AI productivity could bend the US debt-to-GDP curve

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 28:54

   side of this, but I want to end the public side with the macro backdrop. Philippe, you're one of the best, you know, we've been at this a long time. We know that, you know, we invest in companies that are doing extraordinary well. We look at fundamentals, but you can't ignore the macros. Dan Loeb says, if you don't do macro, macro does you. We found that out the hard way too many times in our career. But if you obsess about it, it can also be your undoing. One of the things I thought was so interesting. We're at this moment in time where we've heard from Elon and the guys on the All In Pod, David Friedberg and others who are saying, you know, we're in this debt spiral.

2. 29:32

   There's no way out of the debt spiral, you know. And yet, if you look at the 10-year, the 10-year is still at 4-3, 4-4, right? Despite the calls that it was going to be at 6-5 or 7, we haven't got anywhere close. We've been in a band between 3-5 and basically 4-8 now for two years. And you presented an argument on slide 45 about the productivity cycle that may come out of AI, right, that may drive faster growth in the economy, much like we saw in the 90s with the internet, that could, in fact, lead to lower inflation and lower rates on a permanent basis.

3. 30:09

   It's kind of this backdrop that would bring the deficit to GDP below, you know, 4%. I know you guys work closely with Larry Summers and others. And so as you think, how important is believing this to be true in our overall kind of public investing today? So your original question, Philippe, should we be worried that we all think that AI is a big deal, right? The counter to that is to say, okay, well, what if we're right on the AI, but we're wrong on something else? And we actually analyzed three things. We analyzed, are markets expensive? And the answer is yes, but markets were expensive in the 90s during the PC and internet era, and the market did well. So that's number one. Number two, we said, well, are tariffs a big deal? And we said, yes, they're important, and maybe they haven't gone through inflation yet, but this doesn't feel to us like,

4. 31:03

   I like to say that tokens trump tariffs, right? Basically. And so we're basically left with this deficit. First thing that's on deficit is having Doge and having people like Elon say that we're spending too much. It's useful. And we should repeat that every day. It doesn't hurt. But what I was wondering is, since it's so obvious that it seems that we need more Doge, we need to spend less and stuff like that. Who are the people who every day are buying bonds, 30-year bonds at 4.5%?

5. 31:34

   And I'm sure the listeners know that. But a one-year bond at 4.5% stays and gives you 4.5%. A 30-year bond at 4.5% on its way to 6% or 7%, you could lose 60% or 70% of your money. Yes. You know, once you have a 30-year multiplier on a change in interest from 4.5% to 6%, right? And our basic instinct was to analyze what happened in the internet in the PC day. where we had exceptional productivity gains when the internet and PC really took off in the 90s and to say, hey, what would happen if we had similar exceptional productivity gains?

6. 32:13

   And basically, the answer we were trying to solve is, in essence, today, we're at 100% debt to GDP on our way to 140. And we said, what would it take for actually debt to GDP to stay at 100 or maybe even bend the curve and go down to 80? And what's really surprising, I think if you just show maybe the next slide or so, I think if we move forward just a little bit, you'll see that if productivity for the next decade or so was about 2.5% to 3.5% per year, we could achieve substantial reductions in this key ratio of debt to GDP.

7. 32:51

   And I'm not saying we're there, but I'm saying that at least we've been able to bookend what would productivity need to be to achieve an 80, 100% instead of 140 debt to GDP. This is slide 51, just for the people following along, which is, again, an incredibly important point. We know there are people buying bonds every day at 4.5%. So the question is, why are they doing that? And one of the answers may be exactly what you're saying.

8. 33:20

   What if they're right? Exactly. What if they're right and we're wrong? And in fact, one funny part is in 1993, debt to GDP was supposed to go from 40 to, or 60 to 80 by expert. And it in fact went from 60 to 40. Yes. So experts can be wrong by a lot. Right. And so I'm not a good enough macro guy. And if tech guys pretend to be good macro guys, you know, it's the beginning of the end. but at least we have a little bit of analytical thinking around what it would take and bill and thomas you guys are much better placed than me in terms of your discussions with all the privates which i think we're leading to now and all these amazing new products and you're telling me that that's not going to create like massive productivity i really think it is and and and drawing from that That you would end up with GDP growth.

9. 34:13

   More like the 5% plus, maybe even 6%, which by the way, that was the case for many of the years in the 90s. Then sort of product, you know, and by the way, the 6% would represent 4% in about real terms. Whereas in the past, you know, most recently, we've more be at like, you know, 2% or 3%,