#237 - Fires, Strikes and Brazilian Success

Jacob Shapiro: 00:00:01

Hello, listeners.

Jacob Shapiro: 00:00:02

Welcome to another episode of the Jacob Shapiro podcast.

Jacob Shapiro: 00:00:04

I am Jacob Shapiro.

Jacob Shapiro: 00:00:05

Rob Laerty is joining me for our weekly chat.

Jacob Shapiro: 00:00:08

I don't know if you can tell in the podcast or not.

Jacob Shapiro: 00:00:10

I hope you can't tell, but we are both tired.

Jacob Shapiro: 00:00:12

We have both had long weeks personally, professionally, everything going on in the world.

Jacob Shapiro: 00:00:17

We've covered the Middle east.

Jacob Shapiro: 00:00:18

We've covered China.

Jacob Shapiro: 00:00:19

We've covered Russia, Ukraine.

Jacob Shapiro: 00:00:21

I really also would encourage you if you missed some of our great episodes earlier this week.

Jacob Shapiro: 00:00:25

The one with Ilo on Alberto Fujimori, one of my favorite episodes we've ever done.

Jacob Shapiro: 00:00:29

Ilo was incredibly generous with his time and his perspective.

Jacob Shapiro: 00:00:34

Cousin Marco speaks for himself.

Jacob Shapiro: 00:00:36

That was a tour de force, and we had a lot of fun on that episode.

Jacob Shapiro: 00:00:38

Looking forward to having him on more.

Jacob Shapiro: 00:00:40

And actually, the Iran strategist episode that we did was also very interesting.

Jacob Shapiro: 00:00:45

Not at all what I expected.

Jacob Shapiro: 00:00:47

So with all that already on the podcast feed this week, Rob and I talk a little bit about the port strikes in the US.

Jacob Shapiro: 00:00:53

As usual, some nerdy thoughts about labor and production and capital and protectionism, and closing with some thoughts on insurance.

Jacob Shapiro: 00:01:00

The idea was to try and hit some of the things that have gone underneath the radar.

Jacob Shapiro: 00:01:03

So if you're looking for what's on the front page, this is not the podcast to listen to.

Jacob Shapiro: 00:01:07

Go back to the other four podcasts we published this week.

Jacob Shapiro: 00:01:10

If you're looking for our unique brand of nerdy insights into the things that are on the fringes, but that will eventually be important, that's what we're doing in this episode.

Jacob Shapiro: 00:01:19

Email me at Jacob Ognitive Investments if you want to talk about any of this.

Jacob Shapiro: 00:01:25

As you can probably imagine, my phone and my schedule and my calendar have been blowing up this week, but I have room for more.

Jacob Shapiro: 00:01:31

So please feel free to reach out if you need help.

Jacob Shapiro: 00:01:34

Don't be scared away.

Jacob Shapiro: 00:01:35

Take care of the people that you love.

Jacob Shapiro: 00:01:36

Cheers and see you out there.

Jacob Shapiro: 00:01:41

All right, listeners, it has been.

Jacob Shapiro: 00:01:43

It has been quite a week just to start.

Jacob Shapiro: 00:01:47

We're not really going to touch the Middle east that much in this podcast.

Jacob Shapiro: 00:01:50

If you want.

Jacob Shapiro: 00:01:50

You know, Marco and I did some stuff on the Middle east.

Jacob Shapiro: 00:01:52

We had the iranian strategic analyst on Iran's position.

Jacob Shapiro: 00:01:56

Hopefully I'm going to have an israeli military historian on here in the next couple of days.

Jacob Shapiro: 00:02:00

So for your Middle east content, just go to the podcasts that are Middle east.

Jacob Shapiro: 00:02:04

We know it's happening.

Jacob Shapiro: 00:02:04

We know it's a big deal.

Jacob Shapiro: 00:02:06

I promised rob a story about just how.

Jacob Shapiro: 00:02:08

So we're recording Thursday, October 3.

Jacob Shapiro: 00:02:11

Here's what my week has been like, both in geopolitical terms and in personal terms.

Jacob Shapiro: 00:02:15

I was downtown.

Jacob Shapiro: 00:02:16

I was in downtown New Orleans yesterday for a meeting, and I managed to find a parking spot on a little street off of Magazine street, which is one of the main drags where you didn't have to pay for parking.

Jacob Shapiro: 00:02:26

And I was like, ooh, great.

Jacob Shapiro: 00:02:27

This is great.

Jacob Shapiro: 00:02:28

My day is looking so good.

Jacob Shapiro: 00:02:29

I got this little spot.

Jacob Shapiro: 00:02:31

So I'm halfway through this meeting, and somebody comes in from the street and says, there's a fire down the street.

Jacob Shapiro: 00:02:36

Do any of you have cars parked down here?

Jacob Shapiro: 00:02:38

And I was like, oh, God, let me go see if my car is parked out there.

Jacob Shapiro: 00:02:41

Literally.

Jacob Shapiro: 00:02:42

Literally.

Jacob Shapiro: 00:02:43

Across from where I had parked on the same street is a fire that has engulfed a house, and it became a four alarm fire and spread to three or four different buildings next to it.

Jacob Shapiro: 00:02:52

There was a fire engine in front of my cardinal and behind my car.

Jacob Shapiro: 00:02:55

And I had to go pick up my daughter in about 30 minutes from that point.

Jacob Shapiro: 00:02:59

So I got the person who I was meeting with to drive me to where my daughter was in daycare.

Jacob Shapiro: 00:03:04

Then I called, like, different parents from the school, like, hey, I'm stuck here.

Jacob Shapiro: 00:03:07

Do you have an extra car seat?

Jacob Shapiro: 00:03:09

Cause I couldn't get uber to agree to pick me up without a car seat.

Jacob Shapiro: 00:03:12

Eventually, my friend Jack shout out to jack was like, yes, I will come pick you up.

Jacob Shapiro: 00:03:17

And he picked me up.

Jacob Shapiro: 00:03:18

So I spent, like, 15 minutes at daycare sitting with the one year olds and my daughter on a little bench.

Jacob Shapiro: 00:03:23

Meanwhile, you can see the smoke from the daycare.

Jacob Shapiro: 00:03:25

It's, like, pluming in the air.

Jacob Shapiro: 00:03:27

This thing burned for, like, 4 hours.

Jacob Shapiro: 00:03:28

I came home, I smelled disgusting.

Jacob Shapiro: 00:03:30

My shirt was terrible.

Jacob Shapiro: 00:03:32

A couple hours later, I went back and got my car.

Jacob Shapiro: 00:03:33

My car smells like.

Jacob Shapiro: 00:03:35

Like a house fire.

Jacob Shapiro: 00:03:36

But that's my day, and that's my.

Jacob Shapiro: 00:03:39

That's my analogy for the week.

Jacob Shapiro: 00:03:40

It has felt like that in geopolitics.

Rob Laerty: 00:03:44

Four alarm fire, and you're.

Rob Laerty: 00:03:46

You're stuck behind a fire truck.

Rob Laerty: 00:03:48

That is a good analogy.

Jacob Shapiro: 00:03:50

Literally.

Jacob Shapiro: 00:03:50

Like, I couldn't have had worse luck.

Jacob Shapiro: 00:03:54

So there's a grab bag of stuff that we wanted to update the listeners on today, Rob, and you said it well, a lot of it is going to boil down to, I don't know, what do you like, pitfalls of protectionism or the hidden costs of protectionism, but there's a lot of different things to attack.

Jacob Shapiro: 00:04:11

I think the first thing I want to attack, though, is this.

