Are We About to Enter the First White-Collar Recession? | James van Geelen
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What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world.

My guest in this episode of Hidden Forces is James Van Galen, the founder of the boutique research firm Citrini Research, which specializes in illuminating and demystifying the transformative megatrends poised to shape societies, economies, and the market's distribution of returns for years to come.

James and I spend the first hour of our conversation exploring a series of narratives and investment themes, including Trump's recent tariff announcement on April 2nd, that have captivated markets and that are likely to be highly determinative of investor returns in the years to come, as we undergo a fundamental reorganization of the global economy, along with its supply chains, energy systems, and underlying technological foundations to say nothing about the changing relationship of government and

and fiscal policy to the economy and asset markets. In the second hour, James and I dig deeper into some of the more consequential themes that we identify in the first hour, like the wealth-driven white-collar recession that could accelerate the adoption of AI and rapidly reshape the workforce, the rotation out of U.S. equities as the U.S. turns to fiscal austerity and as countries in Europe and Asia engage in massive fiscal stimulus,

And what could be in store for America's Democratic Party base if its supporters increasingly find themselves out of work and under threat by the policies and changes underway in the new economy?

If you want access to all of today's conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io slash subscribe. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now.

If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you.

Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this deeply insightful and immensely valuable conversation with my guest, James Van Galen.

James Van Galen, welcome to Hidden Forces. Hey, Demetri. Thanks for having me on. It's great having you on, James. This conversation was a long time coming. You and I first met about a year ago or so. We were introduced by one of our Hidden Forces Genius members at a dinner he hosted. And I recently started digging into your research and I got to say, man,

It is fantastic. I've already told you this, so it's not a surprise, but I love it. And one of the things I love the most is something that you actually explicitly cite in your about page at Citrini Research.

which is the second level thinking. And this I'm pretty sure is a term I first heard used by David Epstein in his book Range, and I had David on years ago to talk about this. Before we get into our conversation today, which is going to be both timely in terms of discussing the Trump tariffs and also timeless in terms of discussing some critical macro themes and trends that I think are going to persist in the years to come and that are going to be impactful for investors.

Just tell me a little bit about you. You're the founder of Citrini Research. What's your story and what is Citrini Research? What do you guys do? What do you focus on? Citrini Research is hopefully becoming the premier destination for thematic equity research. I think that we've kind of had success off the back of a couple early good calls. I kind of took a lateral route into finance.

started out in medicine, going to med school and going to become a doctor. But I had worked as a paramedic for probably four years in some pretty rough neighborhoods. So the thing is, by the time you get to med school and you're doing the white coat ceremony, you're supposed to be pretty gung ho about it. Yeah, we're going to save lives. And I kind of showed up and I was like,

the medical system is broken, you know, like I'm kind of already jaded, which is not a great way to kind of enter into the system. So I didn't last very long. I dropped out. I ended up starting a business that I later sold. And then after selling that business, I realized that I'm not a person who deals well with having nothing to do. So at the time, my neighbor was a macro trader.

And I just kind of was talking to him one day and I was like, dude, I am so bored. I literally don't know what to do with myself. And he was like, well, there's always trading. And so, you know, that was like 2017, 2018. And I started trading. I had the worst thing that can possibly happen to you as a trader happen, which is a string of early wins. And I probably lost like...

a good third of my net worth in that, you know, like, like after that period, I basically went on a tear. I had no clue what I was doing, but I was getting very lucky. And then the taper tantrum happened and that just, you know, wrecked my world. And that was kind of when I was like, I should probably, you know, instead of like developing the version to it, I kind of just became really, really interested in it. And I just said, yeah,

I got to figure this out. And I just started reading and speaking to people and kind of coming in with, you know, I've tried to hold on to that, that beginner's mentality, the idea that regardless of how much of an expert you become in something, if you approach it with the mentality of a beginner, you're going to have a much higher chance of like learning and retaining knowledge. And

I basically, at the same time, you know, I was super interested in macro. I was very interested in the idea, like the kind of psychological, behavioral psychology aspect of markets. And that basically manifested in...

of fascination of these themes and trends that take hold of the discourse and drive decisions. It's something where when you have a model in an Excel sheet versus a story, the story, especially if it's backed up by a good model in an Excel sheet, it's always going to be more convincing and markets are just an expression of people coming in in the short-term release and making decisions.

That's kind of what I started focusing on. I got pretty into the macro part and I looked at the macro part and I said, well, I don't think I'm going to understand this unless I can analyze banks. So I started kind of getting really into the weeds on how you fundamentally analyze financials. That kind of led to...

