Roberto Rios | Rewiring Global Trade Flows & Japan's Financial Market Situation

本站添加: 2026-05-30

[00:00:00]Welcome to episode 115 of Contring Corner. I'm Ben Kellerin. Today we have a very special return guest on to talk with us about gold, Japan, everything else going on and the uh meltup in the S&P. So, I think it'll be interesting conversation to kind of get a feel for uh how some of these dots are connected and uh what he's seeing as far as financial markets. So, Roberto, thanks for coming back.

[00:00:20]>> Hey, thanks for having me, Ben. Really glad to be here. Yeah. So, I think uh it'd be interesting to get your thoughts because I basically have started to tune out the S&P a little bit. It seems like a random number generator that basically is deciding how much it's going to go up every day. But, um I I just look at it and I'm kind of amazed that we're in this situation when you have some of these different uh like sentiment metrics on the way the actual economy is doing as far as consumer sentiment and what people actually think on inflation.

[00:00:50]And I'll try not to derailist too much about like the Soviet nature of our stats and inflation and employment, but I I just look at this whole situation and I don't see a real fundamental base reason for why the S&P is at 7500 and change. But what are your kind of thoughts on the S&P?

[00:01:06]>> Yeah, I mean, if you look at the chart, right, like we mentioned uh right before we got on the uh you know, the S&P has been basically in meltup mode since the end of March. Um, there's only been like a few red days and we've had consecutive all-time highs for almost like every single week, like at least one all-time high each week for the last six weeks.

[00:01:27]Um, which is pretty incredible, right?

[00:01:29]especially given the fact that the Hormuz situation is not fully resolved and um the US and Iran seem to still be at a standoff uh with regards to the overall deal making and part of that is because obviously the US first strikes um in late February took out a large section of the um Iranian uh not only military leadership but also you know state uh state and you could say uh congressional or you know um governmental leaders. leadership which makes it much more difficult to actually facilitate negotiations because you're not able to find the right people to negotiate with or the people who do want to who can negotiate are maybe afraid of um of retaliation if they do so. Um >> or they uh meet to negotiate with Kushner and Wickoff and then uh mysteriously vanish off the face of the earth.

[00:02:19]>> Yeah. Exactly. Exactly. Um, and I mean they've even mentioned, right, like I've seen Iranian officials say that they want to they only want to meet with Vance and they they don't trust Kushner or any other um any other American agent that they view as just a uh a proxy for for Israel or for other you know other interests. So um yeah, I think the thing is the market was trading choppy for most of March as was digesting the news of the Iranian um closure of the strait.

[00:02:48]It was it was starting to price out, you know, the I guess indeterminate nature of uh the geopolitical situation and the also the the knock-on effects, right?

[00:02:57]Because they're they're multiaceted. Um most of the world's uh or most of at least Asia's uh LNG and crude comes through the straight. um something like 80%, South Korea, Japan, uh even China rely on the strait significantly for their petroleum imports and LG imports.

[00:03:17]And so um when you close that off, a lot of the downstream manufacturing beyond that also gets closed off. So you think of fertilizers, you think of cement, asphalt, um plasticizers, all these things that need um need petroleum production in excess to be able to be done properly are are going to be impacted. And so that was causing the market to just trade kind of choppy and you know down for most of March. But I think what the markets finally started to realize towards end of March early April is that you know almost whatever happened in uh hormuz especially for the US right because we're talking about American equities is almost a moot point because the US is a net energy exporter and although we are a net importer of certain strains of crude um I believe it's mostly the heavy soured varieties that we're you know mainly importing um but >> beyond that our exposure to this immediately exposure to this is actually quite limited. And the bigger thing on on the market's desk uh coming up is the Worsh appointment which already obviously happened earlier this month.

[00:04:22]And Worsh is trying to position himself as a hawk, right? He's saying that he's going to um you know normalize rates.

[00:04:29]He's going to lay off the uh excessive easing policy that's been done by his predecessor by Powell and by even Yellen. Um, and he's promising to do that while, you know, basically not blowing up the financial system. So, you know, I I I don't know how you can, you know, basically keep the balance sheet at the current level or even reduce the balance sheet while lowering rates because generally those two are contradictory. Normally, if you're lowering rates, that implies an increase of the balance sheet because functionally to do QE, you're b you're using bank reserves to buy bonds. And so, you're basically increasing the overall amount of bank reserves in the system, which is called QE, and you're lowering rates at the same time. So, they're inversely correlated. And the idea that you can shrink the balance sheet, which is what his goal is, and lower interest rates, is going to be essentially like a high wire act that I think the markets has started to sniff out. That's going to be very, very difficult for him to pull off. Um, now there are other things that he can do.

[00:05:27]Uh, the Treasury buybacks are one.

[00:05:30]Shifting issuance to the front end, uh, is another. um you know there's different regulatory changes that the Fed can encourage the uh the CFTC or the um or FINRA or others to make right or the SEC but ultimately there's a limited amount of buyers and there's a lot of debt coming down the pipeline and so you need to find a source to absorb all that. Um I think Worsh he may be successful in these first few months with navigating his like complex you know not QE QE policy. Um you know basically allowing the balance sheet to run off and uh and allowing rates to fall. Um but I think long-term the pressures against them are just too much right. Um you look at you know not only the debt situation but obviously the inflation situation in the in the US um has gotten significantly worse in just the last uh you know few months. Um nationwide I don't know if you saw this gas prices hit the highest that they've been uh since 2022 and individual states are breaking their um like their all-time record highs. So, um >> yeah, California's in deep but that's a long separate conversation, but >> yeah, exactly. Um core PCE has been spiking. Um in April, we got the inflation reading at 3.8% which was above, you know, the 3.3% in March and then 2.4% in February. So, we're seeing a clear uh acceleration, right, uh month over month over month. Um and that acceleration is something that obviously as as energy does it's going to feed into everything else. Um energy is the main component of food, transportation, a lot of service uh service work. Um and uh that means that overall you know consumer goods and manufactured goods inflation is going to keep rising. um PCE which was also obviously like stripped of that core PCE was 3.3% uh annualized in April and it just a few months before in February it was 3%. So it's already up uh significantly um and that's stripping out that to my point that's stripping out the you know energy and and food costs which is what PCE does. So um rising inflation generally means to fight that the Fed has to hike rates and Worsh wants to do the opposite. He wants to continually lower rates. Um rising inflation also means federal deficits grow because the federal government has to spend more money on you know military, defense, healthcare, you know everything. Because why? Because energy costs more and energy feeds into everything. So everything costs more and that generally leads to higher deficits. And so if you're going to do higher deficits, generally you need to ease. And if the if Wars is planning to do the opposite of that, which is to shrink the balance sheet and to lower rates, um I just don't understand how he thinks he can pull this high wire act off in the long term. You know, like I said, the short term maybe he can do it, but long term I think uh he's got to work his work cut out for him. Well, that's kind of the thing that I look at when you kind of look at the oil and the commodities complex and all this other stuff that is going to feed into inflation, right?

