continue to dominate international trade, prop the dollar up and the demand for its debt up, which is really what stablecoins are all about. They're doing a lot of things that are actually quite clever. It's just they're not always that transparent.

26:50Yeah, it's clever but then also it's leading to these massive societal conflicts. I feel like in majority of western countries where it's occurring. So that's always the risk. I think we're seeing in, I live in the UK, interest expenses are more than I think it's education, defence and home office put together or something ridiculous like that. So currently it is painful and you wonder if they'll actually be able to continue with the process, or maybe that's the goal. Maybe it is divide and conquer unfortunately.

27:21Yeah, I totally know what you mean. I think societies are definitely getting obviously less equal and there's more conflict and you have a lot of issues in the UK particularly, but actually in a lot of countries. Most of Europe has experienced similar issues. I think the US probably also has had them a little longer. So what's the rationale for that? I don't know. It is not very logical. It doesn't really make sense.

27:45But the problem is, for governments, to like you say interest is the biggest expense item in the UK, for governments to say, "All right, we're going to stop the spending." No one's going to vote for it. That's the problem because there is an easier way out and the other guy is going to say, "Hey, I'm going to give you more money and I'll give you free stuff." And human nature is we want free stuff. So it's very hard to see how we get out of this in a rational way where we would just say, "Let's balance the books." I just don't see that happening.

28:14Yeah, I agree. Until you're forced to, I think it's going to be what happens. And then you mentioned I think a lot of countries are also going away from the dollar. We've seen China, Turkey, other countries moving away from owning US treasuries to owning gold, and central banks actually buying it. So that seems like another mechanism that could occur where potentially you still have to transact in dollars. I know China's trying to create their own SWIFT system which is going to bypass the dollars. But let's say there's still these fiat currencies where you transact with, but then the actual store of wealth are these precious metals or these real assets. Is that how you could see a system that revolves around that?

28:52I think the gold story is ultimately it's the direct result of the Russia Ukraine war, right? The US and Europe froze Russian assets. So every country in the world has traditionally held foreign reserves, so dollars or euros or sterling in other countries. So they'll have them sitting in a New York bank or in a London bank and that just allows them to transact internationally and make payments.

29:19But the world has frozen Russia's foreign reserves. You might agree with that. It's not what it's about. But it means that every country in the world looked at that and said, "Hang on, all those billions of dollars we've got sitting in London and US banks, they could just take them. How about we just buy gold with that and put the gold in the vault in our country, in which case you can't get to them unless you actually physically invade us, which is a little harder to do." So they've created this incentive and the incentive is therefore buy a lot of gold, and you're seeing the central banks around the world doing that because it's actually the smart thing to do. Poland's doing it. A lot of the slightly more switched on governments are doing it, not just developing nations.

30:03And it's the rational thing to do. You could argue it's a store of wealth if you're expecting inflation. Traditionally, hard assets have done well because you can't print them. Again, doesn't mean you should run out and put all your money into gold, but yeah, I think that's a good place for it in a portfolio.

30:19Yeah, great point. And there's already talk about Venezuela's gold which was confiscated in the UK, sending that back to them or sending to the US, and then we see the Netherlands, as you say a country which is pretty well run, actually bringing its gold back from the US. So there really is a push for sovereignty, and it's more a focus on you don't actually own it until you can touch it basically seems to be the case. And it's unfortunate, it's a lower trust world it seems.

30:45I think the way, you've been talking about AI and innovation, everything always overshoots. Every trend overshoots. Globalisation overshot, so now we get the opposite, right? And you're going to see that with everything. You're going to see maybe immigration has overshot in a lot of countries and we're going to see that come back down. It's always we just do too much and then we pull back too hard and then we do it again, and that's just the way the world seems to operate.

31:09So when you see something that everybody agrees on it and everybody is 100% in it, that's probably the riskiest place to be, and vice versa. So I think that's really what I would look at. And that's, I had a nice conversation with Jim Rogers the other day and I look up to a lot of those older guys who've done this 50 years longer than you and I have been around. And I think that's essentially what they were looking at. It's just like when you get agreement on everything the risk is there, and then look at the things that everybody loathes and look for the opportunity there. And I think that's a pretty good way to start your research.

31:43Yeah, that's a really great way to look at it. And how do you see the geopolitical risk overshooting? Do you think it seems to be continued disconnect, continue divide, continue fracturing between say west and BRICS? Even the west is fracturing as well. So do you see that as a similar trend where it could go further apart and then potentially come back together, or how are you analysing that?

