Podcast Transcript: Boris Vladimirov on US Exceptionalism, Europe Risks, and China Weakness

Summary

This is an edited transcript of our podcast episode with Boris Vladimirov, published on 28 June 2024. Boris is a managing director at Goldman Sachs. In this podcast we discuss late cycle dynamics, concerns about China, the impact on Europe, and much more. Please note that Boris gives his personal opinions in this episode, and not those of Goldman Sachs or any other organisations he is affiliated with. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.

Introduction

Bilal Hafeez: Welcome to Macro Hive conversations with Bilal Hafeez. Macro Hive uses natural and artificial intelligence to educate investors and provide actionable insights for all markets, from rates to FX to equities. For our latest insights, visit macrohive.com.

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Now onto this episode’s guests. Boris Vladimirov. Boris is one of the leading macro thinkers in the market. He’s managing director at Goldman Sachs, and before Goldman’s he was a partner and portfolio manager at Rokos Capital Management. He also worked at Fortress and Brevin Howard.

Boris started his career on the sell side, which included working at UBS and Dresdner. I should also add that Boris will be giving his personal opinions and not those of Goldman Sachs or any other organizations that he’s affiliated to.

Now onto our conversation. Greetings, Boris. It’s great to have you back on the podcast. I always really enjoy our conversations.

Boris Vladimirov: Thanks for having me. And same here, great work to you and to the whole Macro Hive team.

Bilal Hafeez: Great. Thanks for that. Well, let’s jump straight into it.

Current Developments in the Global Macro Cycle

There’s a lot going on in the world at the moment, so maybe let’s just kind of benchmark ourselves a bit here. So what’s your thoughts on the global macro cycle right now?

Boris Vladimirov: Great. First, you know, a very quick disclaimer that these are my personal views and in no way reflect the views of the institution that I work for, which is Goldman Sachs.

My views on the macro cycle are that we have been in a late cycle situation, and it’s very hard to call the length of the late cycle – it’s probably better to call it a mature cycle situation.

And I think there have been a couple of false signals or a couple of shocks that were about to trigger what we call a recession, a rapid easing of the labour market – if we can define recession in this way. But they didn’t, mostly because of the evolution of policy post-Lehman and the way automatic stabilizers work. Policy was super effective to stabilize the shock in 2023. And as such, our answer, stabilizer shock. The cycle can extend, but of course there are headwinds and frictions. And I think we are in slightly different places among the main regions of global macro.

I think starting from the point of weakness, I would be most concerned about the growth in Asia, particularly what I see based on my metrics in terms of money dynamics and credit dynamics in China, even though we have had pickup in velocity and some decoupling between money growth and nominal growth there, the type of deleveraging, deflationary vortex that is happening, which I do not think is now only due to the property market, but also because corporates have become increasingly cash cows, mature companies that can generate cash flow without much investment.

Bilal Hafeez: It sounds a bit like Japan. A Japanization in some ways.

Concerns About China

Boris Vladimirov: On steroids, I think. I think actually the scale, the size, the global impact could be much larger. Because obviously China is a larger economy and quite integrated in the global manufactured goods chain.

And then again, as you mentioned, Japan, obviously one country which I always look at when I want to kind of feel the temperature of what’s going on in China, because it has transparent and timely data, is Japan. And as we can see, Japanese growth has by surprise been on the downside. Surprisingly, I think it’s all time low for Japan.

So I think that it is quite concerning in many ways. Mostly because it’s going to make it harder for BoJ to start a rate hiking cycle as long as the cyclical weakness is underway. And the way I can see the time relationship between the collapse of money create aggregates in China and the Western PMIs, I think the next three to six months will be challenging – not only for Japan, but also for Europe.

Bilal Hafeez: Just one thing on China. We’ve heard of these policy measures over the last month or two. Some people have called it kind of real estate, QE, and all of these sorts of things. What’s your thoughts on those?

Boris Vladimirov: Okay, so look, the Chinese policymakers have targeted long term stability in a way that they have been trying to avoid large injections of liquidity or stimulus support.

