Are We About to Enter the First White-Collar Recession? | James van Geelen

In Episode 408 https://hiddenforces.io/podcasts/about-to-enter-the-first-white-collar-recession-james-van-geelen/ of Hidden Forces, Demetri Kofinas speaks with James van Geelen, the founder of Citrini Research, which specializes in illuminating and demystifying the transformative "megatrends" poised to shape societies, economies, and the market's distribution of returns for years to come. James and Demetri spend the first hour of their conversation exploring a series of narratives and investment themes—including Trump's recent tariff announcement—that have captivated markets and that are likely to be highly determinative of investor returns in the years to come. They discuss the investment implications of a fundamental reorganization of the global economy, along with its supply chains, energy systems, and underlying technological foundations, to say nothing about the changing relationship of government and fiscal policy to the economy and asset markets. In the second hour, Citrini and Kofinas dig deeper into some of the more consequential themes that they identify in the first hour, including: The wealth-driven white-collar recession that could accelerate the adoption of AI and rapidly reshape the workforce. The rotation out of U. S. equities as America turns to fiscal austerity and as countries in Europe and Asia engage in massive fiscal stimulus. The implications for America's Democratic party base if its supporters increasingly find themselves out of work and under threat by the policies and changes underway in the new economy. Subscribe to our premium content—including our premium feed, episode transcripts, and Intelligence Reports—by visiting HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you'd like to join the conversation and become a member of the Hidden Forces Genius community—with benefits like Q&A calls with guests, exclusive research and analysis, in-person events, and dinners—you can also sign up on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed today's episode of Hidden Forces, please support the show by: Subscribing on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334, YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg, Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP, Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces, SoundCloud https://soundcloud.com/hiddenforces, CastBox https://castbox.fm/channel/2629539, or via our RSS Feed http://hiddenforces.libsyn.com/rss Writing us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Joining our mailing list at https://hiddenforces.io/newsletter/ Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Subscribe and support the podcast at https://hiddenforces.io https://hiddenforces.io/. Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 04/03/2025

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Demetri Kofinas?

  What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is James Van Galen, the founder of the boutique research firm, Citrini Research, which specializes in illuminating and demystifying the transformative mega trends poised to shape societies, economies, and the market's distribution of returns for years to come. James and I spend the first hour of our conversation exploring a series of narratives

• 0:41Demetri Kofinas?

  and investment themes, including Trump's recent tariff announcement on April 2nd that have captivated markets and that are likely to be highly determinative of investor returns in the years to come, as we undergo a fundamental reorganization of the global economy, along with its supply chains, energy systems, and underlying technological foundations, to say nothing about the changing relationship of government and fiscal policy to the economy and asset markets. In the second hour, James and I dig deeper into some of the more consequential themes that we identify in the first hour, like the wealth-driven, white-collar recession that could accelerate the adoption of AI and rapidly reshape the workforce, the rotation

• 1:23Demetri Kofinas?

  out of US equities as the US turns to fiscal austerity, and as countries in Europe and Asia engage in massive fiscal stimulus, and what could be in store for America's Democratic Party base if its supporters increasingly find themselves out of work and under threat by the policies and changes underway in the new economy? If you want access to all of today's conversation, and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io/subscribe. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now.

• 2:06Demetri Kofinas?

  If you want to join in on the conversation and become a member of Hidden Forces, Member of the Hidden Forces Genius Community, which includes Q and A calls with guests, access to special research and analysis, in-person events and dinners. You can also do that on our subscriber page. And if you still have questions, feel free to send an email to [email protected] and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions.

• 2:49Demetri Kofinas?

  And with that, please enjoy this deeply insightful and immensely valuable conversation with my guest, James Van Galen.

• 3:00Demetri Kofinas?

  James Van Galen, welcome to Hidden Forces.

• 3:04Speaker 01

  Hey, Dimitri. Thanks for having me on.

• 3:05Demetri Kofinas?

  It's great having you on, James. This conversation was a long time coming. You and I first met about a year ago or so. We were introduced by one of our Hidden Forces Genius members at a dinner he hosted. And I recently started digging into your research and I got to say, man, it is fantastic. I've already told you this, so it's not a surprise, but I love it. And one of the things I love the most is something that you actually explicitly cite in your About page at Citrini Research, which is the second level thinking. And this, I'm pretty sure, is a term I first heard used by David Epstein in his book Range and I had David on years ago to talk about this. Before we get into our conversation today, which is going to be both timely in terms of discussing the Trump tariffs and also timeless in terms of discussing

• 3:50Demetri Kofinas?

  some critical macro themes and trends that I think are going to persist in the years to come and that are going to be impactful for investors. Just tell me a little bit about you. You're the founder of Citrini Research. What's your story and what is Citrini Research? What do you guys do? What do you focus on?

• 4:08Speaker 01

  Citrini Research is hopefully becoming the premier destination for thematic equity research. I think that we've kind of had success off the back of a couple early good calls. I kind of took a lateral route into finance. I started out in medicine, going to med school and going to become a doctor, but I had worked as a paramedic for probably four years in some pretty rough neighborhoods. So, you know, the thing is, by the time you get to med school and you're doing the white coat ceremony, you're supposed to be pretty gung ho about it. You're, you know, yeah, like, we're gonna save lives. And I kind of

• 4:50Speaker 01

  showed up and I was like, the medical system is broken, you know, I kind of already jaded, which is not a great way to kind of enter into the system. So I didn't last very long. I dropped out. I ended up starting a business that I later sold. And then, after selling that business, I realized that I'm not a person who deals well with having nothing to do. So at the time, my neighbor was a macro trader. And I just kind of was talking to him one day and I was like, dude, I am so bored. I literally don't know what to do with myself. And he was like, well, there's always trading. And so, you know, that was

