The Podcast of the Lotus Eaters - August 04, 2026


PREVIEW： Brokenomics ｜ Liquidity, War and the Great AI Repricing


Episode Stats


Length

17 minutes

Words per minute

164.92

Word count

2,854

Sentence count

106


Transcript

Transcript generated with Whisper (turbo).
00:00:00.000 hello and welcome to brokonomics now in this episode what are you going to do well i always
00:00:28.160 listen to you my patrons and there's some chap in the comment who regularly pops up and says you
00:00:33.920 should do one on georgism so i'm gonna do one on that i've managed to find a guy who can talk well
00:00:39.720 about that so i have that coming up soon there's also a couple of you that have been asking for
00:00:43.380 an update on liquidity asking about ai stocks that kind of stuff recent market moves so fine
00:00:50.660 i've put together an episode that does all of that i am of course as ever your diligent performing
00:00:55.840 monkey. So if you need something, just ask me. I'm not annoyed with you, by the way. I'm not
00:01:01.620 annoyed with any of you. You're lovely, of course. I had to do my taxes today. That always makes me
00:01:06.280 grumpy, even though the amount isn't actually that bad these days because Carl saves me from
00:01:11.800 that by not paying me very much. And all my investments are very tax efficient. So it isn't
00:01:18.560 actually that bad. But nevertheless, the principle of the bloody thing will put me in a bad mood
00:01:24.480 anyway so there is that there was a time in my career when i when i was having to pay 15 grand
00:01:29.940 in tax every month and and i always remember that because at the time i had the occasion to actually
00:01:35.720 visit the nhs and when i asked the doctor for the slightest smallest thing he he wandered off in a
00:01:43.380 in a grump and said in a voice that i was very clearly meant to hear as he was disappearing
00:01:47.760 down the corridor effing freeloaders which was which slightly annoyed me but then I suppose he
00:01:55.200 wasn't to know I was I was the literally the only person in the waiting room that night who was
00:01:59.960 actually making a financial contribution in fact looking around the and this was a London
00:02:04.580 inner city London A&E room and I'm fairly confident I was paying more than the rest of them
00:02:12.060 put together if if the rest of them put together was even a a positive number so there is that
00:02:19.460 but anyway no so so taxes taxes being sorted out today i will try and remain in good cheer
00:02:25.800 as as we go through what we need to talk about today so what was it we we needed to talk about
00:02:30.240 uh liquidity tech stocks that kind of stuff maybe maybe throwing a bit of war in there because that's
00:02:35.600 all sort of relevant to what's going on yes so so what is going on well the market is being really
00:02:40.380 being shaped by sort of two forces that are now sort of colliding with each other. And one of
00:02:45.800 those is a debt-heavy financial system that requires more liquidity. I mean, we've gone
00:02:52.740 through that on a number of occasions. If you're new to brokonomics, you'll have to take my word
00:02:57.100 for it. And a physical investment boom in AI and associated energy, defense even, there's a bit of
00:03:04.960 a boom in that as well. And that is consuming capital faster than the market had perhaps quite
00:03:11.280 appreciated when it got into this. And for years, the market has been rewarding long-term promises
00:03:16.280 because capital was cheap. And therefore, of course, if you can pile on those future returns,
00:03:23.700 the market was happy to reward that. But now we're in a situation where oil is rising and
00:03:28.580 bond yields are rising and well geopolitical risk is going up and that AI capex is exploding
00:03:35.640 and free cash flow from companies is getting squeezed and it's not like the market has
00:03:41.400 concluded that AI is faker and a thing like that it's not it's not like a popping of the bubble
00:03:45.060 which people like to throw up in the comments every now and again but there is definitely a
00:03:49.260 question about when does the cash actually arrive you know and and how much of that cash is going
00:03:54.580 have to be continually reinvested in order to do it. So we talk about all of that. To cap the big
00:04:00.600 ideas, liquidity explains the market environment, but not every individual price. So it only gets
00:04:06.960 you so far. It only kind of gives you the financial weather. And money's easy. It supports
