How New Technologies Will Shape the Economy ft. Koen De Leus & Philippe Gijsels

[00:00:06] Philippe

If you go to a world that we think that we will have, a world of volatility, a world of geopolitical worries, a world of inflation, a world of higher rates, basically, I think that’s a world where gold will do very well. Of course, we now broke the $2,000 level, which took us a very long time to take out. But now I think we have started a new upward wave and nobody knows where it’s going to go or how far it’s going to go. But I think this could be one of the trades of a lifetime.

[00:00:39] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also understand that there’s a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions.

Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:31] Niels

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary people from all around the world. In this series, I have invited one of them, namely, Kevin Coldiron, to host a series of in-depth conversations to help uncover and explain new ideas to make you a better investor. In the series, Kevin will be speaking to authors of new books and research papers to better understand the global economy and the dynamics that shape it so that we can all successfully navigate the challenges within it. With that, please welcome Kevin Coldiron.

[00:02:12] Kevin

All right. Thanks, Niels, and welcome, everyone. So we’ve got guest inflation today. We’ve gone from one guest to two. But unlike the Fed, we’re happy about our inflation. We’re going to talk today to Koen De Leus, Chief Economist at BNP Paribas Fortis, and also Philippe Gijsels, who’s Chief Strategist at the same bank.

They are co-authors of a brand new book called “The New World Economy in 5 Trends: Investing in Times of Superinflation, Hyperinnovation & Climate Transition.” There’s a lot to like about this book. There are interviews with debt economists and future central bank presidents, and there’s also a really nice balance of explaining the underlying economic forces that are going to create the trends they talk about and then linking them to investment opportunities.

That’s the goal for today’s show, to give you a sense of what’s coming economically and how it might impact markets. So gentlemen, first of all, apologies for my pronunciation of your last names. But thanks for joining us and welcome to the show.

[00:03:20] Koen

Thank you for having us.

[00:03:21] Philippe

Thanks for having us.

[00:03:23] Kevin

Okay. So let’s start with Koen. Your day job as an economist is to look forward, to try to understand the future. You’ve been doing that a long time. Presumably, you could have written a book like this 5 years ago, 10 years ago. What is it about now, about this point in time that made you feel like it was the right time for this sort of book?

[00:03:51] Koen

I had the impression that I had lost… I didn’t find the framework anymore. I didn’t find the framework anymore to interpret all the things that were coming at me. And so about three years, four years ago, I started thinking, what is different from the past 20, 30, 40 years? And then I set myself a goal to look into, let’s say, 10 trends for the 10 next years.

I think that I was a little bit too optimistic, so I stuck with 5 trends. And happily, my wife has stayed with me as well, because with 10 trends, that could have been a different thing. But now, looking at these trends, looking at globalization, it’s turning into deglobalization, which we call multi-globalization; looking at aging, which is biting harder certainly in Europe.

Looking at let’s say globalization, looking at innovation which is starting to come through I have the impression. Looking at all the five trends that we are talking about, I have the feeling that I get more of a grip on the future. I can interpret it. I can interpret it more instead of all the trends that were going smoothly in the past 40 years, I see in quite a lot of trends that they’re completely going the other way or that they are accentuating.

At the end of the day, four out of these five trends are increasing inflation, instead of decreasing inflation. This means, as well, that four out of these five trends push interest rates higher in the future while, over the last 40 years, they have been pushing interest rates lower. So, it now gives me a better framework in which I can interpret all the things that are coming at us. And as well the high debt and climate change, these are the two other trends that I’ve been studying.

[00:06:08] Kevin

Okay. I’ll just repeat them again. The five trends you’re going to talk about are innovation and productivity – that’s trend number one. Climate is trend number two, and multi-globalization, debt, and aging. So perhaps we can start with innovation and productivity. You were very clear about how important you think that is. You say it’s really the only source of future growth for ageing Western economies. That makes sense.

Economic growth is the sum of growth in the number of workers and the number of hours they work and how much they produce while they’re working. If we’ve got an aging population, that means fewer workers. People don’t work as long hours as they did in the past. So really, it just comes down to how much they produce while they’re working.

So I guess I wanted to start off by asking why we haven’t already seen higher productivity growth. We’ve had a lot of innovation, technological advancement in the last 25 years. Why hasn’t this translated already into higher productivity?

[00:07:15] Koen

I think that’s an excellent question. I dive deep into that. I think the problem with digital product innovation, of the past decades that we see, is that productivity gains are passed on this time in the form of consumer surplus but not in producer surplus. Now, let me explain that a little bit. Producer surplus comes in the form of extra profits. This was then distributed to employees these profits, and this resulted in an increase in their income and wealth.

But today, the increase in productivity is leading to consumer surplus, resulting in an increase in well-being. But that well-being is not counted in GDP, and that is a huge difference. Now, consumer surplus or welfare is defined as the difference between the value of a consumer experience when consuming goods. So what will be the maximum price I’m willing to pay for it and the price I actually paid for it? Due to market competition, consumers often pay less than they are willing to pay.

This abstract measure quantifies the economic welfare of a consumer who consumes the product. Product surplus refers to the real income of a firm. If you look to the 20th century and inventories of 20th century like cars and books and cassettes, there was no problem. If you have a doubling of the cars that are sold, then that doubles as well your producer surplus, but also the consumer surplus.

But now with digital goods, it’s totally different. It’s totally different. Here you see, for example, that there’s several marginal costs. For example, when one person is using a search robot or a million people are using a search robot, the cost of the robot remains identical. There you have these zero marginal costs. And so as consumers use more of these free goods, this consumer surplus increases.

