Welcome And Today’s Two Topics

SPEAKER_00 0:00

Welcome back, everybody, to the Armchair Economists. I'm join this, I'm Brett, and I'm joined again by my friend TXMC. How you doing, bud? Hey everybody. So we wanted to do a chat about uh the most recent Fed meeting. Um obviously they raised it a quarter point. TXMC and I kind of come on different sides of this. I think we kind of agree, kind of don't agree on some stuff. So we thought it'd be fun to talk about. Also, uh else in the news and geopolitics and and and economics and markets is the EU becoming, or I'm sorry, the Canada becoming an associate member of the EU or wanting to be. Looks like they're flirting pretty heavily. I know there was this uh a talk today. This is Friday the 17th. Uh Carney gave us a speech uh where he talked about well, he did kind of threw a little shade at us, but didn't try to provoke us too much. Um but it's clearly an you know an anti-US or anti-Trump move. But so we thought we'd dig into that as well. Um kind of wanted to start off with with a conversation about the Fed. Uh TXMC, you really follow the Fed a lot. So I kind of want want to get your your take on, you know, you know, maybe let's set it up for the folks who are watching and listening uh about why we think you know they raise the rates. Uh I mean, obviously they maybe told us a little bit why Walsh seems to communicate a lot less than Bernanke did uh about why he does what he does. But I want to kind of start there, give the folks some background uh for those who don't follow the Fed closely like you and I do, and then we can kind of launch into you know what we think about it.

SPEAKER_01 1:35

Yeah, sure. Uh thanks for everyone watching us again, by the way. And uh uh make sure you subscribe to the channel and hit the like button. Um yeah, so yesterday the Fed raised interest rates, 25 basis points, which was heavily priced in by the market beforehand. It was like 90% odds priced into Fed funds futures and the sofa curve showed up.

SPEAKER_00 1:57

92 and a half, it was.

SPEAKER_01 1:59

Yeah. Um and you know, historically, when pricing is that lopsided, the Fed doesn't surprise the market on a regularly scheduled FOMC. You know, unless

Why The Fed Hikes 25 bps

SPEAKER_01 2:10

it's some kind of emergency meeting and the market's not expecting a thing, that's when you get the surprise. But in a situation like yesterday, you pretty much just go with what the overwhelming majority of pricing is, and it was not a coin flip. And so they did what the market expected. Um and I I I think, you know, my gauge, I interact with a lot of people uh in finance through Twitter, and I think you know, my read was that people had become a little uh I guess frustrated is the word with Warsh the first two meetings, June and July, because he said a lot of fancy words while conveying absolutely nothing. I mean he's basically just a windbag. And um he, you know, he he wants to get away from forward guidance, he wants the Fed to be more boring, but by saying so little, what he's done is he's now he's just left it up to the market to decide, and it's actually become very interesting. And like yesterday was one of the more interesting FOMCs in quite a while, maybe since the since the the the previous hiking cycle with Powell a couple years ago. Um and you know, I I don't really know if their lack of forward guidance is working, but the real controversy, and maybe we can get into it, is whether they should have done that at all, whether they should have followed the market at all. I think there were some people calling for them to do nothing. There was a couple of people calling for them to actually cut rates, which uh I would have strongly disagreed with. Um but regardless, uh, we it seems like they've teed up uh potential future hikes. When you look at the dot plots which came out yesterday, they come out every quarter, um, that shows the projections of where the Fed as a group, each individual member is asked where they think rates are going to go and growth and unemployment. And then they put them all together and it's called a dot plot. And most of the members had penciled in another hike by the end of the year. And then it kind of stops and it kind of goes steady for a couple of years and then comes back down. And of course, magically in that couple of years, inflation falls by two percent and growth stays strong and unemployment stays flat and everything's great.

SPEAKER_00 4:13

And so right now, you know, so two years, that's that's really interesting timing, isn't it? Two years from now. What happens in two years from now?

SPEAKER_01 4:23

Well, I mean, that's funny, but y yeah, the president changes, but but what's kind of funny is like two percent and f if you if you're a follower of Fed dot plots, like I am, I have a table where I've recorded the results of every SCP since Janet Yellen. And two percent inflation, ever since COVID at least, two percent inflation is always two years away on the dot plots. It's never right around the bend. If you look at the projections, it's always like, oh, we're gonna do some stuff, and year after next, everything will be great. In 2024, it was 2026. In 2025, it was 2027, now it's 2028. So take it for what it's worth. You know, it's not a projection. It kind of gives you an idea what they think's gonna happen, and then you judge reality against that to get an idea of what they're gonna do.

SPEAKER_00 5:11

But but on that point, right, like there's been some externalities, as we like to talk about in economics, that have occurred that have kind of strung out inflation, if you will, right? Like there was inflation related to the tariffs that the you know, terror Trump's big tariffs. Um obviously they've they've come and gone under various iterations, depending on what law gets thrown out at the time or is rutal into constitutional. Uh, but then obviously this this Iran war is what's driving it's a supply shock. This is supply-side inflation. Um, and and and it's gonna be persistent because a lot of destroyed infrastructure, and you compile that, and it's a because it's a world market commodity, you compile that with all the infrastructure destroyed in in in Russia uh through throughout the Middle East. Uh much of Iran's oil is not getting out. If it's getting out, it's getting to China. Uh, but even they I don't think are getting quite enough. So I mean I I think while it is funny and interesting that you know inflation always seemed two years away, like I think that was probably a fair assessment given not given some other shock of some sort, whether that be a price shock with uh uh

Warsh’s Silence And Dot Plot Games

SPEAKER_00 6:20

tariffs or a um supply shock like with oil. So I mean Yeah. Yeah. I guess I guess that's all I'm saying is like that that might be point, not to defend them for constantly having a two-year projection for the inflation going down. I feel like as far as they can tell, unless somebody does something they have no control over, here's what we think is gonna happen. But we've had a lot of things like that are externalities that just impact price level.

SPEAKER_01 6:47

Yeah, and you know, I think also the fact that the Fed has their own personal target of 2%, it kind of biases them to always want to project confidence that they're gonna get the job done. And it might not happen immediately, so it just kind of becomes this biased built-in buffer of 18 months to two years or something. Um and so like I kind of it's that numb that figure, that time period is kind of institutionalized, especially when you consider that the Fed officials are always talking about the lags of monetary policy, how you know when they do something, it usually takes a year to 18 months to even start showing up in the economy. So like some of that stuff is kind of, I think, built into the way these people think about how what they do and how it affects the economy. Uh, but I it's hard for me to ever look at it and go, yeah, I think that's reasonable. You know, like I think that's what's going to happen because they all they also never project recessions. Like it's always positive growth, okay unemployment, you know. It's it's never it's never really accounting for real-world conditions.

