TDI Podcast: The New Market Mantra (#933)

29:07It's just that's the dumbest. I don't even know where that came from. That is honestly boneheaded dumb. But you know what? And by the way, just to be clear with all the people are like freaking out right now that, oh, my God, they're going against Trump. Those everybody that's on the always Trumper side. I can tell you that the policies of the last president, just to be fair, was suck too. You know, there was just as sucky. Absolutely. And they spent too much money. They raised the debt too much. But my hope was that we have – my hope as a believer in laissez-faire government and capitalism and a fiscal responsibility was that something was going to change here.

29:49But this big, beautiful, bloated bill is unfortunately a real problem in that$3 to, I don't know,$5 trillion, give or take$1 or$2, is going to be added to the deficit or into the debt. And that itself tells you that how all this is happening, that it's not going to be, you know. I think you're right because I don't think, look, I'm agnostic. Governments in each country are selected by their constituents, and it's up to you who have it. I'm just standing back and looking at the policies and saying, can they work? And are they sensible? And that's where the biggest problem is. But just coming back to tariffs in a second, getting foreign firms to relocate into the United States might create some temporary employment.

30:39But almost all the industries that are going in are high tech, which are highly automated. So after the initial construction, which they've been doing with foreign workers anyway, how many people are they going to employ? It all sounds good. That's what it's for. It's for social media. It's the optics. It's the optics. It's the optics. Yeah, it's just let us – it's like when you go on a vacation and you post – or not you, somebody, everybody that's listening to me post a picture of you somewhere. It's not going to be in a rainy day sitting in your room bored because you can't go out. It's going to be the sunny day with the sun going down with a cocktail in your hand.

31:15It's going to be the most beautiful scene. That's what they do. That's what they're doing. They're not telling you about the stuff that you don't want to see. It's, you know, it's all look at us because we want to make sure that we keep that high level of confidence. That's right. And just to finish off on tariffs, there's two other points which are worth making. Is if anybody thinks it's going to encourage U.S. exports, I think you have to be very cautious. because just take one area, the automobile industry. And I noticed President Trump was saying that how foreigners are now going to buy a lot of American cars.

31:53Now, people may not be aware, but there's an existing 25 percent tariff on light trucks being imported into the United States. And this obviously helps American carmakers. and American car makers have been encouraged by the tariffs to focus on these very, very highly profitable light trucks. And by the way, it's not only light trucks because SUVs use the same basic components as these light trucks. So they've made these cars and they make a lot of them. But the problem is nobody internationally is going to buy them because overseas you have strict fuel economy standards. Secondly, the fuel prices, because there are taxes on fuels almost everywhere else in the world, are like double.

32:38I mean, our fuel prices here. Oh, so low. I mean, Americans go. So low. Oh, yeah, it's$4 a gallon. They sell it by the court over there, too, which is, you know. Yeah, well, we sell it by completely. We sell it by the liter, which is about one-fifth. But our gasoline prices are double yours. In Cambodia, they sell it by the two-liter Coke bottle that they empty out and they fill on the side of the road. Absolutely. Absolutely. There's a very funny story about that in Madagascar many, many years ago when I was there. We had to catch a taxi to the airport. And we called the taxi and the taxi driver said, you have to pay me first.

33:17I said, ah, ah, ah, we pay you when we get to the airport. He said, no, because until you pay me, I won't buy the fuel to put in the tank to take you to the airport. Mm-hmm. Mm-hmm. So the point I'm making is the world is very different wherever you go. But there's one other thing, Daz. There's one other thing. You've traveled around the world. Do the trucks and the cars that we have here fit down the roads in most of the areas of remote – not the highways, but the places like anywhere in Europe or in Japan or in China, do the cars actually fit on those side roads? No. U.S. cars don't fit. And more to the point, they could double as a bulldozer.

33:57Yeah, they don't fit. That's right. So it's not going to really work in the way that it does. And besides which, you can't make people buy things. You just can't make people buy things. And I can tell you, the Japanese are not going to buy American rice. Yes. It is just not in their culture. It is not in their culture. I agree with you. And so all of this is not going to work. And what it's ultimately going to do, in my view, is there's, as you say, the optics are pretty good. And there's going to be problems down the track. And the two problems, which are absolutely obvious, is that it's going to be inflationary.