But this change in welfare does not result, or at least resulted in much of a producer surplus and no increase in GDP. So we have more welfare, but we haven’t seen the same increase in GDP. That is the difference. Because you don’t have that increase in GDP, what you have seen that the productivity increase of this well-being hasn’t been taken into account or can’t be taken into account. That is the reason why you see that we don’t have an increase in productivity. That is the main reason.

[00:10:17] Kevin

Okay, that’s a great explanation. I think what you’re saying is something like Wikipedia, for instance. We all get value from it. But essentially, we don’t have to pay anything for it. So it’s not contributing to GDP, but it is contributing, in some broader sense, to our general well-being.

[00:10:40] Koen

On top of that, what you see is that Wikipedia has replaced Encyclopedia Britannica, for example. So it has even destroyed some of the GDP. Of course, it’s the same for example with a smartphone. A smartphone, why do you have that? It’s a great tool and everybody has a smartphone. But a smartphone of let’s say maximum $2,000 for a smartphone, which is a very expensive smartphone, has replaced products of total value of about $5,000.

You have a clock radio, you have a telephone, you have different kinds of things. It’s good that we have sold more smartphones because you have had quite a destruction of quite a lot of other products. It’s because you know as well that productivity is a risk factor. So that you have the inclusion of the input of first capital, you have the input of labor, and everything else that can’t be explained by this input of labor of capital is productivity.

So this increase of labor and capital continued to increase. You had some kind of restructure of GDP because of all these digital tools that are free. So what was leftover was a very, very meager increase of productivity.

[00:12:12] Kevin

That makes sense. I guess the question that naturally comes to mind is, why is the future going to be different? What can we expect to be different going forward? Why is there a chance that productivity could increase?

[00:12:28] Koen

Well, I think it has a lot to do with the fact that indeed we had digital innovations. I think with digital innovations, you see that you have had quite a lot of change in the nature of products. We have seen product innovation, for example the smartphones, but we haven’t seen process innovation. So product innovation that you’ve seen, these digital goods, yeah, they’re more or less destroying a little bit of GDP. But if you see process innovation, yeah, that is a totally different beast.

[00:13:12] Kevin

What’s an example of process innovation that’s different from product innovation?

[00:13:17] Koen

Well, process innovation, for example, the conveyor belts. Conveyer belts 50, 60 years ago increased productivity enormously, and it was because of electricity. So because of electricity, we’ve seen that we have had process innovation and we’ve seen that instead of making let’s say one car an hour, we made 20 cars an hour. That is process innovation. If you see product innovation, then the smartphone is the most obvious example. I just talked about it.

You have several devices in a smartphone. It replaced several devices: video camera, alarm clock, music player and everything. But that is product innovation. So I think where we’re going now is that we are going more and more towards process innovation. If you look to this process innovation, then this will come from exponential technologies.

What are exponential technologies? They are technologies that improve at a rate of at least 10% a year at a constant cost and for several decades. That’s the definition of technology author, Azeem Azhar. We have seen for the last 30, 40, 50 years that these exponential innovations, these exponential technologies are developing, are improving at a rate of 10% at least a year.

Some very good examples of that are for example artificial intelligence; second, 3D printing; third, renewable energy where you see that the cost has diminished enormously; and fourth, biology. These are four exponential technologies that are growing very, very, very, very fast. Just to illustrate that, I was doing a presentation on our book for liberal professions, and all of a sudden, these guys came after my presentation to me, and they said to me, “Koen, you’re completely right with regards to 3D printing. Five years ago, none of my colleagues, dentists, had a 3D printing machine. Now more than half of my colleagues have a 3D printing machine or are thinking of buying one.”

Why? Because these are exponential technologies that are going down in price at a very, very, very fast pace. And then you will see that they can be distributed and they can be implemented by many more companies. The same for biological tools, the same for artificial intelligence. Ones that you see that our spreading are rolled out to more than 25% of the companies, there you see that it starts to have an increase, it starts to have an effect on productivity.

I think we’re on the verge of rolling out these exponential technologies in the coming years and it’s happening today already with regards to 3D.

[00:16:33] Kevin

First of all, it’s funny you say that because I actually had the same conversation with my dentist last week. She’s planning on getting a 3D printer. But just in terms of the process you talk about, it’s very similar to what Mark Mills outlined. Mark Mills was a guest on our show about 10 months ago.

What he described is that he has this vision that you’ve got technological advances in materials, machines, and information all converging at the same time, and that’s going to lead to a productivity boom, similar to what you just outlined. But what he said is that, for a long time while these technologies are developing, they happen in the background. We don’t see them and then they just, all of a sudden, burst on the scene and we’re surprised by it.

But the development is already there. It’s been happening, it’s been building, and then at some point, there’s I guess a tipping point or whatever and they’re used more generally, and we start seeing productivity growth. This is kind of an unfair question, but when you say we’re going to start seeing some of the effects of this, is that in the next year or two or is that more like in the next decade?

Do you have a sense for when this might start, or has it already started? Is the performance of the US economy, surprisingly strong performance to the US economy, is that maybe the early stages of this? Can you be more precise in terms of timing?

[00:18:02] Koen

Five years ago, I wrote another book. This was called “The Winner’s Economy”. It was on digitalization, the inequality that it brought and everything. I was saying, I was forecasting an imminent increase in productivity at that time. I’ve thrown the book in the wastebasket because it didn’t happen. I think it will be something around 5, 10 years.