[00:08:47]Everyone's talking about rates, what like direction they're going to go. I just look at and say, okay, is inflation going to get better or worse from here?

[00:08:55]And are these supply chain disruptions that are now baked into the cake? Like, are we actually going to feel them here in the US or are we just going to be like sweeping on the rug? It's all going to be fine. like things are going back to normal. Oil is going back to $70 a barrel.

[00:09:10]>> Like I don't know where oil ends up and I don't trade it directly. It's just I think a sucker's bet especially with the uh inside information that you see in some of these things. But you look at oil, you look at copper, you look at nickel, you look at lithium, you look at all these different commodities and it looks to me like they're just set up to move massively higher. And I think that's maybe a good way to get into gold, which I think has basically been the piggy bank that different countries have rated as like they need to get liquidity. So that's the reason I think gold has been relatively weak. But I look at the rest of the commodities complex like that's a good place to hide out in my opinion over the next 6 to 12 months. But what are your thoughts?

[00:09:50]>> No, I completely agree and um your point is valid. um at the outside of the war, right? Um gold had just gone through this, you could say like 12 market exuberant bull run um in late January of 2026. Obviously, if you remember, we had a blowoff top in gold. Gold hit for 5,500 an ounce in a day and then whipsawed down several hundred. Silver, same story. Whips down from 120 down all the way into the 80s.

[00:10:18]>> Yeah. 30 bucks in a day. Totally >> 30 bucks in a day. And um you know, CME Group of course like had increased their margin requirements several times in late 2025 and early 2026 on their silver futures contracts and their gold futures contracts um and their margin requirements and everything. And then um as as that blowoff top, you know, finally consolidated and shorts started to come back in in force, we started to just see like this consolidation, right, of price action around, you know, 5,000 40, high 4,000s, um, you know, area. And so we were already kind of digesting this massive move in gold and silver, which had predated the the invasion, right, the outset of the war. And then the war begins and you look at the major Gulf states and think about what happens to all these major Gulf states, right?

[00:11:13]Most most states in that area are pegged to the US dollar um as a form of uh you could say like financial engineering like their currencies are pegged to it um po you know because of their post uh 1974 petro dollar status. So they're reliant, heavily reliant on on USD income. And if you cut off their USD income via cutting off the straight, you effectively cut off their ability to source future dollars to peg their currency against. And so if there are currency strains in the forex market, they no longer have cash flows to basically assuage those concerns with, right? So they have to intervene. And you look at Qatar, you look at Bahrain, you look at UAE, you look at Saudi, um, all these entities need dollars. And a lot of them, one of their biggest reserves of of dollars is gold holdings.

[00:12:05]And so Qatar and a couple other states began selling some gold reserves uh, in March, which contributed to the choppy price action. We also talked about this before the before the podcast started, but Turkey sold 12 tons of gold during March and has continued selling in April. And the main reason why Turkey is is doing that is because they're trying to defend the LRA, which has depreciated significantly against the US dollar. I believe it's like 70% in a few years.

[00:12:33]Um, and that defense is obviously kind of like ill- fated because their inflation, sorry, is a wreck. their central bank has been trying to hike rates past, you know, 15 20% to to defend their currency, but that's not enough. Um, and so they're basically trying to, you know, throw the the last hail Mary at the market in attempt to uh to save their currency, but obviously that's not >> they're pouring pouring gasoline on the fire trying to fix the problem.

[00:13:00]>> Exactly. Exactly. and selling your gold reserves at this time is obviously very very poor strategic move, but it makes sense. Again, if you're if you're a politician and you only care about the next four years, then you do you do moves like that. So I would say the combination of the Gulf some of the Gulf states offline some of their gold plus Turkey plus you know kind of like a unstable geopolitical um environment has contributed to all of these different entities deciding to not purchase as much gold or to offlay some of that gold or hedge right some of the gains that they've already made. So, um, we're I think intermediate term, short-term, we're in for a little bit more of a choppiness in the bull in the gold bull market. I think we're still consolidating from the move back in January. But long term, obviously, I'm massively bullish. The response, like we said at the outset, from the Fed ultimately has to be more QE given what's happening with the Middle East and and the inflation story and also the debt story. And so if more QE is coming down the pipeline that is only beneficial for for gold and it's only beneficial for foreign central banks to continue to you know increase their purchases. So um I think another 3 to 6 months of this choppiness and then we're off to 5,000 and then you know 8 and 9,000 after that.

