Investing in Argentina, AI, and More in 2025 | Zach Abraham & Chase Taylor

In Episode 395 https://hiddenforces.io/podcasts/investing-argentina-zach-abraham-chase-taylor of Hidden Forces, Demetri Kofinas speaks with Zach Abraham and Chase Taylor about the recent revision in the Fed's summary of economic projections, the investment opportunities in Latin America, the economic effects of the war in Syria, the state of the outgoing Biden administration, and the economic prospects associated with a second and more invigorated Trump administration in 2025. They spend the first hour discussing how Fed policy, demographics, and systematic passive flows continue to drive mean reversion in equity markets and whether the most recent drawdown is yet another opportunity to buy-the-dip or if the downside risk to investors is beginning to outweigh the fear of missing out on the next rally. In the second hour, Demetri, Zach, and Chase discuss the political and economic experiment being undertaken by Javier Milei's administration in Argentina, whether the country is becoming investable again, how it may serve as a role model for neighboring countries in Latin America, and how Chase and Zach are approaching this potentially enormous investment opportunity. You can subscribe to our premium content and access our premium feed, episode transcripts, and Intelligence Reports at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, which includes Q&A calls with guests, access to special research and analysis, in-person events, and dinners, you can also do that on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed listening to today's episode of Hidden Forces, you can help support the show by doing the following: Subscribe 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 | RSS Feed http://hiddenforces.libsyn.com/rss Write us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Subscribe to our mailing list at https://hiddenforces.io/newsletter/ https://hiddenforces.io/ Producer & Host: Demetri Kofinas http://www.demetrikofinas.com/ 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 12/20/2024

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 guests in this episode of Hidden Forces are Zach Abraham and Chase Taylor. Zach is the principal and founder of Bulwark Capital Management and the host of Know Your Risk Radio. And Chase is the founder of Pinecone Macro Research and serves as Head of Research at Bulwark Capital Management. This is an episode where we tackle some end of year themes, including the recent revision

• 0:42Demetri Kofinas?

  in the Fed's summary of economic projections, the investment opportunities in Latin America, the economic effects of the war in Syria, the state of the outgoing Biden administration, and the economic prospects associated with a second and more invigorated Trump administration in 2025. We spend the first 15 minutes or so on Chase and Zach's bios and investment frameworks, and the rest of the first hour discussing how Fed policy, demographics, and systematic passive flows continue to drive mean reversion in equity markets, and if this latest drawdown is yet another opportunity to buy the dip, or if we are entering a more dangerous and volatile phase where the downside risk to investors is beginning to outweigh the fear

• 1:27Demetri Kofinas?

  of missing out on the next rally. In the second hour, we discuss the political and economic experiment being undertaken by Javier Millay's administration in Argentina, whether the country is becoming investable again, how it may serve as a role model for neighboring countries in Latin America, and how Chase and Zach are approaching this potentially enormous investment opportunity. If you want access to that part of the 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

• 2:10Demetri Kofinas?

  Podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a 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.

• 2:51Demetri Kofinas?

  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. And with that, please enjoy this wonderfully engaging, timely and educational conversation with my guests, Zach Abraham and Chase Taylor.

• 3:13Demetri Kofinas?

  Zach Abraham and Chase Taylor, welcome to Hidden Forces.

• 3:19Speaker 01

  Thanks for having me.

• 3:20Speaker 02

  Yeah, same here. Appreciate it.

• 3:22Demetri Kofinas?

  For people who don't know, Chase is the second person who spoke. Zach's been on the show before. Zach, you've been on the show once before or more or twice before?

• 3:29Speaker 01

  I've been on once with you, but you and I have done this many times because you've been on, you know, obviously I don't need to tell you, you've been on with me several times on my show, but yeah, this is my second time back.

• 3:38Demetri Kofinas?

  Yeah, I've been on Know Your Risk Radio. You guys work together. So listeners are, you know, a lot of you guys already know Zach, but Zach, just for those who don't know Zach is the principal and founder of Bulwark Capital Management and the host of Know Your Risk Radio, which is broadcast, what, across the Pacific Northwest? Where does it reach? And it's also a podcast as well?

• 3:57Speaker 01

  Yeah, so big moment for us actually, kind of reaching a milestone. We're pretty much up and down the West Coast and parts of Arizona and Texas as well. But the show has grown to a point and the firm has grown to a point where You know, that radio stuff, I've had offers to do regular shows, but our show was a sponsored show, so we paid for it as a form of marketing. Podcast wasn't, but we're to the point now where the last radio show we're ever going to do is going to air this weekend. And we're going permanently on the podcast now. So, which is exciting for us. Like I said, it's a big moment.

• 4:30Demetri Kofinas?

  That's, I didn't know that. So you guys decided to give up your radio licenses?

• 4:34Speaker 01

  We are going to give them up for at least until the new marketing rule for the SCC gets looked at. When you look at what that does on a regulatory basis, there's no way to handicap it. You literally don't know what you can and can't say.

• 4:47Demetri Kofinas?

  Crazy man.

• 4:49Speaker 01

  Until that gets dealt with, it, it seems crazy to spend the money when you look at the shackles that are on you.

• 4:54Demetri Kofinas?

  Yeah, you and I have talked about this before in private about just how many people have been dealing with this tighter regulatory environment when it comes to oversight of your financials in the last few years. A lot of firms have struggled with that. And so we'll have a chance to talk about a lot of things of which that will be one. Chase, let's get you introduced to our audience. So Chase is the founder of Pinecone Macro Research. Some of you might know him because of his handle on Twitter, which is at Pinecone Macro. Zach's handle is at KYR Radio. Chase also serves as the head of research at Bulwark Capital Management. Chase, when did you first start Pinecone Macro Research? And was that around the same time that you and Zach first linked up?

