Hugh You Looking At

Richard Kramer:

Welcome back to Bubble Trouble. I'm the independent analyst Richard Kramer and I'm joined by the economist and author Will Page who is undertaking a Scottish gathering of the clans today as we lay out more inconvenient truths about how business and financial markets really work. Our guest today is the esteemed Hugh Hendry, a man who found fortunes walking the tight ropes as booms turned to bust. Founder and CIO of Eclectica Asset Management in London, a global macro hedge fund from 2002 to 2017, two things happened in that period, where it's high watermark events were the early and successful identification of the gold bull market and the housing debacle in the US in 2008, both of which delivered annual returns of between 30 and 50%. So roll your Rs as I try and corral a couple of extremely mouthy Scots in this latest episode of Bubble Trouble. More in a moment.

So our guest, Hugh Hendry, has a long spell running the Eclectica Fund on picking the endless contradictions of global macro policy through a decidedly choppy period of the global financial crisis and now is the host of his own media empire, The Acid Capitalist, and I listened to three of your podcasts today on my run. Acid-tongued or is that just a reflection of the psychedelia that seems to have taken over central bank policymaking that allows us to get to six trillion dollars forecast for the Metaverse. Hugh, tell us a little bit about what keeps you off the streets of St. Bart's these days.

Hugh Hendry:

Well, the acid is really that you have to get kind of out of your face to come and the mess. To quote Jim Morrison from The Doors, "What have we done to our fair sister?" We've ravaged and we've plundered and it fills me with dread. So that is the acid and I have the great fortune of living in a beautiful tiny little island in the middle of nowhere. I had the foolish notion that I could rid myself of the macro voices that interrupts my mind. Very foolish because those voices continue. And therefore, I felt the compulsion to share it all on the platform of Twitter et al.

Will Page:

Fantastic. Well Hugh, I should remind you, on my side of Scotland, we've got a toast, which reminds me a lot of your commentary where we hold our drinks up, we say, "Och, you'll get over that and into something worse." And the doer pessimism you bring to financial markets is I'm sure going to make for an enjoyable conversation. I want to jump in back at the beginning. Our paths didn't cross in Glasgow, but we studied at the same university. You were there just over a decade before I was there. In fact, you were there when the Berlin Wall came down. But I wanted to ask you back at the beginning, when did you first smell a rat? That is, when did you first sort of think, "Hold on. What they're teaching us in the textbooks isn't how the world really works." When did you sort of see the divergence between theory and reality?

Hugh Hendry:

That is a great question and I must challenge you on this notion of being dur or whatever. I carry a cup full of joy with a curiosity and wonder just how preposterous the world is in finance. But to your point, I have a soon to be 21 year old son and he's studying PPE, politics, philosophy, and economics.

Will Page:

Oh dear.

Hugh Hendry:

Just completed his first year. And I've got serious reservations about the E component of that [inaudible 00:03:45]. He's a very smart kid and the toughest part of the course is the most ridiculous part is the econometric calculus, which is the ruin of our policy makers who are beholden to algebra at the expense of wisdom. If only rates were determined by philosophy as opposed to econometrics. And me in my journey, I have to say, hey listen, my father was a truck driver. I thought I was going to be an accountant. I was like just trying to get a leg out of the swamp. And it was only until my fourth, the honors' year, that I stumbled across a course with the most appalling name, market-based accounting research. Let's just call it-

Will Page:

Shadow play number one.

Hugh Hendry:

Well, there you go. But I sat in a dark room with a computer terminal, very old historic terminal, that just had-

Will Page:

Green screen.

Hugh Hendry:

Green screen. Absolutely. And I had a data stream, which to all you young folk who're like, "What is that? Is it a Nintendo? Was I playing kind of tennis or whatever?" But it was the forerunner of Reuters and Bloomberg and you could draw down price data and I was enraptured. We were seeking to determine whether there was wisdom in the distribution of market prices or whether it was just random. And so we could take the release of accounting policy changes with null hypothesis. One change might be where it would have an impact on reported earnings, but no impact on cashflow and the reverse and would the market be wise enough to determine one from the other? And it was Shakespearean witnessing this tempest, this invisible force revealing itself on this old, cranky terminal. And up until that point, I had signed with KPMG. What are they called? KPM? I don't even know. Do they even exist today? I have no idea, but an accountancy. I was set up to be a chartered accountant.

