Peak Prosperity - Deflation and Market Volatility Dead Ahead

Episode Date: February 8, 2025

The discussion, with guest Ed Dowd of Phinance Technologies, covers housing market shifts, inflation trends, immigration’s economic impact, AI market speculation, and predictions of a recession and CPI decrease in 2025, affecting interest rates and investments.

Nothing in this program should be considered investment advice. It is for educational purposes only. Please hit pause and read this disclaimer in full. In a risk-off scenario in a recession, what's going to fund the government debt is people selling risky assets and buying safe assets. You know, we're going to fund this problem through a stock market correction. That's how it's going to happen. The following is the audio version of a video released at peakprosperity.com.

Visit peakprosperity.com to watch the video and to find other insightful content, such as articles, discussion forums, and exclusive subscriber-only content. Hello, everyone. Welcome to this edition of Finance U. I am very pleased today to be joined by Ed Dowd. We're going to be discussing housing, the macroeconomy, Trump, deep seek, other items like that. You're going to want to tune in for this. Ed, so good to be talking with you again.

Good to be here, Chris. Thanks for having me on. So, I mean, let's start. First, people can find you over on Twitter. You're very active there, at DowdEdward, and of course, Financetechnologies.com, finance spelled P-H-I, Financetechnologies.com. And I want to start here. Let's talk about what do people care about. I care about housing. Saw this amazing chart here, this 268% inventory surge across Florida and Texas, so that's the south, which maps to this one. It is kind of a southern thing, but housing seems to be really rolling over. Maybe not surprising given, well, what's a 30-year mortgage now? A lot higher than it was a couple of years ago. What's your views on housing here? So, we just issued a couple of weeks ago,

the U.S. Economic Report for 2025. We're saying the risks of a deep recession are quite high and housing is going to be at the forefront of this. Housing, two problems. There's been a boom in construction, new home sales, but the permitting is going the wrong way. So that's usually the leading indicator. And we have no transactions going, pending sales and affordability. So it's cheaper to rent than it is to buy. And we know what that typically does. So the mechanism for cracking that is price. So eventually prices will have to come down because mortgage rates are too high. Once pricing comes down, then the Fed will start cutting because we'll be in a deflationary environment throughout 2025. So housing has been stagnant and struggling

in the U.S. and the elephant in the room is immigration. Even though they don't buy homes, they rent. And people that own multiple rental properties have been renting to immigrants. That's all going the other way. So there's going to be pressure. And new tenant rents plummeted in the fourth quarter to a new low. And that's a volatile series, so it could

bounce back. So it's a little early, but it went down quite a bit. And we think that was due to the self-deportation that already began when Trump won. And there's been articles suggesting that people are fleeing the country. And that's going to put pressure on rents, and rents are already dropping. So that rent part, that's interesting because, you know, the official story has been inflation, inflation, inflation for a while. A big part of the official inflation measure, which I have a lot of bones to pick with, by the way, I don't take it as gospel, but it's something people trade off of, and we use it as a reference point. So let's just take it at face value. A big portion of that's called owner's equivalent rent. Editorially, Ed, I think it's stupid to call up a homeowner.

Like, if you called me up and said, Chris, what would you rent your house for? I'll make a number up, but I'm not in the market, so I wouldn't really. It's probably one of the worst guesses ever, and we could just go to Zillow and find out what rents actually are. So anyway, leaving all that aside, rents are coming down. Once the BLS catches up to that, the official inflation print is going to surprise to the downside, right? Correct. So we expect CPI to be surprising to the downside throughout 2025.

And that's going to shock a lot of people because the narrative right now is inflation, inflation, inflation. And, you know, inflation has been year over year, the way we measure it, you know, we're second derivative guys. Yes, prices are high, higher than they were four years ago. When we say inflation's coming down, we're talking about year over year change, the rate of growth of inflation. And we think that rate of growth is going to continue to plummet in surprise to the downside throughout the year. And that's going to have implications for the Fed. The Fed just, you know, did nothing yesterday.

They're going to be, I think, playing catch up throughout the year. Well, so this is maybe getting a little wonkish, but my complaint for a while has been that since Bernanke broke the Fed funds rate in 2009, and how did he do that? It used to be, Ed, and I think this is important. This is why I go into this for people listening. It used to be that when the Fed raised rates or lowered rates, they didn't have a magic dial. They had to go into the market and either pull cash out or push cash back in. So that had a transmission mechanism that I could chase out and say, okay, it leads to more bank lending, less activity, whatever.