• 5:36Speaker 02

  Yeah, so I founded it back in 2018 while still in the Air Force. And Zach and I kind of met through all three of our mutual friends of Brent Johnson. I saw some stuff with Zach. I knew I wanted to move to the Northwest eventually. And I saw some of his stuff popping up on Brent's Twitter feed. And so I asked him, like, who was that guy? Like, he lives in Seattle. Like, I want to get up that way. So he kind of introduced us. We met one time when I just came up here and it just kind of took off from there. But he was reading my, my research. And yeah, everything just kind of took off from that point.

• 6:07Speaker 01

  Kind of a testament to his work, right, Dimitri? So I go from being a client to employer and partner. I mean, we, it's more of a partnership. But yeah, for those of you that wonder if it's good enough research to subscribe to, I have subscribed in the biggest way possible.

• 6:22Demetri Kofinas?

  That is true. That's quite an endorsement, actually. So Chase, you said you were in the Air Force. How many years were you in the Air Force for?

• 6:29Speaker 02

  Yeah, about seventeen, sixteen and change.

• 6:32Demetri Kofinas?

  So just tell me a little bit about that. Like, how did you, what, did you come from a military family? Like, what got you interested? And then why did you choose the Air Force?

• 6:40Speaker 02

  Yeah, so my brother was in the Army for a short period of time, kind of like first Gulf War back in the day, because he's almost 20 years older than me. But, but not really, like even grandparents and stuff, no, no real military history. For me, it was, I was working two jobs and going to school full time. And that was hard and I had no health insurance. And then one, one night at work, because I worked overnight at a gym. And I was like, you know what? Like, I remember those recruiters talking to me in high school. And I was like, I was like, I don't know what they're talking about. I'm going to college. I got a plan. And then I realized my plan was not working out super great for me while I slept through class every day. So I started looking at the recruiting website and I was like, wait a second. This would be a way easier life than what I'm doing right now. And for me, it came down to mostly Navy and Air Force, because that's, you can get

• 7:22Speaker 02

  jobs kind of that, you know, have a lot of technology and have more, more potential, you know, for your future than, than carrying a gun around or something like that. So that was what took me to the two, and the Air Force one, I find flying a lot more interesting than, than being on a boat. So that was kind of the differentiator.

• 7:39Demetri Kofinas?

  So I have one, a couple more questions for you, Chase. So one, where did you grow up?

• 7:43Speaker 02

  Yeah, in a little town outside of Houston, Texas. So the Houston area, right on the Gulf Coast.

• 7:48Demetri Kofinas?

  So how do you feel that your service changed your life? Like, how has it made you the man that you are today, do you think?

• 7:55Speaker 02

  Very good question, a lot of different ways. I think the best thing of being in the military is the empowerment side. It's an underrated thing. If you go in, you know, especially as a teenager, but even in your kind of early to mid twenties, if you have any like questions about your own ability to do things, like they will answer them for you. Like, the whole tear you down and build you back up thing is very legitimate. I think there are parallels to people that, you know, are college athletes, things like that, like at a high level, where you get really pushed, you know, past where you think you can go, things like that. So that, that was a big part of my shaping and made me more confident in my own abilities to do, I mean, honestly, anything. But I, I mean, I learned a lot of technical skills too, going back to why, why I chose the Air Force that had a big impact on me.

• 8:36Speaker 02

  And then obviously, my worldview was very much shaped by not just service in general, but I mean, the time period that I served, as we all know, like the Iraq and Afghanistan wars and the historic significance of those for the US, that definitely shaped me. Like, whenever you spend time in a place like Afghanistan that is largely stuck five centuries in the past, like it gives you a whole new view on, I mean, humanity in general. So it was shaping in very many ways, I think. But that number one thing for me was like the confidence building of everything you're able to kind of accomplish. And they throw you in the fire like quickly. You know, you're very young, you don't really know much. You may not have much technical training and it's like you're, you know, you got five minutes to go fix this jet or

• 9:19Speaker 02

  it can't go do its mission. Go. And you don't even know what you're doing. Like you've battled through that and figure some stuff out and fix a jet and get it up in the air. Like, it's very empowering. So.

• 9:29Demetri Kofinas?

  I love that. So Zach, we're gonna get to you in a second, man, but I just have now this opened up two more questions. I just gotta really ask Chase because he's never been on the podcast before. So one of the questions, well, just a comment, which is that's amazing. I'd never thought about that, but that is such an important skill. And I wonder how many people who really achieve a certain level of success have that experience of getting thrown into the deep end of the pool where not only do they not know how to swim, but they don't know that swimming is the thing that you need to do in order to survive. Like you're figuring everything out and you gotta figure it all out in real time. My last question is just about this thing that you kind of mentioned, which is that being in the air force is not like, you know, roving around Afghanistan like an army ranger with a gun in your hand. There isn't the same level of danger, but there's

• 10:11Demetri Kofinas?

  gotta be some dangers. I'm just curious to understand, how does danger, physical danger factor in? Because these other aspects of the work are relatable. As you said, like you could experience this if you're a collegiate athlete, or if you're performing at a high level in a startup. But how does one understand the difference between like a civilian life and a military life when it comes to one's sense of mortality and physical danger?

