Oil Prices Are Rising Fast… Is a Global Recession Next? w/ Peter St Onge

You're only really in danger if you get a sustainable doubling of oil prices.

So remember to start at 67, so that'd be something like call it 135.

And that's got to be sustainable, right? We're not talking like Sunday night, it's 120,

and then Monday morning, it's 80, right? Which is what's happening recently.

Like if it went to 135 and stayed there, but even then, you don't actually go into recession

unless you already have economic weakness. The conflict with Iran is still going, but what does

this mean for the US and China is the labor market finally starting to break down and how should

investors be navigating all of this? Hello, and welcome to Milk Road macro. The podcast that

is here to remind you that there's always a situation somewhere that needs monitoring.

I'm your host, John Gillin. Today is Wednesday, March 11, and today we are joined by Peter St.

Orange. Peter is a PhD economist and senior fellow at the Heritage Foundation, where he provides

data-driven analysis on taxation, monetary policy, government spending, and economic trends.

Peter previously served as an assistant professor at Taiwan's Fang Chi University,

and a private equity fund partner. He creates daily videos on economic issues and has contributed

to a variety of media outlets. Peter is a really great banker and somebody's going to share a lot

of wonderful insights and alpha with us today. So that sounds good to you. Make sure you like and

subscribe. Share this episode with somebody who's going to enjoy it. Today's episode is brought to you

by some turn crypto tax chaos into confidence and midnight bringing rational privacy to blockchain.

And finally, welcome to Milk Road macro. Peter, how are you, sir?

Great. Thanks for having me on. That was a very generous introduction.

Well, I try to be generous with my guests as they are generous with me.

Peter, I think the place we're going to just start the conversation today would be with what's

on everyone's mind is this conflict in Iran. How this is going to impact the economy, because there's

still a lot of unknowns at this time, but I'd love to hear your perspective, your expectations,

layout, what you're thinking this means for the economy and the markets as we go forward here.

So the main thing, it's not the war itself, right? It's the oil prices. And when you're talking

about oil prices, you have two aspects to them. One is shortages, which we got the last time we had

a huge war in the Middle East in the 1970s. And then the other is just oil prices. Now we are not

going to get shortages this time, partly because we drilled, baby drilled. So at this point,

you know, back in the 1970s, we had about 100 days of imports as stockpiles.

Today, we've got about four years of Middle East oil as stockpiles. So we're not in danger of

shortages. The main thing is the oil prices. Now, if you go back historically and correlate them,

every ten down in modern terms, every ten dollar move in oil knocks about 0.2% off GDP.

It knocks about a third of a percent on to inflation and it lose about 10 to 15,000 jobs a month.

That is not catastrophic. So currently, we're looking at oil prices at the moment or something

like $86. That would be about a $20 jump since the beginning of the war, where what 12 days in or

11 days in. That's not that big in the grand scheme. You can basically double all those numbers.

You're looking maybe a half point on GDP, maybe 0.7% on inflation, and then maybe 30,000 jobs a

month. That's not going to send us into recession. If you look at the various markets that are

proxies for recession, the odds are looking like something like one in four, but they were roughly

one in five before the war started. I mean, they're sort of permanently always at one in five

because we have a central bank that creates boom bus cycles that causes recessions. So that's kind

of, that's like the weather. That's just always there. So far, if we're going to stick around $85,

it's not that big of a deal. Yes, 30,000 jobs a month is rough on the people who are losing the jobs.

You do have slower growth, but coming into this war, the economy was growing at about 3%,

which is historically really high. We haven't really seen like a sustainable 3% growth

really since the 1960s when Nixon broke it. So if you're going in with 3% growth, you get $85,

oil for a couple months, then you might be looking at 2.5% growth. It's not really catastrophic.

Deutsche Bank went back and they looked through the various episodes of oil crashes in history.

Now, oil has only been a thing for about a hundred years since Titusville, Pennsylvania,

when they found it. So we don't have that many oil crashes. A lot of them tend to be tied up in

wars. So World War II and things like that, where it's hard to disentangle what the oil is doing

and what the war is doing. But they concluded that you're only really in danger if you get a

sustainable doubling of oil prices. So remember to start at 67, so that'd be something like

call it 135, and that's got to be sustainable. We're not talking like Sunday night, it's 120,

and then Monday morning, it's 80, which is what's happening recently. If it went to 135 and stayed

there, but even then, you don't actually go into recession unless you already have economic weakness.

