#60 - The Plumber Returns - James Aitken on Japan, Kevin Warsh, gold, AI and inflation.

Speaker A: Hi, I'm Steve Platham and welcome to the behind the Balance Sheet podcast where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of successful investors strategies and tactics. Behind the Balance Sheet is an investment training consultancy. We help professional investors up their game in financial analysis and we have an online school. Over a thousand students, professional and amateur, have taken our courses. Our flagship Analyst academy helped one young analyst land a dream job as a partner of a major London hedge fund and helped another, a successful entrepreneur, improve his investing confidence. He made a seven figure sum in year one. Check out the school on our website BehindtheBalancery.com where you can also find the show notes to this podcast. And while you're there, don't forget sign up for our popular and free weekly substack. Hit the sign up button on the top right of the homepage. Expert calls have always been one of the most powerful ways to build conviction. But today investors are asked to cover more companies, move faster and do it with leaner teams. With AlphaSense's AI led expert calls, their TICUS call service team sources experts based on your research criteria and and lets the AI interviewer get to work. The magic is in that AI interviewer purpose built and knowledge base informed to conduct high quality context rich conversations on your behalf, acting as a trusted extension of your team. Then they take it one step further. Your call transcripts flow natively into your AlphaSense experience and become queryable, searchable and comparable. So your primary insights plug directly into earnings prep, diligence, work streams and pitchbooks with zero tool switching and with officense's expert call services, the AI LED expert calls are just one option because they know the importance of a hybrid expert research approach. AI for coverage and efficiency, humans for complexity and conviction. It's the institutional edge that scales research without scaling headcount. For hedge funds, that means validating thesis assumptions across dozens of experts before earnings instead of just a handful. For private equity, it means faster pre IOI scans and deeper commercial diligence. For investment banks and asset managers, it means pulling real operator perspective straight into models and sector positioning without disconnected tools or manual handoffs. Alalet lives inside the AlphaSense platform trusted by 75% of the world's top hedge funds alongside filings, broker research news and more than 240,000 expert call transcripts turning raw conversations into comparable auditable insight. Take advantage of AlphaSense's AI led expert calls now the first to see wins. The rest follow. Learn more@uh, AlphaSense uh.com BTBS James Aitken is known as an expert in the podcast bombing of the financial system. Those skills, acquired largely while working for aig, generated his unique client base in the global financial crisis and allowed him to set up Aitken Advisors, his global macro consultancy whose clients include some of the world's largest and most influential investors. This is James second appearance in the show, his first being number 29, which was super popular. Published in December 2023 when we went on a world economic tour. This time we did something different. James again left his wrench at home and instead of countries, we talked about some of the themes that are relevant to investors today. We barely touched on the Straight of Hormuz. We were recording on May 27 and publishing on June 18. And a lot can happen in that time. And in any case, James believes the way to navigate that is by watching Marcus. More on that in the show. We also cover James Hughes, on Kevin Warsh, on treasuries and on the gold price. And of course we talk about AI. James also explains why we need to watch the supply, demand balance on the S and P. First, the hyperscalers are moving from aggressive buybacks to issuing a drip of stock based comp. Second, we've had an IPO famine and we now face fundraising by some of the largest companies in private markets. Most fascinating for me was when James also shared what he thinks are, uh, the characteristics and habits that make some of his investors so special. This is interesting because they include some of the world's largest investors and some of the world's most successful investors. Last time we ran out of time, so I allowed an extra half an hour and even so, I could have gone on longer. This is a great conversation with a real investing expert.

Speaker B: So, James, welcome back. You're, um, in a very small group of people. I've, uh, only had John Armitage back for a second time, so I'm excited to talk to you. You work with some of the most sophisticated pools of capital on the planet, and last time we spoke, you took us on our world tour of the financial plumbing. Since then, we've got President Trump back in the White House, bigger fiscal deficits, industrial policy, geopolitical uncertainty, tariffs, wars, you name it. So what questions are your clients asking you now that they weren't asking three years ago?

Speaker C: Good to see you again and thank you for having me back. Uh, to be in the esteemed company of someone like John is Quite spectacular. I just wish I had his skills when it came to allocating capital, but there we are. Uh, that was good to see you. And, uh, here we are in the West End of London during this extraordinarily freakish English weather. Um, I'm loving it.

Speaker B: Everybody's complaining that it's 30 degrees. I'm not complaining.

Speaker C: I mean, I think it's great. It's almost like being back home in Australia, but there we are. Um, yeah, I think it's interesting that the question I've been asked most over the last nine months, and this is very unscientific, it's more anecdotal, but the number one question, unsurprisingly, is, when does the AI bubble pop? And bubbles tend not to pop when everyone's asking, when's the bubble pop? It doesn't matter what the asset class is. But isn't that interesting insight, and I wonder whether some of the acceleration we're seeing in, let's call them the AI bellwethers of late, you know, the picks and shovels or the semis or whatever, is people saying, oh, man, I've missed it. And they're just scrambling to get exposure. But that's interesting, isn't it? It's not. Obviously, there's sub questions about Straits of Hormuz and everything else which we can try and explore, but it's interesting insight into the psychology of so many people. And if I might take it one layer down, metaphorically, I'm, uh, working with all. Well, I am working with all these extraordinary investors all around the world, across every asset class, jurisdiction, mandate, et cetera. But very roughly, it's broken down into two buckets. There are people outside the AI ecosystem looking in, trying to understand it M. And then there's a handful of clients I work with, fortunately, who are at the absolute epicenter of the AI ecosystem and have been for a long time because they participated in Core Web's 9 million with an M M funding round in 2019. What? That's a pretty useful thing to do. Or because they're involved with the Bloom Energy or any of those suppliers, or they're involved in gas turbines, or quite frankly, they're just writing code, or they're inside Anthropic and the distinction between the two. And I think this applies to me, to be very clear. I can barely wrap my head around everything that's happening in AI, which is no different, I think, to so many people. And I benefit because I have long worked with a small group of people who are at the epicenter of, uh, it. So, look, lots going on there to set the scene. But unsurprisingly, now so many of the questions are, AI, AI, AI. How should we think about it? How far does it go? Is it accelerating or not? And perhaps we could explore some of that today.

Speaker B: Well, we know it's accelerating, right? Yeah, yeah.

Speaker C: What is exactly? But you know how it is working with people? You can't hit them over the head with a hammer. You can't say, is that what I was doing wrong? No, no, no, no. Here we are on behind the balance sheet therapy couch. But, um, no, it's like so much of my business is not trying to tell people stuff they don't know or don't understand. It's actually reminding them of what they know to be true.

Speaker B: Yeah.

Speaker C: Reminding them of what they know to be true. And it's easier said than done. So, yes, I could be confrontational with my clients and say, don't be ridiculous. Don't try and pick a top of it. Just go with it. Or I could more gently say, look, here's the actual McKinsey data, uh, on AI adoption. Here's all the bottlenecks that we see

Speaker B: all around the world in everything.

Speaker C: We have a bottleneck in bottlenecks, bottlenecks squared, the world's usage of a cord or everything else or so forth, or Gemini Grok, whatever, is accelerating into bottlenecks. What do we think that's going to do to the price of all of this?

Speaker B: So bottlenecks create inflation. Yeah.

Speaker C: Well, yes, there's a risk, but of course, inflation has many different components. But I wonder if it's a little bit more simple than that or simpler than that. We've had this sort of mythology of 2% inflation targets which were adopted by central banks informally 30 years ago by Alan Greenspan, and more officially by Bernanke, sort of, uh, 14 years ago. So whether it be the Fed or many decades ago, the Reserve bank of New Zealand, 2% was the kind of number they arrived at, and, um, then tried to backfill the academic side of that target. But as we can all observe, look, over the past few years, the Fed never quite finished the job. Inflation never got back to this mythical 2% number. And now we're investing enormous amounts of money in this AI arms race. We're also investing in national resilience, defense and everything else. In other words, all the sort of things we should have done over decades but now never did. Guess what? It's expensive. Our future is looking more expensive by the Day on top of that we've got all these bottlenecks, we don't have enough supply side response and inflation never got back to 2%. So I think we'd be more surprised if inflation didn't go up a bit than if it actually went down a bit. But here's the thing. If we've collectively decided as democracies that ah, we're going to focus on resilience over efficiency, which is the inverse of the past several decades, where implicitly we're making a decision that we're not going to slow demand and slow everything down and crash things to get back to 2% just for the sake of uh, it, it's actually a trade off. So guess what? If it turns out that in the United States, for example, core and headline inflation are closer to 3% and 2% for a period of time, whatever that turns out to be. And yes, there's some fat tails around that of course, but if that turns out to be the trade off that it's closer to three than two while we're doing all these other things that we really have to do and should do and policy on average is considered to be credible and we have a test of that coming up with a change in Fed Chairman, then you know what, you might just muddle through. And quite frankly, whilst I remembered all this discussion about long term bond yields and everything else, where are they going? Look, if we're going to be spending literally trillions of dollars, not just in the United States but everywhere, on resilience, because we've flipped the switch from efficiency optimizing everything to just in time to just in case, et cetera, and wrote all these phrases that I like to use, then guess what? It's going to be more expensive, inflation's going to be higher probably on average. How high? I don't know. Long term bond yields probably on average are going to clear at some kind of roughly higher yield than they have been for a while. And nations that are credible with their policy will do all right. Nations such as the one we inhabit right now who are uh, less credible might find it a struggle. And that's reality. So it's not the end of the world is what I'm saying. It's just different.