SPEAKER_00 7:46

Yeah, it always seems like they're confounded whenever whenever we have a recession, like, oh what happened? I have no idea. Well now in retrospect, we know what actually happened.

SPEAKER_01 7:55

Yeah, and in like in a way, it kind of is similar to um the point that I'm making about how they never project horrible things happening. The the Congressional Budget Office, you know, they're always putting out the long-term projections for the budget, for interest expense, and all that kind of stuff. And they never factor in recessions to their projections. It's always baseline what's currently in law and we know is going to be spent, like just linearly projected into the future. And so anything that happens that's unexpected fucks up their projections and they have to do it all over again. Uh and so it's kind of like that. Um, to to the price shock, to the oil shock thing, you know, I I think this is probably the Yeah, this is probably the more interesting, I think, piece of the Fed conversation is like, are they hiking into an into a supply shock, an energy shock? Yeah, historic.

SPEAKER_00 8:41

Let's put it into the whether or not they should have done this conversation. Right. Uh uh So talk to me about your perspective on this.

SPEAKER_01 8:48

Yeah, so like they historically don't hike into energy shocks. And there's a lot of like Fed literature around how they probably don't want to do those things. Um I understand that. But I also think that there is more currently going on than just an energy shock. And I think that that is partly why the Fed bond market, right?

SPEAKER_00 9:12

I think the bond market bullied it.

SPEAKER_01 9:14

I I feel like they couldn't just look through it because there's a few other things. So like PCE, core PCE is at like 3.3%, and it has popped back up uh from where it was, it was lower about 6%.

SPEAKER_00 9:26

And what's PCE, just so you know, for the people in the cheap seats?

SPEAKER_01 9:29

Personal consumption. It's the the the prices of things people are paying. There's there's two measures of inflation. There's CPI, which is the prices, and PCE, which is people buying the things, and then they turn it into a price index. So like they're kind of two measures of the economy. Uh CPI tells you price changes, but doesn't tell you whether people are paying those prices.

SPEAKER_00 9:48

Of a basket of goods, right? Of a basket of goods. Yeah.

SPEAKER_01 9:51

PCE is people paying those prices. And that's up 3.3%. And then also if you look at wage growth, uh there's there's some weird stuff going on in there with the healthcare, but if you take that out, wage growth has gone up in every sector except healthcare. If you look at the Bank of America data, which is the third thing I'll mention and I'll land the plane, uh, Bank of America puts out this thing called the consumer checkpoint, and they do it every month. And I looked at it. You sent me this. And they show they have charts because they they have they have deep micro struct micro data on card spending and like household demographics. And so they not cards like credit, debit cards. And so they they show wage growth by income cohort. And since 2025, 2026 began, all income cohorts, including the lowest, are up like almost a full percentage point to 4% plus. The lowest income cohorts are growing faster than the other two. And so like those things suggest that the economy has more strength in it than just looking at low growth in the labor market, which might have other reasons why it's low, you know, like supply.

SPEAKER_00 10:58

Yeah. Yeah. So I think that's where I come down, right? And so my my day job is working in, you know, white-collar recruitment. And I m this is where I struggle because TXMC is right about the uh the the the data. It absolutely says that we should cut, paired with the bond market thrashing us into cutting. Anecdotally, I just don't see a healthy employment market, especially for white-collar workers. And that I and maybe that's some of my bias, my recency bias of where a lot of the economic drivers came from, you know, say the 20 teens was was the upper middle class, white-collar workers spending a lot of money. Unemployment was maybe a little higher on and lower incomes. And I think that's probably changed to a degree since COVID. Um, and I think for for a number of reasons. I think they got wage growth during COVID that was years in the making or long overdue, right? I mean, yeah. There's states like like like Texas that still have a 725 minimum wage, but I think the lowest wage I've seen in any job advert here in, you know, where I live in Texas is maybe $14 or $15 an hour, right? So i we're not we're not you know flopping off the bottom with with that type of stuff anymore.

unknown 12:12

Right.

SPEAKER_00 12:13

So I think that helps. And and those people, it seems to be that the spending is coming from the lower income um and the more retiree class, call it 50 plus, um, who have money, have a lot of money in the market, have a lot of wealth, um, or or even in into retirement that are spending a lot more money on luxury goods and vacations and stuff than they used to. The the lower income spending more because they got wage growth makes

Hiking Into An Oil Supply Shock

SPEAKER_00 12:40

sense, right? So your your marginal propensity to consume for you know the bottom 50% of incomes is is is darn near 99%. Right. Obviously, so that number changes as you go as you move up that that you know the income ladder and people start to save a lot more or invest more, however you want to classify it. So I think that's I think that maybe it's just you know my bias of kind of living in that like below upper class, kind of white collar, middle middle upper class, middle class, kind of worker, that part is is in big trouble, right? There's some structurally unemployed people there. And I just know too many of those type of people where I I think the labor market's unhealthy. And then here's the other thing what I find interesting, and not to insult anybody, but in years past, when when employment, you know, typical employment, the people who were unemployed and available very often were kind of marginally qualified for the jobs they were trying to get or not as skilled. There was some lacking. The level of talent of people and quality of people that I'm seeing like three, six, nine, twelve months unemployed is is higher than any I've I've ever seen. I mean, there's some really smart, talented people cannot get jobs. And so it just it doesn't, it's a vibe session, I guess, if you will. It just doesn't feel like we're we're living in a growing economy. Um in my 41 years, I've I've I've never felt an economy like this where all the data says it's healthy and fine. And I'm like, no, it's not.

SPEAKER_01 14:15

Yeah, I think, you know, I think some of your points are very valid, uh especially about the the white-collar destruction uh in the labor market. Um because it it it is it's like a higher skill tech worker that's having trouble finding work. It's not the blue-collar guy necessarily. You know, there we actually need some of those people. If you like read the if you read the PMI surveys about like the quality of labor and stuff, and like the small business survey, all of the complaints are we can't find the kind of quality labor we need for our work, for our like goods producing work. But in the services tech sectors, you know, there there are a lot of, like you said, very qualified people who are struggling to find jobs. And I think a lot of them don't file for unemployment necessarily, so they don't necessarily show up and claim they have a good severance package or whatever the fact is, and they just don't happen to show up uh in the employ unemployment stuff. Um But you know, I it's also it's just such a weird labor market because the labor supply is so low that it makes it hard for businesses to find in there where they are to find the workers that they need necessarily. Because if there's a larger supply, it's it's kind of easier to dig through that bucket and try to find someone to work for you. But if if the actual just general supply of labor is pretty low, then it makes it hard nationally aggregate in the aggregate for skills to be matched with open positions. And so that I think that's making it really difficult, the demographic situation and and some of the negative net migration policies of the admin are also not helping. Um that's really I think that's making it hard for us to, as a public, to like have a consensus opinion about the labor market, because it isn't the same demographic situation as like the mid-90s. You know, if we if we were back then, we would would probably know what the problem is. But but now we've got such low, such low labor force growth that it's it's kind of fucking with all of the figures. Like we have these really small changes in jobs month over month, but it's actually like it's an equilibrium. It's just a very thin equilibrium. And I think that makes it really hard for anyone to agree, like, yeah, things are good, things are bad. But from the from the Fed's perspective, to kind of tie it back to how we got on this topic, the Fed seems to think kind of like what I was saying, the labor market's in a bit of an equilibrium. And in just this year, hiring has ticked up from where it was last year, and unemployment has been coming down just a little bit, like a 1.1% or something. And so, in in some ways, the labor market is tightening. Now it's not like an amazingly tight labor market where we're seeing uh job openings exploding and wages going up, but it's like the beginnings of a slightly tighter labor market. And so they've kind of looked away from labor and they're focused on the inflation picture. And I think that's why they felt they had the cover to hike.