Jacob Shapiro: 00:04:16

Eastern port and Gulfport workers strike because this was something that I wasn't really, I didn't really know was sort of in the making.

Jacob Shapiro: 00:04:22

And it seems like it's a pretty huge deal.

Jacob Shapiro: 00:04:27

So what's happening is that the.

Jacob Shapiro: 00:04:29

So the ILA, which is the International Longshoremen's association, so they're manning the ports on the Gulf coast and on the east coast.

Jacob Shapiro: 00:04:38

They decided to strike their 45,000 port workers from Maine to Texas.

Jacob Shapiro: 00:04:42

he first major stoppage since: 1977

Jacob Shapiro: 00:04:53

research on what happened in: 1977

Jacob Shapiro: 00:04:59

It actually does have some overtones with what's happening today.

Jacob Shapiro: 00:05:02

Today, the port strikers, they're really worried about two things.

Jacob Shapiro: 00:05:05

They want an increase in wages.

Jacob Shapiro: 00:05:07

Not that surprising, by the way.

Jacob Shapiro: 00:05:08

They, they want a 77% increase in wages versus, I believe, 50% is what they're being offered right now.

Jacob Shapiro: 00:05:18

A really strident video from this guy, Harold Doggett.

Jacob Shapiro: 00:05:21

Daggett, who's the chief negotiator, about how the longshoremen were out there killing themselves during COVID taking things off of ships while everybody else was sitting in their house.

Jacob Shapiro: 00:05:30

That rings really untrue to me, especially as somebody who had a nurse who was going into the hospital and is not getting a 77% raise for saving people's lives, bro.

Jacob Shapiro: 00:05:38

So just a little personal.

Jacob Shapiro: 00:05:40

Shut the frack up over there.

Jacob Shapiro: 00:05:41

Anyway, hes a good chief negotiator because I dont even care about this.

Jacob Shapiro: 00:05:44

And hes got me boiling a little bit.

Jacob Shapiro: 00:05:47

So what was happening in: 1977

Jacob Shapiro: 00:06:04

Containerization meant that actual longshore workers, it was down to thousands of jobs, and things were going to keep going in that direction.

Jacob Shapiro: 00:06:12

And that strike lasted for three months.

Jacob Shapiro: 00:06:14

nyone who was employed before: 1977

Jacob Shapiro: 00:06:23

but guaranteed income through: 1986

Jacob Shapiro: 00:06:28

That gets eliminated as part of a different contract.

Jacob Shapiro: 00:06:30

There.

Jacob Shapiro: 00:06:31

Not something I've really ever seen when looking at these things, although I'm nothing.

Jacob Shapiro: 00:06:35

A hardcore expert on us labor industrial relations and things like that.

Jacob Shapiro: 00:06:39

The reason I say that, there are overtones to today besides the geopolitical context.

Jacob Shapiro: 00:06:43

Geopolitical context, Carter administration.

Jacob Shapiro: 00:06:46

A lot of pessimism about the United States role in the world coming off the defeat in Vietnam, lack of trust in us government institutions because of Nixon and Watergate, you can sprinkle in some chaos in the Middle east, coming with the islamic revolution, you can sprinkle in little, little comparisons.

Jacob Shapiro: 00:07:05

But not only do the longshoremen want 77% higher wages, they want their jobs to be protected from automation, which is kind of crazy, because you can imagine that taking containers off of ships is actually something that automation would be really good at.

Jacob Shapiro: 00:07:20

If you can automate the crane to do these things, and if the containers are all the same shape and the same size, like that is the ideal sort of thing that machine learning and artificial intelligence could do the other thing.

Jacob Shapiro: 00:07:32

And I haven't been able to do all the research on this, but I've been following some research from John Conrad on Exxon in some articles, and he has been talking about.

Jacob Shapiro: 00:07:42

And I didn't know about this, Rob, this idea that every time a crane for the ILA.

Jacob Shapiro: 00:07:49

So these workers who control the ports in the Gulf, on the east coast, the west coast, ironically, they had more radical positions.

Jacob Shapiro: 00:07:55

So they get paid much more than their compatriots on the east coast, which might be why these guys are going on strike.

Jacob Shapiro: 00:08:01

They're like, hey, the crazy has got higher wages now.

Jacob Shapiro: 00:08:03

We're gonna be a little bit crazy anyway.

Jacob Shapiro: 00:08:05

So for this union, every time a ship arrives in the United States, every time a crane moves a container, they get a massive fee off of it.

Jacob Shapiro: 00:08:13

And the result of this is so that us shippers try as much as possible to limit the amount of times a crane touches a container.

Jacob Shapiro: 00:08:21

So, in the United States, if you get to one of these ILA ports, the ship arrives, container, the crane gets the container, moves it to a truck, and a truck drives hundreds of miles to get it to its destination.

Jacob Shapiro: 00:08:32

Compare this to Europe, where, okay, the ship arrives, crane takes the container, moves it to a terminal, another crane takes it, loads it onto a barge, the barge sails somewhere to maybe get to a smaller regional port.

Jacob Shapiro: 00:08:44

Then it gets lifted up on a crane a third time onto a truck, and then it's a shorter drive to a warehouse.

Jacob Shapiro: 00:08:49

And I couldn't believe this, because the whole geopolitical, geographic advantage of the United States, from everybody from George Friedman to Peter Zion to Hans Morgenthau to Stephen fracking Bannon, is that the US Mississippi river complex allows us to move things cheaply.

Jacob Shapiro: 00:09:05

Largest inter navigable waterway in the entire world, all of it, for nothing.

Jacob Shapiro: 00:09:09

Because we don't want to pay the crane guys for the fees that they take, which also, just, you know, the idea that we led on containerization and we're going to be behind on modernizing ports for the 21st century, there's a lot there, too.

Jacob Shapiro: 00:09:22

So why don't I set you up there, Rob, and we can go into some of the other topics that we wanted to go into, but it does seem like it's going to be a big deal.

Jacob Shapiro: 00:09:29

It does seem like the Biden administration has a choice.

Jacob Shapiro: 00:09:31

It looks like they can maybe push the workers to go back for 80 days, I believe, via Taft Hartley.

Jacob Shapiro: 00:09:38

There's also been progress in the negotiations over the course of this week.

Jacob Shapiro: 00:09:43

But I will say more than 50% of all the goods imported into the US using container ships come in through east and Gulf Co.

Jacob Shapiro: 00:09:50

Gulf coast ports.

Jacob Shapiro: 00:09:51

Nearly 70% of containerized exports leave through them.

Jacob Shapiro: 00:09:55

We're talking about, it's not going to, the impact is not going to be apparent.

Jacob Shapiro: 00:09:59

But everything from perishable goods like bananas and blueberries and fish to toys and electronics ahead of Christmas season to automotive parts, all of these things are going to be massively affected.

Jacob Shapiro: 00:10:12

Even if they get a deal tomorrow.

Jacob Shapiro: 00:10:15

Like, there's already going to be weeks, if not months of disruption just based on the backlog that has built up.

Jacob Shapiro: 00:10:19

And that's before we get to Red Sea shipping, before we get to anything happening in the Panama Canal, before we get to anything happening in the South China Sea.

Jacob Shapiro: 00:10:28

I saw a picture this morning in Singapore of all the ships that have been stacked up because of the recent drama in the Middle east as well, and have been getting texts from some of our friends in the aerospace industry about how air freight is also suffering because of what's happening in the Middle east.

Jacob Shapiro: 00:10:42

So anyway, I droned on a little bit there, but I'll let you take the wheel.

