Global Economic Forces: Debt, Technology, and Geopolitical Risks Explained

Ray, thank you so much for joining. >> It's a treat. >> And look, you've been doing a lot of

work. You've been busy with these five forces that have been shaping the global economy. Just to quickly go through

them. Money and debt, internal order and disorder, power conflict, acts of nature,

um and technology. I want to start on that first one though, cuz it's a point that you've made globally but here in

the US. $7 trillion in spending but only $5 trillion in revenue. Ray, are we already past the

point of no return? That the fact we have this dynamic means that some sort of crisis is inevitable?

>> Um yes, we're we're past the point of no return, meaning uh when debt service payments

squeeze out spending like plaque in the circulatory squeezes out the flow of uh money, the flow of

blood, it's the same kind of thing. Could be measured. So, we're seeing that happen. And then there's a supply and a

demand issue. The supply of um one budget deficit means that debt has to be sold and you have a supply-demand issue.

And we could see it happening in the bond market. We could see that bonds have been a bad investment and that

there's pressure in interest rates and there's borrowing. And that's [clears throat] one of the

five factors as you're saying. But that dynamic is happening. People are treating it

>> [snorts] >> uh like um if it had hasn't happened before. They

don't understand that like plaque in the arteries that it builds up and they have that exposure. So, I think when you're

looking, I think of a particularly vulnerable period is um after the midterm elections and before the um

presidential election um because uh as we connect these forces, we have um that issue, the debt

issue. And we also are going to have a great deal of political conflict. That has implications for taxes, it has

implications for all sorts of things. >> does history tell us that this looks like when we get closer to that point?

Is it yields reaching a certain level? Is it failed auctions? What would you look for to say the time is here, the

bond temper tantrum is is finally occurring? >> Well,

>> [clears throat] >> it could be seen, excuse me, in either the bond market that the market action.

It's a buy long rates rising relative to short rates. In other words, they're trying to hold the short rates down

and [clears throat] the long rates are rising and long rates are rising. >> And you're then you're seeing the

weakening then of the dollar. And and then you're seeing movement such as in gold and other assets. And when you see

that rise in rates, then that starts to affect the stock market because what's happened now is that with bonds going

down and stocks going up, the prospective returns now of stocks are now down low relative to

the prospective returns of bonds. And so that upward pressure then starts to translate into a stock market pressure.

That is the classic dynamic and something that the Federal Reserve then or any central bank is in a position of

not easily being able to manage because it becomes more of a stagflationary environment. So, the stagflation that

we're seeing right now, the Fed wrestles with the question if it's tightening or if it's easing. That also has

>> [clears throat] >> in a economy where there is such a wealth disparity, but also think about

the implications of whether you own stocks or whether you don't own stocks and that difference. That impact is is

very different. That has huge political implications. So, that's where that period

>> Cuz this is an administration that has been very explicit in its desire for cuts. And this is part of the reason

that Kevin Warsh is now our Fed chair, who of course has said, "I am independent." Do you think throughout

history there's often been bond markets that test a Federal Reserve chair? Is Kevin Warsh about to get a big test?

>> Of Of course. Um one man's debts are another man's assets.

Okay. And if there's not a high enough real return, then those bonds

are not appreciated. Okay. So, what are you holding the bond for? You're holding it

for a real return. So, the markets ultimately the the marketplace can ultimately decide whether it owns it or

not, right? >> think we head to the 1930s again where it's a Treasury that works with the Fed?

That some of that independence is kind of chipped away out of necessity to keep debt servicing costs low, for example.

>> That's That's that I think it's exactly headed to that kind of thing, which we also saw a number of times through

quantitative easing. It's called financial repression, and the idea is that you drive the bond yields down with

buying of assets and so on. Sometimes it includes even foreign exchange controls to try to prevent money from going

outside um the country and and so on. But to have that forced low real rates, and

then that's usually accompanied by high taxation and a higher level of inflation to bring in revenue. And because money

um wants to go to other things, that's when gold has been illegalized, that's when uh foreign exchange controls come

in and so on and so forth. I'm not saying we're going that far, but I do think the reality is yes, that the bond

market um either is fundamentally good by providing a high enough real return to compensate people, or it's going to

be manipulated in a sense this way that will make it unattractive. In either case, it's relatively unattractive. And

so money goes elsewhere, and you know, that's just the way it works. >> You've also been very forward and very

early saying that the Strait of Hormuz is an issue for the US. And people follow on and said that. And now it

feels like we're ignoring it. I know you've compared this to the Suez crisis in 1956.

Are we heading toward a similar environment where we become Britain? Where if we can't control the Strait of

Hormuz, that is something that could also cause a crisis of confidence in the US and US financial markets ultimately?

