The Next Perfect Trade (And Why It Only Happens Once a Decade)

28:04At least they'll probably steep on the curve a lot, right? will stock market goes down no probably like defense stocks will rally this and that and before we know it everything is going up right like what kind of shock could actually cause the old kind of recession the old style recession but because we're so complacent maybe it can happen yeah i'm i don't know if it can but i know we can have different variations so an idea i wanted to raise with you is is it is universally thought to be the truth that inflation is sticky that any stimulus or tariffs are going to create inflation the the curve tells you that um everything tells you that but we have a shock coming down the pipe which is maybe the largest economic shock of all time, which is AI.

28:59Now, theoretically, it is probably the biggest disinflationary force mankind has ever dealt with. Correct. I remember you even said it last time when we talked, it's like a deflationary nuclear bomb, right? That's exactly right. And I'm not saying the timing is right or whatever, but I just play with this in my head. It's like we all believe it to be true that inflation is sticky, And if they do anything, if the economy runs too hot, inflation is going to be the problem. Because this is this prior anchoring mindset, A, of 2022, and the 70s and the Volcker years, and this kind of glorification of the inflation fighting machine.

29:37But when I look at it, if I were to come from Mars, I'd say, holy shit, inflation is going to go negative. And there's almost nothing you can do about it. You've got an aging population and infinite intelligence and robots coming at a lower and lower cost every day. Well, technically, again, technically, they can do, right? No matter how fast does AI grow, dropping the cost, Fed can print the money faster. Yeah, but that's not necessarily. But will they? The question is, will they? What? But that's not necessarily inflation. Asset inflation and CPI inflation are two different things. Yeah, it's different things.

30:16It's different things. But if the government starts, basically, it's almost – we already know which – this is not a political point, Democrat, Republican. We know which way the wind is going to blow. Next time, if people are going to start losing jobs massively, if labor is going to get obsolete, we're going to go down the road of universal basic income. There is no way to avoid it. Like we already tried, it's already the tried out playbook during COVID. It's going to happen again. It's going to like the amount of stimulus is going to keep increasing, increasing. There'll be no choice because indeed majority of people like already finding and will more and more find their labor not being marketable.

31:02Like the value of their labor will not be, they will not be able to like majority of competent, able-bodied adults will still not be able to trade their labor for the life which is considered to be like decent life by this society. Of course, in this AI future, even the poor people by some kind of very materialistic life standards will probably have better life standards than people in the previous century. But that will not be acceptable to people because it will be so much worse than what will be the new normal for the society. When if 70 % of population do not have marketable skills or assets to trade their labor or to use the assets to get a lifestyle which is considered to be respected by the society, it's not a socially stable situation.

31:52Not in democracy, at least, right? So in a democratic situation, it's going to result in inevitable some sort of equivalent of basic income or some sort of equivalent of negative taxation or stimulus or whatever. It's just, again, whatever your political views is, that's the road we're going down. The question is how fast, and the question is what's going to be like leading the way. My guess is, like yours, that deflation will actually lead the way because, especially because of the fears of inflation after 2020, these people will be reluctant to just be really, really blatant about sending stimulus checks right away.

32:35It'll take a while for this idea to take root again. And as you pointed out, just a mere easing might not do the trick. It might pump the asset prices. Well, it's kind of obvious, right? If you ease, it's really like a supply-size stimulus, right? It only leads to, if you make money more easy, it only leads to more investment, innovation, and investment and innovation will just lead to more people being fired. Yeah, I mean, this is, you know, I've got to the point that I realized that this AI, robotics, nexus, all of this stuff is going to end up being a super massive black hole for capital. because the more intelligence comes out, the more you can do, the more you can replace jobs, the more you can lower costs.

33:20It becomes this extraordinary flywheel because it's also, we're going to get to the point of self-recursive learning here. So the flywheel gets faster over time. So you always have no choice but to put capital into it as a way of, I mean, I think of it as hedging myself in the end because we're all replaceable by AI because we're knowledge workers. That's purely what we do. And to think about that is how do you hedge yourself? You kind of have to be in the trade. Correct. Yes. It's like, well, it's the same argument that some people do for cryptocurrency, right? You need to allocate for cryptocurrency just on the off chance that that's the only thing that will be tradable in 50 years, right?