Rob Laerty: 00:10:46

Well, there's a lot to go into there.

Rob Laerty: 00:10:49

I guess there's a few different ways we could attack this.

Rob Laerty: 00:10:53

One thing is to start just at the macro level, and the implications of this, as you pointed out, they are going to be significant.

Rob Laerty: 00:11:02

I think what a lot of people don't realize is this is coming at a very important and specific time because now it's peak season for holiday shipping.

Rob Laerty: 00:11:11

Usually peak season is like late August, early September, but that's, we're kind of in the tail end of when stuff is actually arriving in terms of building holiday inventory.

Rob Laerty: 00:11:23

So basically, they're putting the squeeze on the supply chain at exactly the most crucial moment of when that supply chain is operating at the same time.

Rob Laerty: 00:11:35

There had already been a sort of a squeeze in the supply chain, in part because there was a calendar shift this year that made the peak shipping season like a little bit shorter than normal.

Rob Laerty: 00:11:47

And FedEx and UPS both announced, I think, about two months ago that they were going to squeeze surcharges on holiday shipping this year to try to protect their margins.

Rob Laerty: 00:12:01

So you have higher surcharges from the two major shipping companies.

Rob Laerty: 00:12:06

You have a calendar shift that is already squeezing more activity into a smaller space of time.

Rob Laerty: 00:12:13

You have, obviously, this port strike that's just going to exacerbate things in a major way.

Rob Laerty: 00:12:20

All of this leads to this notion that supply side inflation is not going away.

Rob Laerty: 00:12:27

And that's really important because goods inflation, as we've talked about, has been deflationary, has been subtracting from the inflation numbers for really the last 14 months.

Rob Laerty: 00:12:38

So if that should turn around and go in the other direction, that's a major headache for the Fed, for the Biden administration heading into the upcoming election.

Rob Laerty: 00:12:49

But I think that's really important to think about.

Rob Laerty: 00:12:52

And some of this sounds obscure, but if you get any reacceleration of inflation, even as growth is slowing, I think that could be a bombshell for investors expectations and markets, because we haven't experienced that before.

Rob Laerty: 00:13:09

For the last, really, 40 years, inflation and growth have moved together because it's been about demand sopping up, whatever excess supply is.

Rob Laerty: 00:13:17

So when growth increases, inflation increases, and vice versa.

Rob Laerty: 00:13:21

What happens if you get a growth stagnation combined with inflation not only being persistently high, but moving in the wrong direction?

Rob Laerty: 00:13:31

That's going to really freak people out.

Rob Laerty: 00:13:34

So this is a really important issue.

Rob Laerty: 00:13:38

That's one thing I would say.

Rob Laerty: 00:13:39

The other thing I would say is I would expect more of this, because what you're seeing is a growing supply demand imbalance within labor markets that has cyclical elements to it.

Rob Laerty: 00:13:51

you saw similar things in the: 1970

Rob Laerty: 00:14:00

You had a supply demand imbalance because we were running the economy too hot.

Rob Laerty: 00:14:04

And despite the influx of baby boomers into the workforce over those years, we were running the economy so hot that they still had a lot of bargaining power.

Rob Laerty: 00:14:13

this amongst dock workers was: 1977

Rob Laerty: 00:14:31

So you should expect to see more of this more frequently, which is also going to be inflationary and also speaks to the fact that you have sort of embedded interest groups that are willing to put the squeeze on other parts of society to get goodies for themselves.

Rob Laerty: 00:14:48

And I told you I had a story this reminded me of from my dad, and my grandfather used to work in the Rheingold beer bottling plant in New York.

Rob Laerty: 00:15:07

And I remember my dad told me this story that he heard from his father that there was one time where there were multiple days where a truck had come to the plant to drop off bottles or something.

Rob Laerty: 00:15:18

Right.

Rob Laerty: 00:15:19

And because there was a dispute between the teamsters and someone else over who was going to unload this truck, the truck was sitting there and two groups of guys were just standing around looking at these bottles for like four days, and no one would do anything.

Rob Laerty: 00:15:35

And that was the story.

Rob Laerty: 00:15:38

There was no, you know, eventually they found some way out of the impasse.

Rob Laerty: 00:15:42

But that always, my father always was struck by that and told me that story about, like, it's just crazy how all these perfectly able bodied guys are sitting around literally looking at this box of bottles like, nope, this is my territory.

Rob Laerty: 00:15:55

Nope, this is mine.

Rob Laerty: 00:15:58

I say that story because there is no Rheingold beer bottling plant in New York anymore because it was too fucking expensive and it didn't work.

Rob Laerty: 00:16:09

So let that be a moral for these sorts of organizations that squeeze other members of society for their own benefit.

Rob Laerty: 00:16:21

In the end, that's not sustainable for too long.

Jacob Shapiro: 00:16:25

Yeah.

Jacob Shapiro: 00:16:25

And there's a much longer and deeper conversation, I guess, to be had here about the relationship between labor and production in the United States.

Jacob Shapiro: 00:16:33

And I think it's a conversation that the United States government has not even really begun to think about even those terms, labor and production and marxist ideas like that.

Jacob Shapiro: 00:16:44

Those are not concepts that are really in us political dialogue at this point, even though they're very valuable.

Jacob Shapiro: 00:16:51

One thing I didn't say, by valuable, I mean from a sort of understanding point of view.

Jacob Shapiro: 00:16:55

I'm not endorsing Marxism, to be clear, but one of the things that I forgot to say was one of the things that kicked off this labor unrest, which sort of gets to your story, is that at the port of mobile in Alabama, so far away from the New York beer guys, they installed a truck gate that did not require a unionized attendant to open the gate of.

Jacob Shapiro: 00:17:15

So an automatic door, basically.

Jacob Shapiro: 00:17:18

And the ILA is saying, this is the boogeyman.

Jacob Shapiro: 00:17:20

There can be no more automatic gates installed.

Jacob Shapiro: 00:17:23

There must be unionized attendance at all the gates to open the gates, because, you know, there's going to be all these safety concerns.

Jacob Shapiro: 00:17:29

If we don't have these sorts of things, like, it seems to me like they're in a meaningful way fighting against progress.

Jacob Shapiro: 00:17:36

I say that, though.

Jacob Shapiro: 00:17:37

I mean, labor does have to protect itself because we saw during globalization, if you did not protect yourself as labor, you were going to get run over from a production standpoint because it was just going to go to China and you were going to lose your job.

Jacob Shapiro: 00:17:50

So I'm not saying that that's all bad.

Jacob Shapiro: 00:17:52

There's also, this is from the Capital Research center, which is a conservative think tank, so there is a conservative bent to it.

Jacob Shapiro: 00:17:59

But they had an entire report on this, and they had two interesting other historical examples to keep in mind.

Jacob Shapiro: 00:18:07

r one was a railway strike in: 1946

Jacob Shapiro: 00:18:17

The first two lines of his speech, the crisis of Pearl harbor was the result of inaction by a foreign enemy.

Jacob Shapiro: 00:18:22

The crisis tonight is caused by a group of men within our own country who placed their private interests above the welfare of the nation.

Jacob Shapiro: 00:18:28

My God.

Jacob Shapiro: 00:18:29

ir traffic controllers in the: 1980

Jacob Shapiro: 00:18:36

And I think we're still paying for that.

Jacob Shapiro: 00:18:38

I don't know if you saw that extremely scary article, I can't remember if it was the Wall Street Journal or New York Times, about how we basically have not nearly enough air traffic controllers, and there's been a bunch of near misses of, like, planes crashing into each other at airports and things like that.

