“Chaos” at U.S. Universities + Steel | E195





Weekly Update 88 _mixdown

[00:00:00] Jacob Shapiro: Hello, listeners. Welcome to another episode of cognitive dissidents. As usual, I’m your host. I’m Jacob Shapiro. I’m a partner in the director of geopolitical analysis at cognitive investments. Rob is back from vacation. I am not traveling for once. So we’re here to bring you our normal weekly chat about what’s going on in markets.

It’s an interesting conversation. We talk about an article that really captured Rob’s thinking about it. South Korea’s economic miracle. And whether it’s over, we talk about entrepreneurship, about steel commodities in the United States and close with some thoughts about what’s going on in us.

Universities might not be the take that you’ve seen. If that’s an issue that is concerning to you. And if you want to send us any thoughts about anything that we just said, and I’m expecting some thoughts about the university stuff, because people are really riled up about it. It’s Jacob at cognitive dot investments.

Also, maybe you want to email me to talk about our investment research services or having me speak at your event or something like that. But for whatever you want to send me, I’m here for take care of the people you love. Cheers and see you

[00:00:52] Rob Larity: out.

[00:00:59] Jacob Shapiro: Let’s get started. We’re going to back into a conversation about the insanity in U.

S. universities, about what’s going on in the world globally. And the way I want to back in it starts with an article that you sent me from from the FT and it’s on our knowledge platform for those listeners who are wise enough to have access. And it was a story about the it’s an FT article and it asks, is South Korea’s economic miracle over published earlier this week.

And it has a lot of anecdotal data about how growth and entrepreneurship and innovation has slowed down in South Korea. I’ll let you explain the argument, Rob. But my takeaway was South Korea was really good at catch up growth. And now they’ve caught up. They’ve caught the tail and they don’t know quite what to do with themselves.

And the global economy has changed towards protectionism, which means you can’t copy because there’s going to be all these harsh controls and it’s going to be much more difficult. And also they’re not having babies. Like it’s the whole doom and gloom narrative that everybody talks about. But they do the FT zooms out and has a chart of South Korean economic growth.

And from 1970 to 2022 South Korea grew at an at an annual growth rate of 6.4%, and that’s expected to shrink to 2.1% for the 2020s and to 0.6% in the 2030s, which is pretty striking. Now, I say all that and I say it’s perfect timing because two days later south Korea’s economic growth.

Accelerated to a pace faster than the most optimistic forecasts of last quarter. It advanced 1. 3 percent in just the last three months through the previous quarter. The economy grew 3. 4 percent year on year that beats a forecast of 2. 5%. You start looking at exports. You start looking at construction, consumption.

You go down the road, like it’s actually looks pretty good. At least. In the short term, if you zoom out to that 1970s level, we’re not like 6. 4%. But I did think it was funny that as we’re talking about South Korea, like boom, we get these numbers that are sharply higher than maybe what that article would have thought made you think in the FT, which tells me, things don’t go down linearly.

Things can go back and forth. There’s also a conversation there about inflation, but I wanted to set up the conversation that way. And we’ll back into some of the other things we wanted to talk about here. Tell me, Rob, why the FT article about South Korea? What’s so important from your point of view and tell me why these growth numbers are a mirage or are they a mirage?

I’m betting you’re going to say they’re a mirage, but I’m curious if you stick with it.

[00:03:16] Rob Larity: No, there’s certainly not a mirage GDP growth in the Korean or the Chinese model for that matter is different and we can talk about why. But the reason why in part I was thinking about Korea and wanted to draw your attention to that article was.

Korea is a really interesting picture of China’s potential future, or one, alternate universe in which China, we’re looking at the crystal ball to China in 2045 because Korean growth has remained pretty steady. Quite good. It has slowed significantly from where it was in the 2020s.

In the, sorry, in the two thousands and obviously earlier when they were engaging in a lot of catch up growth, but a lot of the problems that they’ve been dealing with throughout the last 25 years. Are the same problems that China faces today at an earlier and different stage.

So let’s just zoom back a little bit, cause then we can get to what Korea looks like today. But if you go back, Korea was after Japan. And as I like to say this, the best book to read about this is Alice Amundsen’s book on Korean development, which is excellent. Korea was the, or the true miracle economy.

I think at one time in the fifties or sixties, they were as poor as Botswana, if I remember that like they were dirt poor,

[00:04:47] Jacob Shapiro: And the war, decimated like Korea in a really meaningful way. Yeah, absolutely. And

[00:04:54] Rob Larity: they, pursued the sort of industrial policy, East Asian growth model to fantastic success.

And they built out a truly successful industrial economy in the 1980s. Shipbuilding, steel, the story of Posco steel is a fantastic story. If you ever want to look at building a company, literally from almost nothing to being absolute steel giant. So they were the poster child of success in so many ways.

And yet by the late 1990s, they started reaching the limits of that strategy. Just like China has reached those limits today and faces difficult decisions and rebalancing decisions. So Korea accelerated its investment growth in the 1990s. In part, that was tied in with the Asian financial crisis. Not to go off on a rabbit hole, but for those who don’t know, what happened during the Asian financial crisis was there was an investment mania.

Capital from the rich world flew into Asia because the capital accounts were all liberalized for most of these countries. Not for China, but for most of them. And you saw these enormous investment booms internally. Including in in Korea. And what happened was when the tide went out again and you saw the natural, collapse of that investment mania a lot of these countries got into trouble and Korea was no different.

So that was It’s marked the beginning of Korea’s problems. And it’s a really interesting case study to look at all the ways that they’ve tried to deal with this over the years, because I think it really informs how to think about China and the choices that they face. So for example, we talk a lot about how China needs to rebalance toward domestic consumption, right?

In Korea, what they did in the late 1990s to try to offset the collapse of the investment boom, maybe you can compare that to the Chinese property bubble bursting today was they had a credit card bubble. The government came out and said, okay, everyone’s getting credit cards and we’re going to put in place policy to encourage consumers to use them.