34:03If everything else will inflate away, maybe. Yeah. I put them in the same bucket. It's like that new technology stack of AI, robotics, blockchain technology, these kind of things. It's like the inevitability of it all, because they're kind of driven by network effects, seems pretty clear. And because the output is more intelligent money, more intelligent capital markets, more efficient capital markets, more efficient intelligence, more intelligence. It's like, what else are you going to put your money in? what i think is interesting thing about this ai black hole as you described that i think everybody is very focused on ai stimulating like double triple digits six digit growth right million percent annual growth whatever singularity kardash of scale one kardash of scale two whatever right yeah people are very focused on that type of growth but what i see in the near horizon I think I still would punt on the growth effects of AI, on actually direct GDP effects.

35:08Because what AI does, and this is hard for me to be very confident about because I'm not an economist. But this is how I'm thinking about this. In the past, technological innovations, like even when things got cheaper, it just became broad accessible or people just would buy better models like TV. Yes, TVs, like all TV would be really cheap now, but people just buy better and better TVs. So it's not like there's a GDP hit from TVs getting cheaper. No. Or people like switched to other things, like people invented cars, whatever carriages got out of style, but people started buying cars. Now, what is interesting with LLMs that they make whole sectors of human activity no longer represent economic activity.

35:53So for example, what used to be getting like going to a lawyer for a simple consultation or asking a lawyer to like help you write a document it used to be an economic activity it's no longer an economic activity getting second opinion from a doctor is no longer economic activity because a lot of people like myself get one opinion from a doctor and one opinion from llm Yeah. Unless it's a very severe case. Right. But I always get sick. So incrementally, I replace second opinion or call to a doctor by over routine issue to reaching out to LLM and same thing with legal stuff. Any kind of simple form.

36:32I don't go to lawyers. I just put in my information and I got spot out the legal document I wanted. Right. So I so but that is not the GDP at all. It's like there are parts of our life which are vibrant, but are not represent economic activities. Like when you're just meeting with friends and going for a hike with a friend. There is no GDP effect of you going for a hike with a friend. So there is very little GDP effect of you asking. And your friend maybe like might give you some advice, right? Say you went to a friend and get some life advice from a friend. It's actually meaningful, but there is no GDP effect.

37:12yeah now there are whole sectors of areas where people getting various advice and help which were huge portion of the gdp which is going away because people are finding this advice but doesn't that just increase into productivity so you've become more productive because you don't have to email backwards and forwards with the lawyer even if the economic cost of the lawyer in the past was i don't know 500 to get this bloody small document done you now do it yourself your productivity increases dramatically because of the time spent and the slight saving in costs in doing it. Possibly. But I think it's like, do I actually do more because of that?

37:51What am I going to do more trades because I didn't have to talk to a lawyer? It's almost like the time is almost the same. I could write a question to my lawyer or I could write a question to chat GDP. The real difference is that there is$500 of economic activity that didn't happen. I'm not so sure because you have to wait for the lawyer to come back to you you chase him up because lawyers never come back to you you said that you write so maybe i save some time but yeah i could use that time to like play board games or go for the set hike right or you could think more or you know do other productive activity that helps drive whatever you want to do whether it's hiking that's a productive activity in alex universe right yeah well it could be like for some people it could mean getting more productive, but it also depends upon for, of course, like, honestly, okay, if you're a hedge fund manager, possibly getting extra productive minute might be even more weight than not having to pay the lawyer for a hedge fund manager managing large portfolio, right?

38:50However, for many people, the big impact is that, like taking out those$500 out. What I'm basically telling you that I'm not sure if there won't be an incremental drag to the GDP from certain activities just not happening anymore yeah yes that probably makes sense because they become non-economic activities so they drop out of the measurements they drop out they become so incremental it's just like the electricity that like whatever the 10 cents of electricity that is spent by asking this question right yeah and then we have to see and we don't neither of us know obviously is where the productivity then drives gdp because whether that translates into productivity i you can do more economic activity maybe but the final demand right what what you're getting is what you're getting is like a lot of stuff taken out of gdp at the same time a lot of people taking out a workforce so sooner later that has to affect the final demand yeah and so far the final demand is somehow magically holding up well because of capex right don't forget we're gonna go through one of the biggest capex cycles in history.

