Full Transcript: Andy Constan on Markets, AI, and Global Positioning

Iran, AI Risks, and the US Exodus

Justin: Andy, welcome back to Excess Returns.

Andy: Ah, thanks for having me, guys.

Justin: You’ve spent over four decades in investing and researching global markets, and today you lead the team at Damp Spring Advisors, where you advise investors on macro strategy and portfolio positioning. What we thought we’d do with you today is work through four distinct themes or areas of the market that many investors have their minds on, and we want to work through with you how you might approach thinking about the investment implications of each of these.

So first is how you’re thinking about analyzing geopolitical shocks like the Iran situation and how a framework that you recently put out there kind of helps you work through things like this that are happening in the market. Second, we’ll dig into AI, specifically the Citrini piece that’s been circulating around and whether AI’s long-term productivity tailwind, and the risks and opportunities to that.

And then we’ll get some of your thoughts on the broader economy. And lastly, we’ll talk about the shift that you recently made away from US stocks to more international markets.

So a lot of ground to cover. People can follow along with Andy at Damp Spring Advisors — that’s just dampspring.com. To start, and people, we’ll put this tweet up on the screen so people can see it, but it was a great tweet over the weekend about how you think about starting, or a framework when we are presented with situations like we’re going through in Iran.

And it was this idea of red flags and green flags and how investors should think about this. So I’ll let you talk about what you were trying to educate people on here.

Andy: Right. So I think the big takeaway from that tweet was my entire life I’ve been a constant active learner and my family and tools in my own way myself have been a constant educator.

Everyone in my family’s a teacher. I try to teach whatever I can. At the same time, I’m also an active learner. I don’t know everything, not even close. And even the stuff I do know I’d like to learn more about sometimes. So that tweet was really about, I think the skill — and it’s probably becoming even more so nowadays given the amount of content that’s created by artificial intelligence — the skillset that I value tremendously and really think that people need to really pay attention to is critical thinking skills. Why are you reading a particular piece of information? Is that a credible piece of information? Is that piece of information biased? Is that piece of information overly confident, or is it humble and uncertain?

And so when I think about learning a new topic — and you know, we make fun of this on Twitter all the time — whenever there’s an event of any sort, all of a sudden everyone’s an expert in that particular thing. Now the fact is there are some experts in things, like real experts that really know what they’re talking about. And then there’s a bunch of people that, for whatever reason, deem themselves an expert with no credentials.

So I think it’s important to understand those people. And then again, experts themselves have biases. And in particular when you’re talking about geopolitical experts, those biases can be heavily political.

And so if you’re really trying to understand a situation that you need more information on — and I strongly encourage it, I’m doing it all the time — I strongly encourage learning more about things. It’s really important how you get, how you process your information. And so I laid out a brief framework.

One is I find there are a lot of people that have no basis for expertise who express that expertise with high confidence, and those are the people you run across all over Twitter. Those are the people that you’re really probably better off not reading anything about. And then there are experts who deserve to be heard but are heavily politically biased. And those are red flags to me as well, because you’re not getting truth. You’re getting information, which is better than somebody who has no expertise, but at the same time you’re not getting truth, you’re getting some bias.

And then of course there are people that have no prior experience and are heavily politically biased and express their view with high confidence. Now that’s the worst. Those are the people that you really don’t need to spend even a moment thinking about their contribution on Twitter or in your reading in any way.

So those are the things that I find are really useful in just streamlining the information content I’m getting. And then there are things that I actually really value. And experience is a two-edged sword. I think we’ve talked about this before on one of the other programs that we’ve done. Experiential learning is not necessarily a good thing because what people do when they are learning something from somebody who has had experience, or the person who has had experience and is looking out into the world, they start with “I’ve seen this before.”

And then they conclude based on decisions they made before and how those went, what to do going forward. And where that fails is they typically do the things that went well and don’t do the things that didn’t go well. And that could have been luck. They could have made a horrible decision based on the information they had and done something that just happened to work out because — luck. You know, they bet a 30% odds thing at a 50% needed payoff and just got lucky.

And so that’s not — you don’t want that repeated, that sort of failure to understand whether you did it right the first time. And then there’s, of course, are they right that they saw this before? Maybe it’s different. So experiential learning to me is a crutch that people use and it’s just as dangerous as having no information at all. Sometimes it’s worse.

But particularly when you’re dealing with factual situations and want a good sense of what history is about, I value people with experience because they’ve been there, they’ve done that. But the synthesis of what that experience is is less certain to me. So I look for people with experience who have low confidence in their views, that recognize, hey, it might not be the same.

I also think there are people out there that are just great thinkers that think through things with no experience at all. You drop them in the middle of a problem that they’ve had no experience with and they consider lots of possibilities and come to solutions and make judgments. And that thought process can be high quality and you can learn a lot from how they think through the problem. They’re almost like your colleague as they’re thinking through a problem — you both don’t have information. So I value that person.

