Transcript
0:00 On this episode of In the Know, we talk a lot about that scary-looking employment report today. It's not as scary as it looks, and we spend a lot of time talking about the impact of the technology revolution. Greetings, everyone. I'm Cathie Wood, and this is In the Know. The employment report today was somewhat scary on the surface, and we understand the fears.
0:31 the actual employment number, so this is the increase or decrease in non-farm payroll employment, was minus 23,000. expectation was for plus 80,000. And perhaps more important, the previous 3 months were revised down by 103,000. so that means the 3-month moving average employment increased only 20,000 per month.
1:08 so that's very slow. now, if you look inside the report, there are a few few things we found interesting. the participation rate dropped dramatically, but if you parse through the various age cohorts, it was the boomers who are retiring. They accounted for the biggest drop in the participation. And the 16- to 24-year-old category, we've been talking a lot about that. and that was the second biggest contributor. The prime-age employment, so between 25 and 55 years old, that participation rate increased. So that was good news.
1:54 The other interesting data coming out of this report was average hourly earnings up only 0.1% the expectation was 0.3% so on a year-over-year basis I have that here somewhere on a year-over-year basis I believe the average yes the average hourly earnings went from 3.4% year-over-year increase to 3.2% now what's also interesting is we believe that the productivity growth is starting to approach that 3% level and so that means that unit labor costs are very well behaved almost zero increase on a year-over-year basis now we believe that as productivity growth accelerates that some of the benefits will accrue to workers over time so we would not be surprised to see wage gains accelerate so that's something to look forward to now what does this drop in the participation rate at both ends of the spectrum mean well a couple of things as the boomers are leaving and and and they're leaving more rapidly I would say than we expected this is the 55 plus year old category they may be leaving because AI can do a lot of their jobs and you know they are not interested in the next chapter they're interested in retirement and hopefully their retirement accounts have been well diversified but with a good slug of stocks since we are approaching all-time highs in stocks.
3:53 so so that's one category. The second category, we talk about this a lot, and many people viewing may be in that category and worried. And I'm just going to repeat what I'm I've been saying and and I think as we learn more and more how powerful AI is, and it's getting more and more powerful, and the cost of innovation is collapsing. Brett Winton, our chief futurist, recently calculated the rate at which inference costs are dropping. So, the cost to answer one of your questions to chat GPT or Grok or Claude, that is dropping get this, 99.99% per year. So, the cost of innovation is collapsing. And while we hear a lot about how much it costs to be at the frontier, $200 a month, $2,000 a month, and and for those who need the frontier to advance their knowledge, great. It's great for the OpenAIs and the Anthropics of the world. and we think ultimately the SpaceX AIs of the world.
5:12 but if you don't need the frontier frontier, you can you can start using these models and create businesses all by yourself. I wish I had had this kind of tool when I started ARK in 2014. I didn't know what to do with the white sheet of paper, how to do a deck, how to do Well, I knew how to do a financial plan. I should know how to do that. but there were so many general and administrative tasks that I needed to do, and I just didn't know the first thing about how to go about doing them.
5:51 Well, now you identify a problem out there or a frustration, and you you are looking for a job, so keep doing that. Definitely keep doing that. But in the meantime, identify that frustration, that problem that you would like to solve out there, and go solve it with AI only, so that when you continue to interview for your jobs, you will go to the top of the ranks in terms of employers wanting you. Why? Because you are showing initiative starting a business to solve a problem and make the world a better place, and you are becoming expert at AI, and it is much easier to do. it does take some patience, but it's much easier to do than I think many people expect. It's called vibe coding. I think they're starting to call it something else now. I've forgotten what the word is. but it's it's kind of fun, and it's kind of mind-blowing, too, to see what we can do given that we are not coders or programmers, engineers, developers, you want to call them. so don't lose hope because we do believe there's going to be an entrepreneurial explosion. And the other interesting news out of this employment report was even though the number of jobs went down, the unemployment rate went down. Why? A lot of people are dropping out of the labor force. So what does this mean for those at the younger end of the spectrum and those even in the middle spot? It means that you have an opportunity to be promoted much faster than otherwise would have been the case. So, if you're in a company, look for, you know, how you might be able to help take over a job with AI.