39:54I was looking with Julian today about Taiwan exports of the US have gone, it's like completely like five standard deviations outside of normal thing because of this capex demand. And that's interesting is that why is Taiwanese currency weakening then? Who knows? I mean, it went much stronger, but recently over the last year, it's been weakening. I don't know. But what is interesting is, because now there is a very defined capex cycle, which is you order the chips, you see the announcements from all these people, we're going to buy a billion, no, we're going to buy five billion, all of that stuff.

40:39then the chips have to get shipped then they can build the factory the the not the factories the you know the data centers and all of that stuff which need to be then built so we're seeing kind of this i think a lead indicator to the size of the capex boom that's got to come and then we've got the energy side of that equation because we've got to feed feed all this beast with energy somehow yeah there are some mysterious things going on because on one part we have uh on one part we have this yeah this i definitely agree with you capex has to be the one making up for final demand and there is a trickle down because there are all sorts of jobs you build data centers you create all sorts of jobs but what is interesting is that oil prices have been going down despite despite the spiking energy demand for data centers.

41:29And that energy demand I only expect to be going up. In fact, I think when people talk about all those beautiful singularity dreams, I still do think that energy might prove to be the bottleneck for the singularity dream. We might not have enough energy to power all of this forward, right? But what is interesting that I was actually thinking that oil would be going up. I cut out of oil. I was even long deferred oil, but I cut out of it somewhere in the middle of the year that fortunately because the trend was just not looking good. I think it's, you know, when I listen to Scott Besant, he basically, and Trump, they basically want oil suppressed in price because they understand that energy is the input and oil is complicated for inflation, the economy and everything else.

42:23So this is the whole Venezuela idea, the whole kind of keep the oil price as low as possible, free up restrictions, let them pump as much oil as possible to keep the oil price down. Oil is too slow to scale for the speed these data centers need to be built. So it's going to be solar. It's going to be gas for the time being and eventually nuclear. So I don't know if oil picks up, but oil picks up always when the economy does. Even building data centers is going to use oil for everything. It is. Well, I mean, I agree with all your points, and probably, I guess, if that is so, then they were successful at suppressing the oil prices artificially or naturally.

43:03Who knows, right? But there are some interesting conundrums there. And I'm hearing right now that people are already beginning to get concerned over the overcapacity of data center buildup and how some of the projects are beginning to get canceled. I'm beginning to see some numbers around that. But what my concern is with all this data center buildup is that I don't really know the tech side of it very well. But given how quickly everything evolves, what if you build like data centers designed for some particular kind of technology and they're not even going to be compatible with technology five years from now at all.

43:39And it'll just empty hulks because it'll be completely obsolete, right? Not that we won't need something like that in the future, but we'll need something entirely different. Yeah, and I don't disagree. But the one thing where I play through the data center thing now, so what we know is this technology is so important, arguably the most important technology humans will ever invent, and maybe the last technology will invent, that everybody has to be in the race. So let's play through a scenario where Anthropic goes under. They can't compete or open AI or whoever it is. You choose your large LLM.

44:19They give up and say, that's it. We've run out of cash. What happens the following day? That's what really interests me because the following day, Microsoft or whoever it is will buy all of the chips, all of the data center, all of the power, and they will double their compute capacity overnight. Right. Doubling of compute capacity is shown via scaling laws to have produced even more amounts of intelligence. So they suddenly win the entire game. That's a really interesting game theory where if anybody goes bust, anybody who buys it ends up doubling their intelligence output. You know, I was recently in this very debate and the debate is not so much in the debate, but we're discussing something because I don't have the strongest views.

45:10Whether in the future AI will be like a utility or it will be like a winner-take-all situation like with search, right? Originally, yeah, there were a few search engines, this and that, right? And Google just won the whole game, right? Same thing with like Facebook won the social media game and Amazon won the retail online game. So will it be like what you're describing as a scenario in which one wins all? Or will there be like multiple utility-like providers? I think it would be the worst world in the world, but the worst thing to ever happen if this technology ends up in the hands of one nation or one company.