First, because already the fiscal side has been quite extended. If there is one example where repeated use of public balance sheet at some point can reach limits, I think China probably is a good example of that. By the public balance sheet, I mean also local government and quasi local government vehicles, as well as the central government, which is still not as high. But obviously the pace of growth of central government debt has been quite fast.

I think the public balance sheet is becoming relatively large for large scale stimulus. I think also the shift of the growth focus from infrastructure, which has been accessed by, so to say, to more advanced technologies and investment in high tech science is very good. But again, that is not going to preclude the propagation of these weakening impulses to the global economy.

Again, I do not have a negative view on China per se. What I mean is that the impulse of the Chinese supply for global support, for global demand is likely to weaken over the next three to six months, let’s put it that way.

I’m just thinking about it in a global macro contribution. I mean, there are some amazing things happening in China, as you can see, economists writing about scientific development and so on. I think that these are two different things.

Again, who apart from Japan, can feel some weakness? Obviously, you have Europe, which generally is about three to six months. And as you can see, even over the last six to nine months, actually, European export or Chinese imports from Europe have slowed down – they are actually down 10% year on year. That 3% is a dollar effect, but still down year on year on something that normally is growing 10%, 15% year on year is a big deviation from trend.

Again, this puts Germany probably in a slightly more difficult place, apart from all the other challenges that Germany has experienced.

Germany-China Trade Relations

Bilal Hafeez: On that German-China trade relationship, do you think some of that’s structural? Insofar as China’s producing more cars now, there’s a shift in the relationship where in some ways, China’s industrial export market has now started eating into Germany’s.

Boris Vladimirov: Well, absolutely. China, as it goes up the value chain in terms of manufactured goods, is going to become a more and more formidable competitors. Germany still, I think, produces and sells around 6 million cars in China per year. It’s a large number. And that’s why Germany has been a bit more restrained or sceptical in terms of the tariff decisions on Chinese vehicles in Europe.

But I do think that we’re talking about broader capital, good exports, which the German mittelstand obviously is a major player in those. If they do slow and continue to slow down, this can be more eventually more challenging. So that would be my main focus. So that means that eventually, down the road ECB might have to ease more than it’s currently priced in.

The Role of Automatic Fiscal Stabilisers in the US

And then taking into consideration about other things including discussions about R-star, the US is obviously a different place because the US has extremely well-functioning automatic stabilizers. Anytime you see some slowdown in private demand, you see immediate widening in the deficit. And that is then smoothed quite like the overall demand that we smoothed quite quickly. That happens.

Just to give you an example, we had the FCI tightening in April with a bit of equities. Also in May things slowed down. There was a downside, surprises, a few numbers and then there you go. Then the May fiscal deficit came at 350 billion which is annualized about 15% of GDP. It’s a fairly large number and it’s 4% in annualized term.

Bilal Hafeez: I mean how does that stabilizer work exactly in the US? I mean what part of the stabilizer – is it like lower tax take? Is it more, some spending kicks in somewhere?

Boris Vladimirov: It’s not spending based. It is revenue-based. It’s a revenue-based stabilizer. So your expenditures are fixed. And to be honest, in all fairness, when you have a political debate, usually the political debates are about the level of spending. And in terms of level spending, the US has not been particularly loose in terms of the changes from last year. 2024 was not a budget where there was a big spending spree. No, not at all.

Emerging Markets Risks

But emerging markets is different, emerging markets is all in the deficit number. And if you have a boost in revenues, because those of supposed terms of shock, then politicians can very easily adjust spending higher because they have more money. And they keep targets like benchmarking deficit, which makes consolidation in emerging markets more difficult – which in a country like US, if you have a positive surprise then your deficit should be improving.

Now the surprising thing in the last few years was that despite the inflation shock, obviously the deficit did not improve that much. It improved somewhat after COVID, but there was no tightening to levels which you would see when US fiscal policy started like in the nineties and so on.

So overall there has been a trend of loosening of fiscal policy in a number of countries. It’s a bigger differentiating factor between the economies. It will define also trends in exchange rates and interest rates, I think at least initially. And of course, we have seen that markets have become more nervous in respect to a fiscal policy, elections, and what elections would mean for fiscal policy in the course of the past maybe couple of years.

And I think obviously it started with UK with some technical reasons why bond market volatility increased. But I do think that actually when I look at the three blocks again, China, Europe and US, I would still say that US still looks the strongest.

