The Highwire with Del Bigtree - DOWD ON THE A.I. TAKEOVER AND THE FUTURE OF THE FREE MARKET

Episode Date: August 15, 2024

Are we in a recession? Former Blackrock equity portfolio manager, Ed Dowd, gives his insight on AI technology, the housing boom, and crypto currency, and what he sees for the future of the market in these turbulent financial times.Become a supporter of this podcast: https://www.spreaker.com/podcast/the-highwire-with-del-bigtree--3620606/support.

This new cycle we've been involved in every week, something crazy. This week, it felt like the stock market was crashing. It was terrifying, but then it came back. Wait a moment, didn't come back. Is it real? Is it not? Is it happening in America? Is it Japan?

So many questions. So little time. That's why I'm going to talk to somebody that can really get to the point. But first, if you missed it, this is what happened to us this week. Stocks around the world taking a major hit. Markets around the world have dropped. The Dow's down more than a thousand points as that global sell-off intensifies. We saw around a trillion dollars worth of wealth wiped off just a handful of the biggest tech stocks.

And the stock market is opening in the red this morning after a rough finish last week on a weaker than expected jobs report. The NASDAQ is down 1067. That is a loss of 5 and 3 quarters of a percent. And the S&P is down 231. That is a loss of more than 4 and a quarter percent. And overnight, Japan's Nika plunge 12%. That is its worst day since 1987. That's Black Monday's crash.

And investors are responding to Friday's stock declines and weak jobs report here as well. Only 114,000 jobs were added to the U.S. economy in July. Now, that was much lower than expected. And that raised fears that the world's biggest economy is slowing. And you're seeing that rippling across those markets, which we were just showing you around the world. getting all these warning flags and signs saying that if the Fed doesn't start to cut and cut a lot soon, we will be in recession by the end of the year. I mean, look, right now, the volatility index or the fear gauge, which is a measure of how afraid investors are right now, it's at a

65. And just to put that in perspective, if we go back to March of 2020, when the pandemic was full swing and people were locked up in their houses, it was 53. It's 65 right now. International markets appear to be rebounding after Monday's concerning global sell-off. Technically, we're reversing course right now, but this market has definitely none of the woods. Well, look, it's been a wild and crazy week. I wanted to reach out to, you know, my favorite person when it comes to being a financial truth teller. Of course, I'm talking about the former BlackRock executive Ed Dowd, who joins me now. Ed, thank you for taking the time today.

It feels like there was a massive panic, some calling for the end of the world as we just saw, and now we feel like things maybe are just coming back to normal. But we live in a time now to me that seems anything but normal. I'm getting afraid to wake up in the morning to what's the headline of insanity that's going to be today. You've always really been great about not just telling us what we want to hear, but giving us a sense of what's really happening. and what we should be looking at into the future. So just to begin with, you know, was this just a crazy panic?

Was it a reset? What have we been experiencing in the markets this week? So this all started with the Bank of Japan and Japan. And there's been a lot of us, including myself, that have been highlighting this is a potential Black Swan event for the better part of a year now. Japan has a zero interest rate policy and they've had deflation for decades and decades. It's had a zombie economy for a long, long time.

And as a result of the Federal Reserve, raising interest rates from zero to five and a half percent in a very short period of time, the Japanese currency, the yen, has come under pressure. It's been depreciating quite a bit. And it hit levels recently, we haven't seen since the 90s. And so Japan could no longer keep their zero interest rate policy. So last week, they raised their interest rates only 25 basis points, a quarter of a percentage point. And that's set off a panic in what's known as the yen-tary trade.

And what is that for your audience? Basically, it's a trade that's been going on for decades where speculators and large institutions borrow in yen at zero interest rates. by other foreign denominated securities and other currencies. It's been a great trade for decades. The fear that swept the markets was, if Japan was going to raise interest rates and defend their currency,

that would cause a margin call. And that's what you saw. And you saw panic in the Japanese markets. The banks imploded. They went down 30% in a very short period of time. It's one of the greatest bank crashes we've ever seen in Japan in 30 years. So the fear is after the, you know, the panic has subsided a little bit.

The fear is that there's going to be knock on effects. And there's going to be kind of this global de-leverging going on. And I want to go back to the US economy. I have a firm finance technologies. We have our own internal economic cycle indicators. We started showing recessionary levels last year. We called for recession in 2.3, 3, 4 last year. We were wrong.