• 5:33Speaker 01

  like, 2017, 2018. And I started trading. I had the worst thing that can possibly happen to you as a trader happen, which is a string of early wins. And I probably lost like, a good third of my net worth in that, you know, like, like after that period, I basically went on a tear. I had no clue what I was doing, but I was getting very lucky. And then the taper tantrum happened. And that just, you know, wrecked my world. And that was kind of when I was like, I should probably, you know, instead of like, developing the version to it, I kind of just became really, really interested in it. And I just said,

• 6:14Speaker 01

  I gotta figure this out. And I just started reading and speaking to people and kind of coming in with, you know, I've tried to hold on to that, that beginner's mentality, the idea that Regardless of how much of an expert you become in something, if you approach it with the mentality of a beginner, you're gonna have a much higher chance of like learning and retaining knowledge. And I basically, at the same time, you know, I was, I was super interested in macro. I was very interested in the idea, the like, the kind of psychological, behavioral psychology aspect of markets. And that basically manifested in a kind

• 6:52Speaker 01

  of fascination of these themes and trends that take hold of the discourse and drive decisions, right? It's something where when you have a model in an Excel sheet versus a story, the story, especially if it's backed up by a good model in an Excel sheet, it's always gonna be more convincing. And markets are just an expression of people, you know, coming in, in the short term at least, and making decisions. So that's kind of what I started focusing on. I got pretty into the macro part, and I looked at the macro part, and I said, well, I don't think I'm gonna understand this unless I can analyze banks. So I started kind of getting really into the weeds on how you fundamentally analyze

• 7:33Speaker 01

  financials. That kind of led to, in October of 2022, I started a Twitter account, and I said something like, you know, I'd done a pretty significant amount of work, and I just nonchalantly kind of, kind of sent out a tweet about the fact that Silicon Valley Bank would probably end up, you know, insolvent in this cycle. And that kind of got some, you know, after, obviously, Silicon Valley Bank collapsed, it went a little viral. And at that point, I had kind of fallen into this AI rabbit hole after ChatGPT. It struck me very much as like, one of those moments that happen once every 10 years or something that is a kind of generational trade. So I kind of capitalized on that momentum, and

• 8:16Speaker 01

  I wrote a framework for how do we trade this AI thematic? And that's where Citrine Research started.

• 8:24Demetri Kofinas?

  In 2023?

• 8:25Speaker 01

  Yeah, in 2023, in, in the first quarter of 23. And, you know, now we have a team, and I think, you know, we put out some, some good stuff and focus on macro and at the same time, kind of these equity themes and kind of broader implications of those.

• 8:42Demetri Kofinas?

  I want to say something to investors who may share my heuristic. I have a heuristic, James, which is roughly speaking, if you present yourself as having an opinion on more than two subjects, I tend to think that you don't know what you're talking about. But that's usually true because people will present themselves as kind of having some kind of divine insight into the future and strong opinions on more than two subjects. In your case, you do cover a number of themes, so there are more than two, but it's really thoughtful analysis. So what I would say is that when you're reading through the reports, it's very value additive. And I speak with a lot of people and I read a lot of stuff, so I hope that that goes for something.

• 9:19Speaker 01

  I appreciate that.

• 9:20Demetri Kofinas?

  Sure. Just real quick, what is the mission and philosophy and real, real quick, because I want to get into, we have so much to talk about today. What is the mission, philosophy of Citrini and Citrini Research and your team? And how do you go about choosing or honing in on a particular theme?

• 9:36Speaker 01

  I think that the kind of mission is to make the number go up, right? Like, I think that the only reason any of us are here is because we want to take money and grow it to more money, right? So in my view, that's a function of being aware of these narratives that drive markets. I think that in this kind of connected social media age, narratives are driving markets more than they ever have before. And I think that there's a kind of false equivalency that people have where they associate narratives and themes with bull markets. And that's really, really not the case. If anything, in a bear market, narratives get even more important, you know? Anyone who was trading three years ago in

• 10:21Speaker 01

  22 knows, you know, that was like a great year for thematic equity investing because there was the Ukraine stuff, there was the energy stuff, there was the inflation and pricing power stuff. And so we focus basically on just the narratives that drive markets in the short term and the long term. And I think that that's valuable for. Really anyone, the idea that over the past hundred years, forty percent of the returns that have been made in the US stock market have come from one percent of all the companies that have ever been publicly listed. And if you go back and you look at what those companies are, something starts sticking out to you where you say, oh, all of these companies had a trend that they were really integral to.

• 11:06Speaker 01

  And you know, whether it's Apple with the smartphone, or you know, what we've seen with Nvidia. So really, from my perspective, that's the most important thing. And we basically set out to examine as many as we possibly can and give people the conviction to explore, you know, more in depth.

• 11:25Demetri Kofinas?

  So we're recording this on Thursday, April 3rd.

• 11:29Speaker 01

  Yeah, we really picked a bad day. There's absolutely nothing we could talk about today, you know, just really, really boring.

• 11:35Demetri Kofinas?

  Right, I'm sensing your sarcasm. Of course, the reason that there's plenty to talk about is that Trump announced the across the board tariffs that they were putting on the rest of the world, along with a formula that journalists derived from how they seem to have calculated what they did. Just real quick, because many in our audience will already be familiar with the basics of what happened here. But real quick for those who aren't, what exactly did Trump announce? And then let's dig into the significance of this before we get into some of the other larger themes that I wanted to talk with you about today. Because this is a big one, this theme of Trump's tariffs, the trade war, the reshoring of domestic manufacturing, the prioritization of labor over capital. This is one big theme in and of itself. So what did Trump announce?

• 12:19Demetri Kofinas?

  What's the substance of the tariffs that we know of thus far? And what is the major takeaway in your view?

