273: James Fishback - THIS TIME It’s Different…or Is It

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Trading in the financial markets involves a risk of loss. Podcast episodes and other content produced by Chatwith Traders are for informational or educational purposes only and do not constitute trading or investment recommendations or advice. I have real issues with how the Federal Reserve operates.

how they think about the economy and how they've let politics, whether they want to believe it or not, infiltrate their thought process. But it's not my job to say what the Fed should do or to invest in accordance with what I believe the Fed should. It's my job to make money on the basis of what the Fed will do. If you just look at the technology that is available to the public.

Today, call that chat GPT-4. If you assume that Chat GPT four is where AI technology stops, there can be no progress beyond that. That technology in and of itself will change everything five times over.

Hey traders and listeners from all over the world. Welcome back to Chat with Traders. And if you're new to this podcast, a big welcome to you. We are in episode 273. I'm Tessa, your co-host. And chat with traders has been a great source of information, inspiration, a place that brings different perspectives, sparks ideas, and important discussions for all things related to trading through the lens of our guests that we bring onto the show.

And at times we also enjoy deviating from our core topics every so often, just to shake things up a bit. We're excited about what this new year brings to our podcast and we really hope that you're all doing well. Hey, cheers to a fresh start and a new year full of exciting possibilities for you, wishing you health, wealth, and success, whatever success means for you. Happy 2024 New Year. Today to kick off the new year, Ian interviews our first guest of the year. His name is James Fishback.

James is the co founder and chief investment officer of Asoria Partners, a global macro investment firm. Prior to Asoria, he served as the head of macro at Greenlight Capital, a two billion dollar hedge fund led by David Einhorn. James is also the founder of Incubate Debate, America's fastest growing high school debate league. As a former national high school debate champion and volunteer debate coach, he launched Incubate in twenty nineteen.

James was fortunate to have the opportunity to display his talent and strategies to the well known billionaire hedge fund manager David Einhorn. Which also resulted in James getting exposed to new ideas and ways of looking at economies and markets. Unwilling to repeat the same mantra commonly put out by the financial media, James presents a fresh look why the economy and the markets have multiple silver linings.

Please note, we at Chat With Traders do not endorse any specific political viewpoint on our podcast. Now, without further ado, ladies and gentlemen, we are so pleased to present James Fishback from Florida. Oh James, how you doing? And w where are you at right now? I'm doing good. I am at home in Madison County, Florida, which is about fifty miles east of Tallahassee, twenty miles south of Georgia.

I actually grew up in South Florida, in Fort Lauderdale. Uh, was there until I was 18, went off to college up in Washington, DC, and uh and have been back to Florida since uh since leaving DC.

Well, okay, great. And w what uh what kind of topics did you uh study in in school and what was your area of interest? My my technically my major was international economics, but I did a lot. I dabbled in a lot of cool classes. I took classes on the Second Amendment, on comparative politics, on history, the Civil War. So I tried to make the most of of my college experience by trying to get as much many different perspectives and courses in.

W w when did you first get into uh investing or or trading? It was about the sophomore year of college. I was doing some undergraduate research with a professor and looking at at the time equity volatility. spending a little bit of time trying to wrap my head around that. Not not easy stuff for being a couple of years out of high school. But I I was just fascinated by the idea, the puzzle, the challenge that it presented. And so

I started getting involved. I went to a a family friend who was a pretty wealthy individual who I connected with. during high school debate, she her her son and I had competed quite a bit on the national circuit. And I said, Hey, I have this idea. I've been doing this research for a professor.

And I'd uh I'd love to try to make some money for you off this idea. And uh to her credit, she gave me a little bit of money to work with. And fortunately that idea worked and we spent the next year building out a portfolio of different ideas in a number of different markets. And that was really the beginning for me in a in a in a very earnest way. Mm-hmm. What what what kind of idea was that? If you could share.

Sure. So this was the the summer of twenty fourteen. And so equity volatility in the US was was awfully low. Currency volatility was awfully low. And so it was just really thinking about how long that dynamic was going to persist. And then if it did end up unwinding as it did in late fall 2014.

what would that actually look like? So a number of different trades to take advantage of mispricings of the term structure, uh, in some cases vault being too high, in some cases vault being too low. And uh as the f there was a flash crash. I'm sure some folks will remember there was a flash crash in the US Treasury market in October of 2014. And that's really what picked up uh kicked a lot of the ball higher and and made this idea work out.

I I've noticed in many of your uh previous interviews that uh you like to spend a lot of energy focusing on uh economic issues. And I'm curious what what makes economics interesting for you? What makes it interesting for me is you never really understand it. It's constantly changing. There's always, always something new going on. I mean, take today, for example. Today's January fifth. We had a big jobs report at eight thirty here in the US.

At first blush it was stronger than expected, so the bond market started to sell off. because the market had priced in a lot of easing, a lot of cuts from the Federal Reserve. And so the I the thinking was, hey, we got a strong jobs report. That maybe means the Fed doesn't need to cut six or seven times as the market is priced.