And there is only one thing that I want to mention which is absolutely phenomenal; there is one time series which is part of our recession probability model. It’s been quite a good lead, and it’s the net interest expense of US non-financial corporates. How much money net between what they have as cash and what they pay on their debt, and how much they have to pay.

So, every time the Fed hikes rate since practically the sixties, that number goes up 10-15% year on year and even sometimes 20. And there is a recession. Every time the Fed cuts, this thing goes down 10-20% and there is a recovery. Guess where this number is now? It’s -40% year on year. -40%.

Unusual Corporate Dynamics in the US

Bilal Hafeez: So even though the Fed has raised rates, the net interest expense of corporates has actually gone down?

Boris Vladimirov: This is the first period where actually the average, on average – and a very important caveat – on average, US corporates are benefiting from the mix of loose fiscal and tight monetary like never before. This is phenomenal.

Of course, the caveat is that it’s not evenly distributed. You have a small number of winners, obviously the tech companies, and you have the high-net-worth individuals that are excessively benefiting. Excessively, but extraordinarily benefiting. I think that this is actually a very strong moment because when you think about creative destruction, you’re practically taking resource from the old world, capital-intensive, highly levered part of the economy, and you’re shifting resources to the new tech-based low interest rate, actually cash rich, low debt knowledge economy, which has no depreciation. Right?

Bilal Hafeez: So in some ways the distribution, the skew in the distribution, isn’t necessarily a bad thing, you’re saying. Actually it could be positive in the sense that it will shift resources from the old to the new?

Boris Vladimirov: Well, it’s bad for the old. I mean, it depends which part of the economy you’re in, right.

As we can see today there was an article in Bloomberg about rising mention of bankruptcy in the media like media account, comparing that to credit spreads. So definitely, I had this macro factor among my practice code, which is called the solvency risk index, which basically is a combination between real rates and credit spreads. And the real problem happens when you have higher real rates and wide credit spreads.

Now in the last 20 years, there was only one such episode at about four standard deviations from the average, which was the 2007, like Q4, 2007 until Lehman. So that was when you had the combination of high real rate and wide grade spreads. This is absolutely toxic, and it leads to major problems.

Now, at the moment, we have relatively high real rate, but actually grade spreads are quite tight. This index is like a two standard deviation, plus we fall at four. And that’s why I keep saying, when people ask me about how long will the equity bubble, or is it equity bubble, I don’t know, like how long is the party going to last? And I say, look, if you can answer to me when credit spreads are going to start widening, then I’ll be able to kind of narrow the answer.

But I think credit is in the driving seat. And of course, there’s been a lot of allocation to credit. When you look at the amount of money that has gone towards credit strategies, credit funds. I wouldn’t say that the market is not supported the overall yield levels – especially after thinking of the traumatic super low interest rate period of the past decade before COVID might still look attractive to people, but obviously now the risk is different.

I think that actually in terms of strategies, there is a real advantage now to invest with the specialists who would know which companies can benefit and which companies can really get hurt in these policies.

Fed Policy in 2024

Bilal Hafeez: It sounds like on a relative basis, you are much more positive on the US than, say, Europe and China. Does that then mean that you’re positive, say, on the US dollar? Does that also mean that you think on the Fed that at the very least they’ll cut less than other central banks? Could they not cut this year, for example?

Boris Vladimirov: To be honest, I think we are past the point of no cuts this year in terms of macro signals and expectations. I think that eventually, when the world starts slowing down, still US will have some recourse to that.

What I do not think can happen easily, is to see rates in Europe down to like zero or 1%. I think that is going to be much harder because of the automatic stabilizers that we mentioned, and because of the fact that if you lower rates to 2.5-3%, the credit constraint part of the economy is going to have a rebound. And the one that has benefited until now is unlikely to be to get much of a headwind.

Yes, they’re going to have less revenue, but it’s not going to be taking revenue away from them. I think that the Fed gets phenomenal power in terms of positive transmission or backstop or put so to say. And that is why people pour money into US risky assets. I think it’s a very kind of clear relationship between the two.