[00:14:17]>> Yeah, I tend to agree. I think it's a I think it's a layup long if you have a long enough time horizon and I think we'll we'll have to wait and see where it goes. I think silver, platinum, all this other stuff like they'll kind of wake up as well at some point soon. But I wanted to kind of go backwards a bit and talk a little bit about a point you made with the Middle East and right it's been interesting to see some of the news out of there with like the UAE leaving OPEC. You kind of mentioned um they need to get dollars, right? And there's uh talk of swap lines and all this other stuff. Um, I do wonder like how all this stuff shakes out, like if this comes to a resolution soon because the only thing with the way the media environment is and the news environment is, the only thing I'm confident of is that Trump is injecting chaos in the system and everything else is up for debate or you have to wait to figure out what's going on, right? There's too many headlines. I mean, some of them are just flatout lies, others are I mean, market manipulation. Call it what you will, but it's really hard to figure out what's happening other than there's chaos in the system and trade is being rewired and rerouted in different ways and that's going to have uh different effects on different countries. But what do you kind of think as far as like the big picture impact of like how does trade get rerouted? How does all this stuff kind of play out? Where does where does this path lead as we kind of see like all this stuff play out on the straight of Hormuz? Because it's not going to go straight back to normal if it opens up tomorrow.

[00:15:50]True. True. I think I mean the global um the the global order that had been created post 1946 right with the creation of the UN and the IMF and then especially post 2000 um uh with the WTO that world order that hyper globalized just in time manufacturing um first in first out inventories um all of that is is coming to an And the path of deglobalization, I think, is becoming more and more clear, not only for the US, which is why Trump paredited it so so hard during his 2016 run and again during his 2024 election.

[00:16:32]Um, but also globally, right? supply chains um are basically not the you know the people who run the supply chain stuff don't realize this but the supply chains themselves are contingent on several premises that are assumed to be natural laws of reality but actually aren't right and those premises are you know the US is the eternal global police power and maintains open all sea lanes there's no power to rival the US or to challenge them um there's no conflict that will interrupt or disrupt up trade to any meaningful event. Um, and that and if any power was to do that, that the US would crush them quickly. All four of those precepts are being challenged by this war in Iran. Right?

[00:17:17]The US is no longer and even if the US is the the hedgeman of the world, what what Iran is showing with their war in their defense strategy is that asymmetric warfare can have asymmetric results. Right? You look at our Patriot and THAAD missiles. Um there's like the Patriot missiles are $2 to $3 million a pop and their drones are $30 to $50,000 and it takes our our interception rate from our interceptors is 20%. So it takes four five interceptors guaranteed to take down an enemy drone. So that's $10 million for 50,000 that they spend.

[00:17:51]And they have massive drone facilities and production uh warehouses that they can uh turn these out at at like an ungodly rate, right? Um, and so actually defeating them in a prolonged conflict is going to be proving to be much harder than than we would otherwise think. And so that's causing everyone to realize, oh wow, like even if the US has the traditional forces of war um that are, you know, traditionally seen as the superior method of combat, that doesn't mean that the most, you know, cutting edge technology isn't going to beat it, right? And even these like asymmetric warfare options like the massive drone um production or um UAVs or or unmanned, you know, submarine vehicles that ram into boats and blow themselves up. Like all these things are going to get more and more difficult to intercept and to fight against. Um especially if you're a traditional military. This is the same problem, by the way, the major powers faced in World War I. they were using horses and cavalry and you know Napoleonic line regiments charging forward at the enemy when the when the opposite side had machine guns and barbed wire and that ended disastrously for millions of of European men. Um and I think the same lesson is starting to be taken, you know, taken heavily here is that the US is using the 20th century technology against a 21st century enemy that is able to use drone warfare, uh hacking, uh AI bots, you know, they're using they're using multiple methods.

[00:19:23]>> Lego propaganda videos.

[00:19:25]>> Yeah, Lego propaganda videos. They're using I mean their their uh their hyperbolistic missiles are um are able to split into multiple pieces like 20 to 30 pieces on re-entry and they're able to launch those uh ballistic missiles intercon basically like intercontinentals um at the same time they launch drone swarms. So, you know, American air bases and American air defenses or Israeli air defenses can get overwhelmed much more quickly than they had previously thought because not only do they have to shoot down missiles, they have to shoot down incoming drone swarms. And that's why we saw, for example, in March and April, the attacks on the Raz Tunura refinery, taking it out, you know, 17% of Qatar's LG productions now offline. U significant portion of Saudi production is now offline as well. Like, we're seeing this play out over and over again. and all these Gulf states that thought they were protected under the American security umbrella are realizing that that protection is not as strong as they thought it was. Um, and that's not even to mention the uh the fact that the Iranians have been working on uh basically like ground to ship missiles that are hypersonic that can potentially take out even our destroyers and our heavier battle cruisers. So, you know, if they can just use a couple hundred,000 $200,000 missiles and take out a 2030 $100 million destroyer, that changes the mathematics and uh stratege gems of war consistent, you know, very very heavily. So, um yeah, I think that is playing on the geopolitical landscape. As for the economic reality, every country is going to start to realize that they cannot rely 100% on any other country in the world for a raw material or raw good because something like this can happen, right? That country can enter war with the US. They can be cut off. You look at Qatar, you know, Bahrain and uh Saudi and UAE, right? These guys want to provide oil and nat gas to Korea and Japan who are huge buyers, right? Japan imports 87% of their natural gas or their total energy and like 95% of their LG. Um they want to do that. They can't cuz they're trapped behind the straight and the few oil pipelines they have uh don't route directly to where tankers can uh take them outside of a straight. And so this is just a difficult um it's a difficult situation for all these countries to realize that the supply chains are much more weak than they than they should be.

[00:21:50]There's a real interesting chart from Marty Bent that he posted uh just a month ago showing um in in the US the ratio between the imports of capital goods um or yeah the imports of capital goods and the imports of consumer goods and the ratio blew out uh from one one to 2:1 recently basically meaning so we used to import like we used to buy a bunch of foreigner stuff like let's say a trillion ion a year. We also receive $1 trillion a year of uh capital goods.