SPEAKER_00 17:08

I I mean, and I think you can make an argument for that. And and I can say anecdotally, I feel some of that, right? Like I is is i i one leading indicator generally for hiring is the the number of openings for recruitment positions. And I've definitely seen an uptick in my industry for for folks looking to hire. Um I I another thing um that I think is I I think two things happened. I think the the great resignation period where wages got bit up and everybody was switching jobs and buying new homes. Um, I feel like business has a lot of PTSD around that. Um and so then when it when it hard flopped back the other way where the you know employers really had more leverage, um they got a little taste of that again, which they hadn't had, honestly, probably since the 80s. And they don't want to give it up. And their hiring is like extremely picky, right? Like definitely work with clients who are looking to fill roles. Um, you know, especially in in in high tech, some you know, sometimes these are roles where you know they want all these things, and I'm like, well, there's 20 people in the country who do that. So what would you like to do? Well, we're gonna look for that 20 people. Oh, okay, great. Well, they all work at Fang, now what? You know what I mean? Like so, I I feel like I don't feel I feel like the the employers have yet to concede on their standards, and it and it definitely feels too like there's like an incumbency bias to hiring. People

Labor Data Versus White-Collar Reality

SPEAKER_00 18:40

who have jobs um want to protect their own jobs. And so I I I think they try to find this sweet spot of hiring somebody who can do the work, do it well enough, but maybe not be upward as mo up as much upward mobile as maybe they would hire you know somebody in the past, right? Because everything's growing fast, I can move up when they move up, type of thing. It it it feels to people more like a zero-sum game. And so when they they do hire, I think they're they kind of draw it out, they're real picky. They'd rather be overworked than unemployed. And so like I I think there's a problem there too. And and I think some of that is just people f are worried about AI taking their jobs, they have some PTSD from you know the last few years of the labor market just being stuck in quicksand. Um but on the lower end, to your point, like all this construction growth around data centers and whatnot is definitely gobbling up a lot of lower ink income labor, I want to say. It'll be interesting to see what happens because I kind of I kind of buck against this idea of some of some of the trade labor being you know lower skilled, it's highly skilled labor that doesn't get paid a lot. And so like I I think that's where I I kind of have an issue with these companies being like, oh, and you hear this in shipbuilding, you hear this in the defense industry, you hear this all kind of manufacturing. Uh, we can't find the people we need. Well, what they're really saying is we can't find people willing to do the work who are competent at a low enough wage, right? Because we need to pat our bottom line a lot more. And so, like, I I understand that.

SPEAKER_01 20:21

And their bottom line has been squeezed, right? Because costs of everything has gone up. So, like, margins have been squished for a lot of businesses, not not every one of them.

SPEAKER_00 20:30

Uh yes and no, right? That that a lot of that was counteracted with the tax breaks for for business uh and the big beautiful bill, right? Like, especially big businesses flush with cash. And and they've been flush with cash going back decades now. Going back to maybe 2010, these companies every year have more and more records. I would say up until recently, especially with with the Fang companies, you know, cash on hand, right? And net income was a lot higher than than it had been in the past. Margins were going up. Now with some of the capital investment, you know, a lot of these these fang companies are cash flow negative, which is another topic for another day, but uh also very interesting.

SPEAKER_01 21:15

Yeah, and you know, I mean, um, a lot of the reason they had great margins was because of increasing globalization, right? And that seems like we are going the other way now. Um, something I've wondered about, and it's been hard for me to find data on it, uh, but you can find kind of like anecdotal stories and articles and things, is um, you know, you were talking about when there was all that hiring coming out of COVID, when we shut the economy down and then reopened it and unemployment shot up. Um, and businesses were flush with cash, whole households were flush with cash. Workers had probably the highest amount of leverage relative to businesses that they've had in in our lifetimes at that in that like little two, three year window there. Um and I think what happened is potentially a lot of businesses uh overhired. And maybe because of optimism of the future that the things were going to continue, because it was a bit of a mania. There was literally a bubble in every asset, like Rolexes, Pokemon cards, everything, Bitcoin. And so it's a little different from the current market. It was more broad. But the I think businesses might have overhired, and then when you run into a r an inflationary regime right after that, where insurance costs have gone up a lot, like the cost of carrying an employee has gone up a lot, and certain sectors, certain industries have had their margins pressured because they can't raise prices as quickly as their costs are going up. I think that's messing with a lot of the health of the labor market because we're in a weird, we're in an inflationary regime. Like inflation is good for corporate profits, but it's not evenly distributed. You know, just the same way that inflationary pressures aren't evenly distributed on the prices of goods. You know, on a given month, certain things will go up, some things will go down. But if you zoom out, the direction of travel is clear. I think maybe some of that's going on in the in the labor market, and then maybe that's why most of the uh softness, or like you see a lot of the layoff announcements the last few years, it hasn't been enough to move national layoffs, but the they've come from tech sectors mostly, most of it. And so that's why I think maybe maybe they got a little over their skis and they had too many people doing not that important work.

SPEAKER_00 23:26

Yeah, I I can say it was probably worse than you think. Um, especially at the higher end, high-tech companies, larger ones, they they would use tactics what I would call talent capture. Right? They they would hire talented folks and let them sit on the bench because to the to their mind, if they don't do that, they're just gonna be competing against those people starting businesses or going to work for startups. And so they they just vacuumed up or hoovered up, you know, all of the tech talent. And it was to your point, it was not a lot, a lot of it was not productive. Um and so yes. I I I think a lot of the AI layoffs in big tech um were because of overhiring. And I knew they were overhiring.

SPEAKER_01 24:08

You said that on Twitter before. Yeah, I think so. I think uh AI is a convenient excuse, you know?

SPEAKER_00 24:13

Yep. Now, however, uh certain roles, especially software engineering, that big tech laid off a lot of folks, they've been quietly hiring those folks back. Um interesting. Yeah, yeah. Not not public. In fact, I've even seen uh job ads for uh recruiters at this company that they say, hey, we want a recruiter who used to work for us, and your whole job will be to recruit alumni back to us.