So what you had in the, Sort of late 1990s where you was, you had it another bubble in credit card driven spending among create and consumers, which turned into a massive bust. So there was bad debts all over. And the underlying problem was wages. In accordance with this debt, they were trying to. to fill in the gap with credit.

So fast forward to the two thousands and Korea got a new lease on life because of the IT technology revolution. And everyone knows the story of the rise of Samsung and the chaebol who came to dominate memory semiconductors, consumer electronics like that was an enormous bolus, not to mention autos.

We forget. I think in Glengarry, Glen Ross, remember when he was looking to put down the salesman and he said, you arrived here in a Hyundai, sir. That was 1992, Korean cars were literally a joke and insult. And now, Korean cars have absolutely dominated and Kia and Hyundai are, real players in the market.

So they were able to find much like China is today, as far as China moving to, EVs, new markets, the same model. Different end market. Korea was able to do that in the 2000s and the 2010s and ride this wave very successfully. And so much of what they’re dealing with is just facing the limits of that because even as they did this growth really started to slow in the 2010s and inequality widened the gap between the extremely productive, super world beating giant.

Shaebol firms and everyone else just widened even further. It’s easy to forget that Korea is not a rich country in aggregate. It’s a very rich and well developed country for a narrow part of the economy. There is a huge gap between the haves and have nots. And I don’t mean just in terms of wealth. In terms of productivity, know how, firm productivity between the top firms and the bottom firms, the gap is way wider than any other any other country, beside Japan which tells you something about Japan.

I’m going on and on, but I guess the takeaway here is Korea has been struggling with a lot of these issues. They’ve tried to. And act a number of policies to improve wage growth, to improve inequality throughout the 2010s, none of it has really taken hold and here they are where they’re their doing ok, but they’re still facing the same issues and they’re not getting any better and this could be a vision of what China’s future looks like you know, getting along but not the go, go growth period of the past and with widening inequality you widening issues with the export driven sort of investment model, never really being able to rebalance to a true consumer led entrepreneurial, small business economy.

[00:10:22] Jacob Shapiro: Yeah, that’s funny. It’s damned. If you do damned, if you don’t exactly to your point, it’s what’s, what. Drove the unexpectedly high numbers for this quarter. First of all, it was exports. So that’s consumption from abroad, not from Koreans themselves. And then construction investment returned to growth.

And that’s because the government said in February, they wanted to accelerate the implementation of infrastructure projects and public private partnerships to shore up industry. And things like that, which again, is this Korea, is this China? You could read that sentence or talk that sentence and just in either one of those countries, and you wouldn’t actually know which one you’re at.

And also to your point there was this current government has a very narrow leader, one by a very narrow margin. A couple of years ago the opposition has been calling for fiscal handouts. So not credit cards, as far as I know, but the equivalent of giving 200 to every single Korean citizen, which, that’s the type of.

Stimulation of consumption that I think you’ve talked about that China should be thinking about. But I think it’s pretty telling that Korea is already there and thinking about it. I think another one of the interesting parallels here between China and South Korea, and this is where this gets a little more explicitly geopolitical, is that I think a lot of the challenge for China is okay.

Like you have these wealthy coastal areas where, you know, narrow sections of the economy have done very well, but you have wide swaths of the interior that are still extremely poor, that haven’t enjoyed the ketchup growth. They’re wealthier, far wealthier relative to where they were 10, 15 years ago, but it’s still not that great.

Like they’re, it’s a change in the quality of their life hasn’t changed in a meaningful way. And the parallel I think to South Korea is, it’s not just, The inequality in South Korea itself. It’s that North Korea is sitting there as well. And if you’re thinking about because I think one of the things that China has to think about is if we could just integrate these hundreds of millions of people in the interior, we could overcome our demographic rates and we could grow our way out of the problem.

But somehow we have to stimulate the economy there. And I think if you’re South Korea, like if you just, if you put ideology aside and all the crazy things aside, man, wouldn’t it be nice to integrate something like North Korea, a true frontier economy back in to the South Korean growth model, because maybe you could not only replicate what you were doing before, but create a new sort of consumer class for some of the goods that they would create.

So there’s some interesting parallels there as well. I think,

[00:12:40] Rob Larity: yeah, I think it’s a real policy challenge because arguably what Korea doesn’t need, even though they have. The super low birth rate is more unproductive bodies in their economy. They have plenty of those. So does Japan. And I think that’s when people talk about the demographic issues, I know we discussed this two weeks ago with Japan, like it’s this very simple argument to say, Oh their population is shrinking and, aging and those things.

And at that time we talked about sort of the gap between superstar productivity firms and non superstar productivity firms. And I tried to make the argument that there’s so much more of a Delta, there’s so much more importance in getting lower productivity people to be more productive for the overall economy than there is oh, you just need another body, another pair of hands another mouth.

And I think that’s the more difficult challenge for Korea and for Japan who has also been trying to do the same thing. If you pay attention, not to shift to Japan, but I’m more familiar with what’s going on there. But Japan has tried many programs and, every think tank is always about how do we improve entrepreneurialism in Japan and productivity of smaller firms and SMBs?

And they just haven’t been able to really do it. There’s been some improvement recently but despite everything, they just struggle to get those lower productivity, small and medium sized firms, all the have nots, all the parasites, if you want to use the Korean film as a metaphor for this, um, all of them to have a revolution in ways of thinking and methods of work and knowledge acquisition and knowledge deployment.

And in the economy, that is the big challenge and no one’s been able to crack that yet. And that’s a real it’s a real problem. And if you look, the numbers, the coming out today, accelerating growth in the construction sector, like that’s, it’s pushing on the string even more because If you look at where that growth is coming from, it’s because they’re building, a hundred billion dollar semiconductor complex and SK hynix just announced they’re going to spend another 14 billion on another section of something like, it’s not it’s not a bottom up driven project.