So the poster child for that is the 1970s, where you had the Arab oil embargo, oil skyrocket,

I think 5X or something, like much, much bigger than what we're seeing right now. But even then,

let's we forget, the Nixon shock was two years before that, right? When he finally threw away

the gold standard because Washington was, you know, Washington spending was at a control,

he had the guns, the butter, butter being the giant welfare state that was built to buy votes across

all the cities in America, and then you had that paired up with Vietnam War. So the situation,

the economic situation, the U.S. was already stagflationary before the oil embargo hit.

Maybe that's why they did the oil embargo because they saw an opportunity that they could

tighten the screws. So the point being that, you know, I think a lot of pundits will kind of run

with the 1970s comparison. It's an easy way to get clicks, right? If you want to predict the end

of the world, then you're always getting somebody to watch that video. If on the other hand,

you make a video that says, you know what, it's overdone, the U.S. dollar is going to be fine,

the economy's going to be fine. That's not good for views. So, you know, understanding that the

goal here is to actually, you know, get to what's really going to happen next, at what we're seeing

right now, it's not catastrophic. The main way that it would get catastrophic, that you could get

those kinds of doom porn scenarios is if the Hormuz, the straight-of-hormuz is closed. In other

words, Middle East oil is all that choked off. And if that ends up going on for months on end,

I don't think that's going to happen because Trump has built Clinton level antenna in terms of

public opinion. And if it's not working, Trump is very, very good at declaring victory no matter what.

So, if he feels like the mega base is not into the war anymore, he'll find the way to end it. He'll

declare victory. It'll be the best, it'll be the best ending of a war ever. Nobody ever thought

it was possible. They said, sir, you can't do it, and I did it. So, I don't think that this war is

going to go on that long. The calendar is imposing a deadline of the midterm elections,

right, which are coming in November. But the thing is, you can't end the war the day before the

election. You're not going to see the act and I have an impact. You're not going to see the oil

prices come down. So, I think that if you go much past June, I think that he's got an internal

sort of pressure to end the war before that quick pause here. If you like this show,

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next macro move. Hit up milk road dot com and subscribe. Gotcha. Okay. So I want to unpack this

a little bit more. You said that there's not a risk of an oil shortage because we

have reserves. Western economies have voted to, I think this morning and I announced that they're

going to release some oil from the reserves to try to help support our economies. But is that

the same scenario in every nation? In other words, is this same across Asia? A lot of the world's oil

and natural gas goes through that straight. Who are the winners and losers here? Who really needs

to see the situation resolved? And does everybody have ample reserves or are there other certain players

in the global market who are more exposed here than others? Yeah. So in terms of oil prices,

everybody faces the same price of oil. But in terms of oil shortages, it's night and day.

And almost none of the oil from the Middle East is coming to the US. They make up something like

2% of our supply. And that's for, you know, it's cheaper to get it here and there. Like we don't,

in other words, we don't need that. Okay. We can find that from somebody else that load 2%.

We could just not export as much, for example, and keep the oil that that we already have here.

So we're not exposed in terms of shortages. Europe is surprisingly not very exposed. They also

don't use much Middle East oil. They get it from Norway. They get black market oil from Russia,

which they're not supposed to be, but it's cheap. And then they also import a lot of oil from the US.

So the West is actually surprisingly not exposed. That's very different from the 1970s,

where it was basically the Arabs fighting the West with oil. That's not what it is this time.

What it is this time is Asia. So Asia is extremely exposed, starting with India,

like the entire subcontinent, so India, Pakistan, Bangladesh, they have about one month of oil stock.

Right. So India can't fix a pothole so it obviously does not have a strategic petroleum reserve.

It's, you know, a pretty dysfunctional country in the best of times. They have very little stocks.

They're mostly relying on just private stocks, like oil, you know, the national gas provider has

a bunch of tanks full of gas. They don't have very much. They're going to be the first to get into

trouble. Southeast Asia, so Thailand, Philippines, Indonesia, those guys are a little bit better,

but not much better. They're about probably two months. China is surprisingly bad. They're about

three months. China plans ahead, but China also imports vast amounts of oil. I think it's

something like seven, seven million barrels. And so they've only got about three months supply.