And so that's exactly what happened. The bond market sold off, started to take away some of the cuts that were priced into the market. And then an hour and a half later, we have an ISM non-manufacturing release, which shows that. a survey gauge of employment.

was actually at the lowest level since July 2020. And that spooked the market. And so all of a sudden, in just a matter of about five to 10 minutes, you unwound the entire sell-off in the bond market and then added, added sell on top of that. And so for me it is It is the challenge of Anybody can look at the data. There's there's there's a piece of data in the economy.

in some way, shape, or form that can tell you, that can tell the story that you want to tell, that can find some piece of data that shows uber pessimism and one piece of data that shows that inflation's going to 10% in six months. What's tricky, Ian, is how do you weigh the data? Which data is more important than others? And how do you look at data comprehensively to tell a bigger, more objective story about what's going on? Now, of course, as your listeners will know, as you will know yourself,

When we're investing, when we're thinking about global macro as a trading strategy, we're not necessarily trading the data. Very rarely are we saying. Well, this position will will as an as an as as a necessary fact, this position will do well if inflation goes lower. No. Uh this position will do well if the jobs report comes out higher tomorrow. No.

There is a reaction function. And so when we think about economic data, we're viewing it from the lens of what the Federal Reserve will do with that data. And so One thing that I'm constantly reminded of is that to really invest on a macro basis.

You don't just have to think about the data. You actually think about how the number one actor in the markets, the Fed, is going to react to that data. Because if they're going to ignore the data, I mean, let's think about it. The Fed cut to zero in December of oh eight.

didn't hike rates for seven years until December of fifteen. And so Pretty much no matter the data release you got, great jobs, poor jobs, whatever, the very, very front end of the treasury market, call it the one year or the two-year part of the curve, two-year treasury yields, were almost always muted as a result of the data because you got the data right. But the Fed was stuck. at zero and stayed there for years. And so it's about balancing those two.

Mm-hmm. But uh frequently uh we don't get updates from the Fed uh every week, right, on on how they interpret the data. Uh isn't there a lot of kind of guessing going on of like, well, based on past history, Uh you know, Chairman Powell doesn't really look at these types of economic releases. And so we're going to presume that he's not going to look at it this time m that much anyway, right? And then i isn't it a a lot of kind of guessing in between the Fed meeting. It it absolutely is.

And a lot of it too, Ian, is what the market thinks is important for five minutes may not be important 35 minutes later. And so there's this great quote from a couple of years ago that high frequency trade. Which represents an increasing share of the market these days, that high-frequency traders know the price of everything, but the value of nothing. And so you could get a data release that has little to no impact on what the Fed will do at, say, the March meeting.

And yet the market will whipsaw, be that the stock market, be that the currency market, the interest rate futures market, will whipsaw on some data relationships. And all of a sudden we'll obsess and say, this is it. And yet here we are. And it actually half an hour, two hours the next day, we've completely retraced the move and then some. And so I've found a lot of value uh in in terms of a trading strategy in thinking about fading the extreme.

When the market misunderappreciates, I'm coining that word here. When the market misunderappreciates or misover-appreciates a particular data point. And and you know that the Fed has historically or hasn't really mattered for the Fed, then that's a really interesting dislocation to take advantage of. So I understand that you worked with the uh famous David Einhorn. Yeah, what uh anything uh that you learn from him, uh

Yeah, I learned a great deal from David. I uh I I I was working at the time, was running my own fund in the spring of twenty nineteen and I I saw David it was talking about the Fed in an interview and so I pinged him on Bloomberg. I said You know, uh this this Fed meeting is they

They they say they're not gonna cut, but if you look back at the ninety eight playbook, the nineteen ninety five playbook, it actually looks like there's a real chance for them to cut if the if the trade war continues on the path it's going. And so we

structured a couple of trades around that view and to David's credit he put them on, put put a trade on from a random kid uh who had reached out to him over Bloomberg, and uh and those trades worked out. And then so over the course of the next nearly two years.

I I had the opportunity to work with him externally to build out a macro portfolio for Greenlight to help think about, okay, what are some really interesting trades? But more importantly, actually how do we go out uh go about structuring those trades? And um had a really great run of it. And then at the end of twenty twenty said, You know, we had a had a good time working together. Do you want a job? And uh, you know, I was it was blown away. I was given the opportunity.

uh a n a month or so later to join Greenlight and to run the macro investing unit within the firm. This is this is a firm that historically, as you know Ian, is what's called the long short equity hedge fund. They think about questions like Is Apple gonna go up? Is Tesla gonna go down? And so I got the opportunity to come in and work directly with David to think about other questions.

Is the Fed going to be hiking rates in the second quarter? Is inflation going to be above or below 4% over the next year? What is the oil market going to look like? What is the European Central Bank going to do? Uh what impact will Russia's invasion of Ukraine have on natural gas markets in Europe? And so an entirely different set of questions I got to ask at a firm that for the past

25 years was just focused on the stock market. So I learned a lot. I think the biggest thing I learned from David was to keep it simple. To keep it simple all the way. It's really easy to want to be creative, to want to think about. structuring an investment in the most peculiar way possible. But this is not for folks who who are

want to do creative writing. This this people who actually want to see their ideas pan out and make money. And so the the worst thing uh that can happen, I think, is you're right. You you called, you made the right call, but you actually ended up losing money. Because you didn't end up structuring the trade. And I don't I don't mean this to say you bought the wrong thing, but you just you maybe did a particular option structure where your exposure to the underlying

changed with time or changed as the direction of that underlying went in a different direction. I'm I'm reminded of a quote by Stan Druckenmiller where, you know, there's something in the options market and the exotic Uh currency options market called a knockout option. And the idea is, well, look, the euro right now is 112. I think it's going to go higher. So I'm going to buy a 115 call with a knockout at 118. And so, Ian, what that means is.

is if you're right and the euro goes higher, you make money. But if you're really right and the euro really goes higher, then you make nothing. And so this is the type of creative cuteness too cute by half. That that David was really against in principle. And so it was cool thinking about, okay, cool. How do we have the right thesis? But then how do we really go out and operationalize that? And so I was uh spent a lot of time doing that.