To the contrary, I think that in Europe we do not have the same type of corporates with the same type of liquidity profile, which means that the R-star in Europe is likely to be lower than in US on a more permanent basis.

Recession Probabilities and R-Star

Now we have this discussion about R-star, and I want to mention one thing in respect to that – there is a huge inconsistency in the market between the probability of recession two years down the road priced by the yield curve, three-month, ten year. Two-year down the road is 90% probability of recession at the current level of inversion. At the same time, two-year wing, two and a half to one receiver spread price is only 10% probability of recession.

So how can that be? How can the curve price, 90% probability of recession and the two-year receiver spread, the two-year wing, which is not even zero – one to zero price is 5% probability. When we discuss that discrepancy, obviously one explanation is habitat, and the fact that real money will want to buy duration as a hedge to the equities that they’re owning. There is a risk priority argument, right.

Not everybody can do receiver spread. Luckily, because also not everybody can sell them. But at the same time people come with the argument that R-star is a lot higher, so in the next easing cycle the Fed is not going to cut that much.

I have a reasonably strong view that actually it is very hard for US to make an argument about the actual real long-term rate. But it is more straightforward to make arguments about what is the front-end real rate that is going to influence supply demand conditions. And I think that that front end real rate varies with the level of fiscal stimulus.

So I am more in the camp of not permanently too high, not permanently too low, but variable. While in Europe I think actually it is definitely lower than US.

Bilal Hafeez: Just to be clear on the probabilities, you were saying one was looking at the effect of the cash market, the yield curve probability, and the other was looking at the options market probability. And that’s why you were talking about different habitats. So real money investors would be using the yield curve that will reflect their view in some way, and then the options, not all players in the market would necessarily use that. So you could actually have different pricing. It may not necessarily be consistent with each other.

Boris Vladimirov: If there was an arbitrage condition – I don’t think that there is a clear arbitrage condition – but if there was an arbitrage condition, you would put steepeners and you would buy the receivers. It’s a double negative carry though, that’s the problem.

Bilal Hafeez: It’s expensive.

Boris Vladimirov: It’s tricky, yeah. Once and when the Fed starts cutting, is when this kind of economics changes because then the negative carrier is going to see a decline of steepeners. But I think it’s an interesting situation. To be honest, I have never seen such a large discrepancy in probability pricing of the same event by different segments of the same asset class.

Bilal Hafeez: Yeah. And I guess also credit spreads are so narrow as well, stocks are trading. I mean, they’re also assigning a low probability.

Boris Vladimirov: No, actually credit spreads right now is actually high probability of recession on two-year horizon.

Bilal Hafeez: On a two-year you’re right, I was thinking more on the short term.

Boris Vladimirov: Short term no, but on a two-year, a tight credit spread is actually the other way around.

Bilal Hafeez: Yeah, that’s fair.

Boris Vladimirov: So, I mean, the overall probability of recession across various segments – so equities are still very low altogether. The equity signal is below 10%. PMIs have declined because they’ve been weak for so long that the model says the PMI’s have to go up.

But the reality is that the real curve becomes so inverted that there is no cyclical optimism in the real curve. And the real curve is highly correlated to the business cycle, actually, both in Europe and the US.

In order to expect unstained, pronounced recovery as we know it from cyclical perspective, you need the real curve to steepen significantly – I’m talking about like, you need 200, 300 base points deepening in the real curve.

There are some things which are different in those key metrics and relationships that we know over the last 20 years. And it requires more humbleness and more caution rather than anything else.

The US Election’s Impact on the Economy

Bilal Hafeez: Now, earlier you mentioned elections and politics. I mean, maybe we could start with the US elections, and then we can talk about the recent developments in Europe.

So, on the US side, let me just present this case to you. When I speak to investors, a lot of them use the 2016 reference point, which is if Trump wins the election, polling is kind of skewing that way.

But let’s do scenarios here: If Trump wins the election, that’s going to be bullish for the economy, he’ll have some kind of fiscal stimulus, whether it’s more tax cuts or something, deregulation, pro-business stocks go up, bond yields go up, dollar goes up. That’s the template people are using. And then Biden will be just business as usual in some way. So, is that the right template to use – 2016? Or are you seeing something different in terms of how these scenarios would play out?