That's about the same as us, but of course the difference is we drill 14 million barrels. China

drills about four million. So they've got a much bigger gap to make up. And then finally,

you've got Japan and Korea. They are deeply dependent on Middle East oil. Some Middle East oil is

something like 95% of Japanese imports. However, Japan and Korea are also run by the smart people

who do plan ahead. So they have enormous stocks. So something like an 8 million barrel stock,

just in Okinawa alone, which partly in case there's a conflict with China for the US military.

But anyway, those two countries together have probably about seven or eight months. In other words,

through the end of the year. Realistically, also, those stocks are not, like to say,

India's got a month and Japan's got seven months. In reality, people move things around. People

find other supplies. Countries will try to bid away supply from other countries. China, for example,

so like currently a big chunk of Russia supply goes to China and then more or less the rest of it

goes to India. Well, China is absolutely going to be waving a checkbook to take what goes to India.

So that makes things worse for India, but it makes things better for China and so on. So it'll be

lumpy in between there, but just kind of as a sort of big picture. US and Europe are basically

insulated in terms of shortages. Asia is in pretty dire straits. Gotcha. Well, I think that's

going to change a lot of calculus on relationships here. One of the things I've heard floated

is there's this rumor of a deal being struck to try to bring Russia back into the Western oil

markets. And I'd love to hear your take on this. Do you think there's any credence to this?

What's the calculus on that? Do you think that this is a move to try to pull them away from China

and squeeze China? Is this realistic? Is it a long shot? What are your thoughts on this?

Yeah, I think it is real. Trump is, he's very transactional, but that goes both ways. In other

words, he's willing to deal with enemies. He's willing to play hard with friends, but he's

willing to go both directions, which critics attack him. He coddles Putin and Kim Jong-il and the

rest of it, but he is happy to deal. He's very transactional. And so in the case of Russia, I think

that he would very much like an end to the Ukraine war that was one of his campaign promises.

His people keep lists. Trump promises a lot of things, like five things a day. And his staff

keep lists of these things. And it's very, very important. They take it very seriously,

being able to take these things off. It might look goofy from the outside. What Trump just says

shit, but actually they do track it. And it's important to him personally. He wants people to think

that he actually delivers what he promises. So I think he absolutely wants you,

Ukraine war. He's been very public at his frustration at both sides in that war. And in his ideal

world, you resolve the war, you bring Russia back into the game. Russia's already flirted.

They were talking about going back onto the dollar, which is pretty funny, like so much for bricks.

The bricks currency that was supposed to kill the dollar. But anyway, I think Russia wants to come

back to the party. Trump wants him back in the party. And it's a side benefit that if you can

bring Russia back in, if you can get all that Russian oil going back to Europe or go back to

the West again, not going to China, then that is a hit on China. China, probably the single country

that has benefited most from the Ukraine war has been China. So they now almost half of their oil

before Venezuela and before Iran, almost half of their oil was sanctioned oil. It was either

coming from Venezuela, Iran or Russia, meaning that they were getting like a 20% to 30% discount.

Given the amount, 14 million barrels of oil, times 20% to 30%, that is a chunk of change.

So they were getting a massive subsidy from being able to buy up all this oil. And so now,

we've taken Venezuela out of the game. 70% of their oil was going to China. It looks like we're

taking Iran out of the game, depending on how this plays out, if he declares victory early. But anyway,

Iran, 90% of that oil was going to China. So if Trump can peel off Russia as well, then all of that

sanctioned oil, now they actually have the pay market rate. So it's like before,

they were instead of going into like CVS, they were buying everything on the sidewalk in front of

it. So they were getting this five finger discount. And so now they would actually have to pay

market rate. So that would be a huge hit to try and give in how much oil they import. Gotcha.

Okay, so I think that that context that framing is really helpful here because the thing that

has been on my mind, and I think a lot of people are starting to talk about, is that

President Trump and G are scheduled for a meeting in April of this year to continue this ongoing

trade negotiation they've been having for as long as Trump has been in office on the second

term, I suppose. But talk to me about this, what are you expecting out of this meeting? How are

these dynamics shifted by this conflict in Iran and what happened in Venezuela? Just talk to me

about this framing of like what these two leaders are doing and who's jockeying for power position

here and what the scoreboard looks like right now. Yeah, so there's a lot of moving parts to it.

And you know, in any negotiation, we're looking at it through the eyes of either side, right? So

Trump has his goals in life. President Xi has completely different goals in life.

If you kind of zoom out, the US or Trump has a lot more leverage today than he did in the past.