Speaker B: And you can live with a bit higher bond yields.

Speaker C: We are living with a bit higher bond yields. I mean, let's go back to the end of 2023, you know, 10 year treasury was got to five and a bit, I think the 30 year got to five and a quarter. The world didn't end. The world didn't end in part, of course, because the AI Capex boom was really picking up a bit of momentum in the background. But you know, it was difficult for certain stocks that were a bit expensive. It were different. Especially difficult for certain businesses that got way ahead of their earnings potential, as you've been writing about, and they adjusted. So for some things it was difficult. But we didn't have a crash, we didn't have a recession. The point being that maybe because of all this other investment that's going on, the pain threshold, if you think about that in terms of higher long term bond yields, maybe the pain threshold that triggers an economic recession or the elasticity of the economy to higher bond yields is actually lower. We shall find out.

Speaker B: We shall find out. But in that environment, presumably we should expect those stocks with further, uh, cash flows to do less. Well, so we should be. But that's not what's happening in the market, is it? I mean, what you're saying is duration is going to be something that we should have less of, but they're not really. Those stocks aren't really underperforming, are they?

Speaker C: Like nearly every everything in finance. The answer is it depends. It depends. So theoretically, if we imagine a world where, let's say we'll just use the example of the 10 year note in the United States, the average clearing price is closer to 5% in nominal terms or 2 and a half or maybe a bit higher for 10 year tips, then you think to yourself, that's going to be a headwind for exactly those kind of assets with the longer duration cash flows. Okay, for periods of time, yes. But if these companies or businesses with longer duration cash flows are still doing other great things, who knows? So it's a kind of a race and there's this tension. But you know, it's interesting, other than a few bumps here and there, Stephen, it's the rise in bond yields hasn't really slowed growth yet. It hasn't really had a kind of structural impact, except on those businesses that got way, way, way ahead of their earnings momentum. And by and large the markets have muddled through.

Speaker B: And you're expecting the markets to continue to muddle through. I mean, you're not nervous?

Speaker C: No, no. I mean, look nervous about market structure, single stock levered ETFs, the casino like characteristics of modern financial markets. Poly market. Kalshi Honestly, what the hell are we doing? What the hell are we doing? And I have a lot of sympathy with Mr. Buffett's arguments that, you know, that we've turned it all into a casino. Well, that's what we do every cycle, don't we? We take it too far now. How far's too far? I don't know. Do we diminish the impact of the retail hoards in everything from US equities to especially Korean equities and to some extent Japan and potentially China coming back? No. As we've seen time and again, Whether it be GameStop or everything else, the retail crowds seem to have a pretty good instinct for structural trends, whether it be AI or tech in general. So we diminish them at our peril. But I do think about market structure. I do think about the ability to distribute risk. I do think about the concentration of passive. You and I and all our friends listening have seen so many stocks that miss earnings by a little bit, absolutely destroyed. Now that's not a great sign for market structure over the long run, particularly if the bellwethers start to do the same thing. Because there's no liquidity on the other side. No, that's a problem and that is the problem. So I'm mindful of that. But there's a flip side to it as well. If you understand the M market structure and how these markets, modern markets work and the casino like characteristics, you can actually take advantage of that because you will see things just fall apart or nothing. And if you understand that's because there's an air pocket of market maker liquidity and actually the fundamentals of that particular business are still as robust as ever, then you can become the next liquidity provider, which, guess what, means you have a margin of safety and higher expected returns. Doesn't happen all day. But look, what am I saying here? I'm not worried about equities per se, particularly not when earnings estimates are rising. Yeah, it would be a very, very strange bear market. Whatever people think of. Earnings estimates are rising. Right. It tends to be, you know, when earnings estimates go the wrong way and then everyone's like, oh gosh, there's nothing below. So we're not there yet. So we play the game. There's a lot of good things happening in the world. There's a lot of unfinished business. But we play the game. And that's been by and large my advice to clients for two years.

Speaker B: And well, hang, um on.

Speaker C: That's not quite right. By and large, whilst understanding market structure into Liberation Day and then taking full advantage of the dislocation after Liberation Day, that was a critical moment.

Speaker B: And are you focusing on any particular areas of the market I mean obviously the AI plumbing,

Speaker C: I'm just a simple Australian, okay? So I like to keep things simple. I like to stay within my circle of competence. Although like you and like our friends listing I'm always trying to expand the circumference of my circle of competence. We're always trying to learn and you know, but you generally stay in there. So what I understand as an Australian I think is resources and commodities and if we're going to be building all these data centers and plugging them in and powering them then I think we're going to need a lot more stuff. So at the most basic level there's an important signal for the BHPs, the Rios and others starting to do well and they're more disciplined it seems to me. I mean you might have a different opinion but the new management if you will like a Trotty at Rio and BHP and others, they've looked at the errors that these giant commodities companies have made over previous cycles where they've always top ticked it by misallocating capital at something that everyone else wanted but they really shouldn't buy but they did anyway and they've learned from that. And uh, what it means is that they're not just more disciplined with their capital which shareholders should be happy about, but they're also more disciplined with supply because it's really hard to bring on new supply now. Not just because it's expensive, it's just really hard now. It's a bit Machiavellian that if you're the dominant commodity provider producer across a range of important assets and there's less elasticity of supply and you're more disciplined with your capital, sounds like your earnings potential is pretty good. Energy is obviously a separate component of that. They seem well placed to capture higher spreads and margins for years to come and I think the world's slowly discovering that. So I spent a lot of time on the. It's a bit of a cliche but it is the picks and shovels of the AI Capex boom. I mean I find it very hard to buy an SK Hynix or Samsung Electronics or all these other things at current prices or a Micron, you know, it's hard to reach for those now. So I'm looking for the picks and shovels that may not have moved as much but are still reasonable businesses at a reasonable price. And it's the bhp, the RIOS and many others that we could name look, the Glencores. And you keep it simple, right? And your trust management, discipline management but also thinking about disruptive businesses within commodities and power supply. And as you know, actually there's a little bit of a story about this. I've, uh, been using Bloom Energy in the United States as a metaphor to help my clients understand the way things are transforming and the way these businesses are literally changing the world. And Bloom Energy is a 25 year overnight success story. Yeah, it's an extraordinary story about this business and this company and what they're doing and how, like so many of these, um, day two are an AI hyperscaler and the world cannot get enough of their product and they're only selling it in the United States. So what happens when they're eventually allowed to sell their stuff to the rest of the world, their fuel cells and everything else? What happens? So Bloom Energy is an interesting one and if I may divulge with a, um, an anecdote. Okay. And this is sometimes how my business works and how my circle of competence expands. There's, um, one of my founding clients recently turned 70, and he's a very generous man and he invited five of us down to one of his houses in the south of France. I won't say where, but it was very nice conversations and a lot of fun and some fancy wine. Um, and one of the other guests I, uh, sort of vaguely heard of, and we were all sort of chatting, the four of us, about our world and this, that and the other bit of this and this other guest started talking. And I'm sure you've been in rooms where someone starts talking and everyone's silent. And this guest, who'd come from the west coast of the United States, has been doing nothing but investing in technology his entire career for some of the very best. And he started talking about Bloom Energy and all its supplies around the world. And as much as some people say markets are efficient, when the key suppliers of any company on earth, let alone Bloom Energy's key suppliers, are saying in their earnings calls that we expect Bloom Energy's, um, compound growth between now and 2030 to go up by 30. It's all there in the public domain. And Bloom Energy share prices sort of oscillating and not doing much. And then suddenly it rips. There's all these inefficiencies in markets, but this guy starts talking not about technology per se, but about Bloom Energy and how they're revolutionizing the world. Now he happens to be a very substantial shareholder, but we were just like, absolutely dumbfounded about the transformation that's occurring. And I bring it up because I think people looking at powering AI or understanding how you literally plug AI in and turn it on. All these data centers, they understand gas turbines and GEV and over and everything else. Here's Bloom Energy, which is about to eat their lunch via their power cells and everything, fuel cells and everything else. And people say, well, you know, it takes two to three years to plug a data center into the Grid. Takes you 55 days to plug in Bloom Energy's cut stuff, so what's people gonna do? And just understanding that and listening to this guy talk for an hour, and he's. Because I may say so, he's like so many of the great investors you and I know, he's. Or so many people in markets. Uh, I'll say very diplomatically somewhere on the spectrum, because it's all about pattern recognition, isn't it? Yeah, yeah, it's all about pattern recognition. Oh, I've seen that before. And our friend from the west coast started talking about this and talking about patterns and talking about supplies and, um, to be very clear for our listener, everything he discussed was in the public domain. He was just drawing our attention to it and we were like, just gobsmacked. So as a result of that serendipitous conversation, I've been reminding my clients, here's Bloom Energy as a metaphor for the transformations that are happening. Here's an estimate of their forward order book. Here's what they've been working on for 25 years. Here is some of their competitors who are still nowhere near Bloom. Let's keep an eye on this company. You may want to buy it and play the game and get involved in high beta momentum, but keep Bloom on your radar as a metaphor for how the world is unfolding and where we're going.

