And how would you describe the bond market right now?

now?I, I think shaky and unstable, um, certainly don't wanna sound like a Pollyanna.

I've written quite a lot of stuff telling people you should be worried about this.

I don't know that I would think it's unstable, however.

Uh, I think if anything, what's worrying is how steadily the bond market is repricing towards higher yields, and the reason it's doing that is because there are ample reasons to think that the world is going to be a more expensive place.

I imagine we, we're gonna n-need to talk about the, uh, about the latest trade war between the US and Canada, but you know, it's, it's all an expression of the steady retreat from globalization, which may have had negative effects for certain people, may have left people feeling that it was unfair in terms of distribution of wealth, but did make the world cheaper.

You could buy stuff from wherever it was cheapest, and similarly, bond yields could, you know, the financing could therefore be made available more cheaply.

And just how big of a problem is that for the US, and, and how does that fit into what we've been talking about?

Yes, El Capitan.

We topped 5% for about a day three years ago.

Other than that, we haven't been above 5% for almost 20 years since the very early stages of the global financial crisis.

And then as the financial crisis took off, people got scared about all kinds of other debt piled into treasuries.

The treasury yield went down.

What I think is important to mention, however, is that we've had two decades, broadly speaking, below 5%.

The four decades before that, again, with only occasional interruptions, we were above 5%.

So do we not have anything to worry about? Is the bond market panicking unnecessarily? Can we all just like relax and go about our lives and just know that this is a pretty normal interest rate? We just have a distorted view and all will be well?

So is that why the US government is jumping in here because we're sort of in financial crisis territory?

Certainly not in, [laughs] certainly not in '07 territory, but in terms of are the same ultimate dynamics happening that this could create issues, that this is something we don't want to keep happening because it could begin to create problems in the economy.

Yes.

One other issue that is particularly troubling at the moment, uh, which is an extremely positive sign for the overall economy but has its negative side effects, is all the investment in AI.

So there are all these massive new data centers being built, which some people living nearby dislike.

They cost a lot of money.

Generally speaking, even the very big companies with lots of cash on their balance sheet that are building them are borrowing to do so.

... for the economy.

W- how does that happen?

I think there, there's an element of a learned response, and there is also an element of markets hate uncertainty, but they can actually deal with bad news per se.

So if you were in a situation where you weren't sure whether there was going to be a really major escalation, there was going to be military strikes across the Gulf permanently removing refineries, reducing, uh, the total supply of oil for a, for a matter of years, if people thought there was a serious chance of that, then we would be in a very different situation.

The judgment that is being made on markets is that this isn't great.

In fact, it's pretty bad, but it's dealable with.

And now that we've got our arms around the scale of the problem, we can ignore it.

I, I'm not saying that's right-

... would you?

To ex- explain what that means, would you?

Yes.

No, n- they'll just keep slicing another little piece off the salami, getting another little edge of advantage from somewhere, knowing that Donald Trump, he really doesn't want to escalate before the midterms.

They know that, they can see that, so they can continue chipping away.

They just need to avoid taking the entire sausage straight away.

That, that might force some degree of, uh, response, sending in special forces or Marines to actually take Kharg Island or something.

Yeah.

The Iron Curtain went up, and we had a way less than ideal situation in which, you know, however many hundreds of millions of people lived under a fairly unpleasant version of communism for 45 years.

... where they got to under Liz Truss.

Exactly.

I mean, the- there are, uh, to be fair to the current Labour government, there are reasons for that in that interest rates have risen across the world since then.

And what really can endanger a f- a financial accident is when yields rise very fast, which is absolutely what happened under, under Liz Truss.

She, she took the market by surprise and, uh, and thereby slipped on a banana skin.

Whereas what we've got at the moment is more of a slow motion car wreck with Labour.

But yes, the, the ultimate fact is, is true.

Is the gilt market affecting what's going on in politics as well?

A lot more

...

it has to sell a lot of Nvidia along the way, because Nvidia keeps getting to be more th- more than 0.2% of the index, 'cause it keeps growing.

In an academic friction-free environment, which none of us get to live in, it's definitely got a lot of arguments in favor of it.

They do weaken when you actually have to...

Again, that, that's why people got so excited about these vast, you know, hippopotamus, elephant S&P 500 funds, that the economies of scale are enormous.

You just set them running and they trundle along cheerfully, and, and, and the costs get defrayed over ever larger amounts of money and their, their economics get ever harder to beat.

Yeah.

So you still might say, "Okay, but why has it all happened in the last week?" I mean, is it, is it sort of people suddenly realizing that the Strait of Hormuz is gonna be shut for a long time? Because they can't be suddenly realizing that governments don't want to cut borrowing.

There is-- I mean, Malcolm Gladwell got rich with this infuriating concept of the tipping point without ever explaining exactly when or why a tipping point will happen.

There are such things as tipping points.

Plainly this happens in markets when some kind of a weird psychological turn or some point in mass psychology is reached and, and things start to move very fast.

It would be ridiculous to say this is all about the Strait of Hormuz.

However, plainly that's the trigger at the moment.

If you want to talk in, in the short term about why particularly this was a trigger, my best guess is that there was some hope out of the-- out of Beijing last week that there would be some pressure from China on Iran to, to reopen the strait, and it didn't happen evidently.

I mean, is that just now very rapidly going into the past?

And John and Rob emphasized it's the bond market, not the stock market, that really matters here.

The stock market, despite appearances, matters less.

Um, we discovered that Donald Trump was actually prepared to look through a fairly big reverse in the stock market, and he probably recognizes that his people don't care as much about the stock market.

The bond market is...

Normally, when you're scared, you buy bonds.

When you are scared in such a way that you sell bonds, that is very dangerous.

That's a very unusual state of affairs.

But that, you know, will, will, what will the next person to sit in the Oval Office learn about the, the kind of dance that presidents have to dance with the market from Trump?

On Wednesday, Anthropic announced plans to spend $50 billion to build custom AI data centers across the US.

US.The companies that are actually doing the build-out of the infrastructure are still making more rather than less profits, so it plainly has longer to run.

I'm not expecting this whole house of cards to collapse anytime soon.

The sheer scale of the investment, just the sheer am- amount of money that's needed, copper and rare earths we are discovering, is intense.

The amount of money that will be spent on electricity is intense.

We still need to be clear about exactly how much AI is really gonna help us, how, how it's going to improve our lives.

Is AI really so wonderful that, that it justifies the immense spending on electricity that appears to be necessary? That is the question.

Mm-hmm

And, uh, and Duncan and John transformed it into, uh, a full-fledged studio.

I- I at one point actually felt the need to make li- myself a rule that I had to talk to another human being-

(laughs) Yeah.

And I said, "Why?" And she said, you know, I said, "Do you like the way it looks?" And she said, "No, that way I know you're not having an affair." (laughs)