The Iran War gives him enormous leverage. He alone can decide whether Middle East oil goes to China.

He essentially has, you know, he's got them by the jugular. And so meanwhile, China is already

in trouble. So I just had a video out this morning that China revised down their growth estimate.

It's the lowest in 35 years. In other words, the lowest since they got rid of, you know, pure

malstyle communism. And this is raising questions whether China is going down the Japan,

zombie economy route. So China's already in trouble. The two biggest issues there. One of them is

the property bus, which is 2008 global financial crisis scale. Two thirds of Chinese households

net worth is in housing. So if housing collapses over there, however bad it was, right? In the 2008

crisis, you know, yet house prices crashing, you had financial assets crashing. In China, it would

be in terms of how desperate it would make the Chinese people, it would be more severe.

That could lead to social unrest. The Chinese leadership, a lot of them, like they're in their 80s,

and they came of age during the culture revolution in the 60s. And they remember what happens when

the Chinese people get upset, which is that they don't march in Occupy Wall Street. You know,

they don't dress up like Ben Franklin in the Tea Party. They throw beer crats out of windows.

Right? So the Chinese people, we've gotten so used to the idea that the Chinese just take it and

complain, okay, but historically there is a line that you cross with the Chinese people get very

kinetic. So I think the Chinese leadership, it's, you know, in theory, you could say, well,

he's a dictator, you know, he can take a recession. What are they going to do about it? I first,

I don't think that's true. I think that, you know, you have many riots every year in China. There

was one a couple of years ago where they drove the tanks around the bank because people were

demanding their money. The bank unfolded. There's a lot of stuff that goes in China that we don't hear

about because they censor. So right, point one, I think that, you know, China is a lot more

dangerous than it looks domestically. So she has to, he's got a lot of pressure to keep the people

happy. He may as well be running elections in terms of how much leeway he has. He's got to keep

the jobs going. He's got to keep inflation low. He's got to keep incomes rising. And number two,

whatever the reality of that is, the leadership in China, I think actually overestimates it because

they have these memories of the culture revolution. So, you know, Putin, I think, yes, can kind of

ignore domestic opinion because he is wildly popular. He does not have a large, you know, domestic

opposition. I think Putin can more ignore his people than China can. I think China is actually

very, very responsive. So in light of that, you know, you look at the leverage that Trump just got

closing the straight or being the decision maker on the Straits of Hormuz, you put that together with

China's property crash that already has people upset. You throw in the trade war, you know, China

has plowed something like $7 trillion into manufacturing subsidies, which is a big reason why

it's the manufacturing powerhouse of the world. But the issue on that is that it's also massively

overbuilt, right? So there was one point a couple of years ago where China had 500 electric

vehicle makers. That's too many, like the world cannot sustain. Okay, 400 of them went bust,

just still 100 of them left, right? So that's the picture across solar panels, across socks,

across toys, like everything, right? China is massively overbuilt. It's massive over capacity.

That was part of the reason why Trump was upset because they were dumping it on us.

In the trade war, now what's happened is that China's taking all that stuff they used to send to

America. They're dumping it in Mexico or Indonesia or Europe. You know, you have like what there

was a story about jeans selling in Indonesian markets for one dollar. Okay, that is below production

cost, right? News flash. You got to get out of the factory to Indonesia to the street. Okay, so like

the factory price was probably like 10 cents. So that's the situation. Now you're getting countries

pushing back on China. So the EU is talking about electric vehicle ban. There was just, there's an

in-house European think tank where they like there's sort of strategy advisors to the EU and they

recently put out a report recommending that the EU quote, weaponize its market against China to

push China now. Okay, so you know, what's happened is that if you take all that stuff that China was

dumping the US and now it's spraying all that at Mexico, Brazil, European Union, India, those

countries, they're getting now gutted twice as hard as before. They're reacting to it and they're

starting to say, hey, you know what, maybe we will do the Trump thing. You know, the logical next

step, if the EU is going to weaponize its market, obviously, is to sit down with Trump and say, hey,

let's team up. You know, so I think China, it's a lot more vulnerable than it looks. You know,

there's this army of China promoters. I'm sympathetic. I lived in Taiwan for a long time,

different country, but similar culture. Very, very impressive culture, right? Very, I mean,

just energetic, creative. They're incredible people. You look at a lot of aspects of, you know,

Chinese industry. It's incredible what they've achieved. You know, you look at the high-speed rail,

35,000 miles for 20 million a mile. California did zero miles for owner. You know, it's,

it is impressive in many ways. However, at this moment, I think that China's in a very dangerous

spot, you know, cutting your growth rate to the lowest in 35 years is that's a big deal in China.

