Welcome folks to Orwellian Optics, a podcast by Allio Capital. I'm one of your co hosts, Chief Executive Officer Joseph Gradante. I'm here with my Chief Investment Officer. AJ, what's up, man?

AJ Giannone

Hey, Joseph, Tyler. Great to see you guys. Glad to be here for another great episode. Tyler, how's it going?

Tyler Goering

Hey, doing okay. Glad to be back. We know we've been off for a little bit, but ready to hit it hard today.

Joseph Gradante

Yeah, got a couple things cooking on the radar. particularly we heard a speech from the President, this weekend. And I think with a lot of noise out there in the markets, we really want to kind of, dissect through this. and, you have, some people out there talking about a recession and you have, high price targets on gold.

And then you have other people that are bullish. And so how do you cut through all that noise? and particularly, the president and the treasury secretary are bullish. And Yeah, the press seems pretty quick to, point at Trump and tariffs. And, I think it's our job to cut through the noise for you here.

So AJ, what'd you think of, this weekend of the speech? I'm going to play it here in a few minutes, but, what were your thoughts?

AJ Giannone

Yeah, it really just all goes back to the efficiency argument. And like, everyone has this gut feeling that the government has been so wasteful. I mean, if if you ask the question, Hey, where do all my tax dollars go? what am I getting for what I pay for? and most people I think would be hard pressed if the federal government disappeared tomorrow to realize if they weren't able to view the news, if they didn't have access to Twitter, if they couldn't see this happened in real time, how long would it take them to notice that the federal government was gone?

how involved is it in really, the average everyday person's life. And, to me, when you hear Trump rattle off a list of all these things, Hey, we're saving money here. And this was a massive waste. Like we're seeing all this fraud and abuse. it's just validating because I think everyone has this gut instinct that there are so many areas of where our tax dollars are going, that could be improved, that are being abused, that are being neglected by the stewards and the civil servants who are supposed to be overseeing, the judicious and appropriate use of these monies and these funds.

to me that was my core reaction was just like, of course, this is so obvious. Why is it taken so, long for somebody to just start diving in and uncovering this? It's just been this. weird, uncouth thing for these, D. C. politicians to talk about. And it's because we can now see that they were all directly benefiting from it.

and now that gravy train's over, they're all squealing about it.

Joseph Gradante

Yeah, I'm going to play the just a short clip here real quick, and just want viewers to listen and see if, I think Ronald Reagan, said, when you think about tax expenditure, ask yourself if you would take 100 out of your pocket if you had to today and put it towards any of these initiatives.

So just listen to this list that Trump goes through right here.

here.

Trump

And they wasted monies at, at never seen before levels. If Joe Biden had simply held federal spending at the pre pandemic levels we had in 2019, we were right now, we would have virtually no inflation. We're trying to balance the budget immediately.

And because of the tariff income, which is really, uh, it's, it's already turned out to be. amazing. Actually, it's really meant more for bringing countries and companies into our country, but it's, uh, the numbers are rather staggering because we're the big piggy bank that everybody wants to be and they can play games and they can say, well, there'll be retribution and, you know, equal this and that, but they can't be equal, but we want to keep it so that we're the big piggy bank.

And if we had years like we did the last four years that wouldn't Have lasted too long, so we're not promising it, but, you know, all of these things could happen. We, we hope to balance our budget, so I don't wanna promise it because if I do and we come about $10 short. The fake news media back there would say we have breaking news.

He did not make it. He did not make it, but we'll get it done very soon. It might not be this year, but it could be this year. Actually, we have a chance of getting it even this year, which people would be shocked at because they were talking about 10 years, 15 years, 20 years from now. When I took office last month, we inherited the consequences of inflation.

That was more than four times what it was when I left four years ago. Think of that. I left, it was at 1. 4 percent. And, uh, the annual government spending over 1. 5 trillion dollars more than projected in 2020 alone. 1. 5 trillion! But under the Trump administration, all of that is changing faster and more dramatically than anyone ever thought possible.

They didn't think it was possible to do what we've done in just a very short period of time. We've accomplished more in four weeks than most administrations accomplish in four years. On my first day in office, I imposed an immediate federal hiring freeze, a federal regulation freeze, and a foreign aid freeze.

