It does seem like there's so much optimism stars are aligned, especially
with Trump saying, you know what, the war is ending or, you know, we're done
with this. We've had him say that about 49 times
since the war started. Some say even like five times in the
last nine weeks. Why should we care and do we care?
Not really, because I think that, yes, we care if oil prices were to really go
parabolic. But I think that the big story and
that's very clear even from the opening remarks from your team, is that this is
all about A.I., Right? That's what's really driving markets
around the world. If you look at even relative
performance, it's all about A.I.. So just stepping back a bit that
something similar happened last year, which is that we were all obsessed with
that it's on the news front and yet that it did go up.
But people forgot about that story because it was superseded by the
amount of CapEx which is happening as far as air is concerned.
Something similar is going on this year, which is that, yes, oil prices have gone
up. They have settled at a much higher
plateau even after the decline over the last day or two.
But the AI boom is just so much bigger that it's swamping all other effects.
So it's very hard to look as to what happened with the tariffs, which were
the negative, that the average tariff rate in America today
is much higher than what it was. Even though people talk about Trump
having walked back and stuff, which is true, but it was two and a half percent.
The average tariff rate before Trump started the escalation on the trade war.
And even after he pulled back, we settled at about 10% or so, very
significantly higher from where we were. And yet the markets and the economy
withstood all of that, mainly because of the EIA boom.
Same thing is happening this year that oil prices are higher, but because this
boom is so powerful, the companies just keep increasing CapEx.
Everyone's convinced that the world is moving towards is the future that that's
all that markets seem to care about. Interesting.
You talk about parabolic and we have seen parabolic moves before like gold,
silver and even oil to to some extent a moment in time,
but never at this scale. The question really is how long can this
last? I mean, the momentum, the rally can't go
on forever. What are the catalysts you're looking
at? So like I framed this in like three
ways, really. One, that if you look at history, the
last 300 years, every single technological innovation has been
accompanied by a financial bubble, every single know from the railroads to the
Internet, canals, whatever you look at it, it's all been accompanied always by
a financial bubble. Because when you have a great
technological breakthrough, it's fantastic for the world.
That's what the world progress is on. But it leads to a huge amount of over
excitement. Companies invest and then they
overinvest. And so that's how it goes on.
But there are two lessons to this. One, that very rarely do these
companies, which are investing and are making money on their investment because
they typically overinvest, it's the consumer that ends up making money.
And the second most important thing is this and we learned this in 300 years of
looking at bubbles, that the consistent factor which pricks the bubbles is that
when you have higher interest rates until you have high interest rates or
some sort of a liquidity event which tightens
money in the market place, bubbles don't just burst under their own weight.
So I think that's what that's the zone we're currently in, that interest rates
are pretty stable across much of the world.
I'm watching the ten year in the US obsessively.
It's not, you know, in a any sort of a major breakout, it's stuck between four
and four and a half percent. Now.
The tenure in the US to get to 5% or more, that's when I think that you would
begin to get people asking questions, What's my return on investment?
How much are going to make out of all this massive CapEx I'm spending?
Until then, this arms race goes on. So, yes, this is a bubble.
When I look at the like, I have four criteria to try and map out if we have a
bubble or not. It deals with overvaluation over
investment, over leverage and over ownership.
The falls that I call them on most of these, for us, this is quite
advanced. Now you can argue that we not that
leverage the balance sheet of these companies which are in overinvesting
now. They are still doing it out of the cash
flows. The debt they're taking is still
relatively small, but apart from that, we are overvalued.
On most metrics, we are overawed. I mean, 60% of American households today
have exposure to the equity market for the highest in the world.
Actually, it's the highest in the world. And in fact, America is the only country
where people. Have more of their wealth in the stock
market than it did even in the property market, which includes their own homes,
typically in China or other places. The it's the other way around.
People are five times more wealth in the property market, in the stock market.
So this is a very extended bull market. But having said that, as I said, that as
long as interest rates are low and interest rates I see are low because
there are about three and a half percent, 4%, what do we think of the
short interest rates? But nominal GDP growth is much higher,
you know, like it's running at four or 5%.
Concentration risk. You take a look at Korea and Taiwan, all
the massive rally has been pretty much down to three stocks.
Exactly. I mean, the risk has become structural.
No, absolutely. I think that this is why looking at
indices has become very misleading now, because, you know, the same few
companies are driving the index. So you spoke about the emerging market
index. In fact, the emerging market index today
is even more concentrated the than the US index.
Remember, for years we have spoken about how in the US, the S&P 500 is very
concentrated, dominated by these big tech companies, almost like never
before. In emerging markets, something very
similar has happened. So you have this massive dislocation
take place that for this year, markets like China, India, these are actually
down in dollar terms or, you know, like India still down ten or per cent in
dollar terms. And yet these Korea, Taiwan markets,
these are up anywhere between 70% for Korea, 40% for Taiwan on a one year
basis, they've all doubled. So so getting massive dispersion.