00:04:13.460 leverage, speculative investments, and distant future profits. As money gets tighter, cash flow
00:04:20.820 and balance sheet and immediate earnings become much more significant for what the market is
00:04:27.460 wanting to reward. So debt creates itself an eventual bias towards intervention. Because
00:04:35.080 as we talked about many times, modern governments have to refinance the debt.
00:04:41.080 They're not going to repay it. I mean, they're not anywhere near being able to repay it and probably
00:04:45.100 won't be for a very long time, if ever. So large debt stocks that need refinancing
00:04:51.660 require functioning bond markets and manageable interest rates. And when that tightening
00:04:57.580 threatens the banking system, through whatever mechanism it may get tied,
00:05:03.640 government needs to intervene. But that rescue normally arrives after the financial markets
00:05:08.880 have been damaged. And then it can be quite large, as we've seen in a number of recent cycles. But
00:05:14.120 you know, the COVID one being probably the best example.
00:05:17.060 A huge amount of liquidity just gets thrown at it.
00:05:19.200 Now, what AI has done is it's changed from a liquidity beneficiary
00:05:23.900 into a major consumer of capital.
00:05:27.840 So AI originally looked like it was another technology sector
00:05:31.760 that's going to be supported by cheap money.
00:05:34.320 We're now starting to realize that it requires data centers and chips
00:05:37.740 and its own power stations quite frequently.
00:05:40.360 I mean, a number of these big players,
00:05:41.760 They're spinning up their own nuclear bloody power plants and networks and factories and all the rest of it.
00:05:47.900 And AI is competing as a source of capital with government and defense and everything, really, housing, industry, I mean, the lot, crypto.
00:05:55.740 And so the build out might still be transformational, but it's still producing disappointment in shareholders for a number of participants, which is what's causing the current issues in the market.
00:06:07.340 So the market is moving from a sort of narrative to capital discipline.
00:06:11.760 It's kind of happening in three stages.
00:06:13.340 So, you know, step one, AI is going to change everything, buy AI.
00:06:17.980 And then it's, okay, build out, large capex, proves demand,
00:06:23.140 and everybody connected in that chain.
00:06:26.180 Step three, which we appear to be emerging into at the moment,
00:06:29.400 is the capital discipline phase, which is, okay, well, show me the earnings,
00:06:33.820 show me the cash flow, show me the return on capital
00:06:36.360 for every pound or dollar invested.
00:06:38.760 Liquidity, I think I referred to it a moment ago as financial weather.
00:06:41.760 I mean, it's not simply money printing. Central bank liquidity is going to influence interest
00:06:47.940 rates and, you know, whether in quantitative easing or tightening and, you know, emergency
00:06:53.200 lending facilities and all the rest of it that come along. But fiscal liquidity, as opposed to
00:06:58.100 central bank liquidity, I mean, that's government deficits is the key one. I mean, Elon often talks
00:07:04.500 about inflation as being solely the product of government deficits. I mean, it's a major one,
00:07:08.760 but I wouldn't say it's the only one. It could also apply to tax cuts funded by borrowing,
00:07:13.040 to be fair, transfers and subsidies, all that kind of stuff. Then there's also commercial bank
00:07:18.140 credit, which was a major factor around 2008. It's still a big part of it, which is banks create
00:07:26.980 deposits when they lend. They've been doing that less since 2008, but this is a strong factor
00:07:32.880 going into it. If anything, the US government is trying to get that going again. A whole bunch of
00:07:38.360 mortgage credit will affect housing and corporate credit will incentivize liquidity in the corporate
00:07:44.280 sector and so on. There's market liquidity, the willingness of investors and institutions to hold
00:07:51.160 risk. And so liquidity determines whether the financial environment is permissive or hostile
00:07:57.080 to risk takers. While we're building up the layers of this, let's also think about why debt creates
00:08:01.840 the liquidity cycle. That ought to be explained. So government refinance rather than repay the
00:08:08.200 debt. As I'm sure you know, if you've been watching any of these, the government's nowhere near
00:08:12.280 paying back their debt. All they're able to do is roll the debt as it comes due, the previous debt