• 12:26Speaker 01

  I mean, the major takeaway is that it's extremely difficult to trade a Trump announcement, because if you were watching it, the way that it played out, it was really amusing to see futures on one side of the screen and Trump speaking on the other, because he comes out, he says, you gotta, the street estimates are saying it's going to be between a 10 and 20% blanket tariff. And he comes out, he says, we're doing a 10% universal tariff on all imports from all countries that's effective April 5th. And you know, futures just start ripping, right? It's the best possible outcome, everything's great. And as the, as this kind of presentation progresses.

• 13:05Speaker 01

  He says, oh, also, we're going to do these reciprocal tariffs. And it's going to be 50% of whatever the country tariffs us, we're going to tariff them. You know, futures take another leg higher because great, reciprocal tariffs aren't 100%. That's less than we expected. And then he busts out this chart. And the chart basically shows numbers that were not what people were expecting. Where they had essentially calculated the tariff rates using the trade deficit. And those tariffs were much higher and on top of already existing tariffs. So China showed 36%, but the existing tariff was 20%. And so an effective 56% tariff rate on Chinese goods, which we buy quite a lot of.

• 13:48Speaker 01

  So that kind of, I think, as he continued speaking, people kind of realized how significant this was. Probably the most significant disruption or restructuring of global trade since Smoot-Hawley in the 1930s. And the fact that it was calculated with the relative trade imbalance of the counterparty, it kind of gives, you know, I came into it thinking Trump's probably going to set the tariffs high so that he is able to negotiate them down, right? And the idea of Trump has a vision. He's kind of a man on a mission. He's hit the ground running. He came into his second term. He doesn't have any obligations. He knows what he wants to do.

• 14:33Speaker 01

  And the idea that he was simply going to use this as a negotiation tactic or like a bargaining chip where it sets him high, walks it down, and is just front-loading all the bad things he has to do to accomplish his vision into the first, you know, six months of his administration so that the negative impact is as far removed from the midterms as possible. That was kind of, I would say, the consensus view. But the methodology of the calculation on the trade imbalance, it kind of suggests a more sticky policy because their goal is to shrink the trade deficit. And that makes it a little bit more, the risk of them just sticking around. And that opens up a whole new can of worms for, you know, monetary policy, inflation,

• 15:18Speaker 01

  the negative growth risk. So, yeah, I mean, restructuring the global trade order is a pretty big deal. And

• 15:28Speaker 01

  People are adaptable, but they do have to find that new status quo. And it seems like the new status quo still hasn't settled in yet.

• 15:36Demetri Kofinas?

  Let's dig into this a little bit. The consensus view, well, not the consensus view. I don't know that there is a consensus view. I mean, there's certainly consensus view among economists about how tariffs are traditionally inflationary. There's also, I guess, a consensus view on how, in theory at least, all other things being equal, an increase in the price of externally produced and imported goods can lead to an increase in domestic consumption of domestically manufactured goods, assuming, of course, and it's an important assumption that doesn't necessarily hold in this case, that there are substitutable goods that are produced domestically that people can consume to offset the price hikes of foreign manufacturers. And of course, the other thing is that I wanted to say that journalists are saying

• 16:18Demetri Kofinas?

  is that there's a concern, that a lot of people are suggesting a concern around possible stagflation. This is a thing I've been hearing more and more about. Walk me through the various scenarios that you're considering here and what likelihoods you're ascribing to this. How does this play out in your view? What are the consequences of Trump's policy? And what can we infer about his commitment to the tariffs and how this is all going to play out?

• 16:41Speaker 01

  Well, to start with the first point, the idea of tariffs kind of being inflationary. The key thing to understand, in addition to, you know, your later assumption that there's a, you know, dynamic by which domestic products become more competitive if there's a substitution, the other thing to consider is, you know, you sell a product and let's say all your competitors are Chinese and it's a pretty competitive industry, the Sino-US podcast universe, and now your competitors' products cost 50% more for you, you know, yes, it can make your product more enticing, but you're also...

• 17:21Demetri Kofinas?

  I'll raise my price by 30%.

• 17:23Speaker 01

  Exactly. And you won't lose market share. And that doesn't even take into account the idea of this kind of compounding effect of tariffs where...

• 17:34Speaker 01

  You know.

• 17:34Demetri Kofinas?

  The input costs go up too, for me, as a domestic manufacturer.

• 17:38Speaker 01

  Yeah, and manufacturing and supply chains are complex, right? We've spent a long time kind of doing globalization. And so tariffs raise prices and you know, the CPI is just an index of prices. So yes, you'll see the CPI go up. But you have to kind of, like we were talking about, you have to think about the kind of second order impacts. So first, you're shielded from kind of international competition, right? And then the trading partners will probably impose retaliatory tariffs. So exports will become more expensive. So you'll be less competitive abroad. And it's pretty easy for them to be licensed to increase prices domestically. But tariffs don't just hit once, right? They compound.

• 18:19Speaker 01

  So in the Trump, you know, 1.0 trade war, the washing machine market, you had steel and aluminum tariffs in 2018. And manufacturers raised price by 12%. The metals that go into a washing machine only represent 5% of the total cost. And that's not them being greedy. That's just like tariffs cascade through supply chains in nonlinear ways. And as they go, they create multiplier effects. So that would be kind of the argument behind the inflationary aspect. But at the same time, let's say, you know, you have this supply chain. And now you're kind of, I mean, 56% tariff on China. Maybe that just, that you look at it and you say, well, my margins would be negative now, right?

• 19:05Speaker 01

  And I'm not working for free, so I got to find another way to kind of source this. And yeah, so you go domestic. But the thing is, that factory in China that you're buying from has probably spent decades optimizing, right? Optimizing because this is what they do. This is their industry and you know, they've gotten lead times down and they have a strong logistics network. And when you pivot to this like domestic supplier, there's going to be a productivity drag. Because it's not going to be as efficient, right? So that can reduce the supply of your, of your product, right? Which ultimately can increase prices again. So at the same time, it can also cause a negative growth impulse, right? If you, if you're just producing less, right?