So as I said, the world has now become about a monomaniacal focus on which
countries have which countries don't have a place.
India doesn't have AI in India has been tumbling.
And, you know, foreign investors, foreign funds have been making exit.
What would change that? Would it take an air bubble baths for
foreign investors to start pouring money into India?
Yes, I think so. I think that India has been perceived
that way, that it's become an anti I play because the current phase of air we
are in is all about infrastructure build out who's got the compute, who's got the
infrastructure to build all of that and India never invested that much on that
front. I mean, India, if you look at the amount
they spend on research and development as a share of the economy, it's point 6%
or so. There is this Korea, Taiwan type people.
They do, you know, four or 5% of the GDP in in R&D.
Even China, the US is closer to 3%. Right.
And those are very large economies. So I think that that's been India's
so-called fault line. Now, of course at a later stage when it
moves much more to adoption, then maybe India has an opportunity of using AI to
try and improve its productivity and its efficiency.
But currently the problem is that countries like India are seen on the
wrong side of the trade for two reasons. One, as you mentioned, that they don't
have this kind of, you know, semiconductors or compute which the
entire world is chasing just now. And the second and this may be a bit of
a myth, but at least that's the perception, is that a lot of jobs seem
to be at risk because of the disruption that India has in the software sector,
software, even the GCC sector. So these kind of sectors, you know,
there's a job risk and there were 10 to 15 million people Indians employed in
this, and some of them tend to be well-paying jobs in India.
And jobs has been a structural issue in India.
So on both those fronts, India is seen as a bit of a risk.
Now, at some point in time, valuations will get attractive.
And the fact that India, you know, that the nominal GDP is growing at 10% will
offer an attractive entry point. But for now sentiment has become yeah,
that we and it's true not just of India, it's true of some of the Southeast Asian
countries as well. Like I was having a look at Philippines
the other day, you know, like no one even talks about it.
But the Philippines market today on some metrics is trading at the lowest
valuation since the East Asian financial crisis.
Would you buy it then? But I think that, you know, like the way
I'm thinking of the portfolio today is this, if I can say so, that you think
about how much air you want in your portfolio and then what are the cheap
hedges that you can have in the portfolio, which is that these are
cheap. They will not work just now, but let's
say this reverses that for some reason interest rates go up or the bubble
bursts, you know, like what are the things that could benefit?
So yeah, I think that the India Philippines, you know, could be the kind
of places. But in general, what I find is that the
best hedge to this currently is not even gold at all, because what's happened to
gold is that gold used to be a good hedge, but because it had such a peer we
rally, it's no longer become a risk free asset.
There's a risk that embedded in that price.
So yeah, gold will do okay. But I think that the best quality stocks
in the world today are the best. I do this because quality as a factor
has done quite poorly, particularly in international markets, and the quality
would be good. Companies with an artery of more than
15% some earnings growth, but they have all done poorly because there's been
such a focus on just having a I and many of the I please.
I mean, we speak about the Magnificent Seven apart from that are in fact
unprofitable. You talk about air place they used to
say is still the place to be. And yet back in 2024, you called peak US
exceptionalism. Yeah, that's not the case.
We're seeing record after record after record.
Yeah, and we'll continue to test record. I mean, so I'd written back in, as
you're seeing like in December of 2024 that US exceptionalism is peaking.
And what did I mean by that? What I meant was that America had had a
50 year great run of stock market performance.
But I was talking about relative the fact that the American stock market
relative to the rest of the world was likely to peak.
And when I look back at it, that has happened that even though the American
market has continued to climb higher since December 2024, in fact, when I
wrote that piece that you're talking about, I think since then international
markets have outperformed the US. You know, like despite all this money
flooding into America and there's massive amount of money, flooding in the
dollar has, in fact in the margin weakened,
it hasn't strengthened against most currencies.
Now there are some currencies like the rupee and the peso,
etc., which have clearly weakened against the dollar.
Crumbled. Fine, you can use the word somebody, but
generally currencies have done okay. So international markets have
significantly outperformed the US since December 2024.
And that's very interesting despite the boom happening.
So now to the counterfactual that if I boom and for some reason I think America
would be very vulnerable. So the other follow up piece that I'd
written last year for my column was that America has become now one big bet on
high that that and that's why even Trump and is able to get away with so much you
know, like a lot of people here in Singapore in other places are befuddled
that how does America get away with all these, you know, actions that it takes?
And my point is, because America keeps bailing out Trump or other policies
simply because of its preexisting strengths and because of the AI boom
continuing. That's why the other actions of America
are superseded by the AI boom. You talked earlier about how you're
keeping a very close eye on ten year yields, which you say it's not at 5%,
but when you take a look at 30 year yields at 5% and expect it possibly to
go higher, isn't that sending alarm bells?