Jacob Shapiro: 00:18:52

So it's not like things are very harmonized.

Jacob Shapiro: 00:18:56

Maybe that's a good way to segue into some of the other things that we wanted to talk about.

Jacob Shapiro: 00:19:01

Rob, I know that you had, we wanted to follow up last week.

Jacob Shapiro: 00:19:04

We were talking about the Biosecure act.

Jacob Shapiro: 00:19:06

You had some more thoughts about, specifically batteries, but some of the other things that the United States is doing in terms of protectionism that I think fit into this idea.

Rob Laerty: 00:19:16

Yeah.

Rob Laerty: 00:19:18

So I want to talk about supply chains, and I do think it ties into this labor versus capital issue, because let's just return to that for a moment, because I think it's really important to have the background here, which is this is going to be a growing issue in general, and here's why.

Rob Laerty: 00:19:39

Robotics has been a growth area for a long time, but for the most part, robotics, until today, this is still mostly true today, consists of industrial robots that operate in caged off areas and very carefully controlled conditions that are doing repetitive tasks.

Rob Laerty: 00:19:59

ctually grown just fine since: 2000

Rob Laerty: 00:20:12

I think: 2000

Rob Laerty: 00:20:30

And even today, I think the number is even lower than that.

Rob Laerty: 00:20:36

Production in total did not collapse, in part because you moved higher up the value chain.

Rob Laerty: 00:20:41

You used more automation, more capital, things that cannot be easily replicated and aren't subjecting you to a labor cost of labor imbalance.

Rob Laerty: 00:20:53

So that's sort of where we've been.

Rob Laerty: 00:20:55

And some of these things are sort of holdouts in terms of the dock workers.

Rob Laerty: 00:21:00

Like they're in a very specific area.

Rob Laerty: 00:21:04

But for the most part, unionized factory labor is not really a thing anymore.

Rob Laerty: 00:21:11

This is going to become more of an issue because this is tying into AI and machine vision.

Rob Laerty: 00:21:17

But robotics is about to get a whole lot better really quick.

Rob Laerty: 00:21:21

And I don't think people are really prepared for this.

Rob Laerty: 00:21:24

And not just in the traditional way that we're used to, which is closed off conditions, industrial robots, but robotics that can work in uncaged conditions near other humans.

Rob Laerty: 00:21:38

I mean, everyone has seen this and they've seen little demonstrations like, this is a real thing.

Rob Laerty: 00:21:43

And the reason why it's becoming a real thing is because the main bottlenecks to developing these kinds of robots are having the robot able to see what's around it and understand what's around it, which is a machine vision problem, which is an AI problem.

Rob Laerty: 00:22:00

So to the extent that we're seeing amazing progress in AI, that's also contributing to the growth in machine vision.

Rob Laerty: 00:22:08

And you mentioned your self driving taxi experience.

Rob Laerty: 00:22:12

That sounds like science fiction, or it would have been seven or eight years ago.

Rob Laerty: 00:22:16

Now it's real because the machine vision is at a point where you can make it work.

Rob Laerty: 00:22:20

Well, robots are the same thing.

Rob Laerty: 00:22:22

Robots taxis are robots that drive.

Rob Laerty: 00:22:25

These are just robots that pick up stuff and move it around and put things over here from over here, and turn screws and do little manipulative tasks with robot hands.

Rob Laerty: 00:22:38

And that's the other thing, is understanding not just what you're seeing, but understanding the physics models around different stuff.

Rob Laerty: 00:22:46

So knowing that if you pick up a glass and you squeeze it with extraordinary force, it's going to shatter.

Rob Laerty: 00:22:52

Like that sort of commonsensical, just monkey mind stuff that we take for granted is very difficult from an engineering standpoint.

Rob Laerty: 00:23:00

But the progress we're making in that area is extraordinary just recently.

Rob Laerty: 00:23:06

So this is going to be here very quick.

Rob Laerty: 00:23:10

It's going to be very feasible to automate a lot of manual labor to the extent that it remains in the manufacturing sector or the sort of warehousing sector, transport, things like that.

Rob Laerty: 00:23:23

This is coming and it's coming very fast.

Rob Laerty: 00:23:25

So that's the background to the labor capital dispute because that's going to be an issue that's going to cause a lot of freight tempers because this is the next stage of what's going on.

Rob Laerty: 00:23:40

With that said, you mentioned protectionism, and I think one of the themes as we're going through the knowledge platform this week and the news that we're combing through is the complications and interesting little nuances as protectionist policies get rolled out both in the US and in Europe, and how it's really nothing simple and there's a few preconditions that one has to have in place in order to make these things really work.

Rob Laerty: 00:24:12

And you mentioned the batteries.

Rob Laerty: 00:24:13

One of the things that was on the Bloomberg this morning was the United States is giving $2.8 billion to domestic battery makers to try to shield them from chinese competition.

Rob Laerty: 00:24:25

And the funny thing about this was they originally announced these awards two years ago.

Rob Laerty: 00:24:30

They've not released any funds yet.

Rob Laerty: 00:24:33

Apparently one third of the companies that were originally slated to get rewards.

Rob Laerty: 00:24:38

The industry has changed so much so quickly that they're no longer even, they're either bankrupts or they're not viable companies that you can give this money to.

Rob Laerty: 00:24:46

So they've had to change all the awards as they've gone along.

Rob Laerty: 00:24:50

So, you know, it's one specific example of one industry.

Rob Laerty: 00:24:55

But I think it's very interesting both because $2.8 billion is like chump change in terms of what we're talking about.

Rob Laerty: 00:25:04

It's taken several years to even distribute that amount, and you can see that it's so dynamic that it's basically not going to do anything because the industry is changing so fast and the companies that they're up against are so huge in comparison.

Rob Laerty: 00:25:21

So I think that's one of the main themes around a lot of what we're going to talk about or what's in the news is you can have import substitution policies, you can have protectionist policies, but if you don't put in place the capacity to replace what you're import substituting, you're just paying more to import from abroad anyway.

Rob Laerty: 00:25:46

And that's not where most of these nations are intending to go.

Rob Laerty: 00:25:51

But I don't know if they have the wherewithal to distribute and really get engaged to the degree and scale required to go toe to toe with, you know, the chinese and korean battery behemoths, for example.

Rob Laerty: 00:26:07

So you're sort of shooting yourself in the foot without any positive side effect in many cases.

Jacob Shapiro: 00:26:14

Well, yeah, and countries like China are ahead here already because that's where a lot of the production is happening.

Jacob Shapiro: 00:26:20

And then, to your point, also an economy and a political structure like China's is much better at deciding to allocate resources massively to something like this.

Jacob Shapiro: 00:26:29

So while you were talking, I was just looking up, you know, cattle, which is the big.

Jacob Shapiro: 00:26:33

The big chinese EV battery maker.

Jacob Shapiro: 00:26:35

I mean, their revenue is like between 50 and $70 billion.

Jacob Shapiro: 00:26:41

So a $2 billion investment.

Jacob Shapiro: 00:26:43

I mean, it's literally nothing.

Jacob Shapiro: 00:26:45

They're by themselves investing almost 2 billion in Bolivia to develop their lithium reserves.

Jacob Shapiro: 00:26:51

Just by that figure, it doesn't work.

Jacob Shapiro: 00:26:54

The European Union is also really straining with this.

Jacob Shapiro: 00:26:58

They have those tariffs against chinese EV's that are being discussed.

Jacob Shapiro: 00:27:03

Hungary came out this morning and said they were going to veto it.