45:52So it has to be, because of this game theory, everybody has to scale at the same time. There's almost no way out of this. There's almost no way for them to go bust, really in this scenario, from the very big LLMs. and we're still going to have open source build out because I think people are going to understand how important this is not to be in the hands of one company. Well, people will understand it, but what can they do about it? If the scenario is describing that one of them cannot compete and goes under and gets bought out, how can we stop that?

46:28Yeah, now it depends whether the government wants to stop that, whether it's too important to fail because if you suddenly say oh microsoft buys it all in an auction they pay 50 over price spread right and suddenly now microsoft have all the compute is that agreeable to the government or not or is microsoft now so powerful that even governments can't stop it i don't know it's just a really interesting it's a very different world this whole thing right yes yes we were we're we live in a very different world it's like not the questions in some sense singularity is happening exactly on schedule and i've been watching this for 20 years and i was expecting it to happen in the 20s and it is happening in the 20 like how like what is happening in the 20s is exactly as outlined some things are happening yeah what by ray kerswell yeah yeah by way it's basically a rate cross-violence schedule is holding up very strongly i think if anything llms came a little ahead of rate cross-violence schedule some other things might have been a little more delayed but basically it's only within like one or two year range actually his schedule is just since the 80s is holding up and this is this is what really convinced me of singularity is because when i was introduced to raycoil's ryan schedule which was 20 years ago i was skeptic of it i was captivated by the idea so i was like and i looked at the historical evidence and i looked at the charts and they all look convincing to me but as always introduced to something new i was skeptic I always notice that like, say you introduced a new trade, some new asset.

47:58You can look at the history of this asset, but you will never really get a feel for this asset until you own it for a few years. You'll never like really know how to trade the asset until you traded it yourself, until you were the one picking up the phone and calling the brokers. Yeah. And you were the one stuck in like illiquid situations. You're the one watching the screen with it. That's when you get it. So same thing with singularity. Over the last 20 years, I was actually, okay, I was already introduced to the idea. So I was able to watch the benchmarks and I was like, oh, wow, it's all falling into line.

48:30It has been falling into line. And when people say like, oh, no, it's not happening. And I think I talked about this. All these people were saying like, this is bullshit. They were very dismissive of it. But people who were dismissive was not showing any math or any graphics. While the pro-singularity people were showing the charts, the computations and everything was going according to charts. But people just refused to believe where the charts lead. And even now, even I myself, like I don't think any human, no human being alive is capable of really fully accepting where these charts lead. I like the talk as if they accept.

49:06We all can say like, oh, yeah, but we don't really, in our bones, we cannot accept it because it's completely crazy where these charts lead. yeah if we went back four years and said oh by the way somewhere around 2026 human intelligence is going to be replaced by new apex intelligence everyone would have said that's utter bullshit and yet here we are it's yeah but but also at the same time if we look at the charts at any of these years that's exactly when it is supposed to happen exactly but you know like 2030 that was the timeline yeah even with this short period of time four years we can't we we miss forecast exponentiality we just can't do it yes and i think like what is also within with this captivation and llms i feel like so many other things suddenly went vertical too and it's not even noticeable but so many for a while i feel like we had almost like 80 years or maybe even longer of stuck technology.