That's going to cause a lot of the leadership. You know, there are these political clicks in China.

They're constantly fighting with each other. A lot of those clicks are going to be looking at

that growth number. They're going to be looking at Xi's relationship, his combative relationship

with Trump. And they may start asking whether it's time for a change in leadership.

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slash midnight to learn more. So you've laid out a lot of the circumstances around this meeting.

You've kind of talked about some of the weaknesses, some of the headwinds that China's facing,

and how the US is sort of strengthened into its position. What in your view should the Trump

administration be trying to get as a takeaway here? What should their goals be? What's the agenda?

And what are they trying to get from this meeting with Wishi in April?

Yeah, so there's two. Fundamentally Trump wants an improved trade balance. So he would like China

buy more of our goods or to export less to us. And it's the main, you know, when you look at it

at first glance, there's not much to negotiate over because China wants the exact opposite of that.

But there are a couple of points where they can deal on the side. And the single biggest one is

that Trump can be bought if you create jobs in America. So we saw this with Europe. We saw it with

Japan and Korea where he said, okay, we're going to come at you with these horrible tariffs.

But if you spend, I think Japan was 550 billion or something. So, you know, if you spend all this

money to build factories in America, then I'm not going to put the tariffs on you. So Trump can

absolutely be bought. And China knows this. And, you know, already you're getting a lot of countries

who are moving to the US. You're getting them moving from Asia where they're saying, you know,

yes, the Supreme Court struck them down, tariffs coming up or Trump's coming up with new tariffs.

But I just want to be rid of the headache once and for all. So I'm just going to put some of my

production in the US. So that's happening from a number of Asian countries. They're also getting

Europeans where they're moving it. That's more of an excuse, right? Like they want to dodge or

they want to get out from under the taxes, the regulation, the energy costs in Europe. And so

they're almost using the tariffs as an excuse to move production. So every single German car

manufacturer, for example, has moved at least some production to the US. So those are both moving in.

Those countries have been using those investments as bargaining chips to get out from under tariffs.

That, I think, is a really clear area of agreement. China does have an enormous amount of capital

still standing by. It's got a very high savings rate. In recent decades, it's been plowing a lot of

that capital into projects in Africa. This is like that. I think, honestly, a lot of those,

they're going to get their shirts handed to them. Why they think Africa would pay them back when

they don't pay anybody else back and be on me. But here we are. So, you know, I think that would

be an elegant way for China to get out from under this is commit to building a bunch of factories in

the US. Trump would be happy with that. You know, you can doubtless, there are some aspects of

Chinese production where it wouldn't be that much more expensive to produce in the US. I mean,

generally, you know, China is a wage advantage. It also has a regulatory advantage. But I'm sure

they can identify areas where it wouldn't be that bad. So if they can come to that, then I,

you know, I think they can have a successful meeting. But a lot of that's going to depend on how

secure does Trump feel in his negotiating position? Does he feel like he's got to give in some room

to get a deal? Which I don't think he feels a huge amount of stress. I think that mega right now

is more focused on the war than the China relationship. And then meanwhile on the other side, China as

well, the question is how much pain, you know, so if they just cut their projections to the lowest

than 35 years, is that going to keep going down because of this trade war and how important is

it for she to resolve this so that, you know, he can nip in the bud and he kind of leadership

challenges? Let's talk about some of the headwinds that the US are facing. There's been a lot of

hand-ranging and concern from the Fed and from a lot of other analysts around the softness in the

US labor market. There's been some concerning revisions to the labor data recently. And I'm kind of,

just concerning the generous report. Yeah, talk to me about this. How serious are these concerns?

Is this something that's overblown? Or do you think that the US is really facing a problem here

where AI is causing GDP and productivity to increase, but employment levels are rapidly declining?