Jacob Shapiro: 00:27:06

I'm not sure exactly what direction that's going to go.

Jacob Shapiro: 00:27:09

But then at the same time, you also had that thing about electrolyzers that you were talking about where the EU is trying to stop using chinese electrolysis equipment for hydrogen production, even though that's where a lot of these things are made.

Jacob Shapiro: 00:27:23

So it just.

Jacob Shapiro: 00:27:25

Yeah, it doesn't really make sense to me, and it doesn't make sense that you can go from.

Jacob Shapiro: 00:27:29

And I mean, this is something that we've talked about quite a bit on the podcast.

Jacob Shapiro: 00:27:33

It's not something we're going to stop talking about anytime soon.

Jacob Shapiro: 00:27:36

But if this is the game that countries like the United States and the European Union are going to play with China, I don't exactly know how they win.

Jacob Shapiro: 00:27:42

China has lots of weaknesses, and we talked about them in depth last week, but this is not one of them.

Rob Laerty: 00:27:50

Yeah, there was a very good financial Times piece this week that I put on the knowledge platform that I assume no one is going to read, but I think is probably the most important thing that no one is talking about.

Rob Laerty: 00:28:05

And it was about the latest estimates of chinese FDI, specifically in renewable energy.

Rob Laerty: 00:28:13

And really, the takeaway was twofold.

Rob Laerty: 00:28:15

The first was the amounts are enormous and growing in extraordinary leaps and bounds.

Rob Laerty: 00:28:22

And secondly, that the shifts between the west, meaning the EU and the US, away from the west and toward sort of, especially in Asia, but eurasian countries, southeast asian countries, has been extremely rapid.

Rob Laerty: 00:28:41

So you're seeing chinese companies building out their own supply chains into these other nations, both to supply rich world markets, but also to service demand in those markets.

Rob Laerty: 00:28:56

So we've been talking internally a little bit about Pakistan and their amazing hunger for solar panels as they go through a sort of death spiral on their electric grid.

Rob Laerty: 00:29:08

China is the one who's stepping in and supplying this equipment and this is a major opportunity for them.

Rob Laerty: 00:29:15

It's an opportunity that the us and european countries are mostly missing because they're not focused on exports and servicing these markets and they're not putting in place the tools to compete with the chinese producers because they have an enormous advantage, they have subsidized capital, they have all sorts of structural advantages that have been put in place.

Rob Laerty: 00:29:36

We talk about this all the time.

Rob Laerty: 00:29:37

Chinas great problem is the imbalance between households and business, production and consumption.

Rob Laerty: 00:29:48

The chinese system is geared toward production and investment and its not geared towards consumption.

Rob Laerty: 00:29:53

And that has obviously negative ramifications which we talk about all the time.

Rob Laerty: 00:29:58

But one of the positive ones is you can really kick ass when you want to go build these industries out, go abroad.

Rob Laerty: 00:30:05

I mean if you look at this electrolyzer story, it was absolutely shocking because electrolyzers are not a big business.

Rob Laerty: 00:30:12

This is a tiny business.

Rob Laerty: 00:30:15

This is like barely a pimple on the butt of the battery business or the solar panel business.

Rob Laerty: 00:30:21

So it's not like, oh, these chinese producers have just gotten this huge scale advantage and it's all over.

Rob Laerty: 00:30:28

Electrolyzers are not economic anywhere.

Rob Laerty: 00:30:31

Hydrogen is super nascent just for the background there.

Rob Laerty: 00:30:34

But if you read the story, the chinese electrolyzer equipment is one third the cost of the european competitors.

Rob Laerty: 00:30:41

And some of these european projects are actually foregoing EU funds entirely because they want the chinese equipment because it's so much cheaper and it's good.

Rob Laerty: 00:30:54

That is extraordinary.

Rob Laerty: 00:30:55

I don't think we've ever seen that.

Rob Laerty: 00:30:59

There's no historical parallel for that.

Rob Laerty: 00:31:01

nt account surplus during the: 1920

Rob Laerty: 00:31:29

They were exporting a ton of capital, but it was primarily because Europe was destroyed and they were shipping bonds to Germany to build municipal swimming pools and rebuild the industry after sort of the, the Ruhr valley was kind of blown to bits.

Rob Laerty: 00:31:52

So I don't know what to say.

Rob Laerty: 00:31:55

History provides almost no guide to this, but this extraordinary.

Rob Laerty: 00:31:59

The scale and the degree of what's happening.

Rob Laerty: 00:32:02

And the US and Europe don't seem to have any really cogent solutions for this other than allowing the trends to continue.

Jacob Shapiro: 00:32:13

Yeah.

Jacob Shapiro: 00:32:14

I'm also struck by how all of this ends up boiling down to energy and where weaknesses become strengths and strengths become weaknesses.

Jacob Shapiro: 00:32:21

ed States, as a result of the: 2008

Jacob Shapiro: 00:32:35

You can, for ideological purposes, you can if you think it's going to save the environment, but there's not a demonstrated need.

Jacob Shapiro: 00:32:40

The same was true for Europe up until Russia invaded Ukraine.

Jacob Shapiro: 00:32:43

The problem for Europe is now they have the need, but now they have this Frankenstein political structure that is not designed for everyone to agree.

Jacob Shapiro: 00:32:50

And Hungary can raise its hand and say, we don't want that, or a France can raise its hand.

Jacob Shapiro: 00:32:55

We're getting this right now with the Mercur EU free trade agreement, which basically everyone in the EU except France wants, and France doesn't want it, they say, because of deforestation in Brazil.

Jacob Shapiro: 00:33:04

It's really because they're rightfully afraid of what brazilian agricultural exports are going to do to France's agricultural industry.

Jacob Shapiro: 00:33:11

Us farmers who are listening to this are living the story, literally, right now.

Jacob Shapiro: 00:33:15

All of which is just to say the EU's political structures are not strong enough to say, okay, we do have an energy imperative issue, let's pivot to that so that we can become energy secure and give the types of incentives we need to produce these things inside of Europe.

Jacob Shapiro: 00:33:30

The ironic thing about China, and this was true, this is where the China Japan comparison, sort of the early 20th century Japan comparison, I think, carries a lot of water, because China doesn't have enough food to feed itself.

Jacob Shapiro: 00:33:42

It doesn't have enough energy to power itself at the rate that it's growing with current technology that's available to it, and it doesn't have any oil or natural gas resources.

Jacob Shapiro: 00:33:51

And it's sort of come up on the limit of what it can do with fossil fuels, because the environment had gotten so bad that it was literally killing people and that the population was literally turning against them, to the point where Xi Jinping.

Jacob Shapiro: 00:34:03

I remember this very vividly.

Jacob Shapiro: 00:34:04

I think I was still at GPF.

Jacob Shapiro: 00:34:06

I think it was: 2017

Jacob Shapiro: 00:34:08

He declared war.

Jacob Shapiro: 00:34:09

Not against the United States, not against Japan.

Jacob Shapiro: 00:34:12

He declared war against the environment and against cleaning up the environment so that people could breathe a little bit easier.

Jacob Shapiro: 00:34:18

All of which is to say it's an interesting dutch disease experiment, because one of the reasons I think that China is at the forefront of EV's and at solar panels and at batteries and electrolyzers, I mean, it's, you know, they're at the forefront of a lot of things from production perspective, but they have to be, because if theyre not, theyre absolutely screwed.

Jacob Shapiro: 00:34:38

Whereas until: 2022

Jacob Shapiro: 00:34:48

And you can see how in other parts of the economy, this really does damage China.