I signed an order creating the Department of Government Deficiency and put a man named Elon Musk in charge. Thank you, Elon, for doing it. very much. And

he's doing a great job. I wish you could have seen him last night. It's really, you know, he's a very committed person. He's a very serious person and he's a very high IQ people, you know, I like high IQ people. Not all have to be, but you know, it'd be nice to have some people up there that he's a seriously high IQ individual.

Now he's got his faults also, I will tell you that, but not too many of them, which is now really waging war on government waste, fraud, and abuse. And they're curbing inflation and saving taxpayers billions and billions of dollars every single day. There's even, uh, under consideration a new concept where we give 20 percent of the Doge savings to American citizens and 20%.

It goes to paying down debt because the numbers are incredible, Elon, uh, so many billions of dollars, billions, hundreds of billions. And we're thinking about giving 20 percent back to the American citizens and, uh, 20 percent down to pay back debt and pay down debt, which is if you look at value, if it were a real estate.

balance sheet. The debt is tiny, but we still, we still want to pay it down. Doesn't matter. We don't look at it as a piece of real estate. It's America. We're going to get it down through intelligence, hard work. And as Elon said, a word called caring, you have to, you have to care. By doing this, Americans will tell us where there's waste.

They'll be reporting it themselves. They participate in the process of saving money. So many of the men and women. In this room, as an example, they pay tremendous amounts of taxes. And here are just a few examples of where your money was going before I came along. These are just some of the, just taken at random.

Oh, there are much worse examples than this. I was just looking at them before the speech, and I can tell you they were much worse. And there are some that are horrible, but I don't want to really say them because they're very, very, uh, embarrassing to people. Very, very embarrassing. And they're really something, but you'll be seeing it, and you will be reading about it.

But just some taken at random. Two million dollars for sex change operations in Guatemala. Twenty million dollars for Sesame Street performances in Iraq. Twenty million? That's a lot of money. You know, I know what it costs to do those things. You get a cast over for fifty thousand. Give them a couple of bucks tip, and that's it.

Not twenty million. Twenty million. That's gone with the wind on steroids. 101 million for 29 diversity, equity, and inclusion contracts at the Department of Education. Wow. And we've also canceled, we've canceled all of these, saved all of this money. And again, this is just a small sample. This could go on. I could read them all day.

Joseph Gradante

And so, there you have it. And, I just think it's such basic and it's just so logical, what they're trying to do. And you see all this fuss over Elon Musk and it's like, these guys didn't get us where we're at. It's years of government malaise that has gotten us where we're at.

I think you hit the nail on the head when you said, how involved is the federal government in the average American's life? How much assistance do they get? How much help do they get? And, When you see that money's going to all these vested, entrenched, special interest groups globally, not even domestically, it was shocking.

we got to cut expenditure somehow in this country. And it seems like any logical person would agree. you Looking at the numbers, 76 percent of people support what DOGE is doing. I mean, Elon musk sent out an email to federal employees last week. There was a lot of hype around that, a lot of reaction.

But, Americans are supporting the president and Elon musk and what they're doing. So, I'm concerned about Washington and Congress, obviously. Tyler, what are your thoughts?

Tyler Goering

I think it's probably a good time to bring up an interesting thing that's been floating around in the news is the doge dividend. on its face, I love the fact that we're going through government with a fine tooth comb and trying to cut out wasted expense.

I think this is a long time coming. The people on both sides of the aisle, Democrats and Republicans are equally responsible for getting us into the situation that we are in and seeing some outsiders like Elon and Trump saying, we're going to take this seriously. We're actually going to cut back on stuff to me.

That's music to my ears. the idea was floated that, with these savings. there may be a chance for Americans to get a 5, 000 check. Now that came with a caveat that, I think the goal was to cut something like 2 trillion, before those checks are sent out. But, I think it's an interesting concept.

I thought we should talk about it a little bit. What do you guys think is a 5, 000 check? Is that going to be horribly inflationary? How will that impact markets? what do you guys think about this? Do you like it? Do you dislike it? Do you think there's maybe a better way we could do this? love to hear your thoughts.

thoughts.