• 10:36Speaker 02

  So for me, definitely very fortunate that, I mean, obviously I can't say I was never in danger because of where I was, but it wasn't like, you know, an acute any moment thing that was as ever present as it is for a lot of people. And even in like Afghanistan compared to a lot of other wars, just it was low key compared to a lot of things for, for most people. But at the same time, I mean, we got rocket attacked on a pretty regular basis. I'll never forget, there was one on Eid whenever I was there. They hit us really hard and those came relatively close. Like you could feel the blasts and, and stuff. So it's a thought for sure. I don't know. Like for me, first of all, as an individual, I have a weird view of death where I just don't view it as as big a deal as I think most people do in general, but like a very stoic view of death, I would say. But for me, it's all about just

• 11:19Speaker 02

  like accepting it on the front end that the probability is higher than it is for other people and just, and just being comfortable with it. I don't know. But again, I have, I have a weird view of that.

• 11:29Demetri Kofinas?

  So Zach, I'm going to direct the next question to you since you're the quarterback over there at Bulwark Capital Management, also a former football player, which is also, I noticed in your bio on your website. We've talked about that before and the importance of sports. What is the Bulwark Capital Management team thinking about these days? What is top of mind over there at your firm?

• 11:50Speaker 01

  Man, good question. You know, it's times like these that I actually encouraged Chase to come work for me. So, and work with me just because I knew that we were headed into, look, we've been in unprecedented times for a long time, right? And I just knew that what was ahead of us was probably going to be somewhat of an apex or it was going to get crazier before it stopped. And that's what we are focused on right now and, and trying to figure out this puzzle, trying to figure out how asset prices are impacted in a world awash with liquidity that is conjured out of thin air. And for those that are about to freak out and say that I don't understand how the mechanisms work with the central bank, like, look, I do. And, and I'm not saying it's full monetization, but we all

• 12:35Speaker 01

  know what's going on, right? When there's a problem, we just paper over it. And so trying to understand the way that impacts things and impacts economic cycles. And then trying to understand how several billion people interconnected to a supercomputer in their pocket that allows them to trade the, all of these assets in real time around the world. One of our other junior analysts is over in Indonesia right now. And he was telling me that he saw people laptops out, people trading crypto. You know, of course, right? Like no surprise, but it's one of those things that opens up your mind and you're like, boy, that's right. You know, like, we all know this is a frothy period of time, and I think it's fair to say a bubble in a lot of different areas.

• 13:13Speaker 01

  What's different is we've never really had a financial asset bubble with the entire world interconnected to a trading device in their pocket. Right? Like, so what does that mean? And then you add it into a world where there's fiat currency and we paper over everything and it's the longest economic expansion in the history of the United States. And you're just like, you know, what do these things mean? And so I think that's the biggest thing. If I'm being really, you know, from a global level. And then trying to ponder the way these new unbelievable, right? Incredibly powerful, powerful to the point we're just getting at the tip of the iceberg of what that power is going to look like.

• 13:53Speaker 01

  In terms of new technologies coming to the fore and how that impacts economic cycles. So that's kind of like a wordy answer, but man, just trying to tackle it all and trying to add value to our clients. And you know, that's one of the things that brought Chase and I together is that, you know, we're sort of outsiders in this industry. We didn't go to Ivy League schools and didn't have, you know, rich parents that, you know, introduced us to their friends and, you know, I, I mean, we manage about 800 million all set here and, you know, not a single one of those accounts came from family. You know, so one of the things that brought us together was the challenge that we saw ahead of us and the fact that if we put around a bunch of resumes, we weren't going to get picked up by a hedge fund. Right? So we knew that we, our only shot was just to do this on our own and make our own. And so,

• 14:39Speaker 01

  you know, for better or worse, that's what we're focused on. We're competitive as all heck. And it's crazy because the opportunity set I think is as wide as I've ever seen it. And yet I think that the right tails and left tails simultaneously in this market and in this financial world right now are just massive.

• 14:56Demetri Kofinas?

  Chase, you have anything to add to that?

• 14:58Speaker 02

  I do, I do. You can speak for yourself because I went to Wharton. Wharton County Junior College. True, true story.

• 15:04Speaker 01

  I am sorry. I, I didn't speak.

• 15:07Speaker 02

  Wharton County Junior College. Don't, don't take that away from me.

• 15:09Demetri Kofinas?

  That's amazing. You could actually go to a, a party or somewhere and drop that and be like, I went to Wharton. And technically I'm not lying.

• 15:16Speaker 02

  Want to ask questions, but.

• 15:17Demetri Kofinas?

  Yeah.

• 15:17Speaker 01

  You gotta, you know what's funny is I'm actually going to order some T-shirts from there. You gotta remind me to do that.

• 15:21Speaker 02

  Hey, Stone Cold Steve Austin went there, you know?

• 15:24Speaker 01

  There we go.

• 15:24Demetri Kofinas?

  So, uh, I got a couple follow-up questions there, Zach. One is just about your process. I mean, the world is incredibly complicated as you've just enunciated. There are so many variables to juggle. You can't come up with a deterministic path to the outcome that you want. So risk and risk management is very important. I'm curious where that factors in from your perspective in order to be a good investor and in, when it comes to the conversations that are happening at your company.

• 15:50Speaker 01

  Yeah. So, and that's something that, you know, we're working on. That's part of what Chase has helped me with. I have always approached things, which was much easier to do when you're running a much small, I mean, look, our active book that we're running right now is somewhere between 475, 500 million. So we're not that big either, but you know, it's different than running 50 million. So I was always a bottom up guy. Fundamentals, I always paying attention to macro. I was a nut, but I wasn't a nut in the, I was a nut because I like to read guys like Chase's research, right? Like I wasn't, it wasn't my thing. I was into analyzing the individual businesses and the companies and really taking a bottom up approach.