Jacob Shapiro: 00:34:52

But in this particular thing, which the narrative pendulum has shifted here, everybody wants renewables, everybody wants the things that China is producing here for both energy security reasons and for ideological reasons.

Jacob Shapiro: 00:35:04

And like they're the game in town, nobody else is going to be able to compete with them at scale.

Rob Laerty: 00:35:11

In many ways, it's the same treadmill to hell idea that we talked about in relation to the property market in China.

Rob Laerty: 00:35:19

This notion that you need to keep doubling down on this strategy.

Rob Laerty: 00:35:23

And you have a, you know, you have a, what's the thing that's on the playgrounds?

Rob Laerty: 00:35:32

Them having a total brain fart that goes back and forth and one kid gets a seesaw, an imbalanced seesaw that you keep having to push down on one end so that it doesn't fall over.

Rob Laerty: 00:35:43

That's kind of an analogy for where the chinese economy is, I guess a positive view, because this is all well and good, but I think you need to identify well what is going to make this change.

Rob Laerty: 00:35:59

And we talk about this all the time.

Rob Laerty: 00:36:01

Does Xi Jinping have the wherewithal?

Rob Laerty: 00:36:04

Does he have the power to shift these levers in such a dramatic way?

Rob Laerty: 00:36:09

Ive expressed doubt about that.

Rob Laerty: 00:36:11

I think the onus is on the changers to show that thats actually going to happen, because theres no evidence of that really happening.

Rob Laerty: 00:36:18

Instead, theyre kind of pushing the imbalanced seesaw in a different direction, the treadmill to hell, if you want to use a more negative analogy.

Rob Laerty: 00:36:30

So if it does continue, then what happens?

Rob Laerty: 00:36:34

I think the positive view is that China's dependence on foreign markets, because if it's going to be pushing on the supply side even more, that dependence is going to grow.

Rob Laerty: 00:36:45

And you get the Norman angel positive view, which is it makes it that much less likely that there'll be large scale conflict between these major economic regions.

Rob Laerty: 00:37:00

You might, you know, maybe that's maybe that's panglossian, but it certainly pushes in that direction at the margin.

Jacob Shapiro: 00:37:06

It's definitely panglossian.

Jacob Shapiro: 00:37:08

There's going to be no conflict until there is going to be conflict or until the us version of the port worker comes out and says, no, no, no, we're going to keep what we want for ourselves.

Jacob Shapiro: 00:37:18

And they traipse across a red line that they don't realize that is a red line for China, which is a great example of, again, and we've talked about this a lot too, and it's one of the through themes for what we're talking about now, us foreign policy and us industrial or economic policy not being on the same page.

Jacob Shapiro: 00:37:36

Us foreign policy was not, was to find a negotiated settlement with Japan.

Jacob Shapiro: 00:37:42

Us economic policy, like embargoes on oil to Japan and all the things that went into that made that completely impossible.

Jacob Shapiro: 00:37:49

And even up until the week before Pearl harbor, the Roosevelt government is thinking, we've got one more chance here, maybe we can push it through, even though Japan had already decided no.

Jacob Shapiro: 00:37:57

Like they've told us what we need to know, like we have to make our move in either direction.

Jacob Shapiro: 00:38:03

There's one other part of this that I wanted to talk about, and then we can do a little around the world thing if you want, Rob.

Jacob Shapiro: 00:38:09

But if listeners want to.

Jacob Shapiro: 00:38:11

I did a little micro geopolitics on the flooding in western North Carolina.

Jacob Shapiro: 00:38:14

We'll put a link to the notes here.

Jacob Shapiro: 00:38:16

But one thing that I didn't say in that piece, which I thought was particularly, which hits on some themes we've talked about here before and was particularly shocking to me, was how few people in western North Carolina have flood insurance.

Jacob Shapiro: 00:38:30

The data here is absolutely insane.

Jacob Shapiro: 00:38:32

So Buncombe county, which is where Asheville is located, 137,123 housing units.

Jacob Shapiro: 00:38:39

This is from distilled earth, by the way, an excellent substac.

Jacob Shapiro: 00:38:42

941 of those units.

Jacob Shapiro: 00:38:45

So less than 0.7% have flood insurance.

Jacob Shapiro: 00:38:49

In Rutherford county, which is a home of chimney Rock, a lot of the worst videos on social media have been in Chimney Rock.

Jacob Shapiro: 00:38:56

32,967 housing units.

Jacob Shapiro: 00:38:59

90 of them have flood insurance.

Jacob Shapiro: 00:39:02

90.

Jacob Shapiro: 00:39:03

I don't know what this does to western North Carolina in the future.

Jacob Shapiro: 00:39:06

I mean, are people ever going to live back there?

Jacob Shapiro: 00:39:08

I was talking to a friend of mine who was like, ah, FEMA is just going to come in.

Jacob Shapiro: 00:39:10

The US will bail them out somehow.

Jacob Shapiro: 00:39:13

I don't know.

Jacob Shapiro: 00:39:14

Those are absolutely shocking figures.

Jacob Shapiro: 00:39:16

And one of the things that distilled earth talks about is that North Carolina is not an outlier here.

Jacob Shapiro: 00:39:22

So inland counties in South Carolina, Georgia, Florida, all these places, very, very few people have flood insurance.

Jacob Shapiro: 00:39:29

And flood insurance is more expensive now than it ever was before because one of the things that capped flood insurance went off the books a couple of years ago.

Jacob Shapiro: 00:39:36

So I obviously pay for flood insurance because I'm in New Orleans.

Jacob Shapiro: 00:39:40

oded in its history, built in: 1853

Jacob Shapiro: 00:39:46

I probably just tempted the gods right there after my fire day yesterday.

Jacob Shapiro: 00:39:51

But first of all, listeners, you should have flood insurance if you don't have flood insurance inside the United States.

Jacob Shapiro: 00:39:56

Oh, yeah.

Jacob Shapiro: 00:39:57

And there was one other thing I wanted to say about that, and this is something that Elo and I talked about the last time we were together in Wisconsin.

Jacob Shapiro: 00:40:04

Listeners, if you have not listened to the podcast with Elo about Alberto Fujimori, here's the plug for it.

Jacob Shapiro: 00:40:09

It was a really great episode.

Jacob Shapiro: 00:40:10

But I was telling Elo when I saw him in March in Madison about how flood insurance had gone up and how I was pissed about it.

Jacob Shapiro: 00:40:17

He laughed at me and he was like, what is this american thing?

Jacob Shapiro: 00:40:20

You have insurance, like in Peru?

Jacob Shapiro: 00:40:22

We're not insuring, like, this is not a concept that exists outside of the United States.

Jacob Shapiro: 00:40:26

I don't even know what exactly you're complaining about, which is also something in the american mentality, whether it's crop insurance or flood insurance or all the different insurances we have to try and manage risk.

Jacob Shapiro: 00:40:38

The cost for those are going up.

Jacob Shapiro: 00:40:40

It's not even clear that they can get paid out, and people aren't even using them.

Jacob Shapiro: 00:40:42

So I don't know what point I'm circling around there, Rob, but this is a theme that we've talked about before, and I wanted to let you talk about it as well.

Rob Laerty: 00:40:48

Well, I think you're circling around an important point, which is insurance is something that societies adopt when they're wealthy, because insurance is basically using the wealth of the country as a cushion to spread out costs in a way that's more manageable.

Rob Laerty: 00:41:06

And we talked about this in relation to Brazil and the floods in Porto Alegre and the fact that most of those people will not have insurance because Brazil is not a rich country.

