Good morning, everybody. And welcome to the third and final podcast for our 2024 outlook, which was entitled Pillow Talk. I'm going to walk through the top 10 list just to give you a quick rundown of what was on that list and why it was there. Before doing anything else, I just want to make it clear-- two things. One, I'm doing this for one time and one time only as an homage to Byron Wien, who published a top 10 list for 30, 40, years whether he was at Morgan Stanley or Blackstone. I had a lot of respect for Byron.

And I never paid that much attention to the articles that came out on how accurate his top 10 list was because I think these things are meant to be projections of things that could happen, not things that will happen. And our industry is so dominated by consensus I think it's healthy to think about the kind of things that could happen and not necessarily what are central scenarios are.

So with that, let me get started. And number one, one of the most common themes I read all year long last year was the sanctions that the United States and other countries are putting on Russia is going to contribute to the de-dollarization of the world, whether it's the Saudis accepting RMB from China for oil and that the emerging world and the BRICS are going to rush rapidly into de-dollarization as much as they can.

Well, maybe. But I'm not seeing a ton of evidence for it yet. And despite all the hand-wringing about the weaponization of the dollar through sanctions, I don't think the dollar is going to end up more than plus or minus around 7% from where it began in 2024. And I don't think you're going to really see much of a change on this chart that we're showing here, which is the dollar share of around 50% of global trade invoicing, even higher amounts of FX transaction volume, official FX reserves, Swift payments, cross border loans, international debt securities. The dollar is still at least 50% of each one of these things. And I expect it to stay there.

Second one. We had a long section on antitrust risks in the outlook. And the reason is because of just how dominant the big tech companies are in the markets, which we talked about in the last podcast. I think the DOJ and FTC are going to win one. And I don't know which one. And there's four big ones, Google, Amazon, T-Mobile, and Meta. Just as a reminder, the Google antitrust lawsuit has to do with the traffic acquisition payments that it makes for default status on devices and other restrictions that it applies related to the Google Play Store so that in-app purchases have to go through the Google Play Store. That's the Google issue.

Amazon restricts eligibility for sellers in front of Prime customers to those sellers willing to use Amazon's fulfillment service. We'll see how the courts rule on that. And then there's this question about whether or not T-Mobile's $26 billion merger with Sprint reduced competition in the wireless market to the point that AT&T and Verizon responded by charging higher prices. I think those are the big three. I don't think the Meta case-- that there's a lot behind it.

Third. Look, the projection or the top 10 risk that Biden could drop out of the election between Super Tuesday and the general election, I'm not going out that far on a limb politically. I'm going out far on a limb genealogically. There's a chart that we had in the outlook that I'm showing here on the screen. For those of you watching the video, the Trump-Biden combination is the second oldest group of people ever to run for president even after adjusting for the shorter lifespans that used to exist. And we looked at every presidential pair going back to 1790.

These are two really old guys, both of whom are older than average male life expectancy. So it's not really going out that far on a limb to project that one or both of them would have to drop out of the race for health reasons. I think it could be Biden for other reasons that we discussed in the paper. But this is more an exercise in trying to understand how the political process works and how the conventions process works and how committees get to name candidates at certain stages in the process even though they haven't been vetted through primaries.

And so that's what that section was all about. And it actually had a link to our November paper that discussed that. The level five autonomous car backlash is coming. There's only a couple of places in the United States, Austin and San Francisco, obviously, that allow this kind of thing. And as we discussed in the paper, these vehicles have been blocking emergency responders, running people over.

And the same way that people gradually soured on those horrible urban scooters, I think there's going to be a similar backlash coming for these autonomous cars. Remember, autonomous cars have had a very checkered history. About 7 or 8 years ago, all the major car company CEOs, including Tesla, projected that by 2024 significant portions-- 30%, 40%, 50%-- of their sales would be level five autonomous cars. That is not happening.

The LiDAR stocks have collapsed. And really, the only application that I've seen of successful autonomous vehicles is in kind of protected standalone industrial sites where you have these industrial trucks that are moving things from one place to another. The fifth one that we talked about this in December in the alternatives review-- for the last few years, the losses on leveraged loans and private credit have been very similar. I think in the next recession, whenever that happens to take place, the losses on leveraged loans are going to be a lot higher. And just the underwriting standards in the loan markets have been generally terrible.

And we walked through kind of these maturity sublimits, reallocation allowances, prepayment step downs, no IP blocker. All of this is complicated legalese for the leveraged loan lender community sacrificing the terms and covenants that it used to have and which the private credit industry still tends to apply. EBITDA add-back restrictions are another example of where the leveraged loan industry allows a lot more creative underwriting and lending for purposes of leverage than the private credit market. So that's prediction number five.

Another one that the press picked up for whatever reason is that I believe that Argentine dollarization would probably fail if attempted. Again, this is not a very bold prediction. Dollarization or linking to any currency is extremely difficult if the central bank of the currency you're linking to doesn't adjust its policy rates to account for your existence. So it's very hard to dollarize.