[00:22:25]The ratio is blowing out to 2:1, meaning we're getting way more capital goods now than we are consumer goods. And the reason why that's happening is not because capital is flowing into the US, which it is. There's a significant amount of capital that continually flows into the US because of Dollar Milkshake, but it's the bigger reason is because our total import bill is falling. And that's because our the manufacturing renaissance, the re-industrialization of America is finally beginning. And you can see this actually this ratio start to change in late 2025 in like November, December, but it's starting to accelerate more and more as this year progresses, right? Um there's multiple manufacturers that have started to move plants back to the US. Uh deciding to reshore manufacturing with AI and with robotics. I think the allure of cheap global labor is starting to lose its sheen. And so there just seems to be more uh appetite now for for reshoring that industrial capacity. And that's especially important for defense. You look at Anderil, you know, um you look at Palunteer, you look at all the big uh big and new defense contractors, they all want to maintain obviously their relationship with the US government, but that also means maintaining supply chains and domestic manufacturing capabilities here. I know a founder who runs a um a drone company that does uh it's like UAV delivery and uh retrieval of of uh you know nonhuman um material. So meaning like you know resupplying food, water, bullets, ammo um you know weapons uh you know night vision goggles, NVGs, everything um into remote locations for like Navy Seals, special forces guys. uh that that founder he refuses to have a single supplier outside of the US because he understands that if in a real global you know war scenario he doesn't know if he can rely on a Serbian arms manufacturer or a you know even a an Australian iron ore producer he wants to have all of it here domestically sourced and so um that's becoming the common ground for a lot of founders especially the new defense tech and hard tech people and I think that that's just going to continue. And so this trend of deglobalization, reshoring of supply chains, I think it's going to continue.

[00:24:42]>> I tend to agree. I think it's a giant problem that's going to take a long time to actually fix. But one of the things you start to realize, you start to do some research on like the great projects that the US has done in the past. It's almost always because we had the engineers working with the scientists, working with the pilots. If it's a plane where like you have all these people in one place and that's the crossover.

[00:25:08]Whereas if you have like a plane that's built in the last three subcontractors are in China and that's where the manufacturing of that happens then you don't have the overlap. I think you don't have the same um the same things that can happen out of that. Not to mention the demographic changes have happened the last 50 years. But I think the onoring and um kind of re-industrialization piece is durable. I guess the question is how much of that is real goods or real technology and how much of it is just AI data centers like the whole data center buildout thing is a little bit of a mystery as far as the size and scale. But um I'd be interested to hear your thoughts on kind of the reasoning behind like the just continued boom in investment in building out new data centers.

[00:25:59]>> I think the um I think it's obviously a bubble. I think it it's a uh it's a narrative bet and the tech companies are hungry for growth. you know um a lot of them have maximized their TAM and they have basically reached the terminal end point of their business model right there's not much more that Facebook or YouTube can expand into when they've already gotten exposure to everyone in the first and second world really >> and so the uh the desire is by these companies to find some other lever of growth and AI just seems like the most obvious one the problem is I think AI suffers from uh not only obviously like training bias because you can train it on data sets that are flawed or have issues. Yeah.

[00:26:49]>> Um but there's also limited applications for it, right? Like and this is something that a lot of AI proponents don't want to admit.

[00:26:55]>> Um >> AI is really good at doing specific hardwired uh you could say like uh you know white collar work especially like lower IQ white collar work. So think about law like parallegal stuff you organizing documents reading reading through court filings summarizing them um you know doing basic financial models doing basic uh coding jobs like it's it's obviously very good at coding and it can even replace like engineering term teams but >> well if it can look up some specific quickly and say hey like what is this legal code on this thing in this state right that's super helpful but is it going to be able to have like the judgment ability or the nuance or any of that. Like I don't see it anytime soon.

[00:27:43]>> Yeah, exactly. Um and think about this too, like again what how many good ideas to solve real problems are there? Not that many. And what they've done essentially is lower the moat towards like you know starting the business. But the best businesses are the ones that solve real problems in the real world for real people.

[00:28:07]>> And I I've known when I worked at, you know, Carta and and elsewhere that a lot of founders are essentially they're creating solutions to problems that don't exist. So they're like, "Oh, let's create a dog dating app because I want my dog to meet other dogs and breed properly." When in reality, it's like nobody really cares about even dog owners who are breeders, like they don't care if the dogs get along with personalitywise. They just care if it's it's a genetics match and if the puppies would look cute and they can sell the puppies. Like that's all that matters.

[00:28:36]And so basically they're creating this solution that to a problem that nobody cares about that nobody thinks is a problem and then the business fails. And I've seen that with AI over and over again. I know several founders who built businesses with AI and the business fails to take off and they spend you know 6 months grinding on cloud code creating a product. Nobody cares about it. Um and I'm I'm not alone in saying this by the way. Mckenzian company, the global consultant, put out a report showing that 81% of AI pilots at S&P 500 companies fail. 81%.

[00:29:08]And so again, I'm not saying there's no use case. There's still clearly a use case when it comes to like again wrote uh like wrote mathematics uh problems or it comes to like just boring legalistic paperwork. Someone needs to read this.

[00:29:23]you know, someone someone's got has to read 500 pages of of court documents to understand what what the court's opinion is on this matter. Okay, use an AI for that. But when it comes to more complex issues or creative issues, especially AI is horrible. And so, um, I think going forward, like the actual utility and and you know, profitability of AI is is not going to be as high as they thought and the leverage that they're going to get from it is not going to be as high as they thought or it's not going to be where they thought, right? Um, the better thing to do with AI is just emp empower normal employees to take off more of their workload of their like boring basically like 80 IQ work that they have to do every day. Take all that off their plate and just let them focus on the high-end like 130 IQ smart creative work that that they're needed to do.

[00:30:08]>> Yeah. Well, I think it's really interesting with some of the stuff that I've been working on. like it's really helpful, but you need to have at least a base level of understanding, if not like medium to higher tier, I guess, to know when the AI is basically saying just spitting out a number, spitting a line where it's like, look, that's just not even close. Like there needs to be some amount of expertise where you can look at something and just like basically do the quick sniff test and say, "No, that's not like it's not there." Right?