Rob Laerty: 00:41:18

And as Ilo pointed out in Peru, insurance is something that's a very foreign concept.

Rob Laerty: 00:41:25

But that is because those are poor places.

Rob Laerty: 00:41:27

Those aren't deliberate or good choices per se, because if you look at underdeveloped countries, one of the major problems, especially when you're really at low on the income scale places in certain areas of sub saharan Africa, for instance.

Rob Laerty: 00:41:44

One of the major problems is that no one has any protection when things go bad.

Rob Laerty: 00:41:50

Someone gets sick, breadwinner in the family gets ill, someone dies, your home gets burned down, gets flooded.

Rob Laerty: 00:42:02

Those are catastrophic outcomes for people in those societies because they don't have the wealth to buy insurance.

Rob Laerty: 00:42:11

And that's one of the great things about developed countries.

Rob Laerty: 00:42:15

So I think one of the themes here is that insurance requires wealth, and it's a drawdown of that wealth in a more steady manner rather than all at once in great spikes.

Rob Laerty: 00:42:28

Because if you don't have savings, which most Americans don't, and you don't have insurance, you're screwed.

Rob Laerty: 00:42:34

You don't have the wealth to build your, to repair your house or to recover from something like this, you have to depend on some kind of handout or you're just done.

Rob Laerty: 00:42:44

You have to move somewhere else and find some way to recover.

Rob Laerty: 00:42:47

Right.

Rob Laerty: 00:42:50

This is really important, I think, for two reasons.

Rob Laerty: 00:42:53

First, because when volatility is low in all sorts of ways, then the economy can run in such a way without a lot of quote unquote insurance in all sorts of forms, because the economy doesn't have to be as anti fragile if you want to say it that way.

Rob Laerty: 00:43:14

And that gives you the illusion of being wealthier than you are, because you're not drawing down on your wealth to protect against a rainy day, literally.

Rob Laerty: 00:43:24

So you look richer, your margins look higher.

Rob Laerty: 00:43:28

If you think of this in terms of supply chains, if you don't have excess capacity, if you haven't built in protection, then you look like you're operating super efficiently, you look like your margins are just great, but really you have a hidden cost, the depreciation.

Rob Laerty: 00:43:47

If you were to think in accounting terms, let's get really nerdy here, and if you were an accountant and you had to take into account like, okay, we know there's going to be the hundred year flood every hundred years, or in whatever area the Houthis blowing shit up in the Red Sea, every ten years, whatever the tail event is, then you would take the magnitude of that and depreciate it over the life of that ten years or 100 years.

Rob Laerty: 00:44:13

And that's a real cost.

Rob Laerty: 00:44:14

You only have to pay the cash every ten years, but the real expense is carried year by year by year by year.

Rob Laerty: 00:44:22

So you look really smart and really profitable.

Rob Laerty: 00:44:25

If you don't pay that expense and you don't recognize it, you don't have insurance, you don't keep extra semiconductor capacity, you don't keep extra shipping capacity.

Rob Laerty: 00:44:35

You don't build out alternative routes in case something goes wrong.

Rob Laerty: 00:44:40

But then when the flood does come, then you're screwed.

Rob Laerty: 00:44:44

And you recognize all the costs all at once.

Rob Laerty: 00:44:46

And that's what we're doing in North Carolina.

Rob Laerty: 00:44:48

That's what people are doing against their will in Porto Alegre because they can't afford it.

Rob Laerty: 00:44:53

And God forbid if there were an earthquake in Peru, those people would be screwed as well.

Rob Laerty: 00:44:59

But the broader theme is very similar, whether you're talking about developed world or the undeveloped world, just this notion of we're not as wealthy as we think we are, because so many of these costs are hidden.

Rob Laerty: 00:45:11

And when volatility increases, when floods go up, which they are, when the climate changes in ways that are difficult to predict, that's when these costs manifest themselves.

Rob Laerty: 00:45:23

And you realize like, oh God, I have no rainy day fund.

Jacob Shapiro: 00:45:28

Yeah, well, that actually brings up a question, because I think you're right.

Jacob Shapiro: 00:45:33

And the flip side of that is that markets reward the companies that have high margins and that are super efficient and that have been moving in that direction.

Jacob Shapiro: 00:45:42

Markets would probably like, I would guess, the equity price for a company that has backup, that has excess capacity on hand, and whose margins aren't as good because they maintain operations in a secondary location or warehouses in a secondary location in case something happens in their primary location.

Jacob Shapiro: 00:45:58

Probably the market, at least until now, is not only not going to reward them, probably going to punish them for having that sort of excess capacity.

Jacob Shapiro: 00:46:07

Are you positing that that might change, that investors might be looking for the companies that do have those sorts of backups that they don't have right now?

Jacob Shapiro: 00:46:15

Or is this sort of one of the bugs of the capitalist system, which is the system is pushing us to be as efficient as possible, to push on the string as much as possible, and the global environment has become less favorable to that.

Jacob Shapiro: 00:46:28

But ultimately, that's still what the incentive is for companies to do.

Jacob Shapiro: 00:46:31

The incentive is not to pay the cash every ten years or every hundred years.

Jacob Shapiro: 00:46:34

It is to ride it as long as you possibly can, make as much money as you possibly can, and hopefully survive the one in ten year or 100 year event.

Jacob Shapiro: 00:46:42

And if you can't, okay, generated value in the short term, it's definitely a.

Rob Laerty: 00:46:47

Bug in the capitalist system.

Rob Laerty: 00:46:49

I mean, that's one of the major problems.

Rob Laerty: 00:46:51

And you see this every day.

Rob Laerty: 00:46:52

This isn't just theory.

Rob Laerty: 00:46:53

Like you can look at individual companies all day long and see individual instances of companies that just, they don't really give a shit about.

Rob Laerty: 00:47:00

The long term management is incentivized to increase the stock price over a two year time horizon.

Rob Laerty: 00:47:06

And whatever they need to do to do that, they will do it.

Rob Laerty: 00:47:10

It brings up one of the interesting.

Rob Laerty: 00:47:12

You know, I was doing some research on the side, looking at family owned companies and how their decision making is different, and I think there's some interesting work being done there.

Rob Laerty: 00:47:23

It's hard to have counterfactuals, because if you look at places where there's a lot of family owned companies, they tend to be geographically very concentrated in India and Europe and places like that.

Rob Laerty: 00:47:34

But it is a different set of incentives in many ways.

Rob Laerty: 00:47:38

So, yeah, it's definitely a bug.

Rob Laerty: 00:47:41

The answer is, I think capitalism can adjust for it.

Rob Laerty: 00:47:44

It'll never go away entirely.

Rob Laerty: 00:47:46

But right now, we're especially complacent, and that's going to be adjusted over the next four or five years.

Rob Laerty: 00:47:55

That's almost guaranteed.

Rob Laerty: 00:47:56

Because if you look at the balance sheets of american companies in particular, there are virtually no more aaa or rated balance sheets anymore.

Rob Laerty: 00:48:07

And I think one of the few exceptions is Berkshire Hathaway.

Rob Laerty: 00:48:10

And I think that's the exception that really proves the rule.

Rob Laerty: 00:48:14

Because why can Berkshire Hathaway have a aaa balance sheet?

Rob Laerty: 00:48:17

Because people trust Warren Buffet to hold all this dry powder, because they think, oh, well, this guy's.

Rob Laerty: 00:48:23

He's a genius.

Rob Laerty: 00:48:25

Like, you're buying the optionality of Buffett.