In October of 2022, I started a Twitter account and I said something like, you know, I'd done a pretty significant amount of work and I just nonchalantly kind of sent out a tweet about the fact that Silicon Valley Bank would probably end up, you know, insolvent in this cycle. And that kind of got some, you know, after obviously Silicon Valley Bank collapsed, it went a little viral. And at that point I had...

kind of fallen into this AI rabbit hole after ChatGPT. It struck me very much as like one of those moments that happen once every 10 years or something that is a kind of generational trade. So I kind of capitalized on that momentum and I wrote a framework for

How do we trade this AI thematic? And that's where Citrini Research started. In 2023? Yeah, in 2023, in the first quarter of 23. And now we have a team and...

I think we put out some good stuff and focus on macro and at the same time, these equity themes and broader implications of those. I want to say something to investors who may share my heuristic. I have a heuristic, James, which is roughly speaking, if you present yourself as having an opinion on more than two subjects, I tend to think that you don't know what you're talking about. But that's usually true because people will present themselves as kind of

having some kind of divine insight into the future and strong opinions on more than two subjects.

In your case, you do cover a number of themes, so there are more than two, but it's really thoughtful analysis. So what I would say is that when you're reading through the reports, it's very value additive. And I speak with a lot of people and I read a lot of stuff, so I hope that goes for something. I appreciate that. Sure. Just real quick, what is the mission and philosophy, and real, real quick, because I want to get into, we have so much to talk about today. What is the mission and philosophy of Citrini and Citrini Research and your team, and what

And how do you go about choosing or honing in on a particular theme? I think that the kind of mission is to...

make the number go up, right? Like I think that the only reason any of us are here is because we want to take money and grow it to more money, right? So in my view, that's a function of being aware of these narratives that drive markets. I think that in this kind of connected social media age, narratives are driving markets more than they ever have before. And I think that there's a kind of false equivalency that people have where

They associate narratives and themes with bull markets. And that's really, really not the case. If anything, in a bear market, narratives get even more important. You know, anyone who was trading three years ago in 22 knows, you know, that was like a great year for thematic equity investing because there was the Ukraine stuff. There was the energy stuff. There was the inflation and pricing power stuff. And, yeah.

So we focus basically on just the narratives that drive markets in the short term and the long term. And I think that that's valuable for really anyone. The idea that over the past hundred years, 40% of the returns that have been made in the U.S. stock market have come from 1% of all the companies that have ever been publicly listed. And if you go back and you look at what those companies are, something starts sticking out to you where you say, oh, yeah,

All of these companies had a trend that they were really integral to. And whether it's Apple with the smartphone or what we've seen with Nvidia. So really from my perspective, that's the most important thing. And we basically set out to examine as many as we possibly can and give people the conviction to explore more in depth. So we're recording this on Thursday, April

April 3rd. Yeah, we really picked a bad day. There's absolutely nothing we could talk about today. Just really, really boring. Right. I'm sensing your sarcasm. Of course, the reason that there's plenty to talk about is that Trump announced the across the board tariffs that they were putting on the rest of the world, along with a formula that journalists derived from how they seem to have calculated what they did. Just real quick, because many in our audience will already be familiar with the basics of what happened here, but real quick for those who aren't,

What exactly did Trump announce? And then let's dig into the significance of this before we get into some of the other larger themes that I want to talk with you about today. Because this is a big one, this theme of Trump's tariffs, the trade war, the reshoring of domestic manufacturing, the prioritization of labor over capital. This is one big theme in and of itself. So what did Trump announce? What's the substance of the tariffs that we know of thus far? And what is the major takeaway in your view?

I mean, the major takeaway is that it's extremely difficult to trade a Trump announcement because if you were watching it the way that it played out, it was really amusing to see futures on one side of the screen and Trump speaking on the other because he comes out. He says, you got a street estimates are saying it's going to be between a 10 and 20 percent blanket tariff. And he comes out. He says we're doing a 10 percent universal tariff on all imports from all countries. That's effective April 5th.

And, you know, futures just start ripping, right? It's the best possible outcome. Everything's great. And as this kind of presentation progresses, he says, oh, also, we're going to do these reciprocal tariffs. And it's going to be 50% of whatever the country tariffs us, we're going to tariff them. You know, futures take another leg higher because great, reciprocal tariffs aren't 100%. That's less than we expected. And then he busts out this chart.

And the chart basically shows numbers that were not what people were expecting, where they had essentially calculated the tariff rates using the trade deficit. And those tariffs were much higher and on top of already existing tariffs. So China showed 36%, but the existing tariff was 20%. And so an effective 56% tariff rate on Chinese goods, which we buy quite a lot of. So

That kind of, I think, as he continued speaking, people kind of realized how significant this was, probably the most significant disruption or restructuring of global trade since Smoot-Hawley in the 1930s. And the fact that it was calculated with the relative trade imbalance of the counterparty, it kind of gives, you know, I came into it thinking Trump's probably going to set the tariffs high.

So that he is able to negotiate them down. Right. And the idea of Trump has a vision. He's kind of a man on a mission. He's hit the ground running. He came into his second term. He doesn't have any obligations. He knows what he wants to do.

