one of the fun things about life in the current here's my water
in the current era is that we're making it up as we go
so when people criticize the federal reserve i'm like come on cut him a break we've never
been at something like this before so a bit of a backstory if you go back to the dawn of time
every successful currency was based on an asset usually gold sometimes silver you know
combination of the two copper whatever it happened to be you'd have your currency it would be backed
up by some sort of physical currency eat your physical asset either in the form of a coin or
in a safe somewhere that's what those of us with a british or german ancestry which is going to be
most of you think of as normal and good and solid and this whole fiat era were a little queasier
but there's one thing that all of those successful currencies had in common
they failed every single one of them and they all failed for the same reason if you have a
successful currency you encourage exchange you encourage differentiation and labor diversity you
encourage economic growth and trade you encourage people to use your currency as a store of value
it's more more and more and more and eventually you run out of the metal
so you have to physically expand your empire to get more and then you start making decisions
for your country based on where you can get the medal as opposed to what makes strategic sense
rome had to go south of this here of the sahara the brits had to have a global empire where they
fought with everyone and all of them collapsed because of the success of their currency
when the world wars rolled around it's not just that the americans were the last ones standing
we were the last ones to come to the party and we told all the allies we will supply you with
anything you need so long as you pay us in gold and in the two world wars we emptied
out the planet of every scrap of free precious metals that had been mined since the dawn of time
and then we launched the order and we had the greatest expansion in economic activity the
greatest period of peace and prosperity in human history and within 30 years all the gold in the
world wasn't enough and so nixon nixed the gold standard and the value of the us dollar is based
on nothing more than tricky dick saying trust me that's the world we're in now you can't go back
the medal doesn't exist every currency in the world directly or indirectly is based
on the u.s dollar and the us dollar is based on the full faith and credit of the united states
we're an unknown territory we have been for almost 50 years
and i think the fed's done a pretty good job this is the m2 money supply
from 2000 until 2019 the total money supply roughly tripled global gdp increased by
roughly a factor of two is that too much you can make that argument but it's not egregious
are only oops sorry let me go back this is qe1 this is qe2 and that's coronavirus
these aren't very big and there was a lot going on for this one
perfect no will that have complications down the line probably will we enjoy those complications
probably not but perspective is important here's the yuan excuse me here's the yen
japan that's the orange and the euro gray neither of these are global currencies the japanese are
one of the more heavily manipulated currencies it's like we're just responsible for some like
one and a half percent of global currency reserves and has almost vanished from international trade
the euro is responsible for 15 to 20 based on which country you're looking at
and ever since the europeans started confiscating insured bank deposits to pay for the bank bailout
so that the taxpayer wouldn't have to everyone who could get their money out of europe did
and yet at a number of times in recent memory their money supplies have surpassed that of the
united states despite the fact that they're not a global store of value they're not a
local store of value and they are not trade currencies that's what bad currency policy in
the fiat age looks like but before you judge the japanese and the europeans too harshly
let's redraw this here are those three again and here's china in an average month the chinese
print over five times the amount of currency that the federal reserve does despite the fact
that 99 percent of the yuan is held within the mainland and most of the rest is in hong kong
not an open system all for an economy that's even by the most aggressive estimates a third
smaller than the u.s economy so try not to be too harsh on mr powell it's got a hard job
this is where the world's iron ore comes from right now mostly from the southern hemisphere
now if you remember that global conflict map i showed you you'll remember that these are
the zones where the shooting is going to get exciting that's not where the iron ore comes
from or where the bauxite comes from or where the copper comes from or where the lithium comes
from almost all the raw materials we use in modern life come from the southern hemisphere
but you don't use raw lithium or iron ore you have to refine it into lithium metal and into steel
and that happens somewhere else
germany ukraine russia japan korea china those are the world's sixth largest steel exporters
they are in the conflict zones so while the raw material will remain accessible it's the finished
product that we use that will be a problem now once you have the raw material for any
of these things what's the single biggest cost factor in turning into something that's useful
electricity and courtesy of the shale revolution the united states has the cheapest electricity in
the world without even using a subsidy system we have 17 steel foundries under construction
in the united states right now that will all be operational within the next nine months
prices are sending us in that direction before we have a global supply shock
one of the ironic great things about coronavirus is it exposed to a lot of companies at various
levels of the supply chain where their vulnerabilities were and they're fixing them
and it's not costing them nearly as much as they thought it was going to be
between the american workforce the american educational system the proximity of mexico
a recession in canada and the shale revolution production costs for any manufactured product
are cheaper in north america than they are in east asia the only reason that east asia is still doing
it is because of the sun cost of the actual capital investment in the first place now you
can't unwind that overnight but under coronavirus we spent a year and a half working on it so the
united states has actually become less wired into international trade in the last year and a half
especially if you consider north america as a unit which i think we should but 1.555 trillion dollars
all the arrows indicate where the value-added components are that contribute to that 155.