But ideally I find a person that has good thinking ability and good experience and has low confidence in their views. So that’s what I’m looking for when I look out on the world. And it’s very hard to find, mostly because the rest of the people are all doing these other things, which are very noisy.

Justin: And by the way, I think this is fantastic and a great way to think about how to consume and digest information that you’re hearing from others out there.

But I think the low confidence thing is very interesting because a lot of times when someone says, “well it could go this way, it could go that way, the probability of it is maybe 30%,” that almost seems to many people like a lack of confidence. But that’s that person acknowledging that, listen, no one can predict the future, we really don’t know, and this time it could be different. And yet that’s not the type of personality that people often gravitate to, particularly during times like this when there’s a lot of uncertainty.

Justin: Mm-hmm.

Andy: Right. And there are levels of this too. If somebody tells me this is what’s gonna happen, that’s hard to believe because that’s not how the world works. No one can predict the future. If somebody tells me there are a bunch of possibilities and here are the probabilities of each of them, that’s actually not that much better.

Because you’re saying it’s a 30% chance of this and a 70% chance of that, you might be on the right side of 50/50, but you might not be. And having that confidence to assess the probabilities — now market pricing can give you a sense of the implied probabilities. It’s just when people then use those implied probabilities to inform themselves of the actual probability. No, that’s just what the market’s saying the probability is.

So it’s a little better to say, “hey, there are a bunch of possibilities.” But then people are immediately asked, “well what are the probabilities?” — which is a good question, but also one that people express with more confidence than they probably ought to.

So I generally look at the world and say, what are the possibilities? And try not to spend a lot of time nailing down the probabilities of those things, but just keep my mind open to that. That’s how I learn about things. Now over time, things converge to the actual probabilities. They become digital in some cases — like if the Fed’s gonna cut rates or hike rates at the next meeting, they become digital, or with a merger transaction. Lots of things become digital, but in general the probabilities of markets are something that you just can’t place a lot of confidence in.

Justin: And speaking of a lack of confidence or different signals being sent — when the bombing started in Iran, at first the stuff I was hearing was “this is gonna be quick in and out.” Then it was “it’s gonna be a few days.” Then Trump has said it’s gonna be maybe four to five weeks, and then I was just listening and he’s not taking off the table boots on the ground. So there’s a lot of different things being thrown out there that investors are trying to digest and the world’s trying to understand.

But just at a high level, how do you think this current event impacts markets?

Andy: Let me run through what my framework is for what’s happening right now. Firstly, before we went to war — and let’s just call it a war, just to keep it simple, maybe it’s not, I don’t want to get political about what in fact is happening, there’s a kinetic act, there’s military activity happening, but I’m gonna call it a war — before the war was announced, there was a possibility of no war. And so that had to be a possibility that you considered. Since then, we now know that there is a war. So now we’re at, well, what are the possibilities of the war?

So I think the first thing to realize is if you’re now catching up to what the possibilities of war were, your process is probably late. Like you should have been a few steps ahead in terms of what to expect, so that you weren’t at this junction of war/no war. You were at the junction of no war with a bunch of possibilities, and a junction of war with a bunch of possibilities, and maybe even a step further. So just in terms of process, I think people tend to jump from one node to the next without looking through. And then of course there’s — we all know this is gonna end one day — so what does that world look like? Anyway, those are just how I’m laying it out.

But for this one, to me, the first thing that I care about — I laid it out this way — the moment it happened, markets weren’t really open. I’m sure there were some small betting markets and things like that. So we had to think, well, what are the possibilities for the Sunday open? And for me, that was simple. He could call for talks — some people call it “TACO” whatever it might be — but deescalate.

And so to me, one dimension is the timing of deescalation. Was it by Sunday night’s open? Was it by sometime this week, or no? And by the way, I’m working with a one-week horizon. I’m trying to look out only one week. So that framework is: before the open, deescalation; during the week, deescalation; or no deescalation. And by Friday, one of those three things will be true.

Clearly the first one was not true, and it was pretty low odds to me when I assessed — and again, the moment I say “pretty low odds,” my confidence drops. Not because the odds were low, but because I’m saying something that’s predicting the probability, and I have no business doing that. I’m just saying one of the paths has closed.

Now the markets seem to be pricing in — well, it’s interesting, what are the markets pricing in? We’ve had a, I don’t know, $15 rise in oil, which at one point was $20 from the 56-ish low that we saw a few weeks ago. That’s a big move. It rallied to 75 and now we’re at 71. And so today, people faded the news. Equities are trading as if the war’s gonna end soon. Bonds rallied initially and came back immediately to a point where there was a significant backup. That seems to be trading as if the war had ended.

Gold, on the other hand, has stayed high, has rallied a lot for the last month and remains very high. VIX Futures have been heading upward for a month now and remain very high. So to me, there’s still pretty great uncertainty about whether we’re gonna get something this week or not. The market seems to be pricing things differently across assets, which to me raises a possible opportunity.