And the idea that he was simply going to use this as a negotiation tactic or like a bargaining chip where it sets him high, walks it down and is just front loading all the bad things he has to do to accomplish his vision into the first six months of his administration so that the negative impact is as far removed from the midterms as possible. That was kind of, I would say, the consensus view. But the methodology of the calculation on the trade imbalance was

It kind of suggests a more sticky policy because their goal is to shrink the trade deficit. And that makes it a little bit more the risk of them just sticking around. And that opens up a whole new can of worms for monetary policy, inflation, the negative growth risk. So, yeah, I mean, restructuring the global trade order is a pretty big deal and it's

People are adaptable, but they do have to find that new status quo. And it seems like the new status quo still hasn't settled in yet. Let's dig into this a little bit. The consensus view, well, not the consensus view. I don't know that there is a consensus view. I mean, there's certainly consensus view among economists about how tariffs are traditionally inflationary. There's also, I guess, a consensus view on how, in theory at least,

all other things being equal, an increase in the price of externally produced and imported goods can lead to an increase in domestic consumption of domestically manufactured goods, assuming of course, and it's an important assumption that doesn't necessarily hold in this case, that there are substitutable goods that are produced domestically that people can consume to offset the price hikes of foreign manufacturers.

And of course, the other thing is that I wanted to say that journalists are saying is that there's a concern that a lot of people are suggesting concern around possible stagflation. This is a thing I've been hearing more and more about. Walk me through the various scenarios that you're considering here and what likelihoods you're ascribing to this. How does this play out in your view? What are the consequences of Trump's policy and what can we infer about his commitment to the tariffs and how this is all going to play out?

Well, to start with the first point, the idea of tariffs kind of being inflationary, the key thing to understand, in addition to, you know, your later assumption that there's

a dynamic by which domestic products become more competitive if there's a substitution. The other thing to consider is you sell a product and let's say all your competitors are Chinese and it's a pretty competitive industry, the Sino-US podcast universe. And now your competitors' products cost 50% more. For you, yes, it can make your product more enticing, but

You're also- I'll raise my prices by 30%. Exactly. And you won't lose market share. And that doesn't even take into account the idea of this kind of compounding effect of tariffs where-

The input costs go up too, for me, as a domestic manufacturer. Yeah. And manufacturing and supply chains are complex, right? We've spent a long time doing globalization. And so tariffs raise prices and the CPI is just an index of prices. So yes, you'll see the CPI go up. But you have to, like we were talking about, you have to think about the second order impacts.

First, you're shielded from kind of international competition, right? And then the trading partners will probably impose retaliatory tariffs. So exports will become more expensive. So you'll be less competitive abroad.

And it's pretty easy for them to be a license to increase prices domestically. But tariffs don't just hit once, right? They compound. So in the Trump 1.0 trade war, the washing machine market, you had steel and aluminum tariffs in 2018. And manufacturers raised price by 12%. The metals that go into a washing machine only represent 5% of the total cost.

And that's not them being greedy. That's just like tariffs cascade through supply chains in nonlinear ways. And as they go, they create multiplier effects. So that would be kind of the argument behind the inflationary aspect. But at the same time, let's say, you know, you have this supply chain and you

Now you're kind of, I mean, 56% tariff on China. Maybe that just, you look at it and you say, well, my margins would be negative now, right? And I'm not working for free. So I got to find another way to kind of source this. And yeah, so you go domestic. But the thing is, that factory in China that you're buying from has probably spent decades optimizing, right? Optimizing because this is what they do. This is their industry. And, you know, they've gotten lead times down and they have a strong logistics network and

And when you pivot to this domestic supplier, there's going to be a productivity drag because it's not going to be as efficient. So that can reduce the supply of your product, which ultimately can increase prices again. So at the same time, it can also cause a negative growth impulse if you're just producing less. So I think that the three scenarios, like you asked, there's...

The first scenario would be essentially kind of run of the mill slowdown. What is a run of the mill vanilla? So yeah, essentially that, you know, obviously all recessions are unique and we can talk about that later. You know, we wrote a piece about what a recession in the US in this environment might look like and what would drive it. But I would say, you know, run of the mill recession is basically, you know, interest rates go down, growth is negative and you have kind of a disinflationary deflationary impulse.

then you have the kind of specter of stagflation, which is you have negative GDP growth, but at the same time, prices are going up, which is kind of a...

unnatural thing to think about. You know, I think I don't know if anyone needs like a history lesson, but I can do this very quickly because it seems it's just like it's impossible to talk about stagflation without talking about the 1970s. But until the 1970s, it was mostly the view that no matter what, the cure for high prices is high prices.