[00:30:38]You just push back and say, "Hey, like you're going to need to reevaluate that or whatever." And if you don't have those breaks, if it's just you don't have any critical thinking, then that's where you get into the place where people are making up businesses to problems that don't exist and right wasting a whole bunch of time on AI, which that was one of the thing. I don't know if you saw this, but I think it was Microsoft, I can't remember exactly who was saying, but um they said that the cost of AI is now like exceeding the cost of the employees that they let go, if I remember right. Um, so it's just it's basically a snake eating its own tail. I think the the funny thing is too when you look at u the way it's being sold to the public as oh yeah like this is going to take your job and right UBI and all this other crap. It's like why after the last 20 years would any of us trust like the Silicon Valley elite like tech bro class, >> right? at some point they're going to basically go too far and end up with uh some major problems there, but I don't think they realize how much they're hated outside of like their own little bubble.

[00:31:48]>> Mhm. Yeah. Yeah. And I think that that's why you see the hard tech shift, right?

[00:31:52]Like so many companies are and founders are now switching to just do hard tech like either commodities you know processing rare earth refining um military industrial complex applications of like you know night vision goggles headsets drone you know drone warfare that kind of stuff um so many better things uh than that like I one one article I wanted to mention is this one called AI's $600 billion question by David Khan who's a He's a one of the uh GPS at Sequoia. So huge private equity fund, right? Over hundred billion dollars aum. Um and basically he pointed out that like you know the AI revenue required for payback um in 2024 is $600 billion a you know uh a year annualized, right? And so basically because what you have to do is you have to think like okay what does it cost the data center to run. Okay let's say $100 million. Well they need a 50% margin right? So you have to double that. So they need to be making $300 million in revenue to pay for their expenses of $150 million a year or $100 million a year. Right? So let's let's shift that.

[00:33:10]So, $200 million of revenue to pay for $100 million a year in um uh in expenses, right? But then that means that the AI uh the AI provider, right, Anthropic or you know, ChatGpt because these, you know, the AI providers, they don't own the data centers. They don't run the data centers. Um >> they're basically a commodity service.

[00:33:31]>> Yeah. They're commodity service. They're a software. They're a software. They're basically a software provider. They need a 50% margin. So, you have to double it again. So now you need the total industry needs to be making $400 billion a year to just barely pay the hundred billion base uh run rate of a year of of running the data centers, right? And the problem is if you extrapolate that out like with how many data centers they're building, they're they're estimating two trillion3 trillion dollars a year by the early 2030s of of revenue as an industry. And for reference, you know what the total industry revenue is right now? It's like 65 billion. So we're at like 6% of where they think it will be in just a few in like two years. 6%. And they think that we're going to be able to pay off all this capex. I mean I look like say what you want, but like I think that this again I think it's just a monkey chasing its own tail. The the tech companies need somewhere to put a bunch of capital. They want a growth story. They want a narrative. And AI seems like the most convenient one to uh to throw at. But I you look at even the individual like economics like ChatGpt for example, they have a $20 pro subscription. They're losing money on that.

[00:34:47]>> Anthropic has a $22 a month uh claude subscription for their pro users. That's losing money each month.

[00:34:55]>> Basically, >> Google's Gemini is probably the same.

[00:34:57]>> Gemini is the same. the the the only way that they make money is they're using their base model, their retail model to hook large companies and then they're charging the large companies um through the nose, right? Um on compute tokens to to run for them to optimize their businesses. So their goal is like let's go sell it to big companies that make a lot of money, right? the big tech companies, big data analysis companies, um even like private, you know, you know, private equity banks, whatever, whoever wants to use our product, we'll charge them through the nose to use an in an enterprise, you know, uh solution and we'll charge everyone else just a little bit. Well, if the enterprise clients dry up, all their economics blow out and suddenly their retail cost turns to 50 or 60 bucks a month and a lot of people would not be subscribing for 50 60 100 bucks a month for a claude or even a TG Pro subscription. So, yeah.

[00:35:52]Um, >> especially if the free the free model keeps advancing behind it.

[00:35:56]>> Yeah, exactly. Like >> just just wait three months and you'll be at where the $20 tier was, right?

[00:36:01]>> Exactly. Exactly.

[00:36:03]>> Yeah. Well, I think uh I I hope that people will wake up and uh understand that Micron and all these other stocks are not going to go up like 30% a week forever. But you never know, man. Like I I just look at the way some of these semiconductor and related stocks and beneficiaries of this are melting up and it's just it's amazing.

[00:36:23]Like Micron's here in Boise, so I'm sure there are people here that are ecstatic about what's going on and it's just I hope they're taking some off the table right now. But I do want to get into uh China or not China, Japan and talk about um where you kind of see that heading cuz I know that's been a area of focus for you and I think it's a very interesting topic because you see what's happening to Japanese bond yields and it's a uh basically 45 degree angle up and to the right for the last 3 years, four years. So what are your kind of thoughts about uh what's going on there?

[00:36:55]what that kind of means for the financial system and uh how it factors into everything going everything else going on in the world today.

[00:37:03]>> Yeah, absolutely. Um I wrote a couple pretty viral pieces on Japan and obviously like my most viral v YouTube videos are on Japan. So I've been really focusing on this area for the last few years, but Japan is so interesting, right? because not only are they a very uh culturally unique and homogeneous society, um they're also kind of like the the test the testing lab globally for you know central bank monetary experiments, right? They were the first ones to do QE in 2001 and they were the first or yeah in March 2001 uh and then they were the first ones to lower to the zero bound in 1999. They're the first one to go negative in the 2010s. They're the first one to do QQE, which is qualitative quantitative easing, which is basically like QE but for more assets than just Treasury bills. Um, and the first to do yield curve control. So, they've been experimenting with this like crazy monetary policy for decades.