50:12Like fundamental way of living was not changing. Like we had airplanes. We're like, since we went to the moon, like we had everything basically, we had computers, we had lasers, we had cars, we had airplanes, spaceships, and we didn't even go to the moon since 69, right? But the fact that we could go to the moon to 69 and in 69 barely can do it now, it just kind of stuck. Things were just getting a little bit mature, miniaturized. and the only thing that was really progressing is information technology and then suddenly I'm hearing all these shifts in robotics like people were writing about robotics science fiction about robotics for over a century the word robot now is more than 100 years old it came from a novel by Carl Čapek R-U-R he invented like a Czech writer invented the word robot and then I forgot what year it is but it's early 20th century uh now we're actually having robots now suddenly they're like all over the place and they seem to be doing we're actually getting them even flying cars flying cars were like for decades people asking for flying cars and guess what like flying cars okay that technologically exists now and they're beginning to get used and so many other things but alex nobody's prepared for the fact that we're probably in the agi year this year whatever however you want to define agi we're pretty damn close to to it and we're going to put that into an humanoid robot yes i mean people are not ready because people are thinking the robots are like a controlled thing but they're not thinking they're going to have super intelligence and they're going to be around us i mean i don't think people society is not prepared for this not in any way that's right yeah so when you look at um what's going on now do you see any interesting trades any interesting opportunities what are you looking at well a lot of it is uh i think duration is a good trade given what we discussed i think interest rates have space to go much lower because i feel like the whole tariff bump is kind of dissolving and with the loss of with the labor market slowing down i think duration is becoming a great trade nobody believes that trade at all right well i i'm in it so we'll see i think duration is a great trade i think uh in a precious metal space obviously like i mentioned that silver run beyond my wildest dreams but there are i think like platinum still has a lot of space to run because precious metals go on very long cycles are sometimes not synced.

52:55And like you could see gold like was way ahead of silver. And people like, when will silver go? When will silver go? Now silver is going. And platinum is only beginning to wake up. So when silver gets stuck, it's probably platinum will start going. So I think like playing this catch up game, I think it's an interesting game. There are a lot of interesting currency dislocations which could be taken advantage of in the long run. I think like extreme weakness of yen probably will not persist. Everything is against yen. like everything is for swiss franc everything against yen and all the stories are going that way but at some point location wins so i think you have to look for locations yeah versus stories sometimes and sometimes you have to work for continuations of stories yeah so i see kind of both location and story and anything anything else what about what do you do with the equity market here or is it too late in the trade you either i think you shrugged with the market because again history shows that at some point you'll buy it cheaper yeah i mean you could i'm not saying that that's the top but i'm also history shows that no matter how much it runs how impregnable it seems at some point you'll buy it cheaper for whatever reason i don't know but i think odds overwhelming that in the next few years there'll be chance to get in an equities market it at a better level yeah because i you know for the for me this year will be a year i would be peeling off the equity trades i've had on since 2022 and then waiting for whatever the cyclical downturn is whatever the shock is whatever happens to then re-enter that trade and so is the book out so the book is coming out next week early next week this is i have this this is my advanced copy so i'm inviting everyone to uh get their hands on it i think it'll be available for sale already not pre-sale but real sale next tuesday next monday it'll be available for sale so please write reviews what it's on kindle as well it's on it'll be on kindle as well there'll be ebook and physical book available and i think the useful point of it even if you The first version of the book would be just kind of to go back to it and see how did the principle play out over the next 10 years.

55:12And this is going back to that idea. If you introduce to something retroactively, it only makes that much impact. But this book already has been there in the world working for 10 years. And now we can see how it has been working. And I promise you, I'm not just tooting my horn. There is plenty of places where I show I screwed up that I didn't do this right. I didn't do this. so like this is why this was the idea my other book the trades of march 2020 where they did full transcripts of trading in the march of 2020 the idea to show things as they are with all the with all the scraps all the lapses of discipline all the mess ups that happen just show the world things as they are yeah and i think it's very important for people who are trying to learn their skills your books are really helpful for it because again as i said it gives you a framework you test your own framework, you show where they go wrong.

56:04You know, the one about the pandemic was very human as well. You know, there was fear there. There was all of the things that, you know, robot Alex the trader also was human looking at this thinking, oh my God, what is going on? You know, they're really good books and super helpful. So I haven't read it yet, but I've got a copy on its way and I'll be reading the digital version as ever and urge other people to do the same. excellent thank you very much Alex fabulous to see you as ever and I'll see you again soon it was a pleasure as ever always nice to chat and it's nice to have a good two-way conversation thank you always all right my friend you obviously enjoyed the episode because you're here with me at the end but listen don't forget to go to realvision.com forward slash join and grab a free membership it's an incredible community packed with alpha great investment ideas and the research that you need to help you unfuck your future.

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