34:39Because I think the Wall Street Journal did a calculation that an iPhone completely built in the U.S. costs$3 ,500, not$1 ,100. Now, it won't be$3 ,500, but it's going to go up. It's not going to be$1 ,100. It's going to go up. And I reckon it'll go up by about a third. You know, I think this whole administration, tell me what you think about this. This is a theory I've been working on. It seems like they were all about the same age, give or take, some of these main players in this administration, right? And they're stuck in a time warp somewhere between Frank Sinatra and Ronald Reagan, right?

35:17And whatever happened in those years, they see as like the best times of life. And they want to recreate that. They want that to be more. You know what I'm saying? I think you're absolutely right. I couldn't agree more. I couldn't agree more. They're stuck. And I've observed this about people, starting with myself, is that there are formative years of your life. And it's very hard to move outside of that. because you know it's the old grumpy old man syndrome basically you know things were better in my day and the answer is they may have been better they may have been worse but they were just different and the world moves on you can't sort of recapture the past it's a bit like jay gatsby jay gatsby spent his entire or rather f scott fitzgerald spent the entire novel of about gatsby trying to recapture the past right and essentially it's impossible yeah but Just moving on, and I think this is the real danger for people, is everybody has become fixated with the tariffs.

36:22And they're going to go on, but I think there's a couple of elements to that. Whatever happens, sadly, I think the rest of the world have changed their perception of the U.S. Everywhere I go, there's quite a major shift in how they see America. So the critical thing here is what they're trying to do is over time, they're going to shift away. All these deals, all of these things are basically short-term expedience. One diplomat said it very well. He said, yes, we can do deals with the United States, but what's the point? He'll change his mind in a week's time. That's a problem. And he said, and one Canadian said it to me, he said, what the Canadians found completely incomprehensible about the U.S.

37:13policy was Trump renegotiated NAFTA in his first term. And then he comes back and tears it up. It was the worst deal ever. It was the worst deal ever, he said. Exactly. And he did it. Who put this deal together? Exactly. So the problem here is nobody believes anything that's coming out of the U.S. now. So all of them are doing a spot of yes, sir, no, sir. They're playing the game. They're playing the game. And what they're trying to do is plan how to get around it. And this is where I think the fatal flaw in all of this is. And the flaw is that when he wrote those letters, which were ungrammatical, written in what I call Trumplish, which is a version of English, basically made a big point.

38:06which is that the only way you have access to the United States market, which is the greatest market in the world, is if you do all of this. The problem is the US is not the greatest market in the world. It once was. It's now about 13 % of global consumption. And it is smaller than China, India and European Union combined. So that's the first thing I'd make. The second thing is that's the size of the market. But the size of the market doesn't matter. It's what you import. The US imports$3.2 trillion of goods, of which I reckon about half you can't avoid. So we are at the end talking about$1.6 trillion of goods.

38:55Now, that's not a small number. I'm not saying it's a small number, but that's the amount that we're all sort of anxiously talking about. Now, the issue is the US is reflating, sorry, the European Union is reflating its economy by about a trillion dollars. China's doing about the same and the Indians will probably do something smaller. So the demand that you're losing from the US will in time be made up elsewhere. So all they're doing is buying time. Because essentially, the US is going to be bypassed in the global trading system over the next three to five years. And this is what I... And that damage.

39:36This is what I brought up, the term that I think I coined a couple of years back, called selective isolationism. The idea that we are forcing this upon ourselves and choosing who we want to do business with or not. But yet, and what that does is it creates all sorts of problems. The idea of isolationism itself is tariff-driven a lot, right? That's what happened during smooth haul, you know. And the way that we are pissing off our neighbors is, now, that could all be reversed in four years from now, possibly. You know, that is, we don't know if this will be permanent damage or people are like saying, you know, okay, it's fine, we'll just do it.

40:16But it's like what happened during COVID. During COVID, as you recall, we couldn't get goods from China. Our supply chains were in disarray. And it was our fault. We were sourcing so much from China. We never thought something like this would happen, obviously. And even though supposedly Bill Gates was promoting this and saying it would happen. But no, nobody really believed this would happen. And nobody set themselves up. And so what happened was when China shut down for a while, we had to go and scramble. and what we decided was never again is this going to happen. And we started sourcing and buying from other places and we built up an incredible rapport and operation with a country like Vietnam and India for that matter and other countries around the world.