Now, to be honest, I don’t think anything’s really happening yet. Not much has changed, even though there was some short-term intraday volatility. We still have great uncertainty. So I think there’s a very good chance we have deescalation this week. He didn’t deescalate today in front of his drapes, but he certainly could. And there’s a very good possibility we don’t deescalate and it takes multiple weeks. That’s one framework.

The other thing is, what pressures are on the characters in place? I think it really matters if the US and Israel — which was very important in this part, and to some extent other Middle Eastern countries — experience casualties. I think that can change the dynamic. If there are no casualties, that’s pretty encouraging for various things in terms of the success of the war, the result, the resolution, et cetera. If there are meaningful casualties in Israel and local US spaces, that’s gonna demand a US escalation. And that’s something to watch.

And then anybody who studied history knows that when a country gets really upset about casualties, there’s pushback on the war effort. I think we’re a long way away from that. God forbid we have such casualties that that would occur. And then of course there’s an absolutely demand for massive retaliation for anything that sounds like a domestic attack here. That’s probably a very low probability, but it does exist.

And then there’s regime — I think about regime and say the regime doesn’t and can’t capitulate. What does that look like? That favors escalation. The regime completely capitulates? That’s a ginormous win for the US in many different ways and has implications on assets obviously. And then there’s an extreme campaign where the regime falls due to a local coup, and an extreme campaign where the regime clamps down even more.

So those are the various things I’m thinking about over the next week. What signs am I seeing on those dimensions? How’s the regime doing? What’s the casualty rate? And what’s the dimension of Trump and the opposition coming to the table? And I don’t know much about any of that stuff. So what I’m looking for — back to the original point — is people that are experienced, good thinkers, politically unbiased, to provide me information on each of those things that I care about.

What have I concluded? Not a damn thing. I have no idea what’s gonna happen, but I at least know the things I care about looking at and have also gamed out in my mind what I want to do if each of those things happen.

Jack: So when you’re running a portfolio like you do at DS Alpha, you’re basically looking forward now. So you haven’t seen anything yet that would make you make any changes to that, but you’re analyzing this from the perspective of looking for potential opportunities that might change your views coming in.

Andy: Right. So last night I sent around a video — I don’t rarely do this, but I sent around our weekly process video outlook video that you can see on YouTube. It’s on my site, on the Damp Spring Twitter. That just tells you exactly what I went through. I had a level for where I wanted to sell bonds. I had a level for where I wanted to sell oil, gold where I wanted to buy stocks, and I was ready for the morning. And I’ll do that every day based on what’s happened, what’s based on the market pricing, et cetera. So I’m prepared for that.

But to be honest, you and I are gonna do this podcast, we’re gonna do our thing. I’m gonna go to the hospital for my kidney stones, whatever might happen, all that stuff’s gonna happen. We’re gonna eat, we’re going to watch television, we’re gonna go out and party. We’re gonna go out and buy stuff. We’re just gonna do our stuff. And it doesn’t matter what’s happening across the globe.

Now oil matters a little bit, but oil’s complex because you say, well, what’s the oil market gonna do? And the answer is, we’re probably in cahoots with the rest of OPEC. We have a domestic oil industry that would love a $75 persistent oil price. We have Venezuelan oil coming on. And then, what if we win and we can control, influence Iranian oil.

So you say, is oil gonna create a massive inflationary spike? And I think the answer is absolutely not. But of course it could. We saw in Ukraine there was a period of time where it was a catalyst for high inflation, and it came back immediately. So most of what I’m doing today is trying to see if there are any dislocations that are very unusual and bloody and worth playing — those I’m gonna seize upon. But by and large, my beta portfolio is still gonna be what it is. And my alpha portfolio, you know, it’s been three months really where very little has changed. I’ve bled theta. That’s pretty much all I can say about my alpha portfolio. You buy out-of-the-money calls, you buy out-of-the-money puts, and they expire. You lose money.

Right now I’m not pounding the table on any asset class. The war — you look at the market prices, the war didn’t change much. It’s probably not gonna affect the global economy much. If there was a dislocation, I would’ve seized upon it, but for now I’m pretty much sitting on my hands.

Jack: Is there any value in looking at the past conflicts and the aggregate data associated with that? Like you’ve probably seen on Twitter, there are the charts of a year later, the probability is exceptionally high that the market’s higher after a war starts. Is there any value in any of that?

Andy: So I’m really negative about data mining of that nature. For one, the market’s always higher. No matter what you have, the market’s always higher. That’s because beta is a good thing. You should always own assets in a diversified way to deal with these sorts of things. They pay returns, it’s good to own. So mostly that bias is always gonna be in the data and people are gonna show it.