Speaker B: It's probably all over for Bloom Energy because it was in my substack the other day, but. Oh, no, um, what's quite interesting about that is it's a very good illustration of disruption.

Speaker C: Absolutely right.

Speaker B: And you need to be very aware of that sort of thing.

Speaker C: Absolutely right. And it's not to be very clever and say it's all over for ajiv and over anything. Anything like that. It's not. It's just to be aware of the disruption that is happening right under our noses. And Steven, it goes back to that, um, metaphor I used before. To be clear, it's not very precise, but just like so many of my clients, I'm on the outside of AI, uh, looking in, trying to understand it and, yes, trying to figure out how to use it in my business. And that's a work in progress. And then there's a core subset of my clients who are right at the epicenter of it, who have been immensely helpful to me, understanding what's absolutely happening and the dynamics. And, um, I've been very lucky there.

Speaker B: I went to a talk. Um, Ed Conway was interviewed by my friend Django Davidson.

Speaker C: He's got another book coming out. Yeah, I can't wait to read it. Ed's book, it was just fantastic. So, well, Material World. Absolutely fantastic.

Speaker B: Yeah. And he was saying, um, how important physical economy is. Yeah. And of course that's true. Do you think investors have under invested in that? I mean, the miners are like one and a half percent of the.

Speaker C: You read my mind. Yeah. Yeah. I mean, materials M. How we might define them, like something like 2%. And people are putting up those charts saying materials even now. Two, maybe two and a bit percent of the S&P 500 market cap, whatever. Okay, so it smells like 1999. Okay, there's room to rise. But then what's, uh, so fascinating is these essential businesses we're talking about, so many of them are the ones that we systemically defunded under the mantra of ESG and everything else. I mean, talk about an act of self harm, but I think we've moved on from that. People are like, oh my gosh. And I struggle with the idea that the median mutual fund is like where it needs to be in terms of its BHP or Rio or Glencore will go down the list. Or even a Chevron or Exxon waiting. You know, there's a lot of capital still to move. Would be my suspicion. Now, I can't prove that, but just again, looking at those benchmark weightings and everything else, they'd seem ready to go. Now, if I want to be cynical and talk about the flip side of all of this, as a, as a veteran client of mine reminded me the other day, commodity companies tend to peak when people start to say that commodities are not cyclical. Right. So. Oh, no, no, commodities aren't cyclical. No, they're always cyclical because eventually the supply comes. Eventually we overproduce. Eventually we open that extra mine we shouldn't have. Now that could still be three or four years away. I mean, we don't know, do we? But it's actually a good intellectual cross check. You know, commodity businesses tend to top when people say, oh, no, commodities are no longer cyclical, they're structural. That's when you run for the hills. But that could be 20, 30.

Speaker B: Yeah, well, it might even be further away than that. But, um, are there any of those commodity markets that you're concerned about? Everything's pretty positive.

Speaker C: Well, it's not so much concerned, it's just I think that we're performing the way you would expect. Whether it be copper, uh, I mean, look, it's all a function of supply constraints, isn't it? And for all these big, big, big commodity companies, are you going to develop a new project or quite frankly you're just going to buy it? Well, of course they're going to buy it. So we're going to see more and more M, M and A because it's cheaper to buy it than develop it. So that's obviously coming. And I'm sure all the PJTs and others of this world are licking their lips at the prospect of that. So I'm not worried about commodity markets per se. Although I will mention something that's interesting, which is gold. Okay. Gold has worked really, really well for a lot of people, whether it be a, uh, family office, some of the family offices I work with over a long period of time, it's worked really well. Uh, foreign central banks obviously, especially post Ukraine and the confiscation of Russian, A, uh, confiscation of Russian assets made perfect sense for all other central banks in so called Nordic countries to stockpile gold and take delivery and keep it under their own roof on shore. So that happened and it drove gold well north of $5,000. And there we were. And then isn't it interesting that as we got to this through this Iran shamozul, which it is a shamozul, the gold started coming off hard and you saw certain Asian central banks selling gold. Central bank of Turkey sold gold. National bank of Poland said we might sell gold. And then the politician said, no you won't. But the point there, Stephen, is what's the point of having insurance if you're never going to use it? So it was actually completely rational for these central banks in particular that had accumulated huge gold reserves over the previous three to five years to actually use that to pay for more expensive refined product imports or whatever they needed to do to get through the Iran turbulence. It made perfect sense. But it was an interesting exercise because people weren't expecting that. They thought gold was going to be some kind of risk hedge or inflation hedge. And it was the absolute opposite as some of the largest holders sold down and in so doing actually realized some of them enormous profits. But it's an interesting little exercise. And I'm not a gold bear, but I pay Close attention. When the narrative around a popular asset starts to change, or more accurately when the price diverges from the narrative. That's always a flag, isn't it?

Speaker B: Yeah, no, absolutely.

Speaker C: No matter how well we know a stock, if you're more and more confident in your earnings outlook on any business and it just keeps leaking, there's something else, isn't there? There's always something else that we've missed and Mr. Market is trying to tell us something via price. So gold's the same. Here we are sort of flopping around 4,500, 4,600. Look, whether it be Middle Eastern families or Turkish families or other central banks out there quietly selling gold to create liquidity to buy other things, it makes perfect sense. But for now let's just put a lid on it. So it's kind of diverging a bit from some of these other markets. So look, not worried about commodities per se. They're doing what you'd expect them to do in an era of supply constraints where it's more expensive to bring on supply and gold's a special situation.

Speaker B: It's interesting you bring up gold because I too have been concerned about that. And of course the problem with gold is there's no fundamentals really. Right. So it's just uh, a straightforward supply demand and this had been exactly the opposite of what you would expect. But have you any thoughts about what we should be looking for other than the price, as to where it goes next?

Speaker C: Well, I think the next test comes, my guess would be if and when, and it's a hypothetical, the Fed, for example, might be able to cut rates again. Now it doesn't seem like it's going to happen this year, does it? Um, for a whole number of reasons, but that would be my guess. So the next test for me for gold in terms of are, ah, the long term structural bias still there. Let's see what happens if the Fed's in a cutting state of mind again. Let's see what happens if the US dollar starts leaking again, neither of which is happening at the moment. So for now, you know what, the market's very comfortable around 4,500 giveaway change. That's fine. It still works as a hedge. I think a lot of the hot money's come out this, that and the other, and we'll see what happens. But um, there's a flip side to this actually. I should mention the central bank of Turkey sold an awful lot of gold. Now some of it was into the market, a whole bunch more of it was on A swap. So sell gold today to buy back forward. Okay, so swap even. So, the gold market, despite not rallying much, absorbed, in my view, an awful lot of selling from the Central bank of Turkey, awfully well. So there are signs that the long term, stronger hands are back in the gold market, quietly accumulating. But we may not be able to know that for some period of time. So I just watch it to watch.

Speaker B: I mean, obviously if interest rates are going to be higher, then that's, uh, uh, another headwind. But you mentioned the Fed, and we better get the new Fed chairman out the way because, uh, uh, look, it's a bit early to know because we're recording this end May, but normally the new Fed chairman gets tested by the bond markets to see what he's made of or made of. And, um, what's going to happen? How are they going to test them?

Speaker C: Well, I'll shock no one by saying Kevin is a very ambitious man, always has been. And he has been lobbying for the job, as everyone in Washington knows, assiduously, for not just the last two years, but perhaps the last 10. And there he is. And he has very keen visions about what needs to change at the Fed. And I think a lot of people in the markets would broadly agree with those visions about perhaps a bit less emphasis of models, although they're important, perhaps less emphasis on forward guidance, perhaps tighter discipline on communication, and also better discussions around the FOMC table. And I think the one that people are most interested in is not actually where interest rates go per se, but what he's able to do with the balance sheet, which is still enormously large. So it's very ambitious agenda and it'll take some effort for him to bring his colleagues along with him, as we're seeing in some of the FOMC voting patterns of late. It's quite contentious. So it's a big challenge for him. Here's where there's some dissonance, I think, between the market's narrative of why Kevin's been appointed and what Kevin's actually saying and what the President's actually saying. You know, higher prices are a real problem for Mr. Trump. And he knows it. He knows it. Okay. It's going to be a real problem come these November midterms for the Republicans. People assume that Kevin's been appointed as some kind of patsy for the President. I'd be wary of that. And I paid close attention to the remarks in the East Room of the White House last week when Kevin was formally introduced as the new Fed chair. Now, symbolism matters to the Trump administration. Okay, There's a shock, all right. Have you noticed that marketing is quite important to them? And branding. It's the first time in 20 years since a new Fed chair has been introduced in the East Room of the White House. Okay. Surrounded by American flags. It was an opportunity for Mr. Trump to confirm the market's worst fears about Kevin just being a sock puppet or a lapdog or whatever for the President. And he didn't. It was the opposite. Now, of course, we'll see what happens through time, but when the President stays on script, I pay attention. When the President goes off script, I ignore him. But when the President is on script, I, uh, pay close attention. And you're right, markets will provide a test for Kevin. His first press conference, his execution, his speeches, this, that and the other. But I think it's also reasonable for the more patient market participants amongst us to give the man a little bit of time to settle into the job. Right. So there'll be some bumps, but he's taking over in. Well, he's just taken over. He's got his first Federal Open Markets Committee, over which he presides, coming up. It's a big deal. He'll be ready out there, speaking to all his colleagues and cajoling them. And then, as everyone knows, you've got the big Federal Reserve barbecue every summer in Jackson Hole, Wyoming, which is a wonderful venue to have it. That in August is actually the opportunity for Kevin to set out his stall, having consulted his colleagues and reflected on the challenges ahead. So what am I saying now? Look, we've got a lot of lingering inflation in the system. We've got bonds all around the world under a little bit of pressure. You know, the bond markets are a bit frisky, quite frankly. Quite frankly, Stephen, I'm surprised that long term bond yields in the United States have not gone even higher amidst the recent turbulence and uncertainty about inflation and Trump and policy. So here we are. The fact that the 10 year note is sort of very roughly around 450 is, all things considered, not a horrible outcome.