41:01And when China opened up, they were forced isolationism. That's what happened there, right? That was different. When they opened up, they opened the doors and thought there'd be all these orders coming in. It was like, hello, hello, anybody there? So we're doing the same long term because we retrained ourselves. That's what these other countries are being forced to do also, aren't they? That's exactly right. And I'll give you a very concrete example is in Brazil. when in the first Trump era, around 2017, 2018, remember he put all the tariffs on China and the Chinese stopped buying soybeans? They just switched to Argentina and Brazil.

41:48And I was talking to a farming consultant in the Midwest and I said, did the sales ever come back after the tariffs basically were reduced? after Trump left office, he said, nope, nothing. Not a single one came back. And the second thing that happened, I said, well, okay, so how do these farmers survive? He said, well, whatever amount they raised from the tariffs from China was just given back as subsidies to the soybean farmers. So that's the only way that industry keeps going. So I don't think it's worthwhile, while. But I think there's several things in what you're saying. I think it's a mindset.

42:32And I'll be very frank. The most nations now around the world really now have painted across their foreheads a statement by Henry Kissinger. Kissinger once says it may be dangerous to be America's enemy, but to be America's friend is fatal. And that's what they're now working towards. And that's the big problem longer term, but that's a longer term thing. There is a shorter term thing that's going to play out, which nobody's talking about, which is what is going to happen, what I call the capital wars. The tariffs are only one part of it. What we're now going to see is a switch to capital account things.

43:19So controls on money flows, on investments. And that, I think, is what people are missing. And that is going to be far, far more damaging than the tariffs. And let me explain what I mean by that. Now, one benefit of the tariffs is it's raising revenues. Everybody knows that. And I think they raised about$50 billion in the last quarter. And I noticed the Commerce Secretary was sort of beating his chest a lot. and saying they'd raised$50 billion and how this was going to reduce the budget deficit. Now, what he seems to not grasp is that the budget deficit is$5.3 trillion. So$50 billion by four is 200.

44:04That's 4%. And even if you double it, it's not going to be sufficient. And remember, the tariff revenue always, and I know this by having looked at history, is short-lived because people stop buying. People just simply can't afford it or whatever happens, they find new markets. They just stop buying. Well, tariffs are taxes. Tariffs are taxes. Taxes are inflationary, higher cost. And when people are stretched to begin with and exhausted from pricing escalations, it causes problems. Absolutely. And so now we have to focus on the main game, which is the U.S. government debt, which is$36 trillion.

44:44And as the big, beautiful bill is going to add a huge amount to that. And I think, by the way, the Congressional Budget Office estimates grossly underestimates how much will be added. Grossly underestimated. Well, if it's$5 trillion, I'm going to stay with that. I can't think of anything. I can't think of more. I just can't. No. Yeah, it's worrying to think of it more. Now, you have the budget deficit to be financed. But notice one thing. the US current account deficit, which the tariffs were meant to fix, has remained high. It hasn't changed. So you have to fund these two deficits. And essentially, if you look at how the funding works, foreign investors have about between$25 and$30 trillion invested in the US.

45:34About$17 trillion is in equities. The rest are in a hodgepodge of treasury securities, corporate and agency debt. And essentially, the problem now is if the foreigners start to withdraw that, and everybody says, well, I can't withdraw$30 trillion. And I said, I can't. They can't. That's absolutely right. But if they withdraw a couple of trillion, that's enough. Because that would completely destabilized the treasury markets and the US currency. And we had some of that shock back in April. Correct. And that's what I'm really worried about is that's going to come. And the other thing here, which is quite interesting because it flies below the radar, the US has shortened the term of its borrowings.

46:25This was under Janet Yellen. Janet Yellen tried to keep bond deals down at the long end of the curve so that mortgage rates didn't go up. by borrowing short. And they've got a lovely name for it. It's called Activist Treasury Issuance, ATI for short. But essentially, US debt now is getting shorter and shorter. And US debt that's maturing within 12 months is around about 30%, which is the second highest after Japan. And the average maturity has come down from around 10 years to six years. It's one of the shortest in the world. So you now have rising debt levels, amounts to be financed, relying on overseas people, high interest costs, particularly if inflation doesn't come down, and a lot of short-term borrowing.