Will Page:

One of the big ones.

Hugh Hendry:

One of the big ones. I was a smart kid and they had offered me the inducement of I think 2000 pounds back then. It was a signing on fee. That was the first actual engagement and fascination, which started me off on this long road.

Will Page:

So you went from being a bean counter to measuring the gaps in between the beans. And just very quickly, on your concern about econometrics, I have to say, when I was at university, same campus in Glasgow as yourself, I remember being taught about the error term, which sits in the econometric formula. And I raised my hand in class and said, "What's inside the error term?" And they said, "That's the stuff that we don't understand." So I raised my hand again and said, "Shouldn't we understand it then?" They still use error terms in the Bank of England's formulas today.

Hugh Hendry:

The added term is the principle risk component of markets today.

Will Page:

Wow. That's a good way of summarizing it.

Richard Kramer:

So our Bubble Trouble listeners are very familiar with the analyst world. What I call the sycophants and stenographers. Those congratulations on a great quarter. And how should we think about the metaverse mark? But as you get up into the higher levels of the stratosphere where you deal with, in these macro world, the oxygen gets thin, it gets hard to think, can you simply explain what a macro fund or a macro analyst looks at and what sort of data helps you make decisions when you know that you're betting against, in many cases, these policy makers who are making their decisions based on no data whatsoever or on the wrong data as we had our podcast last week about the Bank of England consistently using the wrong models and the wrong forecasts. And you'd think that if they consistently did it, they could just do the opposite of what the models tell them, but they don't seem to be able to do that either. So what sort of data do you look at to second guess people who you know are using bad data?

Hugh Hendry:

On that point, I do recall reading the front page of the Financial Times. I guess it followed last month's debacle of raising rates again. And I was again joyful at the opening statement written by the Financial Times that there was mea culpa. The Bank of England said, "Damn these models. We apologize. We've been using models and we're now going to reject them." And I was thought, "Hallelujah." But then it went on to say, "The models are suggesting we should be cutting rates aggressively. That we are nose diving into a profound recession." And then of course the next line is, "So we're now going to ignore the model," and I was thinking, "Bring the model back. The model sounds to have found some wisdom." And answering your question in terms of my engagement with that interface. My engagement was an unconventional engagement and I was ruled and governed by, again, philosophy.

I was governed by the notion of irony and paradox that back in the day to be granted a global macro investment mandate was just one of the highest honors, the highest station that you could be awarded because effectively you were granted the permission to do whatever you chose to do, which is wonderful. Against that, you had no beta. The reputations and the riches, which are made from the guy who set up the pharmaceutical hedge fund or the technology hedge fund or the South Korean hedge fund or the Japanese hedge fund, the Chinese hedge fund, at the moment when those indices were flavor of the month, we constantly confound luck with genius. And so I didn't have, if you will, the fair wind behind me, but my thing is to be aware of the conceit and the arrogance of well-formed arguments and logic.

Will Page:

Resonates with me.

Hugh Hendry:

Now they are necessary, but they are not the entirety of the operation. You have to seek legitimacy in narrative and in idea before pronouncing and implementing it. And for me as a practitioner of risk, that meant that any idea I had could only be played, that we could only deploy risk, when we had the legitimacy of price trend. And to cut it short, I bought things going up and I sold things going down. Yeah. And famously back in 2003, we had the Bank of England armed with, well how many Ph.Ds are working for the Bank of England? Hundreds I would imagine.

Will Page:

About two per person I think.

Hugh Hendry:

And they concluded that the gold reserves were somewhat redundant and they were selling off the Bank of England's gold. And when you think-

Will Page:

I remember this.

Hugh Hendry:

We've been accumulated over hundreds of years through famine's, international conflict, and here we were 25 years into a bear market where I think gold had peaked in January of 1980 at about $870 per ounce. And here we were in 2003 and they were selling it for $275 an ounce. And again, like with logic and Ph.D. arguments and I was buying it. I was buying it because the trend, there was no legitimacy in their well-formed argument.

Will Page:

Wow. Just like Richard said, our last podcast was called Judging the Old Bailey, the old Andrew Bailey that was. If you were judging to give us a tweet like summary, what would be your judgment on our Central Bank governor to date? And remember, we do have not proven under Scott's law. So you can get your out of jail card with that one. Pun intended.