Absent the general greatness of owning assets — listen, I worked at Bridgewater. The funny story I like to tell there is I was interviewed by Bob Elliott, who’s now all over Twitter, a friend of mine, Greg Jensen, Bob Prince, and Karen Karniol-Tambour at the time. They were interviewing me as an outside person coming in to talk about vol. I was an experienced vol guy — that was my life. And I came up with them and showed them a type of systematic trading strategy I wanted and had back-tested until 1981. And they said, this is garbage. Can’t you — don’t you have more data? I said, well, index options were invented in 1981, so there wasn’t any data prior to 1981, legitimately. And they said, of course there was. You just have to come up with what it would have been if it had existed. So I was like, oh, okay. What they were basically saying is, sample size is just too small. You just can’t — if you’re trying to draw a picture of everything in the world and you only have 30, 40 years of data, you’re not gonna get a clear picture. You need hundreds of thousands of years of data to get a clear picture, and it just doesn’t exist.

So that was interesting to me, and it’s been important to me for a long time. I think that’s why micro strategy trading — the things that Jim Simons came up with at Medallion, at Renaissance Technologies — that’s where you have lots and lots of data. But for macro, there’s just no — you know, sure it matters, but mostly it suffers from very low sample size.

And so I know it all — one of my subsequent projects was looking at every single stock market since their inception, which includes the UK back to 1701, since the Buttonwood tree and the New York Stock Exchange, all the way to public data from Russia starting in 1991. I looked at every single market in every single country that has ever existed to try to understand certain things about valuation. And I remember a lot of that for certain things. And the only time it really is meaningful — like really meaningful things happen — is when you lose a world war. Your country gets pretty messed up if you lose a world war. And there’ve been two of them. So the rest of it? Noisy. Not something you could depend on.

And then it’s a question of what your horizon is as well. So the answer is that I know all the history, I certainly care about all the history, but I’m not going to take the history and presume that because something seems to have happened in the past, it’ll happen in precisely the same way in the future. Respect for the history, but not convinced.

Jack: I want to shift and ask you about AI. You know everybody’s been talking about the Citrini piece, which was more of a negative piece, but I don’t want to ask about that. I want to ask more specifically, how would someone like you analyze something like this from the perspective of how it’s gonna influence the economy?

Because I’m struggling a lot with that. I’m more of a macro tourist, but I’m trying to think about things like productivity, things like economic growth and how we would analyze something like AI. You’ve obviously got the negative situation with Citrini, you’ve got the venture capital people saying we’re about to be in a world of abundance. And I can’t really think it through. So what would be your framework? How would you think about the long-term implications of AI?

Andy: Those outcomes are things I’m thinking about. Each of those outcomes are possible. And so you have to be prepared for each of those outcomes.

I’ll tell you what I’m doing — let’s just cut to the chase. No one knows. Citrini — James, this guy I know — he wrote an interesting piece. I found it fascinating. Loved it. Thought it was at some level science fiction, as any futurist work is going to be. And he prefaced it by saying, “this is just a thought experiment, I don’t know.” So I found that article extremely interesting, and frankly found — there were some really pretty nasty things, but some of the retorts and responses — the Citadel piece, for instance — pretty good, interesting. I don’t know if any of them are right, and I’m sure what I would predict would not be correct.

So what am I doing? I think it’s actually much more healthy to say, instead of trying to nail down what the future of AI is for productivity, just say: what’s happening now? And let’s try to figure out the implications of that. And there are two very, very important things that are happening now.

But before I jump into those two things, I think you also want to look at what history has been. And the history is pretty clear. Humans are creative individuals. They have a thirst to work to improve their situation. You want to improve your standard of living. Even if somebody told me, “you never have to come to work again and you’re gonna get the same compensation or more than you got today,” I would still find a way to make a new contribution. So there’s that incredible thing, and I think that’s driven history.

You look at every industrial innovation across centuries, and there’s always been a period of time in which there’s some disruption that could be years or decades, but is disruptive. There are some wiggles on that. And then there’s where you end up, in which every person works, keeps working. We keep trying to improve our situation. And so you have to say to yourself, with some humility, what is the nature of human beings that they’re not gonna keep trying to improve their personal situation by working hard?

I don’t care what the computers can do — it’s very hard to say that humans are just gonna give up trying to improve their life and let the government — ultimately the government is gonna have to allocate them their lifestyle in such a circumstance where they no longer have the urge to work, or where computers can do everything that humans could ever possibly do. And so that has implications. But it does seem to me that — and I was there during the most recent productivity enhancement, which was really to me the PC, which then became the internet — that was a big deal. I wouldn’t have ever joined Wall Street if it wasn’t for Lotus 1-2-3, which was a thing that was designed to make people more productive and created jobs, created financial analysts on Wall Street, created consultants at McKinsey. All these people that could now do scenario analysis instead of using literally the back of a napkin to plan out one scenario — you could have a hundred.