I think what is very important is, as you said, these technologies are being rolled out, they’re being invested in. Why is that? If you look to the past, when was there an increase in productivity? There was most of the time aftershocks. What we’ve seen over the past years, I think, is a huge round of shocks. We had the COVID shock and then we had the energy shock. We have in Europe and the Russian shock.

So all these shocks have made companies hugely invest in innovation because they still wanted to keep on working while there was a shutdown. They have started to invest in renewable energy because they want to decrease their dependence on energy. So because of these shocks, I have the impression that yes, we could be somewhere 5 to 10 years away from having a productivity shock because of these investments.

To which levels are we going to go then? I guess we could go to let’s say 1%, 1.5%, maybe some years 2%. So not in the so distant future.

[00:19:52] Kevin

One of the things when people talk about exponential technologies, particularly AI, there’s a lot of excitement but there’s also a lot of fear that you could lose your job and get replaced by a machine or a robot. You have a fascinating quote in the book where you say, “You don’t lose your job because of AI, you lose your job because of a company using AI.”

Another company comes along and employs the technology in a more effective way and it kind of outcompetes where you’re working. I think that comes from a survey that you did of your clients which included 13 of what you call “factories of the future”. I was wondering, you said, summarizing that survey, that those factories of the future had a very different take on the impact of automation on jobs than the general population.

So I was wondering if you could summarize what you did there. Tell us what these factories of the future are and why you think they have a more optimistic view of the impact of automation on jobs.

[00:21:06] Koen

So the factories of the future coming is a program installed by the technology Federation Agoria. These are forward-looking manufacturing companies using the most advanced digital technologies, and they have to go through a whole process to receive this factory of the future award. Today, there are about 60 Belgium firms that have received this label, and now this program is being rolled out as well all over Europe. So probably in the near future, there are going to be quite a lot of factories of the futures as well in Europe.

Now, when you say that technology is going to destroy millions of jobs, what you see when you look to the forecast of McKinsey, they estimate for example that the breakthrough of artificial intelligence means that between 2030 and 2060, some half of the current work activities could be automated. That’s scary. In 2020, the World Economic Forum estimated that 85 million jobs would disappear by 2025 due to a new generation of smart machines, and that is important as well. Ninety-seven million jobs would be created at the same time.

Now of course the big question is, who loses their jobs? Are you going to be one of these companies, one of these 85 million who are going to lose their jobs? Who will be affected? Usually, what we see is that it is the companies and it is the people that are working in the companies that do not invest in these new technologies. That is what we saw as well when we did the survey.

We asked in the survey, “How do you see the expected net job destruction in the short term and in the long term?” From these 150 companies that we asked, we saw that factories of the future were much more optimistic of job creation. The traditional companies said, “We are very afraid that we’re going to lose quite a lot of jobs.”

If you’ve looked into what kinds of job creation there was, in these factory of the future companies, from 2015 to 2020 compared to what kind of evolution there was in the other companies, you saw that the factory of the future increased their employment over that periods by 13% while in the other companies, there was a destabilization. You saw, as well, there was an increase in productivity growth in these factories of the future by 10% while there was an increase in productivity growth of the other companies of only 5%.

So you see, the companies that are using these technologies, that are training their people, they will see opportunities. They will grab more turnover because they had an increase of turnover of 14%, the factories of the future, while the other ones only 2%. This is bringing new opportunities. This is bringing new jobs.

So that’s why I say you don’t have to be afraid of artificial intelligence. You really have to be afraid that you don’t use artificial intelligence yourself. That’s where the quote is coming from.

[00:24:45] Kevin

Thank you for that. I think that’s a good opportunity to let Philippe talk a little bit here. As you were talking about the job growth at factories of the future, new firms that are employing technology, it reminded me of a section in your book where you say that right now, when we look at how the market is reacting to AI. It’s kind of reacting in the way that’s assuming that the current tech incumbents: Google, Apple, Microsoft, etc., are going to be the winners from AI.

But if you listen to what Koen just said and if we look at history, it’s often different. It’s often firms that maybe don’t exist right now or that are small. So how do you see this playing out? Do agree with the market that these incumbents are going to be the winners? If not, how do investors navigate or try to take advantage of these trends when the potential winners aren’t necessarily obvious right now?

[00:25:53] Philippe

That’s a very good question, Kevin. When you listen a lot to Top Traders Unplugged and you believe in trend following, the market is always right, basically. So that’s a very good conclusion. But let me maybe talk a little bit about the questions we get from clients. We basically get two big questions. The first one, is AI for real? Spoiler alert, it is. The second one, how do you benefit from it?

First of all, the question “Is AI for real” is a very fair question because we had five waves of AI already over the last 50 to 60 years, and each and every time it was a hype that died out reasonably quickly. So why is this time different? Well, there’s a fantastic book by Steven Johnson, “Where Good Ideas Come From”. Our book is also a book about books. If you’re going to read all the books that I’ve mentioned in our book, you’re on your road for quite a bit of time already.

But he says, what’s innovation? Well, innovation is like a table, a round table. On a round table, there are smart people. There are scientists, there are researchers, there are basic Nobel Prize winners, but there also what we call in Belgium innovators, so people who put stuff together. On the table, there are parts and parts that you have to see in the very wide sense of the word. It’s like microchips. It’s like computers. It’s like chemical substances, but there’s also research and so on.