SPEAKER_01 24:36

Wow.

SPEAKER_00 24:36

I think it was like a Microsoft ad that I saw that with, but I've heard of that repeatedly at some of the other FANG companies. So i i we we're in a funky employment era. I mean, outside of uh outside of employment, it does sound like price level is going up, to your point, getting back to kind of raising the quarter point. And the bond market really was telling us what to do. And uh to your earlier point about, well, it's because Walsh isn't talking to us anymore. Yes, and um, you know, rumors were, and this is a widely shared rumor, that Walsh really just wanted to inflate our debt away, right? He was brought in to run the economy hot, inflate our debt away, and that was how we were gonna solve everything. So you know what's really funny is I can see his reticence and wanting to raise rates into that.

SPEAKER_01 25:21

Yeah. So Walsh is all is the second Fed chair that Trump has appointed. It's funny. So in 2017, uh Trump wanted lower rates. Uh he nominated Jerome Powell and Jerome Powell raised rates. Jerome Pow 2026, Trump wanted lower rates. He nominates Chairman Walsh. Warsh raises rates. It's he can't he can't what's the guy gotta do to get lower rates? Um so what I want to to bring it back to the Fed, I think I wanna I want to ask you, because you're you're right about the bond market. Just kind of touch on that. The bond market was basically telling the Fed, like, if you don't raise rates, we're gonna do it for you, and you're not gonna necessarily have as much control over it. Uh and so I I think in some ways, if when you're the central bank, not that they are necessarily

Overhiring, AI Layoffs, And Talent Hoarding

SPEAKER_01 26:10

always forced to do a thing in policy because of the market. A lot of times they a lot of times they just go with what the pricing is. And I I think that the bond market was telling them we expect you to raise rates, and if you don't, it's gonna be a major surprise to us. And I I think they didn't want to risk that. Uh, but my question to you is do you think it was a policy error and why if so?

SPEAKER_00 26:34

Man, I'm really on the fence on this. And and you and I argued in our tech string uh about this, and I was definitely more on the side of they shouldn't raise rates. The bond market piece is where I kind of start to see more of a need to raise rates, right? Like I I think there's more to the bond, you know, the 10-year treasury price. Um, I think a lot of that's based on they don't trust our government to repay its debt. And so the cost of borrowing just go up. That's that's how this all works. And fiscal is just out of control. Yeah, yeah. Fiscal is nuts. No taxes and spend like we're sailors, right?

SPEAKER_01 27:07

Like six percent deficits. Yeah.

SPEAKER_00 27:09

Yeah, yeah. It just it it doesn't work. It's bad on all fronts. So I mean, I I get that, but do I think it was a mistake? Man, I don't know because to your point that you started this whole conversation with is raising rates into supply shocks doesn't really work.

SPEAKER_01 27:23

I mean Right. Yeah, raising rates isn't gonna produce more oil. That's that's true. But I just structurally tighten financial conditions a little bit.

SPEAKER_00 27:32

It might, you know, it might so when you're raising when you're raising rates into inflation because uh of a very active consumer, you're only moving the the demand curve, right? The money supply kind of demand curve. What you're trying to do now um is okay, price level has changed, and you're trying to retract demand in order to meet price level. And and I I haven't seen that done effectively, right? Like, okay, so I what I think is my hypothesis is, and I don't have the math to prove this out, is the negative effect might be more than just linear, right? Like the the polling in order to pull back demand, we might have to really stall things out, right? In order to affect price level enough because it's supply shock. So there's a floor on this shit, and with something like oil, it affects the price of everything. Yeah, right? And so like if price effects of energy and uh you know all sorts of other things, and you know, there's a bunch of other policies that that make exasperate that problem, right? Like, you know, we're putting huge tariffs on solar panels coming in from China, and then at the end of the year, we're gonna put a price floor on solar panels that come in from China. We're gonna restrict the price per watt to 38 cents. It's currently 27 and a half cents, right? So, like there's all these like pushes against like energy there just in general, not just oil and you know, funding the transportation of our society, right? Living in Texas, oil and natural gas power most of our grid. And so uh there's other things to worry about there besides just you know filling up your car. Um, so I just think it's it's it's a big supply side problem. And I don't think trying to move demand back to like rebalance the price level is gonna work. Unless they get real nasty. And this is what we saw uh coming out of the last major oil shock, right? We'll call it you know 70s under under um Carter, right? Like they had to get real nasty in the early 80s with the interest rates in order to really repress demand in order to get the price levels back down. I I just I don't know. I I don't have a good answer here. I just know it it it doesn't feel like the right thing to do necessarily because of all of the softness in different parts of the labor market. I I also kind of think, and I don't want to dive into the AI thing too much, I really think that's a lot of that build out's gonna stall out in the next nine, six, nine months. I just don't think that people can raise capital in order to, you know, necessary to continue these data center build-outs, right? Like the cost of borrowing is going up a lot. Look at the credit, the the the price of the credit default swaps or Oracle's debt has like gone up tenfold in the last two years, right? So like people are starting to see a lot more default risk. Uh and they're a well-known company with a well-known revenue stream. Now, think about these AI data center-specific companies or these vehicles that the big companies spin up and they only own 49% and a bunch of it's owned by PE. Like, that's gonna be even harder to raise capital. And then there's this kind of like shadow debt that's out there that we don't really know if the big fang companies are underwriting it or if they're not underwriting it. Like, how is this being lent out? And so I just I I really feel like there's gonna be a uh a drawback in demand there too in the near future. So it just feels like maybe not the right time to like restrict the money supply. I don't know. Yeah. Does it make any sense to you? I went on for a long time there.

SPEAKER_01 31:16

No, I mean, I I think you're you are illustrating the fact that this is like extremely an extremely complicated environment and there is no clear answer. In 2022, it was obvious you guys got to raise rates. You know, they were actually too late. They waited until CPI was over Yeah, CPI was over eight percent in March when they started raising of 2022. Uh and so I I think but right now it's not so clear.