32:04Well, I certainly hope so because I'm not keen on World War 3. I think, I mean the stuff in the Middle East, I'm a cynic on that one too. I think it's very profitable for certain groups and organisations. I don't want to put my tinfoil hat on here, but that's the way I see it. We get these 20 year wars, Afghanistan, Iraq, and so on, and they've all finished, so now we get the next one.

32:29And then you have to also look at simply who's the beneficiary of oil not flowing out of the Middle East. A lot of countries benefit from that and a lot of countries get hurt by that. So I think unfortunately a lot of the world is run by very cynical politics. I say that as a cynic myself. But I also personally don't see that being catastrophic for the entire world. Obviously it's catastrophic for the people in the area. It just becomes what we see as another minor conflict that drags on for a decade and it sucks for the people there, but we've had those, we've seen a lot of those.

33:08Yeah. Who are the largest oil and gas exporters outside the Middle East? It's the US who started it unfortunately.

33:16Yeah. By far, far bigger than Saudi Arabia. Yeah. So we're on obviously a very optimistic tone there for the world. But in all seriousness, look, there's tremendous opportunity out there. I think there always is in all situations. And when people are feeling the most

33:29Bearish is actually the moment to look around and look in the things that people are most bearish about. And I think look for some opportunities. And that's kind of what I try to do. And just stop watching the news. It's depressing. It's intended that way. And just focus on what you actually want to be doing. And I think we can have a brilliant time and brilliant life and brilliant investment experience no matter what happens out there. But you just need to have a bit of awareness of it and generally speaking do the opposite of what everyone else is doing.

33:59Yeah, it's a very important message and we last spoke 4 years ago. It was a lot about macro but also about investing and that's a lot of where your career has been. Are there any specific sectors that you think are currently undervalued or overlooked at the moment that you're watching, or is there anything else that you can talk, maybe geography?

34:18I think there is value in, okay we saw a trade at the beginning of the year where basically software companies got hammered. Like Microsoft fell off the cliff like 30% or something because people said AI is going to replace Microsoft products. And it misses the point that yes it's much easier to build software now but it is still really really hard to sell software. And Microsoft has hundreds of thousands of customers who pay them on a subscription model every month, very very hard to get those, especially with enterprises who are really risk averse. No one's going to go and say, "Yeah, let's just change Microsoft Office to something else."

34:55And people said, "Well, what if someone offers free Microsoft Word?" Well, somebody already did. It's called Google Docs, right? But hasn't affected Microsoft. So that was, I think, an opportunity where the market was just being too negative on a tech implementation. And you're seeing it with companies. I think Uber, for example, is a good example right now. And I'm not saying buy Uber, I'm not a financial adviser, but Uber is getting hammered because people are saying self-driving will kill Uber.

35:19Now, if you think that's through, what's the biggest cost of Uber? It's having drivers. So, who's got Uber on their phone? Everybody. Who's battled all the regulators around the world for their licences? Uber. And the guys are very, very aggressive running it. So all it takes is for Uber to buy the self-driving cars and they've already got the customers. Whereas if you start with a car, now you have to get the customers. That's the much harder part.

35:45So I think that's one of those slightly contrarian things. Right now the CEO just bought $10 million of their own shares. Again, it doesn't mean it's going to go up, but it's things like that that I look at where I can see a little bit of money flowing into it, not a lot. But fundamentally I see the battering is probably overdone in my opinion. Of course I could be wrong or not.

36:04And what do you watch for to understand if it is overdone? Because I guess always a challenge. I agree with what you're saying. It's like where do you catch a knife or where do you then jump in to take the position?

36:14It's the hardest part. So I look for something I call a heartbeat and it's essentially on a stock chart. You look for a stock that has basically gone sideways like a heartbeat as long as possible. Like years is wonderful. And then you look for it to move out above that trend. It's been in that sideways trend. For me, that's the moment where I get interested. And I try not to buy something that's just falling because it's cheap because I mean look at PayPal or Plug, they can go down 98% and still not be cheap.

36:47So that's kind of what I look at. It's quite, it's more technical than anything. I try not to build too much conviction for anything because I think it blurs your rationality. So I've got a couple of hard rules on that that I learned from my mentors and I followed up like to the letter. And then if it goes down further, I'll just sell it and I'll go do something else. So I'm not going to cling on and go but I was right, surely I was right, because a lot of the time we're not.