So you let smart people play with parts and you’ll find something new. That’s innovation. But the point is, if you look at DaVinci for example, quite a bit of centuries ago, he drew parachutes and helicopters and submarines and so on, but these products never came into being only 200, 300 years later because he did not have the parts. If you want a helicopter or you want an airplane, or you want a car, then you need a motor. When you want a computer then you need a microchip. So you have to do this a little bit in sequence.

You already see where I’m going. What are the parts that you need for AI? Well, two big chunks. The first of it is computer power, quite a lot of it. And preferably also quantum computing. That’s a big trend that we also see in the future somewhere, in the not-too-distant future. The second one is big data, a way to store the data, to work with the data and so on. And these two parts are, today, on the table. So therefore, I believe that AI is for real.

Now, going back to your question, how do you benefit from that? If you look at the market, it’s a Magnificent Seven. Up until recently, it was the Magnificent Seven. The big ones we all know, the Microsofts, the Apples, the Googles, and so on of this world, they really dominated the market last year and also the first couple of months of this year. If you were not invested in them enough, you would lag in the indices, which could have used a little bit of a self-fulfilling prophecy because all the managers in the world were forced to buy this stuff.

Now, like you said, this is not the way it goes in history. Because if you believe what Koen says, and sometimes he is right, not always. He believes he’s always right, but not always. Well, this is going to create, in a certain way, innovation, but innovation also means incumbent players coming in and replacing the old companies. And that’s basically what Schumpeter says. So if you look at internet for example, one of the last big breakthroughs before AI, there were not a lot of companies quoted on the stock market. All of a sudden, there is a fantastic idea.

With the internet, a lot of money comes in. A lot of new companies get created, 400, 500, 600 of them. Most of them go belly up, but you remain with a couple of big ones like Amazon and Meta and some others, and they are the new leaders. That happens time and time again in history. That was the way with plastics, that was the way with 4G, and with trains. If you know the history about train companies, they all went bankrupt four or five times, but eventually, they all stayed, and the companies and the technology continued.

Cars are a very good example. At a certain moment in time when they invented cars, there were about 6000 of those companies. There was even one in Belgium, which also by the way went belly up. And there were about 10 to 15 that remained. So what you could expect here is that new incumbents come in and sort of replace the old players. Now, I’m very careful when I say this because it’s always very dangerous to say this time it’s different.

But never before have we had companies of market cap of about $3,000 billion, with so much cash, so much profits, so much as in years, so much knowledge, the possibility to buy whatever they want. So at this time, they could take a chunk of this market. That’s always possible. So what do we do? Because that’s the question, and it’s very chicken what we do, but we do not want to lag behind the market or competitors.

So we are sure that we’ve invested enough, not too much, in the big guys. But we also look for other opportunities. It’s not in the book, but what I look at is something that you invent when you are on the road. We are, in fact, looking for the Domino’s Pizza of AI. If you look at Domino’s Pizza, it’s a pizza shop. It’s a very big one of course. But that’s hardly what you would call a technology company.

But if you look at the stock price of the thing, and you would take away the name Domino’s Pizza, and you would ask anyone what’s this, they would say it’s like Bitcoin or it’s like a technology company because it has gone up 40 fold or something like that. What did they do very well? Well, when 4G came into being, they used 4G in their new model to take orders and so on, and that was one of their ways to grow.

If Koen’s story is right, what needs to happen to have productivity or more productivity, AI has to come out of the technology space, and it has to move all over the economy. Therefore, we invest in The Magnificent Seven, we are on the lookout for incumbents, but we also clearly look for the Domino’s Pizzas because they’re still quoted at a lower valuation.

[00:32:17] Kevin

It’s a tricky one, right? Because as you say, it’s hard to avoid investing in the Magnificent Seven. At the same time, it doesn’t feel like this is a trend that you can invest in in a passive way. You have to, I guess, take some risks on companies that may not exist right now. They may be private companies, or they may be companies that, like you say, can figure out how to employ technology and grow in a different way.

For just a normal investor, is it even possible then to benefit from AI given that most of the tools at people’s disposal are passive index-like products either tracking the market or some type of theme, ETF-based theme? It seems like a really tricky one for the average person to get exposure to.

[00:33:20] Philippe

It this. It also probably is for the professional as well because looking into the future, like Niels Bohr already said, can be complicated. Making predictions, especially when it’s about the future, is tricky by definition. Now, I still think, and that’s what my team or part of my team does, ww try to look at these opportunities. Also, bringing trend following once again into the equation, if you buy the S&P 500, it’s a passive index. You buy it, but you also expect is that when new companies come in, and they become hugely successful, they will be included in the S&P 500 – not immediately, but gradually.

So if you look at the S&P, and I don’t know the numbers by heart, but let’s say 30, 40 years ago when we talked about the Dow Jones. If a company was in the index, it would be there for 50 years or something like that. Today, you see that the ecosystem is replaced faster and faster. So when new names come in like Nvidia and so on, you invest in them. I must say I’m a stock picker. I’ve looked at markets since I was 12. So I’m a stock picker. That gets me up in the morning.

I’m not saying that you should go passive, and you should only look at indices. But the only thing is the S&P 500 also gives the average investor the opportunity to invest because you know when new companies emerge, they will eventually come into the S&P 500 and then you do not have to ask yourself the question, am I going to pay 40 times not earnings but 40 times revenue for Nvidia because who will buy it?

That’s one of the main issues of last year. Now, in the NASDAQ 100, these seven names are about 50% of the index. And even in the S&P 500, the seven are 30% or 35%. So in a way, you invest in them. But of course, it is way more fun to try to find the next Domino’s Pizza of course.