And inflation is eventually supposed to erode demand until you have a slowdown and a recessionary environment takes hold. And the Fed can kind of help or hinder that process in multiple ways. The 1970s was really the first time in the U.S. at least that we saw this long term stagflationary environment. And it wasn't one thing that happened. It was like.

a series of policy mistakes. First, in 1971, Nixon decides to abandon the Brentwood system and end the dollar's convertibility to gold. And then at the same time, he imposes wage and price controls. And then in 1973, you have, you know, the

first OPEC oil embargo. And so you get an energy price shock. So even though it seems like there is a directive from the administration to get our economy looking more like the 1970s, the fact is that our economy is a lot, a lot different than it was in the 1970s. Energy used to take up a much bigger share of the wallet and spending manufacturing

transportation, these were all- Labor was more organized and more easily able to demand higher wages. Yeah. So we all understand what happened there. But if you were going to say that tariffs can cause stagflation, you would have to say, okay, well, are tariffs the supply shock? Are tariffs the equivalent of this kind of OPEC oil embargo? And exploring that is pretty interesting, right? Because

Tariffs this way, at least, if they stay this way, just assuming that there isn't a walkback or anything, they affect almost all goods. In the 1970s, it was until the oil embargo was lifted for inflationary pressures to kind of subside. Now it's basically you just have Trump and it's an emergency order. So it's policy dependent and it can be persistent. And the supply chain effect of an oil shock is pretty simple and pretty direct and a

relatively easy to model, whereas it's much more complex and much more kind of all reaching with tariffs.

And in the 70s, the response, you know, you have the monetary response. We're going to develop new energy. We're going to become more energy independent. And here the response is basically, OK, I guess we have to restructure global trade. You know, I'm not saying that either of those things are easy. But in the 1970s, with the monetarists letting interest rates kind of float freely to combat this inflation with Paul Volcker after Arthur Burns kind of dropped the ball, you

The monetary response was largely ineffective, but eventually effective. In the tariff situation, the Fed is kind of frozen because their policy response would be totally ineffective, right? And they also can't be seen to get into this like political, uh,

brouhaha, right? They're supposed to be independent. So it's interesting to explore the concept of stagflation. But like I said, it's an intentional policy choice rather than an external shock. And today's workforce has a lot less ability to demand compensating wage increases than they did back in the 70s. And either you have a normal recession, you have stagflation, or like you said, maybe it just works, right? And they get everything that they want.

I think that the problem with that view is essentially, I don't know, you know, you probably speak to a lot of business owners and you're a business owner yourself. And I watched this presentation yesterday and I was watching it and like, I mean, this is what I do. I do this all day. And I was like confused, right? Like not confused that he did it. It was, he kind of said he was going to do it, but just confused about the way that it was going to progress. And if you're a business owner and you're dealing with this environment,

You're basically forced to go from being an expert in pipes, whatever it is, HVACs. And now you've got to be an expert on global trade policy. That's going to increase in uncertainty very, very significantly to the point where you start to wonder, the economy is not like a speedboat, right? Even if the Trump administration's goals here are to...

you know, come in with a strong negotiating position, walk this stuff back, rebalance trade deficits, and this like kind of bullying of trade partners works and everyone just kind of caves. The uncertainty that's been created is much more difficult to model. And uncertainty does tend to be slowdown, right? Like it tends to drive slowdowns in the economy.

I think that's a really important point. And again, there's so many things I want to talk about today, so I don't want to spend too much time on Trump's tariffs, but it is important. I think one of the other things that's important to reflect on when we're comparing today with some historical period is you mentioned Smoot-Hawley as a comparison for the tariffs. Another key distinction between Smoot-Hawley is that that was in 1930.

when the size of the federal government and its role in the economy was much smaller than it is today. And why is that important? Because people's confidence in government policy and in what the government intends to do and the role of the dollar internationally are very different. And so one of my concerns is, and this is a question,

What are we to make of the potential of a loss of confidence in US capital markets in the leadership of Washington in the global economy? What are the risks there? What in your view should investors think or consider as possible outcomes of not the tariffs,

but of a cascading loss of confidence in American economic leadership globally. Well, you know what America's biggest export is, right? Yes, absolutely. US assets and the dollar. Yep. So this is a very interesting time to be doing this because it's like the nature of Trump, having traded Trump 1.0, and it's even crazier now. I said more things during Trump 1.0 that two weeks later I was like, oh,

that was stupid. You know, so it's like a very high risk that you just say something that's immediately like, you know, that's not what happened because you're kind of like applying whether it's game theory or like just like assuming people are rational actors. I think that the dynamic for that is very, very difficult to look at. But what I will say is, you know, Trump seems to view bilateral trade deficits as

as evidence of cheating on the part of the trading partner, right? You know, that's like deficit sounds bad, having a trade deficit, you know, these guys are taking advantage of us. And this comes back to, you know, the methodology, the math behind the estimated foreign tariff rates was based on the size of respective trade deficits. So while there are a number of factors that determine the size of the US trade deficit, taking it to zero would be effectively impossible. I guess you could say counterintuitively, the end of the Bretton Woods system

in 1971, it solidified the US dollar's global reserve currency status. And as the sole source of the dominant reserve currency, the US was eventually forced into a dynamic of running persistent trade deficits, right? Because the rest of the world just wants dollars. So you can read, this is like, it's called like the Triffin dilemma. It touches on this dynamic, but