>> um, what what we're seeing now, indisputably, and I'm I travel around the world and I speak with world

leaders. I was just a month in Asia, and 10 days in China and so on. And what we're seeing around the world is the,

um, question of will the United States, can the United States, fight a war in defense or an offsetting,

uh, set of pressures uh, of other powers, particularly China. And in Asia right now,

uh, all the leaders I spoke with would say, um, we we it's clear that the United States cannot fight a war because

the population doesn't want the cost of living impact, that they don't want, um, people to die, they don't want they want

it to be over fast. Okay. And also the country can't be overextended. How can it fight a war in the Middle East and

fight a war there? It's getting overextended. Well, that fact, that realization,

is having very big geopolitical implications for those who expect because it was a

policy of containment for China. Okay, there's Taiwan issue and then around the Taiwan issue are questions of borders

and so on. There was a process of containment. That's that's over pretty much and so

as a result of that there's a dynamic Taiwan and Taiwan's very serious case because it's not just political, it's

chips. And and for example, it's entirely within the power of the Chinese government to basically

say, let's take let's put a a blockade or and let's have a week of no chips out

coming out. Let's just imagine that that signal was given to the market that all the techs all the stocks AI stocks and

everything would crash the stock market would crash. >> Yes, and considering how high we're

coming from right. I would kind of love to combine these ideas because on one hand you have the spending we're

already doing. War has been incredibly expensive. That's more spending from the US and then there's AI and the desire

for AI sovereignty. Debt markets are being flooded with AI. >> [music]

>> Alphabet raising their debt their equity offering to 85 billion dollars. Are you concerned that there's a crowding out

happening in this market? Can we handle that amount that's coming? >> All great technology changes

um produce bubbles. And the reason they produce bubbles is

because nobody can get get it exactly right. Okay, there you have to either spend a ton of money

to capture your market share and so on or and and you and don't worry about

whether it's too much or not or you don't spend enough money and you lose your market share and it's very

imprecise with a lot of competition, okay? And then when people bet on the technology,

which I'll bet on the technology, but they think that buying the stocks is betting on the technologies, which is a

different thing because the stocks can be expensive and so on. That's that's a problem. And what happens is when wealth

grows a lot relative to incomes, I want to distinguish wealth from incomes, okay? Wealth is you can create wealth

very easily in the following way. You say I'm going to have a raise $50 million

$50 million on a billion dollar valuation, okay? That's counted as a billion dollars of money and now you're

a billionaire, but they only put up 50 million, okay? And so wealth, you cannot spend wealth. Wealth is you have to sell

wealth to get money cuz you can only spend money. So when there's a lot of wealth relative to the amount of money

there is, there is a vulnerability and bubbles burst when money when wealth needs to be converted into money. Often

that's often that's because of debt, but it could be for anything. It could be for

wealth taxes, for example. Supposing you put in wealth taxes, then those people who have wealth are going to have to

sell some of that wealth to pay taxes. That dynamic that I'm talking about accompanies the miracle technologies

that over a period of time have wonderful implications for productivity. So I don't think it it has a problem

with productivity. I do think not about productivity, it has a big wealth gap implication. A very small percentage of

the population is going to do unbelievably and a lot of people won't. So what do we do? Can we work together

politically to deal with those issues and how do you I do not believe I'm not optimistic on us working together to

solve some >> So what's So what's the end? Is it a bubble that bursts eventually?

>> So I I I think it is, yes. And then that moment, there's always the issue of a bubble, and we can measure a bubble. I

have indicators and that that there's how many people are over-owned, what's the sentiment, a lot of indicators for

bubble, and we are right now rising close to closer to, not at, the same level in

2000 and same level in 1929. >> level where you say, "Oh, no, here's the one that we really need to worry about?"

>> about it is there's two parts to it. There's quote a bubble and then there's the pricking of the

bubble. And the pricking of the bubble happens when there's a need for wealth to be sold to get the money. Like

normally in a dynamic of uh a debt problem. Okay, if you take Japanese bubble, take the '29 bubble,

take the 2000 bubble. All of them have an element of, you know, tightening money to to because it can't go on

forever. It'll find its bubble. The question is how long you let the bubble go before there's the pricking. So in

order to do the market timing, to know how to market time, it requires both the understanding of the bubble and the

looking for the pricking, and the pricking is the converting of wealth into money cuz I need money in order but

I have wealth but so I have to sell some of the wealth in order to get the money. That's how it works. That dynamic is

following that kind of path even though it's a wonderful technology that'll happen uh great

>> Ray, we could talk about this all day and I'm so upset we're out of time because I know you're using it

specifically in your family office. So we're going to have to talk again specifically about that because I'm

really interested to hear more about that, too. Ray, thank you so much for sitting down with me. Really appreciate

your time.