What's your view of this situation? Yeah, so, you know, the first question is can you trust the

job numbers? And anytime I say anything about job numbers or inflation numbers, I always get a

chorus of comments like ads, BS. And yes, I agree. However, if you don't use official numbers,

everybody thinks you're a crazy person. So, you know, with the huge caveat, assuming that the

latest revision to the numbers is finally the correct number, you know, anyway, if you sort of squint

and look at the job creation, it appears that job creation has been weak over the past 12 months

since Trump took office. However, almost all of that, or fight more than all of that, is number one

counting legalist's jobs. So, you know, when you deport two and a half million people, about half

million were deported, about another two million self-deported, that's going to take a bunch of

jobs with them because those people were going to Wendy's, they were getting their haircut,

they were getting dialysis on your dime, all of those were jobs, right? So, their consumption is going

to come out of the economy, you're going to lose a bunch of jobs. Number two is the federal workers.

So, again, a huge bunch of parasites, good riddance, don't let the door hit you on the butt, but that was

300,000 jobs. So, once you take those two, we're actually not in a job, we, you know, weak job market.

Those are all paper jobs, they're fake jobs, they're jobs we never wanted. Those people should have

gone home and the federal workers probably shouldn't go to Mexico as well. So, if we control for all

of that, it's not a catastrophic job market. Jobs for native born Americans grew about half a

percent last year, that's almost precisely identical to population growth among native born

Americans, which is half percent. However, given that GDP grew close to 3 percent last year,

it was like 2.2, but that's the government shut down if you control for this, 2.7. That's a pretty

fast growth rate in 2025, and we saw very little job growth for that. So, I think that it is fair

to say that there is a gap opening up where the economy is doing great. Jobs are only sort of

crawling along at population growth, and nobody really exactly knows why that is. There are some,

you know, little nuts and bolts figures, you know, for example, if it is more expensive to import

stuff, and if you can't get illegal workers, then there's a bunch of low-end manufacturing,

like making brooms that isn't sustainable anymore. Honestly, that manufacturing never should have

been here, because wages should not be low enough to sustain that kind of manufacturing. But,

anyway, you know, there are some sort of liberal candidates like that. I haven't seen

anybody who's really controlled for that, which, you know, would take a lot of number crunching.

And so, the next biggest sort of usual suspect is that AI is finally showing up in the numbers.

Now, AI is funny, because the AI jobs are again, and they were talking about that 10 years ago,

people don't realize. And they're all these predictions by, you know, Boston Consulting and

Gartner, which is one of the big tech projection, one of the big tech crystal ball firms,

World Economic Forum, Klaus Schwab. All these guys were sure that AI is going to wipe out between 50

and 70 million jobs by now. You cannot see AI in the numbers, okay? You can't see it in the

aggregate numbers. It was not 50 to 75 million jobs that we lost. There is an entire industry.

It is second only to global warming in how hyped AI is. And given that Klaus Schwab and the WEF

is hyping big numbers, I think they said one in three jobs would be replaced by now. Okay,

it didn't happen, narrator. So, there is definitely an AI panic porn industry.

Having said, we are starting to see it specifically in new hires, entry-level hires.

So, if you look at the numbers for recent college graduates, for example, so new hiring for tech

is down 25 percent in the past year. Two-thirds of companies said that they're reducing entry-level

hires. Let's see, the unemployment rate for new college grads is the same as it is for high school

grads, which has never happened. In other words, the college premium on unemployment rate,

you're still getting paid a higher wage, although that's collapsed as well. It's about half what

it used to be. So, without a doubt, it is starting to hit young people specifically. And what it seems

to be doing is blue collar wages are fine. AI doesn't touch you if you're blue collar, right? Like,

in theory, eventually robots will be able to do plumbing, but the thing is you can make one AI

for 8 billion people, right? But every McDonald's is going to need five robots. Do the math.

The robot thing is going to be much, it's going to be like 20 or 40 years before robots take all

the jobs. AI is going to happen much, much faster. So, what that does is it creates this call up 40-year

period where you've got extra demand for blue collars because the whole reason why AI would be

spreading is because it's making stuff cheaper. It just makes it stuff cheaper, incomes go up.

Then comes go up. The middle class people are buying second homes, they're installing swimming pools,

they have more stuff, right? If you consider, for example, that the average new house in America

in the 1950s was 890 square feet, right? That's smaller than your apartment guarantee, all right?

That was a house. And, you know, you can see them. You got to like the outskirts of Philadelphia

somewhere. You can see these little houses built in 1950s, and they're ridiculous. They look like

toys, right? The average house now is like 20, I don't know, 24-hundred square feet or something.

Houses have tripled. If your house is three times the size, you need people for stuff, right?

So, in the 1950s, you did everything yourself. In fact, you probably built your house yourself.