Boris Vladimirov: I personally think that with US, the US is so important to global developments that the best assumption is that the past is not a great guide about the future. You should look at the new and the different things, because otherwise it would just be too easy. And we know that it’s not easy. I think that it’s very important to analyse the initial conditions.

I personally think that market participants – at least on the fast money, or as they call the smart money side – they have very high prior that Trump is going to win relative to what the political scientists say.

And I find this very interesting, because when market participants have certain bias relative to some specialist opinions, or betting markets, there can be surprises. Again, I’m quite agnostic on my view about the outcome. But I think that if there is any reason to believe, or any evidence to believe that the chances are more even than what market participants believe, there can be some moves even before the elections. That’s kind of how I see it.

As we get closer to the elections, we’ll have obviously more opportunities to recalibrate our priors. And that recalibration probably is going to start next week with the debates. I mean, the debates are obviously an important part – we have in August the Democratic convention, we have Trump’s choice of a running mate. So, there will be a lot of things that are going to come to the market.

But at the end of the day, what I think is important is to understand a very serious constraint that is not only valid for US, it’s valid for a number of countries – We might have overused the function of the public balance sheet of stabilizer. If China wants to teach us something without teaching us specifically, a lesson, it is that, yes, you can achieve greatness, by maxing out the public spending card, but then eventually you will have to consolidate.

And when my children are asking me, so what is today’s religion? Because there is always now this debate about religions, and it’s kind of a big divisive point – I say, look, there is only one religion in the world today – it is the religion of avoiding pain by all costs and all means. And everybody’s trying to practice that religion across all political spectrums.

But the reality, is that in systems which are zero sum game or near zero sum game, it’s very difficult to do that ad infinitum, right? You must have the perpetuum mobile or infinite resources to be able to do that. If you have constrained resources, it’s just a question of resource allocation or intertemporal substitution. And then at some point you have to take some pain, right? And obviously, when you have children and you’re teaching them things, you have to explain why certain things which are not fun need to be done, right?

And I think when debt to GDP levels go up, there will be things that we’ll have to do that are not fun. And the question is how we are going to get the political will to do that, and whether the markets will have to play a role by higher volatility to send a message and so on. So these are all things that have happened in the past. There is nothing new about that. We have all read the stories about the bon vigilantes and so on.

Will US Debt Hit a Breaking Point?

Bilal Hafeez: In the case of the US, people often say, when will we see a US debt crisis? And you covered EM for a long time, so you know what EM crises look like. In your eyes, how do you think about answering a question like that?

Boris Vladimirov: I have a very strong view, actually, and I think it’s very simple. No, it’s not very simple, but I have maybe a one liner that can give a pointer. Look, the real problem is market volatility, okay? This is the real problem because if volatility goes up, some people make a lot of money and some people lose a lot of money. And those people who lose a lot of money, they do not come back to the game. And then liquidity goes down. And then there is a problem.

And I think that that is why central bankers are the best economists we have. Let’s put it this way. These are the wizards that have contributed tremendously. These are the unsung heroes of our time that have contributed tremendously to the prosperity of the world. And they understand very well that you have to do things to try to smooth and minimize volatility.

The problem, though, is that, again, if you start getting to levels of debt where – or if you have funding policy that start creating issues, that’s a risk – but more importantly, I think it’s really dangerous if your overall debt and debt funding goes up when actual wealth is going down.

For example, take US, ten years ago marketable debt was around 14% of net worth of US households, non-commercial corporates. Now it’s 17%. Is that a big change? It’s not a really big change. I mean, 14/15 to 17 is like two points. Again, it’s a safe asset. Now it’s also a higher yielding asset. I don’t think this is a drama, it’s a risk.

But if you have some events that create a large decline in the net worth – which means you need a situation of a large equity sell of housing, prices go down and so on – and at the same time you need to stabilize and your debt to GDP is already large. And then the debt as a percentage, as the net worth increases sharply and it becomes more volatile, then it becomes very tricky. Then it becomes a lot more problematic in terms of forward decisions. It can lead to bigger increases in the saving rate, which makes it hard.