Bond Market Pressure And Fiscal Deficits

SPEAKER_01 31:40

Um and but you you know, the uh the level of PCE is is kind of like actually slightly above the median level of where all prior hiking cycles have begun, going back to like the the 70s. Um so you know, they're kind of within their historical kind of boundaries for when those things usually start, especially also if you look at the spread between the two-year and fed funds, it's gotten really wide. And the year usually the two year the two-year tends to lead Fed funds by a little bit. So I th there was a lot of market-based kind of suggestion that this is what you guys need to do. Um But no, it's not gonna produce more oil. Uh I I don't know that there's gonna be a I don't think we're gonna have a uh uh Warsh isn't gonna try to be Volcker. It was it was Jerome Powell's job to do a a a a soft imitation of Paul Volcker, and he kind of maybe stopped a little bit short of doing that. Um but also you know if you this isn't the 1980s anymore. Debt to GDP is four times what it was back then. So you you know, every time you raise interest rates by 25 basis points, you raise interest expense by, you know, hundreds of billions of dollars. Uh it's currently a trillion, right? So if we raised it by 0.2%, I I can't do the math, a couple hundred billion dollars of interest expense. And so that that all that does is just feeds right back into the asset owners and the holders of the majority of cash, right, who are the wealthy, who are the ones who are doing most of the consumption. So there is a risk that raising rates does absolutely nothing uh in terms of economic outcomes. But what it might do is build back a little bit of the Fed's credibility because the market was kind of running away a little bit from them, and everyone saw that. And so I think if they had done nothing or worse, if they had cut for some reason, if they had made an argument for that, there were a couple of people a couple months ago in the on the Fed that wanted to cut, um, I think that it could have been even worse. Yields could have gone even higher, and it would have been uh like a lack of credibility situation with the Fed and the bond market, and and they don't necessarily want that. I I don't think Warsh, a brand new Fed chair, wants to play with those forces. And so the if you look at what the market expected, the market didn't think they would get very far. Like if you look at the the the yield curve and you look at where the the the market is pricing out hikes and things like that, they didn't think there'd be more than two or three hikes. Uh the Fed, for its for its uh own purposes, just yesterday, they hiked once and they showed maybe one more later this year. So it's possible they don't get very far at all. Uh and something causes them to have to stop again or perhaps pause because maybe there is some weakness that does start coming through. If the oil shock, the supply shock because of the war gets worse, or if the labor market isn't actually tightening and it suddenly gets worse because it's hard for us to really know what's going on there. There's so many like weird little cross currents in the labor market. Uh so this is a this is a very fraught time. I do I would not want to be a central banker ever, but certainly not right now. This is probably the worst time to be one. Um But you know, I think I think we'll have to wait and see. I I I think by the end of the year they might have raised one more time. Um what's really funny is there are a lot of folks who assumed that because it was a midterm year and because the the president wanted lower rates, that the Fed wasn't gonna do anything.

Independence From Trump And Fed Credibility

SPEAKER_01 35:10

But they kind of squashed all of those people's worldviews. Everyone who thought Warsh was just gonna be a Trump cuck, everyone who thought there's no way the Fed's gonna hike in a midterm year, they just shattered all of that stuff, which I think is pretty funny. Uh so you know, well, at least there's a a feather in the cap of people who uh didn't think the Fed was a super political body to begin with. I think I think they showed a little bit of independence, uh, but whether it's a policy error, we won't know probably for uh maybe at least another year.

SPEAKER_00 35:39

Also, and uh you know it's a board of governors and it's a majority vote. And there's only so much. Yeah. Yeah, I know, but like he's not gonna be the one guy who shows a no vote on that. He because that would just ruin his own credibility.

SPEAKER_01 35:54

Aaron Powell Well, I think he withheld his vote. But it was but uh but maybe I was wrong. I think it was twelve well, there's is there twelve or thirteen of them. It was twelve nothing, whatever it was the vote was.

SPEAKER_00 36:04

Yeah, Trump said he gave him permission to you know go along with them.

SPEAKER_01 36:07

I think Trump just wants to be be seen as still having some influence rather than it looking like the Fed just said, fuck you.

SPEAKER_00 36:16

Yeah, I so I mean as it relates to Walsh, like I don't think Warsh, you're right. I keep calling him Walsh, and he's definitely Walsh.

SPEAKER_01 36:27

I I we are average armchair economists. We don't get people's name right.

SPEAKER_00 36:34

We are we are basic bitches here, all right? Right, right, right. This is not a fancy people podcast. Right, right. So I don't think Warsh um is as much of a a Trump cuck as you said, uh, you know, so eloquently as people thought he would be. I I think the bank and maybe this is me being a conspiracy theorist, but I think the banking class in this country, right, like the Wall Street class in this country, uh hold a lot of power and and and they understand the unique position the US Fed has in the world and how important its credibility is. Um, you know, money walks and bullshit talks, right? Like to a certain degree, I think they had some influence over who even gets nominated for those roles. Um I I I think you saw that again with Worsh, right? Like I nobody in recent memory that I know of who's been nominated to run the Fed, maybe in my lifetime, uh, was not highly qualified. Right? PhD in economics or, you know, similar, right? Similar level of experience. Uh so I I just I guess I have a little bit more faith in people's like own self-interest that they prevented Trump from doing, you know, whatever that he wants to do.

SPEAKER_01 37:50

Yeah, and I'm I'm frankly I'm glad because otherwise, you know, if the Fed had just kowtowed, then we would be in total uh third world banana republic kind of territory at the central bank. That's just not where you want to be.

SPEAKER_00 38:02

Argentina level money printing, right? Yeah.

SPEAKER_01 38:05

So should we move on? Yeah, I think we should. I think we I think we we wrung the stone dry on this one.

SPEAKER_00 38:12

Yeah.

Canada Flirts With The EU

SPEAKER_00 38:13

Let's move on to uh Canada being an associate member of the EU, or it looks like that's where things are headed. I think this will be fun. Yeah, it's funny. Um I because uh for a number of reasons. Politically, uh you know, Carney's so astute when it comes to like, okay, I mean, he's an economist, right? He ran the Bank of England, he ran the Bank of Canada, he's a smart guy, right? So it'd be like if Worsh was our president, right? Like he understands how international flows of capital and cash work. Um and he's also unwilling he knows what happens if he capitulates to Trump, so he's not going to do it. And so he's gonna find any outlet he can for Canadian goods. Um and I mean Canada to a degree is somewhat European tied because it's a Commonwealth country. I mean, I know it's technically not part of the UK anymore, right? But that's how Kearney was the, you know, the head of the Bank of England, right? Like was this whole like Commonwealth type type ideology. So there's still some European ties, but I I really just think this is a counter power move. Um and Trump has been largely been neutered with a lot of this, you know, tariff stuff, right? If if if if the Supreme Court would have upheld the terrorist tariff policies under the previous act that he was using, I doubt Canada does this, because then he would just throw in you know 150% tariffs in the EU and Canada and you know drove in their accounties even further into the ground. But uh they need they need an outlet for some of their goods, especially like lumber and some of these other things. I but I also think this is bad for them long term. Um the EU is kind of a mess. Uh and I I honestly don't think the EU lasts another 20 years. Oh, neither do I. I don't think they make it 10. Yeah. Yeah. I mean, I I would I was gonna say 10, but um I I kind of was giving myself a buffer. But i I mean, it the the dominant countries um are really losing out. I mean, there are a few countries in the EU that have grown a lot and continue to be strong. I mean, maybe Poland's one of them, uh, where their economy looks pretty healthy and has really come a long way. Uh Germany's stagnated. Uh France has stagnated. They have heavy France has a heavy debt load. I think theirs is even worse than ours. If I'm remembering that.