I think that there are broader macroeconomic forces that make this approach almost destined to fail. Trump has a lot of political capital right now. I don't know if you... Have you spoken to Marco Papich ever? I have not, but I'm familiar with him and his work and know a lot of the guys from Stratford from where he came. Yeah. He wrote a great book called Geopolitical Alpha. The core of that book was essentially...

your model for predicting what's going to happen or making probability trees should be focused on constraints. Absolutely. Yeah. Trump doesn't have a lot of constraints right now. And this kind of comes into, you know, another trend and thematic that we've played or positioned for the past two years and to varying degrees has been how to trade China, right? China is kind of for a long time. And maybe again now has been viewed as uninvestable, right? Where because of this geopolitical risk,

It just wasn't worth it, right? And it wasn't worth it to have money in China, take this geopolitical risk, especially wasn't worth it when NVIDIA goes up every single day. Now, my framework for approaching China was, okay, here's what I'm going to do. Obviously, we wrote 100 pages on this, so I'm condensing it very significantly. But it was the Chinese economy comes down to one thing, and that's what does Xi Jinping think is the right thing to do?

And for a while, the right thing to do from his perspective was to de-lever, uh,

And you had a big policy impulse that was focused on the deleverage of the property sector. And obviously, that made it super tricky to invest in China. But at the same time, if you actually paid attention to what he was saying, there's always something to do. And there were things to do. So a good example of this is like, you know, in May of 20, I want to say 2024, Xi Jinping came out and said, we have to build a

a domestic semiconductor industry, right? We have to be less reliant on Taiwan, on the US, et cetera. I read that and I say, okay, I'm going to buy Chinese semiconductor companies. I don't care about the geopolitical risk or whatever, like it has the mandate of heaven and I'm going to position my portfolio in the same way that this economy is being positioned.

China continued to go down. All the Chinese semiconductor companies, you know, Camercon, Nauru, Huawang, even SMIC, which you can't buy because it's sanctioned if you're in the U.S., they did great. So that dynamic of kind of fiscal policy and kind of executive policy being one of the most important drivers, I think it's really important for investors to take note of that because when

Policy becomes a primary driver. We saw this in 2022, right, where monetary policy for a while was the primary driver. People weren't paying much attention to fiscal policy, even though arguably in the economy they were equal or even skewed. But the market was concerned with monetary policy to the degree where the

Most money I ever made in a single day was when Nick Timoreos leaked the jumbo 75 basis point hike, closely followed by the most money I ever lost in one day on the LDI, the guilds crisis in the UK. But the thing about that was...

There was one thing that the market was concerned about and even incremental changes in that were massively market moving. And now that's shifted. And the driver is Trump and his policy. And he has a lot of political capital and he has a lot of things that he wants to get done. And

in this current phase where Trump has an excess of that political capital from his election, he's going to do what he wants to do. So, you know, you really have to pay attention. And more or less, he has been kind of telling you, again, it's kind of similar to

to the Fed in 2022 after a period of like very, very poor communication. I think they kind of realized that they were dropping the ball and they started really like communicating. Here's what we're going to do. We're like, we're going to we're going to keep hiking rates until inflation starts coming down.

And that's what they did. So I think the most important thing from this perspective for investors is to basically pay attention to what Trump and like, unfortunately, Howard Lutnick, which he's just a talker and just the whole administration, you got to listen to what they're saying, because chances are they're going to tell you what they're going to do before they do it. So just at least one more question on the tariff front and on the Trump policy front.

And that has to do with industrial policy, because I think one of the criticisms that a technocrat would make is that tariffs aren't necessarily bad. Maybe the size of the tariffs could be bad, but if used in conjunction with industrial policy to help support and accelerate the investment toward and building up of domestic manufacturing and goods production in the areas that are getting tariffed, that could actually help accomplish the goals that the administration is talking about.

Have we gotten any clarity about what Trump intends to do about the Biden-needle industrial policy initiatives like the IRA, the CHIPS Act, et cetera? This is something that I, as far as specific, I don't think that we've gotten hints on where that will be primarily focused. You can make guesses, but in 2024, in March, we wrote a piece about playing the 2024 election.

And it was kind of funny because we wrote that piece in March. At the time we wrote it, Trump's odds of winning were 25%. And we've made basically a basket of about 120 securities, 60 securities on the long side, 60 on the short side.