• 16:29Speaker 01

  And what, again, one of the reasons that we started working together is I started realizing around 2017, 2018 that, look, bottom up still is important and it still matters. But if you're managing retail money, the way, in my opinion, and is backed up by a lot of the work that Mike Green has done, Chase and I are both big fans of Mike Green's work. I've had him on my show before. You started noticing that asset prices were moving differently. That you didn't see stocks react to fundamental news the way that you would think. What in my opinion, you started seeing was you started seeing flows overriding fundamentals. Okay, now guys like Kupi, you've had Kupi on the show, Chase is good buddies with him.

• 17:13Speaker 01

  I'm not as, I don't know Kupi as well, but.

• 17:15Demetri Kofinas?

  Actually, I haven't had him on the show.

• 17:17Speaker 01

  Oh, you haven't?

• 17:17Demetri Kofinas?

  No, I haven't, not for any particular reason, but I, I know him from his Twitter account, but we don't know each other in any other way.

• 17:25Speaker 01

  Yeah, he's a great guy. You, you should have him on sometime. He's a brilliant investor and he's shared a ton of ideas. Just I, great dude, love him and brilliant dude. And he really takes a bottom up approach and he rolls with it, but he runs a hedge fund. So he can, his returns can be so much more lumpy, right? Like it's one of the things that people don't realize about retirement or managing retirement assets, you've got to make sure that no matter what happens, you get one shot at it, right? So you can't afford to allow a O8 to blow up somebody's portfolio, right? And you can't have those kind of lumpy returns. And part of it is just the business risk. The clients won't stick with you, right? If you're down 5% in a year where the S and P is up 25, you're going to bleed clients.

• 18:07Speaker 01

  And the fact that you beat the market by 25% the previous year, they don't do the math, right? So anyway, what I started figuring out was we've got to look at other things other than just bottom up. And I need to understand the way these flows are coming and I need to understand how they're impacting asset markets and I need people to help me do that. And so I still very much do my bottom up approach and Chase is really in charge, for lack of a better term, of handling the macro overlay of our value portfolio, right? So the core of our portfolio being the same process has always been bottom up, trying to find good companies, GARP situations, deep value situations, and then risk managed macro overlay and, and that's the process.

• 18:53Demetri Kofinas?

  So actually, I should also mention that Mike Green was recently, just a few days ago, we're recording this on Friday, December 20th, so a day after Jay Powell gave his press conference after the FOMC's latest rate cut decision and their revised forward guidance and SEP, which we are going to talk about. Mike gave a Q and A to our Genius members a couple of days ago. Zach and Chase are both Genius members. We had a chance to discuss some of these topics as well, including Fed policy. Mike's also going to be at our Scottsdale Dinner in January, as are you, Zach, where the focus is going to be on what's going on in the technology triangle of Arizona, Nevada, and New Mexico. Semiconductors, commodities, and the US-China competition are going to be the topics.

• 19:34Demetri Kofinas?

  Dylan Patel, founder of semiconductor research and consulting firm SemiAnalysis, will be there, as will Brent Johnson, who you all know well. Mike Green, of course, as we said. Trevor Hall, who is a commodities industry expert and CEO of Clear Commodity Network. And of course, David Dorr will be there, because I cannot put on a dinner anywhere near Area 51 without having David Dorr there. And Chase, you're going to be at our Buenos Aires Dinner in February, which I think still has a few spots left. So just a shameless promotion of our Genius community, guys, which I am so incredibly proud of. So let's talk a little bit about what happened just a few days ago on Wednesday. The Fed released a policy statement that was interpreted by the markets as hawkish,

• 20:19Demetri Kofinas?

  despite cutting interest rates by another 25 basis points. The markets dumped, they've since rallied, the S and P seems to have recovered roughly half of those losses as we're recording this today. What did you guys take away from that press conference? What do you think the market was reacting to? How much of it was driven by the simultaneous expiration of stock options, index futures, and index options contracts, all on the same day, which happens only four times a year? How much of it reflects concerns about a looming government shutdown, which I feel like we should all be desensitized to at this point? And how much of this is a reaction to Powell's statement and the revised forecast from members of the Federal Reserve?

• 20:58Speaker 02

  Yeah, so I think the single biggest takeaway from both the projections and the presser is kind of this...

• 21:08Speaker 02

  The level of dedication and seriousness around the 2% inflation target. They keep paying lip service to it, but the new revised inflation forecast for the end of 2025 is 2.5% for core PCE now. Obviously, that's half a percent above the estimate and that's, that would be essentially four years after we crossed above 2%. So at this point, you're kind of admitting that it's okay to be above two for four years. You're admitting that you were off by 0.3%. So for really the last two years, they've been saying, ah, 2.1, 2.2 is where we'll be at the end of 25. They do, you know, a full percentage point rate cut in the last few months. And then they come out and say, oh, by the way, just kidding, it's not going to be 2.1, 2.2.

• 21:52Speaker 02

  It's going to be two and a half next year. Oh, and we're going to keep cutting. We're going to cut two more times next year. So this gets to the point where you're like, you know, obviously you're not serious about 2.0% or anything particularly close to it anymore. I've been saying for a while, like.

• 22:04Demetri Kofinas?

  That's very, that's significant. That is very significant.

• 22:07Speaker 02

  And that, and the market took it very seriously. I've been saying for a while, if you look at what they're doing with the framework of 3.0% instead of two, like it all makes sense what they're doing. Like they get under three, they're kind of happy. They start backing away from cuts. But if you look at it on like care about 2%, like then none of it makes sense. So I walk away from that with kind of an Occam's razor kind of view of like, as long as it's between two and three, they're, they're more than fine. And that to me is the single biggest takeaway is the 2% target. It's just not real.

• 22:37Demetri Kofinas?

  And does that to you reflect sober analysis of US government deficits, unfunded liabilities, outstanding liabilities, both private and public? I mean, what explains that unofficially revised target upwards on inflation?