Now they do turn a dial. They just pay more or less interest on excess reserves, and then the rest of the market chases that. So now when the Fed raises lower rates, it feels like it's even sloppier transmission. There's no extra cash in the market. It's just now there's a higher rate of interest you might experience, but it's lost that cash in, cash out mechanism. Did you track that at all? Well, the transmission mechanisms have broken for a while. We had the reverse repo.

When they started raising rates, they went into the market and created the reverse repos that they allowed money market funds to tap. So they basically, you know, took a large chunk out of the market of, you know, what used to be traditionally commercial paper. The Fed became the money market funds, basically. And that reverse repo is going the other way. And that's going to be interesting. I don't know what the effects are going to be, but there's definitely M2 went negative year over year growth in November of 22, first time since the Great Depression. We had a couple bank failures. People forget. We had, you know, in March of 23, a bunch of big banks just disappeared. Then the Fed came in and did their bank term funding program. And at the time we had the bank failures,

that was because there was a duration problem, right? So they went from 0% interest rates to 5.5%. A bunch of people became worried about the unrealized losses on the balance sheets of some of these banks. And then the Fed started lending against those losses. But what the Fed's not going to do is lend against credit risk. And we went from duration risk, now we're entering the credit risk part of the equation. We all know about the commercial real estate problem. And we also know the Fed put out a report at the end of November, the New York Fed, saying that the banks are extending and pretending. So they're pretending these loans aren't bad, but they're going to have to, you know, at some point write these off.

And that's coming this year. The Fed is not happy with the banks extending and pretending and hiding losses. So we're going to see commercial real estate losses roll through. And then what's bigger than the commercial real estate is obviously single-family homes and multifamily homes. So that will be a problem, too, as we roll through the year. So we're entering the credit part of this problem. We see bankruptcies at all-time, you know, business bankruptcies at all-time highs. And this will roll to the economy eventually. And we're going to see lots of revisions starting in February because I'm sure I don't know if you've been following this, but there's been questions about the establishment survey versus the household survey.

For jobs. Yes, for jobs. And there's been, they had to revise, I think in September, 850,000 jobs down. And they're going to have to revise some more jobs down. And what we're finding is, in my whole career, and some people have done the work on this. We didn't do the work. So we're quoting other people's work. There's a report called the QCEW, Quarterly Census of Earnings and Wages, done by the BLS. That's the book report. That's work. There's a report called the QCEW, Quarterly Census of Earnings and Wages, done by the BLS. That's the book report. That's reality. That's after they get all the data. The nonfarm payrolls are the estimates. And there's usually a disparity between the reality and the estimates,

but it should net out over time to zero, over time. And the QCEW for June came in. We get September's in February. And there was a seven-sigma disparity between the establishment survey, the nonfarm payroll, and the reality. And that was one in a quarter million jobs to the downside. So, the question is, was theiden administration bureaucratically incompetent or was the fraud or a combination of both i don't you know you tell me seven sigma is a big problem so what did what did what did what did that do i don't know i think fourth quarter gdp numbers just came out and they're they came in lower than expected what the the BEA, the Bureau of Economic Analysis, which is different from the BLS, they saw the QCEW.

They started to revise down some of their income accounts. And so we're going to see revisions, I think, to fourth quarter, a third quarter GDP. And I think when all is said and done, we're going to, the NBER will say that the recession started in the fourth quarter. I think that's what we're going to, you know, a year and a half, two years from now. Yeah. Well, I think you saw Peter St. Onge and another gentleman, I forgot his name, but they sort of re-ran the inflation numbers and said, well, they're a lot higher than advertised, where if the BLS had said 26% inflation since 2020,

they said it was closer to 40%. When you run it by that number, you find that we've actually been in sort of recessionary territory, which matches the social mood a little bit. People get irritated, cranky, upset. That's what recessions are. They're kind of dark periods. That maps better. I think the government gaslighting has been extraordinary. And to your question, I consider it to be fraudulent until otherwise, because if you flip a coin and it comes up heads 11 out of 12 times, I'm going to guess it's not a fair coin. That wasn't just simple incompetence on the part of the McJobs number by the Biden administration. Well, the other thing that was very inflationary was the 10 to 15 million illegals

coming into the country. Oh, yeah, let's talk about that. So that's the elephant in the room. Net legal migration is a million a year, a million. What we saw the last four years was literally an unprecedented economic variable that was introduced into the economy. And it's already starting to come out that billions and billions, I think it's going to be, you know, closer to a trillion, of money went to NGOs to facilitate. This was not just people coming. This was a logistical endeavor that was purposeful, that brought these people over the border, got to find them accommodation. Some people got goodies. Some people found jobs.