So rumor has it that you like lemonhead candy. Uh, how are these treats metaphors for the Fed and the economy? Yeah, I do. I it's it's one of those rare times where you get to talk about your childhood in this business. And lemon head candies are these Little candies you just suck on.

You put them in your mouth. And the first thing is this burst of sour. That's the first sensation is this burst of sour taste, lemon taste. And then as you suck on them for a minute or two, they become sweet. And so think about that. You put them in your mouth, sour, and then after a little bit, they become sweet. The Fed starts hiking rates in March of twenty twenty two.

Then they go 25 basis points a meeting, 50 basis points. June comes around, they're doing 75 basis points a meeting. They do 75 basis points for the next three consecutive meetings. Stock market doesn't like that very much, credit market doesn't like that very much. That's the sour. And then 2023 comes around, after the stocks are down twenty percent. The year prior, after all this tightening from the Fed, the most aggressive pace, by the way, since the Volcker days, and things start to change.

The economy actually starts to look better. The pessimism gets defied at every single term. As Nick Timorose in the Wall Street Journal wrote earlier last year, it seemed like the recession was always six months away. And the reason for that is because in in today's economy, the way that the US economy is structured, higher rates does not necessarily mean Lower growth, more unemployment. In fact, it means the opposite. And here's here's how. If you're a business

And you've got two sides of the balance sheet. You've got your assets, you've got your liabilities. If you've termed out all of your liabilities to the point where you have no exposure to floating rate debt, like Microsoft, Apple or Google, you have no exposure to floating rate debt. The Fed could hike rates to 30%, and it's not going to have any impact on how much you pay an interest service.

On the contrary, actually, as the Fed was hiking rates aggressively, Ian, what happened? Those businesses who had all this cash parked on the sidelines, they started making real money with that excess. Same thing with households. The vast majority of mortgages in America are 30-year fixed rate mortgages. And so when folks either bought homes for the first time or refinance, we're one of the 14 million homeowners who refinance.

In the two years around the pandemic, they locked in low rates, not for six months, not for nine months, but for 30 years. And so when the Fed came around to start hiking aggressively, there was no impact. To their interest servicing costs, it was a 30-year fixed rate mortgage, fixed rate for 30 years. But what did happen? Well, all that stimulus that came out of either the CARES Act or the American Rescue Plan.

All of that stimulus was sitting in bank accounts that was now being moved to money market mutual funds. And now earning 5%. And so for the first time in a quarter century, American consumers were being paid a real amount of money to hold cash. And that was supporting consumption in the economy. And so the the econ 101 would tell you.

Wait a second. The Fed hike rates a lot. So the stock market has to go down. And so we're gonna have to lose jobs and we're gonna everything's gonna come to a screeching halt. And if you would have told me. That I think if you'd have told most people that the Fed's going to go from zero percent to five and a quarter at the fastest rate in 40 years, it's gonna hike.

seventy five basis points at four meetings back to back to back. It's gonna draw its balance sheet down as well over this period. I would have said of well, most people would have said, yeah. Unemployment's above five percent. Actually, unemployment's three point seven percent. And we added three million jobs over the past year. And we had uh almost Five percent.

Third quarter GDP growth and retail sales knocked it out of the park, and so on and so forth. And so at the end of the day, the lemon head problem for the Fed. Succinctly put Interest rate hikes are not having the effect that the Fed intends. They're not having the effect, much like by the way, the rate cuts from two thousand and eight, nine, right? That entire period of quantitative easing, those that monetary

Stimulus was not having the effect that the Fed wanted. The Fed wanted to use quantitative easing, use things like Operation Twist and seven years of zero rates to boost the economy, to increase job growth. What did we get, Ian? We got the weakest recovery in the post-World War II era. And so the Fed has a track record of wanting to do one thing. and actually getting the opposite effect. And so David Einhorn, my former boss, quoted, uh coined this theory called the Jelly Donut hypothesis.

which was that the first jelly donut, like the first rate cut or the first hundred billion in QE. Is a delicious afternoon snack. The second one is good, but not quite as good. The third one, it starts to wear off. The fourth and fifth one. stomach ache and the fifth and sixth, I know it's not politically correct, but they're eating disorders. Right? And so much like those additional jelly donuts, went from having a a much smaller marginal benefit to a negative benefit.

The lemon head has gone from being what was perceived to be a negative for growth and employment to in many ways supporting the very thing that the Fed actually wanted to slow down.

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So the the old mantra, uh don't fight the Fed, is that now dead? I mean, are we is this situation you're describing quite unique in history? That uh it we can say, oh, okay, well, the it th this time truly is different for these variety of factors that you just mentioned.