• 22:54Speaker 02

  Yeah, I think first and foremost, the answer is yes. Like to me, we all think of the two mandates the Fed has, price stability and the labor market, but I think in reality, there's a third and that's funding the government and at a reasonable price. So I think at the end of the day, if you press hard and push into a recession to get down to 2%, that makes funding the government get pretty awkward if, you know, your deficit goes from seven to 10, 12, whatever percent GDP. So I think that weighs into it a lot, no doubt, but also like. Once you kind of hotwire the equity market as a retirement utility first and foremost, and a capital allocation mechanism secondary, you get to this weird point where you're kind

• 23:37Speaker 02

  of riding a tiger and you're not allowed to get off of it. So I think that's part of it too. Like, they do want to keep asset prices up because they're, the more we kind of gear the economy to asset prices, the worse it gets if we let them actually float themselves and find an equilibrium. So they need to keep asset prices up. They need to keep inflation up so that the deficit situation is manageable. Yeah, I just think they have more than, more than those two mandates in reality. And honestly, they're probably just, you know, actively managing to the, all of their mandates in a way that if you back away, kind of makes sense. They just can't say

• 24:11Demetri Kofinas?

  it. So they have to keep inflation up, but not too up, right? Because it is the limiting factor on easy monetary policy and the limiting factor on asset price inflation. High CPI and PCI is going to put a damper on asset price inflation, and it's going to change investor calculus with respect to how to view drawdowns like yesterday. So right now, given the current dynamics, are these drawdowns still opportunities to buy with the expectation that the Fed's going to expand its balance sheet, ease monetary conditions into 2025? Or does yesterday portend further downturns to come as inflation reignites in either 2025 or 2026? How do you guys view this? I'm curious.

• 24:52Speaker 02

  To me, like, I mean, all depends on that inflation, where we go, right? I would argue, standing here today, like, without significant Trump policy in 25, and inflation's going to head lower. Like, the energy side is going to bring it down, the housing side's going to bring it down. It's kind of the biggest movers are just kind of stacked against it. So then it comes down to the policy side for tariffs and immigration next year. And I think, you know, part of this too, like, multiple people at the Fed have said, look, look, I put that stuff in my forecast. Like, one of the reasons I pushed inflation up next year is because if they do act on these policies they talked about, like, well, that's going to push inflation up. So really, it just comes down to how much of that happens, I think. And as far as buying the drawdown, like, I think buying big drawdowns is going to make sense until

• 25:35Speaker 02

  Passive flows flip the other way and until the Fed's hands are tied whenever it comes to providing liquidity. Now, buying a 3% drawdown or a 5% drawdown, probably not that great of an opportunity, especially at a time like this when sentiment positioning is so extremely stretched. But you know, when you get in those kind of 15 to 30% drawdowns, as long as those big gears are still, still there, like, yeah, it does make sense to buy them.

• 25:57Demetri Kofinas?

  Zach, what do you think?

• 25:59Speaker 01

  I mean, obviously, he and I are pretty much in lockstep, all this stuff. It's really funny because we have a process and we research the same way we always have. But we, we've started to look at things differently because you have to. And Chase had a line the other day, I think he was talking about Michael Saylor and he's like, yeah, he just said the quiet part out loud. And I was dying laughing because I, I think that that can really, like, like Chase was alluding to, I think that could really apply to the Fed. And one of the things that I've thought about is that I think a really good guidepost that we're really close to the end is when the Fed does say it out loud. Right? Like to this point, they haven't, like, meaning everybody's like, what's gonna happen, what's gonna happen? Like, let's just step back and take a look at this real quick. They don't have a choice other than to let inflation run hotter.

• 26:44Speaker 01

  There's no choice. You want to talk about budget deficits and problems right now? If you took all hands off and just kind of let the economy do what it does, right? My best guess is you'd probably be running into, you know, a 50% decline. And you'd still be looking at a market that was trading above its historical average when you factor in stock-based compensation and all the other nut stuff that's gone on, right? But if you did that, right, you're carving off, it'd be about what, $27 trillion in, in market cap? Right? And then you think about the capital or the capital gains flow, you know, revenue that comes off of that. The other thing, and Chase can talk about more than this, we've got a slightly different view too, that one of the impacts of the last 15 years in our view

• 27:26Speaker 01

  is that the tail is wagging the dog, meaning we think one of the biggest economic drivers are higher asset prices, not the other way around. Right? So, and this is based off of Chase, I don't, I don't want to take credit for it. But we've started looking at these things and when we see asset prices turning up like they did in, at the end of 2022, our call was Hey, this recession talk is all overbaked. And as a matter of fact, we think inflation growth is about to pick up. And here's the interesting thing. I think a lot of people are going, oh, yeah, that's the market sniffing it out. And I'm like, no, no, no, no, no. That's the economy sniffing it out. Right? The asset prices are going up because you've created a loop. Right? So everybody knows in every asset class these days, you just total. Right?

• 28:09Speaker 01

  So you're sitting in the S and P 500, over 50% of all invested capital is via ETFs now. Right? Passive flows. So it dominates the investment landscape like no other investment, you know, theme ever has. And the market acts that way, meaning you get these short term shocks. The marginal buyers and marginal sellers, you know, hit it hard and drive prices down. And it's sharp and violent. And then all of a sudden the noise kind of stops and you hear that little ratchet sound start again. Right? And the S and P just starts rising up and grinding higher.

• 28:41Demetri Kofinas?

  So how much of that is flow driven because of the phenomenon of systematic passive that Mike Green has talked about and that we mentioned earlier? And how much of it is the experience of 2008 and the expectation that the Fed is going to be there to help speed up that mean reversion in equity markets?