SPEAKER_01 40:29

They have the biggest bond. Yeah, they have the the biggest bond market in Europe.

SPEAKER_00 40:33

Yeah. I and the UK government, they're not part of the EU, but you know, they're definitely part of that whole section there. They're similar to the Germany and France.

SPEAKER_01 40:41

They've stagnated.

SPEAKER_00 40:43

Yeah. Yeah. Well, I mean, I think it's policy-based too, right? Like the best thing that could have happened is North America and the Europe teamed up to kind of create an economic bloc that was led by the big industrial countries in the EU and the United States to a degree. That's not gonna happen. Um So I I think this is Carney's best option, but like long-term, closing up more towards Europe might actually hurt him. If if if if Canada and the United States stay hostile towards each other, which this is gonna this is gonna complicate things, right? If we get a more reasonable Republican or Democrat on either side who wants to come in and who leaves a little bit more in a sane train practice, um, I I think it it's gonna make renegotiating any type of NAFTA type agreement with with Canada and Mexico really difficult. Um, so I don't I don't know how that works, right? Because now they have all this bureaucratic overhead with being an associate member of the EU and they're gonna have to consult with them. And they those those countries can't agree on anything. Right? Like they yeah. You look at like the Ukraine war, they all wanted to confiscate Russia's assets, and you know, Belgium was the only one who didn't because it was souls sitting in their banks. Like you can debate the merits of whether or not that should or should not happen, but like there's an example of what is it, 33 to 1 on that, and so nothing happens. Like that's the problem with the EU, is one member kind of stymies everything.

SPEAKER_01 42:07

Right. I mean, I think uh I think I read that for them to be given any kind of special treatment, they would need a unanimous vote from all the EU countries. Uh I might be I might have that wrong. Someone say in the comments if you're listening and you think that's wrong, let me know. Um I think uh this would be difficult. It kind of depends on how far this goes. Like right now, it it's uh we're upset with the US because they're being disrespectful and mean, and so we want to be better friends. Oh, okay. What does that really mean? Because you're both trade surplus economies currently. And so who's gonna buy more from the other person? Because you both need more of your trade, you need your trade partners to buy more from you than you buy from them, or unless unless you want to start running persistent trade deficits. And I mean you can do that, but then that comes out in the wash somewhere else in the economy, right? Like reduced trade competitiveness or something, something else, erosion of your industrial base in the midst of you trying to rebuild your industrial base. So is that really what you want? And so I think that this this becomes pretty complicated pretty quick, depending on how far they want to take this. Like even just kind of putting Trump's ridiculous rhetoric aside, I do think he's made this worse. Uh he's made it more difficult. But where I think some people have it wrong is in thinking that this is all because of Trump. I actually think that some of the U.S.'s goals here supersede administration, and that whatever whoever the president is, whoever whoever the admin is at the time, they kind of coat the agenda with their own discourse, and that can kind of shade things. But the underlying direction of travel, I think, is kind of set in stone. And the general idea is we need to rebuild our own industrial bases. We want to move our supply chains into friendlier jurisdictions, reduce dependence on China. That's the goal of the U.S. And that's what they want their trade partners to do, because if the if the U.S. I think we talked about this a couple episodes ago. If the US is the only one who tries to block China out, then all of China's excesses, their trade surplus, just spills into all the other economies and starts disrupting that.

unknown 44:11

Right.

SPEAKER_01 44:12

And so Europe doesn't want that to happen. Canada doesn't want that to happen. The US is trying to get them maybe in a more forceful way than will be productive. They're trying to use their market access as leverage to force their allies to listen in like the quickest way possible. And it's not necessarily bearing fruit. The political pressure for Kearney is to do what he's doing, which is to say, fuck you, America. I'm going to go talk to EU. But unfortunately, we come back to the math of trade balances, which is which one of you is going to run the corresponding deficit to absorb the other's surplus. That is the role the United States has been playing for 50 fucking years, and it's gotten

Trade Surpluses And The Reality Check

SPEAKER_01 44:50

strong larger and larger, in part because of China. China has exploited that system masterfully. But it's also allowed everyone else to run a surplus. Australia as well. Australia's now talking about maybe we'll become better friends with the EU. Okay, which one of you is gonna be the one that starts running the net deficit if you if this goes to the extreme end of the track and you try to like uh di disentangle yourself from the US? Because I think the Go ahead, go ahead. I'll come back to my points in a second.

SPEAKER_00 45:23

Yeah, I think one thing that that's kind of important that's a that's missing that we haven't mentioned so far is like why was the EU, why was NAFTA created, right? It's because of proximity, right? Like it is a lot cheaper for them to send semis over the border than it is to pack container ships full of shit that run bunker crude at ungodly levels of burn across an ocean. So uh there's a the same Australia, you're gonna train with the EU great. You you're what nine, ten, twelve, fifteen nautical miles, thousand nautical miles away from Europe? Like how how's that gonna work? You're not gonna be price competitive. Yeah, we're we're where Australia may may have an advantage over even Canada may well maybe not to a degree, but I know they have a lot of like mineral wealth in Australia that can be exported, iron ore, that kind of thing.

SPEAKER_01 46:12

And I guess it's it's a different mineral profile than Canada, right? They but they both have things. Yeah.

SPEAKER_00 46:17

Yeah. Canada's got things like lumber, right? Like, well, the EU probably can use some of that. But and they have crude. Yeah, the cost of that lumber is gonna go way up, right? You know, a lot of me being a woodworker as my hobby, I know a lot of uh a lot of like Baltic birch, right? So that's northern Europe, Russia. Yeah, yeah, wood nerd. Um a lot of that supply has been interrupted, right? Especially it's that's not coming from Russia anymore. We're not trading with them. So now you're looking, you know, Finland, Scandinavia versus that Baltic birch. So uh obviously that doesn't grow necessarily in Canada, but uh similar species grow there where they can export that that might fulfill that need. But it's gonna be more expensive because it's a lot further fucking away.