It’s it’s very similar to what they’ve seen can work to a great extent to some extent, but it also comes with downsides and problems that eat you away internally. If you don’t deal with

[00:15:14] Jacob Shapiro: them. Yeah, you said the thing about. Unproductive bodies. I feel like the rejoinder there would be if you could drive down the cost of them pretty far, you can perpetuate the current models.

Like I said, if you can get some, folks in the Chinese interior to do the same jobs that folks in the coast were doing, where wages are rising. And so it’s no longer competitive and you can get maybe those new middle class citizens to consume the goods that the really cheap, even if they are unproductive bodies are making in the interior and they’re doing better than they did before, you Maybe you’re right.

You’re not fixing the structural issues at all, but it seems to be much easier to continue kicking that can and maybe, buying yourself more time than it does to do the things you’re talking about. But this is a nice segue into talking a little bit about entrepreneurship and maybe we’ll back into the controversial things about what’s going on in us universities, but you.

We were talking about entrepreneurship before we got on. And I was looking for some data to support the notion that Western entrepreneurship is more successful and is driving more than maybe Eastern entrepreneurship. And as you might know, listeners or as you might have already figured out, that’s a really difficult thing to quantify.

What is entrepreneurship? What is success? What are your terms and things like that? But you start to poke around and There’s a narrative in the West about also the decline of entrepreneurship, and I’ll put up some notes to some of the articles that I read for this in the show notes.

But 11 academic article from the Cambridge Journal of Economics talked about how entrepreneurship in advanced economies is in decline and that instead of these Country’s becoming more entrepreneurial as they grew and things like that. They’re becoming ossified and there’s a decline in entrepreneurship in general.

Tyler Cowen, I know is one of your favorites, Rob, and he wrote a book in 2017 called the complacent class, the self defeating quest for the American dream. And part of his argument there is that in particular Americans, Are less entrepreneurial than before that entrepreneurship in the United States had declined around 50 percent between 1978 and 2011.

That people working for big firms has risen in general that the average firm size has risen in general and that Americans just take less risks. They move less, they start new businesses, less things are just less, less innovative in general. So I wanted to put that out there to you to say.

Is the situation really that much better in the West? Because there is a, use the example of the South Korean parasite movie in some ways, this is a symbiotic relationship between West and East, right? Like the entrepreneur innovates or something like that in the West, but the only reason it’s cost effective to produce the boondoggle that the entrepreneur has figured out is to get the unproductive bodies in Asia to make it at a much smaller cost than it would be made in the United States.

And then you send it around the world. And then. On April 25th, South Korea’s exports are up like seven or 8 percent more than everybody else thought. So take that in any direction you want.

[00:18:03] Rob Larity: Yeah. The symbiosis between the two is, is a whole nother rabbit hole we could go down into. And how sustainable is that?

Does Korea ever need to worry about the 85 percent of its population? That is not very productive and doesn’t do very much. Can they just live off of Samsung? That’s, I’m not being sarcastic, like maybe that is a possible outcome because that’s, we’ll just be their role in the global economy.

But in the U S in particular, I think, I think there’s similarities, but there’s also fundamental differences between the two because in the U S arguably there are mechanisms to create or to adjust or to fix when there’s stagnation, when there’s complacency, and I think, support him or not, I don’t think anyone could look at the fact that Donald Trump is, currently favored to become the president and not see that as a blow against sort of Traditional norms and what you might describe as complacent institutions.

I know a lot of Trump supporters and people who vote for him and most of the people I talk with it’s a matter of, well, screw those elite people, it’s a sort of smash the smash the complacency joker style of of political advocacy. On a lot of measures, I’ve spoken before about one of the positives of the 2021 boom.

And Elon Musk being such a pivotal figure, love him or hate him. And a lot of people hate him. Like the fact that he is such a crazy entrepreneur and is so he is the central figure in our culture right now. Like entrepreneurial figures, whether it’s Jeff Bezos, whoever you want to talk about, we lionize entrepreneurs and people who have gone out and are building things.

And I think that’s a very positive cultural. So my sense would be that cyclically, the complacency factor probably peaked right around the time that Tyler Cowen wrote that book. And that a lot of the, call them teething issues that we’re experiencing in more recent years are sort of, reactions against that as it, the pendulum swings back in the other direction again.

Which I think is fundamentally different from what the data shows in a place like Korea or Japan where they’ve just Perpetually at least for the last hundred and fifty years Perpetually been dominated by centralized Organizations that are well connected that are elite whether it was the Zaibatsu, before the war or the, the major Japanese conglomerates after it, like you see similar patterns recurring again and again, where you don’t see that evidence of sort of risk taking or entrepreneurialism at the grassroots level for whatever cultural or historical reason.

[00:20:58] Jacob Shapiro: Do you buy the argument though, that there has been a decline in entrepreneurship? In the United States in particular, because were talking about the South Korean economy surprising to the upside. The United States economy continues to surprise to the upside for most people. We’ve talked ad nauseum about the economy growing faster than the Fed wants and the Fed not being able to cut rates the way that it wants.

You also get a sense of the data, at least in the United States is showing you that it faces a similar problem. So what is the rejoinder? Because I don’t buy the, that the rejoinder is, Oh, artificial intelligence is changing things in general. Like artificial intelligence may change things one day and maybe innovation is happening in artificial intelligence in the United States, but it seems hard to me to make the argument that’s what’s increasing productivity and growth right now and that’s where things are driving.

So

[00:21:44] Rob Larity: it’s not artificial intelligence at all. Um, the data shows that, firm creation, however you want to define it, was falling. And now since the pandemic, it’s been rising again by a lot. So if you’re a data driven, you can look to that, I prefer to use sort of nebulous historical analogies.

Cause I’m a nerd and I think the way to think about this is COVID was like world war one culturally in terms of you have an experience that shocked an entire generation of people. Physically removed them from their normal habits. If you read about World War I and how it changed things, like you physically took millions of men from their little villages and towns and you put them in a new country where they spoke a new language and they experienced traumatic new things, mostly negative ones, but very new.