Hugh Hendry:

Well, it's too easy to vilify and personalize. I'm not impressed by Bailey, but I can't think of the last time I was impressed by a Central banker. And really rather than mudsling and the like, my retort is simply, when I'm in competition with others, I simply ask, "Tell me the last time they made a policy judgment and you thought, "Wow. They get it and this is going to do good." And I struggle. Famously people might go back to the summer of, when was it? 1991. Was it one or '94, when Greenspan, he preemptively raised interest rates. You got to go way back. Why can't we go back 18 months? Why can't we go back into the very evident recovery from the alien body snatching invasion that we call COVID and why can't we say, "Yeah. They got it there and they started to do smart things." We can't.

Will Page:

I keep on thinking about my favorite film of all time, which is All the President's Men, Robert Redford, Dustin Hoffman, and that famous scene where deep throat in a car park says, "Don't be in awe of the people in the White House. Truth of the matter is, these weren't smart guys and things got a little out of hand." You're totally cut to Central bankers like they know it all, they're above the law, they can walk on water. But then you look at the tools that they're working with, manufacturing surveys filled out by some junior clerk in a company in Sully Hall six months ago to determine an interest rate policy today in 2023. Another one, Hugh, a very important one for me, and Richard's heard me talk about this before, we don't have a measure of commuting costs in the inflation basket.

It's not there. It's just mutched into transportation. Think how much commuting costs have fallen due to the pandemic and we're not measuring that fall. That's relevant. I'm not saying it's going to overshadow inflationary pressure, but that's super relevant in terms of what's actually happening to the price level that consumers are experiencing if you're only working three days in the office instead of five. Those two days of train fare costs overshadow any increase in the price of coffee and a croissant right when you get to the train station. So it's this type of stuff for me which bugs me out. Just street smart observations.

Hugh Hendry:

Yeah. But that's micro. I operate it at the macro level. And I see two things, two damning things if you will. I think an ignorance of money. I say to my Acid Capitalist tribe that there are only five people in the world that actually get money, that actually understand it as a concept. They certainly don't work for central banks. They do not work for Goldman Sachs. Mostly they don't work for hedge funds. They're a very rare find. And that's problematic and I even fell into that trap. My clients closed my fund in 2017 and I have to say I had scant knowledge of the Eurodollar system. And to those not familiar, think of the Eurodollar system as a grand pawn shop operated by private sector banks. And you can go there and present collateral.

In gangster movies, it would be a gold ring, but in modern financial parliaments, you would be presenting perhaps $100 million of a high grade equity portfolio. And you present it to the pawn shop and they give you cash and they'll give you $100 million of cash. They'll give you a line of credit. But the deal is you got to haul your back in their in 24 hours time and they reserve the right to change their mind and to change the terms. Okay. And that has become, and I call that non-sovereign dollar creation. The principle creation, the principle printing of money today, exists outside the domain and the territory of the United States and therefore outside the domestic regulator, which is the Federal Reserve. And they seem to be content to ignore it, but in ignoring it, we're seeing repeated policy errors. Okay. So that's my first problem. My second problem is that I believe the macroeconomic history ended 25 years ago.

It ended 25 years ago. And I associate that with the rise and rise of mercantilism and the industrialization of an enormous continent, the continent of China, where industrialization has always been funded with the surplus savings of the rest of the world.

Will Page:

Right.

Hugh Hendry:

The problem for the host nation, is it a problem? The great thing is they have all these amazingly high knit present value projects which are going to just take their economy forward, but they have a deficit of internal demands to finance it and that's fine. They run trade deficits and the [inaudible 00:17:46] of that, the balance, everything balances in this works, is capital inflow and the Chinese rejected that model. And the rejection of that model has completely put a spanner into not just the econometrics, but indeed the philosophy and the understanding of how the modern economy works because it's meant to work the way it always worked for 200 years, but for the last 25 years it has abysmally failed.

Will Page:

That's right. And there's a point in the early notice where America was running twin deficits, a deficit on the current account and a deficit on the capital account. And I tried to read that one as basically China's lending lots of money to America so it can live beyond its means and America's buying lots of goods from China with that extra money. So they have to pay back the Chinese twice. So you have those types of imbalances. It does upset the history books.