7:55 A job that a baby boomer was doing. And if you're young in a company and you've got and you're natively AI already and a very productive, make your boss look brilliant and make other people look brilliant. So, you can make your way through the organization much faster than otherwise would have been the case. And then finally, starting your own business. Now, there's only a 10% chance that it will work. Maybe the odds will go up because AI is helping.
8:28 But it might and I can tell you as a founder, there is nothing like starting your own business. It's the most exhilarating thing in the world and if you're funding it by yourself as I did for 4 years, it it at times is the most terrifying experience in the world. But on balance, the exhilaration far overwhelms the terrified moments. So, now let's jump right into the charts. This one, federal deficit to GDP below 5% for 26.
9:05 Very very few people think that is going to happen. We're not giving up entirely, although the the fiscal year end is September. So, it is unlikely. However, if the economy is beginning to boom the way we think despite that unemployment report and that productivity is one of the reasons, technology and productivity. We could see the deficit to GDP drop closer to 5%. Right now, it's at 5.6% as you can see here. So, at 5.6% and what's interesting about looking at in at it at this deficit to GDP ratio is that we are today where we were in early '80 when Ronald Reagan was president.
10:06 we had gone through back-to-back recessions and very tight monetary policy to try and get double-digit inflation down. And we got to a 5.6% deficit. I had just moved to New York and I remember that people were blaming Reaganomics and Art Laffer at the time because Art Laffer said, "If you cut taxes, the deficit will go down." Well, he didn't mean cut taxes over 3 years. He meant cut them. If you cut a tax rate and the lowest rate is in 3 years you're probably going to defer a lot of income and that's what happened and that's one of the reasons we ended up in a recession. Okay, so we're at the same point now. And the reason I bring that up is I believe we we're in a déjà vu moment. I'm writing a letter about this and that we're back to the future in terms of Reaganomics.
11:06 we have a little bit of a different tax cut. It's more for corporations than for individuals, although individuals are included. and of course massive depreciation and what I find interesting is that the deficit has kind of held steady even though corporate tax refunds have been massive this year. and individual tax refunds have been much higher than expected. And another thing that's going on, you can see on this chart, federal outlay growth is starting to accelerate mostly because of the massive increases in defense spending. And so the question when looking at this chart, this is a four-year annualized rate of change.
11:54 So it's meaningful. It means it's starting to make an impact. But again, look at history. We're still at the lower end of where this growth rate has been historically with the exception of I believe that was heading into 08 09. So we're still at the lower end and we we are seeing continuing job cuts in federal government as well as state and local government. That was a big part of the decline in this month.
12:31 So when you're cutting the people out and actually increasing the productivity of government, that is good. I think the defense boom is forcing the rest of government to deploy and productivity tools like AI. And you can see the green line there is just turning on a four-year annualized rate of change. And you can see in the context of history again, where we were in the 70s.
13:05 Many people thought we were going back into the 70s because of what happened after COVID. But we're not. We the monetary policy did not support. In fact, it completely derailed. Many many categories of business, manufacturing, housing, autos, and so forth. So, while capital spending was holding things up. So, you can see there is no similarity now to the '70s. we do not think inflation is the bigger risk.
13:39 We think, deflation deflation is the bigger risk to companies who don't get with the program and be and their products become obsolete or uncompetitive. how high will the dollar get this year? Again, Kalshi market, that, that, we have partnered, with Kalshi to evolve. And you can see today, that the forecast is for 102.6 for the DXY.
14:10 and, it it it suggests that the dollar will go up from here. And we find that interesting because the narrative out there is, "Oh, all of these governments are selling off their treasury, securities. they're effectively trying to get out of the dollar." So, we have a few charts on that. there have been very strong headwinds to the dollar that way, which I will show you in a minute. but here first I'd like to talk about the yen. Something very important happened this week, with the yen. It is clear now that the Japanese government has said, "We are going to support the yen by selling treasury securities." And year-to-date they have sold 5% almost 5% of their treasury securities. this week, Treasury Secretary Bessant, and it was famous, it's on on X, you'll see his to-do list. One is to intervene on behalf of the yen.