Speaker B: It could have been a lot worse.

Speaker C: It could have been a lot worse. And we might come back to that. So I'm prepared to give Kevin the benefit of the doubt. He has a very challenging job. He knows his, like anyone in that role, is already thinking about legacy and everything else. And I'll just say that when his term is up at the Fed, I think he has other ambitions. That would be my bet. So let's see what happens. So, look, he knows that his job is to appease markets, not explicitly, but implicitly. He knows that and I'm prepared to give him the benefit of doubt and again to come back to the balance sheet. So many people have said to me, there is no way the Fed will be able to reduce the assets on their balance sheet, AKA quantitative tightening. This, that and that. I'm saying, and I've very gently said to people, I think you're wrong. And they're already working on that in a very systematic way. With Mickey Bowman, the Vice Chairman of Supervision, there's some really impressive thinking going on about the structure of the balance sheet. The Treasury Secretary Scott's involved, Kevin's thinking about it, Mickey's thinking about it. They're all talking about it in a very sensible way. They're not gonna rush out and flog all sorts of treasuries and agency mortgage backed security. They're not gonna, they're going to think about it in a structural way. And for the first time since 08, I know it sounds harsh, but for the first time since 2008, Stephen, the Fed is actually thinking in a joined up way about feedback loops, obvious feedback loops between post crisis, post, uh, Lehman financial regulation and the Fed's balance sheet policy. Well, of course there's feedback loops, but they've never thought about it in a structured way. So, uh, my general advice to my clients is not to bet against Kevin head on. It's not to bet on Kevin with your eyes closed. It's to say, you know what, let's give this guy the benefit of the doubt because he's actually working on some very good and important things that the Feds avoided for too long.

Speaker B: Yeah, um, they employ a lot of people, a lot of us.

Speaker C: Too many. Turns out they'd probably be better getting

Speaker B: somebody like you in charge and getting

Speaker C: rid of all that. Well, I wouldn't, I don't think they're that desperate. No. No.

Speaker B: Well, you'd probably have to improve your, your sartorial skills.

Speaker C: Yes. I mean, I think, I think long trousers and no, uh, tennis shirts might be the way forward. Yes.

Speaker B: You know, as long as you're comfortable. Where does that leave the dollar?

Speaker C: Again, there's all sorts of reasons. The dollar might be a lot lower and it isn't. And that's interesting. And just, actually, just let me answer that with a little bit of a philosophical observation about markets. And this is really important, as all our listeners know, particularly the fund management community. I mean, every day, where do you start? You come into work, you open your inbox, you've got 1500 emails, you've got Bloomberg's, you've got WhatsApp. Where do you start? You've got to go into the sales meeting, you got to go in the morning, you got no, you got no headspace. You're always on the back foot all day, which is absolutely terrible, a terrible situation to be in. So where do you start? You've got people opining on everything. Uh, the COVID experts are now the energy experts and now the Straits of Taiwan experts are now the geopolitical experts. There's experts everywhere. Everyone's got an opinion, everyone's guessing. Well, opinions aren't going to help you. Well, they might at the margin, but they're not going to really help you. What's going to help you is creating bandwidth to think. You know, the, protecting the most precious asset, which is time. Time to think and just reflect and look out the window and look at your portfolio companies. And I uh, say to my, I think we said this last time, I can't remember, forgive me, uh, I often start presentations to my clients by saying, look, let's just an important caveat to start. If you're trying to understand what's happening in the world, don't listen to me. And they're all like, well, what are you talking about? I said no serious point. If in doubt about what's happening in the world, lean in to what your best run, longest held portfolio companies are telling you every time. Because by definition, if they're your best performing, best run, longest held portfolio companies, they're doing something really right. They're probably using technology to manage their financing, their order books, everything. They have their fingers right at the pulse of the global economy. They're the ones that understand rising input costs, pass throughs, profit margins, everything else, if in doubt, start there. Don't read another research report. Seriously, don't listen to me. Lean into these people that you're backing. Start there and then look for patterns across all the companies. What are you saying? Make yourself more rather than less comfortable. Free up that headspace and then come back to me and let's have a chat, let's compare notes and let's think about how we avoid making everyone else's mistakes. Because that's what we're trying to do, we're trying to avoid everyone else's mistakes. Right, that's where you start. But related to that, if I think I understand, if I think I have a well founded view of the world, well grounded, well read, well researched and everything else, and it's not showing up in the price of what I'm interested in. I'm wrong, I'm wrong. And for all the well place concerns about market structure, passive quantamental flows, systematic and everything else, all of that is absolutely true. But it's amazing how much you can still learn about the world by just looking at price. Oh yeah, every day. And you know, some markets clear better than others but markets are clearing, markets are clearing and you just lean in and you see these consistent patterns. I don't mean the AI, hyperscalers, power providers, the semis and this, that and the other. Right, that's spectacular. But you see these things. How is, you know, here's the state of mind of the world. How is it that BHP and Rio share price is not front page? Oh, because it's all about AI. Well, hang on a second. Without those companies you wouldn't have all this, you know, that kind of stuff. One of my favorites, which I horrendously missed, Prismian in Italy now there is one of the world's great companies, Prismian. They make cables, they make them very well. Five years ago or maybe seven years ago, one of my clients said to me there's these guys in Italy, there are ah, cable providers all around the world. These guys are really special but because they're in Italy, no one really thinks about them. This is how they run their balance sheet, this is what they do with CapEx, this is what they're thinking longer term. They're looking about this thing. Have you heard about AI? This was 10 years ago. They're doing this, they're doing that. They've got this ship, unsurprisingly, it's called the Leonardo da Vinci, one of the world's most advanced. They're doing all these things. They're telling me already that their forward order book for the next two years is full and their share price hasn't moved and it didn't move for three or four years. And that for me is one of the great misses. And the limited duration day last year it was a bit higher but it was dapped down to 40 and now I think it's 150. And they're still generating earnings momentum and outperforming, I mean simple things like that. But the price moved and then the narrative followed. Right? But the point I'm making here is whether it be long term bond yields in the United States, conceptually you say to yourself it should be higher, they're not. You can also say to yourself, my gosh, there should be some kind of um, the phrase here in the UK is more on premium, which I think is absolutely valid. Right. Imagine what would happen to sterling assets if Whitehall and Westminster stopped doing stupid stuff. I mean they just roof it. You don't take a genius, just stop doing stupid stuff. It would be amazing for the entire country, but unfortunately a little bit introspective at the moment. I think a lot of surplus countries around the world view the United States as having some kind of moron premium as well. Or execution premium or Trump, whatever it is. Okay, so why aren't you selling the dollar? You know, all things considered, the dollar is remarkably big. Now believe me, Stephen, if the rest of the world was fleeing dollar assets, we wouldn't even be having an argument. It would be so obvious. Dolly JPY would not still be locked limit up, which is interesting in itself, despite dirt cheap.

Speaker B: Right?

Speaker C: It is. So why is it locked limit down? See, this is the question. Who doesn't know that the yen's not dirt cheap? This is the thing.

Speaker B: But why is it? I mean I remember the Swiss when the Swissie when it was tied to the euro.

Speaker C: Yeah. 120.

Speaker B: And I said, well, this is just like ridiculous. And it just seemed to me like Sterling and the RM and well, why wouldn't you fill your boots with Swiss francs? And um. Which I did. And then I came into work one

Speaker C: morning and so it was you that knocked it out.

Speaker B: And uh, I thought, oh, that's quite good. There was a panic on the floor and uh, the first thing I did was pick up the phone to my.

Speaker C: That's a mistake. No, that's a mistake.

Speaker B: And cut half my position.

Speaker C: Yeah.

Speaker B: And uh, I mean the yen just looks exactly the same, but it seems to take forever for the currency markets to wake up to this.