37:13Yeah. It seems to be the key message from the Druckenmillers and I guess Jim Rogers as well. It's like well yeah you have an idea, you put money into it. If it doesn't work you try and get out as soon as possible and try not to sell too early. It's always, but that's the hardest part and that's why they're the best in the business.

37:26Yeah. It's very hard to say I'm wrong. Very hard. So what I do is I set up a stop, which means it sells automatically. And that way, I don't have to admit to myself I was wrong. I've already told the broker where I'm going to be wrong, and then the broker just does the job for me.

37:39Yeah, that's a great way to do it. And then the hard part is putting the stuff in, I think, sometimes.

37:44Yeah, you have to, you can never cancel them. That's a little bit of discipline for sure. It's easier than doing it in the moment because it's hard to sell something when it's down 10% or 20%. It's not a fun thing to do, but if you don't, more often than not, it's going to be down 40, 50, 60, 70% and at that point it's really going to hurt you.

38:02Yeah, definitely. And then we were talking about AI before and I think it seems like you think it's having a massive impact on the economy. It obviously is. It's, I guess the timeline is the challenge like everything. It's like how long will it actually last or how long will it take to actually have a massive impact on the economy. So what are your thoughts on AI? I know you slightly touched on it but maybe an in-depth analysis on how you see it.

38:30I think it's a great question Anthony. I think what I would look at always is like how does innovation play out. And there's a chart, this curve, and basically we expect a new technology to have a tremendous impact really really quickly and therefore valuations go through the roof. And then we realise this is going to take a little bit longer and then we overreact and it crashes. And then the eventual benefit from the technology is way way way way bigger than we could ever have imagined at the beginning. So the long-term impact I think of AI is much larger than we can currently fathom and imagine. But the speed at which we expect it is probably unrealistic.

39:07So therefore you get a bubble and that's happened every single time we had a technology. I mean whether it was car companies, the original car companies, 90% went out of business. EV companies is the same, 90% went out of business. AI companies will be similar except that this time we have a lot of very large companies with very good cash flow like your Microsofts and Amazons and so on. I'm a little less bullish on the pure AI companies.

39:35So I think that's just a pattern and you have to at some point just say okay valuations are really rich and maybe I put my money into something else. Like the president bought a waste management services company in his last filing and he sold Meta and some other tech companies. So you have to decide for yourself what that point is. But I think that's the thing to do, like don't think you need to be there till the bitter end, like the very top of the market, because you only know it's the top after the crash. So that's kind of the way I look at that. I try to be less in AI. So when I invest in something new actively, I look around in industries that have maybe very little exposure to that because like everybody else, I have a fair bit of it already.

40:21Yeah, great point. So, Felix, thanks so much for your time today. We covered so much about the economy, macro, geopolitics, what's happening in markets. But my last question is, what is one message you want people to take away from the conversation?

40:33I think be an optimist, but also be a realist. And realise the patterns of the market and the economy and everything. Ignore the news and the noise and just build out your system, do your thing and enjoy life.

40:50Yeah, it's an important message. It's so easy to get bogged down in all the horrible news, but then when you think about our day-to-day, it doesn't really affect us that much.

40:58I haven't had a television in 20 years. I don't watch the news. I don't read the newspapers. It upsets me. So I don't want to know. There is sadly no benefit in you knowing about some poor person getting blown up somewhere in the world. It will not make their life or your life any better. So I think the responsibility we have is like make a positive impact. And it's very hard to do that when you

41:20Get bogged down by mainstream news.

41:24Yeah. Super important message. So Felix, thanks again. If anyone wanted to find out more about your work and what you do, where would the best place for that be?

41:30Just look on YouTube. Just type in Felix Prehn on YouTube and you'll find me. We put out a couple of videos a week. The goal is just to explain and break down the more complex macro stuff like we did here today and you can find me there. And Anthony, thank you so much for what you do. You help a lot of people by explaining what's going on out there and giving people a platform to share that with. So keep doing what you're doing.

41:55Appreciate it. Same for you. Thanks again.

41:58Thanks, Anthony.

41:59Hey, everyone. Thank you so much for listening. Really appreciate your support and I hope you found amazing value out of this interview. If you really enjoyed it, would appreciate if you liked and subscribe or share. It really helps with the podcast. We're still trying to expand, get to more people to help make sure that everyone understands and decode what's really happening in the world of finance, investing, macroeconomics and geopolitics. If you enjoyed this one, then you might enjoy this other interview as well. It's really appreciated and thank you.