And we said Trump's odds are mispriced. At the very least, it should be 50. And honestly, he's probably going to win. So here's what you want to be long and here's what you want to be short. And then we kind of separate like we do this pretty regularly with themes, separating it into sub themes. Right. So the first one was, well, Trump is going to enforce the 2% of your GDP spend for NATO. Right.

And that's massively, massively bullish for European defense. And meanwhile, he seems to have a bent on potentially cutting domestic government spending. So that's probably not great for U.S. defense. And that trade worked amazingly. And it was just, again, listening to what he was saying. Right now, most of what he's saying is focused on foreign policy and trade policy and a

There's been a little bit of tax stuff, but tax cuts are a little further away than I'm comfortable with because of this severe uncertainty. And there's also been talk among members of the Republican Party that maybe they actually raise taxes for the upper income bracket while lowering them selectively, example being no taxes on tips, for the middle class constituents that make up the bulk of the MAGA base. Yeah. And that's like...

When Trump is speaking, he's populist, right? He's more of a populist than he is a Republican in the sense of Reagan.

That's something that, pivoting a little bit here, we explored in a piece that we wrote last week on the idea of if we do have a slowdown, what will be the primary drivers and what will that slowdown actually look like? Because while from a macro perspective, recessions are kind of similar, right? Like rates go down, inflation goes down, equities go down.

beneath the surface, they're all, they all have pretty unique drivers. They're not a monolith. And that is what impacts the, you know, dispersion and equities. So one of like my, uh, kind of like pet projects is trying to come up with these like, uh,

ridiculous paradigms for the macro environment. So to quote Leo Tolstoy and Anna Karenina, all happy families are alike. Each unhappy family is unhappy in its own way. And to your point, each recession is unique with a unique set of drivers, which speaks to a piece you recently published that I think you're referring to. Are you referring to the haves and have nots piece? Yeah. So I love that piece. Let's talk about that. Because

That actually inspired, I think, the title of this episode, which has to do with the white collar recession that you write about there. And there are two sort of aspects to this recession that I want to explore. One of them is the wealth-driven driver of it, which is kind of what we're hinting to now. And the other one is the AI component. Walk me through the story that you tell in this piece.

both about the form and sources of wealth and distribution of economic gains in the American economy over the last 30 to 40 years, and how AI factors into your thesis. Yeah.

I just have to do a shout out. We collaborated on this piece with another Substack author, The Last Bear Standing. Again, you know, Substack is an amazing platform that kind of like in my mind represents a kind of insurgency and investment research. There's a lot of independent analysts out there that are putting out stuff that's way better than, you know, anything the sell side is doing. So that's my little, I have to do that part. But for the idea of a,

So the macro economy kind of, the themes in the macro economy can always kind of be summarized pretty quickly for, and we have like a running thing where we try to come up with these clever titles for these dynamics.

For a while, we called it Schrodinger's recession, which you're familiar with the thought experiment of Schrodinger's cat, right? Absolutely. Yeah. Why don't you tell listeners also real quick about Schrodinger's thought experiment for people that don't know? Yeah. So Schrodinger's cat is just a way to kind of... It's quantum physics that you have a cat that's in a box and is the cat alive or dead? It's both. And the only way that it is one or the other is if you observe the cat. And

and then the cat is either dead or alive. So this kind of like the Heisenberg uncertainty principle, there was this uncertainty about recession in the US economy that was not showing up in the hard data. And that was honestly the best possible environment for stocks. People think that a good environment for stocks is when people aren't worried about stuff. That is like...

Couldn't be further from the truth. The best environment for stocks is when people are uncertain of stuff and they keep getting evidence that, you know, like resolution of uncertainty. Right. Investors hate uncertainty. But the only thing they love more than they hate uncertainty is resolution of uncertainty.

So that was something where you would have progressively these walls worry that would get built up and then we would just rip past them. And that was great for stocks. And so about two months ago, two or three months ago, we laid out the idea that we've shifted away from that. We collectively observed the cat and the primary risk now was

a wealth effect driven recession, which is kind of circular reasoning. So we called it the macroeconomic Ouroboros. So you're familiar with like the Ouroboros, it's the snake eating its own tail. And so like if you think the head of the snake is equity prices and then, you know, the tail is the economy, it's basically the idea that

so much wealth is concentrated in the stock market. And, you know, even more than, than just a few years ago, uh, not just because of price increases, but because of allocation decisions, you know, uh, 2022 was, uh, widely hailed as like the death of the 60, 40 portfolio, which I think, uh, you know, rumors of the 60, 40 portfolios death have been greatly exaggerated, but there are a lot of households, especially in the top 10% where their financial asset exposure is basically their house. And then a hundred percent of us equities. Um,

At the same time, over the past 20 years, the top 10% of earners have gone from accounting for about 35% of all spending to now more than half. Which is just absolutely massive. Yeah, just huge. And once you take into account that if you go to the top 20%, it becomes like 65%.