they're color-coded for their likelihood of disruption and the numbers are in billions of
us dollars so green should be okay yellow figure 25 if it's not going to make it make other plans
orange you're kind of hosed that's half and if it's in red just write it off completely
now in the united states our two biggest partners are mexico
canada and that's green there's a lot of green there's a lot of yellow
there's no red i don't mean to suggest that we are immune to what is coming
but the exposure is limited we can grow through it particularly with some help from our neighbors
the germans can't they face two problems one they're far more integrated with the wider world
both in absolute and in relative terms two because their demographics are terminal because europe's
demographics are terminal they need access to the wider world not just to get the value-added
components in but to get the finished product out this model does not work at all
and some german companies have seen the writing on the wall there's a reason that
the biggest volkswagen plant in the world is in mexico they're trying to relocate as much of
their value-added production to the western hemisphere as they can while they're here
when you do assembly in china you do assembly in the united states it looks different we're
more likely to automate but there's still a lot of weird crossovers in a lot of these sectors so
like take computing for example there's a lot of computing assembly that requires fingers and eyes
and american fingers and eyes are just too finicky and too expensive
you can't automate that mexico is great at that so we've got this weird mix in
the market where the really high-end assembly in computing is going to mexico
but the mid-end stuff that can be automated yeah we'll do that it's kind of weird but yeah it works
let's talk about a few sectors real quick uh the six sectors that are relocating most quickly uh
the first one is wiring and you know that's not something we have done in this country since the
60s now what normally happens with wiring is you get the raw ore you smelt it into metal
you get an ingot you send the ingot somewhere where it's melted down and pulled into wire
that wire as a spool like this is then sent to a final manufacturing location where it's unspooled
mixed with other wires built into wiring harnesses and then put into the vehicle or
computer or whatever so here in this country it's only that last step that we do as part of terminal
manufacturing the final step but the united states is now getting back into primary metals
in a big way why ship the intermediate pieces away so as steel plants are coming back as copper
plants are coming back we're even starting to fiddle with aluminum a little bit we're going
to see more of that middle step coming back again it'll look different it won't be done by
hand as much but this entire sector is likely to be north american centric moving forward
because it's where the metal comes from that's where the finished product comes from
textiles is a weird one with automation we can now create thread
turn it into yarn weave it in the cloth cut it into sections sew it into clothes cheaper
here then bangladeshis can do it by hand all it takes is the industrial investment
which is not that expensive so any place in the united states that makes synthetic fiber
gulf coast any place in the united states that has cotton carolinas deep south
can move into this space and basically take over the entire global industry other fun fact a lot
of the sector is really shattered the cotton's in one place the thread is in another the yarn is in
a third the cutting is another place the clothes are in another and then the finishing isn't a fit
there's no need to do that with automation you can put it all in the same place
again the jobs will look differently and a modern textile mill like this
you know that's a two acre facility in north carolina it has a staff of
two this is not a thousand people at a loom anymore these are software engineers
electronics you want to employ three million people this is what you go for
this is fax machine this is old style phones this is stereo speakers this is hard top computers what
you need to make this sort of manufacturing work is a variety of different types of workers the
high end the mid and the low end you need them as close to physically possible most countries
in the world can't pull that off we're not particularly equal and mexico's right next door
we're perfect for this and unlike automotive or computing where it's a highly
automated process with a relatively known number of workers there are steps of this that are very
labor intensive on the high end on the low end this is how you change your employment profile
i can't even see that from over here what is that that's computing okay we already talked about the
assembly side uh one of the things to keep in mind about computing is it's like the anti-electronics
it's very very concentrated and it's a clean room issue every step of the process from melting of
the silicon uh metal pulling it into a crystal slicing into wafers doping and etching and baking
breaking them up into chips turning those into semiconductors that all happens under one roof
it's all clean room work and you can't have a clean room truck chain to take it to different