I don't know if you remember, but, you know, after COVID and the disabilities went up, there was a period where the help wanted signs were everywhere. The immigration took care of some of that uh the illegal immigration and uh velocity of money which had been plummeting started to go back up again velocity of money has been going down since 2000. it started to go back up and that's what happens when you give handouts to people who then immediately spend it into the economy. Okay. So Trump's policies are going to forget about whether he deports a single person. He's stopping the flow. We've already seen new and new border encounters have plummeted. So it's the second derivative. The flow is going, is going the wrong way. It's stopping. So all the juice from the Biden administration, which we'll find out,

where it was government spending and illegal immigration, is all going to reverse under Trump. So that's- I thought that was genius of Trump to just freeze the funding, because then you have to find out what's happening. You may know this, but Brett Weinstein and I, Michael Yan took us down, we went to the Darien Gap, you know, got in a little dugout canoe, went in the jungle, watched these people coming out. And what caught me, Ed, was exactly what you were saying, was that this wasn't poor huddled masses coming, struggling out. This was a well-oiled machine. There was kits, maps, station houses, a well-planned... I mean, this wasn't a path through the jungle. This was a rut of human migration going from wherever it

into the united states it was well funded uh it was a logistical operation that when we look back on it was a plan and this just doesn't happen and the money involved and when we ran eight percent budget deficits the last time we did that was during the great financial crisis. So I would say a large part of that 8% was bringing in the 10 to 15 million people. And we're going to uncover all that. So what, okay, so just economically though, what's the impact? You've hinted at it. You've said it was inflationary to bring these people in.

How so? So they get goodies and they put pressure on rents, and they put pressure on all sorts of things, you know, like consumer goods. So they get money, they get assistance, and they spend immediately. So the velocity of money, which had been a problem in the U.S., took off.

Now, it's not anywhere back to where it was, but that's going to roll over again. And as you know, velocity of money is one of these economic measures that befuddles economists. It's hard to figure out, but one of the leading indicators of velocity of money is credit creation or destruction. And we're starting to see the early signs of credit destruction, delinquencies, credit cards are going up, consumer credit is rolling over. We saw Ally Financial a couple weeks ago get out of the mortgage business, looking to sell their credit card business.

So this is how it begins. So the velocity of money, we think, is going to go way back down. And then you add on top of that the stop of flow of illegal immigrants, it's going to go the wrong way. And that's good for the middle class. I mean, the biggest risk to a middle class person is losing their job, right? So if you don't lose your job, prices are going to be coming down. Trump's going to restructure the economy, stop this favoring of illegal immigrants. There won't be, we think,

in our estimation, a recession. And that's proof positive that he's restructuring the economy. And he's getting basically an economic turd, a fake economy handed off to him, and he needs to fix it. And, you know, Bastin needs to reduce, he wants to reduce the budget deficit to 3% from 8% by the end of 28. He also has a problem where Yellen funded a huge ton of the debt in the last two years in the short end of the curve, three-month T-bills and six-month T-bills, which also had a stimulative effect in the economy. It's the most pristine collateral, three and six months, so that facilitated speculation and leverage.

He needs to term that out, and a recession would help him term it out. So 10 years are, I think, 458 right now, and 30 years are a little higher. In a recession, he'll be able to turn that out at lower rates. So the yield curve will remain steep during the recession, but the yield curve will jump down, and he can turn out, you know, I think tens are going to like two and a half, three, when this is all said and done. You know what? Gold and silver are my top choices to protect my wealth against inflation and economic instability.