• 28:57Speaker 01

  I would say, I think it's probably, at this point, I think the, I personally think the passive flow dynamic is the biggest thing.

• 29:04Speaker 02

  Yeah, I absolutely agree. Now, I think the, the speed of dip buying and things like that, like sure, like, you know, knowing someone has your back helps there. But even in 2022, like the Fed didn't really have anyone's back and we did go down. But, you know, it didn't take much to kind of be right back up. And I think a lot of that's just, it's just the passive inflows. But at the same time, what makes it difficult to, to get a read on is the top names have been so, their, their performance has been so good that it does cloud how strong passive is. I think in the last year, MAC7's earnings grew up like 30% and the rest of the market's like three. So it makes it tough to like truly diagnose, but I, I'm with Mike Green on this. I, I think he's, he's pretty much got it nailed.

• 29:47Demetri Kofinas?

  Does this dynamic remain in place so long as the demographics and inflows from passive remain in place and the dollar remains a global reserve currency? Do one of those two things need to flip?

• 29:58Speaker 01

  Yeah, I think so. I mean, I think you could have market events without that, right? Like, for instance, at a certain point, when you look what's going on in the baby boom generation, and we're recipients of it, you know, we're asset managers of retired people, so we're upfront. At a certain point, the flows get bigger on the withdrawals, you know, than the inflows do, right? The other thing that you have to consider, though, is like I was saying earlier, you can't forget how big a world it is and how interconnected it is and how many people need dollars. And, you know, look at what's going on in Brazil right now, right? I can't tell you how much international flows have come from Brazil into US markets, but I bet you it's pretty significant. And here's why. Even if the S and P draws down 30%, look what the real has done against the US dollar

• 30:43Speaker 01

  over the last year, right? Is, I mean, it's just gotten slaughtered. So this flow game can go on for quite a long time. And I think at the base of it is the fact that, again, when we run out of money, we just make more and the perpetual motion machine continues. So definitely one of those things, I think, has to break and it may take two of them. What are your thoughts, Jason?

• 31:05Speaker 02

  Yeah, definitely has to break on the passive side for things to change. But to your point, the capital flow angle is in a lot of ways just as powerful. The money's not as big by any means, but, and we've seen kind of a blow off in that recently, the capital inflows.

• 31:17Demetri Kofinas?

  You mean capital inflows from the periphery into the core?

• 31:20Speaker 02

  Foreigners to buy US stocks even directly, it's been very, very powerful. And you can see globally, some of like the most popular ETFs that are out there are like 2X, you know, Nvidia ETFs, and you have people all over Europe and Asia like buying stuff like that. So it's multi-pronged. I would say, though, like, now, reserve currency part, yes, but can the dollar go down and this be fine? I would, mag seven companies, the tech companies in general, tend to make a lot of money overseas. So if the dollar were to go down, they would, in a lot of ways, benefit their competitiveness and their earnings. So in some ways, you could have dollar down and it just sort of good for everyone in the world. But yeah, if the reserve structure was hit or you had a discontinuous drop, then all bets are off, I think, for US because.

• 32:06Speaker 02

  Those capital flows can go back the other direction and you know, as emerging markets know, like when portfolio flows rapidly head for the exits, it can be devastating to the point where a lot of emerging countries try really hard to keep those hot flows from coming in or slow them down because they know how bad it is on the way out. You know, as the US, we don't, we've never had to think about stuff like that. But if something happens where people want to take their money home, then it, you know, it could become a destabilizing factor, not, and not just for us, but like for the whole world. If someone like Japan who has three trillion dollars invested globally decides that they're better off investing at home, or they're near abroad, if you will, like people like France, Australia, US, all of a sudden have a, have a, a funding problem for their government deficits and they have possibly equity drawdown problems.

• 32:50Speaker 01

  There's one other factor to this too. And I see it as somewhat of a global dynamic as well, like meaning not just here in the United States. And what brought this to mind was the conversation, Mark Andreessen was recently on the Rogan podcast and he was talking about, you know, you and I have talked about this before, but sort of the unholy union between big business, in this case, it was tech, talking about how the Biden administration planned to address AI. And I'm sure you and the listeners know all about that. But it did remind me that that's another factor to think about. And, and, and these dynamics, right? The richest people in the world, the biggest companies in the world have always, you know, communicated with the governments. But I think you'd be very unwise to not pay attention to what Andreessen

• 33:32Speaker 01

  was saying and realize that this was not a one-off, that this is happening in several different places. And that is that they were just going to hand AI in totality to three different companies, right? Just to lock down. And so that's another part of this dynamic. And if you think that what corporations need, or what will benefit them and their stock price, if you think that that doesn't play into Fed decisions, I think you're lying to yourself. The extent to which it does, is it implicit? I don't know. Yeah, I love Rudy Hafenstein. Actually, we're going to be doing an interview with you and him on, on our show. And I love his critiques of the Fed. I'm not as sure about what their intentions are.

• 34:14Speaker 01

  I agree with the impact that they've had, but I just, my whole point is saying that those things are interconnected, right? These things are linked. And so, you know, here in the United States, you actively have the government and these companies that we're talking about are the ones that are top of the index, right? That have driven the whole party and parade up into this point. And they're incredible companies, but you also have to consider that collusion between government and big business. And I think internationally speaking, I don't think that's ever been a bigger factor.

• 34:40Demetri Kofinas?

  So we'll have a chance to talk about that because that also brings up the problem of AI safety, which I think probably is reflected in some of those decisions by governments. And it's very easy to look at what they do wrong from a regulatory standpoint. At the same time, there are real concerns around the deployment of this technology. And I don't really know what the exact answer is, though I must confess, I didn't really watch that interview. I watched some of it. Before we get into that, though, I want to just ask you guys something because it came up when we were talking about capital outflows from the United States and you guys both brought up Japan and France among some of those countries that could repatriate capital. Did either of you or did both of you hear my most recent episode with Russell Napier on national capitalism?