00:08:18.080 becomes rolled, while adding to it. And then that debt that they're adding now will get rolled over
00:08:23.100 in the future as well. So the system therefore depends on investors buying corporate bonds and
00:08:29.100 stable collateral, which is the rest of the market, and banks being willing to lend, which
00:08:35.260 post-2008 has been made increasingly difficult for them, and manageable interest rates, which is a
00:08:41.000 struggle when you've got inflation going on, and confidence in the system as a whole. So you've
00:08:45.780 got this refinancing wall. Large quantities of very cheap pandemic-era debt is now rolling over
00:08:53.140 at much higher rates than it was originally taken out on. So the problem is not just the enormous
00:08:59.560 amount of debt itself, it's the refinancing. So debt previously financed, you know, in the COVID
00:09:06.860 era, it would have been basically near zero. That's now getting refinanced. I mean, anything
00:09:12.860 on the sort of five year, which a lot of it would have been, anything on the five years now getting
00:09:18.080 refinanced closer to four or five percent. And obviously it's a pretty significant move when
00:09:21.460 you're going from zero percent to four or five percent. So the interest expenditure rises even
00:09:27.400 without new debt being added. And so the sequence looks something like heavy issuance, which is
00:09:34.020 never not the case really, but COVID was a good example of heavy issuance, leads to higher yield,
00:09:39.740 tighter credit, weaker risk assets, creates financial stress, and that creates a policy
00:09:45.340 response, which is quite often a liquidity injection. And that's the cycle that we get
00:09:49.880 into quite a bit in pro-economics. And obviously higher debt does not prevent crashes. What it does
00:09:55.360 do is it makes prolonged crashes politically difficult, very difficult to tolerate any
00:10:01.940 sort of prolonged crash for the reasons just articulated. You need that collateral in the
00:10:08.580 system to support the market that it does the continual buying of your debt, the rolling of
00:10:13.720 your debt. So the government just, I mean, it can't accept any sort of widespread mortgage
00:10:19.920 defaults, the 2008 problem, but even pension losses, market losses, banking stress, because
00:10:26.840 it all impacts on falling tax revenue, especially in the US where a lot of their tax take is
00:10:32.920 a product of how the market's doing.
00:10:35.900 And the rescue normally comes after the damage has been done.
00:10:38.240 So long-term liquidity, especially injections of, extra injections of long-term liquidity,
00:10:44.660 it can coexist with short-term market pain because the debt burden becomes difficult
00:10:49.260 to service. Governments need those lower real financing costs. So policymakers, they favor
00:10:56.040 inflation to the alternative, which would be some sort of cutting government spending, which of
00:11:00.660 course they're not going to do. So the short run process can be larger refinancing, real yields
00:11:07.100 are going to rise as a result, dollar strengthens, speculative assets will fall, credit will widen,
00:11:13.720 and refinancing becomes harder.
00:11:16.040 But the full cycle is tightening, refinancing pressure,
00:11:21.620 which they don't like, market stress, then the intervention,
00:11:27.100 then liquidity recovers, then you get this asset price boom,
00:11:30.860 the cycle that I tend to operate on because this cycle
00:11:35.860 is so incredibly predictable that you really might as well
00:11:39.360 take advantage of it.
00:11:41.100 And that all then just leads to renewed leverage.
00:11:43.720 excess, animal spirits, all that kind of stuff. So effectively what I'm saying is that the system
00:11:48.120 is structurally biased towards future liquidity arriving. But it can and will, over any short-term
00:11:56.680 period, produce quite nasty downturns before that liquidity injection arrives, because they kind of
00:12:03.000 need to see that stress in the system in order to justify an intervention. So you kind of want to
00:12:08.520 look at, okay, well, what are the indicators here? What are we looking for? And real yields and the
00:12:13.000 dollar are probably the key things i think that's fair to say so real yields the return on government
00:12:19.520 bonds after inflation basically and when these real yields are rising as they are at the moment
00:12:27.000 safe efforts assets become more attractive and that long tail of future incomes for things like