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has never been easier, more secure, or more transparent. Remember, Peak Prosperity followers get six months of free storage. So sign up now at peak.fan slash goldcore to secure your six months of free storage. Again, that's peak.fan slash goldcore. Let's talk about that poison pill that Yellen left. I consider it literally treasury vandalism that she's committed here. So, you know, the debt ceiling magically gets hit on January 21st, first day in office. She's left over $10 trillion of treasury refinancings that have to happen just this year, right? Which you say, maybe he can

term some of that out and take it from three-month paper, turn it to 30-year paper. That'd be great. But $10 trillion is a big number. I mean, you know, how much can you really term out when you've got that much paper rolling in a single piece? And that's all courtesy of Yellen. And by the way, we only have 630 billion in the kitty as of a couple of days ago and a fractured Congress and Senate. So, I mean, couldn't this become turbulent for a bit? Yeah, it could. And, you know, people, China's been selling treasuries, not because they're trying to hurt us, but because they have to, because they have their own economy.

They're selling it to fund what's going on internally. And so their yields are plummeting because they're in a deflationary depression. They're going to be exporting deflation. Mark my words. We just saw it with Deep Zeek. We could talk about that. We'll get to that. Yeah. And they have a real estate problem that's continuing to trouble them, and it's all going to accelerate. And there's also housing problems in Europe. Real home prices have been rolling over since 2022, 2023 in Europe. Real home prices adjusted. The U.S. has been flat. Real home prices have been flat, but they're about to go down. And then let's also not forget, because our economy,

quote unquote, looked the best globally, there's been a flight to the U.S. in terms of financial assets. Our stock markets are at all-time peak valuations. And once it's determined the U.S. is not what everyone thinks it is, there'll be a flight out. And this is where Besson will be able, in a risk-off scenario in the recession, what's going to fund the government debt is people selling risky assets and buying safe assets. So we're going to fund this problem through a stock market correction. That's how it's going to happen. While we're on it, what do you think of Scott Bessent?

I've rather liked what I've heard so far. And I saw Trump give a talk just a couple couple days ago where he sort of hinted that maybe we could eliminate income taxes, right? I'm pretty sure I was hearing Scott's voice through Trump, where he talked about the period from 1870 to 1913, excise taxes, being wealthy, maybe we could eliminate the income tax, that grand old era of that period. What are your thoughts there? I think that's noble, but I don't think it's going to happen anytime soon. I think in our report, we talk about trade deficits, and I'm not going to give away the juice, but there's a surprise coming for the Trump

administration in a recession with trade deficits. So if you're going to fund it through trade deficits, it's going to be difficult during a recession. Getting income from, because the trade deficit is at a record high. It won't be at a record high during the recession. Yeah. And what about Scott Besant? What's your take on him so far? So everyone criticized him saying he's a Soros guy.

Look, people don't understand Soros. There's Soros Fund. Look, people don't understand Soros. There's Soros fund management and then the open society. Soros fund management, he doesn't care if you're like a one horn, one eyed purple people eating monster. As long as you generate alpha, he doesn't care whether you agree with him politically or not. He wants the best, no DEI in Soros fund management. So there's plenty of people I know who work at Soros fund management who can't stand his politics, but that doesn't matter.

So Scott Bastin, you know, eventually got FU money and left because he couldn't stand his politics and, you know, he eventually left. So people need to understand that there's open society is where you have to have the DEI right think. Soros fund management, that's his engine.

And he doesn't do DEI and and political think and and so that's that's so people said oh he's a Soros guy and blah blah blah no and he's been openly uh you know talking about this for years he's a conservative um you know and he happens to be openly gay. And so that's another, I love it. You know, like Trump is anti-gay. He's got the first openly gay, you know, treasury secretary. So go figure. But he's not, he's not a DEI. He's not woke. He cares about the country and he knows what, and he's been for the last year, he's been on Steve Bannon's War Room talking about what's been going on under the Biden economy. And, you know, he's mostly right. I think one of the things that everyone's missing, though, is this immigration thing, which we talk about extensively in our report.

It's really, when you logistically pump in 10 to 15 million people, it's a new economic variable. Not sustainable, but when you stop it, it's going to hurt. Yeah. And two sources, I mean, that was all government money, right? And some of it came through NGOs, which is sort of, they didn't appropriate it necessarily. They just sort of granted it out. And next thing you know, it's out there in spendable form, driving up rents, being spent all over the place. Right. And, you know, a lot of these NGOs employ people. They're making great money. Catholic Charities being one of them. You know, this is when we write history books and figure out where that money went the last two years, it'll be great.