15:17 But what we didn't know until yesterday is that, or maybe even today, is that the intervention was selling the euros that we have and buying yen, not selling dollars. So, that that tells us a couple of things. There is some agreement between Japan and and the Treasury perhaps not to sell any more Treasuries.
15:47 That has put pressure on our Treasury yields. And it also suggests that that Japan is getting concerned about its inflation rate. Remember, not too long ago they were worried they'd never get out of deflation. Well, now they're worried about inflation and they do not want the yen to go down anymore. So, here you can see a chart of the major sellers of Treasuries. But, Japan is at the is near the top of the list there selling 5%. You've got China, you've got Canada and Saudi Arabia. I found that one interesting because Saudi Arabia really needs $85 a barrel for oil in order to fund its budget without resorting to cutbacks elsewhere. So, we're now seeing it in the form of Treasury Treasury sales. So there has been a lot of pressure on long-term yields and yet we haven't been able to get them to 5%.
17:01 So, on this one let's go into monetary policy a bit more. Here, as opposed to the four-year annualized rate of change in M2, this is the year-over-year increase in M2 and it's about 5.6. And so, again, just to serve as a guide, you can see in the context of history, this is not at an extreme. and it's probably at the midpoint of the range here. Now, will it go higher?
17:33 It might go higher. but will that cause inflation, CPI-based inflation, to con- continue moving up? We do not think so. And, this will take us back into, well, while we're talking about inflation, just in the last month, there have been a number of surprises on the low side of expectations for inflation. CPI headline, this would have been for June. We'll get the July one, next week.
18:06 Minus 0.4. Core was zero. This is month-to-month. PPI, month-to-month, minus 0.3. PCE, so personal consumption, deflator, that was minus 0.1 for June, and the core was only 0.1. now, on a year-over-year basis, the consumer indices are still, for the most part, in the threes. the core headline, and headline and core for PCE, headline for CPI, core for CPI is 2.6% year-over-year. So, we are still wrestling in that 2 to 3% range for that core, with the recent increase in oil prices. but why don't we think the CPI here is going to continue following money, growth on a year-over-year basis up. First, I've just given you some statistics suggesting we're beginning to see surprises on the low side of expectations. Second has to do with the labor force participation rate, that I just, discussed with you.
19:28 as you can see, it is falling pretty rapidly, and I gave you the reasons, the the two ends of the spectrum. and this brings us back to, you know, I've marveled, at the the correlation, you can't say causation, of course, but correlation between the labor force participation rate and the velocity of men M2, the rate at which M2 turns over.
20:01 When people are concerned about their future, they tend, to pull back a bit on on spending and maybe save a little bit. Now, they've not been able to save much, and I'll get into that in a moment, but I do think this drop in the labor participation rate, the boomers, now they're depending just on their retirement income, so they're they're probably, little more conservative in their spending. And on the other side, the young people, 16 to 24-year-olds, they're probably a little concerned as well.
20:41 And maybe everyone's concerned, but we did say that the participation rate of the prime age did go up, so that's a little bit of good news on there. They are the biggest income earners. So, even if velocity just rolls over a little bit, does not resume its downtrend, even though the labor participation rate suggest it will, that will diffuse the impact of money growth. So, 5.6% velocity slows down by 1%.
21:18 and so flatlines essentially. That will take one percentage point out of the power of of the 5.6% monetary growth. now here's average hourly earnings. this is just more recent and you can see continued deceleration. So, we are back to where we were pre-COVID. I think that's important. I think that's important to the Fed. as I mentioned up front however, it will become obvious if we're right and we're in a booming economy that part of the rewards associated with productivity growth should not be just margins, but also compensation. So, average hourly earnings. So, when we start talking about labor shortages again, we are not right now, which is interesting. but when we start talking about them and especially people in the younger age cohort, that unemployment rate starts to decline significantly, then I do believe we will see wage growth go up along with productivity growth and that's okay.