47:14That is not usually the recipe for success. I mean, they should have gone gangbusters at 1%. Absolutely. I couldn't understand why they weren't issuing 50-year bonds. Well, because they didn't want to increase the debt. Yeah, that's right. And also there's always this thing, I hear this among corporations, we don't want to borrow long because we'll be so profitable, we'll pay off the debt and we don't want to be stuck with debt because we've got to be so profitable. That's so dumb. And I just sort of roll my eyes and go, good, good. If you're so profitable, the 1 % is still a moneymaker. You leverage it up on the profitability.

47:52Yeah, exactly. Well, it's stupid as it was stupid. Yeah. And now you have to look at what they're going to try to do to deal with this problem, because they've got a massive debt problem and a massive financing problem. So I think it's a three or four pronged strategy that's playing out here. The first is, okay, well, how do we correct this? We're going to increase revenue and tariffs are part of that. But there were some other interesting things which people don't really look at. The famous section 899 of the big, beautiful bill, would have increased taxes on foreign companies operating in the US by 5 % annually to a maximum of an additional 20 % over the normal tax.

48:32And there was this funny thing in there saying, well, we'll tax people who we deem to levy discriminatory taxes on American businesses. And since the administration has the right to basically classify who's discriminating against us and who's not. So you can take it as a given that it'll be on everybody. And of course, American companies love this because it gives them a huge competitive advantage. The thing that people don't understand, Dustin, and you can confirm this with me, once you have these tariffs and these taxes and all that in foreign companies, the US companies feel the right ability and desire to increase their pricing because there's no reason they can't because in doing so, they're just, they keep it a little bit lower.

49:11So if this is a 20 % tax and then therefore a 20 % increase in pricing of another product that comes in? Why not just increase ours by 15 %? And we're great. I have a friend who's in the plumbing business and he has big inventory, right? He's a distributor. He said he loves the tariffs. I'm like, why is that? He goes, because my inventory just went up by 15 % in value. Absolutely. Oh, my God. Absolutely. That's terrible. It's just crazy. And those taxes, it was withdrawn from the bill eventually because they did a horse trade on basically the minimum corporate tax under the international tax arrangements.

49:46But it'll come back. You mark my words, it'll come back. And there's other things as well which people don't really focus on. One is taxes on foreign remittances. So if you're a worker in the US remitting money, there's going to be an additional 1 % tax on that. Now, that doesn't really encourage people to come and work in the United States. That's the first thing I would say. The second, then there's a whole thing about port fees, which have completely flown under the radar. And this is going to go through. So it's an additional cost of$600 to$800 per container. It's about$15 or$18, I can't remember now, per ton, specifically on ships built in China, which is about 80 % of the global fleet.

50:33So every time those ships dock in the U.S., whether they're bringing in imports or taking out exports, they're going to have to pay taxes. and there's, of course, the famous$5 million gold card visa, which Trump is promoting. These are all ways of raising money. Now, whether they're going to work or not and how disruptive they'll be, I don't know. But there's also other little things which are going on, which again, are flying below the radar. One is, you notice that the US banking regulators relaxed banking regulations, which is a supplementary leverage ratio. There's only one reason they did that.

51:11It allows American banks to hold more US government bonds. Yeah, of course. So they're trying to create a bigger market. Well, they like also the stablecoin. That's why the stablecoin is so popular. Absolutely. The stablecoin, you hit it on the head. The stablecoin is exactly that because each stablecoin has to be actually invested in interest-bearing short-term government debt. And the most funny thing about that is they actually defended stablecoins and short-term debt issuance. They're saying they're only issuing short-term debt because the stablecoin demand is so great, which is kind of interesting.

51:43But everybody thinks, okay, well, these are fine. They're at the enders. But they're not going to work. They're not going to be sufficient. And this is where, effectively, the two major concerns I have going forward. One is obviously the barney that's going on between the White House and Jerome Powell. Yes. Now, the reason they're doing this, leaving aside the personal animus that exists between those two individuals, is they want interest rates down. Trump has said he wants interest rates down at 1%. And the reason is you can't service this government debt with current interest rates because, as we know, the interest bill is now so large.