• 19:49Speaker 01

  So I think that the three scenarios, like you asked, right? There's a.

• 19:57Speaker 01

  The first scenario would be essentially kind of run-of-the-mill slowdown.

• 20:02Demetri Kofinas?

  What is a run-of-the-mill vanilla slowdown?

• 20:04Speaker 01

  So yeah, essentially, you know, obviously, all recessions are unique, and we can talk about that later. You know, we wrote a piece about what a recession in the US in this environment might look like and what would drive it. But I would say, you know, run-of-the-mill recession is basically, you know, interest rates go down, growth is negative, and you have kind of a disinflationary, deflationary impulse. Then you have the kind of specter of stagflation, which is you have negative GDP growth, but at the same time, prices are going up, which is kind of a unnatural thing to think about. You know, I think, I don't know if anyone needs like a history lesson, but I can do this very quickly because it seems it's just like it's impossible to talk about stagflation without talking about the 1970s. But until

• 20:49Speaker 01

  the 1970s, it was mostly the view that no matter what, the cure for high prices is high prices. And inflation is eventually supposed to erode demand until you have a slowdown and a recessionary environment takes hold, and the Fed can kind of help or hinder that process in multiple ways. The 1970s was really the first time in the US, at least, that we saw this long-term stagflationary environment. And it wasn't one thing that happened. It was like a series of policy mistakes. First, in 1971, Nixon decides to abandon the Bretton Woods system and end the dollar's convertibility to gold. And then, at the same time, he imposes

• 21:30Speaker 01

  wage and price controls. And then, in 1973, you have, you know, the first OPEC oil embargo. And so you get an energy price shock. So even though it seems like there is a directive from the administration to get our economy looking more like the 1970s, the fact is that our economy is a lot, a lot different than it was in the 1970s. Energy used to take up a much bigger share of the wallet than spending, manufacturing, transportation, like these.

• 22:00Demetri Kofinas?

  Labor was more organized and more easily able to demand higher wages.

• 22:05Speaker 01

  Yeah, so we all understand. Happen there, but the if you were gonna say that tariffs can cause stagflation, you would have to say, okay, well, are tariffs the supply shock? Are tariffs the equivalent of this kind of OPEC oil embargo? And, you know, that exploring that is pretty interesting, right? Because tariffs this way, at least if they stay this way, just assuming that that there isn't a walk back or anything, they affect almost all goods. In the 1970s, it was until the oil embargo was lifted for inflationary pressures to kind of subside. Now it's basically you just have Trump and, you know, it's an emergency order. So it's policy dependent and it can be persistent. And the supply chain effect of an oil shock is pretty simple and pretty direct and relatively easy to model.

• 22:47Speaker 01

  Whereas, you know, it's a much more complex and much more kind of all reaching with tariffs. And in the seventies, the response, you know, you have the monetary response. We're going to develop new energy. We're going to, you know, become more energy independent. And here the response is basically, okay, I guess we have to restructure global trade. You know, I'm not saying that either of those things are easy. But in the 1970s, with the monetarists letting interest rates kind of float freely to combat this inflation with Paul Volcker after Arthur Burns kind of dropped the ball. The monetary response was largely ineffective, but eventually effective. In the tariff situation, the Fed is kind of frozen because their policy response will be totally ineffective, right?

• 23:32Speaker 01

  And they also can't be seen to get into this like political

• 23:40Speaker 01

  brouhaha, right? They're supposed to be independent. So it's interesting to explore the concept of stagflation. But, you know, like I said, it's an intentional policy choice rather than an external shock. And today's workforce has like a lot less ability to demand compensating wage increases than they did back in the seventies. And either you have a normal recession, you have stagflation. Or like you said, you know, maybe it just works, right? And, and they get everything that they want. I think that the problem with that view is essentially, I don't know, you know, you probably speak to a lot of business owners and you're a business owner yourself. And I watched this presentation yesterday and I was watching it and like,

• 24:24Speaker 01

  I mean, this is what I do. I do this all day. And I was like confused, right? Like, not confused that he did it. It was, he kind of said he was gonna do it, but just confused about the way that it was gonna progress. And if you're a business owner and you're dealing with this environment, you're basically like forced to go from like being an expert in like pipes, the whatever it is, right, HVACs isn't. And now you gotta be an expert on like global trade policy. That's gonna like increase in uncertainty very, very significantly to the point where you start to wonder, the economy is not like a speedboat, right? Even if the Trump administration's goals here are to, you know, come in with a strong negotiating position, walk this stuff back, rebalance trade deficits,

• 25:09Speaker 01

  and this like kind of bullying of trade partners works, and everyone just kind of caves. The uncertainty that's been created is much more difficult to model. And uncertainty does tend to be slowdown, right? Like, it tends to drive slowdowns in the economy.

• 25:25Demetri Kofinas?

  You know, I think that's a really important point. And again, there's so many things I want to talk about today. So I don't want to spend too much time on Trump's tariffs, but it is important. I think one of the other things that's important to reflect on when we're comparing today with some historical period is, you mentioned Smoot-Hawley as a comparison for the tariffs. Another key distinction between Smoot-Hawley is that that was in 1930, when the size of the federal government and its role in the economy was much smaller than it is today. And why is that important? Because people's confidence in government policy and in what the government intends to do and the role of the dollar internationally are very different. And so one of my concerns is, and this is a question, what are we to make of the potential of a loss of confidence

• 26:10Demetri Kofinas?

  in US capital markets, in the sort of leadership of Washington in the global economy?

• 26:19Demetri Kofinas?