But the only reason we were wrong was because the US government juice the economy with government spending and government jobs. Also, the payroll numbers, which surprised people on Friday and they went negative, have been in many people's opinions, and I hate to say that's fraudulent or statistically patted with niceties, even Federal Reserve Jerome Powell, and it's not this meeting, but the meeting before this even called that out, so there's questions as to the veracity of the payroll numbers. So we have finance technologies have been looking at a real economy that's been underperforming quite a bit and the middle class is suffering greatly and businesses across the country are starting

to grind a whole bankruptcies are on the rise we have credit problems starting to rear their ugly head so this is just the beginning of what we think will be a recessionary economy coming in the next six to 12 months and it's definitely going to come probably either signs of it will be appearing free election or post-election but the financial markets will lead back. And so what we've been recommending for the better part of the year is if you have, and again, I don't give financial advice, but if you have a portfolio or retirement savings, move some of it into cash, money market accounts or US T bills.

And I want to also suggest you follow Warren Buffett. Warren Buffett has converted most of his portfolio into T bills. He owns 4% of the U.S. T bill market. And Warren Buffett's not looking for an April. percent pullback in the markets, which is what we just had. He's looking for a big, big correction. So one's coming. It's not the end of the world.

These actually present opportunities for people that prepare ahead of time. And we call, like I said, if you have some cash on the sidelines, it's called dry powder and you can take advantage of it. The big fear is that this goes systemic, meaning we have bank failures and what have you. And that's a whole different situation. But I can't call them until we start to see it. The Federal Reserve will at some point have to give you. up the ghost and start lowering interest rates. They do not want to do that because once they

start doing that, that will put pressure on institutions to sell what order called risk assets like stocks and corporate bonds and buy safe securities known as treasuries. And that'll have a feedback loop on itself. So the Fed is loathe to take action after this weekend because, again, it's not our economy. They want more data. But I've seen this movie before. They're going to have to cut. And when they start cutting, they'll cut fast and furious. And we'll have to see what see what the policy response is. But again, it's not the end of the world, but it'll be painful, and it could turn into a systemic problem, and then we'll have to see the policy responses. I was wondering, I mean, you know, we obviously look at, we're going into an election cycle.

We've been in one, you know, we're going to have an election this year. Did any of this have anything to do with Kamala Harris moving into this position? Is this political in any way? you know, how are the markets looking at that? I've talked to, you know, some of the well-to-do people I know are very concerned with a Kamala future compared to perhaps a Trump future. Are these things that do, does a market tend to look at those ahead of time or does it happen in real time? Will we see it once the election happens? So I would say that this market had nothing to do with Kamala Harris. This was a problem that had been flagged by many others, including me.

And I've speculated the timing of when Japan goes Capului was uncertain, but it was a risk in a Black Swan event before the election. The goal of any administration is to keep the economy rolling and juice the economy any way they can going into an election. And my bet before this was that they were going to be successful in in at least getting over the finish line economically. I mean, the real economy is bad, but a lot of people look at the financial markets.

So I think this was a surprise out of nowhere. It does favor not the current regime and favors Trump and Bobby Kennedy. But this isn't political. This is something that came out of the blue. And I will tell you, I'm a professional. I was alarmed at how quickly things unraveled starting last Thursday.

I was expecting prior to this that the markets would kind of maybe go to a new all-time high right before the election a month or so. But then we'd have volatility right before the election, maybe a little correction, and then the economy would get worse from there. But this is a big surprise. It's shocking, and the ripple effects we don't know yet.

We don't know, we call it who's holding the old maid, what bank in Japan just one bus that we don't know about yet, and then that has ripple effects. Credit starts contracting and whatnot. And the other problem we have is prior to any election, especially the most controversial one we've seen in our lifetime still, is any large business decision is not going to be made until people know who's going to be sitting in that seat come November. So businesses are already on pause. The economy is kind of slowing down and grinding to a halt, which isn't going to help things at all. When you look in the future, obviously, we've had you on.

You've been one of the only people looking at the finances just around the COVID-Vax. We've discussed that, the harms from it. Of course, you've published on this issue. One of the things that's, you know, we've been talking about more and more on the high wire and that I'm nervous about is AI. I feel like I'm really late to the party here. It's now hitting me how quickly this thing is going to start sweeping up and taking up jobs. I did a show.