And when, you brought them back again we’ll throw Nabby reference. Son. Remember when they all came back from the war and the show was just different the servants just couldn’t and didn’t act the same way, like something had broken. And I think it’s clear. If you look at, work habits behavioral changes, like that was a similar dynamic with the pandemic in terms of shaking up people’s mentalities and ways of life.

And, for all the negative aspects of the pandemic, that is a good thing. That was what we were waiting for and it happens. And I think the data shows like all you have to do is just look. Entrepreneurship is through the roof. Every, everybody wants to be an entrepreneur. They want to have a startup.

They want to build something. Um, a lot of that is crap, but the general trend. is really a positive one.

[00:23:34] Jacob Shapiro: I guess that’s where I want. This is part devil’s advocate and part, I want to pick at you a little bit cause a lot of it does feel like crap. And I wonder if some of this data about entrepreneurship declining in high income countries is because and this is not just the United States.

This is in the UK, this is Germany. Anywhere you get high income countries with sort of demographics that are starting to veer towards aging, you get a decline in entrepreneurship rate, which sort of makes sense. Like young people are the ones that are usually willing to take risks and growth to your point, usually creates problems that have to be solved, that there aren’t companies that are out there solving for these actual issues.

But the startup, like the entrepreneurs that I come across in the United States, generally speaking it’s not ones that are fundamentally changing things. The people who talk about fundamentally changing things are these Sam Altman sitting on Olympus talking about, oh, and we will do small modular reactors, or we will do these like things that are going to cost billions of dollars and might not actually be profitable.

Whereas The startups and things like that are, tick tock or social media or services based, not things that are actually making things, whereas, China has its fair share of problems. But one of the interesting things about China is that because it has a completely different model than the U.

S. It’s entrepreneurs. When they look out at the world, they’re looking for countries that are like China, and they’re trying to design Solutions to problems that are like the Chinese area. So I wouldn’t say that China is a bastion of entrepreneurship, although there’s been a lot of entrepreneurship there.

But look at things like online, like elementary school learning or things like that go towards education. Like China’s actually had some really interesting entrepreneurship in that area, while in the United States education like continues to be this thing that nobody could figure out. So I don’t know, is there anything to that?

Is there anything to this idea that entrepreneurship is really going to come from a country like Brazil or like in India where there’s growth and there’s problems and there are things that need to be fixed rather than in the United States where entrepreneurship doesn’t, I don’t know, it doesn’t feel like entrepreneurs are solving problems in any meaningful way.

Even Elon Musk okay the solar stuff is more interesting than the EVs. There’s tons of EVs. It’s everywhere. And Tesla’s already taking it on the chin in the EV business because people can make EVs that are better and cheaper than Tesla at this point.

[00:25:48] Rob Larity: There’s a lot of elements to that question, so I’ll try to take them, pick them off one at a time.

So, the first one is China is super entrepreneurial, especially relative to Japan and Korea. And I think that’s one of the things that they have most in their favor is historically China is a very sort of commercial oriented entrepreneurial place. And all of the entrepreneurialism you’re seeing in China is in large part contrary to what the policy setup is meant to create.

They’re not, they’re kicking against the pricks if you’re a small entrepreneur in China. Which It demonstrates just how resilient and powerful that force is. So I think that’s when you’re thinking about China and the pros and the cons, that’s one of the main positives in the plus column to put in their favor when you’re analysing that, analyzing that places that change and are crazy and chaotic like Brazil and India.

Let me speak to Brazil because I think this gets to the U S question through the back door because there’s multiple types of entrepreneurship. A small individual person is not going to create the next SpaceX. Like that’s just, in terms of capital, it’s just not going to happen. What you’re talking about when you’re talking about sort of small and medium business entrepreneurship is for the most part, you’re talking about kind of normal businesses.

People copying and doing what already exists, but in an efficient way and for markets that maybe don’t have it. So that is a kind of entrepreneurship that really you can see thrive in a place like Brazil, for example Brazil is not going to make the next space X what Brazil needs. They don’t need that.

What they need is they need to just block and tackle. I remember the first time I went to Brazil years ago, I met this guy in Goya, which is in like the Texas of Brazil. And he told me the story he was a really successful guy, and he was, he told me this story, he said he said, I went and I saw I went in the United States and I saw that they use these machines that they take with tires and they recycle them, and they use the recycled rubber to basically protect people and the ground when you’re drilling in mining operations.

And And no one in Brazil used that. So I went to China and I bought one of those machines and I set it up here and I sold a bunch of stuff to Volley and made millions of dollars. That’s, that is entrepreneurialism in, in Brazil, right? Like just copying shit and doing it adequately. Now the flip side of that is, and the reason why people just don’t do that all day long, It’s because there was some law change and this guy’s business went out of business overnight and he had to do something completely different.

So when you think about like risk reward and what is your discount rate, not to get all finance y up in here, but there’s a reason why those opportunities are just laying around all over the place in emerging markets because the risk is significantly higher. So it’s not just Oh, just go to Brazil and copy all the U S stuff and you can make billions.

Like it’s not that easy, but that’s the sort of entrepreneurship that you see in those kinds of emerging markets and what they need. And the more they can do that, which is why, like in the Brazil context, when we talk about, Hey, things are just like getting normal that’s great. Like when we talked about Bolsonaro and the elections and, and the cost of capital in Brazil.

All those countries need is for things to just not be too crazy and it will be, it’ll point in the right direction. So in the U S to move, to, to that part, I think it’s really twofold. So on the one side small entrepreneurs and people were doing less of this pre pandemic like firm creation was lower just because they measure that how many people are opening businesses and most businesses are boring.

It’s restaurants and laundromats and, stupid things that don’t change the world. But change everyday experience for most people that has gone up again, post pandemic. And I think it gets to this notion that, my world war one metaphor where like. People are just more willing to do stuff.