And the countries that do it successfully, like Hong Kong and the UAE and Qatar and Oman and the Saudis, generally benefit from very, very large foreign exchange reserves, commodity-related resources, and they have a certain degree of business dynamism and labor market flexibility that allow them to adjust to changing conditions. Argentina doesn't have that. It is still highly Perónized, referring to the Perón era.

And look, the milestones that Milei has accomplished or proposed so far are impressive. Privatization of airlines and energy, rail, and sewer, cuts in public spending, liberalizing energy prices, eliminating ministries, ending incentives for industrial development, firing government employees. If you're the IMF or the American Enterprise Institute or the Cato Institute, this is right out of your preferred playbook. And so some of these things may result in a boost in private sector activity and greater efficiencies. I just don't think dollarization would succeed and would probably fail within a few months or a year of being implemented.

The seventh one is on Ukraine, the prediction that the war drags on-- well, not a prediction. The risk that the war drags on but that the funding impasse with the US is eventually resolved. If you define the existence of a sovereign entity as a country that controls its borders, you can have a legitimate discussion now about whether or not the United States has lost that sovereign control.

And I think when you look at the number of actions taken by the border, the customs and border protection agencies, they are just skyrocketing. I think that in an election year is going to put a lot of pressure on the Democratic Party to find some kind of solution that breaks the funding impasse on Ukraine.

And then prediction eight. If there was ever a reason why some people might be worried about regional banks, it would be now. Obviously, there's a lot of pressure. They've been the big lenders in terms of construction loans and office loans. But I think that there's a chance that the regional banks do pretty well and that their price to book values remain stable despite all the obstacles.

When SVB went under a few months ago, there was a temporary period when the price to book ratios of the US regional banks converged with Europe. They've since widened back out again. And part of the reason for this being on a top 10 list is when you look at the support that the regional banks in the US have, it's kind of remarkable. For the first time ever all banks, including the regionals, can post collateral at the Fed and borrow 100 cents on the dollar, even if the security is worth less than par. That's the bank term funding program.

And then-- I have a lot of respect for Tim Geithner and all the work that was done after the financial crisis to solidify the banking system, but we were told at the time never again. No more bailouts of irresponsible investors and lenders. If there was ever a case where the federal government could have argued that uninsured depositors should take a hit, it's Silicon Valley Bank.

It was basically a venture capital piggy bank. The deposits there rose and fell with the IPO calendar. Only 3% of their deposits were fully insured. It offered venture loans in exchange for deposit exclusivity. The average account balance was over a million. And the average uninsured account balance was over 4 million. The top 10 depositors had 13 billion in uninsured deposits. The list goes on.

There's also a long history of losses imposed on uninsured depositors when the FDIC works out of bank. And yet, despite all of that, all of the uninsured depositors in Silicon Valley Bank were bailed out. That leads me to believe that the combination of FDIC help and these Fed facilities are there to sustain and help the regional banks deal with a lot of the pressures they're under. And I think because of that the regional banks are going to do OK.

We're going to talk about this in much more detail in the energy paper, which comes out in early March. But the ninth topic on the top 10 list was the risk of electricity and natural gas outages in major urban centers. Part of what's happening is that electrification is rising at the same time that nuclear power and fossil fuel capacity are being retired. And so you're electrifying the grid at the same time you're introducing more renewable intermittent renewables on it.

And in NERC's long-term reliability assessment there, they're showing a decline in the reserve margins, which basically is the amount of spare capacity you have to deal with a surge in power demand during storms, whether it's a winter storm or a summer storm. And so the risk of these major urban events is rising. And as I mentioned, we'll talk about that more in the energy paper in March.

And then the 10th topic was on the inhalable COVID vaccine. So far the COVID wave this winter is much milder than the prior three. And most of the hospitalization risk is exclusively attributable to people aged 75 and over. There's evidence that the latest booster-- XBB the booster-- works reasonably well against hospitalization risk, something around 65% to 70% efficacy versus hospitalization when compared to the risk of being unvaccinated or having one of the older vaccines.

That said, the current booster doesn't really do much at all to prevent transmission. At most, it might suppress your infection risk by 30% to 40% in the first month. And then the efficacy versus infection declines. What a lot of scientists have highlighted is that we need an inhaled vaccine that produces mucosal immunity to block infection in your nasal system instead of blocking it when it's in your lungs.

So some of these inhaled proteins are under development. The news is good. And I think there's a good chance that one of these things gets approved for use late in 2024. I've got an Eye on the Market coming out next week-- I think on the 23rd of January-- that's going to get a little bit more into some of the science around vaccine safety, the history of vaccines, the FDA, and a look back at COVID lockdowns, which in retrospect are looking very, very troublesome in terms of the costs being imposed on the generation of students, some of whose math and reading skills are set back a couple of decades. So anyway, so more on all of that next week. Thank you for listening. And see you soon. Bye.