Hugh Hendry:

The great tragedy, the great missed opportunity of the noughties, was that China let on, and it's not just China, Northern Europe, Germany, and of course the Japans and the South Korea's and even the American, we might have a third world war to support the Taiwanese. They're damn mercantilists, but there was essentially a sum of about seven trillion dollars, which these nations were seeking to finance the purchase American dollar financial assets. And not just any financial assets. They wanted risk-free. And it was a wonderful opportunity for the US public sector to run really big government deficits.

Will Page:

Huge.

Hugh Hendry:

And it would've been funded principally by the Chinese. And we could, God, imagine, we actually could have had a functioning medical system in America. We could have outstanding infrastructure. We could have an education system which catered for the many and not those who could pay for it elsewhere. And that didn't happen. Going to, again, economic and flawed orthodoxy that government is bad and deficits are bad. And over that period, the US government, it only issued two trillion dollars in risk-free treasury securities. And so the market and its infinite wisdom and Adam Smith greed if you will with the invisible hand, the market took it upon itself to create risk-free securities. And that was these mortgage-backed securities, the idea of pooling a geographically diversified collection of mortgages.

Typically the last thing you're going to fail on is your mortgage. And then if you can diversify that, and up until that point, there had never been the occurrence of a nationwide house price decline. So again, we're coming to the notion of the conceit and the arrogance of a well-formed argument. What if we put these safe assets, we diversify geographically, and we sell then? And Goldman Sachs et al sold five trillion dollars to these mercantilist nations and what a pity and what a waste. What a profound opportunity cost that was.

Richard Kramer:

We need to move to the break, but I want to come back to something you said on one of your Asset Capitalist podcasts, interviewing the brilliant Marc Cohodes who we've engaged on many short tech ideas over the years, but you were talking about the lack of skeptics in the market and there are just too few people willing to stand outside that orthodoxy or reject those well tuned arguments with all the Ph.Ds behind them. When you are running a fund to step back and say, "Hang on a second. There must be a counter argument here." We've had many podcasts on the title of too good to be true and you have to think about that now in the context of a market full of assets quite obviously mispriced, but no one wants to be the one pointing out the emperors walking stark naked.

Hugh Hendry:

Yeah. My biggest challenge was convincing people that I was an oxymoron when they thought I was simply a moron.

Will Page:

A moron.

Hugh Hendry:

Okay.

Will Page:

There's a T-shirt printed with that. Yeah.

Hugh Hendry:

The oxymoronic element derived from the notion that I was regarded as being a contrarian, but I was a trend following contrarian and these are odd bedfellows. And the Marx monetization has really come from moronic contrarian behavior and indeed I've taken much rant from the same in that people proclaim a narrative and a belief and don't look at the trend. And if we reverse engineer it, the classic of that has been Tesla and the smart wisened prose that shorted it all the way from that explosive breakout in 2019. So I see taking risk, risk management, I'm nothing but an elevated, what do I want to say? Like a janitor working at an Amazon warehouse. It's my task to take narrative and to store it on shelves and then to be able to call it down from wherever it's located as that narrative suddenly finds legitimacy within trending markets.

Richard Kramer:

I think we've got to wrap up part one. There's so many threads we want to pick up on. I absolutely want to reprise your hilarious take down of Kathy Wood and her ability to pump up the trends without any reference to well-heeled arguments, but we'll be back in part two with Hugh Hendry of Eclectica X of Eclectica now of The Acid Capitalist and Will Page to talk about a few more Bubble Trouble topics and ask Hugh for his favorite smoke signals. Back in a moment.

Welcome back to part two of our Bubble Trouble episode with the esteemed Hugh Hendry, The Acid Capitalist, and Will and I are really enjoying this conversation, talking about taking a different view of the orthodoxy and all of their well-heeled arguments. And Hugh, I'd like to ask you when you see this endless parade of bubbles inflating and bursting, abating or progressing, and we've just been through McKinsey telling us that the metaverse was going to be worth six trillion dollars in 2030. We've had-

Hugh Hendry:

That's the GDP of Japan, the GDP of Japan.