I don’t know if AI’s gonna provide that, but back at the time, it didn’t feel to me like the end of the world, like all jobs were gonna be eliminated by the PC. It seemed empowering. This doesn’t seem empowering to me, but you know, I wasn’t around during the internal combustion engine or the industrial revolution. I imagine the buggy whip makers felt very differently — more like how people today are feeling — than I did when I was challenged to find a place in the world as a person that could use a PC. So it’s a little different, but I think we’re gonna go through that phase.

And if we come out in a scenario like the doom scenario where nobody can find anything, nobody can contribute productively, and the machines all determine what is produced — and presumably the capital owners who own those things, in cahoots with the government, allocate our resources — you know, that’s a pretty dystopian world. It could happen, but that’s just not my central case. And I’m not sure what I would do with it. As an investor, I have no idea what I’d do with it.

So let me ground it with what I’m actually doing. And I think it’s extremely interesting. We all hear about a productivity boom, which means — just use a number — 1% productivity boom extra above the normal productivity, that occurs. Maybe you get another 1%, maybe you get 2%, but let’s just use 1% for the math. The GDP grows 1% more than it did. Okay, who gets that GDP? And so you have this concept of a pie, the size of the pie, and the share of the pie. If the pie grows and everybody keeps their same share, that has one dynamic — that’s a nice outcome, a great outcome for productivity. Everyone does a little better.

But at the same time you have a share thing, which is what we’re seeing. Every stock is now threatened by this idea that they’re gonna be put out of business by AI. Well, that’s just a share thing. The company that was making this stuff no longer gets to make it, so they don’t contribute to GDP. Their share of GDP goes down and somebody else’s GDP goes up.

Now that’s super important when you’re trying to determine what stocks to own. But from a macro standpoint, I’m more interested in: what sort of GDP pie is growing? Well, let’s step back. You’ve got all these companies that are gonna be the winners in share of GDP in the future. And they’re priced like it. They’re priced for earnings growth. They’re priced for dominant positions in the market in the future. Where does that share come from?

Let’s say the 1% we’re using is $300 billion — that’s 1% of $30 trillion, which is 1% of our GDP. Do they get all 300 billion, or do they get 300 billion plus another 300 billion that somebody forfeits? And to me — and I’ve been saying this for a while now, and these stocks have mostly begun correcting on this notion — there’s just not enough GDP to support, even if they take share and GDP grows, there’s just not enough support for all of the tech companies that are priced the way they are to all win.

There’s a movie called The Producers, and the producers sell a show to their investors called, I think it’s called Springtime — Springtime in Germany, it’s about Nazis, it was a hilarious movie. Anyway, they oversell it, they sell too much of the gate, 200-300%. I feel like there’s a lot of that going on right now. There are gonna be some great winners, there are gonna be some disasters. And in aggregate, we’ve probably over-allocated the GDP available to these entities. And we haven’t taken away any GDP from those who are going to be disruptive. And so to me, that’s not great for companies.

So that’s one thing I’m paying a lot of attention to as it relates to this. And the good news is I don’t really have to care about the dystopian future. This is gonna play out in the next two to three years. And by the way, they’re going for it. You can’t say they’re gonna stop spending one day. They may realize that there’s not enough pie for them to all eat, and that’ll be a bubble popping. Who knows how long it’ll take before that happens, if ever. But that’s what I’m focusing on over the next couple of years. Where does the GDP come from? Who pays it? Who loses share? Who gains share? And how much does the GDP grow? And I think it’s over-allocated to the equity markets right now, which makes me on the margin bearish equities. Now, do I have a big bearish bet? No, I hardly have any bet at all, because this isn’t playing out in real time. And there are other dynamics going on in the economy that are pretty pro-growth.

But it’s first in my mind when I think of AI. The second thing I’m thinking on AI has been a theme I’ve been on for about six months. I wrote a piece called “Can I Have a Hamburger? I Will Pay You on Tuesday for a Hamburger Today.” And that is — the promises that are made on AI spending, foreign direct investment in factories, and government deficits require somebody to lend the money to the people that are going to do that spending. And those promises have massively increased. Not only are deficits continuing to run at 6%, so that needs to get funded. And then there’s all the credit creation that needs to happen for foreigners to invest in our factories as they promised to do due to the tariffs, and for AI to fund its CapEx.

And so I really care about those capital flows. I’ve noticed that Meta has terminated its share repurchase. I’ve noticed the cash balances and free cash flow usage of all the hyperscalers have shifted and are now being used for capital expenditures. And I’ve noticed the difficulty and size of the corporate issuance that’s coming from anybody that’s involved in this space that’s doing CapEx, and its implication on spreads.

And then I look at the projections of future spending and say, our GDP is dependent — partly dependent on all this spending, and it’s also dependent on our consumers not losing their jobs, which gets back to the dystopian thing. That depends on being able to finance all this CapEx in the capital markets that are gonna have to experience two, possibly three of the biggest IPOs in history over 2026.