And in a in a normal situation, uh interest rates go up. Well, you know, we you you should sell the market because I mean, after all, we look at the market today and it's higher than it was in the bubble times of of uh late twenty twenty one. Uh yet interest rates are still higher. Uh what does that say? Are we having a kind of a melt up um market? I mean what What's driving this market to new highs despite the interest rates being high and quantitative tightening in effect?

Yes, it's a it's a good question. And the fact that the market has done as well as it's done since Early November as rates started to come off, but especially since that last Fed meeting, it's raised a lot of questions and a lot of eyebrows. I think the biggest thing is

That this time in many ways is different. And I I know that people will latch onto that phrase one way or the other. And they'll say, This time is different without any credible evidence. And then they'll say, No, it's not. This time is never different without any credible evidence. Well, allow me.

if I may, to present that credible evidence. Because I'm I'm a former high school debater. And so I think about the evidence that you actually need to make these points. And so Here's here's just the fact. Over the period that the Fed was raising rates. Corporate net interest payments in the United States have gone down five quarters in a row and are now down twenty-five percent from where they were when the Fed began raising rates.

And so rates higher, yet net interest payments lower is the textbook definition of a paradox. It's like saying you're going on a diet. And you're doing all this exercise and you're eating all these kale chips. but you're actually gaining weight. And so it's difficult to see the Fed meaningfully bringing down.

inflation from here. And by the way, we're we're still s we're still well above the Fed's target. Yes, we're well off the seven, eight, nine percent highs of twenty twenty two, but the Fed's inflation target is two To get the type of return to inflation at two percent, you really need to see demand destruction. And you're not seeing that in this environment. The economy has actually surprisingly held up well.

given high rates. The question of whether the Fed is going to is going to cut rates in 2024 is actually less of a economic question, to tell you the truth. And it's more of a political one. I've never believed the idea that the Fed is some independent body just because they say so. You know, the DOJ says they're independent. The FBI says they're independent. The IRS, which when it was auditing conservative organizations under President Obama.

swore they were independent. So your your independence is not So just because you woke up one day and said you're independent, your independence has to be earned. And I gotta tell you the truth, Ian. The Fed has not earned one iota of independence. And here's why. Give us one example. In 2019, when the Fed was thinking about cutting rates, same time that I was talking to David Einhorn, first time we had worked together, the Fed was thinking about cutting rates.

It was at this very time that the former president of the New York Fed he had just retired a year Bill Dudley, just at this time where he said in a public opinion piece for Bloomberg News that the Fed should not cut rates. Because it would help President.

Trump get elected. That is exactly what it was. And so for me, when I think about something like that, someone who was just in The number two position at the so-called independent Federal Reserve, going out in public, imagine what he says in private, going out in public and saying that the Trump presidency represents a threat to the global economy. And then if the Fed were to cut, they would, in a sense, boost the economy and boost Trump.

chances in the 2020 election. Take it a step further. That's just one example. Let's take it a step further. For every Republican economist at the Fed, there are 10 Democrat economists. 10 to 8. Take it a step further than that. Nine hundred thousand dollars was donated from Federal Reserve staff to political campaigns. In the 2020 election, 97% of that went to Democratic candidates and causes. That's higher than Harvard University.

Ninety seven cents of every dollar in Fed donations to the Democratic Party. And so whether they want to think they're independent or not is not even the point. Maybe they genuinely do believe they're independent. But just like our universities have sworn that they are independent, you can't be independent and can't have diverse viewpoints when nine out of ten of your staff members are of a political party.

And when ninety-seven cents of every dollar of your political donations go to that political party. And especially not when the number two at the entire Federal Reserve system says you can't cut race. This is gonna help Trump. And so what does this all mean for where we are today? The Fed represents The Washington Elite.

They're in their own little bubble. And this bubble believes a couple of things. They believe that January 6th was the worst day in American history. They believe that Donald Trump represents an existential threat to American democracy. And to the global economy. And they just believe that, much like you or I would believe that it's sunny outside right now, which it is. And so why would it?

They in their own subconscious way, well, you know, we've we've hiked a lot and inflation on this particular metric has come down and we need to take a little bit of insurance. We need to recalibrate policy and and and so it's besides the point. They're gonna cut this year. They're not going to cut too much because if you cut too much, you actually end up leaving fear in the market about, wait, hold on a sec, what does the Fed know? And that would actually have the opposite effect.

So I could very much see a nineteen ninety-five, nineteen ninety-eight, twenty nineteen style, what we call a mid-cycle adjustment. The Fed typically cuts for two reasons historically. The first is imminent recession. So think the spring of 2020. Throw the kitchen sink at that puppy. You're cutting rates, emergency meetings, Sunday night, 100 basis points, emergency QE. Think Lehman Brothers. Think January of 2008.

And then there's you cut because you have to recalibrate policy. And so think of 2019, for example. Uh there wasn't a recession. There were some some risks on the horizon. It was really about taking out insurance. Against the possibility of some weakness and some uncertainty. And so this is to say, in summation, I have real issues with how the Federal Reserve operates. I have real issues with

how they think about the economy and how they've let politics, whether they want to believe it or not, infiltrate their thought process. But it's not my job to say what the Fed should do or to invest in accordance with what I believe the Fed. It's my job to make money on the basis of what the Fed will do. And I've had to come to this realization. in in a difficult ways uh over the last couple of years is I've I've struggled between those two. It's hard.

And and that's kind of my key takeaway is you gotta take the Fed for what it is. It's an imperfect beast, and you have to invest accordingly.