Richard Kramer:

GDP of Japan, just mind you. Web3, NFTs, crypto, they've all exploded into public consciousness and then slinked away into the darkness. When you look at this universe of bubbles popping up left, right, and center, does it make you optimistic about investment opportunities?

Hugh Hendry:

Thank you. I'd like certainly to take on the notion that I am not a permabear. My first speculative endeavor was capturing the emergent bull market in gold. And if you were to follow my history back to when I was working in Edinburgh for a very esteemed investment group, and I think they hear when I ever mention their name in proximity to mine, but I tell you, I was a prominent member of their US equities team and I assisted and participated in the global asset allocation monthly committees. So they were running the ridiculous 60 40 model, which continues to this day, present in equities. And of that 60% equity allocation, two percentage points were attributed to American equities back in the holocene days of I want to say 1994. So again, things change and I think we have to-

Richard Kramer:

Just on the cost of the tech boom.

Hugh Hendry:

My point was, "This is the best damn companies in the world and we can only find 2% of this damn portfolio." I mean forget tech. You could have Coca-Cola. Coca-Cola in 1994 to today, you could have bought so many. So ambidextrous. I like boys, I like girls. Well maybe we might have to review that. And I try and invest without prejudice and that's really hard. And so there are bubble indications today emanating from anything with a proximity to artificial intelligence and the poster child is NVIDIA. I do not call it names. I get involved. [inaudible 00:27:16] trending asset classes are incredible and things don't go wrong on the turn of a dime. Things kind of go wrong. It takes about at least 12 months to get a sequence of three descending lower highs. Okay?

So if you've got a pulse and you're curious and you're always into self-reflection, you're going to work it out. It has a price gap. What is a price gap? It had earnings which were so way beyond expectations that the first trade when the market reopened was I'm guessing eight, nine, 10% higher than when it closed at-

Richard Kramer:

More like 20.

Hugh Hendry:

There you go. And so I call that an interruption in the force, that disturbance in the force and I get a little bit kind of old-fashioned. I believe that the gap gets filled. I don't know when, but I worry about that, but if NVIDIA were to come back and just put a touch back into that gap, I'd be happy buying it. I would own these seven stocks, the Microsoft, the alphabet, the applied micro devices, et al Meta. I'd be owning them just now because they are in a powerful thrusting higher movement.

Now with regard to equities, I don't think equities are in a bubble. Far from it. The majority of equities recognize the perilous condition of the global economy and Europe is in a recession. Recessions are confirmed four or five years later with the revisions because it's damn hard and measure a $23 trillion piece of hardware called the United States Economy or even the weenie British economy. They are taking policies decisions on bad data. So without a doubt we are in a recession and equities reflect that. So there's the S&P, the prominent index of the world, is below its highs of January 2022 and it's just oscillated, but it's more stark than that because it's a market weighted index and therefore is buoyed by the presence of these mega cap stocks with these bubble like trends. You take that out and the majority of household American names are trading at the same nominal price as they traded almost as we entered this century.

The markets are not dumb. They get a little bit frivolous from time to time, but there is a lot of risk imprinted into these markets. I try and encourage people that are trying to do it themselves, DIY investors, and I try and encourage them to think quadratically to think of for allocations of their precious money. And the first one would be equities and let's call that the S&P. The second one would be fixed income, predominantly government. So let's call that the treasury. The third one, and the third one is a big one, it's alternatives. So gold, commercial property, index linked bonds, government bonds, private equity, coin, that's a ring. That's $100 trillion allocation in that bucket. And then the final one would be cash. And of course cash presently is damn sexy. Without risk, you can get 5% for the year.

If I was a hedge fund and I was getting two and 20 and I could guarantee just sitting there at five. The problem is I can't compound it five because I'm pretty damn sure those rates will be substantially less in a year's time. You only get risk by underwriting other people's fears. And the attraction for me is that when I'm dealing macro, at the very gross end of the world, I believe in mean reversion. And the treasuries are now trading in a very rare atmosphere where the price is three standard deviations below its norm. So if you think of a bell curve, the proportion of the ground captured by where they are is fantastically small. And to me, it feels like that's where the S&P was in March of 2009 and of course there was a list as long as my arm telling you you'd be crazy to buy equities and of course that was the right thing to do. Okay. But I can only buy that via a call option just now because it's not a legitimate narrative because it's not trending. It's gone sideways.