22:41 here you see a big surprise in the productivity report we got this week. was unit non-labor costs. What the heck is that? So, this is you know, we're looking behind our shoulders saying, "What don't we understand out there?" So, we did a little digging here. This looks very inflationary, doesn't it? it's not. what it's calculating is accelerated depreciation, which of course we know that the accelerated depreciation is probably the most extreme we've ever seen it because the tax package encouraged it. If you build a manufacturing facility over the next the well, the next two two and a half years, if you start it, you'll be able to depreciate it 100% in year one instead of over 30 to 40 years. So, you get a huge tax refund up front. The same thing with equipment, domestic R&D, and domestics and software spending.
23:54 so, this actually accelerated depreciation is accelerating capital spending. That's good news. here's more on monetary policy or what the Fed might be looking at to guide it. I've just given you a few that they're looking at and trying to figure out. That last one being very interesting. this is another guide, at least for me. there's a downtrend since since 2008-9 in the yield curve as measured by the 10-year Treasury yield the 2-year Treasury yield. what is that telling us? Normally, normally the increase or the steepening takes place because bond yields increase faster than the 2-year yields, which are much more sensitive to Fed policy. What's happening right now is that short rates have been going up more than long rates in this recent period. And I think it's because there are more and more signals that inflation is surprising on the low side of expectations and that we might be in an era much like we were in the Industrial Revolution when it it was a period that tended toward deflation and so the yield curve actually was negative more than half the time. and on average it was negative by 100 basis points. We might be going back to that kind of a period, which I know would be a big surprise to the fixed-income markets.
25:45 here is just the spot price of of oil. And what you can see here that I find fascinating is that oil prices peaked at $147, I think it was, in 2008. And even with the two wars that we've seen, we've not been able to break above that price. And in fact, we've come down from the post COVID price peak. We just matched it and then came right back down.
26:20 we've been doing some work on on supply and demand for oil and we think there's a big glut brewing. And one of the biggest swin- swing factors is Abu Dhabi. The UAE left OPEC in May. And its production has gone to an all-time high. it it's about 4.11 million barrels per day. I think under the OPEC quota system, it had been limited I'm going to say to the low threes range. It might have been high twos.
26:59 and it has just broken loose. Now, why do we think that's happened? I've been to Abu Dhabi. Abu Dhabi is one of the most innovative countries in the world. Sheikh Tahnoon has been focused on AI. I went and gave a presentation in 2021 to a group at a an inn Abu Dhabi, a group of world leaders, about AI. And I had I remember in speaking to the leaders there, you know, they said, you know, what are some of the things we should be doing to capitalize on you know, this technology revolution that's brewing.
27:44 And we didn't even have chat GPT by then. That was the wake-up call for a lot of people. I and I said, go autonomous mobility, make it easier from a regulatory point of view. Boy, have they done that. and I think they've lit a fire under our own FAA to get going. and they've they've just invested aggressively in whether it's crypto or robotics, definitely AI, definitely health care as well and the impact that AI is going to have on health care. so, what have they concluded probably here? They probably have concluded that the oil price has peaked. And I remember telling them that I thought the oil price would crash.
28:36 Well, of course, that looks silly now. Maybe or maybe not because it did start going down, right? and then of course we've had the two wars, Russia and Iran. And now it's coming down again. Abu Dhabi has probably concluded, let's try and get maximum price for oil. Let's sell as much as we can now.
29:07 because oil prices are going down. I and I I think they see because they're going autonomous, that the grid is going to host a lot of transportation and the grid is powered not by not by oil, but natural gas, hydro, solar, definitely renewables, wind, and so I do believe the oil price is going to go down quite significantly. And that's how we get to our good deflation cuz that's a tax cut for most of the world. Now, I will say for the US it's not as much of a tax cut as it has been as it as it was historically.
29:50 It starting in 2015, our exports went from essentially nothing to 6 million 6.3 million today. and they're continuing to rise. So, we're a net energy producer. So, it will hit us, but it will hit us mostly in energy producing regions. Here's commodity prices again, same story. We hit roughly the supply chain bottleneck range that we hit in after COVID. We went back there.