52:24So they're going to basically try to get the interest rates down. And in my view, it's a matter of time before they get somebody in the Fed, essentially, who's going to do what the White House tells them. Because his term ends next year. Yeah, May. And I think it would need some very brave people in the Federal Reserve to stand up to the White House because God knows what else they could do. And as I pointed out to a friend of mine, I said, they're not going to stand up because if they stand up, they'll have the IRS crawling over all their personal affairs. In about two minutes. The question is who's going to take that job.

53:01The only person that would take that job is going to be somebody who's just going to play ball. Well, it's basically going to be somebody who likes to lick the wrong end of the elementary canal. And we see what happens when this goes on. But I want to just go back for a second. Sure. And then I want to talk about that. I want to also get into force controls and Stephen Mirren. Sure. And some of that. But, you know, with every delectable, not every, but many delectable things like a piece of fruit, an apple, a peach, you eat it, it's delicious. But there's a pit. There's a pit in there. And we just say, we don't complain and whine and be upset that there's a pit.

53:39It's just what it is. It's the same thing with China. What is our problem with China? I mean, I don't really get the fact that, you know, there's some good there. And, yes, they do dumping and they do unscrupulous things. and you want to talk about the fentanyl, that's a problem. Okay, fine. Whatever you want to talk about. But with every relationship, with every good, there may become some piece of bed like a pit. And we just can't get beyond that. It's like somebody wronged somebody, and this is a lifelong desire just to kick their ass for some reason when, in fact, we created what they are, by the way.

54:15We created this. There's absolutely no doubt about what you're saying, But the most important thing is Americans have benefited from low cost of everything for the last 30 years from the rise of China. So I get it. That's what I'm saying. I don't understand. But I'm not going to understand. I'm not going to understand. I'll give you that. And I don't think you can explain it to people either because it's kind of a weird, weird thing that's going on. But it's kind of interesting because I've just spent seven weeks in China. and it's fascinating to look at how they look at America. America is obsessed with China.

54:56The average person in China and also most of the bureaucrats now regard America as kind of irrelevant because basically they're saying, well, we are a very large domestic market and yeah, we rely on exports. We understand that. but we are now much better in terms of higher technology than we used to be certainly their

55:19Satyajit Das:electric vehicles make tesla look like stone age cars yep and there's a whole world outside of the united states we can sell to and the matter is how do we do that so the obsession is one way it's not a two-way obsession it's like a love affair where one person is in love with somebody else or is reliant on somebody else. And the other person couldn't give a stuff about them. Right. How come they're not thinking of me? Yeah, yeah, yeah. Yeah. They keep obsessing about it. But the other side, and the funniest one is in Taiwan. About five years ago, a friend of mine who I'd worked with before, who's Taiwanese, said to me, can you explain something to me, Des?

56:02And I said, what? He said, why is the rest of the world so concerned with China invading Taiwan? when we don't spend any time thinking about it. Yeah, something was made up. And I said, I have no idea. Diversionary tactics, scapegoats. This is classic kind of politics going on. Let me go to something else here, if you don't mind, because we only have a few minutes left here. I want to talk about the economics of these forced controls. We touched on this for a second. I want to get your thoughts on how you go through this. There was another piece you wrote about with Stephen Mirren, the Council of Economic Advisors, and this proposal of restructuring U.S.

56:40bonds into 100-year perpetual securities. Is that – how would that even happen? I don't even – I mean, you could issue new ones, of course. That could happen. But they can't just take our U.S. bonds and restructure the 30-year and say, hey, you know what, we're going to make it a 100-year bond. Well, this goes back to the point about we talked about with the parallel between what's happening in the US and President Trump's private businesses. So basically why Mirren is the chairman of the US Council of Economic Advisors is this paper that he wrote. And he basically made the simple point, which we were making earlier, is that essentially the US is captive to foreign investors and basically they have to prevent capital flight.

57:26And to manage the debt, they have to wipe it out. So he basically had a three-pronged plan. The first one was exactly what you're talking about, which is this exchange. You can do forced exchanges. If you're the borrower, you can force whatever you like, which is to force the other side to take low or zero coupon bonds, which is what he wanted. But that would be a de facto default. But, you know, your default, people default. And Trump, as you know, his businesses have defaulted several times. The second part is his other idea was, well, OK, well, maybe we won't do that or maybe we'll do something else, which is I'm going to charge a user fee for government security.