[00:35:27] Kevin

I’d like to pivot and talk about the second theme in the book which is climate and the energy transition. We had Hannah Ritchie on the show a couple of months ago who’s an expert in the environmental sustainability side of that. So what I was hoping to do is just focus more on the economics and the investing side of the energy transition.

So my first question I guess maybe for Koen is we see a lot of estimates for how much we’re going to have to spend on the energy transition, up to maybe $100 trillion over an extended period of time. What I’m interested in is that it’s always talked about in terms of cost. Well, it’s going to cost us this much to execute the energy transition, and that’s always phrased in sort of a negative way. But investment is spending, and spending ought to enhance growth.

I’m curious, how do you view that? Do you think all the spending that we’re going to be doing is going to be growth-enhancing? I’m not talking about 30 or 40 years down the road. Obviously, if the energy transition is successful, and we can get zero marginal cost of energy, that’s going to be growth-enhancing. That’s easy to understand. I’m talking about in the next three, five years as we really start to ramp up spending. Is that going to be net positive for economic growth?

[00:37:03] Koen

I think it is, and I think you see it already in countries like Spain and Italy and some other countries that are profiting from the NextGenerationEU plan and huge investment budgets. I’ve run through the scheme that the International Energy Agency has put forward. They’ve drawn a net-zero 2050 poll with in the beginning a huge increase in investments.

Indeed, in their scheme that they set out, their forecast, they see initially limited positive effects. They say limited globally because it’s accumulating up to about one percentage point of GDP. So, an extra increase of one percentage point of GDP up to the late 20s. Subsequently, what you see is a net negative effect on global annual GDP growth. Why? Because what you see there as well is that next to an increase of investment, they have as well an increase in the cost of carbon tax.

So you have an increase in investments which is a lifting GDP from the other side. You have an increase in costs which is reducing GDP. So at the end of all the periods up to 2050, what’s leftover in the simulation of the International Energy Agency is net negative economic growth of one percentage point cumulative. But I think certainly, in the short term, the investment boost could as well as increases productivity.

I don’t think that’s taken into account in the scheme of the International Energy Agency because this investment boost really comes at an ideal time. You have to know that it compensates for decades of austerity, austerity in which infrastructure investments in particular have suffered. If you look for example, I’ve looked at some and I’ve put some figures in the book, in the US, government investments (I exclude defense) have halved since 2000 to 1.4% of GDP coming from almost 3%. In Belgium where I live, it plummeted from 4.5% to 5% in the ’80s to 2% in the ’90s. And you see for the European as well, you have seen that it has taken a big hit during the Global Financial Crisis. So this outdated infrastructure is now being renovated.

It led to crumbling productivity over time. But now you see we have a huge opportunity to put this good infrastructure back into place, and I think that could be productivity-enhancing as well and could lift growth a little bit more than what the International Energy Agency is saying it will do.

[00:40:32] Kevin

Thanks for that. Of course, their prediction of a net negative over the very long term depends on the implementation of a carbon tax which we’re still quite a long way off from at the moment. So that remains a question mark. Maybe Philippe can talk about the investment implications of all this capital investment that we’re going to see not just in the energy transition but also in replacing the infrastructure.

I know you spend a lot of time in the book talking about the impact on commodities and metals prices in particular. Can you explain why you’re so, I don’t know if bullish is the right word. I think at one point, you said we’re headed to a new commodity or metals super cycle. So can you maybe explain the dynamics there?

[00:41:28] Philippe

Yeah, absolutely. As a bank, we clearly believe in this transition that Koen has talked about, but of course, you have to do it also I guess in a more or less realistic way. Because we can all say we want to save the planet, but we have to look at the consequences. And if you look at the consequences, if you replace oil and gas by electricity, you move from Big Oil to Big Shovel as we put it. You will need a lot of all these materials, all these metals.

We had the book preview done by Bloomberg for the next 25 years in terms of demand for all these metals. If you make a prediction over a period of 25 years, you know it will be horribly wrong. It could be double, or it could be half. And also the composition of the bars could be totally different because nobody knows. I don’t know what the battery of the future will look like. So it’s very well possible that you have less cobalt and more nickel, it’s very well possible that you replace lithium by sodium for example.

So the total amount and also the composition will be unclear. We feel the safest about copper still. Because if you want to transport electricity from point A to point B, you still need copper today. So in my mind, no big surprise that the copper price is going up. But there is a huge demand coming up and I would call it a wall of demand. On the other hand, you do not have enough supply.

The biggest copper mines in the world are being closed down. You have problems to get permitting done, you have problems to get investments done. So according to estimates, you need about 200 new copper mines over the next couple of years and you just are not going to have them because even if you were to decide today, we’re going to invest a massive amount, it will still take you 7 years, 10 years, even more, to get the first rounds of copper out of the ground.

So this is not a black swan. This is not the COVID pandemic This is not the war in Ukraine. There you could say, and we could debate that that’s something that fell on our head and we could not know. But if you put demand and supply for these metals together, I do not see all this is going to happen. I think this market will balance only at much higher prices.

So this has massive consequences for inflation for example, for consumers and for companies. To the companies we talk to each and every day, we say if you use these metals or whatever commodities as your input, hedge them. Make sure that you’re okay with the supply and that you’re okay with the price more or less. As investors, this is a massive opportunity.

One of the ways to benefit from the AI revolution, the electrical revolution, and also the climate transition is just investing in these commodities. If you look at the recent future, in the softs, you have the cocoa and you have the coffee and others. That’s more climate change. But all the hard commodities, the metals and so on, that clearly has to do with electrical evolution. In my mind, that’s only the start of it.