So When I was thinking about um kind of the bullish arguments for keeping interest rates as high, it's like, well, uh, historically we keep hearing this mantra, well, the Fed is gonna break something. Something's gonna break, right? uh'cause they're raising too fast or holding interest rates uh too high for too long. But um in the markets seem to be doing fine with it and the economy seems to be doing fine. So uh one argument is why not keep interest rates

higher for longer if the economy is as resilient. Um And then but then on the other hand, I think, well, the other other opposite point of view is that perhaps the Fed is being forced to cut interest rates because interest on the debt is now reportedly to be even higher than defense spend. And that debt service will prevent interest rates from ever getting back to these current levels. What do you think about either of those?

I think they're they're both good arguments. I I you know, personally, if I were running the Fed, I would say, let's actually commit to what we said we were going to do. uh ten weeks ago, which was higher for longer. What whatever happened to that whole thing, right? And so the Fed can change on a time. I will tell you though, what what actually happened over that period where the Fed said in early November, and by the way, even in early December, Powell came out

And said, We're not even thinking about cutting rates. We need to keep rates. We need to preserve the tightening in the economy. And then two weeks later started talking about, well, there's three cuts and this, that and the other. What actually changed, believe it or not, was Biden's poll numbers. plumbed new lows and in almost every national poll, Donald Trump is beating Biden uh by single digit points. And so

Did that have something to do with it? Uh I'll leave that to your viewers. But what I will say is there's no question that the debt servicing costs are playing a role in how the Fed is thinking about fiscal sustainability. I'm very disappointed in Chair Powell, I gotta tell you, Ian, because This is a guy who comes from the investing world. When he actually became Fed Sure, he doesn't have a PhD. He didn't do any of that nonsense at Harvard or MIT. He came in from the business world.

And I actually thought he was going to approach the Fed radically different. Unfortunately, he's succumbed to the very theories and jargon that Yellen and Bernan Inke and the like have been pushing for for Eon. Um what I'll say is Powell, when the pandemic hit, Powell said, throw the money at the problem. Do whatever you need to take, do whatever it takes, spend that money because the risks here are too large. He went to Congress, Ian, in October of 2020.

And told Nancy Pelosi in a hearing that the risks of spending too much money are smaller than the risks of spending too.

was a green light for them, Democrats and Republicans, to spend like drunken sailors. That's what led to the American Rescue Plan. That's what led to more generous unemployment benefits, more stimulus checks, which had an unbelievable impact in fueling the inflation that we saw in the summer of And so what I would say is, where is Jay Powell when he now says he doesn't want to comment on what Congress is doing, doesn't want to comment on the fact that we're running a two trillion dollar death.

in an economy at full employment, in an economy where inflation is still well above the Fed's target. This is the same Jay Powell that had no problem talking to Congress when the objective was to spend more, spend more, spend more, ostensibly in the face of the pandemic. And so I'm disappointed that he hasn't had the spine to go to Congress and say to both Democrats and Republicans, because both parties, it's really the corrupt establishment that is at the heart of our reckless spending policy.

that both parties need to get their act together because this is not going to end well. And the American people deserve real, real fiscal sustainability.

I saw a graph on how global liquidity bottomed in the fall of twenty twenty two and started upwards to a new high, despite continuing quantitative tightening here and also interest rate uh increases. Uh, do you think the US markets are more influenced by monetary policies worldwide than just the Federal Reserve's actions here in the US?

Yeah, there's there's no question that what happens in places like Japan, the European Union, even in some of the emerging markets will have an impact on us. Think about it. When Japan promises to keep rates at zero. At the same time that our ten year treasury yield is was four, four and a half percent.

That money is going to leave Japan in droves and it has over the past 10, 15 years, as rates in Japan have been close to zero in, you know, five years prior to today, when rates in Europe were close to zero and in some cases negative. That led to substantial buying in US treasuries, in US stocks, in US corporate debt, because the yield just wasn't on offer for those investors in their own economy. And so when you see that liquidity come out of places like the Bank of Japan or the ECB.

that absolutely has an impact on the flow of capital globally. And most of the time, it comes here to the US because one, it's a liquid market. We have high nominal yield. And the most important part is that most of the time, treasuries act as a hedge. And so you get to buy something that, yes, has a higher yield, yes, has a superior liquidity profile to some EM sovereign debt in Brazil or South Africa. But lastly and most importantly, offers your portfolio some hedging.

Because we we know historically that if stocks get hit, that if there's some global growth scare outside of some inflation shock, treasuries should rally, yields should go down. And so it's a win-win-win. And that's just one example of this global liquidity pair. So for a number of years I've been looking at this, uh the effect that additional debt had on GDP going back to the nineteen sixties. I picked a starting date of nineteen seventy one and I haven't been able to get this question of mine

answered uh by anybody, including ChatGPT, and I was wondering if you might be able to shed some light on it. So I looked at the GDP for every year from 1971 to present. And then I also looked at each year's increase. In other words, how uh if the debt went up by a dollar, how much GDP did that generate?

And I'm I was under the assumption, perhaps I'm wrong, uh perhaps you can uh shed some light on this, that if you borrow a dollar and you spend it into the economy, that you should get at least a dollar in GDP output. Um, frequently in the past, we've gotten more than a dollar of GDP output. So for example, the five year period from nineteen seventy one to nineteen seventy six.