So, that's not that big of a delta, right? Like the top 10% of earners account for the majority of spending. So, when you take that and you juxtapose it against a defiant president with populist tendencies and a consolidated power structure, he's kind of intent on driving this new economic vision for protectionism and retreat from free trade.

And he's populist, right? He's like you said, right? With the proposing no taxes on tips. And how do you pay for that? Oh, well, we'll increase taxes on the rich, right? And you're like, wait, this guy's a Republican? And

Yeah. So there is no Trump put for the stock market. It's not like how it was when back in the first term, the Dow Jones was the primary driver of how Trump would react. Not to mention that we headed into this election and into this administration and into inauguration day with an expectation that it would be that Trump 2.0 would be a lot like Trump 1.0 on that front. So we also have the dynamics here of a rapid reversal in pricing.

Yeah, that happened quickly. So something else I just want to... I really love this piece. I can't recommend it enough. Again, the exact title is The Haves and Have Nots. Yeah. Okay. So I want to... There's something else. There's another dynamic in the piece that you write about with respect to the distribution of wealth

and income that I want to highlight. And that is this phenomenon of wealth transfer and how boomer wealth is being used to subsidize the income and lifestyles of millennials and Gen Z. Now, again, this also ties into the whole white collar thing because the further up you are in the income distribution, the more likely you are to be white collar. And that loops in our conversation about AI. But let's just hone in on this a little bit because I find this fascinating. My friends and I have talked about this for years now, where we just kind of see

lots of people living a life of expenditures that seem out of balance with what would make sense based on what one could conceptualize that these folks actually make. I don't know how much data there is on this, but what do we know about just how many millennials get some to some significant amount of financial support from their boomer parents? What is the feedback loop between the value of the boomer stock portfolio

the boomers own sense of their wealth and income carrying capacity in the face of some percentage drop in the stock market? And then what is the mechanism that filters down through millennials? And what is the total number of people? Again, we don't have exact numbers here. We can't quantify this exactly, right? But we're talking about more than just the boomers.

We're also talking about the millennials, many of whom are supported in one way or another by their parents. So how big is this effect of a fall in the equity market of the tail of the economy, the markets wagging the economic dog and generating a white collar recession?

Whenever we write a piece, we try to, and I think everyone should do this if they ever have an investment thesis, you should, after you lay out your argument or while you're laying out your argument, the most important thing is to anticipate what the pushback will be, right? So as we were writing this piece, which kind of makes the argument

makes the claim that the wealth concentration is kind of resulting in an unstable dynamic where equity prices can become reflexive very quickly if they go down and kind of immediately transfer through to lower consumer spending. And on the other side of that, you know, the bottom, I would say maybe even 90%, they have not been doing great, right? They've essentially, you know, been in a recession since inflation took hold.

And as I was writing that, I knew immediately to quote Javier Millay, they'll send the 200 loser economists my way. Right. Like I knew I was going to get a bunch of like economic data wonks. Like, no, you know, we've been at full employment. Real wage growth for lower income brackets has been, you know, in percent terms, the biggest growth since the pandemic. And, you know, the thing is.

Sometimes you just have to balance data with actually talking to people and going outside your bubble. I really cannot recommend enough, especially if you're in finance, you should have a diverse group of people that you talk to and they should not all be finance people. You need some friends that really have no clue who Janet Yellen is.

So the idea that the bottom 50%, yeah, we might have had full employment, but these jobs are not high quality. There's a lot of people working two or even three jobs. And that data is skewed by the fact that

You have these, you know, a lot of the concentration of stock ownership is in the top 10% and in the generationally in boomers. Wealthy parents, right? They kind of, as you get asset price inflation, they feel more emboldened to pay expenses for their adult children. And that goes beyond just, you know, there was a great article about this in the New Yorker that was people with parents with money.

They're committing to pay expenses beyond just like rent or education. It's pretty common that the children of wealthy parents, they'll have their parents' credit card tied into their Uber account or their DoorDash account. And other consumer spending is just covered in a way that frees up a really significant amount of disposable income. And that effect doesn't show up in the official income statistics, but it does drive consumer behavior.

So like you said, right, you can't like put this on a chart, but you can just examine anecdotally, right? Like high income earners are often from wealthy parents and sustained decline in stock prices would pretty much almost immediately reduce spending, not just in the generationally for the boomers, but for their children.

Just to clarify something here, when we say children, are we talking about the children of boomers that are in their 20s or is this a phenomenon that continues basically throughout their 30s and so long as boomers have felt that they've had ample income to support them? Because you and I talked about this a little bit. I've seen this phenomenon.