These prices will be way higher and of course they will be way more volatile. So a lot of banks, including our bank, they say it will go up 10% or 15% and then the price goes up 10% and you increase by another 10%. I think I have a target in the book of about doubling. Not so long ago, most people said you’re absolutely crazy. But now we’re seeing new highs, so I think that’s fairly possible over the next couple of years.

[00:45:12] Kevin

Is that something that, going back in terms of executing on that, is that mining company stocks? Is that owning currencies of countries that have large natural supplies of these commodities? I know we’re not giving specific investment advice here for sure, but I’m just kind of curious in terms of your thoughts. What are the realistic ways that people could think about trying to exploit some of these trends?

[00:45:43] Philippe

Well, traders can of course play these commodities, but you also know that when you’re in a futures contract and then the contract is in contango, each time, you have to hold the future while you will lose money on it. For an individual investor, that’s extremely complicated. So you should indeed look for mining companies probably.

But of course, we all know, and it is the case for gold mines but also for copper mines and many mines, all kinds of different metals that they mine, you basically they have issues as well because they have problems with the permitting, they have problems with the taxes, they have problems with getting the financing done. So it’s difficult in the book, and that’s very far out-of-the-box idea.

It’s not a 50% probability and maybe not even a 30% probability, but we somewhere say instead of an OPEC, on top of an OPEC, you could have an OCEC, an organization of copper exporting countries. Because a lot of these countries, especially in South America, they’ve taken a turn to the left. So if they would privatize to a certain extent mines, they could sort of form a cartel.

Because if you look at oil, it’s very much concentrated in a couple of countries. The same for copper. Chile has already 28%. Add to that Peru and some other five, six countries, you already have a chunk of the supply. So if they would work together, they could control prices as well. So that’s a very important thing.

Therefore, like I said, I’m also a stock picker, so I try to find individual companies. But if I were to invest in mining companies, copper and related companies, I would do it to a tracker or I would do it in a fund. Because the last thing that you want is that you are right and the copper price doubles but your mines that you own are nationalized at the moment. So, I think you should either away try to spread out your risk.

[00:47:41] Kevin

I think that’s really sensible. If you follow the politics, particularly in Chile and Bolivia, you see a growing recognition of the fact that a lot of the value of those resources hasn’t found its way back to the actual citizens of the country. So I think this time around, there’ll be a lot more effort to control the profits and make sure that they don’t leave the country.

You talk about winners and losers from the energy transition. I was curious, you said that the losers will be fossil fuel producers, gas producers, oil. I wanted to ask, in particular about natural gas because if we think about the carbon footprint of different fossil fuels, natural gas is definitely the cleanest, far less carbon footprint than coal and oil. So can you argue that it’s actually a good transition fuel for us in that as an investor, maybe long term, very long term, we won’t be using much natural gas, but in the short term, we’re going to need it?

Particularly when we think about the energy demands of AI that’s going to increase electricity consumption dramatically, we’re already seeing that, we’re going to need clean fossil fuel to help meet that. How do you respond to that?

[00:49:18] Philippe

Well, I absolutely tend to agree with you basically because on the first, if you look at it, it’s clear that Chat GPT and also Bitcoin mining, it’s maybe not a good example, but you use a lot of energy. So the amount of electricity will go to the roof. Like I said, I think we should do this transition in a realistic way. So we’re still going to need a lot of the fossil fuels in the short term.

Also oil for example, if you look at the demand and supply equation for oil, we’ve talked about peak demand. We’ve talked about peak supply for many, many years now since the ’70s. Well, the reality of the matter is that demand and supply for oil still go up. That’s 103.5 million barrels a day on the demand and the supply side. So you’re still going to need that.

So in the long run, I think oil will be gradually phased out. But gradually is something that means 20, 30 years at least. And in the meantime, these companies could make huge profits because I would not be surprised also with everything that’s happening in the Middle East that you see oil prices of $150 per barrel. Because the underinvestment that’s already there in copper and others is even larger than oil at the moment. So if you get a spike in demand for whatever reason, I’m not so sure that we will be able to meet it.

For natural gas, I think your point is extremely valid. It’s a fairly clean way of doing this. It’s a big problem for the United States. I listened to one of your broadcasts the other day when Marko Papic was on. He made the point maybe with liquefied natural gas coming on stream faster than we think, basically, the European economy would not be so bad as everybody thinks. I think that’s a very interesting point.

But indeed, we will still need that. I think also without giving specific advice of course, once again, a lot of these LNG players in the United States, they’re very cheap if you look at valuation. So that is something very interesting to look at. Of course, and you have not mentioned it yet, but nuclear is also something that we could look at, because basically, a lot of people, a lot of countries are changing gear on that one.

It had to disappear. It was extremely bad. You had the case of Germany and other places. But more and more countries around the world are adopting it again. So yeah, I think we will need massive amounts of energy. Therefore, in a way, an investment in the energy sector is also an investment in AI.

[00:51:50] Kevin

Right. That’s something that I think Mark Mills talked about a year ago. That seems to be part of the general dialogue and understanding now. I have one last metals related question. I actually found out about your book when I read a column by Rana Foroohar at the FT who was also a guest on the show talking about her book “Homecoming” last year. She highlighted your view on gold.

This really goes to the multi-globalization theme, but you are very bullish on gold. I think you say in the book that the price could double. Maybe some of that’s already happened. But I was wondering if you could just explain your views and your thesis on why you’re so positive on it.