30:26 a lot of this is oil. and now we're starting to come down again with the exception of some prices like copper hitting an all-time high because it's so important to data centers and electric vehicles. So, there's a reason for it. There's you know, the demand curve is shifting out. The demand is going up relative to supply. The price is increasing as a signaling mechanism to produce more.
30:57 Okay, will core CPE I mean CPI fall below 2%? Most people think no. And we this year. So we've got until December. We think it's possible if the oil price cracks that that it could filter. This is core so it excludes energy. But energy goes into so many other products and we're beginning to see CPG so consumer product goods prices some fall because the consumer is hurting and it's mostly lower and middle income.
31:34 And so we're beginning to see companies cut prices to invite more demand. And for that reason we are seeing a margin squeeze. So you can see in purple here that's core consume core CPI. In the green is core PPI. Even though PPI prices have gone up. You saw them in the commodity prices.
32:05 This core CPI inflation rate has essentially well it stabilized but we think it's starting to come down again and will come down more rapidly. Now on inflation I do think that Kevin Warsh is looking at private measures of inflation and you can see here Trueflation headline is around where we're in the mid twos now. So did come up from where it was because of oil prices primarily, but look what's happened to core inflation as measured by Trueflation. And in next in the know, we'll give you a sense of where we're seeing these price declines. because given what has happened to oil and given what you see from from the government measures, something must be declining that the government measures are not picking up. 1.5% inflation. In the context of history, the Fed looking at this chart will not tighten.
33:13 It will not tighten. And I think now that we're getting monthly indicators and we got this employment report, the Fed doesn't want isn't getting a lot of signals that it should be tightening. Here's household employment to speak of one. Household employment is negative on a year-over-year basis. This includes small businesses. here's the labor force. It is falling. Again, boomers, some of it is immigrants leaving the country. and some of it is entry-level jobs, you know, not being there for young people and so some of them are going back to school.
34:00 some of them are starting their own businesses, so they will get into the employment numbers pretty soon, we hope. youth unemployment, will it drop below 7.5% this year? Most people don't think so. now remember this peaked at 11%. It was revised down to 10% and and has come down further. This is the purple line here. and as of the last reading, it was 8.5%.
34:31 if a lot of people start their own businesses, they will get into the labor force and will be counted as employed, so they'll fall out of they'll fall out of this one. You can see the green line is the unemployment rate for all of the United States has tipped back over to 4.1, very low by historical standards. and we do think that the youth unemployment is is going to continue down.
35:04 will Michigan consumer sentiment go above 65 this year? Most people say, "Absolutely not. The consumer's feeling terrible." and the consumer's feeling terrible as you can see from the University of Michigan. By historical standards, I mean, it's worse than almost anything, worse than COVID, worse than '08, '09, worse than 1980 with double-digit inflation and and interest rates. Now, we did get a little bit of a pop in this last month, and I think that related to gasoline prices when they were coming down, and we had a moment when interest rate prices were coming down, and other consumer prices are starting to come down, especially in the food area. Eggs is a big one. so I actually think there is a shot we will get past 65. so I would my my I would bet better than even this year.
36:00 And now, here's another here's another piece of evidence that the consumer is not happy. the the saving rate is going down, even though boomers are retiring, well, they're part of the reason the saving rate will come down. but they're probably not drawing it down rapidly. but there there's another reason, affordability. So, low- and middle-income earners are reaching into their savings to manage day-to-day.
36:34 so, that is one reason the consumer sentiment index is low. as compensation growth picks up, as employment growth picks up, and we do think it will, we think this is going to turn around. And so, so that will that that buffer will begin to build again and give consumers a little more confidence, we think. now, here is and this is this is the divide between the wealthy and the lower- and middle-income categories.
37:09 so, here you can see it comes from something called the Fed Funds Flow of Funds Quarterly. now, we just took a look at this because I'm writing a letter and I just was curious, okay, where are we in terms of households equity exposure versus cash? And the green is cash, the purple is equities. we are at an all-time high in equities. Cash, we're near a long-time low. Part of that is, you know, what I just described about savings. Part of it is higher-income earners looking at the stock market saying, "You know what?