labor points so when these are built they are intended to be there for their entire life cycle
20 30 years they'll upgrade the equipment as they go but they're not going to like tear
it down and split it up koben changed the math what's going on in the auto industry right now
with the chip shortage is changing the map we have nine of these under construction in the
united states right now the first two will come on operation uh in phoenix within a year and a half
automotive
admit it's kind of sexy in terms of manufacturing it's the biggest value added in the world
your average internal combustion vehicle has 3 000 parts your average ev sorry 30 000 parts
your average ev still has 5 000 the value added capacity for small and especially medium-sized
businesses is massive all they require is a degree of co-location you can have different price points
for the labor that's ideal it's not necessarily required not like it is for electronics now texas
because it's got that interchange with mexico owns a lot of this but alabama's at the southern end
of that ottawa alley and that is no laughing matter we have any folks in mississippi here
mississippi mississippi is getting in on this mississippi as you guys know the labor force
isn't too sophisticated it's a lower price point but some of those areas in central mississippi
central eastern mississippi are integrating with the birmingham area in automotive because
it's close enough and this is the kind of thing that trump made a big difference in
one of the clauses in nafta ii is that 85 percent of the value-added components
that are in a north american sold automobile have to be manufactured here and because we
already have massive network effects both in texas and in auto alley it's really easy
to add that incremental next piece you can get the price right mississippi has the right price
i'm sorry heavy machinery is kind of like automotive in that there's a lot of pieces that
go into it tends to be a differentiated supply chain but because not everyone needs a steamroller
it's not as spread out now when the united states allowed mexico excuse me when the united
states allowed china to join the world trade organization in the year 2000 this entire sector
whether it was for farm equipment manufacturing uh manufacturing equipment uh construction equipment
or mining equipment the whole thing moved over to china so if we do have a split in relations
i hope you have the heavy equipment that you need because it's going to be two or three years before
that can retool and there aren't as many places in american automotive that can handle heavy
machinery because it's not what they were designed for you'd be able to move around
really big chunks of metal houston can do that but they can't do that
and continue to excel at automotive at the same time they need more industrial plant
so if you are in the need for a heavy truck or a combine you might want to speed up that purchase
because this while it is being retooled and it is coming back one of the trump's things 80
has to be done here it's not moving as quickly because not everybody needs one until they do
we also have the greatest internal migration going on in this country's history at least
since world war ii now this is not a population density map this is an urban expansion map
so any city in green can physically expand in any direction without restriction you move into blue
they're blocked in one or two directions by the time you get down to red they physically cannot
expand at all so for example dallas fort worth can just sprawl like a lesion across northern texas
whereas san francisco is completely blocked in by ocean and mountain
if you're in red the only way to expand and add people is to move
up if you're in green you can go out and going out costs one tenth as much on the whole
so blue and green can expand orange and red can't that explains housing values for the most part
a lot of other things going on first of all baby boomers don't want to shovel snow when they retire
they move where it's warmer millennials want to raise kids and not in an efficiency apartment
in the castro they're moving where there's more room and where it's cheaper or they can have an
actual house suburbs are great third because of covid no one wants to be on the subway the cities
with circles are dependent upon mass transit we used to think that as a plus right now not so much
that means that we have a lot of citizen mobility that is moving to the mountain west
the southwest and the south roughly half of our urban centers are losing people and half
of them are gaining people and that wash but if you guys remember what happened after the
financial crisis we stopped building homes for three years we entered covid with fewer free
residences than at any time in our history we're down 800 000 nationwide it's gone down since then
so we had three months at the beginning of cobin where no one built anything
so we have half the population in some degree of motion concentrated on half
of the metro regions at the same time we have housing shortages on a national basis
i live just outside of denver and in my neighborhood property prices have
doubled since coveted started same things happened in austin where i
moved from wish i would have hung onto that house for a couple years
you