A lot of people did. Now, you know, you've got a guy for this, he's got to clean the pool, he's

got to do people hire house cleaners, they hire, you know, pet sitters, like the pet center

industry did not exist in 1950. So, the point is that if like either AI is going to make us rich,

in which case you're going to have all these jobs doing, you know, basically middle-class people

would be consuming services the way that rich people do today. You're going to have more stuff

that raises demand for blue collars. AI doesn't touch blue collars because it can't replace them.

Or the alternative is that none of this golden age happens because AI does not make us richer.

And, okay, in that case, nobody will use it. And then it was a false alarm. So, you know,

just keep doing what you were doing. So, you know, the only way that AI is going to disrupt the world

is if it's massively better than what came before, which I think it is for a lot of things.

Goldman Sachs, for example, did a test where they could replace 95% of the labor hours they were

putting on like IPO perspectives. Those are very highly paid people that's extremely efficient

to be able to do that. Now, it's not going to be 95% across everything, but yes, AI is vastly more

productive. But if that's the case, then the productivity itself makes us rich. That then creates a

ton more jobs for things that don't compete with AI, which are also known as blue collar. So,

I think when the smoke shift or when the smoke clears, it's going to look like the movie office

space. So, he's got this miserable useless job in the cubicle, right? And then he finally, you know,

they discover they don't need all the people. And so, they get rid of everybody and he volunteers

to go first. And then the movie ends with him fixing a road standing there looking up in the sun

and enjoying life. That is the AI economy. Now, what's fascinating is that the losers in that are

the people who write about the AI jobs are again, right? They're the journalists and the professors

and the people like Gartner, the people at think tanks. Hi, mom. So, those people are the ones

who are going to lose their jobs. And so, they're the ones who are telling us that AI must be stopped

at every cost. It's going to turn us into paper clips. The blue collars are the ones who are going

to benefit. So, I think it's going to be fascinating. And in many ways, it's a direct reversal of the

industrial revolution, right? Before the industrial revolution, like, if you take a modern professor today,

the closest analog would be like a guy who walked around on the street talking to people who

probably slept in the gutter. I mean, this was literally a Socrates, I think it was Daya

Jinnis who... Daya Jinnis. Thank you. Yeah, he literally lived there. So, I mean, if you take

professors, what were they before the industrial revolution? A couple of them were sort of kept

women. You know, they're basically court apologists. What did the Ruffard call them? The intellectual

bodyguards who would serve the House of Holland dollars. That was a very small share of them.

The vast majority of them were beggars or put differently that were pitching hay because you

couldn't make any money sitting around giving economics lectures to random strangers in the street.

So, those people, they're terrified, right? Already, the plumber makes more than them.

An adjunct professor makes $30 an hour. There was just a study that said that the average babysitter

in America makes $25 an... So, a 16-year-old with no... It's babysitting, right? They make within

$5 an adjunct professor. No wonder they're in rage. So, they're facing a future where the door

dash guy, the grocery bagger, right? All these people who they look down on are going to make

more money than them. So, they're either going to have to go join them and do door dash, which

is deeply humiliating if you're a professor, or they're going to have to live in a world where,

you know, they go back to living in the street, giving philosophy lectures or random strangers.

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notes to join our community and get on the alpha. Peter, this has been a really fascinating

conversation. I have a lot more questions that we're not going to have time for, but I want to end

with some party wisdom for the audience here. And I just want to kind of get your thoughts on this

to whatever extent you're comfortable sharing. But there's a lot of uncertainty. There's a lot of

volatility in all markets right now. And that seems to be the norm for the rest of this year.

And I'm curious how you're thinking about protecting your capital, allocating a portfolio,

and just like navigating these as an investor, these markets rather as an investor during this time

of increased volatility and uncertainty. Any thoughts you'd care to share with our audience

around that? Yeah, so big picture. I think the biggest trend and this predates the war is the

is artificial intelligence. I think, you know, if you look at it as a share of venture capital,

if you look at it just in terms of dollars, it's about five or ten times what.com was. I mean,

it is, it is absolutely dominant. I don't think we've got even gotten close to playing it out.

I think we're probably in about 1998 in.com terms and it's got longer to run. So for this year,

I'm, I'm very bullish on the sort of picks and shovels in AI. That means overwhelming semis.