SPEAKER_01 47:01

Yeah, I think that's the decision. Like, you know, just using Canada as the example, uh, the decision that they're now gonna have to be have to make. Like right now, like I said, we're still in the early stages and it's just kind of the kumbaya phase. When rubber meets the road is when you decide economically that you're willing to pay a premium for things just because you don't like what the U.S. is demanding of you. And and maybe you want to make subpar economic decisions out of pride. Well, like that works for a little while. You know, maybe that that might answer some political pressure, but reality comes later and it doesn't care about pride, right? And I think that that is where things start really getting interesting, is like you have all of these par countries in the EU, uh, Japan, Australia, Canada, who want to rebuild their industrial bases, but they want to do less trade with the person who's absorbing their surpluses, that doesn't make a lot of sense. Uh and so I I think also we talk about defense manufacturers, just kind of bring this into the conversation. Uh the US exports like half of the world's arms manufacturers. And so if you're in a in a increasing great power competition, you know, between the world's largest powers, and you're gonna be forced to choose sides, you're gonna probably need to spend a lot on defense. And especially if you just listen to the rhetoric out of NATO, their goal is to spend a lot more on defense. Most of those people buy it from the United States. They're not gonna be able to just suddenly stop doing that. There isn't another producer willing to just come in and suddenly fill in 40% of the world's exports, which uh defense exports, which the U.S. owns. Like, for example, 85% of Australia's defense purchases come from the United States. So, like, when we talk about we're gonna divorce from the US, which is the narrative, not necessarily out of the countries,

Proximity Beats Politics In Trade

SPEAKER_01 48:50

but the narrative of the public watching these things happen, like we kind of have to remember that there's a symbiotic relationship that's been built in the current world order. And if you're gonna start, if you're gonna unplug the US from your economy, so to speak, you kind of have to find some some way to reproduce them in the aggregate, unless you intend to dramatically reshape your own economy in ways that it hasn't before. And I don't know if the politics everywhere will support that.

SPEAKER_00 49:16

Yeah, uh here's where I might disagree with you a little bit, because there are countries that were beefing up their defense production capacity um even before you know the big impetus with the Ukraine war started, right? So there's a couple points here. South Korea has been really leveling up their dev defense production, right? So uh look at look at like a country like Poland. They they they bought F-35s, uh, they bought Abrams tanks, um but that Abrams tanks purchase was 100 to 75 tanks, and then they turn around and bought 500 tanks from from South Korea, right? So there there are other outlets, and there's there's um you know Rheimatol in Germany, which is starting to produce weapons uh to the quality of that we've had in the past. I think we had a major advantage in quality through the 90s and 2000s, and it maybe even this existed, you know, in 2015. Uh the Ukraine war has made a lot of what's in our current stockpile pretty irrelevant, right? Like drone warfare, like on the ground, and I'm talking about first-person, you know, FPV drones, that type of thing, inexpensive drones, have rendered most of our armor obsolete. Um and maybe only relevant in like high maneuver warfare, like high-pace maneuver warfare, certainly not relevant to anything that's going on in Ukraine right now, which is you know, World War I level trench warfare to a large degree. And so I I I think there are other countries that are are absorbing some of that. Um and and those are just the two of the examples, right? So Sweden, they also make fighter jets. Um countries are starting to buy from them. Um there's the Rafals that people are buying that are supposedly good. I don't think when it comes to fighter jets, nobody makes a better fighter jet than the United States. Our fifth generation fighters and even our fourth generation fighters are are better than anybody's. Um we don't know much about China because they've never been battle tested. Uh although we know that the air-to-air missiles that China have at least outrange our old air-to-air missiles, right? We saw that. Yeah. Or or at least the air-to-air missiles that we've got.

SPEAKER_01 51:24

I think Russia has one too. Doesn't Russia have one that outranges us? I thought I saw something about that.

SPEAKER_00 51:28

No, see, that's the problem with Russia. Like everybody was scared of like the Su-57 fighter that was supposedly stealth and it's not stealth at all. A lot of their weapons just kind of turned out to be a lot of bluster. China's were crappy, crappy, crappy for years. However, in that brief little conflict with India and Pakistan, um, Pakistan using Chinese, because they're they're one of the

Defense Supply Chains And New Suppliers

SPEAKER_00 51:50

first importers of Chinese weapons. And like the 2010s and 2015s, they were getting just crap from them. That was just breaking constantly. But in this most recent conflict, their air-air missiles outranged the Indians. And that's why they shot down a number of Rafals uh into India because they they completely outranged them and surprised the shit out of us. The United States responded by producing new missiles in even even longer range, right? Air-to-air missiles. But my point is that China's catching up there as well. And so you're gonna see them, I think, take over Russia's spot, um, providing arms to well, everybody who wants them.

SPEAKER_01 52:26

I think that's interesting. And I, you know, I I think I agree that you know, given given time, the US can use leverage, like the the leverage it's trying to use, which is access to its economy and its consumer base and things like that, uh, access to its technologies. I think it can use those as leverage up to a point. But the but the more aggressively they try to use that leverage, the greater the opp the they raise the relative return of countries investing in alternative capacities. Right. And so like there's kind of like a window of time where the US can really lean on its part its trade partners and allies and use its hegemony to like kind of try to try to force an outcome. I'm not saying that what the U.S. is doing is going to work, but I think that they have a window of time where they can try to press and try to create a new version of the world order from what we've had for the last few couple of decades. Um and it's unclear whether they will be successful, uh, but I think the the hardest part will be countries replacing the consumer wealth of the United States, right? Because Canada's exports are 70% of their just to kind of take take to pull back from the weapons talk a little bit, the Canada's 70% of their goods exports go to the United States and it's 20% of their GDP. And so, like, uh you know, if you say, well, we're not gonna do trade with you, okay. You just created the Great Depression in your economy, like if we just kind of take it to its logical extreme. So it's not that's not going to happen. Trevor Burrus, Jr. U.S. and Canada are not gonna stop trading with each other. U.S. and EU are not gonna stop trading with each other, regardless of what Orange Man said this morning, uh, who has he has no understanding of trade balances, by the way. He thinks a trade deficit is a loss, is theft. It's crazy. I'm running a trade deficit with my grocery store, by the way. It's crazy. Yeah.

SPEAKER_00 54:21

HEP is stealing all the all of all from all of us. Right. I run, yeah.

SPEAKER_01 54:25

I have a trade deficit with my barber, I have a trade deficit with my car insurance company. I'm just getting fucked everywhere. Uh but the uh when's the last time my car insurance company bought something from me? Uh but you know, I do think it's funny, like the this con the Canada EU thing is a little funny to me because the reason that they've gone this way and talked to the EU about becoming an associate member, which doesn't exist yet, they'd have to create whatever that means, is because the U.S. was trampling on their sovereignty. So their decision was to cozy up to a supranational body that is known for taking away the sovereignty of its members. And so if it, you know, it it that's kind of funny. And so if if if the EU realizes what I said earlier about the bal imbalances of China spilling into other economies, like if the U.S. kind of tightens the screws on tariffs with China, uh, and they decide to increase their protectionism and their anti-dumping measures and whatever else they want to do against China, will they make Canada comply? Will Canada comply? Will that be a provision in their agreement as being an associate member of the EU? And if so, how is that any better for Canadian sovereignty than what the US is currently telling them to do? So I don't really understand. That's why I feel like this is a prideful reaction rather than necessarily a logical one. It's kind of like a kid getting mad at their parents and running away, throwing a banana and a sandwich in their backpack and running away, and they get to the end of the block and realize the streets are dangerous and they only have a sandwich and a banana, and they go back home. And so like I I think maybe we're in that phase. I know that's maybe that's insulting to Canada. I mean I'm trying to be funny, but that's that's the way I'm thinking about it is that you're not going to be able to divorce your partner to the South because, like you said, like the the most efficient way for you to rebuild your industrial base is to integrate with the North American partners who literally share a border with you and to have a unified chain in this continent. That's the way to do it. And I think they will eventually come around. It might just take a different president from the U.S.