Joseph Gradante

No, I like the 20 percent going to Americans 20 percent going to pay down the debt. And there's got to be a way that we pay this down. And I think it's a good start. And I don't know why anybody would be against it because at the end of the day, we're all in this together as Americans.

yeah, I agree with you wholeheartedly. the reaction in the media is dumbfounding to me. and at the day, he needs Congress, you need the legislature. and so I just think there's going to be a lot of noise around this for a while. And it's up to independent media sources like us to cut through this.

And, AJ, what do you think about the sovereign wealth front?

AJ Giannone

Yeah, this brings up an issue, again, which is we've hit on it a number of times, but the fiscal situation in the U. S. is dire to say the least. And, you've seen folks like Ray Dalio come out with proposals around how we deal with this. And I think 1 way in which to deal with it.

That accomplishes both progress towards addressing this deficit and this ballooning debt as well as accomplishing some other strategic objectives is the proposal that was pushed out a few weeks ago around the creation and funding of a U. S. sovereign wealth fund. And we've seen other instances of sovereign wealth funds.

In other countries like Saudi Arabia and some of the Nordic countries. the core concept that I think is important for us to focus on here is, what is the objective of it? And I think from my perspective as a market practitioner, I think it accomplishes a couple of things, both fiscally and politically that make it an attractive solution us to pursue in this particular, period of time, it allows us to make.

Targeted investments in key areas of infrastructure, innovation and technology and markets that will allow us as a nation to be better positioned on the world stage from a competitive landscape point of view. So if you go back a couple weeks, a month or whatever to, the announcement of the 500 billion investment in AI to make sure that we maintain AI supremacy in the race against China.

And you extrapolate that out to its logical conclusion, with which is, we need to be making targeted investments in areas of the economy that are going to be critical to the success and ability for us to continue to succeed going forward into the 21st century. So the Sovereign Wealth Fund idea allows.

The government to effectively provide stimulus and provide incentivization structures to these key areas that will help us because it's not a level playing field. This is exactly what these other countries, particularly the Chinese and some of these other, competitors on the world stage are doing.

you look at what Saudi is doing with their sovereign wealth fund. They're investing billions and trillions of dollars into. Building their version of a 21st century economy. And if we don't execute on this initiative, we will be behind them from a strategic perspective. when you think about what this means, it means, okay, we're gonna.

Figure out a way to fund this thing, to use the assets that are on the United States balance sheet in a calculated and strategic way to be able to go out into the market and make these targeted investments to, to own and direct capital assets in a way that is best suited for the American people and has a long term vision of which, corporate America really struggles with.

There is a certain. attractiveness to just a pure capitalist approach of let the market figure these things out. Once you start talking about 10, 20, 30 year timescales, it becomes increasingly difficult for markets to get. Excited about, certain technologies or investments. So what this will do as a tool is allow the sovereign wealth fund concept to bridge that gap between capitalist incentives in the short term and strategic incentives in the longterm.

And to me, that's a win for us. Yeah.

Yeah.

Joseph Gradante

Yeah, I love it. It's very utilitarian. And when I think of the government and its role, I think, it's its role is to produce the greatest good for the greatest number of people. It's not really capitalism versus socialism. For me, it's more of a utility argument. And how can we be efficient and effective?

and they essentially have three ways that they can pay for the sovereign wealth front, and that's borrowing. Take that off, right? That's not an option. then you have Taxes and tariffs aren't tariffs are just reciprocal and That's what I mean about the noise in the media.

They talk about tariffs and just quick note on that, other countries are hitting us with tariffs. So all Trump is saying is that, hey, if you're going to charge us a 10 percent tariff, we're going to charge you a 10 percent tariff. That's it. He just wants them to drop tariffs on American exports.

and then selling assets And so I think, you addressed it and, we have lots of obviously defense assets, lots of energy, we're sitting on lots of natural gas and lots of oil and to tap into that and put that into strategic investments is absolutely, a master plan and going to be crucial, keeping up on a global stage that, there's an increase in parody Tyler, what do you thought I

AJ Giannone

in here, Tyler, and I'll make 1 point and turn it over to you. But, the other piece of this 2 is, on the tariff side, whether you want to talk about tariffs or specific taxes more generally, there's an argument to be made that you could securitize the future revenues from some of these programs.

if we make the determination as a country that certain tariffs on key industries are Or sectors or areas of the economy, that help bolster us production domestically are going to be long term. So if we can, put something through Congress that says, Hey, we're going to have tariffs for the next 10 years on these critical minerals or these production bases or whatever, that's something that you could then turn around and securitize the revenue from that and use the sales of those securities to fund the sovereign wealth fund.