[00:37:57]And that's resulted in a basically a 0% uh inflation rate for that entire time since the late 90s and a 0% growth rate in their overall economy and also their stock market. And so because of that the Japanese consumer which is still you know highly educated intelligent uh hardworking right extremely regimented they needed somewhere to put their savings and so they became essentially the global creditor for the last 30 years. So you look at uh British guilts, look at German boons, right? You look at US treasuries. Um they're the largest sovereign holder of uh all global sovereign debt and they're also the largest creditor generally to corporates in the US in Europe um and across Asia both in terms of investment grade debt and even on the junk grade uh spectrum of things. So um the Japanese have basically been the lender of of first resort to everyone for for decades and their monetary experiment was working you know you kind of say working right there was no growth but they weren't collapsing uh for for years until we saw a massive inflation spike postcoid and a hiking of rates subsequently by the Fed to fight that inflation starting in March of 2022. And starting in that month, the USD JPY, which is the exchange rate between dollars and the yen, blew out from 110 to 155 to the dollar by September. And that precipitated the the Japanese central bank to do a foreign exchange intervention um for the first time since 1998 in September of 22. And that intervention was like $30 billion. They followed it up in October with another $35 billion intervention. And then they started panicking. They started saying, "Hey, we have, you know, yield curve control running currently. Why don't we start moving the bands on yield curve control? So, let's move interest rates up a little bit out of the negative bounce." So, they move it up to zero.

[00:39:53]Still wasn't enough. There's still pressure on the currency. So, all throughout 2023 and 2024, they started hiking rates um slowly and they started laying off of the QE and the quantitative easing and uh they would yield curve control and eventually phased out yield curve year yield curve control completely by March of 2025. and permanently hiked out of the zero bound that same month. Um, now in January of this year, they hiked again uh to 0.75 and they've been there for, you know, the last 4 months or so. And they've been just been waiting, right? Because things have been kind of still chaotic.

[00:40:31]the USC JPY is still at their red line and they they don't want to waste any more money on interventions because they've already blown through well over, you know, $180 billion in their cumulative interventions. Now, this all came to a head literally earlier this month. So um after the US began their uh bombings in Iran and after the closure of the strait, Japan immediately started to to experienced um higher volatility in both their bond and uh forex markets.

[00:41:01]And again the reason was simple. Japan imports 87% of its primary energy. It imports 95% of LG, 97% of petroleum.

[00:41:11]Their only other source of fuel, you could say, is their few amount of nuclear reactors that they have. They used to have 55 operational and they shut down many of these after the Fukushima nuclear disaster in 2011. So currently they only have 13 running.

[00:41:27]They're trying to upstart another 12.

[00:41:29]But the problem with restarting a nuke is that it's not like a, you know, flicking the switch kind of operation.

[00:41:35]You can't just go in and, you know, boot everything up within 30 minutes. It takes years to restart a nuclear reactor safely. And so even though they're rushing to restart their nukes, it's going to take several years before the first ones are are fully online and able to provide electricity. In the meantime, 80% of their of their electricity needs are serviced by LG just by burning liquid natural gas um in in uh in generators and using that for you know for energy production. And again, most of that energy comes from from Qatar and from Bahrain, which are currently blocked from exporting it. So, Japan starting in March, they began to do um releases strategically of their SPR.

[00:42:17]They released I think around 40 million barrels of petroleum um from their SPR.

[00:42:22]They actually have they're pretty prepared for this as the Japanese typically are. They have 254 days of reserves of uh oil, but they have less than that in that gas. they have a little over a month and so what they're trying to do is source LG at any price from any seller um anywhere in Asia and that's leading to much higher energy prices at home including electricity prices. So because of that Japanese CPI has gone above 3% in March and April which again is for for a country that has had 0% inflation for decades that's very very concerning. Um, but the bigger problem is that that puts a bunch of pressure on their currency because currency holders think, hey, like why am I holding Japanese yen when I know that their energy situation is extremely precarious? They're going to have to print money somehow to manage the fiscal situation and um, you know, overall like their economy is going to slow because they're going to be facing you know essentially like energy shortages and temporary blackouts from this. So, uh, dollar yen has been pushing 160 consistently over the course of April.

[00:43:28]And then starting on April 29th, the Bank of Japan announced their first intervention for around um, I believe it was 5.8 trillion uh, or no, five 5.8 quadrillion yen or something like that, which is no 5.8 trillion yen, which is um, $ 35 billion. And then they followed it up with another $4.8 8 trillion again intervention which was uh around $30 billion. So you know $65 billion in two interventions. The first one was on uh April 29th. The next one was on uh May 6th. Um both of those took out a chunk of the traders in the USD JPY spot markets. But it's only been 3 weeks since their last $30 billion clip and we're already at 157.8. So we're already almost all the way back to 160. And >> well, pretty soon you'll be talking about real money.

[00:44:20]>> Yeah, I know, right? I know. And what's so here's the other crazy thing. I know this is a lot, but I love this market because it's so fascinating and again it has wide reaching implications for equities and for bonds and everything.

[00:44:32]Um the last few interventions before this, the Bank of America analysts had found that roughly for every $1 trillion USD of foreign exchange or 1 trillion uh yen um which is like 30 billion USD of uh exchange intervention that they do um they were seeing like a you know let's say one yen drop in the US GPY rate right so if you if they dumped 5 trillion yen, which is $35 billion, then they're going to get 5 yen taken off the USD JPY. So, if it's at 160, it'll go down to 155. Easy math, right? And so, that implies that if they drop 10 trillion yen, which this time they dropped like 9.7 or 9.8, that the exchange rate should go from 160 to like 151 or 152. And instead, the terminal rate of the of USD JPY was 155. So it was half as effective as they thought it was and half as effective as it was before 2026. So that just shows you like how much more pressure is currently on their exchange rate because of the energy situation. And uh the current prime minister Sai Takichi is a populist right-winger. Um you know she wants the she's already done a uh a dissolution of uh of the lower house and then a snap election on February 8th. She basically is aiming to rewrite a large section of the Japanese constitution as it regards to personal defense. So Japan's military post 1947 via the MacArthur Institute Constitution was basically designated only for self-defense force. So it was very small, not allowed to maintain naval ships, very small air force, right? Like minimal minimal um mil military activity. And Japan is realizing that obviously as the US is withdrawing from the global stage, they need to be able to head off China and uh you know other opponents in the region.