So, I think that you can envisage parameters of the system where extensive over-reliance of the way the system behaved in the past may be misleading about the future outcome. And I think that in emerging markets you have exactly these problems.

First, the network of emerging markets is a lot smaller – the network of emerging markets is around 140% of GDP. US household network was 160 billion last quarter. This is basically 160% of global GDP. It’s massive. So US is a tremendously wealthy economy. And as such, I do not think that the current level of us debt is an issue.

And Japan tells us that as long as the private sector assets go up together with the public sector, debt might not be also an issue over a long period of time. The question is when there is imbalance between the two, this is the risk. And in all fairness, I do not see any substantial changes in that respect. But I do think that interest rate volatility in the long dated interest rates can pick up and can be higher.

And then the other argument that I think is very important is don’t forget the power of the carry. If you have an upward sloping curve, and you have 2/300 basis points of spread or 400 basis points of spread between your funding and your long dated bond yield – it’s a very powerful instrument to stabilize the market. So, I do think that I do not foresee a kind of a major debt crisis, but I foresee higher volatility. That is going to give some warning signals to policymakers.

The Rise of the Far-Right in Europe

Bilal Hafeez: And now we haven’t talked about the recent European election results. So, what we saw there was a fairly large victory for the far-right parties across Europe. Then we’ve had the surprise French election announcement as well, where Macron has called for an election. People now expect RN to win the elections there, so then you’ll end up with the RN, the right-wing party, winning parliament there. So why has there been this rise in the far-right? And does it mean anything for the macro space or markets?

Boris Vladimirov: I think the outlook for Europe is complicated. Europe has been under a number of shocks, practically since 2016. And the rise of the anti-liberal or nationalist sentiments and views and political ideas has been uninterrupted.

I personally explain that with one straightforward argument. The rising information load and complexity, perceived complexity is creating anxiety in a wider number of individuals. And even though metrics of well-being continue to actually slowly move higher, that well-being does not result in more happiness and in appreciation of the status quo.

So, I think the impact of social media and the exponential increase of information overwhelms the bandwidth of our consciousness, which does not evolve for that amount of information. I’m sure that today, in a week, we are processing more bits of information than people will probably have processed over a millennia in the history. And then the brain or the physiology of the brain, this is a slow-moving process. Maybe 20 generations down the road, you know, our grandchildren will have brains that will be able to process infinitely parallel computing type of people. But we are limited.

And that anxiety, I think, is generating two things. Anxiety in the past always generated the need for religion, which is a simple answer that can explain the world without questioning its rationality or based in science. That’s number one.

This is, I think, a great explanation why the far right is rising; they have one simple answer – It’s foreigners’ fault for everything. In fact, if you look scientifically, immigration is positive for the economy. The most successful countries are the multicultural, multinational countries, and there is zero evidence that a clean, one nation, kind of simple, straightforward state can be in a much better place than a country that has opened itself to immigration.

I think that the message of the far right is obviously based on something which is not founded in reality, but it works because it appeals to an existential fear driven by complexity.

The second thing which I find worrying is the lack of dialogue. And I think, again, social media has strong effects with this cultivation, practically of listening only to those who like you and talking only to those who think the same. I think the culture of dialogue and debate, which is absolutely essential and foundational for democracy, I mean, the word parliament, you know, bears that in its meaning. I think this is very concerning.

I think that everybody, as a society, as responsible members, everybody has a personal responsibility to foster a culture of dialogue if we do not want to end up in more division, more conflict, and in a much worse state than we are now. And that is valid in the first place.

I’m not talking about international – because if you have bad actors who do bad things, it’s really hard to listen. Let me listen to your argument. You want to come and kill some people, and I’m going to sit down and listen to you destroying the energy grid of a country and killing millions of people. It’s not the right thing that you can have a dialogue on. You need defense equipment for that. It must be reasonable and rational.

But I think the first thing is to start on a country-by-country basis, which I think, in a way, in France, this is what Macron actually wanted to achieve by surprising everybody and triggering the early elections. Because obviously, I think Macron’s team is extremely savvy. Macron has been phenomenally good for France in terms of business, in the economy. He relies on technology. He understands public opinion, he understands the political landscape.