It'll be one of the biggest scandals ever. Yeah. Hey, before we go to DeepSe seek, I want to get your point of view. I still look at Japan. I think Japan's an issue. This is the Japan two-year yield. Finance a lot. Lance a lot. Finance Lance a lot. Look at this. From minus 0.05% to 0.79% on a percentage basis. I don't even know how to calculate that. But this feels like a big deal to me. It looks to 0.79% on a percentage basis. I don't even know how to calculate that. But this feels like a big deal to me. It looks to me like Japan is maybe starting to lose control of things a bit. And of course, Japan is this really weird story to me, Ed, because they have an aging

population that's declining. What they need is a lower economy, but the banking system just doesn't know what else to do besides pump more debt in and just keep throwing money at it to see if they can stimulate it. They don't, I think, I'm not sure who's serving who at this point in time. Did this banking system serve the people or is something else happening? But it looks to me like Japan is getting a little spicy over there, I think. What are your thoughts? So during August of last year, there was the yen carry trade hiccup when Japan raised interest rates 25 basis points.

Yeah. Yeah, from zero. And I think what people need to – and I did a couple interviews, and I said, look, in every Fed cycle, when they start raising, they break something. They broke the Bank of Japan. So that is a central bank, so they can do things that other institutions couldn't do in a Fed cycle. But that, to me, is a sign that the global deleveraging is starting. They're trying to mitigate it.

They're trying to stabilize the yen because you want, in FX markets, you want stability. You don't want them whipping around with one free standard deviation events daily, which was going on in August. So they backtracked, and the dollar-yen imploded after they raised interest rates, and that blew up the carry trade.

But then they kind of pulled back a little bit, and then the yen started to depreciate again. So, they're in this—this is— we always knew that the global sovereign debt crisis would express itself and the release file would be foreign exchange rates. So, Japan is in a doom loop. They either blow up the yen carry trade and raise interest rates and go against, every central bank is lowering interest rates. They need to raise.

And if they do that, they blow up the yen carry trade, which has, you know, financial reflexivity implications across the globe and a deleveraging event occurs. Or they say the yen carry trade for the globe, and they're in a doom loop on their currency, and they have hyperinflation. So that's where they are. And that's why this Japan problem isn't going away anytime soon. It's just in this whack-a-mole right now. So it can pop off at any moment. And that's the problem.

And we don't even talk about that in our report, because that's just one of those things that just, when it goes, it goes. There's economic, real fundamental economic pressures that are going to probably cause the end carrot trade to blow up so in this report you're covering macro and your outlook for uh what's coming who who could benefit from this so it's priced for um high narrow earth individuals rias who manage other people's money, asset managers, asset allocators, CEOs, real estate professionals who manage portfolios, anybody that, you know, is responsible for other people's money or they have a lot of their own money. Interesting factoid, most people who purchased the report

over the last two weeks have been real estate professionals. And psychologically, so they're seeing what we're talking about in their own business. Real estate isn't like a public market, so it's not public. You can't view it every day. Psychologically, we know the way this works. Our sales will explode once the stock markets start discounting this. And they're currently not discounting what we're saying. So if you're smart, you'd read our report. If you don't agree with us, fine, keep riding stocks. If you agree with us, reallocate some assets. But I suspect this report will explode once the stock market's down 20% to 30%, which at that point you know you kind of

miss the boat yeah but very typical now so the story we've had so far is what you're looking for is uh uh cpi is going to surprise to the downside that's going to put downward pressure on long rates at that point in time maybe giving scott bison a little bit of an out um that this net migration flow which is now halted, may even reverse. So that's also going to be anti-inflationary in its own way, deflationary, if you will. And so we add all that up. You know, there's one other person who may agree with that. This is Warren Buffett's cash pile, a third of a trillion.