[00:52:42] Philippe

Talking about Rana, “Homecoming” is of course a fantastic book. It’s a white cover. That’s the reason why our book is white because I liked the cover so much that we sort of borrowed it from her. So that’s a little story besides the question obviously. But talking about something way more interesting, namely, gold. Gold is very often a refuge against all sorts of things.

But in our book, one of the main ideas, like Koen said at the beginning, is that we should not compare the current situation with the last 30, 40 years from ’82 until recently. We should go back to the ’60s and the ’70s. Also, very recently, with the figures of the last couple of weeks in the United States, disappointing a little bit, inflation being high, the ‘S’ word, stagflation, is used more and more.

Stagflation is a fantastic environment for gold like it was in that period when stock markets are getting more volatile and less buoyant while gold does very well. Basically, we make the point I do not think that the dollar is going to fall because the dollar is still, until further notice, the reserve currency of the world. But there is still a strong appetite, let’s say, for a lot of countries that are not so friendly with the United States, like China and Iran and some others, to diversify away from treasuries. And very often, that money finds its way to gold.

So it’s very interesting. We track this very closely. The central banks have been massive buyers of gold, while the investors and especially the retail investors have been sellers of gold because we can see that in the ETF flows. Normally the ETFs are the drivers of the gold price. Now you clearly see them going the other way because ETF holdings are dropping like a stone, while the gold price is making new highs almost every day and every week.

So that leads me to believe that if the retail investors and the investors come on board as well, this could go even way further. So I think that if you go to a world that we think that we will have a world of volatility, a world of geopolitical worries, a world of inflation, a world of higher rates, basically, I think that’s a world where gold will do very well.

Of course, we now broke the $2,000 level which took us a very long time to take out. But now I think we’ve started a new upward wave, and nobody knows where it’s going to go or how far it’s going to go, but I think this could be one of the trades of a lifetime.

[00:55:23] Kevin

Yeah, it’s fascinating because we’ve seen the run up in gold price at the same time that real interest rates in the US have gone from negative to, I’m not sure where they are today, about 1.5% to 2%. Typically, gold and real interest rates move inversely. I assume you’re interpreting that as a bullish sign that gold can do well, has managed to do well even though real interest rates are positive. Is that correct?

[00:55:56] Philippe

Yeah. That’s what a gold bull will say of course. Somebody who thinks it’s going to go down will say gold should be at 1000. But if you indeed take that argument, and we very often say to clients (and I think it’s also somewhere in the book) that in our world, interest rates are like gravity. When gravity is zero or negative, like it was not so long ago before interest rates went up, basically everything could fly.

Of course, when gravity increases, and we saw that last year but especially the year before, then all kinds of assets tend to have a difficult time. But indeed, I would interpret this by saying that when gold can even go up against the forces of gravity, what will happen when gravity gets in its favor? Then of course the move upwards, in my mind, could be way more important.

[00:56:51] Kevin

While we’re on that, because you talk a lot about inflation and interest rates, what is your central expectation in terms of real interest rates, the difference between nominal interest rates and expected inflation? You’ve got forces tugging in both directions. The reason I’m asking is because you can very easily make the argument that nominal interest rates need to go higher, real interest rates need to go higher, which would create the gravity for gold. So are you expecting real interest rates to end up at lower levels than they are today, lower than the 1.5%, 2% today?

[00:57:33] Philippe

Well, I give that one to Koen. That’s the chapter almost about debt. Because when we talk about debt, you will need negative interest rates or a lot of inflation to get the debt under control. Now, I just wanted to add to this before I give it to Koen. This is a very optimistic book because with each risk, there is an even bigger opportunity. But if you want to read a depressing chapter, it’s the chapter about debt. I don’t know whether it’s a coincidence, but that has been written by Koen. So maybe I give the work to him on this one.

[00:58:07] Koen

He doesn’t like this kind of question because when we do a presentation, the two of us, he knows he has to shut up for 20 minutes, and you’ll notice that it’s very difficult for Phillipe to shut up for five minutes. It’s not only about debt, this question on interest rates, because all these trends have an impact on real interest, have an impact on productivity, have an impact on inflation, on nominal rates.

So at the end of the book, we have let’s say this scheme where we try to really say in the next 10 years, what is going to be for this particular trend, for example innovation and productivity? What is going to be the impact on productivity, real growth, real interest rates, inflation, nominal rates? We did that for the different five trends and then we did an aggregate.

I have to admit, I just added everything. I just added the pluses and the minuses. I know normally, probably you have to do some statistical adjustments and I don’t know what, but probably that would have taken me two or three years longer. My wife didn’t agree with that, so I just put everything together.

In total, these five trends, if you look to what we expect for the next 10 years, we think that real interest rates will be more or less stable. And for the next, let’s say, in the period 2035, 2065 (it’s a little bit optimistic that we want to forecast this, but okay), there we think that real interest rates will be more or less stable or a little bit higher. But of course, if you have these stable real interest rates and then you have to add there an increase in inflation, because I think most of these trends, except for innovation, but innovation is only going to come in 5 to 10 years we think. All these trends are reflationary. Yeah, then you have a stable or a little bit higher real interest rates plus a big increase.

Let’s say that we think that 3% is going to be the new 2% for central banks. They will never say that, but I think that will be the new target. Plus inflation, then you have nominal interest rates that will be quite a bit higher compared to the last 10, 20 years. You see that today already that that is something that was not taken into account by the different governments.