Um, for every dollar that we borrowed, uh, GDP grew by three point three. So you had a very positive multiplier. So it it would seem like debt. was a good thing in that way. And these positive multipliers continued all the way up. to two thousand and six, looking at five year blocks. And then starting after two thousand six, then the GDP multiplier went to way below uh 0.29, 0.57, 0.64, and so forth. And my question is, how can GDP

grow less than each additional dollar that we borrow and spend into the economy. What is this a sign of? Is this a sign of malinvestment? I mean, where is all that money going? It's it's a really, really good question. I'm I'm trying to visualize it as as you tell me and and think about what could potentially drive it. This is one of those examples where It's it's truly multi causal. There are, you know, dozens of things that you can think of that can drive this relationship.

You know, one thing I think we have to think of is how well our tax dollars are being spent. And is that money actually being spent in the US? And so take for example on where wherever your listeners are on the Ukraine-Russia issue, it is undeniable that we're spending. hundreds of billions of dollars.

on a war thousands of miles away from here, that money has little if any impact, you know, outside of military contractors here in the US, but is benefiting a foreign economy. On the other hand, We're taking out debt. to support migrants who are coming across the southern border. Who will end up, and this is just a fact, will end up most likely being public charges in our system. And so if you think about just as just two of the most recent examples I could think of where foreign military spend

Along with supporting migrants from other countries, no clear discernible impact, no clear discernible benefit for our economy. In fact, Clear Downside That's what I begin to think about when I think, well, is that incremental dollar that we are borrowing, is it actually benefiting us? And I'll I'll tell you what would actually benefit us. Real infrastructure projects, not bridges to nowhere, but real infrastructure projects that connect rural communities.

young and old workers to have access to labor markets outside of their immediate vicinity. And so if you don't own a car, And they're and you're making fifteen bucks an hour, but there's a job that could pay you twenty-three dollars an hour, but it's an hour and a half away. And there's no infrastructure connecting those two cities, no public infrastructure. bus, train, rail, then that opportunity is never going to be available.

You're never gonna be able to have that income. And that could be the difference, Ian, between you owning and renting, between staying single and starting a family, between you investing in your education, going to night school. And so just that one example of that job being out of reach because of a lack

Of domestic infrastructure investment. And I don't mean repaving the same road 15 times or retooling a bridge. What I'm talking about is actually creating labor mobility through public infrastructure investment. That opens up unbelievable opportunities for Americans of all walks of life. And that's what I'd like to see DC spend money on, as opposed to funding forever wars. and and and paying essentially not to secure our southern border.

Um, I understand that you're a follower of companies in the AI field. Any AI pure play companies uh that you like currently. You know, I think a lot of people, when there's a big trend on the horizon, much like AI, they want to find out the the best pure play investment. And their thinking is if this thing takes off, I really, really want to do well. And I I gotta tell you the truth. I think it's the wrong way to think about it. And the reason I say that is because a pure play on AI.

Is not just a pure play on the technology, it's a pure play on the narrative. And any narrative is going to be subject to drawdowns, to corrections. To nasty, nasty sell-offs. Think about Amazon for a second. Amazon drew down 85% from its peak in 2000, only then to go up 14,000.

And by the way, Amazon at the time was a pure play internet play. It was a it was a bookstore, it was evolving into other products, but it was an e commerce internet play, this thing that it was coming about only a decade prior. And so what I would much prefer to do instead of saying this AI company, which yes could five, six, seven X. As this AI theme really begins to take shape, what I'd much rather do is say: look at existing companies that have strong balance.

strong management teams, strong motes, strong motes around their competitive model. And how are those businesses harnessing AI? And so I'll give you one example, Microsoft. comes to mind, right? Microsoft was this old stayed technology company up until they invested in open AI. And those two companies are pretty much one and the same in terms of IP.

Microsoft is now using its co-pilot software in their enterprise offerings to the point where 150 million people can have access to PowerPoint, Word, Excel. and use AI tools to streamline existing workflows on existing devices. And that allows Microsoft to one collect incremental revenue on top of what they're already doing, so you charge more for this AI add-on and also cut costs. And that also gives them just a longer relationship where with more pricing power longer term.

And so I I view Microsoft as no, not a pure play, but as one where, look, over the last 10 years, Microsoft has compounded at 20%. A year. And so even in a world in which AI is not a thing, Microsoft could certainly still compound at pretty substantial growth rates. And so you get to own a high quality company with a high quality balance sheet. With MOATs and enterprise software with a strong consumer facing business. And you get to do that in at the same time.

As you own a company that offers you a really nice embedded option on the AI theme. It reminds me of a Bill Ackman quote from a couple of years ago, which is the idea of hedging. That the best hedges in the market are the ones that you would buy even if there was no hedging benefit. And so I kind of paraphrased that for a The best AI stock. Are the stocks that you would buy even if they weren't so heavily invested in AI? And for me, Microsoft is at the top of the list.

Tesla is also on that list as well. What they're doing with their internal robotics team, with Optimus, with the uh FSD, uh full self-driving, real world AI. These are strong companies as it is, and AI is really just a kick.

For the positive positives of AI, uh do you see a high likelihood of AI ushering in a new golden era of productivity and increased profits for companies? And contrast that, the bears argue, oh, that uh AI is gonna destroy uncountless numbers of jobs uh in a way that has not been felt in any other technological advancement of of our of our lifetime. Uh what are your thoughts about both of those?