They’re more willing to move. We know people who move from the Northeast to the Southeast, or to Miami, or to Texas, or they’re moving from California to Texas. Like, when you move, you start a new job. You start a new business. E commerce is enabling a lot of this. Like little stuff, people selling stuff online.

It sounds unsexy, but that’s really good for the economy because when people do new stuff like that, usually you’re allocating resources better than just remaining stuck. And if you look at the data on Korea or Japan, they’re small businesses. Not only do they suck, but they never die. They just suck and they suck and they don’t change.

And it’s a 75 year old Japanese guy has been doing it for 40 years and the son’s working there and he’s just miserable. And that’s life. And that’s the difference between those two types, right? That’s very different from the sort of entrepreneurialism that Elon Musk or Sam Altman are doing where they can allocate massive amounts of capital.

And that’s a different dynamic, but I think when we think about some of the craziness and some of the stupid entrepreneurs, like I’m sure you’re, when you think about entrepreneurs, you’re thinking about, Oh, this guy with his dumb app that he’s, boasting about that’s what most people, most of the entrepreneurs that we interact with.

In Boston or Paris or, whatever are doing but that’s, I think it’s in a way it’s good because if you look historically the really big technologies, the SpaceX type technologies they are not economically rational and you need stupidity or you need.

Government defense expenditures, basically one of those two things, private capital stupidity or government defense expenditures to finance the massive needs that you. That you require to build those sorts of fundamental revolutionary technologies, because most of them don’t turn out to be anything. And almost always you lose money.

[00:31:54] Jacob Shapiro: Is this a good segue maybe into, I know that you were looking at new course results, that’s a steel company. For those of you who aren’t following as closely as we are is there something about that story and about volatility that helps us talk about this part of the conversation too? I think it does.

[00:32:10] Rob Larity: It’s a, it’s an interesting comparison. People looked at the 2010s for example, and everyone knows growth was just not good and things were stagnant and companies weren’t investing and yet stock market returns were awesome. So what gives, why do those things go together? Because most people who don’t work in finance or investments assume Oh, when the economy is doing well, then my stock portfolio is going to do well and vice versa.

But it doesn’t really work like that. And I think getting to our point about craziness and entrepreneurialism and stagnation. One of the things I think is worth thinking about is, we’ve talked a lot about volatility, both in macro cycles and policymaking and geopolitics. And within, from a bottom up standpoint, within industries and disruption and, uh, entrepreneurial booms and manias, like we’re having one right now with AI and data centers, like that’s like the third one in three years my God the, that’s good for growth as we just talked about, but it’s not good for investors per se.

And it’s not good for investment returns. And here’s why. And I brought up new core before because I happen to be looking at their earnings this week and off wall street is actually short new core or we’re recommending it as a short to our clients. So that’s why the interest, but new core is an interesting example of how companies in these sorts of crazy environments that are more volatile.

How they basically screw up. And it’s because of a certain bias that companies have, which is to be both short term oriented and to be unable to be counter cyclical in either their communications to investors or wall street, or the way that they allocate capital in the business. So that’s very highfalutin, but to put this into a concrete example, take new core steel, which is a perfect example of this.

New core had the most absolutely incredible blowout, amazing results in 2021 and 2022, because there was a giant boom in demand and there was a contraction of supply and they just minted money. Absolutely minted. Hundred year storm kind of profits. So what did they do? When their stock price boomed, they started buying back all of their shares.

They took the profits they were making and rather than put them against you know, store them away for the inevitable, down times, cause this is a cyclical business. They went and they bought, they allocated their capital, buying back shares at very expensive levels. The second thing they did was they came out and they said, Hey, times are great.

We’re going to build a ton of capacity. So they’ve accelerated their CapEx. They’re building, rebar plants and steel sheet plants. And they’re expanding their capacity significantly. They’re making a bet that good times are going to continue. This is really stupid and I don’t, I do want to pick on them because we’re short them.

And they’re pretty dopey. But they’re not the only ones. Like Textron, for example the conglomerate down in Rhode Island they’re wonderful example of this because they always buy their stock literally at the peak and then they’d never buy it when it’s getting the shit kicked out of it.

Most companies are like this, right? And the problem is when things are, that’s okay when things aren’t as volatile, when you have a 2010s kind of environment where it’s just nah, the economy is plugging along. And not great, but not, not in recession either that smooths out the moves and that can work very well.

But in this sort of environment, when you’re allocating capital pro cyclically, then you’re destroying that capital. You’re destroying your investors wealth and we’re seeing a lot of businesses doing that right now. And that’s why, if you look at, outlooks for the next year I’m very bearish on, on us, especially large cap stocks.

For partly this reason, expectations have been set way too high and companies have been way too complacent and aggressive because the times they just had were really good. And now things are starting to roll over and they’ve, they’re like the coyote, they’ve run off the cliff and they’re looking out at the Mesa, whatever ahead of them.

And the floor is starting to fall out from the bottom. So to wit like new core steel their business is starting to roll over and the architectural billings index today, which is a leading indicator for for commercial construction. It just hit its lowest level since the pandemic, like super contraction mode for non residential construction is really starting to roll over

[00:37:06] Jacob Shapiro: You can’t really imagine anything less entrepreneurial than share buybacks, but to try and explain what Nucor is doing a little bit, so the United States is the world’s largest steel importer. This is 2020 data, but 26. 3 million metric tons of steel. The U S imports about 8 percent of all steel imported globally. And it’s a steel imports are 12 percent larger than the next biggest importer, which was Germany.

Again, that data is 2020. So it might have changed a little bit. And I can’t help but bring up, as Joe Biden head heads towards this electoral rematch with Donald Trump, he announced I guess it was just last week or the week before that he was going to triple the tariff rate on steel and aluminum imports from China.