If you’ve seen over the last weekend on Friday, Fitch and I think Standard and Poor’s, they were ready to adjust the credit rating of France. They kept it stable, but you see that more and more of these countries are starting to be afraid of getting their ratings being pulled down. Why? Because of that increase in interest rates that is making it more and more difficult for them to control this huge debt pile that has to be refinanced and that is increasing interest rates.

For example, if you look to France and if you look to the interest rates payment that they have to do, there was a minimum I think in 2020 of around 29 billion, and they will go up to more than 70 billion by 2027. So that’s a huge difference. That is something that I’m a little bit afraid of. I think countries will have to reduce their budget deficits, otherwise, we’re going to see some very, very bad accidents.

[01:02:23] Kevin

I like that framework because if you say, okay, well, real interest rates, pick a number, say 2%, roughly where they are now, inflation target 3%, you say you miss it, you end up with 4%. Well, there’s 6% interest rates. That’s not a complicated model but it seems pretty sensible, and that’s definitely higher than what a lot of the long-term budget projections are assuming.

So it sounds really like what you were laying out is a world where the next couple of years are going to be challenging for governments because the growth that could be generated by all this capital investment and potential increases in productivity won’t have come through yet, but the higher interest rates will, and that will put pressure on deficits. Is that a good 10-second summary of your forecast for the next few years?

[01:03:24] Koen

Yeah, certainly for the debt. You know that debt only can be stabilized if your economic growth, your nominal economic growth, is going to be at least as high and preferably higher than the implicit rate you pay on your debt or pure outstanding debt. And that implicit rate has gone down continuously over the past 30, 40 years up to a point where, okay, in Europe, you had average interest rates of around 2%. In the United States, it was a bit higher. But in Europe, it’s 2%.

So if you have to refinance now all these debts, suppose for one minute that we are right and that we’re going into an environment where interest rates are going to be structurally higher than the very low interest rates that we’ve seen in the past and they’re going to stabilize at the level of 5% or maybe the 6% that you were talking about, Kevin. At that moment in time, you will see that all the countries or quite a lot of countries with get in trouble. Why?

Because they don’t realize a GDP growth of 5%. So you have average, the implicit interest rates on debt that is going to go up very, very, very slowly indeed to 4% 5%. Let’s say that it remains at 5%. You really have to create a budget in equilibrium in order not to get this snowballing effect. This budget in equilibrium, I don’t see it anywhere. I don’t see it in Europe. If you see France, it’s minus 5%, minus 6%. If you see the United States, I think it’s minus 6%, minus 7%. That is huge.

So the only thing that can save us, and as Phillipe said, it’s always easy when you are an investor, you’ll see in everything, in every doom and gloom, you see investment opportunities. That is true. So that’s why his job is much more fun than my job, just to point out. But if you see it, the only thing that can save us is that the United States and European countries say now we’re going to get to a budget in equilibrium.

But how are you going to do that with the climate transition? How are you going to do that with ageing? How are you going to do that with defense spending that is going to go up? So it is a huge challenge. I think we will see, I don’t say exodus, but I think we will see some things like we’ve seen two years ago with Liz Truss, that all of a sudden, interest rates went up two, three percentage points and she was forced to leave her seat to the next one.

And I think we’re going to see that the bond vigilantes are going to be much, much more active in the next couple of years than they were over the last 10, 20 years.

[01:06:41] Kevin

Yeah. I completely agree with that. It’s interesting. We’re actually going to have to wrap it up here, but it is interesting because the sort of spending you’re talking about, we can put defense spending aside, but generally speaking, is investment related. So that ought to generate higher growth which would help with the debt sustainability. But it’s kind of a timing issue, right?

You’re spending a lot of money now, the growth doesn’t materialize for a few years down the road, and maybe the bond vigilantes get nervous in the interim. We’ll see. Certainly, I think it’s shaping up to be a fascinating and volatile next few year. So gentlemen, I really want to thank you for taking the time to join us. We’ve really just scratched the surface of all the detail and information in your book.

The book again is called “The New World Economy in 5 Trends.” Philippe and Koen, thanks so much for taking the time to spend with us. We wish you all the best.

[01:07:53] Philippe

Thank you for having us. Thank you.

[01:07:54] Koen

Thank you very much for the opportunity. Thank you.

[01:07:57] Kevin

Okay. With that, I’m going to pass it back over to Niels.

[01:08:02] Niels

Thank you so much, Philippe, Koen and Kevin for an absolutely fascinating look into some of the trends that they believe will shape the future. It was interesting to hear Koen explain why the new technologies of the last 20 years have not improved productivity and how innovations in areas like AI, 3D printing, and biology will be fundamentally different.

I also liked Philippe’s point that the market is currently assuming that the winners from this will be the big tech incumbents, but this would be a deviation from history, where typically, it is new players who disrupt existing companies and capture most of the benefits.

Another fascinating point about the markets was how the spending on the energy transition could create another super cycle for metals, particularly copper, where Philippe says there is a large structural shortage in supply compared to what is going to be needed for the investment that is coming.

I thought their point about the underlying strength of gold was also interesting. Usually, it moves in the opposite direction of interest rates and is driven by retail flows. But recently, the price has risen despite retail outflows from ETFs and rising rates. They see this as a sign of strong underlying structural demand that will continue.

Make sure you go and follow Philippe’s, Koen’s and Kevin’s work, as well as getting a copy of their books, because as you can tell from today’s conversation, some of these ideas are topics that may not be discussed enough on mainstream media.

From Kevin and me, thanks so much for listening. We look forward to being back with you on the next episode. In the meantime, take care of yourself and take care of each other.

[01:09:48] Ending

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