That’s a lot of equity. And you’re also getting a lot of corporate debt, and you’re starting to see some tweaks on that. I’m a credit trader all my life. I don’t see any blood in the water on the credit market. There’s some things that are a little troubling, but mostly I don’t see a lot of cockroaches. I see a couple, and I know there’s supposed to be a whole bunch of cockroaches, but there may not be. Hold your horses on declaring a credit crisis. But then I look at issuance and say, it still has to come to market and get funded cheaply, or else the growth doesn’t come. And if the growth doesn’t come, the consumption doesn’t come. And then you start to have a meaningful slowdown in the economy, mostly due to the fact that the pricing expects such outrageous future growth.

So that’s what I’m focused on. GDP share — who’s getting it, who’s giving it, where’s it coming from? And how do all these hamburgers, all these promises that are getting spent today, get funded? For now it’s working okay. You see some credit spread problems — Oracle did a $26 billion issuance in the fall, and their credit spreads widened by a hundred basis points, which is a lot for a single name. So much so that they had to do a $25 billion equity issuance that they kicked off a few weeks ago.

There’s some stress there, but the biggest companies are still generating enough free cash flow that they are willing to make ever-larger promises, and those promises came in their earnings. You look at Amazon, Google, Microsoft, maybe Meta — all of them blew away expectations for what was already in their guidance for CapEx, and all the stocks went down. So there’s a lot going on in that space.

But that’s the angle I’m taking. I’m not gonna tell you whether we’re gonna have a dystopian future, or like every other time in history there’s going to be a period of transition where humans find new things to do. I would lean toward the latter over the former. But who knows.

Justin: First Popeye quote on the podcast, with your “I’ll gladly pay you on Tuesday for a hamburger today.” It comes from Wimpy. Wimpy. Anyways.

Andy: I remember.

Jack: Going back to the overall economy — with your framework of growth, inflation, risk premium, flows — the first two of those, how are you thinking about that right now? In terms of where we are, it seems like growth has held up pretty well, maybe better than many people expected. Inflation seems to be above the Fed’s target but not really going too much of anywhere. How are you thinking about those two pillars right now?

Andy: So a year ago today I was thinking that we’re in for a meaningful growth slowdown. We got a meaningful growth slowdown in the first half, and then things changed. And so I think we’re still dealing with those things that have changed. One is tariffs didn’t turn out to be as much as they were going to be. That was a positive. Two, there was no DOGE, which was a potential negative that never manifested in fiscal.

And then ultimately there was the One Big Beautiful Bill, which came in July. And from then on the fiscal stimulus was clear. You know, the moment that thing printed, you could tell you were gonna have a stimulative impact in the second half of the year due to the immediate ability to depreciate CapEx. You saw that immediately — that started kicking in the economy. And then of course you had the three tax things, which is actually getting delayed a little bit because people still withheld as if they were paying taxes on tips, Social Security, et cetera. And now they’re gonna see that in the first half of the first quarter. They’re seeing it now — that’s happening now.

And so you’ve got a fairly strong growth impact from the employment standpoint. I don’t care that much about employment, obviously I care as a person, but as a tool for predicting what’s happening — when you’ve restricted the growth of the economy through immigration, that’s the first order thing. And then looking at what actually is happening regarding the demand side. Demand side seems soft, so I’m not really super on that. But what is true is consumption is staying high, and that has something to do with wealth. There was a wealth hit — not really enough time for anybody to actually notice though Wall Street was all over it. The April-March, April-May sell-off could have been a real hit to the economy if it had persisted, but it recovered quickly. So I don’t think we got the hit. But now, continued wealth impact can’t be negative. People are able to dissave.

Leverage is not rising quickly. As I mentioned, the deficit is stimulative. The Fed has cut a few times, so that helps a little bit. And so I couldn’t — I’ve been thinking that growth would be a little lighter than it was, and I’ve been surprised. Part of that’s the CapEx. I didn’t expect it to be so large. Caught up to that now. But the consumption side has been a little better than expected.

What’s also true is the Fed, while cutting rates, also eased in a different way in that they stopped QT and actually began building their balance sheet. And I think that had a meaningful impact, particularly on the metals. You look at the metal market and you wonder where it took off — it took off the day it had been rallying for years going up, but then we went parabolic pretty much right after the Fed decided to buy $40 billion extra in bills a month. Now that ends in April. So that’s interesting. I’m paying attention to that.

By and large, the economy’s doing well, and inflation is staying sticky for that reason. You’re not seeing inflation come in in a meaningful way. Those are where I think the main drivers of the economy are. You’ve got the One Big Beautiful Bill stimulus, you’ve got the Fed pretty easy, you’ve got wealth doing well, and the job market isn’t turning over yet. And to me that’s inflationary and pro-growth.