  What are the risks there? What in your view should investors think or consider as possible outcomes of not the tariffs, but of a cascading loss of confidence in American economic leadership globally?

• 26:33Speaker 01

  Well, you know, you know what our bit like America's biggest export is, right?

• 26:38Demetri Kofinas?

  Yes, absolutely. U.S. assets and the dollar.

• 26:40Speaker 01

  Yep. So this is a very interesting time to be doing this because it's like the nature of Trump, having traded Trump 1.0 and it's even crazier now. I said more things during Trump 1.0 that two weeks later I was like, oh, that was stupid. You know, so it's like a very high risk that you just say something that's immediately like, you know, that's not what happened because you're kind of like applying, whether it's game theory or like just like assuming people are rational actors. I think that the dynamic for that is very, very difficult to look at. But what I will say is, you know, Trump seems to view bilateral trade deficits as evidence of cheating on the part of the trading partner, right?

• 27:23Speaker 01

  You know, that's like deficit sounds bad, having a trade deficit, you know, these guys are taking advantage of us. And this comes back to, you know, the methodology, the math behind the estimated foreign tariff rates was based on the size of respective trade deficits. So while there are a number of factors that determine the size of the U.S. trade deficit, taking it to zero would be effectively impossible. I guess you could say counterintuitively, the end of the Bretton Woods system in 1971, you know, it solidified the U.S. dollar's global reserve currency status. And as the sole source of the dominant reserve currency, the U.S. was eventually forced into a dynamic of running persistent trade deficits, right? Because the rest of the world just wants dollars.

• 28:08Speaker 01

  So, you know, you can read, this is like, it's called like the Triffin Dilemma. It touches on this dynamic, but, you know, I think that there are kind of broader macroeconomic forces that make.

• 28:22Speaker 01

  This approach almost destined to fail. And whether, whether, you know, Trump has a lot of political capital right now. Right. So, you know, I don't know if you, have you spoken to Marco Pappitch ever?

• 28:34Demetri Kofinas?

  I have not, but I'm familiar with him and his work and know a lot of the guys from Stratford, from where he came.

• 28:40Speaker 01

  Yeah, he wrote a great book called Geopolitical Alpha and, and, you know, the core of that book was essentially your model for predicting what's going to happen or making probability trees should be focused on constraints.

• 28:52Demetri Kofinas?

  Absolutely.

• 28:52Speaker 01

  Yeah, Trump doesn't have a lot of constraints right now. And this kind of comes into, you know, another trend and thematic that we've played or positioned for the past, you know, two years into varying degrees has been how to trade China, right? China is kind of, for a long time, and maybe again now, has been viewed as uninvestable, right? Where because of this geopolitical risk, it just wasn't worth it, right? And it wasn't worth it to have money in China, take this geopolitical risk, especially wasn't worth it when Nvidia goes up every single day. Now, my framework for approaching China was, okay, here's what I'm gonna do. Obviously, we wrote 100 pages on this, so I'm, I'm condensing it very significantly.

• 29:35Speaker 01

  But it was, the Chinese economy comes down to one thing, and that's what does Xi Jinping think is the right thing to do?

• 29:45Speaker 01

  And for a while, the right thing to do from his perspective was to delever. And you had a big policy impulse that was focused on the deleverage of the property sector. And obviously, that made it super tricky to invest in China. But at the same time, if you actually paid attention to what he was saying, there's always something to do. And there were things to do. So a good example of this is like, you know, in May of 20, I want to say 2024, Xi Jinping came out and said, we have to build a domestic semiconductor industry, right? We have to be less reliant on Taiwan, on, on the US, et cetera. I read that and I say, okay, I'm gonna buy Chinese semiconductor companies.

• 30:29Speaker 01

  I don't care about the geopolitical risk or whatever, like, like it has the mandate of heaven and I'm gonna position my, my portfolio in the same way like, that this economy is being positioned. China continued to go down. All the Chinese semiconductor companies, you know, Camercon, Naura, Wawang, even SMIC, which you can't buy because it's sanctioned if you're in the US, they did great. So that dynamic of kind of fiscal policy and kind of executive policy being one of the most important drivers, I think it's really important for investors to take note of that because when policy becomes a primary driver, we saw this in 2022, right? Where monetary policy for a while was the primary driver. People weren't paying much attention to fiscal policy, even though arguably in the

• 31:14Speaker 01

  economy, they were equal or even skewed. But the market was concerned with monetary policy to the degree where the most money I ever made in a single day was when Nick Timareos leaked the jumbo 75 basis point hike, closely followed by the most money I ever lost in one day on the LDI, the gilt crisis in the UK. But the thing about that was there was one thing that the market was concerned about and even incremental changes in that were massively market moving. And now that's shifted and the driver is Trump and his policy and he has a lot of political capital and he has a lot of things that he wants to get done.

• 31:54Speaker 01

  And in this current phase where Trump has an excess of that political capital from his election, he's gonna do what he wants to do. So, you know, you really have to pay attention and more or less, he has been kind of telling you, again, it's kind of similar to the Fed in 2022. After a period of like very, very poor communication, I think they kind of realized that they were dropping the ball and they started really like communicating, here's what we're gonna do, like we're gonna, we're gonna keep hiking rates until inflation starts coming down. And that's what they did. So I think the most important thing from this perspective for investors is to basically

• 32:35Speaker 01

  pay attention to what Trump and like unfortunately Howard Lutnick, which, you know, I, he's just a talker and, you know, just the whole administration, you gotta listen to what they're saying because chances are they're gonna tell you what they're gonna do before they do it.

• 32:51Demetri Kofinas?