Now that’s not where the U S is getting most of its steel. It’s getting it from Brazil, Mexico, Canada, Japan, South Korea. Even Vietnam, places like that. But I think what the Biden administration is thinking about here is in terms of well, if there’s this glut of Chinese steel on the market, then prices are going to be super low.

And then none of these companies are going to be able to do anything. Go back even a couple weeks before that. And you’ve got Biden, even as he’s welcoming Kishida from Japan at the White House and talking about the greatest, strategic deepening of the U. S. Japanese Ty since 1960, he’s also saying but Nippon steel can’t buy us steel because us steel needs to remain an American company for the national security and everything else for the United States.

So it seems to me that if you are a company like new core and rising protectionism in both parties, so whether it’s Biden or Trump, it’s just a, it’s a matter of degree how much protectionism you’re going to get. Trump probably walks in and reinstates the tariffs on Canada and Mexico immediately.

We get into a whole sort of thing about that. But Is there an argument there that there will be a huge increase in demand for steel in the U. S. for the Inflation Reduction Act, quote unquote, and all of the, big energy infrastructure spending and construction and stuff that’s coming down from the U.

S. government?

[00:38:56] Rob Larity: That’s the consensus view. But if you look at the numbers, like the IRA stuff has already been flowing in for quite some time and the commercial construction boom is in, in the later innings starting to roll over the infrastructure spend, which a lot of people are focused on the infrastructure bill, that’s not even really gotten off the ground yet.

And it’s uncertain to what extent and how quickly that it will. Think it’s easy to look at a high level and say if we get tariffs, that’s going to be great for these guys. But the horse has already led the barn here to some extent. And the other issue is, I think it ignores the spillover effects If we came out and put enormous tariffs on our trading partners or on China or, Mexico and Canada that’s not good for confidence, this isn’t, and I’m just repeating what we said a few weeks ago, but compare this to the tax cuts that Trump enacted the last time he was elected, those were a giveaway, to everybody.

That’s just makes everyone happy, except for, people who own treasuries over the long term. But in the short term, that’s just gravy. There’s no downside. The tariffs are a whole, as we said, then. That’s just reallocating income from one group to another. So it’s not necessarily good for the economy and it’s not even necessarily good for steel.

If, for example, business confidence tanks, because, Oh my God, all of our consumers are getting totally squeezed because all the Chinese goods they usually buy are now 40 percent more expensive. And now we’re not going to build that new factory. We’re not going to build that new data center, whatever it may be.

The net effect could actually be quite negative for steel demand, especially because yeah, we’re the biggest steel importer, but steel is not a highly traded good. It’s very heavy. The reason why we get most of it is from Brazil and places like that is not because Brazil is more more productive at making steel than Korea is because, those guys are farther away.

And So I think it may have some unexpected surprises if that were to happen.

[00:41:07] Jacob Shapiro: Do you see that throughout the steel industry? Is New Corp sticking out like a sore thumb or is there oversupply in the steel market in general? Certainly there is on the Chinese side, and there’s been evidence in Chinese markets that, this has been true for years, but that steel oversupply in the Chinese market, because they’re building those ghost cities and everything else is, really brought the price of steel down throughout the world.

Is that it’s strange to hear that, Oh, and by the way, us companies are building new capacity and they think there’s going to be a lot more demand because it seems like there’s too much steel out there in general.

[00:41:35] Rob Larity: Again, getting to the volatility issue, I think this is about information and signals and how companies act, because you have to remember like almost no corporate management team is there for the benefit of the company.

That sounds terrible, but it’s true. They’re there for the benefit of their own pay package. And their own pay package, in almost every case, is dependent on the stock price of the company. So they’re there to please investors like us, and to tell us what we want to hear, and to tell Wall Street what it wants to hear.

That’s their purpose. That’s their overriding, modus operandi. So when you have, the series of events that you saw in the last few years, Like the U S is not necessarily, uh, undersupplied in steel. What happened was during COVID you had a lot of steel makers shut down facilities because they were anticipating like, Oh my God, the whole economy is going to go into a freeze.

So the the non EEF, this is getting too detailed, but basically us steel shut down a bunch of their stuff. And what happened was, Oh, the economy didn’t go into freeze. And actually we had an enormous stimulus driven boom in the following two years. So everyone is racing to catch up and there was a supply contraction at the same time that you had a demand explosion.

So the price exploded of steel and everyone made a shit ton of money. Now you’re seeing the obvious sort of ramifications of that, which is demand has been strong and now it’s starting to decline. And yet the companies are not going to go out and say we think on a normalized basis over 10 years, like we have enough capacity, we don’t need to build it.

No, they’re saying, Hey, things are great. They’re going to continue to be great and we’re buying back our own stock because we think they’re so great. By the way, new core management is selling their personal holdings of stock, but they’re buying the stock with the company’s money. Just to clarify as our many corporate management teams right now we’re going to buy back our own stock and we’re going to build more capacity because look at how great demand has been.

So there’s not this issue of Hey, maybe demand won’t be so great. Maybe this was, You know, a bullets. No, it’s what they call mega trends. Oh every, every wave in this volatile, sign curve of demand and our crazy world is being extrapolated as if it’s, a nine, angle up into the right forever and ever, whenever we’re at the peak of the wave, that’s what I’m trying to say about, the issues with corporate management

[00:44:09] Jacob Shapiro: teams, the commodity super cycle.

If I had a dime for every time I heard about the commodity super cycle, the last three years, I’d be on an island in the South Pacific right now. Speaking of not islands in the South Pacific, you like that segue I’m in some ways I buried the lead here because and. I think the thing like I got it from my, the Jacob, please start over from there.

The thing that has occupied the front of us newspapers in a reprieve from the, Oh my God, Trump jury selection. Are these pro Palestine protests at us universities really across the country. And I say this, if you went to the wall street journal, For the past 24 hours, right until the U S released its GDP growth data, their front page thing was this visualization of Palestine protests throughout the United States, like front page of the wall street journal.