37:56 I'd prefer to have my more of my savings in equities than cash. Even though I'm getting a little better yield these days, the market has been going up, so I'm going to stay there." Now, as you know, we try and Democrat we're trying to democratize the holdings of equities, both public and private. and I do think as the younger cohort starts to enjoy intergenerational wealth transfer, and it's already happening, that equities and crypto are going to be their preferences as opposed to cash as well. and one of the reasons for crypto is there are much higher yields in the world of decentralized finance.
38:53 so we'll we'll be paying close attention to that. But one other thing to note, look at the tech and telecom bubble in 2000. We're well above that. but but if you look at the valuation of the market, if you look at the valuation of the market, and we'll put this in the next In the Know, the valuation today of the top tech stocks in the S&P 500, so the Mag 6, that valuation today is as low as the valuation at the of the top five tech stocks in the tech and telecom bubble at the bottom in 2003.
39:40 So very big difference there, night and day. So now we're going to rattle through economic indicators. You see most of these each each time anyway. consumer spending is holding up partly because consumers are digging into savings, and partly because higher-income earners are enjoying a very strong equity market. on the other hand, the lower-middle-income earners, you know, their biggest asset typically is their home, and they're trapped. Existing home sales are stuck because mortgage rates have gone back up. We're heading back towards 7%. That's not good. A lot of indicators fell back. This one is inventories of family homes.
40:35 Those are for sale. Now, the the numbers of of permits and starts have come down. They start started coming up, then interest rates went up. So, here we go. The inventories have gone back up. Builders need to clear to to clear the the the homes off their balance sheets. This is very they're very expensive to hold. Well, they're starting to do so with lower prices. New home prices have been falling for a couple of years. Existing homes are not quite there to clear to to to get people to move from a 3% mortgage to a 6 and 1/2% mortgage.
41:21 They're going to need price cuts. So, those of you in homes for sale, the way to move them is to cut prices so they come they offset the mortgage the mortgage rate rebound recently. Freddie Mac, will it average below 5.75? Yes, Cal she the Cal she markets think not and you can see we've had a back up here. We think it's still possible this year, but not probable. So, we'll give we'll give the wisdom of crowds that one.
41:59 Here is manufacturing. There's been a replenishment of industry of inventories. We've got two wars going on. Fears of supply chain. Some of this is just in case, given the supply shock they experienced during COVID. Some Some is, but but we are seeing new orders continuing to pick up. So, that's very good. That's very good. here is We've explained this a few times, but we've put some lines here to explain a little more. You can see during the '90s when we were going through the internet revolution and the wireless revolution, this measure of capital spending, non-defense capital goods orders excluding aircraft it grew at roughly 9% per year.
42:54 And then, because of the overbuilding during that time we saw the fallout and then we peaked roughly at where that initial peak had been three times. now, if I were if if this were a stock chart, I'd I would have told you, "Okay, so resistance failed. Resistance failed. Resistance failed." Broke through resistance partly because of COVID as we needed to digitalize our world even before the chat GPT moment came off a bit as interest rates went up, and then we had the chat GPT moment. We are back to the future. And we think this is going to be an extended cycle, that this the fears in the market about AI hype are overblown to some extent. I know we'll see you know, volatility around the spending as perhaps there's some second-guessing. but we believe we're in the earliest stages of a true technology revolution. And for 25 years, this capital spending number had been stuck. We have a lot of time to make up.
44:19 Now, on capital spending, this this one is causing a lot of fear for the semiconductor index in particular. Semiconductor index is in green and in purple is the Silicon Data LLM token expenditure index. And we move that forward 15 months because it seems like at least recently it's been a pretty good fit. In terms of leading the semiconductor index is lower. So this is causing quite a stir in the market, but let us break it down a little bit more for you. Now on this chart, you can see that previous index broken down into into price, which is in purple, and volume, which is in green.
45:13 So prices are coming down. And you can see X marks the spot. We of week to date, these are weekly price indexes and volume indexes. So the price average of the five days through Friday, it will be posted on Sunday. Is where you see the X there. The volume, however, is moving back up again. We had a little bit of a scare like we did around April. And part of this is companies is companies saying, "Wait a minute. We need to get more efficient.