So in Bidia, Broadcom, companies like that, I am, I don't touch the AI applications and the reason

is that I don't know what the mode's going to be. All right, when AI first came out or, you know,

for, for 50 years when people talked about AI, the standard stick was some rich guy is going to

invent AI and then he's going to own the world. Okay. And in other words, the assumption was that

there would be this almost infinite mode on AI. What you actually see is that, you know, like,

I use different AI models. You know, I've got the four big ones because I run stuff through

it as a fact check. And if I ran something through Claude or through GPT or through GROC,

if you ask me the next day, I can't remember which model I ran it through because they're almost

the same. Right. I think that's been the single biggest shock in AI is that as powerful as it is,

there's like no economic mode on. There's very, very little mode to it. And so, you know,

somebody like Palantir, for example, a very high multiple as an interesting business that, I mean,

a lot of people don't like it because it basically uses AI for military and, and potentially surveillance.

However, I wouldn't buy or I did buy it in the past and then I got concerned because of the mode.

Right. So I have no idea if that's actually going to be sustainable. And I think that's a wider

question, software, SAS at the moment, is that nobody knows which modes are going to survive.

Right. So if you can vibe code Adobe Acrobat in 45 minutes with, you know, zero technical training,

then why is Adobe worth 100 billion? Maybe it should be worth 10 billion based on, you know,

the customer relationships and not the actual tech. So for that reason, you know, usually, you know,

I think it's prudent to keep a batch of money and, you know, like the mag seven and, you know,

companies like Google or something, Amazon have been winners for a long time. I think at the moment,

we're kind of in a funny space where a lot of these companies to the extent their mode can be

replaced by software or to the extent their mode is based on software could be vulnerable to AI.

I think that a lot of those are risky. Now, the next question is how long the war lasts. So that's,

that's kind of a special grenade that they just threw in the middle of this, this sort of, you know,

pleasant long-term trend. And, you know, if you look at prediction markets, generally, it looks like

about 50-50 odds and it ends by April. So that's the original eight-week promise about one in three

odds that it goes past four months. I think it's very unlikely to go past midterms. The longer it lasts,

the more economic damage it is. If it's a two-month war, it's more or less going to bounce off.

You know, all the market moves that happen when the war started are more or less going to reverse.

It'll be like it never happened. So, but, you know, and if, if you think either that the war's

going to go long or if you want to make a trade so that you're hedging the rest of your portfolio

that is exposed to, you know, growth and to inflation, then, you know, you would just want to

basically get into standard recession industries. You would of course get into energy because oil

prices are proxy for how long the war lasts. You get into defense stocks. There, you need to know

something like, again, what the modes are. There's a special bonus in both of those where Trump has

been acquiring stakes in various companies to try to get them to up production. So, for example,

rare earths. I think uranium lithium. So if you're going to get into the energy space with kind of

a war hedge part of your portfolio, then, you know, you would want to look at things like that.

There's, you can actually ask AI who they like like targets are. They have pretty decent

thoughts on it or you can go the old batch and route. But yeah, so those would be some ways to hedge.

And then of course, just a standard recession hedge. You know, if you're trying to stay

market neutral on your portfolio and that would be, you know, banks, consumer staples, utilities,

energy utilities, you might normally think that those would be a really nice hedge because,

you know, they're sort of boosted on both ends. If energy prices go up, they don't usually get the

profit. They usually have to pass it on. But anyway, those are just kind of standard defensive

plays. If you're concerned about the war, I'm personally not. I think that Trump is looking for an

excuse to declare victory. I would be surprised if it goes on past April. Yeah, I think I agree with

you on that. I think he's looking for the exit. And hopefully if we all are. And so that means that

the likelihood will find it seems to be higher than that. Professor, I really enjoyed this conversation.

I think this has been a really insightful opportunity for our audience to hear some of your wisdom

and you've covered a lot of ground today. So thanks so much for being on Milk Road macro.

Where can we send people to find more of you in your work online? I make daily videos on

economics, on X, the artist formerly known as Twitter. So those are real short, about three and a half

minutes. They come out seven, thirty every morning. And then I do weekly deep dives at profsandong.com.

Professor Peter, thank you so much for being here. I hope we can talk again soon. Of course,

thanks, Sean. And thank you all for joining us. I hope you all learned something today. So until

next time, stay safe, stay educated, stay bullish. And we will see you all in the next episode of

Milk Road macro. Thanks for being here, everyone. Bye. One insight to what's really moving markets and

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