Everybody says this is a gamble similar to Cameron’s Brexit vote. I think that you can be passive and wait and take time, but sometimes if you throw a little shock, you can try to foster negotiation, you can foster debate, and you can try to foster agreement. The main issue is whether this environment of polarization is just not going to create a bimodal kind of distribution of the outcome that has zero chance of bridging the differences. That’s the issue.

Eventually, replying probably to Nassim Taleb, who is one of the great practitioners of probabilistic wisdom to the real world in life, I think am I kind of doomsday pessimistic on Europe? No. I think actually I’m strong a proponent of the concept of anti-fragility. I think that systems that are closed, that are stiff, that do not have embedded drive for change, are a lot more at risk from cataclysmic events than systems that are battered with a number of shocks and have to go through.

I mean, think about on the positive side – Europe actually managed to survive one of the biggest energy shocks in a way that has surprised many. In a combination both of kind of saving and some stimulus. So, I do think that adjustment is possible. Again, political will is very important for the European project. I would be worried if you had most of the countries run by the far-right and the dialogue and the integration in Europe being put on hold.

Again, I do not think that there is the case for disintegrating Europe. Everybody has seen the benefits of the joint currency and ECBQE. So, it’s in the back of the thinking of all those far-right politicians who think they might take power and of course, that type of backstop they will all love to have. So, I think that there is IECB. Again, back to my praise to central bankers. I think that central banking is the institution that has allowed for the prosperity. I think this will continue to be the case.

Bilal Hafeez: Yeah, not many people in finance sing the praises of central banks. It’s good to hear somebody actually say that.

The Impact of AI on the Economy

Now, we haven’t talked about AI yet. Obviously, there’s the optimistic side of AI, that this AI is transformative to society and for the economy. Then there’s the pessimistic story, which is that AI will take people’s jobs, will reach AGI. It’s going to wreak havoc amongst everyone. How do you think about the whole AI revolution?

Boris Vladimirov: I’m going to start with the optimistic side. I think the main area in which I would love to see more progress, actually, is education. I think that in a number of countries, schools look like how they looked 2-300 years ago. Now, you may call that tradition and quality, but I think that actually it is more a replication of vices rather than anything else, because knowledge has become very dynamic, and you need a new dynamic approach.

Now, obviously, there are some countries, like Finland, which are incredibly innovative, and they are achieving great results in their education system. I think we have to experiment; we have to do different things in different countries – using AI in schools. But I personally think that an AI assistant that brings the child on a tailored basis based on the psychological profile of the child, on a curiosity journey, with math, with science, with everything that is factual, is phenomenally important.

Of course, the schools will remain relevant – they are not irrelevant. But they will turn more think places where we learn social skills, we learn charity and we play sports. And I think that if we can restructure the education systems along those lines, the countries that do that are going to yield phenomenal results down the road.

On the pessimistic side, I am mostly worried of application of AI for malicious purposes. This is like rogue countries, rogue agents in the global system who want to create chaos and disruption obviously will have much more leverage because they will be able to achieve their bad goals with less resources. This is the key problem. Obviously, there is a number of people thinking about that whose job is to protect society. I think these people have a lot of work to do and I think it’s a very important mission that they will have.

On the job side, I strongly believe in creative disruption. I think that we have to go back to the BOMO effect. The very productive parts of the economy shrink to irrelevance. You’re probably not too worried that agriculture employs only 1% of workers and creates only 3% of global GDP. 200 years ago, if you put those numbers forward, people think that you are totally out of your mind.

So I do think that there will be many areas that have potential to shrink on relative basis. The BOMO effect stipulates though, that the wages in the areas that shrink go up – that increase in wages brings up the wages in the less productive areas, making them bigger in the economy. That’s why governments – along the productivity shocks of the last hundred years – government has gone from 3% of GDP to 50% of GDP, right? And the question is can we automate government, right?

I’m sure that the economy is going to generate some form of activities – I think sports and competition probably are going to be an entertainment, is going to be enumerated a lot more. I am very sceptic to the ultimate use of AI in terms of art and creativity, including music, because even though you can mimic existing things, the human preference set is a random variable. And as we know, AI is not great on random walks. AI is a martingale process that can very well reflect the existing state of the world.