  So just one, at least one more question on the tariff front and on the Trump policy front. And that has to do with industrial policy, because I think one of the criticisms that a technocrat would make is that tariffs aren't necessarily bad. Maybe the size of the tariffs could be bad. But if used in conjunction with industrial policy to help support and accelerate the investment toward and building up of domestic manufacturing and goods production in the areas that are getting tariffed, that could actually help accomplish the goals that the administration is talking about. Have we gotten any clarity about what Trump intends to do about the Biden or industrial policy initiatives like the IRA, the CHIPS Act, et cetera?

• 33:34Speaker 01

  You know, this is something that I, as far as specific, like I don't think that we've gotten kind of hints on where that will be primarily focused. You can make guesses, but like, you know, in 2024, in March, we wrote a piece about playing the 2024 election, right? And it was kind of funny because we wrote that piece in March. At the time we wrote it, Trump's odds of winning were 25%. And we've made a, basically a basket of about 120 securities, 60 securities on the long side, 60 on the short side. And we said, Trump's odds are mispriced. At the very least, it should be 50. And honestly, he's probably going to win. So here, here's what you want to be long, and here's what you want to be short.

• 34:18Speaker 01

  And then we kind of separate, like, we do this pretty regularly with themes, separating it into subthemes, right? So the first one was, well, Trump is going to enforce the 2% of your GDP spend for NATO. And that's massively, massively bullish for European defense. And meanwhile, he seems to have a bent on potentially cutting, you know, domestic government spending, so that's probably not great for US defense. And, you know, that trade worked amazingly. And it was just, again, listening to what he was saying, right now, most of what he's saying is focused on foreign policy and trade policy. And there's been a little bit of like tax stuff, but tax cuts are a little further away

• 35:02Speaker 01

  than I'm comfortable with because of this like severe uncertainty.

• 35:06Demetri Kofinas?

  And there's also been talk among members of the Republican Party that maybe They actually raise taxes for the upper income bracket while lowering them selectively, example being like no taxes on tips, for the middle-class constituents that make up the bulk of the MAGA base.

• 35:22Speaker 01

  Yeah, that's, and that's like, when Trump is speaking, he's populist, right? Like, he is, he's more of a populist than he is a Republican in the sense of Reagan. And that's something that, pivoting a little bit here, we explored in a piece that we wrote last week on the idea of if we do have a slowdown, what will be the primary drivers? And what will that slowdown actually look like? Because while, from a macro perspective, recessions are kind of similar, right? Like, rates go down, inflation goes down, equities go down. Beneath the surface, they're all, they all have pretty unique drivers. They're not a monolith.

• 36:07Speaker 01

  And that is what impacts the dispersion in equities. So, one of my pet projects is trying to come up with these ridiculous paradigms for the macro environment.

• 36:21Demetri Kofinas?

  So, to quote Leo Tolstoy and Anna Karenina, "All happy families are alike. Each unhappy family is unhappy in its own way." And to your point, each recession is unique with a unique set of drivers, which speaks to a piece you recently published that I think you're referring to. Are you referring to the haves and have-nots piece?

• 36:39Speaker 01

  Yeah.

• 36:40Demetri Kofinas?

  So, I love that piece. Let's talk about that, because that actually inspired, I think, the title of this episode, which has to do with the white-collar recession that you write about there. And there are two aspects to this recession that I want to explore. One of them is the wealth-driven driver of it, which is kind of what we're hinting to now, and the other one is the AI component. Walk me through the story that you tell in this piece, both about the form and sources of wealth and distribution of economic gains in the American economy over the last 30 to 40 years, and how AI factors into your thesis.

• 37:17Speaker 01

  Yeah, so I just have to do a shout out. We collaborated on this piece with another Substack author, The Last Bear Standing. Again, you know, Substack is an amazing platform that kind of like, in my mind, represents a kind of insurgency in investment research. There's a lot of independent analysts out there that are putting out stuff that's way better than, you know, anything the sell side is doing. So that's my little, I have to do that part. But for the idea of, so the macroeconomy kind of, the themes in the macroeconomy can always kind of be summarized pretty quickly. And we have like a running thing where we

• 37:59Speaker 01

  try to come up with these clever titles for these dynamics. For a while, we called it Schrödinger's recession, which, you know, you're familiar with like the thought experiment of Schrödinger's cat, right?

• 38:11Demetri Kofinas?

  Absolutely, yeah. Why don't you tell, why don't you tell listeners also real quick about Schrödinger's thought experiment for people that don't know?

• 38:17Speaker 01

  Yeah, so Schrödinger's cat is just, it's a way to kind of, it's quantum physics, that you have a cat that's in a box, and, you know, is the cat alive or dead? It's both. And the only way that it is one or the other is if you observe the cat. And then the cat is either dead or alive. So this kind of like, like the Heisenberg uncertainty principle, there was this uncertainty about recession in the US economy that was not showing up in the hard data. And that was like, that honestly, the best possible environment for stocks. People think that like, the good, a good environment for stocks is when people aren't worried about stuff. That is like, couldn't be further from the truth. The best environment for stocks is when people are uncertain of stuff, and they keep getting

• 39:01Speaker 01

  evidence that, you know, like, resolution of uncertainty, right? Investors hate uncertainty, but the only thing they love more than they hate uncertainty is resolution of uncertainty. So that was something where, you know, you would have progressively these walls worry that would get built up, and then we would just rip past them. And that was great for stocks. And so about two months ago, two or three months ago, we laid out the idea that we've shifted away from that, right? We collectively observed the cat. And, and the primary risk now was wealth effect driven recession, which, which is kind of circular reasoning. So we called it the macroeconomic Ouroboros. So you're familiar with like the Ouroboros? It's the snake eating its own tail?

• 39:44Speaker 01

  And so like if you think the head of the snake is equity prices and then you know the tail is the economy, it's basically the idea that so much wealth is concentrated in the stock market and you know even more than than just a few years ago, not just because of price increases, but because of allocation decisions, you know, 2022 was widely hailed as like the death of the 6040 portfolio, which I think, you know, rumors of the 6040 portfolios death have been greatly exaggerated, but there are a lot of households, especially in the top 10% where their financial asset exposure is basically their house and then 100% US equities.