Okay. Now thankfully, for a modest outlay, I can buy a lot of time and I've got options which don't expire until the beginning of 2025 and by then I think what's about to happen will be common knowledge. And then finally and controversially, and my biggest risk exposures, my biggest because it still has a volatility two and a half times greater than any other asset class, and that is Bitcoin. The commodity Bitcoin, not crypto, but the commodity Bitcoin-

Will Page:

There's a difference.

Hugh Hendry:

Yeah. There is a profound difference. And again, you've seen mean reversion, you've traded from 69,000 to let's call it 25, but more than that, I say to you, it resides within this alternative quadrant, which I said is perhaps $100 trillion. And the total size of the Bitcoin commodity, if we assume that all those 21 million coins were minted, is $0.5 trillion and that's nothing, right? It could be four times higher and it doesn't move the needle in. To give you some relative perspective, gold is $13 trillion. If gold were to triple, it would be the same market capitalization as all US equities. Anything can happen, but I feel that that's a stretch. So I've got mean reversion and I've got something which is so piddly small, but I think it will go on and prove itself to be an enduring alternative asset.

Will Page:

And fascinating just to hear, you mentioned earlier in part one, I was looking at the world micro, you're definitely macro. I see the world bottom up. You're seeing it top down. It's fascinating seeing how you bought these patterns from a top down perspective. I want to switch gears slightly and ask a question about, well, it's the customary podcast ChatGPT question with a twist. You've seen Bloomberg launch a large language model recently. And I'm trying to think through what does this ChatGPT large language model revolution do to the analyst industry? Now two very quick observations. One, I do sense a big echo chamber in investment bank analyst. My favorite example goes back to BBC when Mark Thompson was director general. He did a press conference announced, "Too much duplication in BBC news. I'm going to introduce cuts." And I show this to students because the press conference is Mark Thompson in front of a bunch of microphones.

14 of them are from the BBC. That's an echo chamber, that's duplication. Second point, chief operating officer of one large bank said to me, "I spent $110 million on economic research at this bank and 97% goes unread." That just made me think there's a lot of deadwood in these PDF reports which banks are pouring out. It can only be one story, Apple's earnings calls. Do we need to employ thousands of analysts to report on that one story? What's your thought about ChatGPT fire hosing the analyst industry?

Hugh Hendry:

So I was, as you can imagine, somewhat unorthodox in my approach to managing a hedge fund. And the traditional motto is the edge arm and the edge is some polished character who's going to be your best friend and he's going to wine you and dine.

Will Page:

[inaudible 00:35:11] expect about.

Hugh Hendry:

So that's that. So I've got an ongoing prejudice. I don't see the need for it at all. Let's turn it positively. I believe we are in the midst of what a great friend of mine, Emil Kalinowski, called the silent depression. The expansion in per capita US GDP since the beginning of 2009, on an index basis we've gone from 100 to 118. We've expanded 18%. Okay. Let's run the same figure and the same index from the beginning of 1930 and over the same, what is it? We're talking 14 years. That corresponding index, which covers the Great Depression, would be at 178.

What is happening is catastrophically bad for the majority of people and it's going unrecorded. And you're reaching a point where Marxism is popular, is resonating again with the young folk because they look at their parents and they think, "I'm just not going to attain the prosperity that you reach." And when that becomes the belief system, Marxism and its notion of the permanent plateau and the need therefore to redistribute away from this grotesque uni-coefficient and this grotesque inequality, it's a hard force to hold back. And yet, we've had, this is the fourth depression in 200 years. First one was 1825, and it's always captured by culture. So it was the source material for Les Misérables, Victor Hugo. The second one was kind of 1875 when the banks ran out of gold in financing the rebuild of the American economy after the Civil War.

And of course it was captured by Dorothy in the Wizard of Oz. The third one, which is the one which is common in our minds, was the Great Depression. And this is the fourth. The fourth which kicked in in 2009. So you came in, we segued here with ChatGPT and I am an eternal optimist. Marxism is essentially being short on human ingenuity and that's why he is consistently, or not him, but the theory has consistently failed and I'm hoping that ChatGPT might be the thing which allows us to generate the velocity escape speed to put this depression behind us and to have a more equitable and richer society. It's not going to be easy, but it seems a very potent force.

Will Page:

Yeah.