Well, I wouldn't say alarm bells, but it's sending like an orange signal.
It's telling you that this is what you should be looking at.
As I said, 300 year history of bubbles, higher interest rates is what kills
them. So if you get higher interest rates, the
entire equation changes. But, you know, this is still broadly, if
you look at it, it's been stuck in a range for a while now.
Right. So in terms of that, but I think that
the if interest rates go up, that's when it tells you, hey, this boom is coming
to an end. Now you can see that it's already very
advanced. I don't want to be around these, you
know, like it like in this bubbly phase. But there's a lot of performance
pressure that people are facing just now, because if you look at even bubbles
historically, they typically you get the best returns.
Typically at the end, even in 99 2000, you know that a lot of people speak
about how Alan Greenspan in 1996 had said this was irrational exuberance and
it took more than three years after that for that to really manifest itself.
But we know from that statement the Nasdaq went up multiple times.
But I think that a detail which is often overlooked here is
that even in October of 1999, from then to the peak, the Nasdaq doubled.
So, you know, the the the end when it happens, the last phase of this, when
there's a scramble going on, the price action tends to be the most parabolic.
And that's what we're seeing in some markets like in Korea and these places,
you know, like now all of a sudden these chip stocks, they they going up 10% a
day. I'm talking about and we're talking
about really large caps chip stocks here like Samsung High Index.
And still, you know, that's not normal price action.
That tells you that this isn't a parabolic stage.
But they said that until interest rates come in, undercut this, it's very hot.
There's no science to see that it should stop right here because these things
just tend to carry on with a momentum of their own.
There's so much retail speculation going on, not just in the US, even in Korea.
And then now you have, you know, like pro-cyclical things going on that
American individual investors are now being allowed access to buy Korean
equities as well. So it just.
Fuse this further, We're sure. I'm just wondering again, the current
geopolitical landscape, how are you pricing that into your investment
theory? Because if you take a look at what's
happened, you know, amid this Iran war, the U.S.
has had to move all its weaponry from Asia to the Middle East.
And now we're talking about a shortage of weaponry.
In fact, the U.S. has told the E.U.
that perhaps, you know, all the transfers of weaponry may have to be
delayed. Inventories are really low.
That's a huge risk for the world, isn't it?
Yeah, but, you know, like markets are very bad at pricing these
kind of risks. And that's because of the fact that, in
all fairness, because 99% of the time these risks never materialize.
There are always geopolitical risks out there in the 1% probability that they
materialized, like, you know, like the First World War or something as grave as
that. The markets are blindsided by that.
So that's the problem that, as I said, more than 90% of the time you have
geopolitical risks and they don't quite materialize.
And you know, like there's a line with I always repeat that history is better
remembered than it's lived, that we now look back and think that this is a very
geopolitically fraught time. But at any point in time,
geopolitics always seems that way because there's always some risk there,
even in the best of times. Know the people.
Year before, I think we were born in the 1960s speak about, you know, like the
fact that there were all sorts of fears that us and Russia, the Soviet Union at
that point in time would have a nuclear war.
And you had all these exercises of people hiding under desks and stuff in
like America. Similarly, in the best of times of the
early 1990s, the peace dividend coming through, there was a real fear and
Margaret Thatcher and all would speak about that, that the Soviet Union as a
last gasp to stay in in power and to stay united would launch a nuclear
attack you know like to try and assert its authority.
So and that was remember now we look back at the 1990, there's a golden
period about, you know, geopolitical stability.
So my point is that geopolitics is always volatile.
Yes, it seems it's a bit more volatile now.
Could be the last 20 to 30 years, but the markets are very clear, which is
that you do like the fear, geopolitical risk.
And in the 1% chance that something really disastrous happens, they're
always, you know, shocked by it. How do you think this will play out for
the midterms? I mean, Cam Griffin did say that, you
know what, the Democrats are going to win.
Yeah, well, if you look, you know, here's the problem with the strike,
which is that, yes, I think that there's an overwhelming consensus that the House
will flip on that. You know, you know, like I think that
everyone has sort of decided the Senate is still 5050.
And here's the problem in the in the polling numbers that everyone looks at
Trump's polling numbers and they are relatively low.
But the two points I'll make here, one that every
American presidents polling numbers for the last 50, 60 years have been
declining. So comparing it to history has become
fraught because in a more polarized world, all numbers are declining.
And the second point I'll make here is that the if you look at the generic
ballot, the Democrats and their polling numbers are, in fact, lower than
Trump's. So be it.
It's about who you're fighting out. So that's another reason why Trump is
able to get away, because a lot of people in America are also very
disillusioned with what the Democrat Party is doing.