So you're effectively collecting. That tariff revenue up front and providing it as a service to the market, in the same way that you would securitize and sell receivables, if you're a retailer in your walmart and you've got, 12 billion of receivables due over the next 12 months, you say, Hey, I'll sell that 12 billion of receivables, in a securitization package and collect, 11.

8 billion upfront today. And now investors will be able to earn that extra. whatever it is, 200 million of value that you've effectively, financed to have that cash available today. So there are multiple avenues with which to fund this, all of which I think. Are on the table. And if we attack this from a first principles perspective of, how do you build an asset that will be accretive to the U S balance sheet and income statement in the future, then it's worth investigating all of these.

And folks will say, oh, you can't borrow. And maybe it doesn't make sense to borrow, but there, I think are creative ways that this new generation of government will enable us to attack. And when you have scope, when you have folks like Scott. best as a treasury secretary who are seasoned market veterans and you pair them with some really technically capable people and some really intelligent people who are now only now just taking the driver's seat.

these are young folks who are coming into government with a approach like, hey, we can figure this out. This is a solvable problem. If we just use our base logic and reasoning and we ignore that bloated bureaucracy that's always saying, no, you can't do that. Or here's why this won't work.

These are all solvable problems. And, sorry to cut you off there, Tyler. But I thought that was worth saying is like, there are ways to do this that, maybe are a little bit, unconventional, but still very well possible.

possible.

Joseph Gradante

Tyler, just real quick, I'm just Getting at the fact we have to cut spending as well while we do this, spending on, malaise and get our government to be functional to actually deliver on these things. And, it's not really cogent to just have the president doing executive orders.

We got to pass deregulation. We got to pass tax cuts and to be able to pass tax cuts, whether it's just an extension of the Trump tax cuts, he's talking about this thing where if you build an America, it will come down to 15%. And so if you're going to do that, it's going to add to the deficit. And so they got to cut spending if they're going to, tack on, some low interest borrowing.

it's got to be the sum total of changes. And that's all I was trying to emphasize, but Tyler, go ahead.

Tyler Goering

No, I see the, sovereign wealth fund is almost analogous to, national security or a national defense tool. It allows us to supercharge, areas of our economy that keeps us ahead of our near peer rivals, like China, for instance, they're becoming more and more advanced every day. They're competing with us almost on an eye to eye level.

and. In us doing these things and starting a sovereign wealth fund, we can invest in the technologies that keep us a step ahead of our competitors, which that's good for everyone. That's good for all Americans. It helps keep our place at the top of the pile. So I'm very bullish. and I hope that we do start a sovereign wealth fund.

I also think A. J. Touched on a really good point in that sovereign wealth funds have an indefinite time horizon. So you're not motivated by these short term gains. Like you said that corporate America may be shooting for. It allows you to invest in technologies that you know, you may not see the returns or the benefits from those for some time.

also, it encourages the private sector, I would say as well, to invest in those things along with you. So you kind of have that blanket of security that the sovereign wealth fund maybe is going after X, Y, Z new technology. And that may, induce private investment in that just for that reason alone.

So no, I think it's a great thing and I hope we keep going down this route.

Joseph Gradante

So my question here to play devil's advocate is. what happens, in the government playbook here. How does this play out? Does it play out in the public square in terms of, you still got to address Washington and, they have a one vote majority in the house and there's already one no vote on some on one of the budget plans that was proposed.

I'm not sure who it is. My guess is that it's Thomas Massey, but I'm not really sure yet. I didn't look into it. but curious, like how you guys think, cause I think this is going to have to play out in the public sphere. I mean, that there's such ardent public support and that's how it played out with Reagan.

And, I just, I can't believe that, Democrats won't get behind some of this. That's where I'm disappointed because government is the problem here. And I'm concerned that it's going to continue to be the problem. And, Yeah. How do you foresee it playing out?

out?

AJ Giannone

The skeptic in me says it's going to play out exactly like you've described Joseph and that the Democrats are going to block this every step of the way and we're going to be left. With some half baked solutions that don't really hit at the source of the problem that really just, touch the surface of the root of the issue.

optimistically, I think there are avenues where there is enough public pressure to get some substantial things done, but I do think it will be difficult to actually navigate down those channels. It will take a deft, Clever approach by the administration and all of the different related parties to figure out how to do that because you are going to need to get some different constituencies on board when you can't afford to lose many votes.