Speaker C: Hang on, let me just push back gently on that. Okay, well you can push back.

Speaker B: You don't need to.

Speaker C: Just gentle. No, I like to be gentle. I like to be gentle. Um, I started my career in foreign exchange 34 almost 35 years ago. Macquarie bank and Sydney.

Speaker B: And the youngest ever employee, age 9,

Speaker C: I think I was 10. Um, um. And you learn that you can't have a view on the dollar in general versus all sorts of currencies without having a view on the end.

Speaker B: Why?

Speaker C: Well, simply because Japan is an enormous exporter of capital. And if they're doing something, whether it be selling dollars or buying dollars, it probably impacts the entire dollar complex. And we've seen another example of that recently. Dolly JPY 160. The Ministry of Finance in Japan instructed the bank of Japan to intervene to bash Dolly yen down from 160 to around 155, which they did. They then put a lid on it for a few days. And what's happening down at 155? Well, once again, Japanese savers are selling yen and buying dollars to put it to work overseas. Then everyone knows that the bank of Japan's no longer there. And here we are back at 159. You know, this is not the action of a policy regime that wants a stronger currency. It's the action of a policy regime from the extraordinary, uh, Sanae Takeichi, Japanese Prime Minister down, that actually doesn't want a strong currency. They just don't want it to collapse. And that's very different things. And there's been so many, um, not rational, but so much commentary over the past three years that if Japanese yields ever went up and the bank of Japan hiked, that Japan would repatriate assets from around the world out of US Credit markets. You name it, that would drive the yen up. Never happened. I mean, it happened at the margin when people did a few hedges, but it never happened. And it is still not happening. And I agree with everyone who says the yen is fundamentally cheap. Okay, so how do I do that? Well, actually, you just buy Japanese equities. That's been the trade. It's not the yen, it's yen denominated stocks, Nikkei topics. They're the things that continue to win because Japan is getting away with a really weak exchange rate. It's remarkable to me that Trump, for example, hasn't had more to say about the yen. But perhaps he's got a bit too much in his intro.

Speaker B: But the point here is lower down the list.

Speaker C: Yeah, yeah, but my simple observation, and it's not calibrating it to the basis point or decimal point or anything else, but my simple observation would be, based on my experiences over 35 years, you cannot have a robust view on the dollar in general in any direction without having a robust view on the yen. In other words, if your bearish dollars and the yen's not playing, in other words, the yen's not rallying, it's very hard to stay bearish dollars. And there's a few things in motion at the moment where the ECB is probably gonna hike next month, or they're certainly signaling that there's a little bit of divergence pending between monetary policy regimes. But if the Fed is now perceived to be a bit more hawkish, which is a flip in pricing over the Past couple of months, which is valid if the market's now sniffing out potentially one Fed hike this year and into next year. It's really hard for the dollar to fall. It's really hard for the dollar to fall. So what am I saying? There's been a vast number of reasons over the past 18 months for the US dollar to turn around and fall apart. It hasn't. And the pain trade, the pain trade which often drives markets is that the dollar doesn't fall and starts to rise again. Now I don't have an opinion on that, but I'm mindful of it.

Speaker B: It's unusual for you not to have an opinion.

Speaker C: I mean, well, just on effects, I mean, I, I, I, I, I am no different to anyone who says to himself, man, I would love to have a red hot go and just buy Yen and just hold it for five years, okay? But that's tying up a lot of capital and there's a lot of other things happening on the world. That's the only thing I say. It's like, okay, what's the opportunity?

Speaker B: Okay, the opportunity cost.

Speaker C: It's like what's, yeah, it's like, what's the opportunity now? And, and candidly, so much of the macro, as has been the case in the post Covid world, so much of the macro is actually playing out in equities every day.

Speaker B: But last time we spoke, we discussed this idea, uh, about the Japanese banks repatriating. They're sitting on massive profits on the currency. And the 30 year JGB is what, 4.3 now? Well, that's gotta be pretty attractive. You're a domestic bank. Uh, I mean, isn't it likely that they'll all start to bring money back?

Speaker C: I mean, only if they have a hole in their balance sheet. But they don't. They're earning enormous spreads. They're minting money right now. I mean, you look at the commentary coming out of Mizuhos and others, I mean they're not. It's so counterintuitive. But it's like, well, why do they need to? They don't need to. You see, this is the thing. If, and by the way, the related point would be that all these people that say Japan will have a fiscal crisis, well at one fundamental level, Japan can never have a fiscal crisis because if it's bad enough, they'll just sell everything else and bring it home. Which is not a great day for the rest of the world. But there we, uh, are.

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Speaker B: So what you're really saying is that if the dollar starts to weaken and then they lose confidence in the dollar, then it will slide but as long as it doesn't go down. That's right, probably okay.

Speaker C: I think it's a sequencing thing because the yen for a whole bunch of structural reasons, I mean the current account surplus rising, Japan exporting, all sorts of important defense get around the world. Amazing what they're doing. Japan restructuring itself under Sanai San is as impressive a political leader as I've seen a long time. I mean, by golly, I mean it's all go and it's so impressive. So you say to yourself, you know what, I gotta be tilted towards Japan somehow. Hopefully you can find an attractive price. Although it's increasingly difficult and at some point you think the yen's gonna rip, but it keeps not doing it. And if I just put up dollar yen on a blank piece of paper, uh, and removed the x and y axes all the dates and all the prices and just put up that chart and said what do you think this thing is and where do you think it's going? I reckon nine out of ten people would say that thing's going to explode higher. Right? Yeah, yeah, that's the point. That's the test here, okay. Because the markets in their collective wisdom and the Dolly Yen market is massive. Okay. Dolly Yen back in the day could be turned around by a Soros or even a Scott Besant betting on abenomics when Dolly Yen was 80, which was one of the best trades Scott ever did. Um, and you know you can at the margin the levered market participant, the hedge fund can drive Dolly Yen but at the end of the day what drives Dolly JPY is Japanese portfolio flows.

Speaker B: Yeah.

Speaker C: And they're not reversing. In fact they're still going out and it's a remarkable thing.

Speaker B: I want to talk about China but um, while I remember m just wanted to ask you your thoughts about the S and P has got an amazing amount of dispersion now. Uh, I mean it's like in theory, never been a better time to be a stock picker in practice, quite hard to outperform. Uh, but this um, opportunity set is really amazing. Why is that happening now? Have you got any explanations for it?

Speaker C: At one level it speaks to how efficient the equity market can be. I mean to see dispersion such as we're seeing within the Max 7 is extraordinary. I mean it's like Nvidia just, well up until very recently, just sideways, sideways, sideways, sideways. You know, I said to actually said to one client in February, oh, am uh, I too late to AI I said, well I don't know the answer to that but by the way, here's Nvidia trading at 20 times 2027 earnings. What do you want to do? You know, it's doing better and it's actually becoming less expensive. But I hope they bought it. But yeah, I don't have a good answer for that. Uh, I just observe that it's persisting but with tongue in cheek. Why do you need to diversify between stocks and bonds when The S&P 500 is going to be a self diversification machine? That's what low dispersion means. I mean it's just you get all the diversification you want within that index. It's extraordinary. And that's been the case for a little while now. So I regret I have no good answer for that. I just observed that it's persisting and that's okay. If it means that people are so efficient that they understand the next few basis points of Google's earnings momentum is better than Nvidia or Micron, fine, that's fine. But I regret I don't know.

Speaker B: And do you have any view on this imminent IPOs of SpaceX OpenAI anthropic and what that will do to.

Speaker C: Yeah, Paul might have, um. Whenever. I mean, Mr. Druckenmiller, for a man who never spoke when he managed other people's money, now speaks all the time. And I think Mr. Druckenmiller's great skill is to say absolutely nothing over and over again and everyone goes, oh, my gosh, that was incredible. No, no, no. So I'm less inclined to listen to Mr. Druckenmiller, no matter how utterly, utterly fabulous he is at pattern recognition and understanding trends. I mean, there's obviously very, very few in his league who. When Paul Jones speaks, I really lean in because their first and foremost is a great human being, an unbelievably kind human being. There's a reason the turnover at TUDOR is so low compared to every hedge fund, because Paul will stick by and reinvest in employees who have done the right thing by him over a long period of time. And when they have that inevitable drawdown, he'll be right there bidding them and saying, hey, it's so impressive. Whereas others might be saying, thanks, but, you know, that's life. So Paul, first and foremost, was a great human being, but when he speaks about market structure, I pay attention because he's not just saying, oh, I'm doing this, that and the other, and people say, oh, he's always changing his mind. No, no, completely misses the point. The great point Paul was making in an interview. Uh, um, I think it was a month or two back with Patrick o'. Shaughnessy. Actually, he gave the interview in February, then it went up in April. Invest like the best is. Exactly.

Speaker B: I have a. Heard of it, yeah.

Speaker C: Have you heard it? Yeah, yeah, yeah.

Speaker A: Um.