• 35:22Speaker 01

  Come on.

• 35:23Demetri Kofinas?

  So, okay, so folks that heard, he's so great. His stuff is fantastic. And his newsletter, the Solid Ground newsletter is top notch. So people are interested in that. And what's also I just, you know, free promotion for Russell here. When you actually sign up to that newsletter, he goes out of his way along multiple steps to prohibit you from signing up. You literally have to wait to sign up, to get approved to sign up. It's actually wild. His level of risk aversion around having the wrong person sign up for his newsletter. So it speaks also to his integrity. But anyway, enough of that. One of the things that Russell talks about is let's take the case of France. He's made the case that countries like France are especially vulnerable to implementing capital controls and forced repatriation of

• 36:05Demetri Kofinas?

  capital in order to help fund government liabilities. How do you guys view that that overall national capitalist framework and the implications it has on US equity markets and especially the S and P, which foreigners own through these index funds that we talked about earlier?

• 36:22Speaker 02

  Yeah. So I think this is really interesting because. We've had this 40 kind of ish year run in the system that we're kind of exiting. And it's worked really well for investment returns, you know, it's worked really well for keeping interest rates low. And now we're kind of shifting into the national capitalism in the US in a major way, you know, in the last decade. And obviously it's happening globally, all over the world. What I feel like people are missing is that it reverses some of the things that made these kind of asset price returns possible. Having really cheap labor, you know, that we were abroad, really cheap labor. That stuff becomes less, less doable, you know, if you're not going to ship off business to the cheapest place to produce it and you're going to bring a bunch of it home.

• 37:07Speaker 02

  American labor is not, not at all cheap. So you have prices that have to go up. You have interest rates that have to go up. Obviously that means the cost of capital and the cost of labor go up. And right now we see S and P with record profit margins and they keep climbing. And interestingly, profit margins almost directly correlate to the deficit size. So you can't really cut the deficit without messing with margins. And also if you, if you bring enough business back with onshoring with new industrial policy, you will add some jobs back into the heartland and that is obviously good. But you're also going to raise prices in a significant way and prices on capital and labor both. And you're going to cut into margins, which you're going to cut into returns on investment

• 37:51Speaker 02

  for public investors. And like, as I've already said, like we, we kind of hotwired the market to become a retirement utility. The average US households has never been this tied to the stock market in history. So we really can't afford to have that go down. So there's a lot of competing cross currents here that, that make it very tough. But clearly the big forces are not just here, but kind of around the world to kind of retrench into your own country and into your own alliance networks. At least secure really strategic stuff because even peer free traders these days kind of like are willing to make a concession if it's a really strategic thing. So I think we're clearly going that way, but I think considering the, the negative ramifications

• 38:34Speaker 02

  and the stuff that pushes back on everything that's been good about the last 40 years is important.

• 38:39Demetri Kofinas?

  So let me just piggyback off your comments about the stock market being the preferred savings vehicle and retirement account for most people because I think this is so incredibly important when thinking about government policy and what governments will and will not do from a fiscal and monetary standpoint. It's also why I agree in principle with people like Charles Goodhart and Manoj Pradhan, who co-authored a paper and also co-wrote a book together some years ago titled "The Great Demographic Reversal." I had Charles Goodhart on the podcast, who's also the former chief economist of the Bank of England, to discuss their thesis. And I agree with this view that is central to the book, that aging demographics, while they have been deflationary

• 39:22Demetri Kofinas?

  in the case of Japan, could be inflationary in today's developed economies with structurally high debt and deficit levels because more countries are aging at the same time. It's not just Japan anymore. And also, governments are more likely, for a variety of factors, to use fiscal policies to address deflationary forces in asset markets. So I think that's one area where people may be operating with the wrong framework. When we're talking about debt, like, so let's bring up the government shutdown here. I think the threat of the shutdown has to do with some number of Republicans, I think the number's like 38, who are revolting against, what was it, Trump's suggestion that they get rid of the debt limit? Is that right?

• 40:04Speaker 01

  Correct.

• 40:05Demetri Kofinas?

  Okay, so I haven't been following this story very closely. What do you guys make of it? Are we set up for a list trust moment in the US Treasury market in 2025 when Trump takes over?

• 40:16Speaker 01

  Well, Jase, as I guarantee, he's followed it closer. I personally think, look, an event is eventually going to happen, in my opinion. I mean, I just think at some point-

• 40:27Demetri Kofinas?

  When you say an event, you mean what, long-term yields dislocating?

• 40:30Speaker 01

  Yeah, I mean, it depends on how it's handled. I mean, one of the things we were talking about is percent- Was basically saying that when they get into power, they're not going to do the same nonsense that Jenny Allen was pulling off in terms of how she was issuing, right? Like she was going historically light on long-term issuance effectively. You know, they weren't running QE, but if you're issuing half as many long-term.

• 40:52Demetri Kofinas?

  Yeah, they were keeping long rates lower by issuing more on the short end to make up the shortfall.

• 40:58Speaker 01

  It's going to be really interesting. What we were saying, it's going to be really interesting to see what he does when he gets in there because it's going to be one of those scenarios where like you're bashing the Fed president constantly and then you get in the seat and you're like, well, let's continue on doing what he was doing, right? Just because you you're looking at it from a different perspective. It'll be really interesting to see how that plays out because I would be fascinated to see how the market handles that. I would be fascinated to see what happens at the long end. But I mean, I think the way you're going is that, you know, my opinion was when you went down the QE path, it was never going to stop, right? And I don't think it will. I think that we will see QE again in the next, I don't know, 16 to 24 months. And I think the only reason that we're able to get off QE now is because they splashed the pot in COVID, right? So like if you're not getting

• 41:42Speaker 01

  some type of outside unnatural flow into this market, it is a self-propelling machine in a way, but it's not. It needs that input, right?