• 40:23Speaker 01

  At the same time, over the past, you know, 20 years, the top 10% of earners have gone from accounting for about 35% of all spending to now more than half.

• 40:38Demetri Kofinas?

  Which is just absolutely massive.

• 40:41Speaker 01

  Yeah, just huge. And, and you know, once you, once you take into account that if you go to the top 20%, it becomes, you know, like, like 65. So, so that's not that big of a delta, right? Like, like the top 10% of earners account for the majority of spending. So when you take that and you juxtapose it against defiant president with populist tendencies and a consolidated power structure, he's kind of intent on driving this new economic vision for protectionism and retreat from free trade. And he's populist, right? He's, like you said, right, with the proposing no taxes on tips and how do you pay for that? Oh, well, we'll increase taxes on the rich, right?

• 41:24Speaker 01

  And you're like, wait, this guy's a Republican? And yeah, so, so there is no Trump put for the stock market. It's not like, like how it was when, back in the first term, the Dow Jones was like the, the primary driver of how Trump would react.

• 41:43Demetri Kofinas?

  Not to mention that we headed into this election and to this administration and to inauguration day with an expectation that it would be that Trump 2.0 would be a lot like Trump 1.0 on that front. So we also have the dynamics here of a rapid reversal in pricing.

• 41:58Speaker 01

  Yeah, that happened quickly.

• 42:03Demetri Kofinas?

  So something else I just wanna, I really, I really love this piece. I can't recommend it enough. Again, it's, the exact title is The Haves and Have Nots.

• 42:10Speaker 01

  Yeah.

• 42:10Demetri Kofinas?

  Okay, so I wanna, there's something else, there's another dynamic in the piece that you write about with respect to the distribution of wealth and income that I wanna highlight, and that is this phenomenon of wealth transfer and how boomer wealth is being used to subsidize the income and lifestyles of millennials and Gen Z. Now again, this also ties into the whole white collar thing, because the further up you are in the income distribution, the more likely you are to be white collar, and that will loops in our conversation about AI. But let's just hone in on this a little bit, because I find this fascinating. You know, my friends and I have talked about this for years now, where we just kind of see lots of people living a life expenditures that seem sort of out of balance with what would make sense, based on what one could conceptualize that these folks actually make. And I don't know how much data there is on this, but what do

• 42:54Demetri Kofinas?

  we know about just how many millennials get some to some significant amount of financial support from their boomer parents? And what is the feedback loop between the value of the boomer stock portfolio, the boomers' own sense of their wealth and income-carrying capacity in the face of some percentage drop in the stock market? And then what is the mechanism that filters down through millennials? And what is the total number of people, again, we don't have exact numbers here, we can't quantify this exactly, right? But we're talking about more than just the boomers. We're also talking about the millennials, many of whom are supported in one way or another by their parents. So like, how big is this effect

• 43:37Demetri Kofinas?

  of a fall in the equity market, of the tail of the economy, the markets wagging the economic dog, and generating a white-collar recession?

• 43:45Speaker 01

  Whenever we write a piece, we try to, and I think everyone should do this if they ever have an investment thesis, you should, after you lay out your argument, or while you're laying out your argument, the most important thing is to anticipate what the pushback will be, right? So as we were writing this piece, which kind of makes the, makes the claim that the wealth concentration is kind of resulting in a unstable dynamic where equity prices can become reflexive very quickly if they go down and kind of immediately Transfer through to lower consumer spending. And on the other side of that, you know, the bottom, I would say maybe even 90%, they have not been doing great, right? They've essentially, you know, been in a recession since inflation took hold.

• 44:27Speaker 01

  And as I was writing that, I knew immediately to quote Javier Millet, they'll send the 200 loser economists my way, right? Like, I knew I was gonna get a bunch of like economic data wonks. Like, no, you know, we've been at full employment. Real wage growth for lower income brackets has been, you know, in percent terms, the biggest growth since the pandemic. And, you know, the thing is, sometimes you just have to balance data with like actually talking to people and like going outside your, your kind of bubble. I really cannot recommend enough the, especially if you're in finance, like, like you should have a diverse group of people that you talk to, and they should not all be finance people. You, you need some friends that really have like no clue who Janet Yellen is.

• 45:10Speaker 01

  You know, so the idea that the bottom 50%, yeah, we might have had full employment, but these jobs are not high quality. There's a lot of people working two or even three jobs. And that data is skewed by the fact that you have these, you know, a lot of the concentration of stock ownership is in the top 10% and in the generationally in boomers. Wealthy parents, right? They kind of, as you get asset price inflation, they feel more emboldened to pay expenses for their adult children. And that goes beyond just, you know, there's a great article about this in the New Yorker that was a people with parents with money.

• 45:53Speaker 01

  They're committing to pay expenses beyond just like rent or education or, you know, it's pretty common that the children of wealthy parents, that they'll have their parents' credit card tied into like their Uber account or their DoorDash account. And other consumer spending is just covered, you know, in a way that frees up a really significant amount of disposable income. And that effect doesn't show up in the official income statistics, but it does drive consumer behavior. So, like you said, right? There's, you can't like, like put this on a chart, but you can just examine anecdotally, right? Like, high income earners are often from wealthy parents. And sustained decline in, in stock prices would pretty much almost immediately reduce spending, not just in the generationally for the boomers, but for their children.

• 46:38Demetri Kofinas?