[00:46:30]And so to do so, they need to amend the constitution and they've already done that. But that means that they're going to be spending more money on military defense. They're going to be building up their domestic defense manufacturers. Um and that's going to cost, you know, cost them on the fiscal side. At the same time, Sonatichi is trying to cut the personal consumption tax of 8% on all food and beverages, which which obviously affects all retail um and like you know, blue collar and white collar workers in Japan, which is obviously immensely popular, but also cuts into the fiscal revenue for the uh for the Japanese government. So doing all of this at the same time basically implies a you know much much weaker uh yen but also a a weaker demand for JGBs which is why I mean you look at look at the rates right now like it's insane the 10 years at 2.7% uh the 20 years at 3.62 the 30 years at almost four. Those are all all three of those rates are uh are almost all-time highs. The the 40 year is at all-time highs. The 30-year is um what reached it just a week or two ago. Now it's you know retracing and then the 10 year is at the highest since 2007. So all in very severe stress mode.

[00:47:42]>> Yeah, it's uh I don't think they've probably had the same um offshoring their manufacturing sector that we've had here in the US. But at the same time, >> if they're going to be routing a bunch of spending into right building up military capability and right all these different things, it's it's going to be very interesting to watch because like you said, it's not uh it's not like they have a bunch of energy that they're just sitting on and waiting to extract. It's okay. You need to right you need to have these basically global supply chains.

[00:48:12]You need to have like these trade deals.

[00:48:14]And I know there's talk about getting more oil and gas from Alaska, but a lot of the projects are like long lead time, right? They're 5 years minimum. So, I mean, there's some oil that I'm sure ends up in Japan, but I mean it it's hard to see how all these things play out as far as where it goes other than I would expect more inflation. And I think that's kind of the theme for just about every developed economy is right when when it comes to when it comes down to it, like what is going to be the release valve? Like are the politicians going to take the medicine or are they going to say kick the can and let's let it rip and inflation's going to run hot? Right?

[00:48:57]That's an oversimplification, but that that's kind of the general like path I think we're walking down. And it'll take 3 to 5 years to be certain if I'm right, but that's what I see.

[00:49:10]>> No, I I completely agree with that. And again, the situation is compounded when you think about Japan, right? With their loss as the creditor of first resort, right, as the the person who is lending globally to everyone. Um, they no longer necessarily want to do that because of their own domestic issues, right? And their JGBs now are yielding something.

[00:49:29]So, it makes more sense if you're a Japanese citizen. Why take on the forex risk? Like, why not just hold cash in JGBs? Why not just hold cash in your own domestic bank account, which now actually earns a yield? You no longer need to search abroad for for a couple basis points. You can find them at home.

[00:49:46]Um, that just means that now the, you know, the faucets are turning off. And, um, the upward pressure that's been applied to bond prices globally is now is now starting to dissipate. And this is also compounded obviously by Japan's demographic situation. As I'm sure you know, like the last few years, Japan has actually had a shrinking population. In 2025, they lost 900,000 people overall.

[00:50:10]They had like 1.8 million births. Um, and more than that in the amount of deaths. And so their total population declined by almost a million people. And in a country of 130 million, you know, that's almost 1% of the population in a year. And this is projected to continue for for years and years and years going into the future. They have more old people starting in 2016. More old people were buying adult diapers than young b young couples buying diapers for children. So that just shows you like how bad the fertility situation is. And if you think about like you know who is the marginal producer and consumer of a society, it's young people, right? It's between 20 and 40 where you have your peak of energy, peak of earning power.

[00:50:54]You start a family, you have a bunch of kids, you spend on the kids. That is what provides the growth and the uh motility of capital for a nation to move forward. Not 75, 80 year old people who just want to sit on savings and you know sit and retire >> trade houses like Pokemon cards these days. If you look at the >> the median age of the home buyer here in the US like it's what 59 or something.

[00:51:16]It's just like >> what what are we even doing at this point, right? It's >> yeah, >> it's really frustrating to see how over the last 20 years like things have gone and the response is always like, "Oh, things have gotten so expensive. We need to eliminate property taxes for people that are retired because they're on a fixed income." It's just like we really haven't learned our lesson on some of the stuff, man. Like subsidize the old at the expense of the young, right?

[00:51:40]That's that's the playbook that the boomers and the politicians seem to go back to no matter what happens.

[00:51:46]>> Yeah. Yeah, you saw Nancy May tweeting yesterday that they want to abolish property taxes for boomers.

[00:51:51]>> And it's like they already have 80% of the national wealth of the United States. Like eliminating property tax just makes it so young families will have to bear all of that, you know, and it'll further reduce the fertility rate and further screw over the young. So, uh yeah, I think I mean that's unfortunate and uh obviously like society needs to change. they'll do anything but the uh 100 100 million deportations that we really need. So, but um yeah, is there anything else that's uh top of mind these days as far as financial markets or anything that is uh kind of caught your eye in recent weeks as far as kind of current events?

[00:52:29]Like I'd love to kind of get into one last topic if you have something else you want to get into.

[00:52:34]>> Sure. What's Well, what's your last topic?

[00:52:36]Um, I mean, I I have a whole bunch of things going on, but they're more on the political and um kind of cultural side of things, but if you want if you want to detour there, I'll I'll take it there. Absolutely. But I figured if they if you have another market topic, we could I mean, you're you're the guest on the show. That's why that's why I asked, but if you want to talk about uh demographics and birth rates and like the cultural issues, like I'm happy to do that as well. So, >> okay. Um, I don't have anything else market focused. I think I covered everything.