And so then you just have to compare it to what’s priced. And bonds don’t see that. We’re at 4% on a 10-year note — that’s a little higher today, but that’s a pretty low yield, particularly if you think the Fed is not gonna cut a lot. You know, the fed funds rate is 3.63%, that’s not very steep. So there is some expectation this growth rolls over, but not in other asset prices.

And I’ve been saying this for a long time now — there’s been a major problem with data, in which survey data has become politicized and hard data has become less reliable. Saying it was great quality to begin with — it is what it is. We have the best data quality in the world, which is not that great. The rest of the world just sucks versus our data. But it’s gotten worse. It’s gotten worse because we had a slowdown and that’s created some, I think, unreliable data. And you saw it in the GDP estimate — you had a 1.4% GDP, the consensus was 2.8% for Q4. So I don’t think you can place a lot of confidence in the data, but the data’s clearly not negative. There’s nothing to be particularly concerned about. I just don’t place a lot of confidence in it right now.

So, you look at what’s priced: equities are priced for what I’ve described as the AI thing plus overall a strong economy, and bonds are less certain. So that’s a divergence in some sense.

Justin: Up until about a year ago, the US market was kind of like the only game in town, but more recently international stocks and emerging markets have been performing a lot better, and I think you’ve become more favorable on looking outside the US. Can you explain your thought process there?

Andy: Sure. This all comes from my experience at Bridgewater and how we thought — how Bridgewater thought — about what makes a good portfolio. A good portfolio is one that has pro-growth assets, anti-growth assets, pro-inflation, anti-inflation. Everyone’s seen the four-box grid of the All Weather fund. If you haven’t, it’s in their white paper. A good portfolio has each of those assets providing a decent expected return.

For most of the last two decades, developed World ex-US has had essentially uninvestible bond markets. Bond markets with yields close to zero or below zero in some cases. So what does that mean? When you have a bond market in your local country that you can’t own because it doesn’t provide you any expected return — and as an anti-growth asset, when anti-growth occurs, you don’t see any appreciation because they’re trading at their highest price, they can’t trade to more negative yields, they’re just capped. And so they don’t provide any anti-growth diversification.

What does that mean for your equity allocation to that country? Well, a Japanese All Weather portfolio just is not that attractive. So you don’t wanna own much of it. You’d rather own somebody else’s All Weather portfolio like the US, because it’s just not balanced. The Japanese doesn’t give you any balance.

You can always own pro-growth assets easily — you just own stocks, and you don’t have to own Japanese stocks. You can own rest-of-world stocks. But if you want some Japanese economy exposure, which is a major part of the global economy, you have to own both their stocks and their bonds. And you couldn’t. Same with Europe.

So I’ve been paying a lot of attention to this for many years, and I’ve been looking for a period of time in which the European and Japanese bond markets provide balance to an All Weather portfolio. And when they do, you can own their stocks and their bonds in good size. As a global portfolio allocator, you can now own a balanced All Weather portfolio in Japan. You couldn’t before. Now you can.

So what has happened? Well, because you couldn’t, partly because you couldn’t own this, and partly because of the American exceptionalism, partly because of our sizable trade deficits — people own a lot of US assets and have been rewarded for it. And by the way, the US also does a really good job of making owning assets attractive. The mix of assets you can own — we do tech well, that’s less important to me, but it’s important. But rule of law issues, consistency of the way corporations are treated versus labor — lots of things make capital very attractive to deploy in the US, and it has been, and it’s been a huge win.

Until January of last year I owned a hundred percent of my personal beta portfolio in US stocks and bonds, mostly because they’ve been working and also because of what I just described where the rest of the world just looked like crap. And that changed. And it changed not because Trump was elected — it changed because European bond yields and Japanese bond yields rose a lot and are now investible.

And I said, huh. I don’t own any Japanese risk parity and I — and everybody on the planet is overweight US risk parity. Let me lighten up. And so I started lightening up in January, did again in March, and just continued to lighten up until now I’m fully out of the US. And that trade has worked magnificently, because two things have happened.

For one, the assets have performed better than the US assets in their local currencies, but also because of this flow where people are overweight US assets and want to move to Japanese assets. And some of those are local Japanese people, some of them are international investors like Warren Buffett. You need yen to do that trade. You have dollars, you need yen. So you have to convince somebody to give you their yen so you can then use that yen to buy Japanese assets. And so part of it’s currency appreciation, and the currency has appreciated nicely as the assets have.

The most recent thing I saw is last year’s performance in broad rest-of-world equities ex-US was 40% in US dollars, and the S&P delivered 20%. So it’s just been a fantastic trade. Now will it last forever? No, it’s gonna wiggle. Like today it’s wiggling — we got a strong dollar rally today, obviously that trade’s not working as well. But that’s the reason why I want to be out of the US. It isn’t any values thing, it isn’t any political thing. It’s just that everybody already owns all they could possibly want of US assets, and rest-of-world assets aren’t bad. Seems like a good time to rebalance.