Speaker C: Well, try to invest like the best. As I think about it, I mean, there's a reason they're the best, because we can't be them. We can try, but he made the point about supply. And it's a really good point, really important point, because part of the reason that the equity markets have done so well is because we're reducing the float every day via buybacks, aren't we? That's what buybacks are, reducing the supply of shares, which means that if the earnings momentum is intact, share prices have to go up. I mean, people don't tend to think in terms of supply and demand of shares as much as they think about supply and demand of commodities or gold or copper or things like that. But it's a really good point because here comes this colossal unlock, colossal SpaceX, then OpenAI and then goodness knows what else to come. Massive unlock and distribution of massive P and L for all sorts of people. Not just the promoters like a musk, obviously, but so many endowments and foundations and others got into SpaceX at very low numbers and are about to get the biggest windfall of their investment careers. And this is a big deal. So not only do I think in the first instance about all this supply of shares coming to the market on SpaceX, which, by the way, you read the SpaceX prospectus, it's available to Australian retail investors for a reason, because they need to flog this everywhere, they need to put it everywhere they can. Now, this is all approved by regulation, but even, you know, like comsec securities in Australia, Commonwealth Bank's retail platform, they're now able to participate in SpaceX, right? So the supply of SpaceX shares all around the world is going to be profound and then we'll see how they are digested. When you have a business which is immensely powerful and run by an extraordinary human being, but at some point it has to generate really proper earnings to justify the price. So there's a challenge. But then there's something else happening. There's been all these concerns about illiquid investments for several years, and rightly so. You know, they call it euphemistically DPI distributions to paid in capital. They've fallen a lot because there haven't been many IPOs. SpaceX is a big one. OpenAI similar, etc. Anthropic, whatever. SpaceX is a big one because a lot of these private investors and the foundations and endowments across the United States in particular, about to get a lot of liquidity back. And guess what they won't be doing. They will not be putting that back into private investments of any kind. They just won't. They just won't. So what am I saying? In the first instance, the world has to take down enormous amount of supply from these mega IPOs. So the prices to me is perhaps less interesting then who's going to digest all these shares related to which I almost forgot to mention to begin with, the AI hyperscalers were building all these data centers out of cash flow that stopped. They're now borrowers. So at some point the buybacks are going to slow to a trickle. So you've got the organic slowing of the buyback, repurchases and demand, you've got the new supply coming from these mega IPOs. And you think to yourself, it'll be an interesting test during the summer to see how much indigestion there will be as the equity market as a whole rotates through these enormous liquidity events. And I'm not saying it's a negative, I'm just saying it'll be an interesting test to see how it's absorbed. But that's the point Paul's making, and it's a really important one. How do we, uh, uh, digest all this supply? It's well worth watching. But then the byproduct of that is follow the money. Follow the money. So if we're in an endowment at Stanford endowment or, you know, some family office that got into SpaceX very early, which a lot of them did, and about to have this big windfall, and you've been struggling to manage your liquid investments for a long time, my strong view would be not a single dollar of the windfall coming from the SpaceX IPA will be recycled into anything private or liquid. It will go back into public markets. And that will be worth watching as well.

Speaker B: Well, it's interesting, I mean, uh, uh,

Speaker C: oh, one other thing, one other thing I've just remembered about the dollar. There's a connection here, right? So people say to me after, you know, the past year in Iran and everything else, and I think this is certainly some element of truth here, that the big recyclers, the big owners of capital in the Gulf in particular, they've got rebuilding costs and everything else, obviously, that restore the damage and Ras Laffin and Qatari orangey and everything else, they're not going to be exporting capital, let alone to the United States. And all a bit peeved at Mr. Trump, okay? But it's really hard to sell something you can't sell. So if a huge chunk of the world's capital has been invested in a liquid US dollar, assets, private, whatever, private credit, private equity, and there's been no distributions, there's nothing to sell. But if some of these things start to unlock via mega IPOs or floats or anything else, and you actually get the dollars back, then you've got something to sell, potentially. So it's interesting to also watch the currency markets at the margin now that the unlock is occurring as a real time vote. Thumbs up, thumbs down on the efficacy of the Trump administration over the remainder of this year. And Beyond. It's interesting to watch.

Speaker B: No, I mean, I think this is going to be fascinating for all sorts of reasons. I mean, one, you know, the US retail market market, um, is driving the stock market at the margin and obviously there's a huge retail fan club for these stocks. But if you're an institutional investor, quite hard to make an investment in SpaceX and the valuation.

Speaker C: Right.

Speaker B: So. But you've also got to be cognizant of the fact that you don't own any. You're not going to be allocated any in ipo, and having that big, uh, deviation from benchmark is going to cost you. So you're almost forced to. Oh, well, I wouldn't, I wouldn't buy it, but it's in the benchmark, so I kind of, I've got to mitigate my risk.

Speaker C: It's like so much of passive investing. It's not about price, it's about quantity. And Musk knows that. And isn't it interesting how NASDAQ and others have changed their listing rules and index inclusion rules? Now, admittedly, it's a heck of a big ipo, so they probably do have to change it. But even so, it's guaranteeing that an awful lot of people get into this at a very, very high price, which they may come to regret. And that's not great. But we, again, look, we'll find out.

Speaker B: Uh, it's fascinating. I think it goes in the index at 3x. The free flows. Well, of course, I mean, there's kind of a reason for that because of course the people that aren't locked up will be able to sell.

Speaker C: But you see, there's another aspect to this. Every CEO, uh, of every listed company knows that a big chunk of the rerating game is getting into XYZ Index and then working your way up from the rustle for something bigger. Wherever you might be, that is the game. Because, you know, so many of the flows are dominated by passive. And that flow is less interested in your business than it is that you tick a box as part of a weighting of an index. Sure. And everyone's trying to do that. You know, anyone who's trying to do an IPO will first check to see what the index inclusion rules are and quite frankly make sure it's large enough to more than meet any threshold to ensure you get the maximum amount of passive bid. That's reality. I'm not saying it's great, but it's reality.

Speaker B: Now, last time we spoke, you were quite right on China. You said kind of muddled through. I mean, property's gonna drag, but it hasn't been a disaster. And it's kind of sort of carrying on. I mean, what are your clients thinking about China? Are they happy to have exposure there? Because obviously, if you want to invest in AI, you can invest in the US you can invest in the physical manifestation, or you can invest in China. Are many of them doing that?

Speaker C: Not really. No, they're not. It's kind of interesting. They're not. I mean, they're investing in China. Yeah. And they've done pretty well since, you know, the starting pistol, if you will, was Jack Ma been rehabilitated. Yeah, that was it. You didn't need to read another China research report. Oh, Jack Ma's back. That's it.

Speaker B: Go.

Speaker C: That's it. And I. And I do think that Xi Jinping is actually trying to create an equity culture in China. He saw what the Japanese have done. It's amazing. The South Koreans then saw what the Japanese done and said, hey, we want some of that. I think it's worked beyond their wildest dreams in self. And she sees things like, well, uh, that looks pretty good. Because we want to slowly, steadily boost domestic demand and consumption and so forth over a long period of time. And we know at some point the rest of the world might push back on us, dumping excess capacity on them to help our economy muddle through these structural challenges. So Jack Ma is the starting gun. And, uh, there's been some good progress in certain businesses. I mean, these are still extraordinary businesses, as everyone knows. But if all the actions in the United States, why not just keep the marginal dollar there? And then from time to time, you might dabble. But it's interesting that compared to two years ago, there's not a lot of chatter amongst my clients about opportunities in China. Doesn't mean they're bearish. It just means that there's a lot going on everywhere else, which is true. But one thing that is interesting, a, uh, very diligent. Well, all my clients are diligent. But there's one young chap who's incredibly diligent, and he was in China visiting his portfolio companies, uh, three weeks ago. And I'll be careful to say this in generic terms. And he reported back to me that what is so interesting is that all these Chinese industrial companies are increasing prices now. No surprises there, given generally rising input costs. But of course, a good chunk of the disinflation story and China exporting excess capacity on the world is the assumption that, you know, China will undersell a BYD or whatever just to gain market share. Well, hold on a second. If industrial companies are raising prices at the margin, what's the trickle down effect on that on Chinese export prices, on global goods prices and everything else. So it's just something interesting to watch. Now it doesn't mean you're bearish on Chinese industrial companies because if they're able to pass through rising costs, it's probably good for their margins and their earnings. But it's an interesting anecdote about what we need to watch for, because if Chinese export prices stop falling and there's less goods disinflation at the margin coming out of Chinese exports, then it makes things a little bit trickier for policymakers in the west for realize inflation in the west and everything else. So I look at China always from many different angles. Of course there's the high level geopolitics, um, just on that, the recent visit of Mr. Trump to Beijing was one of the great nothing burgers I've ever seen. Absolutely nothing of any consequence was discussed, which was the entire point. It's like, let's give Donald a win. I'll take him around the special flower garden that no one gets it. I'll just pander to his ego so Trump can claim the biggest win in history. I'll get him saying the things I want him to say on Taiwan. Thanks, Kali. See you next time. I'll see you actually at Mar a Lago in September. Can't wait. And everyone's written pages and pages and pages and pages on what the meeting meant. It was just a nothing burger. Which was the point. Which was the entire point.