• 41:51Demetri Kofinas?

  That's why I'm also skeptical and Chase, I'm curious to hear your thoughts on this, both of you, actually. I'm skeptical of this idea that Trump's going to come into office, taxes are going to get cut, tariffs are going to go up, inflation is going to remain under control, and we're going to engage in massive capital spending, some of it government-directed as part of a larger industrial policy to reshore. So like all this is just going to happen seamlessly. I mean, no one's suggestion is going to happen seamlessly, but I just think that this is going to be very difficult and we're going to have to make some tough choices. And in my mind, the least likely thing of all is that the tax cuts are going to be the priority.

• 42:28Speaker 02

  Yeah, even if you think about the tax cuts, and I think you're right, I think it's going to be harder to get done than than you would think like, oh, well, we have all of Congress, it'll be easy, like probably not. But even Trump himself has said, you know, like, I want corporate tax down to 15, but I'll take 20, which is a rounding error difference between here and there. So that's probably roughly how that goes. Do I think they can cement the prior individual stuff? Yeah, probably. But if you actually look at all of the tax cuts that have been proposed, it's $8 trillion worth over a decade. Which

• 42:55Demetri Kofinas?

  Which is not going to break the bank.

• 42:56Speaker 02

  Obviously, they're not going to get all that through, but you know, people are very optimistic about what Doge can do. And like, I bet they can't offset eight trillion, like especially given how much the deficit is structural and not, you know, just for fun. So I agree, I think, and I think that vote is a bit of a precursor to like, there are those spending hawk, you know, Freedom Caucus people that are already standing up to Trump now, they may get primaried and be gone soon or whatever. But there is like a group of people in Congress that are not kidding about spending cuts. And obviously, in my opinion, at least the Trump White House is not all that concerned with spending cuts. And I think he's going to have to deal with people like Elon that seem to be half serious about it before long.

• 43:38Speaker 02

  Because it's just an interesting situation where all these people that have been so all over the deficit and getting government smaller, now have to come face to face with with Trump, who probably actually doesn't care about that. And how that plays out is going to be interesting.

• 43:52Demetri Kofinas?

  Well, we've seen that with the two longest serving Republican administrations of the last 40 years with the Reagan administration. And we saw with the Bush administration, remember Paul O'Neill, Treasury Secretary under Bush, when he first came into office, resigned because he was opposed to on a philosophical and and principled level, Bush's tax cuts and spending policies. So I think, you know, it's one of those things where it's almost like a guarantee that when you get into office, you're inclined to spend.

• 44:21Speaker 01

  One thought on that too, look, I would like lower taxes. Okay, I'm I don't I don't think anybody wouldn't. But I think that when you look at tax rates historically, in my opinion, I think people are focused on the wrong thing. Meaning it's really hard to make an argument that taxes are too high, right? I also don't think that's going to be nearly as impactful economically as people think it is. I think the bigger issue is the regulations. If you want this economy to be able to grow and we want to grow out of the current situation, because let's be honest, right? They are not going to allow, and they, you can fill in the blank with whoever you want, the Fed, the Treasury, government, whatever the case. They're not going to allow a great depression. Okay, so we're not going out that way, right?

• 45:04Speaker 01

  And they've proven if they got to print six trillion and just start handing out to everybody and propel the next fart coin of the world or whatever, that's what they're going to do, right? And ignore them at your own risk, right?

• 45:15Demetri Kofinas?

  It's amazing how we've all learned what Fartcoin is in the span of just a few weeks.

• 45:20Speaker 01

  It's just, it's, it's an incredible time to be alive, man. But on the regulation side, when you look at the, think about what I was just telling you about us going off the radio. Right? If you don't think there are too many regulations, you don't run a business. And you don't realize how ridiculous it's gotten and how much tax you pay. Like, it's just insane, right? And everybody's like, well, business, you got a corporate tax cut. That's another thing about the Trump tax cuts. They only applied to C corps, right? So that wasn't a corporate tax cut for everybody. And I understand tax policy and realize that that's difficult. But I'm just saying, like, I don't think the tax cuts are nearly as important. And I think right now, I think Argentina is providing us somewhat of a, an example, right?

• 46:02Speaker 01

  A stencil, if you will, meaning if you want to do what you're going to eventually need to do on the fiscal side, which is get things closer to balance, get GDP to debt, back to manageable levels. Growing your way out, I think, is the only option on the table. And if you want to do that, I think that regulatory reform is going to go miles further than any marginal tax cut here or there.

• 46:28Demetri Kofinas?

  So you've actually led us perfectly into where I want to take this conversation next, Zach, which is Argentina. As I mentioned, our next Genius Dinner is in February in Buenos Aires. And the theme of that dinner is the investment opportunity in Latin America and Argentina, and especially how Millet's administration has performed in the first year, how successful he and his team have been in reforming the regulatory bureaucracy, whether Argentina can serve as a role model for other countries in Latin America, and whether we might see a domino effect of libertarianism or more capital and business-friendly policies spreading throughout the continent. We're going to talk about that in the second hour, guys. For anyone new to the program, Hidden Forces is listener-supported.

• 47:11Demetri Kofinas?

  We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Zach and Chase, 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. Guys, stick around. We're going to move the rest of our conversation onto the premium feed.

• 47:46Speaker 01

  Sounds good.

• 47:48Demetri 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 @Kofinas and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.