We just talked about the fact that it can write a song that probably is good enough for for most commercials to use, what's going to happen to commercial songwriters, but just the fact that it can be creative, just sort of open up my whole mind of what's possible here. Then when you see the people that have developed it, saying things like we made two critical errors, we swore we would never, like, introduce it to the internet, and we wouldn't let it code itself. Both of those things are happening. Do you have concerns? I mean, when we look forward now, everyone will always just say it will be like, anything else. It's just like when we, you know, got car manufacturing up, you just change how

you do things. Then there'll be people that run the AI. Is it going to be disruptive or do you feel like humanity has a way, and especially the United States of America, to handle just what, is this just an evolution and necessary evolution and we'll be fine? So we just put out a piece on AI at our firm. And also, I've been here before. There was the dot-com bubble. So two things. AI is coming, but it's not coming for a while. The current version of AI is not robust. It's a language processor, and it's not thinking on its own and and doing, you know, SkyNet is not here. And there's been a lot of hype in the financial markets on AI, and this reminds me at the dot-com boom where it wasn't ready for prime time. A lot of companies

came public and then disappeared. And then eventually we had to do that. had web 2.0 and firms like Facebook, Amazon rides from the ashes out of that. So the good news is I think this is a bubble. It's bursting. It's not ready for prime time. And the biggest problem is no one knows how to make money off AI yet. So there's been a lot of capital investment in it in V-Vdia AI chips, a lot of money spent, but there's no business model on the other side. There's no way to monetize this quite yet. So we're going to have a bust. So that's the good news. The bad news is AI is coming slowly over time and will be disruptive.

So the fear, I think, is misplaced that it's going to hit us now. The current AI is not going to have to snuff, and there's no way for people to make money yet. So this is going to take five to 10 years to unfold, in my humble opinion. Now let's get into the area that you've been in here with us talking about, which is COVID vaccines, bird flu vaccines are now in development. It looks like they're going to really start fast-tracking those adjustments to statements about there being an emergency in sort of some of the documentation around it. We watched Pfizer starting to take a hit because, as we've reported over and over again, it seems that a lot of Americans just think that nine shots is more than they need and the booster shots are not doing very well anymore. I think it's somewhere, you know, probably between, you know, 70 to 90 percent of those that are eligible for a booster aren't getting them. Are we continuing to see that effect the pharmaceutical industry or do you see them starting to load up?

You know, what are you seeing for the future? I mean, when you watch numbers, market is how you've learned a lot of what you've learned. I'm very concerned that when they start calling for a pandemic saying not if, but when, when I see them, them ramping up to develop a vaccine. I feel like we're around the corner from them needing to use that vaccine. Is there anything in the market that gives you that can foretell what you think is going to happen there? Or is there a pandemic around the corner? Well, right now the stocks of Pfizer and Moderna are not taking off, which is good. If you start to see those stocks take off, we might have issues. But we have an election in 90 days. The bird flu has been hyped up. And I don't

I don't know if you saw the WHO, the WHO, just declared an emergency meeting on Monkeypox. So personally, I believe this is a lot of pre-election games. They're trying to gin up some fears so they can justify mail-in ballots again. I don't think anybody, honestly, there's enough of us now that won't comply, that won't do this.

And I don't think it'll be effective. The great news, like you said, is the booster uptake on the ninth shots, like 2, 3%. And the word of mouth, even though you and I, especially you and others, did a great job of getting the word out on these things. And it's spread word to mouth. Mainstream media is still, as we know, miserably behind the eight ball on how bad, how unsafe and ineffective these things were. But I don't think anyone is going to sign up again for a new untested vaccine anytime soon. And if they do, there'll be far fewer numbers this time.

And I think we have enough of the critical mass that we will resist any of this attempted medical tyranny. There's been some recent comments by Dr. Hotez, Mr. Vaccine himself, who wants to bring in the UN and Department of Homeland Security to round up the anti-vaxxers and saying that we are a threat to national security. I mean, that's insane talk. Yeah, absolutely. Lastly, housing is such a big deal. It's a major conversation. You know, here in Austin, we just had a huge building boom, which seemed to just sort of, you know, things were going crazy. Now it's sort of dropped down substantially.