It's a big number. Look at that middle finger at the end there. How do you, who's got it wrong? I mean, I know a lot of people say, you know, oh gosh, Buffett, he's lost touch again, but man, he lost touch in year 2000 through 2001. Everybody was down, he was up. Big. Yeah. So let's do a little history lesson. We made a call, our economic cycle indicators, which had historically performed very well, were calling for a recession at the end of 23, beginning of 24. We were wrong. And Warren Buffett was already starting to accumulate cash in 23. Okay. So he saw what

we saw. But the thing that I think confounded everybody was this new illegal immigration, which really—if you really think about the numbers, they really weren't highlighted until election time. So, in 23, we really didn't know the extent of the number of illegals coming in. Now we're finding out it's 10 to 15 million. Ten officially. You can add another five, because, you know, there were people who slipped through through without border encounters the 10 million is the border encounters so let's call it 15 that new economic variable made us early and uh we have a hedge fund that we haven't seeded yet

but our economic it's run off our economic models we had a 20 drawdown on paper in 23 and 24, which was a forced standard deviation event. We never had a drawdown. So, you have to ask the question, had the laws of economic fundamentals changed, or did something different happen? And this is what happened. But it's obviously short-term. It can't go on.

That's why Trump was elected. It was breaking the society. It was introducing a lot of societal problems, crime. You know, if you're wondering why Trump won the black and Hispanic community, they're looking at the illegal immigration and saying, why are these people getting stuff and I'm getting nothing? So that's why Trump won, because of the economy, which for the middle class was bad. The only people that benefited the last two years are the super wealthy and the super

poor who got goodies. Everybody in between saw their wages at minus 2 percent, which, that's what got Ronald Reagan elected in 1980 and Bill Clinton in 1992. And we had minus 2% going into this election. So the middle class has already been experiencing their own recession. Even though the official government numbers don't suggest that, there's been a middle class recession. So the idea is then maybe that continues a bit.

Let's, I want to switch to this piece now. Jim Cramer was saying NVIDIA stock roughly could be breaking out here January 22nd. Unfortunate timing, but of course he's famous for that. And on the 27th, you said here, folks lending billions to AI startups without revenues using rapidly depreciating NVIDIA chips as collateral could only end one way. DeepSeek is merely a catalyst to assess the wisdom of that financing mechanism. What are you talking about here? Help people understand that because now I feel like we're sort of in Enron territory, vendor financing and, you know, balance sheet shuffling and loaning against collateral that rapidly depreciates.

What's the story here? Well, let's go back. I mean, history lesson. You're at the dot-com boom. There were a bunch of companies that had zero revenues, and they all went bust. But those of us during the dot-com boom, we said, hey, don't bet on pets.com. Bet on the arms merchants, the C's the junipers the qualcoms the nortels the lucents and that worked for a while until some of us figured out oh there's a bunch of there's a bandwidth boom and it was it was a huge infrastructure build because the internet

was going to take over the world so just just like we had in the railroad booms, you overbuild the infrastructure. So we had huge investment in bandwidth. There was, you know, Windstar, WorldCom, all these companies. They all went to zero because they didn't really have any revenues. And WorldCom committed fraud to show that they had, but they were cash flow positive. They weren't.

So we had this huge over-building bandwidth. And then at the end of it, we had vendor financing where Cisco and Lucent were lending money to some of these new companies that had zero revenues. It was the build it and they will come model. And the junk bond market was what financed that back in the day. So the CLAX, these Windstar, they all got junk bond financing. Eventually, the junk bond market was what financed that back in the day. So the CLAX, these Windstar, they all got junk bond financing. Eventually, the junk bond market figured out they weren't going to get paid, and that seized up, and that was the end. And then we saw what happened to Cisco, Nortel, Lucent, that party ended, because there was no revenues to support that infrastructure build. The good news is all that bandwidth didn't go away.

The companies disappeared, but then the cash flow positive, you know, Bell companies bought all that bandwidth for pennies on the dollar, and then the Internet 2.0, Web 2.0 companies came like Facebook. So out of the ashes of that infrastructure overbuild there were real benefits for the economy same as with railroads in the 1840s you overbuild railroads all the people who overbuilt them lost money but then pricing collapsed and then there was a net good for the uh you know the economy same thing with ai. Infrastructure overbuild, funding companies that have no revenue. None of these AI companies make any money. If they do, it's not a lot. They're free cash flow negative to, you know, billions of dollars. arms race to get nvidia chips and lo and behold someone thought it was a good idea private equity the the new junk bond guys thought it was a good idea to lend billions to these companies with