Richard Kramer:

You say that, but as someone who studies this day in day out, and I've been a tech analyst for 30 years and is deep in the weeds in tech as you have in global macro, my biggest fear is that the resources to operate all of these large language models and all of this resource intensive compute are sitting mostly in the hands of the big seven companies and a few others that you mentioned. And that we have, certainly since 2008, been on a long stretch of massively privatizing the gains and socializing the losses, which led us to these inexplicably awful genie coefficients that we see today and how do we break or flip the script to allow those huddled masses, our kids and our kids' peers, access to the same resources that are concentrated in the hands of such an incredibly narrow set of people.

Hugh Hendry:

Well the great thing is with ChatGPT you could certainly do central banking better than having twice-

Will Page:

It's interesting, isn't it?

Hugh Hendry:

Why do we have a Vatican? Why do we have an assembly of 12 wise people again? But to your point, my major thrust back to you is tell me the largest company in the world at the end of the previous century in terms of market capitalization.

Richard Kramer:

The end of the previous century, it was probably Exxon.

Hugh Hendry:

Nokia.

Richard Kramer:

Nokia. Well, it wasn't the largest in the world in market cap.

Hugh Hendry:

Well let's all check and then you can put it in the program notes. And actually it's interesting, this conflict or this animosity, friction between the superpowers of China and America, and Huawei, here I'm being Scottish. I mean-

Richard Kramer:

Huawei by the way. It's Huawei.

Hugh Hendry:

Huawei. Effectively-

Will Page:

Huawei.

Hugh Hendry:

It's been rebranded no way. Okay. And that is interesting because it was a profound market failure. Our system failed because there is absolutely no sustainable economic risk return from building out base stations and the supporting infrastructure and software. But the Chinese recognized the profound strategic importance of actually owning that and we had nothing. We had no government sponsored response to that. Were you going to say something Richard?

Richard Kramer:

Yeah. Let me give you another perspective on this. So by the time someone working for Ericsson or Nokia and is in their mid 30s and has joined the company as a 22-year-old engineering graduate and is now a network architect, that person gets a month off in the summer, eight weeks of holiday, goes three weeks of training. That person effectively has worked as many hours as someone who joined Huawei at 22 and is now 26. So by the time the person who's at Huawei who's 36 has worked effectively the equivalent of two careers of someone working at Ericsson and Nokia. And we don't recognize that some of that Chinese economic miracle was built on their willingness to follow the nine, nine, six model. Nine to nine, six days a week. And they don't get a month off in the summer and for all of the American companies, the American tech sector that didn't see it coming.

Hugh Hendry:

No.

Richard Kramer:

But he wasn't willing to put the effort in to become that proficient that quickly, which is why Huawei was a decade behind in 3G and on par in 4G and leapt ahead five years ahead of Ericsson and Nokia in 5G.

Hugh Hendry:

Forgive me, I do not dismiss the commitment and everything, the endeavor, the almighty endeavor, but despite all of those nine, six, sixes or whatever, it's not a business that lights you up in the capitalist world. But my question is, when you rebrand it as no way, okay, what do you replace it with? Because it is the dominant-

Will Page:

It's the infrastructure.

Hugh Hendry:

So again, this is how my mind works. So I'm going to come, Will, into micro and I say that we are revisiting the world of the '70s. I don't believe the inflation is similar, but the '70s was a chaotic time where the joy and the salvation of a rules-based system that works and rewards, well that all broke down and we're back there and we're into this realm of national champions. America has to create a national champion. In one of my recent podcasts I was saying, "I can imagine that you kind of have to call up the chief executive of Qualcomm and say, "Hey listen, we need you to take a hit for the team. We need you to buy Nokia and Ericsson. We're going to give you, we're not going to worry about competition. You're going to make a bundle when and if you figure that stuff out." But something the west has to recreate no way and there's only certain pieces of intellectual property that persist and allow for that. I don't know. Have you thought about it in those terms?

Richard Kramer:

I have and I would say one of my stock phrases would be to say the NSA and CIA would have invented Google and Meta if they were really clever, but they're not so they figured out that they are our national champions. And if you want a reason why, for all the fulminating politicians and [foreign language 00:44:24] about why we should regulate these businesses, no one's laid a glove on them for the past decade is because they are, along with Apple, Microsoft, and Amazon, the national champions in the US. And that infrastructure, okay, it's too prosaic. It's not sexy enough. Let's look at these newfangled internet services and they have oodles of support from the US government.