All it takes is, one holdout, so to speak. And, then you have to start giving away key aspects of the program to get that person on board.

Tyler Goering

let me tie this back together with, we talked a little bit about a doge dividend earlier that what if everybody starts getting 5, 000 checks from the savings that we have, found in our bloated federal government, do you think that might change hearts and minds of American citizens when you actually see your cold, hard cash returned to you that may, On a broader scale, people might say, yeah, I'm going to pay more attention to how my government spending my money.

I like getting my money back. do you think this may have a long term consequence where people become, more on board with the idea of fiscal responsibility and therefore it makes some of these things easier to pass in Congress because your constituents are now reaping the benefits of this waste coming back to them.

And maybe on a longer term scale, they like this and they think that this is a good idea. And maybe we start moving in that direction as a country to be more fiscally responsible and be more studious about how we manage our tax dollars and spend our tax dollars.

Joseph Gradante

Well, you bring up an excellent point, Tyler, and you're talking about economic literacy, right? It makes all too much sense. And, and I'm glad you said that because that's really our goal at Alio, right? Is really to promote economic literacy and to really help people understand economics to end so that they could look at policies and really vote in their best interest, not along partisan lines.

my concern is that people don't get the accurate information. They get a lot of emotion, a lot of bloat. And, and that's why I just think, things are different in the media. And so people really got to, seek out the truth. And I agree with AJ, there's the skeptic in me and there's the optimist in me.

And I just think they're going to have to be very clever and very strategic about this. There's going to be a lot of trade offs and, I think the skeptic in me is thinking that if the Senate delivers the bill, it's going to be more watered down than if it comes from the House, because I've listened to John Dune and, there's some things he's enthusiastic about and there's less things, they're more entrenched, and there's more, Establishment Republicans in the Senate.

So that's my concern. That's going to have to come from the Senate and not come from the house. And you're going to get a worded down version of the bill, but we'll see. I think either way, I don't know if we get taxes down to 15%, but I do think we do get the extension of the tax cuts. We definitely get deregulation now to tie this all into markets.

there's been a lot of volatility in markets recently. there's been some gains in the eurozone. I think, we're entering a new regime and I think, we're just seeing some cyclical movements globally, seems to be a broadening out, but I'm still. bullish long term.

I think in the short run, you talked about a couple of weeks ago, AJ, about diversification. And when we talk about diversification here, we love gold. I personally love gold. What do you guys think?

think?

AJ Giannone

Yeah, that's a key piece of this. the long and short of it is that at some point we will have A higher degree of clarity with respect to what fiscal and monetary policy will be going forward. I think in this particular instance, we are in a unique time where there is a tremendous amount of uncertainty and the economic fundamentals are still supportive of a growth trajectory.

There are signs of weakness to point to specifically. elevated defaults on credit card balances and auto loans, but at the same time, you see a tremendous amount of consumption from the high end. So the, the top earners are still doing fantastically well, you've seen a little bit of volatility creep back into the markets with folks looking at a rotation between consumer, discretionary and pivoting away from that.

To more of a consumer defensive value, quality style factor allocations. What that says to me is that there's a lingering undercurrent of weakness that this uncertainty brings that folks are going to need to address at some point. and the way to do that, when you look at what's performed well in the markets this year, to your point, Joseph, it's gold, it's hard assets, it's a commodity like gold where there's that safety factor inherent in.

Both the price as well as the psychology of owning the asset. for me, the short term, between now and maybe mid year, looking a little bit bumpy, the medium term between, mid year and year end, also looking a bit bumpy. a careful balance because the underlying economic fundamentals are still supportive while the macro.

Risk is elevated, so that I think there's a heightened risk that any one of the 10 different things that we have to worry about on a daily basis has the potential to knock this train off the track, so to speak, but the train is still on the tracks and just because the risks are elevated, across these multiple different factors doesn't necessarily mean that any one of them is going to hit, if you liken it to being in a casino, you're at the roulette table and you blow up.

if any one of 10 out of 30 numbers hits, the odds are still in your favor that you're not going to blow up in that scenario, but the risks are elevated. And that's similar to how I see this scenario. Now it's that things are still weighted in the favor of someone to own risk assets, but the chances that this train gets knocked off the tracks are just elevated.