They're they're both true. AI is going to destroy a lot of jobs. The the jobs it's going to destroy just so happen to have little to any impact on the US economy. They're management consultants. There are junior bankers or people who make PowerPoints and adjust periods and and spend all day thinking about what they're going to update their LinkedIn to tomorrow. Those are the people who are going to get

Pushed out by AI first. It's the welders, the plumbers, the truck drivers, the people who use their hands to work, who offer something unique. They're the ones who are the most insulated. From the AI labor transformation. And so actually, the first benefit of AI is it's going to have a bottom line.

impact on companies by allowing them in some cases to lay off twenty to thirty percent of their labor in some industries essentially overnight. Those savings are going to drop right to the bottom line and boost stock prices. They're going to allow companies, by the way, to invest in new ways to harness new revenue. So there's both bottom line and top line benefits.

Now, what does it actually mean for those workers? They're actually going to have to go out and retrain for all the talk about how automation was supposed to hurt blue-collar workers, the biggest automation, which is AI, the biggest paradigm shift. is going to protect and insulate blue-collar workers and is going to unemploy a lot of white-collar Think of a paralegal. Think of a first or second year legal associate. Think of an investment banker or a research analyst or a data scientist.

Today, without any assumptions in about what ChatGPT-5 is going to look like or what the next model from Google's Deep Mind is going to look like. If you just look at the technology that is available to the public today. Call that chat GPT-4. If you assume that chat GPT-4 is where AI technology stops, there can be no progress beyond that. That technology in and of itself will change everything five times.

I use AI every single day. I kind of use it as a data scientist to check different models, uh, to visualize different data sets, uh, economic data, trade data. And it's unbelievable. I I would have hired probably two people that we didn't end up hiring for my new fund, Desoria Partners, had it not been for Chat GPT four. And so this is already having a real impact.

You're starting to see companies institute hiring phrases. You're starting to see companies on top of that start to lay off workers. You'll, I'm sure your listeners will appreciate or have seen a video of the the twenty two year old product product manager at Facebook or Instagram or Quizlet or Duolingo. Who will record her day in the life at her San Francisco apartment, walking down to her San Francisco office building and pouring herself a

glass of organic orange juice and putting some chia seeds on some organic overnight oats and then having a bowl of oatmeal and then having some watermelon and then having a glass of Chardonnay at the end of day. I'm sorry. She is going to be out of a job because she brought no real value to the company. And and so AI is going to revolutionize everything. Unlike crypto, it actually has a use case. We're already seeing the use case today, right here, right now.

Unlike crypto, you don't have to make any assumptions about, well, AI adoption, this, that, in the future. It's being adopted as it is. And the most important part in is that AI adoption is not just top-down, it's bottom-up. There's nothing stopping. an individual employee from utilizing this technology to boost their productivity and to deliver gains to their company. At the same time, you have the top-down

adopting enterprise software that leverages AI technology. And so you're gonna have both this top-down and bottom-down effect where AI is really gonna transform the entire work workplace.

Excuse the last interruption here. This is Tessa. We hope you're enjoying this episode so far. If you love the podcast, Please give Chatwith Traders the best review you can on whatever platform you're listening from. This will help us to keep the episodes coming. Also, if you haven't subscribed to our email list, please hop on to chatwithraders.com and click on subscribe. so we can keep you posted of information that may be of importance. Thank you. Now back to the chat with our guests.

Any discussion on AI frequently is accompanied by a discussion on UBI, universal basic income. And I uh saw that uh currently Canada is proposing a$2,000 per month. for each person above the age of seventeen. Uh, I think it's in their Senate. And what amazes me is that uh nobody seems to be doing the math because$2,000 per month per person would consume 176% of all Canadian tax revenue.

Now, on the other side, I have heard some pro UBI people argue that um AI will usher in the biggest deflationary uh movement that we have ever seen, causing prices Uh. literally everything to potentially collapse, which would allow for very, very cheap living. And thus combined with a say a different type of ownership, ownership of the means of production.

locally owned, uh decentralized, autonomous organizations, public trusts, co-ops, and so forth that under this deflationary wave that AI will create. could allow for more universal basic income to make that all feasible. And also they argue that is absolutely necessary because jobs will get crushed. What is your view on that? It's a good question. It's um look UBI, we actually had that experiment in the US and in other developed economies during the pandemic. Stimulus check.

Generous unemployment benefits. Child tax credits and so on. And they proved to not only be massively inflationary through the demand channel, which is to say you give people money, they go out and spend it, but it also proved to be massively inflationary through the supply chain. You gave people money. They no longer wanted to work. They left the labor force. And so employers were left scrambling to find workers and as a result had to pay up bigly.

To attract talent from the sidelines. And those costs were passed on to the consumer, the higher wage costs. So it's a double whammy for inflation. UBI doesn't work because of those reasons. Two thousand dollars sounds like a lot of money. It has to be inflation adjusted for it to keep its purchasing power up for time that effectively locks you in this vicious inflationary cycle. And lastly, it deprives people of the dignity and the purpose that comes with work.