Many of them were founded based on privatized patents that came out of DARPA or other parts of the funded by the National Science Foundation at universities and so forth. And one of the big geopolitical questions for the Americas right now is that do you know the percentage of Ph.D. or master's level engineering students in the US who come from other countries?

Hugh Hendry:

Oh, I would guess 80%.

Richard Kramer:

Yeah. 70%.

Will Page:

Wow.

Richard Kramer:

So a failure to address inculcating and building homegrown talent to staff all these companies in 10, 20, and 30 years, not to mention have people work hard enough to match the output of their Chinese counterparts or competitors, is going to be a major issue for the next decades to come. Anyhow. We have to wrap up this Bubble Trouble and then we ask our guests for smoke signals. Now I suspect you're a man who's not averse to occasionally smoking something or other. And we're looking for these moments where you go, "Uh-uh." You overhear terminology or metaphors or things that give you an eerie sense of deja vu, the one or two things that really just rankle and set your hackles off. What are your smoke signals for our listeners when you're thinking about policy makers and the macro economy, when someone says, "This is the way it is," and you just go, "Ugh. The moral equivalent of a face palm and please let me reach for something on the acid/psychedelic side to take me out of here."

Hugh Hendry:

It's been and it's gone. Like traffic cops say, "Hey folks, keep moving. This is all sorted." We have experienced something exceptional. We have seen the demise of four banks and one of them in a different continent and I'm talking about Credit Suisse and three regional banks which have failed and they have failed before the economic storm reaches ground. Okay. And that is profoundly terrifying. And on top of that, they failed because of the telephone become the iPhone becoming a weapon of mass destruction to the banking sector. There's no more inertia. The banking model as we know and understand it is over. Humpty Dumpty is broken. I don't care how many, you ain't putting them back together again. And you wait until the damn recession hits. So there are tight-

Richard Kramer:

You don't need to line up for Northern Rock anymore.

Hugh Hendry:

Indeed. Well there are times when it is wise and what I have to say to those willing to listen, I recommend you panic.

Will Page:

Hugh, bringing it to a close sir. I want to close off this podcast by thinking about how would I get you back 'cause it has been inspirational getting this macro top-down view of the world, how you can see the patterns and the magic eye picture from where you sit. Two things jumped out at me. One, Richard talked about the percentage of Ph.Ds in America who come from abroad. It just made me think I would love to spend 40 minutes with you discussing trade. Not trade as banks and central bank policy makers view it. Manufacturing goods get captured in statistical databases, but trade in talent. That's what we don't look at is where's the talent going? Gradually, Chinese universities are getting better and they're not sending their students to Europe anymore. That for me is bubble trouble for the higher education sector. And the second one was your optimism around AI.

And I always quote Ellen Blinder who taught me when I was studying in Glasgow that capitalism works when you employ somebody else to cut your grass because you could do something more productive for your time. Point being, you might enjoy gardening or you might really love cutting your grass, but if you can do something more productive with your time, you employ a gardener. And I'm just wondering whether ChatGPT, large language models, AI is just one big F off gardener, which allows us all to do something more productive with our time. And final point to close it off with is just your ability to question the science, be it the pure science or the rather less pure social science, the value of being a contrarian. And I want to just draw on the pandemic briefly, which is when we had the BBC telling us, "Just believe the science," you heard this expression a lot, fine, but that's not how science works.

Science works when you have 19 eminent professors over here who say one thing and there's one outlier over there who spots something else. Well, let's look at what they spotted and learn why they spotted it and see what we learn from this outlier example. So that ability to question the science, be it pure or social, I just want to thank you very much for bringing that contrarian logic to Bubble Trouble. My thanks to Hugh Hendry and to my cohost Richard Kramer and we'll see you next time.

Hugh Hendry:

Thank you, gentlemen.

Will Page:

If you are new to Bubble Trouble, we hope you'll follow the show wherever you listen to podcasts and please share it on your socials. Bubble Trouble is produced by Eric Newsom, Jesse Baker, and Julia Natt at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Until next time for my co-host Richard Kramer, I'm Will Page.