  Just to clarify something here, when we say children, are we talking about the children of boomers that are in their 20s? Or is this a phenomenon that continues basically throughout their 30s and so long as boomers have felt that they've had ample income to support them? Because you and I talked about this a little bit. I've seen this phenomenon. As a Greek, again, for people that don't know, I'm a dual Greek and US citizen. I've seen this phenomenon in Greece long before I saw it in the United States. I also used to work and live in Italy. In Italy, this was a rampant phenomenon. It just seems to have eventually come here to the United States as well. But we're also talking about people presumably in their 30s who are having some of their regular lifestyle payments being supplemented by their boomer parents, right?

• 47:19Speaker 01

  Yeah. And the data that you can get, the year-over-year, it's 5% roughly increase in 18 to 35, saying that a portion of their expenses are paid for by their parents. So 26% of people 18 to 25 say that their parents pay their phone bill. A little lower than that say that they pay for Netflix or for subscription services. Much higher on rent. And that's reasonable. I think if you're a parent, you want your children to do well. And you can also, if you're wealthy enough and probably have been successful, you probably have a good idea of the differences now versus then. And it's kind of a fact, right? Brent has gotten a lot higher, just in percent of wallet share, right?

• 48:04Speaker 01

  What people spend, a lot of it's on rent, right?

• 48:07Demetri Kofinas?

  Are they helping also with mortgages and stuff like this? Are we seeing that as well? Is there any data? And the reason I bring up mortgages is because we know that the price of homes is one of the biggest roadblocks to wealth accumulation for younger people because prices are much higher than they were 20, 30 years ago.

• 48:23Speaker 01

  Yeah. And it's kind of another piece of supporting evidence that Trump 2.0 might be a bit more concerned with the populist agenda of helping the base rather than just doing the Tax Cuts and Jobs Act and doing things that pretty much solely accrue to the top 10%. His pretty much primary focus, it seems, is on getting rates lower. And when he or Treasury Secretary speak about it, they're speaking about the tenure, right? And that has to do with mortgages, right? So they're really making a concerted effort to increase home affordability by making mortgages more affordable. And to answer your question, no. I haven't found the data. Maybe one of your listeners will be able to.

• 49:06Speaker 01

  There's not that much data on this and even when you do find data, it's like it doesn't go back very far. So it's very much an anecdotal thing, but you know, similar to the other aspect that we spoke, that we'll speak about the AI impact. That's just something where, you know, at a certain point, the data isn't there. And you can go back into like primary sources from the past and see how things have played out. But always there's kind of like, like history repeats itself, but also like there are new things under the sun. So that, yeah, that's a good bridge into your other question about, you know, the impact of AI, which I don't think this is a controversial statement to say that, you know, there's a large language model shaped sort of Damocles hanging over the

• 49:51Speaker 01

  white collar employee.

• 49:53Demetri Kofinas?

  So this is what's going to lead the second hour of this conversation of our conversation, James, as I move us into it. Just to flesh this out a bit, I think what I again found so interesting and compelling in the piece is not just the wealth driven aspect, the fact that the tail of the markets could wag the economic dog and, and result in a, in a recession that is much more weighted towards white collar workers, but that also it could accelerate the adoption of large language models and other AI driven applications that will begin to permanently replace large swaths of the white collar workforce. And in such a way that isn't necessarily immediately obvious to the people getting replaced because

• 50:34Demetri Kofinas?

  they're dealing with a recession and they're not understanding perhaps also why that recession is as deep and as prolonged as it is. And we enter basically a multi-year, maybe even multi-decade period where this technological transformation that has happens every once in a generation or more is coinciding with a deep recession. So I think that's one thing I absolutely want to explore. And I also want to explore how those wealth driven drivers that we talked about have affected the business and credit cycle and how that should impact our expectations about how booms and busts run through the economy this time around. To the extent that we have the ability to do this, I'd also love to talk about the Europe narrative, this rotation out of US equities into Europe, how that's influenced by.

• 51:16Demetri Kofinas?

  The national security picture and some of the spending, the Draghi Report, et cetera. Also, something I mentioned to you this morning that I'd love to explore is something I was thinking about when reading this haves and haves not piece, and that is the political ramification of this, which is to say that we saw with the Republican Party what happened when what became known as the MAGA base, which is basically a realignment between traditional lunch bucket Democrats and other sort of Republicans who fell within this sort of, quote, Rust Belt or the larger middle class, how those people who sort of fell, who were not winners in the race towards globalization, how they came together and formed a political movement, in part driven by economic and social grievance.

• 51:58Demetri Kofinas?

  It would be interesting to imagine, or one could easily imagine, I think, that something similar could happen in the Democratic Party, because its base is disproportionately represented by white collar workers who sort of were motivated politically to align together around this idea of DEI, woke ideology, racial equity, equity inclusion, whatever, all this kind of fluffy stuff that we're familiar with. It would be fascinating to imagine how the Democratic Party may be rapidly shaped and will evolve in the face of a recession that disproportionately hits their base. And we can already begin to imagine what that might look like from a policy perspective, because we've seen some proposals like UBI put out there.

• 52:40Demetri Kofinas?

  So I think that's also something I'd really like to discuss, which is Democratic Party 2.0, possibly who the leaders might be, fascinating, something I don't really hear people describing. And again, to the extent that we can talk about China, I would love to discuss what's going on with Chinese companies and the Chinese development ecosystem in AI, and whether or not America is sort of dropping the ball in its policies to help accelerate this move. And if, in some sense, our perception of how China and the Chinese are doing is actually far out of step with the reality, which is to say that they're doing much better and that we're discounting them. For anyone new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors.

• 53:23Demetri Kofinas?

  The entire show is funded from top to bottom by listeners. Listeners like you. If you want access to the second hour of today's conversation with James, head over to hiddenforces.io/subscribe and sign up to one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. James, stick around, we're going to move the rest of our conversation onto the premium feed.

• 53:55Demetri Kofinas?

  If you want to listen in on the rest of today's conversation, head over to hiddenforces.io/subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at Kofinas, and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.