00:12:34.200 tech stocks where that becomes discounted more heavily or less attractive and leverage gets
00:12:40.140 more expensive and speculative assets are going to require a higher expected return to keep up
00:12:46.960 in that environment. And the dollar, a strong dollar, is going to tighten conditions outside
00:12:53.120 the United States. It's going to raise the burden of anybody who's got debts to nominated dollars,
00:12:59.660 which is just about everybody across the world. And it's going to attract capital into the US
00:13:05.420 as a hedge and it will often coincide with weaker risk appetite. So think about the combined signal
00:13:13.340 as a result of that. If you've got rising real yields plus a rising dollar, that should be
00:13:20.380 hostile to Bitcoin, crypto, high multiple technologies, emerging markets, speculative
00:13:26.440 growth. I mean, all that sort of stuff. Any business that's leveraged. Whereas falling real
00:13:30.200 yields and a weaker dollar generally make the opposite risk-taking more well more attractive
00:13:37.400 more easy and the liquidity that we talk about often that enters the system quite unevenly it's
00:13:44.820 not like it raises all prices equally it depends on how it comes in so i mean some of these might
00:13:53.560 seem obvious when i go through them but i mean mortgage credit that's going to rise house prices
00:13:58.340 primarily venture capital funding is going to improve you know technology valuations you know
00:14:03.920 institutional flows is is going to raise equities and bonds that kind of thing you know insurance
00:14:09.840 companies or pension funds buying you know government bonds and well any any sort of bonds
00:14:14.520 any any sort of fixed capital instruments i mean in practice is what we're talking about is the
00:14:18.200 cantillion effect the money creation changes who receives the purchasing power first and then who
00:14:25.860 captures the lion's share of gain as a result. And it's worth stressing that asset inflation
00:14:30.180 is not consumer inflation. Consumer inflation is, we're not directly measuring the cost of
00:14:37.940 buying a house or a business or a portfolio of assets or something like that. A person can become
00:14:42.500 richer relative to the basics, you know, food and clothing, that kind of stuff, whilst becoming
00:14:49.980 poorer to housing stocks business assets stuff like that so really what i'm trying to describe
00:14:58.700 is the ownership becomes the key dividing line between people asset owners and wage earners or
00:15:06.880 non-asset owners whatever category they might be in you know asset owners you're getting the
00:15:11.820 appreciation you're getting the the you know the the collateral from which you can do other
00:15:16.740 borrowing for example and you get those compounding returns whereas if you're a wage
00:15:21.340 earner or you're benefiting from the the flow rather than the stock if you are going to try
00:15:27.300 and save you're having to do it from taxed wages and you'd end up having to hold more cash because
00:15:32.480 you have to because your your medium is wages cash spending as a result maybe some savings on
00:15:40.400 the side and so of course you're left struggling to accumulate any sort of asset base i mean
00:15:45.580 breaking out of it is just a difficult thing to do. I mean, it's still better to start, but no,
00:15:51.900 let's talk about, okay, how the risk assets respond differently if we're going to get into
00:15:56.740 talking about assets. So technology, what is it like? What is it responsive to? And it's responsive
00:16:03.180 to yields and future expectations of what it's got coming down the track, the growth speed and
00:16:10.640 capital availability okay fine property is much more related to you know loan to value mortgage
00:16:19.760 rates the bank's willingness to lend and physical supply itself of course private equity is again a
00:16:26.080 bit different you know leverage refinancing costs exit valuations crypto which responds incredibly
00:16:32.960 well to liquidity and is is is always worth keeping an eye on for what it tells you about
00:16:38.560 the availability of liquidity in the market well i mean liquidity obviously leverage and speculative
00:16:44.080 risk appetite so each of these are going to respond differently to the market as it goes
00:16:52.480 and i am i am building to the recent market moves i just necessarily to go through this
00:16:57.840 a little bit of setup on this if you enjoyed that content and of course you did because you
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