[00:53:08]Um, yeah, I mean I I I've talked Well, I I'll say this like on my substack, I put out several pieces talking about what I call like bottleneck trades, which is essentially like looking. So, I think strategically, especially as a true equity investor, um, you've got to look where the money is right now. And and fortunately, if it is going into AI, right? If the bubble's going to continue and it's going to burst soon, but um if if the money is flowing there, you need to look at the upstream suppliers of AI uh companies. So, think about like the glass substrate creators that make the substrates that are used to uh laser the chips or think about the nuclear energy companies that can provide energy to to these data centers, right? Um, and then this is also true of obviously like defense companies like I've been thinking about not only Anderil but their upstream suppliers like who is supplying the uh the optics right the optical lenses for their night vision goggles all of the upstream suppliers um when they're especially if they're supplying a company that's booming they're going to see a boom in their contingent business and a lot of investors are not going to be looking there necessarily so it's a it's a place of value and a place of uh outsized returns and so I put out a piece in January, basically outlining this thesis, which is what I call the bottleneck trade and then outlining like four or five companies and creating a a sample portfolio. That portfolio is up 200%. Um, there's killed it in four months and I'm continuing to look for more and more companies in that area.

[00:54:39]So, if you want to I won't reveal the companies obviously it's from my paid subscribers. Um, but um, if you want to get access to that, go look at my substack. And I think just as a framework though, obviously I'll get give this for free. Think about whatever industry is booming, whether it be the precious metals miners, whether it be, you know, modern defense tech like Anderil, um, or Poseidon, like that drone company I mentioned earlier. Um, and then think about if they're getting all these grants from the Navy and the Army, um, and DoD for hundreds of millions of dollars to produce drones or to produce night vision goggles. Um, you the next gen of night night vision goggles. about all the companies that are upstream of them that have to produce the glass optics, the substrates, right? The laser uh you know, the laser rangefinders, everything. Um >> chances are they're micro caps, too, which means you get uh if you hit it right, you get the outsiz outsized juice on the upside.

[00:55:34]>> Exactly. One of the companies that I outlined on this uh in this piece was it's 150 million market cap and they're locking in orders every quarter for 40 to 50 million from single uh from single buyers. And so their revenue is skyrocketing. It's up like 300% already this year, which is why their stock has done so well. And so that's why the average portfolio return is 212% for those four companies. Yeah.

[00:55:59]>> Just because it's it's absolutely killing it. Well, I think the the capital cycle is undefeated when it comes to stuff like this and the US is definitely going to be investing in a lot of these different areas, but um if my listeners are looking to find you or find your work, where should they look for you?

[00:56:14]>> Uh so I'm on Twitter, Peruvian_bull, uh just Roberto Rios, and then on Substack at Roberto Rios as well, Dollar Endgame. Like I said, I write about monetary dynamics, the Fed, uh Japan, um global macro, and then I also sometimes do like stock picks like the the bottleneck trade. So, if you want to sign up and see that newsletter, go and do it.

[00:56:34]>> Yeah, it's definitely uh definitely worth checking out. And I do have to slide in my traditional closing question before I let you go, which is what book should add to my reading list?

[00:56:43]>> What book should you add to your reading list?

[00:56:45]>> Yeah.

[00:56:45]>> Well, that's that's problematic because I need to know what's already in your reading list.

[00:56:49]>> It's a long one. I got a full uh full bookshelf already, but I got a whole bunch of different things finance history related, but um yeah, lots of stuff to keep buying as time goes on.

[00:57:00]But really, anything even if it's fiction, like whatever you uh whatever you recommend, like I've had people recommend Harry Potter before, so don't don't take it too seriously.

[00:57:09]>> Okay. Okay. I think I think actually one of my favorite books uh especially historical books I ever read um was this book called The Storm Before the Storm by Mike Duncan.

[00:57:20]>> Okay.

[00:57:20]>> It's a a discussion of the late Roman Republic and into the early Roman Empire. And it's basically historical retelling of Sola and some of the major generals of that period basically navigating the complexities of the Roman Roman Republican life. like you know they have you know Gothic barbarians and golic barbarians on the northern borders that are assembling right and it's a state of emergency the Senate elect you know consoles and Solah is one of the consoles he's a very famous red-haired tall wildeyed general who was kind of a crazy man um uh had multiple wives you know like just was a party part partyier but also a brilliant brilliant general um and he becomes console and goes up and fights the barbarian Arians. And while he's up there, his one-year console ship ends. And so he's basically said like, "Hey, you're not console."

[00:58:14]And he tells the the messenger like basically like, "Go back and tell them that I am like I'm up here fighting to save their asses. They better make me console again even though it's illegal because I need the authority to carry out these military duties for the state of Rome." And he went back and then they approved it. And so he was console for multiple years in a row in order to fend off uh a Gothic invasion uh from the north. But then that led to obviously like the open door question of if you're a republic and there's emergency situations and there's one leader like Julius Caesar who is proven to be leagues beyond everyone else, why would you not give him all the power? And what does that lead to? Like that leads to a dictatorship. That's a key man problem.

[00:58:56]If he dies, there's a scramble for power, right? like it just gets really fascinating and it it's a really cool breakdown of uh of Roman politics at the time of the European uh political climate of uh of the power struggles between you know different ent different people and their and their chess matches you know to to gain control of the of the state um and also like where Rome was heading right which is ultimately an empire and the great I would say arguably the greatest empire that uh the Europe has ever seen. Yeah, it's uh it's funny. It goes back to the Roman Empire meme, like guys are always thinking about the Roman Empire, all that. But um yeah, no, I I find all that stuff fascinating because you look at history and you see parallels to what's going on today and it's really obvious and I think a lot of people are not able to see like some of the parallels between Spain, between Germany, like and the US like today like there's all all these different elements. You mix it up and we have pieces of it here today like all over the place everywhere you look. So, I think that's helpful to kind of figure out where we're going. So, um but yeah, I really appreciate you coming on and kind of shooting the breeze as far as financial markets in Japan and what's going on around the world. But we'll we'll have to uh do it again sooner next time. And uh I think sometime in the next couple months, I'm sure we'll have more to talk about. Maybe the supply chain breakdowns that I think are coming will be uh in full swing by then. But anyway, with that, I think we'll be wrapping up. Thanks for stopping by and we'll see you next