And so you start to see more mental health issues, you start to see crime, you start to see a lack of just general happiness with people about what it is they're doing and and how they're feeling about the impact they're having. And so inflationary, to your point, fiscally unsustainable. What you what you really have to do is you have to give people an opportunity to retrain. Give them an opportunity to retrain. Now let's not go overboard and say that every job is going to be susceptible.

If you use your hands for a living, you drive a bus, you drive a truck, you cut hair, you fix windows, you lay down pavement or concrete, you are fine. AI is not going to have any impact. What I am worried about. Are those service oriented, data oriented middle office, back office roles? And in some cases, even leisure and hospitality. Think about for a moment the last time you were at a drive. And you pulled up to the window or you pulled up to the intercom.

And you wanted to place an order that technology exists today to replace every single drive-thru attendant in America with artificial intelligence voice text. And so, yes, for them there are going to be pockets of working class, lower income folks who are going to be displaced by artificial intelligence. But that's not the end of the world. And so they're going to be able to adapt.

But it is the end of the world if your entire existence is about, well, how well do you analyze data? And all of a sudden, You have this chat GPT four model that comes in that can analyze a thousand times the data that you do at at a fraction of the time. And that is what is going to get people that they've spent twenty, thirty years honing their craft as a data scientist, only to have AI do it a thousand times better, truly a thousand times better And

That is something that's going to take time. There are definitely deflationary impacts here. I think a lot of it is actually diff deflationary from the business side. So businesses are going to be able to cut costs. They'll perhaps bring prices down a little bit, but there's gonna be some staying power there. And so the real beneficiaries are going to be the bottom lines of businesses who can turn around and charge you practically the same.

of what they were charging you a year ago to file a will or to file a lawsuit, but they can do it at a third of the cost and maybe cut your price by ten percent. That is a massive game for any company, public or private, and has huge implications for investors and for stock.

Great. So to wrap uh things up, uh looking to twenty twenty four, what kind of opportunities do you see for us in twenty twenty four? The US economy is doing fine. The US economy is doing fine. The consumer, for the most part, is strong, continues to spend. Anyone who says that we're going to fall out of bed and have a recession needs to explain with specificity. How the US economy, 70% of which is the consumer, how the consumer is going to fall out of bed and stop.

And so you can't make these big vague calls about recession is imminent and it has to happen because it's been too long when the consumer is spending as much as they are. And by the way, they're not necessarily spending because they're in genuine economic health. We still have benefits. From all of those fiscal chance transfers, there's still money lingering around. We had a huge stock market boom. And so that's conferred wealth, which confers spending in the economy, irrespective of that.

Any call on US recession has to really be a call on a consumer recession. And that is very, very difficult to see today. Is there going to be some slowing of growth? Is there going to be some tempering of the optimism that we've seen over the last couple of years. Absolutely. Will we likely see Fed I think so. Not necessarily for economic reasons. Part of it is yes, inflation has come down, so the Fed needs to recalibrate. Part of it is the political justifications.

That we talked about earlier. And so I think that doesn't necessarily mean the Fed starts cutting, but it means that the cutting cycle ends up happening a lot sooner. And ends a lot sooner than if there weren't political considerations. If you just go back, for example, let me describe the exact statistic because I was just looking. And I think it'll be of interest to your listeners.

Since nineteen twenty eight, stock market performance during the three months prior to a US presidential election. has correctly predicted the outcome nearly ninety percent of the time. If in the three months prior to an election the stock market is up, that means That the incumbent president in this case, Joseph Robinette Biden Jr., is going to be re-elected. If it's down, it means his opponent is going to be re-elected.

And so if you're the Fed, what you want to do is you want those rate cuts to happen sooner rather than later. If you do it two months a four, you don't actually get that stock market boost. So you have to actually, and it takes time for these things to flow through to the markets and the economy. And so big predictions for me. What I'm looking forward to is one, staying nimble. Things change, facts change. You have to change with them. But right here, right now.

The economy is punching above its weight. The Fed is going to cut. Those cuts will probably be closer to the ninety eight, ninety five, twenty nineteen cutting cycle, which was three cuts. in in pretty short succession, that is going to put a flo further floor under the economy. And depending on who wins the 2024 election, could have massive implications for another leg higher in inflation. And that's something we all need to keep our eyes.

uh focused on. Mm-hmm. So for investors, I imagine that the global liquidity boom that's going on right now, combined with the cuts in interest rates, should uh make for a really good risk on environment. It it it it should. It should. And it's it's not it's it goes without saying that these things never move in a straight line. I I tend not to be a believer that, you know, what the Fed does next year having any big impact on the stock market, that there's any relationship there. Yes.

In a on a multi-day, maybe a multi-week horizon, if the Fed doesn't end up cutting as much as the market's price, which at this point is a certainty, they won't cut as much.

As the market is priced, that somehow that's going to be bearish for the stock market doesn't make a whole lot of sense because the stock market is up massively since March of 2022 and the Fed hiked from zero to over five percent. What is the biggest force in the markets over a multi year horizon, which is what I think matters for most investors, is artificial intelligence.

It is a game changer and we just have to be prepared for it. But it it it really can be the powerful tailwind that can push us higher in a very, very big way and continue deliver out performance for US. Uh fantastic. Well, James, thank you very much for coming on uh Chat with Traders. My pleasure. Yeah, how can our listeners get in touch with you? I'm on X. My username is J underscore Fishback. And always posting uh interesting, at least to me, interesting points on. Yeah, great. Thank you.

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