Speaker B: The interesting thing, perspective that you have is you talk to all these like super investors. And we've got a lot of professional investors listen to this podcast.

Speaker C: Yes, we do.

Speaker B: I don't know why, but.

Speaker C: Stop it, stop it.

Speaker B: What do those elite investors, what do they do differently?

Speaker C: Ah. Uh, great question. I'm so pleased you asked that. Because it's the thing that people don't ask about. It's like, oh, they're great with numbers. Yeah, yeah, yeah. That's the second step. Let me give you an example of an extraordinary man I've worked with now for. We've worked together for 25 years and he was one of my founding clients and he's a great friend, mentor. He's one of those people who realized early on that you can't be a successful trader and famous. And that's unkind. It's difficult to be a successful trader and have a profile because it's much harder to change your mind. If you've got a view that's public and you're a big trader, it's really hard to reverse. And as you and I know, being able to change your mind is your key to staying in the game. You know, pragmatism versus dogmatism. And this chap learned it very early on. He. I say if it cheekily. He hid away in the corner of a very successful, long established hedge fund and harvested billions just quietly in the corner in his own very quirky way. Billions for their clients, billions for his boss, billions. You know, he's done all right. No public profile, nothing on Google, just the way he likes it. We speak most days about all sorts of things. And when markets are busy, nothing else matters. He's just completely on markets. And he'll be following things and seeing things and just noticing things before other people do. It's extraordinary. And then he'll stop because he sees something he doesn't understand, and he'll just take all the risk off, then go and do yoga or something or ring up for a chat. So when he's unavailable, I know something's important's going on, I don't know what it is. I just know something's important. My friend is all in, and then when he's off, he's all off, he's relaxing, he's reading and stuff like that. So what's the point of this? I actually had a long chat with him the other day about a whole bunch of things. Um, and he said, this is extraordinary when you think about it. He said, even when I see something developing in any stock or bond or commodity or currency, even if I see something and I'm confident something happening before I even put on one unit of risk, I will reflect on how I'm feeling. Have I slept? Am I feeling imbalanced? Am I doing this? Am I doing that? In other words, am I in the right state of mind to put this bet on whatever it is? Whereas most of us, and dare I say, uh, it certainly applies to me, we think we know something. It's like, oh, let's have a go, have a go, you know, and that's. There's nothing that's just, you know, we're all constructed differently. But when you're running the kind of risk he does, basically what he's saying is, I want to be absolutely certain I know myself before I think I know, uh, something about this asset that I think is going to do something spectacular. Now that is so much harder to do. Than people think to actually have that pause no matter what. And he might miss the first 10, 20 basis points, whatever it is, doesn't matter to him. He's first saying, how am I feeling? Am I in the right frame of mind? Knowing that if he's right, he's going to be running that so hard over the next few days, weeks, months, whatever. He's going to be all in on that thing. So he first wants to check within himself, related to which his discipline for 35 years in markets. And he found this out very early on in his career. It's like, if I'm going to trade, it's going to be, uh, about me and on me, and I'm going to own it. I will never read any emails in the morning. I will never read any broker reports. All I'll look at. And he does this every day for 35 years. I will just look at price. And he says, most of the times things are where they are. So even I can wake up and say, if Dolly ends here or the Euros there in Tokyo, I think the spoons are going to be there. You know, you'll always get it within 10 basis points. And most of the time nothing's happening. So it's like, all right, some days he'll notice things again. We go back to pattern recognition. We're, um, all just a little bit out there and that's fine. And he'll notice things and go, hey, that's different. Something's happening in Korea. I'll just write it down. And then he'll go through screen, go through all these prices, rates, commodities, everything. And then he'll go back and say, is anyone talking about that thing that's starting to move in Korea?

Speaker B: No.

Speaker C: I'm smelling something. I put one bet on that, and then it keeps going. And then it'll add and add and add. Or it could be Dolly and it could, could be whatever.

Speaker B: He's a macro guy.

Speaker C: Yeah, yeah. These days it tends to be commodities. And he, you know, from October, November last year, all the way through until the start of Iran, he was trading up an absolute storm in all sorts of commodities because he was seeing things line up and he's like, right, I know this, let's go. But the point I'm making here is that for too many of us, and I'm susceptible to this as well, our first opinion is someone else's. Now, it sounds odd coming from me because my job's. I'm in the opinion business and the strategy business. I'm trying to share my Knowledge to help my clients stay out of trouble and to keep them on the right path. And then, if we're patient, take full advantage of other people's mistakes. And, I don't know, it's Machiavellian, but that's what it's about. Be less stupid than everyone else and then take full advantage of their mistakes. It sounds arrogant and Machiavellian, but that is the game. And he will start from the perspective of, I only want to look at price because price is how we keep score. Price drives my nav, Price is my P and L. Price is how I get paid. So I will not read anything until I first checked in with the thing that matters most. I start there, and then I'll check inside myself, and if it all lines up, I'll have a red hot coat. And I've seen him do that over and over again, and it's extraordinary. And I bring him up as an extreme example of so many of the people I work with. Their ability to just understand things or spot things, whether it be patient patterns or just. Is really extraordinary. Now, of course, we've been doing it long enough. It becomes ingrained, it becomes habits. But for me, so many of these people are, uh, I'm not saying idiosyncratic. That's wrong. Or iconoclastic. They're just so wonderfully weird. Wonderfully weird. And that's their age. They are unconventional. Not in terms of what they own, per se, although that's sometimes part of it. But they are so comfortable being weird. Maybe they don't fully recognize it doesn't matter. And it shows up in their results. The way they think about business, the way they're excited by certain things, the way they understand things, the way their ability to look around corners all these things. It's wonderfully, wonderfully weird. And that is why they tend to outperform so many of their peers who obsess with joining their sixth conference call this morning on the Straits of Hormuz. Guess what, sunshine? That ain't going to bloody help you.

Speaker B: Yeah, well, we know that.

Speaker C: Right? Right.

Speaker B: It's interesting you say that, because I always spend a lot of time looking at share prices, and I always, always found it puzzling. Why, you know, people tend to write off technical analysis. Well, actually, you know, the share price is, like, the most important piece of information.

Speaker C: Yes. It's how we keep score. How about this? Uh, um. To encapsulate what we're discussing, so many people approach investing and trading or whatever, as I am. Right. That's where you Start or minimum, I know something that nobody else knows. Because if I'm right, that's going to go up. Or if I'm right about something that's too expensive, it's going to come down. I am right. These wonderful, wonderful people that I'm talking about start with, how might I be right?

Speaker B: Very different.

Speaker C: Not, I'm right, how might I be right? And that's really cool. And then the magic trick, once they're right, they can't explain why they sell. They get a feeling. This guy I was talking about, the guy that looks into himself, he'll have max risk and then he won't be able to sleep during the night. He's like, what's going on? It's not because he's got a Bloomberg next to the bed or anything else, although he does. It's like there's something not right. Oh, picks, uh, up the phone, just bangs everything out. Because he. Yeah, he believes this. You know, it sounds a bit wishy washy, but it's true. You know, famously, you know, Mr. Soros, why did he take profit or get out of positions? Because his back started hurting. You know, there actually is something to that.

Speaker B: Oh, no, I. Absolutely, 100%. And your friend that, um, thinks about

Speaker A: how he feels, does he keep a

Speaker B: diary of how he's feeling?

Speaker C: That's right. Uh, do you do that? I've started doing it this year for a number of reasons, but I actually find it quite helpful because at the first level, it gets some of your more ridiculous thoughts out of your head, which is good, that's a good thing. But also just as a cross check and as a discipline to say, okay, I thought X, I thought, why? And it's sins of commission and sins of omission. You know, uh, I knew that. Not just hindsight, but actually I wrote that down and I did an action and just, you know, that. And you realize that there's certain patterns in your behavior because you might be tired, uh, you might have missed a workout, you might have eaten too much, you might have had the third bottle of red. Well, second, um, you know, and you see patterns like, right, stop it. Because that's harming my performance. That's where it's useful.

Speaker B: So you drinking less red wine, really?

Speaker C: Yes, I am, marginally.

Speaker B: Marginally, yeah.

Speaker C: But I am just bits and pieces. But yeah, you just notice the difference when you're feeling a little bit foggy and you're not. Huge difference.

Speaker B: No, absolutely. So, um, what are you reading?

Speaker C: Who was it?

Speaker B: What would you really recommend to listeners.

Speaker C: It's hard to know where to start because I'm always reading so many things.

Speaker B: I thought you recommended the Barton Biggs book.

Speaker C: Really good. Really, really good. Wealth, War and Wisdom. And, uh, Biggs had a job on Wall Street. Investment strategist, wide following. You know, he's working in investment banks, so his job is to help move things along and turn over. But few people have ever written as well as he did. Now, I never met him, but I often wondered why he wrote so well and why he had such a following. And the answer was because he was an English major at Yale and you reread his stuff. And often some of the older clients I work with send me stuff that Biggs was writing in the 70s. It's so good. The phraseology, the way he conceptualizes things, the way he imparts, just really great stuff. And I stumbled across this book, Wealth, War and Wisdom, which was focused on share prices in World War II. And that somehow the market, in its collective wisdom during those harrowing days, understood, um, things before anyone else. Like the predecessor of the FTSE bottoming the day Hitler signed the quote, unquote, peace agreement in Paris and then blew up that railway carriage. That was the absolute bottom. Right. Just things like that. And there's another very wise client of mine that says markets always tell you what to do if you listen. And I think that's still true.