As a Greek, again, for people that don't know, I'm a dual Greek and US citizen. I've seen this phenomenon in Greece long before I saw in the United States. I also used to work and live in Italy. In Italy, this was a rampant phenomenon. It just seems to have eventually come here to the United States as well. But we're also talking about people presumably in their 30s who are having some of their regular lifestyle payments being supplemented by their boomer parents, right?

Yeah. And the data that you can get, you know, the year over year, it's 5% roughly increase in 18 to 35 saying that that portion of their expenses are paid for by their parents. So 26% of people 18 to 25 say that their parents pay their phone bill a little lower than that, say that they pay for Netflix or for subscription services, much higher on rent. And, you know, that's reasonable. I think if a

you're a parent, you want your children to do well. And you can also, if you're wealthy enough and probably have been successful, you probably have a good idea of the differences now versus then. And it's kind of a fact, right? Rent has gotten a lot higher, just in percent of wallet share, right? What people spend a lot of it's on rent, right? Are they helping also with mortgages and stuff like this? Are we seeing that as well? Is there any data-

And the reason I bring up mortgages is because we know that the price of homes is one of the biggest roadblocks to wealth accumulation for younger people because prices are much higher than they were 20, 30 years ago.

Yeah. And it's kind of another piece of supporting evidence that Trump 2.0 might be a bit more concerned with the populist agenda of kind of helping the base rather than just doing the Tax Cuts and Jobs Act and doing things that pretty much solely accrue to the top 10%. His pretty much primary focus, it seems, is on getting rates lower. And when he or

Treasury secretaries speak about it, that they're speaking about the 10-year, right? And that has to do with mortgages, right? So they're really making a concerted effort to increase home affordability by making mortgages more affordable. And to answer your question, no, I haven't found the data. Maybe one of your listeners will be able to.

There's not that much data on this. And even when you do find data, it doesn't go back very far. So it's very much an anecdotal thing. But similar to the other aspect that we spoke, that we'll speak about, the AI impact, that's just something where at a certain point, the data...

isn't there. And you can go back into primary sources from the past and see how things have played out, but always there's going to be like history repeats itself, but also there are new things under the sun. So that's a good bridge into your other question about the impact of AI, which I don't think this is a controversial statement to say that there's a large language model shaped sword of Damocles hanging over the white collar employee.

So, this is what's going to lead the second hour of our conversation, James, as I move us into it. Just to flesh this out a bit, I think what I, again, found so interesting and compelling in the piece...

is not just the wealth-driven aspect, the fact that the tail of the markets could wag the economic dog and result in a recession that is much more weighted towards white collar workers, but that also it could accelerate the adoption of large language models and other AI-driven applications that will begin to permanently replace large swaths of the white collar workforce.

and in such a way that isn't necessarily immediately obvious to the people getting replaced because they're dealing with a recession and they're not understanding perhaps also why that recession is as deep and as prolonged as it is. And we enter basically a multi-year, maybe even multi-decade period

market, where this technological transformation that has happens every once in a generation or more is coinciding with a deep recession. So I think that's one thing I absolutely want to explore and I also want to explore how those wealth driven drivers that we talked about have affected the business and credit cycle

and how that should impact our expectations about how booms and busts run through the economy this time around. To the extent that we have the ability to do this, I'd also love to talk about the Europe narrative, this rotation out of US equities into Europe, how that's influenced by the national security picture and some of the spending, the Draghi report, et cetera.

Also, something I mentioned to you this morning that I'd love to explore is something I was thinking about when reading this Haves and Haves Not piece, and that is the political ramification of this, which is to say that we saw with the Republican Party what happened when what became known as the MAGA base, which is basically a realignment between traditional lunch bucket Democrats and other sort of Republicans who fell within this sort of, quote, rust belt or the larger middle class.

How those people who sort of fell, who were not winners in the race towards globalization, how they came together and formed a political movement in part driven by economic and social grievance.

It would be interesting to imagine, or one could easily imagine, I think, that something similar could happen in the Democratic Party because its base is disproportionately represented by white collar workers who were motivated politically to align together around this idea of DEI, woke ideology, racial equity, equity inclusion, whatever, all this kind of fluffy stuff that we're familiar with.

It would be fascinating to imagine how the Democratic Party may be rapidly shaped

and will evolve in the face of a recession that disproportionately hits their base. And we can already begin to imagine what that might look like from a policy perspective, because we've seen some proposals like UBI put out there. So I think that's also something I'd really like to discuss, which is Democratic Party 2.0, possibly who the leaders might be. Fascinating, something I don't really hear people describing. And again, to the extent that we can talk about China, I would love to discuss what's going on with Chinese companies and the Chinese development ecosystem in AI.

And whether or not America is sort of dropping the ball in its policies to help accelerate this move. And if in some sense, our perception of how China and the Chinese are doing is actually far

out of step with the reality, which is to say that they're doing much better and that we're discounting them. For anyone new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with James, head over to hiddenforces.io/subscribe and sign up to one of our three content tiers.

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