This is the most important thing that’s happening now. It’s a, now it’s U D U S GDP growth or whatever. But there are a lot of protests. There have been. Thousands of protests in many cities throughout the United States, they’re relatively small. But people can’t help but compare this to, is this the 1960s?

Is this the anti war movement? Columbia has moved, I think, to hybrid schooling because they’re worried about people getting hurt on their way to class and things like this. And it’s just there’s so much talk about it that it’s the thing that everybody’s focused about. And I didn’t want to ignore it, but I wanted to back into it from the point of view of everything we’ve talked about on the podcast so far and say that I think it maybe tells us something about what’s going on at U.

S. University. And some of the dynamics that we’ve talked about here may be part of what’s at work. So let me just give you some more interesting data, which is, according to Gallup, the percentage of Americans who have expressed confidence in higher education has fallen. In the past decade from 57 percent to 36%.

So only a third of Americans now have sort of respect for higher education. There’s been declines in undergraduate enrollment, not since the pandemic, since 2011, you’ve got 3 million fewer students on campus, universities and colleges increasingly are going to international students to pay the way because they have fewer students that they can actually send.

Almost half of parents would prefer not to send their children to a four year college. even if they had no financial obstacles. And then you start looking at, if you start breaking down the data a little bit more, how much school costs is still very high up there. The total cost of attending just a public college in the United States is 30, 36, 000 a year.

Average length of time to a degree is five years. So tack on debt service and not working and all those other things. You’re talking about maybe 300, 000. That’s more than the median net worth of most. U. S. families. So I think that there is something, there’s obviously something going on in the U. S.

university system and something is not quite right. I’m not sure that we can extrapolate from these protests that something is wrong, but I do wonder if they’re just a symptom of a general feeling of malaise in universities that has something to do with, Universities are not preparing Americans for the economy that actually exists that students don’t have the skills that they need for the jobs that actually that are actually available that to your point about covid shook people to the core about what school was for because people were still getting charged tuition rates even though everything was on zoom and what was the point and now zoom and virtual Can just be instituted at the click of a button because there’s some protest on a Columbia campus.

You start to play these things out. I think that’s there as well. The last thing is, and this is something we’ve talked about before, but this is actually a bit of good news post the pandemic and post some of the Trump restrictions on immigration and things like that. There was a real decline in international students inside the United States.

That’s reverted to the mean. So people are coming back to the United States in a huge way. China has the top spot for, people coming to the United States to go to university. I thought you might be interested to know, actually I’ll ask you, Rob, can you guess two through five on which countries send the most students to us universities in the world?

[00:48:03] Rob Larity: Oh which countries send the most students? I would guess the Chinese or have to be in that’s number one. Yeah. Yeah. That’s number one. Oh, boy. I don’t know. Why don’t you just tell us? I don’t want to let’s do it.

[00:48:14] Jacob Shapiro: Number two is India and India has had a huge increase. So 35 percent increase year on year.

So really catching up with China. Number three, and this may be cuts against your argument at the beginning is South Korea. And an 8 percent increase on then Canada. And then Vietnam is there. And then in terms of growth, the highest growth rate of students who are coming to the United States come from sub Saharan Africa and Ghana actually has one of the largest growth rates and is now on the top 25 places of origin for the first time.

For the first time, and when they’ve been looking at some of this data so the flip side of this is that even as Americans are less confident in institutions of higher education, the mirage of international students don’t want to come to the United States has actually fallen away. And if you look at the countries that are wanting to come to the United States to soak up those ideas and that research and to learn how Americans do things and to learn ironically, the lessons of entrepreneurship, It’s, it makes sense that India is there.

Kind of makes sense that South Korea is there too. Like they understand they need to learn things. So I’ll let you, maybe we can poke around the actual issues of Israel, Palestine, or you want, or we can stick on the U S university thing. But I think that in the conversation about these protests about Palestine at U S universities, I think we’re losing the thread.

The thread is that. Something is not quite right for U. S. students at U. S. colleges and universities. And this is just one of a number of signals that something is not quite right. That students are not getting what they need. And we’re spending too much time going, Oh, this is terrible. What does this say about the U.

S. student and anti Semitism and blah, blah, blah. Whatever. The stuff has always been there. There are deeper problems and deeper rot here that we should be talking about.

[00:49:52] Rob Larity: Yeah, um. The complacency issue I think is tied into this because universities are probably the most complacent big institutions around, arguably speaking, except for, maybe some big corporations or areas of government.

So I think there’s definitely an element of that where these institutions are just, you don’t need me to rehash everything that’s gone on, but I suspect people are going to look back on these congressional testimonies that the presidents gave as a major signpost of when things really started to accelerate in the opposite direction.

In terms of universities losing their prestige. All traditional institutions are losing their prestige, whether it be, the nightly news or the presidency or, Harvard university, whatever it is, that’s what. Um, that’s what happens when complacency and decadence, rips itself apart and something new gets created.

And it’s a very tricky thing because those new things haven’t really emerged yet but they’re probably coming and you can see the glimmers of them coming. And I guess in a negative way, like not to take the international students thing and try to piss all over it. But yeah, in some ways I suspect, and I don’t have the data for this, but I would suspect that a lot of these international students are getting the the leftovers of the U.

S. students in terms of signaling value, because, I could tell you for a fact that a lot of people in especially emerging markets, like just to have an American degree is enormously prestigious, and that’s the main Reason why they do it. Yes, the quality of education is probably better than what’s available on average in many of these places, like Ghana for instance.

But still, there’s an, there’s a strong signaling element to this, which used to be what universities in the US like that was their bread and butter was why would you want to go to Penn or Harvard? Because the signaling value was enormous. And yes, people say, oh, the networks and blah, blah, blah, but it’s because you can say, I went to Harvard, or I went to Penn.

And the value of that is eroding for the first time ever, arguably and that’s, maybe that’s good. We can have these institutions remain in business by selling their signaling value to people in Ghana and Vietnam and American students can do something more productive with their time with a different institution that isn’t going to charge them 80 grand to, to do what they do.