Joseph Gradante

Yeah, I agree with that wholeheartedly 1000%. I think you're articulated perfectly. I see it like there's a linger and thunderstorms out there and it was like a 30 percent chance and those thunderstorms are potential recession because I think anything can knock this off the tracks now. But I do think it costs the underlying fundamentals are still strong.

And because the sum total policy changes are. net bullish, and pro growth. I think, when you look at where we're at currently, you can't look at people that have been in office for four weeks, you have to look at what got us here and what got us this point. And I think, we talked about Ray Dalio, he talks about history being the biggest indicator and, I liken this year to, Reagan's first year, in office and, Reagan didn't really see the growth until they got the tax cuts done in 81.

And then 82 is a really great year. and so I think, we're in a similar situation where, if we do get one of those thunderstorms, I still think in the long run, we would recover pretty quickly because of the policy changes that are happening and the positive stuff that's happened. But I think the heightened risk, means that it can be knocked off, just knocked off the tracks a lot easier.

Like you said, Tyler, what are your thoughts?

thoughts?

Tyler Goering

I was going to bring up some research that A. J. sent me this morning that sent a paper that said almost 50 percent of all spending is coming from the top 10 percent of earners. Now, does that raise any red flags with you to me that, It seems almost analogous to the S and P 500, where there's only a handful of stocks that are really driving the vast majority of the growth in the index.

And it seems like that's happening with the American consumer as well. To me, that says risk is definitely heightened as it got into a point where it's raising any red flags or worrying you, AJ, what are your thoughts on that?

AJ Giannone

Yeah, I would say it's not necessarily. Worrying me because that's always been the case, the wealth effect. and the propensity to spend of those high earners has always been the dominant force in consumption in the domestic economy. But I will say that concentration is now elevated. And the other piece to link all these things together here.

That's really interesting. Is that there's a direct line between monetary policy and. The consumption there that is counterintuitive and it's those folks in the top earning capacity derive a much higher, a sensitivity to wealth in their consumption patterns that comes from earning assets and from owning.

Equities and houses and things that have appreciated and value. So if you're in the bottom income earning quintile, most of your wealth is effectively, how wealthy do I feel this week or this month based on how much I got paid? Whereas if you're in the top income quintile, you have.

Assets like 401ks and stocks and houses that have appreciated tremendously over the last couple of years. So although, maybe rates have increased, maybe, you haven't gotten the pay raise at work that you wanted, you still have this massive corpus of wealth that is now 30 to 50 percent more valuable than it was four years ago.

And especially in 2024, when we saw the strong market performance had continued to appreciate throughout the year and into 2025. So you have this effect where the top income earners. Who have this massive wealth effect that's making them feel really wealthy, that's driving their consumption, higher is now contributing the most to, domestic consumption.

What that means is to me that if you get a pullback in the market, if you get a housing correction, if you get any kind of negative shock to the wealth effect, you're going to see. A much larger relative decline in the consumption pattern of that income quartile, that's going to drive consumption lower.

it's almost counterintuitive. You expect the recession to cause the stock market decline. But I think, in this case, we could be looking at a scenario where, any real decline in aggregate wealth that comes from the stock market or from the housing market could actually push us into recession because it'll cause that group that's dominating the consumption paradigm to pull back in a big way.

Joseph Gradante

And then I think that's a spot on. I don't think anybody could articulate that better than the way you just articulated it. we have the PMI coming out on Friday. And so that will be interested. and so we just have to pay attention to these indicators and see how things go. it's a game of probabilities when it comes to markets.

And that's what people want. I want to take away from this. Um, you know, and so, you know, we are looking at the probabilities and, any closing thoughts, gentlemen.

AJ Giannone

No, just really looking forward to my 5, 000 doge check. So these guys can get back to cutting and, uh, you know, I can put it back into my portfolio.

portfolio.

Joseph Gradante

It's been another episode of Rewinding Optics by Allio Capital. Don't forget to go to the website, join our beta list, alliocapital. com. Click follow us and we'll see you next time.

Tyler Goering

Thanks guys.

AJ Giannone

Thanks everybody.