Rob Laerty: 00:48:28

You're happy for Berkshire to have tens of billions of dollars of cash and to be overcapitalized, in your view, because it's Buffett.

Rob Laerty: 00:48:37

But if it were anyone else, the investors would be saying, well, why aren't you levering the balance sheet?

Rob Laerty: 00:48:42

You're overcapitalized.

Rob Laerty: 00:48:43

Why are you running with this extra capital?

Rob Laerty: 00:48:45

And that's what you're seeing in almost every other company, because the average balance sheet rating, the average credit rating has deteriorated significantly in the last two, three decades.

Rob Laerty: 00:48:59

And if you look, every company now is hovering right at that BBB to BBB rating because that's the lowest rating you can get and still be not junk rated because you don't want to be junk because that imposes a significantly higher cost of capital on your business.

Rob Laerty: 00:49:14

But everyone is sort of gamed.

Rob Laerty: 00:49:16

Not only are they not AAA, but they're all right on the knife's edge of that junk rating.

Rob Laerty: 00:49:23

And if you look even within that, the EBITDA numbers that are used to judge these things are total bullshit.

Rob Laerty: 00:49:28

And the quality of earnings has gotten significantly worse in that 20 year period.

Rob Laerty: 00:49:33

So the actual cash flow, that's your EBITDA is supposed to be your cash flow.

Rob Laerty: 00:49:39

That's like a mirage.

Rob Laerty: 00:49:41

And most of these companies have cash flow that's significantly worse than their so called reported EBITDA numbers because they're gaming it.

Rob Laerty: 00:49:47

And that's the situation we've gotten ourselves in, because they've been incentivized.

Rob Laerty: 00:49:51

It's like someone who has the incentive to get in their Ferrari and drive 200 miles an hour to win the race, because as long as you haven't crashed, why would you do anything different?

Rob Laerty: 00:50:03

Right.

Rob Laerty: 00:50:05

But the problem is, inevitably, that's going to run into a credit.

Rob Laerty: 00:50:12

risis like we saw in the late: 1980

Rob Laerty: 00:50:23

And then it resets itself and people will start putting value again on having buffers, which currently they do not.

Rob Laerty: 00:50:32

So that's sort of where we are.

Rob Laerty: 00:50:33

I think you want to be very wary of any businesses of owning corporate bonds in general right now for that reason, because the whole underlying structure is very weak.

Rob Laerty: 00:50:44

But these things move in cycles, and we're getting to the point where we're going to be entering the nasty part of the cycle, most likely.

Jacob Shapiro: 00:50:55

Yeah.

Jacob Shapiro: 00:50:56

While you were talking, I was googling which us large equities have AAA credit ratings.

Jacob Shapiro: 00:51:04

So this is old.

Jacob Shapiro: 00:51:05

This is a year old.

Jacob Shapiro: 00:51:06

So maybe this has changed since last October.

Jacob Shapiro: 00:51:08

But as of October: 2023

Jacob Shapiro: 00:51:17

Do you know, you want to take a guess at which two companies we're talking about?

Rob Laerty: 00:51:22

Oh, yeah.

Rob Laerty: 00:51:26

I don't know.

Rob Laerty: 00:51:28

I couldn't tell you who the other one.

Jacob Shapiro: 00:51:30

Number one, is not surprising.

Jacob Shapiro: 00:51:32

Microsoft, which is the same sort of buffet principle, I guess.

Jacob Shapiro: 00:51:34

They've just made so much money that they literally, like.

Jacob Shapiro: 00:51:37

They can't.

Jacob Shapiro: 00:51:37

They can't.

Jacob Shapiro: 00:51:38

They're talking about restarting three Mile island now.

Jacob Shapiro: 00:51:40

So maybe they're putting some of that capital to use.

Jacob Shapiro: 00:51:43

The other one is Johnson and Johnson, which I would not have quite expected there.

Jacob Shapiro: 00:51:48

And I don't know if that's before or after the spin out of.

Jacob Shapiro: 00:51:51

I forget what the spin out was of the tile and all the other stuff that they did.

Jacob Shapiro: 00:51:54

What the name of it was.

Jacob Shapiro: 00:51:55

Kenview.

Jacob Shapiro: 00:51:56

Yeah, Kenvue.

Jacob Shapiro: 00:51:57

Anyway, not investment advice, but there are your two aaa guys left.

Jacob Shapiro: 00:52:00

Whereas in: 1980

Rob Laerty: 00:52:05

And just to put that into context, Microsoft is not like.

Rob Laerty: 00:52:08

That doesn't count.

Rob Laerty: 00:52:09

They're a software company.

Rob Laerty: 00:52:11

The only reason they even have debt is because they borrowed to buy back their stock, artificially engineered the balance sheet with some debt, just because the cost of debt was so low.

Rob Laerty: 00:52:22

So that's not a company that would ever need to carry any leverage and should always have net cash.

Rob Laerty: 00:52:28

Right?

Rob Laerty: 00:52:28

if you were to compare now to: 1980

Rob Laerty: 00:52:37

Those were companies with physical assets that needed to be financed with a lot of debt.

Rob Laerty: 00:52:42

That's the difference.

Rob Laerty: 00:52:43

Like: 1980

Rob Laerty: 00:52:54

Yeah, of course there's going to be a lot of companies that put a lot of premium on having buffers.

Rob Laerty: 00:53:00

That's a real illustrative difference.

Jacob Shapiro: 00:53:07

Anything else we want to tell the listeners, Rob, or should we give them a break?

Jacob Shapiro: 00:53:10

They've gotten a lot of content this week.

Jacob Shapiro: 00:53:12

Oh, oh, the last thing I wanted to say, and I wanted to ask you about this, in relation to the credit rating thing.

Jacob Shapiro: 00:53:16

I don't know if you saw that Brazil's credit score is getting raised by Moody's to the highest junk grade, so they're right on the cusp of being investable.

Jacob Shapiro: 00:53:25

I wondered if you had anything to say about that in the context of talking about credit ratings and things like that.

Jacob Shapiro: 00:53:29

Because on some level, I don't trust any of these things because it's all a racket.

Jacob Shapiro: 00:53:32

But we like Brazil, so let's applaud the racket when the racket does what we want it to.

Rob Laerty: 00:53:38

Well, credit ratings are useless because they're always backward looking.

Rob Laerty: 00:53:42

Let's just say that.

Rob Laerty: 00:53:44

Don't ever rely on credit ratings to make any kind of decision, because they're always way behind the curve when things change.

Rob Laerty: 00:53:51

But I think it does show that the brazilian economy is going from strength to strength.

Rob Laerty: 00:53:58

One thing I found very striking was Brazil is having elections right now for the.

Rob Laerty: 00:54:03

At the mayoral level.

Rob Laerty: 00:54:05

So local elections and city elections.

Rob Laerty: 00:54:08

And the major talking point is not the economy, it's crime, which is interesting because crime has actually gone down significantly on most measures over the last seven or eight years.

Rob Laerty: 00:54:19

So I put this on the thing and I said, hey, this is actually a really good sign for the economy, because the economy must be really darn good if everyone who's trying to come in as an insurgent and get elected, all they can do is point to the typical brazilian bugbears of, you know, getting robbed in the street and murders and, you know, law and order and stuff like that, which is always has always been the case in Brazil.

Rob Laerty: 00:54:42

Like that's always a public fixation, but things are pretty good there.

Jacob Shapiro: 00:54:48

All right, well, on that rosy note, we will talk to the listeners probably sooner rather than later based on how things are going.

Jacob Shapiro: 00:54:55

Cheers, y'all.

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