[00:52:19] Jacob Shapiro: And I think it’s worth saying that, when you think about the way universities are used. And colleges in the United States are currently structured. You’ve already talked about world war one, world war two is the source of how universities and colleges are currently set up because all these soldiers get back and you get the GI bill and you have to do something with these soldiers.

You have to teach them new things or they want to do new things. So they’re growing families. So you get this massive growth in the United States and this democratization of universities, whereas universities before were We’re largely to train the elite of society and to prepare them for public office or to take over the reins from their, wealthy partition, patrician, family, businesses and things like that, that changes in the 1960s.

And I think one of the reasons you had so much unrest in universities in the 1960s is because you have all these different groups suddenly. living together in close quarters and talking about ideas and thinking about things. And of course, there’s going to be these huge disagreements. And that’s a good thing.

It’s that universities are supposed to be slow to change. They are not necessarily supposed to respond to whatever is happening in society that day. It’s supposed to be a place where professors can say what they want and not get fired. And students can explore ideas. And it doesn’t define the rest of their life.

They get exposed to something. They either accept it or reject it or whatever else they do. Like it’s supposed to be a space to do that sort of thing. So I am very attached to the idea of the university as this lily pad of openness and expression within society. I think it’s very healthy. But I think that the U.

S. Economy has changed and society has changed and the things that are being taught, you no longer necessarily need to be successful in the same way that you might have needed them in the sixties when generations hadn’t been exposed to any of that at all. And one sort of example of this the federal government and several U.

S. States have eliminated degree requirements for many government jobs. There are companies like from Washington, Big ones like IBM or Deloitte they’re getting rid of the requirements to have a degree in order to get a job. Intelligent. com did a survey of 800 companies last year, found that 45 percent intend to eliminate bachelor degree requirements for positions in 2024.

So you go down the list and you think about what students need in order to be successful. I loved Cornell University. I hate to shit on Cornell University. Nothing that I, I learned how to think at Cornell. It taught me some things in terms of like professional and self development and things like that.

But none of the skills that I employ on a daily basis, I got at school. Like I could have gotten them in a book. I learned things about myself and you can learn things about yourself, not at a, at an expensive school in the middle of a beautiful place. So I don’t know. I think there’s something in that, this idea that the things Young Americans need to succeed in this economy.

The way that things are changing is not what universities have been geared to give them. Universities are still it’s the lagging indicator of what did the U S student need in the 1960s and seventies to succeed. And it’s just a very different world.

[00:55:09] Rob Larity: Yeah or put another way, I think you could say that the American University is like the personal World War I of every 18 year old who goes to them in the sense of you didn’t learn how to do your job at Cornell or any university.

I certainly didn’t learn how Skills per se. And everyone always, Oh, what skills are they? No one’s learning any skills, like any, anyone who’s ever hired a college student, unless they’ve done a co op program and they have a bunch of internships, like they know they don’t know shit and that’s fine.

Everyone understands that. It’s that displacement from. You’re home from your normal environment into a new environment with new people for the first time and it’s, formative period of your life like that social experience is probably greatly undervalued and the other aspects of it greatly overvalued and just compare it to a country like France, right?

Like most relative to the U. S. Fewer people leave their hometown. Fewer people go away to university. And I think that you can see that in elements of sort of risk taking and a lot of the things that make America what it is. There’s something good about that, but I guess universities don’t need to be what provides that per se, and you’re getting more of those elements that can be accessible outside of that.

Um, I don’t know where I’m going with this, but there there’s value there, but it doesn’t need to be packaged the way that it was traditionally packaged and skill development and a social experience are two separate things that you can disaggregate and deliver to people in a much more efficient way than We’re doing right now.

[00:56:44] Jacob Shapiro: And I think the thing that really does need to change in the American psyche is that, and you can see this, and this is why I led with that. It’s the front of the wall street journal is mapping and visualizing like these Palestine protests and things like that. There is still such a cache and such a reputation.

For college and university in the U S system where, Oh my God, they have tents on Columbia and they’re costing students and things like it has captured the national imagination. It’s become a talking point. Like the speaker of the house is at Columbia, like talking to the Columbia university president.

Like what a waste of time, like the speaker Johnson, you don’t have anything else to be doing with your time. Come there’s, but it still has this, we’ve, it’s still captured our imagination. And I think it’s going to be really hard. For sort of Americans to accept that, maybe they don’t need to go to college.

Maybe it’s actually better that you find an apprenticeship or maybe it’s better that you do national service in some place or go to some place in the United States. It’s really poor that has a lot of inefficiencies and build a startup there with that. Buying dumpsters and renting them out to people in a town that is blowing up, like that sort of experience might do a lot more for preparing young people in an economy than what we have right now.

And I don’t know how that changes. I think the problems of the university, like whatever, like at universities will be here, they’ll survive, they will adapt. But I do think there’s this thing happening where a generation of. Students are going to colleges and universities expecting to be prepared for life and on the other side of that, there will be jobs and opportunities and that pipeline.

I don’t know that works anymore. And I do wonder. I don’t wonder. I think that some of what we’re seeing in terms of just unrest with an issue that’s at the front pages of everything else is dissatisfaction with that, like feeling what are we here for? We’re not none of this is actually working.

Anyway, that’s my best interpretation, but I’m also as somebody who was president of a chapter of Hillel during previous bouts of Israeli Palestinian conflict. I’m very happy not to be a president of a Hillel on a university campus today. Thank God. Okay. Anything else Rob before we get out of here? No let’s close it up.

All right.

Thank you so much for listening to the Cognitive Dissidence Podcast brought to you by Cognitive Investments. If you are interested in learning more about cognitive investments, you can check us out online at cognitive dot investments. That’s cognitive dot investments. You can also write to me directly if you want at Jacob at cognitive dot investments.

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