Speaker B: Absolutely.

Speaker C: I think that's really important thing to keep in mind. But David Epstein has written a number of books over the years. He's got a new one called Constraints.

Speaker B: Oh, yeah. I can't wait to read it. I mean, I think it's fascinating.

Speaker C: It's very, very good. Good book. I think one simplistic interpretation would be that too much money is a bad thing and when we're unbounded, we don't focus. Yeah. But to use the example of General Magic, which I'd forgotten about in 1995, which had unlimited VC funding and also from Sony and other people, and essentially was creating the predecessor of the iPhone and everything else, but just didn't quite have the, pardon the pun, bandwidth to do it. Um, so David's book's good. Um, I'm reading a lot of books on, um, Dr. Paul Conti, and start with what's going. Right. Um, I've been doing a lot of work on mental health this year, just out of curiosity, trying to understand myself better, learning from my friend, that client, who seems to have benefited massively from understanding what makes him tick. Um, I've got. I'm just going through all the pile of books I've been reading. Um, I think, I think what would be easier. I know I should have prepped this before we got together. If, if I can send you a brief update in the so called show notes of a solution, that would be brilliant.

Speaker B: You promised to do that last time. You never did it. So.

Speaker C: Whoops.

Speaker B: Well, hold me to it.

Speaker C: Now we've got three.

Speaker B: We've got three.

Speaker C: I normally have. I normally only have three or four books on the go because books shouldn't be an ordeal. Books should be like, I'm enjoying this. This is really cool. And some authors are better than others. Um, I've actually just read. This is a weird one for you, Ralph Waldo Emerson, he wrote a book, unsurprisingly, many, many years ago, just on the topic of compensation. Now, it's not compensation in the way that most people would think of it, listening to us in terms of money changing hands, just on the topic of compensation. Well, that's the first time I've read anything by Emerson. Obviously I've heard of the man. I'm like, wow, this is just a whole nother level of intelligence and intuition and it takes you away from thinking about, you know, what's the price of gasoline going to do at the straights of formulas Reopen. Which is a little bit more prosaic, but just things like that and it just, things keep coming up. And, um, there's another book coming out by a gentleman called Andy Stumpf, who does some work with some friends of mine, an ex Navy Seal. It's called Drown Proof. Now it sounds quite dramatic, but it literally is drown proof. You know, when bad things are happening in the world or happening around you, how do you strengthen yourself from the inside out? You know, these sorts of things. Interesting. So I'm just going to. I've been going down a bit of rabbit hole this year about mental health because. Because I think it's very important and interesting and understanding myself and understanding, to be blunt, how is it that I've been able to do what I do for 35 years in finance? And how is it, what is it about me that enables me to do what I've done for the last 17 years with my business, working with all these extraordinary investors and what is it about me that makes them want to listen to me? I've never thought about that. I just go out there and do my thing and somehow it seems to connect with extraordinary people. And that's great, but. But why? Better late than never trying to find that out, Right?

Speaker B: Well, I think it's fairly obvious. I don't know why you can't work that out, but if we do this again in three years, I hope we can. Well, um, hopefully we'll do it sooner than that. But if we do it again in three years, what do you think we'll realize that we didn't understand today

Speaker C: that artificial intelligence was the biggest event of our lifetimes. I'll tell you why I think that now. Am I invested for that? A little bit. But let me tell you why I wonder about. I think that from a investment, uh, perspective, okay, from time to time, there are colossal secular trends in the world that drive everything. Now, I'm, uh, not saying it's the right analog, but prior to AI, the biggest secular theme, I think, was not technology, although that's obvious in it and everything else. And Amazon, that's obviously all part of it. It was Chinese property, that Chinese property boom, not China joining the wto. But the Chinese property and infrastructure boom was one of the biggest, biggest, the previous biggest secular trends of our lifetimes, right up until 2017, when Xi Jinping decided he wanted to pop it, and somehow he's got away with it. But there we are. A point being, Stephen, that these secular trends arrive. Some people are early to them, obviously. And then as soon as it starts to accelerate, people try to call time on it, which is a huge mistake. And the key with the China property boom was not to overthink it, to understand it, not overthink it. Uh, and imagine how big it could be and how to drag everything up with it, which it did, okay, until it ended. And then we sort of had a few bits and pieces. And I happily admit that I was a bit too slow to understand the impact of AI and now I get it. And if AI, it's a China property boom, is the right analog for AI, then our challenge is actually to not overthink it.

Speaker B: Ah.

Speaker C: And not question it. Uh, and just trying to understand how we stay with it without losing money. Now, that's very easy to say, but that would be my bet if we're three years out. I don't think we've seen anything like this. I really don't. And part of my thinking is motivated by an extraordinary man who I was lucky to study with in late 2024. And I know this sounds gratuitous, name dropping, but I took advantage of one of those Harvard executive, uh, education courses at the end of 2024 because it was with a very great man, Richard Zachhauser. Now Zach Houser, is one of the world's great beach players. He's also one of the world's greatest decision theory, um, professors. So everyone should look up Richard Zeckhouser. And even at the end of 24, he and his colleague Dan Levy. And Zeckhouser's 80 years old, not prone to overstatement. And he stood up to a bunch of us at the executive education, ah, before a bunch of us at the executive education course at Harvard, which was fantastic and just said, AI is the biggest event of my lifetime. And we're all like, really? Well, he's right. He's right. So when Zeckenhauser, with his brain power, analytical ability, introspection, and decades of big decision making, whether it be a bridge or advising Charlie Munger, he was one of Munger's heroes, right? When he says something is that big, you pay attention. So to answer your question, if we're reconvening in three years and we say, you know, I imagine one of the world. The things that the world may have missed is just how big AI is. And you think about the Capex, the chip shortages, the bottlenecks, and everything that are happening now when approximately 10 basis points of the world's population is starting to understand the power of Claude. What happens when the rest of us start to figure it out? What happens if we get to 5% figuring out how to use AI properly? Yes, there'll be job risk and all this other stuff is out there. We know it's going to be tricky politically. Okay, we know all of that. It's not going to be an easy journey, but that would be my strong bet that if we're here again in three years, it's that we might have underestimated how big this is.

Speaker B: Well, hopefully it will still be me in person, but it might be just the Avatar with the AI questions.

Speaker C: I hope not, because I think this is the. Actually, this is an important point you're making. In a world that's going to obviously be driven more and more by impersonal objects, bots, avatars, I suspect that humans will crave more human connection. Yeah, I'm sure that's true. I think you're on a safe wicket here. Not a sticky one, but yeah, I do wonder about that. And you actually reminded me of something else. People ask me all the time, what are you doing with AI? And my frank answer is, I don't know. I don't know. I'm trying to figure it out, but I have got my new AI agent and they say, oh, that's amazing. I said, no, no, it's a human. It's a human. It's a 40 something Londoner who's become a great friend, who's been involved in all sorts of AI businesses. He's one of the people I mentioned who's right at the epicenter of AI and partnered with people, and he's done very well for himself. But I've said to him, look, I can try to wrap my head around this and I've got no chance, or I can just buy you lunch once a week or once a month and we just talk and I just download and then we experiment and that's what I'm doing. Um, and I know that I could be using it to enhance my business and do so many things to allow my clients to have access to my search library in the most pain free way to allow them. I know all of that. But I want to be careful about ip, I want to be careful about this, I want to be careful about, you know, what I'm doing here, et cetera, et cetera. But there's so many ways that are coming to my mind about how I can use it, but I still don't know if I'm thinking straight. So look, I'm basically way down the scale of AI adopters. I'm overawed by it, not overwhelmed by it. I'm overawed by it and I'm struggling to figure out how I can deploy it in the most effective way. And that's going to be a fun learning journey in itself.

Speaker B: Well, James, it's always a pleasure to talk to you. Thank you so much for your time.

Speaker C: Thank you, Stephen. Good to see you.

Speaker A: Well, someone who's produced a book list of nearly 3,000 thousand books was always going to be well read. But James, expertise ranges from China, Japan to gold and AI and seems remarkable to me. If you're an institutional investor, you better get in touch with Aiken Advisors as I don't see how you can afford not to have his notes from a Small island in your inbox. I've only so far had two guests returning for a second session. Let me know who else you would like to hear more from. Thanks as ever for listening

Speaker B: behind the

Speaker A: balance sheet and affiliates and podcast guests may own shares or have an economic interest in securities discussed in this podcast which is aired for your education and entertainment only. Nothing in this podcast should be construed as investment advice or relied upon for investment decisions.

Speaker C: Always do your own research.

Speaker A: Thank you for listening. I hope you enjoyed this episode. It would mean a great deal to me if you could please share this with just one friend. And feel free to spread the word by subscribing or even leaving a review on Apple Podcasts or Spotify. Thank you for your support.