58:07So if you're a foreigner, you buy a government bond of the United States, you pay us a user fee, which is actually a withholding tax. They couldn't call it a withholding tax because that would be contrary to tax treaties. So this became a user fee. And the other one is, he said, well, the other way we could deal with this is foreigners would have to hold these securities in limited access escrow accounts. Basically, that's seizure. I don't understand. What's the whole purpose of this? The whole purpose is what? To dissuade people from buying bonds? No, the whole purpose is that we've got$30 trillion of your money and we're not giving it back because it's just wiping out the money because we won't pay it back.

58:48But isn't that kind of what we do? This is so dangerous. Isn't this how we do by debasing our currency and creating inflation? Yes. Isn't that the whole point of – without getting into the whole discussion how this works, but basically by debasing your currency or taking down it through an inflationary process, what ends up happening is that you actually reduce the value of the money that you have to pay back over time. Well, that's the whole point. The point is the dollar is down 10%. I do not know of one sovereign fund, one international investor who is keen to increase their exposure to the U.S.

59:26Not one. U.S. dollar or U.S. Yeah, to the U.S. dollar and U.S. investments. Really? Well, somebody's bringing money in. The only people who are bringing money in at the moment, in my view, are companies, which are basically pushing money in because of the plans they have to invest. But if you actually look at them, Japan, basically in terms of treasury bonds anyway, the major ones are Japan, Hong Kong, Taiwan, and the petro states. And the petro states have a different problem. They haven't got any money anymore because of the lower oil prices and their own extravagant spending. So basically, what is happening now is this problem that exists, which is the reliance on foreign capital, is being made worse by people talking about these plans.

1:00:17Because that's basically going to make these people very nervous, and they're going to actually try to withdraw the money. And Mirren gave a very interesting sort of analysis of this. He said, well, they can't take their money out because if they try to, the US dollar would crash and interest rates would go up, asset prices would fall, they'd lose money. So they'll have to stay in. Now, that's fine up to a point. And it's probably true. But it's not exactly encouraging foreign investment. And that's what you're trying to do, remember, under the tariffs as well. So the problem is this whole plan is full of inconsistencies and contradictions.

1:00:59And there's no consistency, no coherence, no real strategy. The best way to put it, it's a Hail Mary pass. You know, we're going to run a massive budget deficit. We're going to put these things up and hope to hell it all works. And if it doesn't, it's all going to blow up and we're going to call bankruptcy. Well, I hope that, you know, we don't end up with any kind of financial repression or maybe something. My hope is that something is going to come out of this somewhere good. But I agree with you that the totality of all this as I watch it unfold on a regular basis with the fact that we don't really understand what the ramifications would be.

1:01:36and this time is different with tariffs. This time is different with tariffs. It's not going to create inflation. It's not going to create a problem with selective isolationism. It's not going to, this time is different because everybody likes us now. Okay. And they want to do business because - Isn't this time, isn't what John Templeton once said that this time it's different is the foremost dangerous words in financial markets? Yep, yep, exactly. Exactly. Das, always a pleasure having you and I appreciate you staying up or getting up early, I guess, to do this. And we'll talk real soon. I really appreciate you.

1:02:11Thanks very much, Andrew. And you're a great guy. All the best. Thanks. Das is always great to have on, always just a treasure trove of information. And his explanations is what I think people really like and how he brings things forth and makes it easy to understand. So he's very complex and very difficult to really get through, sometimes almost impossible to get through. data points, theories, outlooks, and not only that, just facts about what's actually happening. So hope you enjoyed that. I did as well. Great stuff. Great stuff. Next week, we have coming up Meb Faber. If you haven't heard Meb, he's awesome.

1:02:55He's awesome. So stick around for that. Make sure you subscribe. Make sure to tell your friends. Make sure to visit thedisciplinedinvestor.com and make sure to be here next week. I will be here. Thanks for joining me again. I'll see you again real soon. This podcast is intended for informational purposes only and does not constitute personalized investment advice. Investing involves risk, including the possible loss of principal and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guests and may not necessarily reflect those of Horowitz and Company, Inc., and investment advisor registered with the U.S.

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