45:56 We're spending too much. So we're getting little adjustments like that." And then we get the turnaround. The turnaround because what companies can do in terms of increasing productivity is astonishing. And so here you can see the equivalent of a revenue index. Putting those two that I just showed you together. Again, we had the little dip in April. We had a larger dip this time around because I think there was a backlash to token maxing.
46:29 And now we're on our way up again. All right. Last of the four. So we've got consumption, we did that. Investment, we did that. this is trade. and so this is exports exports minus imports. so you can see it's kind of stabilized. We know President Trump wanted to go all the way back to zero. It's not. The US is growing much more rapidly than the rest of the world including China. we do believe that's the case. And and if that's the case, then what we're going to see is our our imports are going to grow faster than our exports. Imports are already larger than exports. So by definition, the trade deficit is going to go up. The flip side of a trade deficit is a capital surplus.
47:24 And that we are seeing too. Foreign direct investment into the United States is exploding. It's not just through the the the markets. It is actual physical investment thanks to our new tax laws and depreciation. Here, a little bit more of a breakdown. China, our imports from China and Hong Kong have been cut in half to the benefit of Vietnam Mexico and other Asian and Latin American countries.
47:59 China, you know, we're trying to figure out this metals to gold index and we think that China, and we'll get to it in a moment, is a reason for or an explanation for that chart. Before we get there, here's profits, US domestic profits before tax. They're hitting highs we have not seen in many, many decades. And you can see that the profitability increased during COVID, helped by massive monetary and fiscal stimulus, has has held. And the way it's holding is with AI and productivity increases.
48:43 so it is not out of the question that margins will continue to increase. but we do think productivity gains will go to margins, will go to paying workers a little better, and maybe will go to cutting cutting prices to remain competitive. Here, you can see on this chart, the the what I was hinting at a little bit more, the positive correlation between metals to gold and 10-year Treasuries has begun to reassert itself. it since the Fed started tightening in February of '22, the it was more often the case that the 10-year Treasury yield was moving up and metals to gold was moving down.
49:40 That is changing. You can see that the correlation has ticked up. Metals to gold price is going up, but it's It's primarily because gold has been going down. and you see on the top the 10-year Treasury has gone up. and as I described earlier, there has been quite a bit of selling by central banks that both Japan and the US want to stop now. So, what could happen here? Let's say the 10-year Treasury yield stays in this new range that it's found. in the 3 and 1/2 to 4 and 1/2% range. we could imagine this metals to gold in indicator continuing up if gold continues to go down.
50:37 All other things equal. And given Warsh's hawkish stance and his determination to get inflation down combined with the fact that inflation indicators are starting to come down. we we we might it's going to be interesting to see if gold down goes down more than metals go up because we do think in a boom metals will go up.
51:13 So, stay tuned there. If we use the '80s as our guide, again, Reaganomics, the dollar the dollar's tendency was to go up, which became very deflationary for countries in the emerging markets, especially those with dollar-denominated debt. so so let's see what happens. I'm keeping an open mind on this one. Now, back finishing up on market indicators, you can see here S&P to oil is is bullish. you can see that few at least so far we have escaped based on S&P to gold what a lot of strategists out there thought was happening. They think that our debt in the US, which is 40 trillion now, so, you know, we're only a 30 trillion-dollar GDP. so, a lot of people are very concerned about that.
52:18 we we are not as concerned, and if I haven't put the chart in this time, I'll show you next time. the right metric against which to measure our debt is not GDP. GDP is so-called a flow statistic. the right measure is a {quote} {unquote} stock statistic, so level, like stocks themselves. and on that basis, there's and there's very little concern. But many people thought that dip in S&P to gold earlier this year was going to turn into a route for the S&P like the the '70s were. And they they pinned it all on that debt. We are not worried about it. We're glad everyone is, though. because we do think government needs to get out of the way and except for defense spending, national security, and so forth. so, and those in government working in government right now are as the employment ranks have come down, are probably getting more productive with AI tools. So, bravo there. All right.
