The Grant Williams Podcast Ep. 109 - Julien Garran

**Grant Williams** (0:10)
Before we get going, here's the bit where I remind you that nothing we discuss should be considered as investment advice. This conversation is for informational and hopefully entertainment purposes only. So while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets. You're about to listen to a very special preview edition of The Grant Williams Podcast, featuring my very special guest, Julien Garran of MacroStrategy in the UK. Subject at hand is artificial intelligence, and in particular, the massive bubble that Julien sees forming in AI spend around LLMs, the Nvidia round tripping, OpenAI, all of it. It's an extraordinary conversation that was born of a piece of work that I came across of Julien's a few weeks ago, and after reading it, I just had to get him on the podcast, so I'm delighted that he's agreed to join me. Every episode of The Grant Williams Podcast, including The End Game, The Super Terrific Happy Hour, The Narrative Game, This Week In Doom, Shifts Happen, Kaos Theory and The Hundred Year Pivot is available to Copper and Silver tier subscribers at my website grantwilliams.com. Copper tier subscribers get access to all the podcasts, while members of the Silver tier get both the podcasts and my monthly newsletter, Things That Make You Go Hmmm. So if you enjoy what you hear on the show, and you'd like more high quality content like it, then please make your way over to grantwilliams.com and join our exciting community today. And with that, on with the show.
Julien, thank you so much for doing this. I'm incredibly grateful. We were just chatting off mic before we started, and I was just saying how I'd written a piece on AI myself and wished I hadn't after I read yours. It's such a fascinating topic, and you covered it so brilliantly, and I'm really keen to dive into a lot of this. And I want to set it up, if I can, by reading back to you two paragraphs you wrote, which to me not only was like getting hit around the head by a piece of two by four, but sets the stage for the conversation to go in any number of directions. So this is what you wrote. Make no mistake, I think that this is the biggest and most dangerous bubble the world has ever seen. The misallocation of capital in the US, which also includes housing, VC and crypto, is already 17 times the.com bubble and four times the 2008 real estate bubble. And as it unwinds, it will not just threaten substantial economic malaise, it will threaten to overturn the entire globalist agenda and the new financial order that developed with the advent of Thatcher and Reagan from 1979 and 1982, accelerated with the fall of the Berlin Wall in 1988 and sped up again with China's accession into the WTO in 2002 The LLM-AI bust will be as important as a backdrop to the next phase in global macro as the savings and loan crisis was enforcing the pace of US reflation from 1991 that saw the dramatic rise of the Southeast Asian economies at markets of South Korea and Taiwan in the early 90s. Except this time, unlike 1994, the train has no brakes. We are increasingly likely to see reflation, inflation and the rise of the Indian middle class along with the fall of AI emerge as the dominant macrothemes of the second half of the 2020s. Wow. I didn't have the balls to write anything as definitive as that when I wrote mine. So kudos to you because it's extraordinary. But you then go on throughout this extraordinary piece to lay this out as to how you got to these conclusions. So the floor is yours. Start wherever you want to start because I've got questions littered all the way through this. And if you want to start before the beginning or at the beginning, it's entirely up to you. But the floor is yours.

**Julien Garran** (3:43)
Thanks very much for having me, Grant. So I guess the first thing is to try and identify the bubble. And there's lots of ways people try and do that. Often they're looking at valuations relative to history. But the problem you have with that is you have to adjust for interest rates. You have to adjust for changes in market structure. For instance, increased monopolization, providing there's not a major legal challenge, can lead to more valuable company formation, which we've clearly seen over the last 20 years or so. But what we've done is try and, there's an old kind of stock phrase that all models are wrong, but some of them are useful. And what we've done is use a Wixel spread to try and identify how big this bubble is. And what the Wixel spread does, the reason it's useful is that it explains how economies are and what a bubble really means. And what a bubble really means is that people are buying and building assets that don't make a return across the whole cycle. So they may make a return in the short term when conditions are easy, but later when conditions tighten up, they end up destroying value. Now, Jeff Bezos was on The Wires earlier this week, saying that he thought that maybe this was a bubble, but it didn't matter because it would create an infrastructure which would be very valuable in the future. I completely disagree with that. I think that bubbles destroy capital, they destroy value because you could be building something much more valuable instead. And so the way that the Wixle spread works, and Nat Wixle was a Swedish economist from about 100 years ago. He argued that the cost of debt for the average corporate should be a couple of percentage points above a nominal GDP growth, which is the return on the economy as a whole, or return on investment in the economy as a whole. And if you set rates at around those levels, then business people who know their own companies, who reckon that they could make a good return over the cost of debt, would borrow and expand. And businesses that didn't think they could make a return would run for cash and they'd shrink. And that way, you allocate the capital as best as it's possible to do. And that means that growth is as fast as possible. The best income that you can get, you get the biggest kind of income surplus over what you're spending. And that means you can reinvest it in building the capital stock faster than under any other system. And the capital stock is the foundation for future opportunity and for future growth and well-being. Now, what happened in 2021, in the second year of kind of COVID response, was that Powell set the Wixel spread effectively much more aggressively than we've ever seen in history. And the financial historian, Edward Janszler, argues that the cradle for every bubble in history has been easy money. And by running rates at zero with QE, while the nominal economy was growing at about 11 percent annualized in that quarter, what he did was get the Wixel spread down to about minus 13, minus 14 Now, what that does is it creates an incredible stimulus to companies and to people to gear up and to buy and build assets. And initially, they were buying and building residential housing, they were buying crypto, they were putting money into venture capital funding, they were buying non-fungible tokens, etc. Now, on top of that, we also had the fiscal stimulus. And I think one of the critical issues that we saw was that even though the stimulus was concentrated in 2020 and 2021, it actually was, a lot of it was delayed action. So about 1.3 trillion of the fiscal stimulus was saved. And that was then spent down over the next three years. So the stimulus kind of kept on coming. And about 2 trillion of the monetary stimulus got put in reverse repo. It was still there at the end of 2022 It came out into the economy over the next two and a bit years. And then there was about 500 billion of extra monetary stimulus that came out of the Treasury General Accounts as Besson drew that down in the first half of this year. So even though the main stimulus was 2020 and 2021, we were still feeling it five years later. And the ultimate impact of all of this is that the cumulative misallocation of capital that we saw has grown in this chart here, has grown to an unprecedented level. So that's about 65% of US GDP. And that's around 17 times the size of the accumulation of misallocated capital at the peak of the.com bubble in 2000 and about four times the size of the accumulated misallocated capital, especially in the residential stroke credit bubble of 2007-8 before the financial crisis. So that's starting to tell us the magnitude of the problem that we're facing.