I’ll flow back to an even balance over time. What I want is a global risk parity where I own rest-of-world and US assets roughly at their GDP weight, have currency exposure roughly at the GDP rate, and balance between stocks and bonds. And that’s where I’m heading. But for now I’m taking a detour from massively long US to no US and then back to even. That’s the journey I’m taking and it’s been very effective, and I think it has more to run.

Justin: One of the things we wanted to ask you about here — and Jack, feel free to chime in because I know we were talking about this before — is you wrote a piece on the Trump accounts. And you may have had a slightly different take than what most people think, which is generally that this is a very big positive. You know, each newborn child in the US gets a thousand dollars from the government, that’s effectively gonna be invested in the S&P 500. I believe it stays invested until they’re 18, they can continue to invest it or treat it as an IRA if I have my facts right. And there are a number of positive things, but I think you were looking at maybe some of the mechanics, and with all this stuff there’s always positives, but there’s also that the money’s coming from somewhere. And it doesn’t always mean the outcome is all positive. There’s always a balanced take here. And that’s the way you kind of approached it. So I’ll let you comment on that.

Andy: Yeah. I mean, for one, it’s not very big. There are three and a half million children born per year. What’s that over the Trump administration? That’s gonna be 10, 12 million. So that’s — a thousand dollars times 12 million is $12 billion. So $12 billion. Who the hell cares? Honestly, who cares? The high takeaway from this is it’s a gimmick. It doesn’t matter at all in any possible way you could possibly think of. And it’s 100% a gimmick. And by the way, I dare you to challenge me with a $12 billion program and how it could really make a difference to the world.

Now, on the other hand, it’s nice. Like, I get the idea. For most of my life, I have altruistically pushed and provided people with as much financial literacy as they possibly could get. And I think financial literacy is extremely important. And so four years of kids — maybe it lasts longer — get more financially literate. Okay, that’s a win. I can’t argue against it. Can’t possibly argue against it. How could it be bad? Okay, so that’s in the win column.

By the way, there are trade-offs. I could do it differently. I could spend $2 billion and educate 14-year-olds with a mandatory curriculum and a test that they have to pass, and then they get a thousand dollars. I could do it differently. But you know, Michael Dell loves this stuff. Trump loves it. It just gets gimmicky. Even Dalio likes it for the financial education standpoint.

Now, I just want to step back and say 12 million is not much, hardly anything. But you know how it gets funded? With $12 billion of debt. Do we want to borrow another $12 billion on top of all that we currently borrow? I don’t. I’m a fiscal conservative. I want to cut the deficit. I happen to be okay with raising taxes and cutting spending, but I want to cut the deficit. It’s out of control, and it’s just stealing from future generations. And this isn’t gonna make a difference to future generations. The stealing is in the trillions, and this is in the tens of billions.

So I’m against it for that reason, very simply. But then there’s this last bit, which I think is interesting, that nobody even thinks about — who sells the stocks to the kids, and who buys the debt that the government issues to do it? I know who those people are. They’re people who own stocks. So is it good public policy for people who own stocks now to own less stocks and more debt, because they’re gonna have to buy the government debt that the government is using to fund this for kids to have more stocks?

I’m like — all you’re doing, if you did it with the Social Security Trust Fund, like, would it be a good thing for the Social Security Trust Fund to own, instead of government debt, stocks? Well, certainly if stocks went up, it would be good for the beneficiaries of the trust fund if they outperformed cash. But it would be not good for the people who sold the stocks. Meaning the same people — there’s only one private sector, you can split returns in any way you want. If you want to give them to kids, God bless, but you’re taking them from somebody else.

And so to me it’s like, the government can always transfer wealth in more sensible ways than having kids speculate on equities and existing holders speculate less on equities. Just transfer wealth in some way that’s at least more targeted. You can do that through tax policy, you can do that through money printing, you can do that through deficit reductions, which has an opposite effect. Lots of ways to transfer wealth. This one’s just an absolute nonsense gimmick with one tiny little bit of financial literacy.

Justin: So in closing, if you were to put your finger on some of the most important things that you’re paying attention to right now — let’s say over the next few months — what would those be?

Andy: Number one, it’s the ability for the very large promises being made to be funded with equity and debt, and what that costs when it hits the market. By far, that’s the most important thing to me. I can’t think of something that’s even close to that.

At some level I care what the Fed is going to do, but honestly it’s just not that important to me at this stage. I guess the last thing — and I don’t think it’ll play out in the next three to six months — but it is clearly the ultimate question: at what level of return on CapEx will the market get satisfied, or will have a problem with what is being spent? And that, again, I don’t think that’s a three to six month thing. I think we need to see.

Justin: Andy, thank you very much. We always enjoy these conversations and so does our audience, and hopefully we see you in a few months.

Andy: Sure, anytime.