53:34 So, here is another one. This is new. And we'll monitor this as well. I love these sorts of clues. So, this is gold to the total return on T-bills. So, if you look at what happened in the '80s and '90s, this metric went down. That was very bullish. Now, one of the biggest reasons it went down and went for both reasons, gold prices went down consistently and the total return from T-bills went up, which mean meant interest rates were coming down. So, that was a very powerful period for equities.
54:16 Couldn't get more bullish than that. But, what look look at what happened starting in 2000. 2000, when we look back and start telling history again, we will demarcate the year 2000 and it will be a Fed mistake. The Fed the Fed was much easier than it should have been because of Y2K, Long-Term Capital in 1998, Y2K in 1999, and then the tech and telecom bust in 2000. And that unleashed the inflation that you see here as as measured by this index. So, it's been a very health unhealthy period as measured by gold to the total return on T-bills.
55:07 I think we've seen the worst of it if gold prices are going to go down. Now, I don't think the T-bill total return is going to go up much because I do believe we're in a boom and that T-bill rates will go up. But, if we're right and we're in the deflationary boom, I think gold prices will go down. so, we're watching this one carefully, too. okay, have to mention Bitcoin. We're getting questions about it. Bitcoin relative to gold, finding its legs.
55:42 and I do think David Puell's on-chain indicators are looking more positive. We should have paid more attention to them when they turned negative during the flash crash. we didn't. We didn't think that was going to propagate the way it did. I take full responsibility for that. in fact, I also caused a problem by saying stable coins were taking were usurping one of the roles that would Bitcoin was going to play. And what's so interesting about this period in time, just listen to Cloudflare's earnings call last night. He didn't use the word stable coins, but he did use agentic commerce, agentic payments throughout. And we think stable coins, which will be dollar positive, and Bitcoin are going to be the two biggest beneficiaries of that movement. And the other thing to listen to is it just came out this week was the latest Bitcoin brainstorm that we did with Bitcoin Park and Rod Rudy.
56:51 that was all about the convergence between Bitcoin and AI. I always learn so much when we do those Bitcoin brainstorms. here also for those wondering about Michael Saylor, you can see that stretch is recovering. it had a near-death experience because because and it wasn't near death by any stretch of the imagination, but hedge funds were pushing pushing pushing. This is what they do when they see a weak link. And Michael Saylor was the weak link.
57:27 this notion that Bitcoin would continue to unwind and he would be he would be forced to sell Bitcoin to pay dividends 10 to 11% so he's been testing the market by selling some Bitcoin just to give those hedge funds a sense of hey stop it it's not going to happen and I'm selling Bitcoin and what are you going to do about it now? So we shall see. And here more broadly we don't see any problems in the banking system so no private credit problems certainly no crypto problems that they're they're not touching crypto very much yet and same with junk bonds relative to 10-year Treasury yields no problems so no problems and so I will leave you now. Lots of opportunities no problems lots of opportunities we are so excited about what's going to unfold in both the equity markets and the crypto markets during during the next few years this technology revolution is real I think the inflation scare that has that had unnerved the markets is going to disappear. And believe me consider the source I know I've been saying this for a number of years we think we're going to see deflation before we see any any kind of super inflation to concern the markets and we think that will occur in the next year or so. And it's going to be fantastic for investors and and companies that are on the right side of change and really are harnessing all of these technology tools and it will be very difficult for those who who do not do so.
59:34 so, it'll seem at times quite confusing because some of the most tried and true companies are not going to get this right. and it is up to those of us in the equity markets, especially active equity management, with the help of prediction markets, which I think is going to bring more active equity management back. It is up to those of us who are watching this technology revolution unfold from our vantage point to pick the right stocks. And no, we're not always going to get it right. You know, in our business, the saying is if you're right 60% of the time, you're going to have a golden record.
60:17 And now that we've gotten through a very difficult time for innovation with interest rate scares, inflation scares, wars, and so forth. And we've climbed the wall of worry. I think the wall of worry is going to be a lot more fun for those of us who are dedicated to helping our clients discover and invest in the companies who are going to lead us during this revolution. So, thank you so much. Have a fun last few weeks of summer and we'll see you after Labor Day.
60:55 >> >> Hey.