nvidia chips as collateral so it rhymes and it ends badly because when and deep seek is merely a catalyst because this is going to happen anyways all right this is pricing had to come down you can't have forty thousand dollar gpus you just can't it just it's it's it's unsustainable somebody can you know other companies will enter the market you know intel would eventually figure it out so this was going to happen anyways what deep seek did is figured out a way to take fewer Nvidia chips do some queer I'm not a software expert but they figured out a way to query everything for a hundred of the costs and even if it's 50% and they're lying

it doesn't matter so deep seek basically just pause the market and they they're giving it away for free so you can recreate what deep sea did on your own now is that a psyop it doesn't matter it doesn't it doesn't matter but they just did they just blew up the economics of nvidia's 40 000 gpus and that'll could nvidia go to a new all-time high in the next two months sure but the the starting uh the starting gun just shot so uh to be very clear here i actually am a big fan of what ai might be able to do i i find utility in it i think there's things i can leverage it for right now that make my life more efficient particularly particularly around research. That's all fine. But it's fundamentally a deflationary force to me because I know I work with somebody who doesn't need an executive assistant anymore

because the note-taking function out of AI is so good that they don't need that role anymore. So I can see cases for that. Now, I'm old enough to remember when back in early digital currencies, people like, oh, Chris, you know, Ethereum is going to just blow everything up because we're going to have smart contracts and look at all these use cases. And here I am 12 years later, like, dude, where's my use case? Oh, it's not that anymore. It's a digital asset now, you know? And so I'm still, I think AI has some uses, but again, I think we're at the hype stage where people are imagining all the great things it's going to do. I think it's going to do some great stuff, but again, I think we're at the hype stage where people are imagining all the great things it's going to do.

I think it's going to do some great stuff. But is it going to justify NVIDIA having a $3.9 trillion market cap to just provide the picks and shovels to it? I don't see it. No, and the way the laws of economics works is for the true benefits of ai to come like the web uh the the bandwidth boom you need pricing to collapse so that you know the future ai companies the innovation is going to come when the infrastructure around it is super cheap and somebody can start something in the garage and that's where the new companies will come from right the big ones you know yes so

they'll make money but you know for true uh innovation and the true benefits of ai to come you need pricing to collapse and they will and you know and then we can talk about ai i think this will happen faster than the what than what we saw in the dot-com boom, bust, and then the Web 2.0 companies. I think this will be faster. But once the AI crisis collapses, you know, the infrastructure of it so that you can cheaply, you know, get all the nuts and bolts to do your own AI or a company to do their AI rather than, you know, needing $10 billion to do it. Then we'll see people rise from, we'll see new companies emerge. I don't know what they are yet, and it'll be fun trying to figure out who they are. I mean, Google didn't IPO until 2003 or two, and Google arose from the ashes of the dot-com

bust. Facebook wasn't even on the map yet the only one that really was on the map was amazon that was if you own and yahoo eventually went away so all a lot of the dot-com companies that everybody owned in their portfolios were gone except amazon i think that's it i mean there's some other ones but uh this is the current AI companies, which a lot of them aren't public yet. They're still startups. Those people are going to anybody invest in those probably going to lose all their money at some point. And if you, you know, that's just my guess. Hey, curious what you thought in the moment when you saw Ellison and Altman and Son and their little song and dance in front of Trump.

What was your first reaction to that, and how do you interpret that? Yeah, so I remember being freaked out. I know the players. I don't know Altman as well, but I know Larry Ellison quite well. I was a software analyst in the late 90s, early 2000s, before I became a portfolio manager. Larry Ellis is a constant salesman. He's full of crap. Oracle was not the best technology back during the database wars.

There are other public database companies, but he won. He won because he was the best salesman, had the best sales force, and he employed tactics that the tech geeks didn't know how to employ. And what I mean by that is his competitors would issue a product that was better than his. He would immediately create what we called slideware, say, we have it. Don't buy theirs. It's coming in a month.