Apart from strategic behaviour, when it’s optimizing a linear function like playing go, it is not great with nonlinear problems. That’s why in markets we’re going to still have to take the human decision-making due to our ability to manage risk. And I think that it’s not so straightforward to apply marketing technologies to random walks.

As such, on net, on balance, I’m huge optimist of the utilization. If we can muster up the right kind of vision and focus. And I think that again, there is a strong case for the US leading the way. UK as well, I think is doing a lot to try to keep those academic hubs that have their kind of ecosystems created doing well. So UK is up there. I mean, India should work. China is a formidable power already in that respect.

Are We in a Tech Bubble?

Bilal Hafeez: Now, the final question I had for you on markets is, are we in a tech bubble and how long will it last?

Boris Vladimirov: I think we have to go back to physics there and the log periodicity universal exponent, usually before reversals, you have acceleration in volatility. And the reason of that is related to deployment of margin and the returns on margin. Excess confidence leads to excess margin taking. And in order to cover the margin, you need larger and larger moves. Otherwise, the house of cards flips around. I do not think that we’ve seen that form of exponential acceleration yet.

When we see it, we are going to see positive correlation between the VIX and upside moves. I think this is potentially an indicator to look at. Again, I would say liquidity changes in terms of the broader measures of liquidity. The broader measure is the velocity of money. The narrower measures of liquidity are bank reserves. Liquidity changes related to that usually can be triggers, especially in the last two years, equity investors have been quite sensitive. So, I would say probably not yet, but there are a number of flags that we have to be attentive to.

Book Recommendations

Bilal Hafeez: That’s great, I appreciate that. Now, just a round off conversation. I do always like to ask you about books, anything you’ve been reading that you wanted to flag, whether it’s in markets or non-markets.

Boris Vladimirov: Well, it’s actually non-market. A couple of things I want to mention. One is there is a really good book, it’s called ‘Vienna: How the City of Ideas Created the Modern World’. It’s actually out of the moment.

I was born in Bulgaria. Vienna became my home in the nineties. And you know, I’ve always been fascinated by the history of display in terms of intellectual history. If you’re more interested to learn about the intellectual history of Vienna and how it affected science and knowledge in the 20th century, I think this is a great way by Richard Cockett. It’s Yale University Press.

The other book that I find very interesting is called ‘Babel’ by R.F. Kuang. R.F. Kuang is a fascinating young writer, and currently she’s doing a PhD at Yale. She already has a line of five or six books. Bable is a fiction, completely fictional book about a Chinese orphan that gets brought by an English professor and trained in Latin and Chinese and Greek, in order to become a superb translator.

It’s a book about language and power, which I think in a world that looks fairly Orwellian in many aspects. And George Orwell, obviously, the theme of language and power is very strongly presented in his work. I think it’s a very good read of that, kind of in an almost fantasy way. It takes place in Oxford in the 18th century, so it’s a bit like a period drama.

I think sensitivity to language, especially if we want to navigate a political and social sphere that is very polarized – to have inclusive language, that tries to build bridges rather than build walls, it is a very, very important part of this culture of dialogue and debate that we want to foster within our societies. I think this is very important.

Bilal Hafeez: No, that’s great. I appreciate that. Thanks for that, Boris. So just finally, what’s the best way for people to follow you?

Boris Vladimirov: I think that’s tricky, because obviously, people in the markets can follow my work, which is published by Goldman. But I think these podcasts with you have been a good way to reach out to some people who are interested. And of course, then people occasionally, they just reach out and they drop me a line. Yeah, that’s the way. But obviously, we’re all very busy and we try to find efficient ways to communicate. I would say via the publications that I occasionally do at GS.

Bilal Hafeez: Yeah, okay. That’s great. Thanks a lot, Boris. That was excellent. And good luck with all of your work, and good luck with navigating these markets.

Boris Vladimirov: Thank you. Bye. Thank you.

Bilal Hafeez: Thanks for listening to the episode. Please subscribe to the podcast show on Apple, Spotify, or wherever you listen to podcasts. Leave a five-star rating, a nice comment, and let other people know about the show. We’d be very, very grateful. Finally, sign up for our free newsletter at macrohive.com. we’ll be back soon, so tune in then.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)