SPEAKER_00 56:36

Well, I and and also to your point about you know trade with China and

Europe’s Energy Trap And China Dependence

SPEAKER_00 56:40

the EU, and this kind of be my last point before we wrap up. Um I I don't know if the EU actually has the stomach to get aggressive with China. They they talk tough sometimes, but when the rubber meets the road, like they have all of these problems. Well, I mean, look at let's look at energy, right? Like okay, they're you know, they close all their nuclear plants down, which was stupid, right? Like that was clear political pressure based on ignorance, right? Like dumb. Dumb dumb dumb. All right, so now we're gonna buy natural gas from Russia. Almost as dumb, right? Like they're really bad at like making strategic decisions, right? And then from there, okay, well, now we have this energy problem where we can't buy natural gas from Russia anymore. Now, like solar panels like are ubiquitous across Europe, or especially in the industrialized countries like Germany, and they're all coming from China. So they they have this problem where like they need to buy solar panels for China because they have energy issues. There's the the the amount of solar that's come online in Germany has been so much recently that during some of the days they have excess capacity of energy in the grid because everybody's got flipping solar around their house now. And so like storage capacity and those type of things, you know, grid level surge capacity might be important for them, but they just they literally can't get they won't survive without China. And so by the time they fix those problems, right, their industrial base is completely gone. And now what? They have no leverage. That's that's what the e the UK is living, right? Like they have no industrial capacity left anymore. A few years ago, I forget if it was a Japanese company or a Chinese company, owned like the last steel mill in the UK and like literally like pulled out, and the UK government like rushed in and got a few workers there and and turned these forges back on. So just so you know, if these forges ever cool down, they're unusable again. And these are like expensive pieces of infrastructure. So they they saved the one major steel mill in their country. Um, and and that's it. That's all that's left. I mean, uh I again tool nerd, right? So, you know, Sheffield Steel, right? English steel was tool steel has been used to be famous, you know, worldwide. I mean, the US steel obviously was too. So like that's a perfect example of just no industrial capacity. It's the same thing with their defense industry, which has no industrial capacity, their shipbuilding has no industrial capacity, they have no ability to generate you know actual wealth anywhere. And for a while they were kind of the banking capital of the world because they let you know foreign rich folks live there for free, basically, without taxation. The most recent government changed that and they all left. A lot of these people went to Dubai. Obviously, that's probably not as safe as it used to be. So people are maybe not the greatest place to go. Yeah. Yeah. So they you know, they they they were trying to raise more tax revenue by taxing these people, which I can completely get on board with. They ended up with a smaller tax base in general. So these people were spending less money in their country, and it was actually net negative on their economy. So it might have might have could have been handled a little better, right? You know, capital flows are easy. But I just don't think that the EU can do what's good for itself. And so in the end, this ends with us all North America, the EU, all and you know, the westernized Asian countries like South Korea and Japan and Taiwan all singing kumbaya um and and and ganging up against China. Right? I don't and and it's and it's isolated. That's where this ends. If we want to bluster until that

The Emerging Blocs And Where Allies Land

SPEAKER_00 1:00:10

happens, like it's just wasting everybody's fucking time.

SPEAKER_01 1:00:13

Dude, I that last thing you said is literally the cherry on top of my worldview currently, is that there's a currently we're doing we're doing a bunch of dick chasing and just a bunch of dancing around sexual pointing. Measuring. Yeah. And you know, Canada's the they they're feeling prideful, they're feeling insulted, they don't like the rhetoric coming out of their longest standing ally. Like I totally get it. Um maybe not their longest ally, but their closest ally in the United States. They don't like it. They don't like what's coming out of them, and they're they're having political reactions to those things. But like I like I said earlier, I think eventually reality meet rubber meets the road. Uh everyone's going to realize that you know what the U.S. has been trying to go trying to create, or what I think they're trying to create, is either uh you could think of it as a tariff wall against China or a customs union or an economic security block, something that is a dollar-friendly block and then a dollar belligerent block. And uh in the dollar belligerent block is China, Iran, North Korea, maybe Russia, maybe not. Parts of Africa, parts of South America. Right. And so and then everybody else, and currently the G7 at least, is gonna be in the dollar-friendly block. And it's just they're gonna have to come around to those things. And maybe it takes a different president, but I think the the agenda will stay the same by the U.S. And I think it has to, because China has grown so large, their relative competitiveness against the U versus the United States is the gap is closed so much that the old system just no longer works for the United States. It is no longer in their strategic interest, and they have to change things. And so that is why we're seeing all of this stuff. It's why we're seeing all this economic statecraft, it's why we're seeing all this mercantilism. And I think it's just gonna continue to get worse uh until it gets better. And, you know, eventually we might get to the outcome you and I are talking about, where they all kind of agree, okay, we have to work together because if only one of us does this, then everyone else is just gets fucked by can't because China's not gonna change their economic model necessarily. They they this is the model they're married to. They don't want to give household demand too much of a role in the economy because then they don't have control over the allocation of capital. And so they've they they've been pissing on this idea for like 10 years now. Oh, we're gonna we're gonna increase household demand. No, they just keep investing more and more in capacity because it's all they've got. And I don't think that's gonna change. So the West has to respond. And right now, I think the US sees that because they're at the center. But the EU and the Canada and the other middle powers, that I think they're trying to like figure out where they fit in this new system. And I think ultimately they fit underneath the U.S. umbrella again. It's just that they may be more responsible for their own regional defense, and they might be slightly more responsible for certain aspects of the industrial supply chain than they have been. And it's just about figuring that shit out over the next five, 10 years.

SPEAKER_00 1:03:16

All

Comments, Requests, And Closing

SPEAKER_00 1:03:17

right. Well, thanks so much, uh, TXMC. Great chat today. Um, we'll be trying to do this again next week on whatever is relevant at the time. We usually figure out these topics a couple hours before we chat. If there's anybody still listening who has got something they want us to talk about, put it in the comments. Uh we did see a few comments last week. Uh so we're seeing a number of you starting to participate a little bit more. Um, so we like that. Uh and on that note, I think I'll end things here today. Uh TXMC was good chatting, and we'll see you next time.

SPEAKER_01 1:03:47

Yeah, Brett. Uh Brett, it was great chatting with you, man. Uh, thanks for everyone who's still listening. Make sure you subscribe to the channel, hit the like button, share it with anyone you think would find it interesting, and uh, we'll talk to you guys next week.