It would cause the market, but he would tell us, okay, go write that thing that you would tell us developers. Go make what I just said. And so he would come up with a product that was not as good as his competitors, but he was a cutthroat businessman and knew how to sell. And so when we saw him up there, he was popping off about nonsense that AI can't do. AI is a large language model compiler. It's not going to sequence DNA and turn around an mRNA vaccine. He just made that up on the spot, is my guess. I don't think the Trump people knew. The other thing people need to understand is, prior to Trump winning, and Marc Andreessen has talked about this, there was a plot to have government-controlled monopoly of AI, and they

told the Andrezens of the world, don't invest in startups, you won't be allowed. Okay, so Larry Allison and Altman and Microsoft, I think, were the ones that they were going to choose open AI. And so what happens when Trump gets elected? Their monopoly goes away. So they run to the Trump administration, tell Trump, we couldn't have done this without you, even though the project that they rebranded as Stargate started under the Biden administration, and they had already built 10 data centers. So this is a rebranding effort to give Trump the credit and then ask for government assistance. Because there was $100 billion supposedly raised.

They didn't even fund the first $100 billion. South Bank doesn't have any money. So this whole thing was just going to kiss Trump's butt. Ellison popped off, got everybody in the medical freedom community freaked out. I don't think Trump had anything to do with that personally. I think that's just Ellison talking out of his butt. So I just grabbed it because I thought this really caught me. So this is a picture of the DeepSeek team. Average age, less than 35. And that's the face of entrepreneurship right there. I mean, that's amazing to me that that smiling crew right there just basically undid what you're talking about was this giant, huge corporate moat. Nobody

will catch up. Our moat is because we have all these billions. The government's going to squash competition, tell Andreessen, don't even bother investing. We're going to pick the winners and losers. And while they were merrily trundling along, creating multi-trillion dollar investment disasters, this is the crew that came along and said we think we can do that for about 95 percent less inferential compute cost um welcome to technology right it's nothing if not one long sea of disruption and if it wasn't china somebody else was going to do it i mean um you know and and apparently, I think they're like hedge fund guys, right? They were quant, yeah, quant shop.

So I don't understand this technologically, but I was talking to my partner, Colos, who's a quant, working hedge fund land. He's a PhD physicist in finance. And he said, yeah, yeah, AI neural networks are slow, and they require too much. So, you know, if I had time and I was working on this, I would have used a quant overlay to figure out that all we're doing is core,

you know, freaking out of the way to like grab the information when you need it rather than search everything and then spit out something. So that was, that was, that's it. It's just a different way of, uh,

you know, processing information from what I understand. Now, the debate is, how much are they telling the truth? Even if it's 50%, it doesn't matter. It just doesn't matter. You know, $40,000 GPUs are not sustainable. They're just not. We know semiconductors. we know semiconductor cycles this

is this is this is this is you know this is how it works you remember you remember consumer let's think of consumer electronics remember flat screen tvs i was one of the dopes that bought a five thousand dollar flat screen tv back in the day when they first came out now and it was tiny compared to what they'd come out for 300 bucks these days. We just know one thing about technology is that prices go down. Technology is inherently deflationary. Indeed. So as we look forward and round out this part of FinanceU, so we've got a recession coming. We've got surprise deflation coming um there's going to be uh whatever the impacts are of this deep seek uh pin and as you said the bubble was already you

know going to burst itself anyway but so this is a catalyst um trillions are going to go missing obviously because if you get normal um margin compression on nvidia chips and maybe there's been an overbuild that's going to take years to burn off, which I think is right. You know, if that collapses back to a trillion, just one trillion evaluation, right? There's 2.9 missing from people's portfolios. Also, tends to weigh on the bullions and animal spirits, all that. Is that a fair summary of what you're looking for for the next year? Well, look, the stock market has been in a bubble uh and the market is concentrated in seven names i think right now 30 well it may have changed recently but 39 of the the spy etf or the s

s&p 500 same thing their indexes you can buy the ETF, is seven names. So if you own the market through an index, you basically are exposed to 40% of your index's seven names. So if they get cut in half, that won't be good for your index returns. All right, well, Ed, thank you so much for your time here. Where can people find this report that we've been referring to? And I guess they can follow you at at Dowd Edward on Twitter. So how else? Yeah, so at Dowd Edward on Twitter,

it's synancetechnologies.com with a PH. There's a button at the top, you can go to the product page, you get a 85 page report, deep dive, you get an executive presentation that you can hand off to your boss. And then you also get a video of Carlos and I going through the executive presentation. Excellent. Well, thank you so much for your time today. Thank you. Good to be here, Chris. Appreciate you.