But the real conversation is something we've talked about, the World Economic Forum, promising just a couple of years ago, everyone's going to rent. And it does feel like we're moving into a renter society if we don't watch out. companies you've worked for Black Rock, State Street, Vanguard. There seems to be a lot of investment into the single-family home market, some discussions by political leaders on trying to do something about that. What do you see in the housing market? Do we really have an issue with large corporate entities competing with first-time home buyers and things like that? And what will that do to an economy like America's? That was more of... a problem several years ago. In fact, I'm hearing now a lot of these firms are unloading

their some of their portfolios because they're nervous about prices coming down. A couple things to solve the housing problem. We need to build more homes, affordable homes, not these McMansions. So you can increase the housing stock that would bring home prices down. The other thing that's going to force home prices down is an economic recession. That's one. The third one is right now it's cheaper to rent than it is to own. And when that's happened historically in the past, and when that happens, home prices will correct. So I predict home prices are going to at least moderate and come down. And whoever's the next president, I would love to see some sort of policy response

where we incentivize people to build cheap affordable housing that would really bring the stock prices, the prices of the homes down across the nation. All in all, and then, you know, the petra dollar, our place in the world, how's America doing? I mean, are we, do we, you know, are we holding strong? Is there a hope? Because it feels like if we lose our financial strength, we could also lose our moral authority. Are those two things connected in your mind? Absolutely connected. This is a good news, bad news situation here. The current regime has done a bunch of moves to delegitimize the dollar.

One was to float the idea of, we have sanctions on Russia where we froze their assets. There's been talked for the first time of stealing their money, which would send a chill throughout the global system that the U.S. could at any moment just take your money. Freezing and stealing are two different things. And so that delegitimizes the dollar. The weakness of the current regime has caused a lot of the other nations. to become more bold and actually talk and open about the bricks and de-dollarization. The good news is reserve currencies don't die overnight. It takes time.

So we're doing a yeoman's effort in trying to destroy the credibility of the dollar, but it's so ingrained and so pervasive in the global financial system. Any country that tried to de-dollarize overnight would have a deflationary depression. So it's something that is slow moving, but we started that movement. And so we need to worry about this. And the next administration that gets in there needs to fix this. I just got a question from one of our producers that's, you know, starting to invest in Bitcoin. Where are you at with Bitcoin?

Is this a real thing? Is it going to last? Is it going to stay? Is it dangerous? What should, you know, what is your perspective on that? Cryptocurrencies. Crypto is now an aspect class. It's here to stay.

But like anything, you shouldn't have all your eggs in one basket. You should never own just gold, just Bitcoin, just. stocks, just bonds. You want to have a kind of a wide variety of assets. It's here to stay, but I will also caution people. People think that in a recession or economic turmoil, Bitcoin will go up. Bitcoin is a very volatile instrument. It's still new. And it's also a function of liquidity. And Bitcoin will go down in a financial panic. But long term, you're fine. But if you're buying it hoping to avoid near-term depreciation, that's not the end. instrument. The safest instrument in the world is a three-month T-bill because you get your money back

in three months with five and a half percent interest currently. So that, that, do what Warren Buffett's doing if you're worried about the future, but own some Bitcoin long-term, other cryptos if you've done the work on them. So it should be part of everyone's portfolio. They're going to be part of the financial world for years to come. Fantastic. Well, look, I really appreciate all that information. Any last words to people, you know, that are maybe struggling to pay for groceries and having a difficult time? Is there a way that they should focus their resources to sort of ease the pain? What can your average American do inside of this economy to make life easier for themselves and maybe protect themselves for the future? Well, first of all, you know, one of the biggest things everybody has to do is not getting fear and not worry about.

about the future. Try to live in the present moment, try to create personal human relationships and rely on one another. During the Great Depression, as bad as it was, people started to help other people. And there's nothing more gratifying than giving something to your neighbor.

So we need a sense of community. We need people to rely on each other and get through this. If you're sitting alone, worrying about where the next paycheck's coming, you'll end up in a state of anxiety, fear, and depression, and you won't be able to function. So try to reach out to people, try to help other people.

When you help other people, it comes back your way. So I would tell people that are struggling to form groups and networks to help each other out. All right. Thank you so much for all that great information. I appreciate you taking the time today to enlighten us on all this going on. I look forward to speaking with you again soon. Take care. Well, great seeing you.

Thanks for having me on today. Absolutely. For those of you that maybe you're watching for the first time, you should check out his book, Cause Unknown. You can find it anywhere you find a book. Obviously, it's a discussion on, you know, this rise in sudden deaths amongst athletes and students around the world. Is it being caused by vaccines or something else? We should certainly be asking the question, what is causing it? Great book to take a look at.